<PAGE>
________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For Quarter Ended July 31, 1999
Commission File Number 0-8877
CREDO PETROLEUM CORPORATION
Colorado 84-0772991
(State of Incorporation) (IRS Employer Identification)
1801 Broadway, Suite 900 80202
Denver, Colorado (Zip Code)
(Address of principal executive office)
303-297-2200
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
_____ ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, net of treasury stock, as of
August 31, 1999: Common stock, $.10 par value - 2,979,000
Preferred stock, no par value - None issued
________________________________________________________________
<PAGE>
CREDO PETROLEUM CORPORATION
Index to Form 10-QSB
For Quarter Ended July 31, 1999
_________________________________________________________________
PART I - FINANCIAL INFORMATION (unaudited)
Consolidated Balance Sheets
As of July 31, 1999 and October 31, 1998
Consolidated Statements of Earnings and Changes in Retained
Earnings For the Nine and Three Month Periods Ended
July 31, 1999 and 1998
Consolidated Statements of Cash Flows
For the Nine Month Periods Ended July 31, 1999 and 1998
Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Not Applicable
________________________________________________________________
The financial information furnished in this Form 10-QSB reflects
all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position of
the company for the periods presented.
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Balance Sheets
A S S E T S
July 31, October 31,
1999 1998
---------- ---------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 315,000 $ 349,000
Short term investments 3,165,000 2,186,000
Receivables:
Trade 341,000 272,000
Accrued oil and gas sales 320,000 272,000
Other 35,000 541,000
----------- -----------
4,176,000 3,620,000
----------- -----------
OIL AND GAS PROPERTIES, net, at cost, full cost method:
Unevaluated 679,000 616,000
Evaluated 5,698,000 5,885,000
----------- -----------
6,377,000 6,501,000
----------- -----------
OTHER, net 37,000 85,000
----------- -----------
$10,590,000 $10,206,000
=========== ===========
L I A B I L I T I E S A N D S T O C K H O L D E R S '
E Q U I T Y
CURRENT LIABILITIES:
Accounts payable $ 529,000 $ 662,000
Income taxes payable 51,000 51,000
----------- -----------
580,000 713,000
----------- -----------
DEFERRED INCOME TAXES 1,258,000 1,044,000
----------- -----------
COMMITMENTS ----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, without par value
5,000,000 shares authorized,
none issued - -
Common stock, $.10 par value,
20,000,000 shares authorized,
3,667,000 shares issued 367,000 367,000
Capital in excess of par value 6,235,000 6,235,000
Retained earnings 3,365,000 2,967,000
Treasury stock, at cost,
699,000 shares in 1999 and
648,000 shares in 1998 (1,215,000) (1,120,000)
----------- -----------
8,752,000 8,449,000
----------- -----------
$10,590,000 $10,206,000
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Statements of Earnings And Changes in
Retained Earnings - Unaudited
Nine Months Nine Months Quarter Quarter
Ended Ended Ended Ended
July 31, July 31, July 31, July 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $1,799,000 $1,493,000 $ 554,000 $ 558,000
Operating 322,000 353,000 105,000 115,000
Investment income
and other 296,000 165,000 51,000 58,000
---------- ---------- ---------- ----------
2,417,000 2,011,000 710,000 731,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Oil and gas
production 591,000 592,000 210,000 228,000
Depreciation,
depletion and
amortization 664,000 552,000 183,000 202,000
General and
administrative 550,000 518,000 161,000 183,000
---------- ---------- ---------- ----------
1,805,000 1,662,000 554,000 613,000
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES 612,000 349,000 156,000 118,000
INCOME TAXES (214,000) (122,000) (54,000) (38,000)
---------- ---------- ---------- ----------
NET INCOME 398,000 227,000 102,000 80,000
RETAINED EARNINGS,
BEGINNING OF
PERIOD 2,967,000 2,639,000 3,263,000 2,786,000
---------- ---------- ---------- ----------
RETAINED EARNINGS,
END OF PERIOD 3,365,000 2,866,000 $3,365,000 $2,866,000
========== ========== ========== ==========
BASIC AND DILUTED
NET INCOME
PER SHARE $ .13 $ .07 $ .03 $ .02
========== ========== ========== ==========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Nine Months Ended
July 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 398,000 $ 227,000
Non-cash expenses included in net income:
Depreciation, depletion and amortizatio 664,000 552,000
Deferred income taxes 214,000 122,000
Other 9,000 11,000
Changes in operating assets and liabilities:
Proceeds from short term investments 1,906,000 2,656,000
Purchase of short term investments (2,885,000) (1,997,000)
Trade receivables (69,000) 10,000
Accrued oil and gas sales (48,000) 30,000
Accrued interest - 3,000
Other 506,000 25,000
Accounts payable (133,000) (713,000)
---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 562,000 926,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties, net (486,000) (1,240,000)
Changes in long-term assets (15,000) (33,000)
----------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (501,000) (1,273,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (95,000) (34,000)
----------- ----------
NET CASH USED BY FINANCING ACTIVITIES (95,000) (34,000)
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (34,000) (381,000)
CASH AND CASH EQUIVALENTS:
Beginning of Period 349,000 635,000
---------- ----------
End of Period $ 315,000 $ 254,000
========== ===========
See accompanying notes.
</TABLE>
<PAGE>
CREDO PETROLEUM CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
July 31, 1999
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a
significant capital resource and source of liquidity. At third
quarter end, working capital was $3,596,000, up 24% from the
fiscal year ended October 31, 1998. Cash flow from operating
activities before working capital changes totaled $1,285,000 for
the nine months, up 41% from the same period last year. Cash
flow was used to fund net oil and gas property expenditures
totaling $486,000 and purchases of treasury stock costing
$95,000. Excess cash flow is reflected in the increase in
working capital.
Existing working capital and anticipated cash flow are
expected to be sufficient to fund fiscal 1999 operations.
However, if the company were to make one or more major
acquisition during the coming year, bank borrowing, issuance of
additional stock, or other forms of debt financing would be
considered. Because earnings are anticipated to be reinvested in
operations, cash dividends are not expected to be paid in the
foreseeable future.
Commitments for future capital expenditures were not
material at third quarter-end. The timing of most capital
expenditures for exploration and development is relatively
discretionary. Therefore, the company can plan expenditures to
coincide with available funds in order to minimize business
risks.
PRODUCT PRICES, PRODUCTION AND OPERATIONS
Numerous uncertainties exist in the oil and gas exploration
and production industry which are beyond the company's ability to
predict with reasonable accuracy.
Gas price decontrol, the advent of an active spot market for
natural gas, and increased energy commodity market trading have
resulted in gas prices received by the company being subject to
significant monthly fluctuations. Gas prices generally
accelerate in peak demand periods such as the winter months and
subside during lower demand periods.
Uncertainties also exist with respect to the supply of oil
available to world markets. OPEC and other major foreign
producers exercise considerable influence over the worldwide oil
supply which in turn affects prices for petroleum products.
Although product prices are key to the company's ability to
operate profitably and to budget capital expenditures, they are
beyond the company's control and are difficult to predict. The
company periodically hedges the price of its oil and gas
production when the potential for significant downward price
movement is anticipated. Hedging transactions take the form of
forward, or short, selling in the NYMEX futures market, and are
closed by purchasing offsetting long positions. Such hedges do
not exceed anticipated production volumes, are expected to have
reasonable correlation between price movements in the futures
market and the cash markets where the company's production is
located, and are authorized by the company's Board of Directors.
Hedges are expected to be closed and gains or losses recognized
for financial reporting purposes as related production occurs.
However, hedges may be closed earlier if the anticipated downward
price movement occurs or if the company believes that the
potential for such movement has abated. All other futures
transactions are accounted for as speculative transactions and
gains and losses are immediately recognized.
<PAGE>
Hedging gains, included in oil and gas income, for the nine
months ended July 31, 1999 were approximately $167,000. Hedging
losses were approximately $35,000 for the quarter ended
July 31, 1999, and hedging gains were approximately $102,000 for
the quarter end April 30, 1999. Hedging gains and losses were
not material in the comparable prior year periods. Due to
strengthening natural gas fundamentals and resulting
substantially stronger natural gas prices, at July 31, 1999, the
company had closed its entire natural gas hedge which included
the fourth fiscal quarter of 1999. Realized hedging losses
totaled approximately $51,000 for the futures contract months of
August, September and October of 1999 and will be recognized for
financial purposes in the fourth fiscal quarter of 1999.
Oil and gas sales volume and price comparisons for the
indicated periods are set forth below.
<TABLE>
<CAPTION>
Nine Months Nine Months Percent Percent
Ended July 31, 1999 Ended July 31, 1998 Volume Price
------------------- --------------------
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 650,900 $ 2.12(1) 548,000 $ 2.05 +19% + 3%
Oil (bbls) 29,400 $ 14.21 25,700 $14.31 +14% - 1%
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Percent Percent
Ended July 31, 1999 Ended July 31, 1998 Volume Price
------------------- --------------------
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 197,400 $ 1.88(2) 223,100 $ 2.00 -12% - 6%
Oil (bbls) 10,200 $17.97 9,000 $12.54 +13% + 43%
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Percent Percent
Ended July 31, 1999 Ended April 30, 1999 Volume Price
------------------- --------------------
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 197,400 $ 1.88(2) 215,900 $ 2.12(3) - 9% -11%
Oil (bbls) 10,200 $17.97 11,200 $12.89 - 9% +39%
(1) Includes $.26/Mcf hedging gain.
(2) Includes $.18/Mcf hedging loss.
(3) Includes $.47/Mcf hedging gain.
</TABLE>
For the nine months ended July 31, 1999, increases in gas
production compared to prior year reflect (i) flush production
from new wells placed on production during 1998, (ii) four wells
on which the company's new fluid lift technology was installed
during the last year and in which the company owns a 75% or
greater interest, and (iii) production from the company's 13,000
foot Tracy Federal #1 well which was returned to commercial
production. The increase in oil volumes is principally due to
production from the S.E. Hewitt waterflood project for which
operating results were deferred during the prior year.
<PAGE>
The decline in production for the third quarter of 1999
compared to the same quarter in 1998 is primarily due to (i)
decline in production from the Cline #11-1 well, and (ii) certain
gas metering adjustments. The decline in gas production for
third quarter 1999 compared to the immediately preceding quarter
is due primarily to (i) decline in production of the Cline 11-1
well, and (ii) declines in several wells located in Ellis County,
Oklahoma which were new wells and had flush production during the
prior year period. The increase in oil production is primarily
due to production from the S.E. Hewitt waterflood project for
which operating results were deferred during the prior year.
The Cline #11-1 well is the company's largest producing
property. The company owns 49% of the well and is the operator.
During fiscal 1999, the well accounted for approximately 28% of
the company's total gas production and about 14% of the company's
estimated proved gas reserve quantities. The well is currently
producing at the rate of approximately 1.0 Mcfgd and minor
amounts of oil and water. However, measured surface casing
pressures have been declining at a higher rate than expected
indicating that the reservoir is smaller than originally
anticipated. Because the well has a limited operating history,
reserve estimates are based on very limited data and are less
precise than reserve estimates for wells with an extended
production history. The company believes that it was
conservative in making its original reserves estimates for the
well, and that, despite the more rapid than expected pressure
declines, any downward revision in the reserve estimates for the
well will not have a material effect on the company's total
reserves. However, reserves estimates must be viewed as being
subject to significant change as more data about the well becomes
available.
Over the past 18-24 months, the company has participated in
development of new fluid lift technology. The technology is
designed to efficiently lift fluids from wellbores using pressure
differentials, and is primarily applicable to mature natural gas
wells in low pressure reservoirs. At July 31, 1999, the company
has applications on four of its gas wells. All of the
applications have initially resulted in gas production rates
which have equaled or exceeded the company's expectations. The
latest installation, completed in July 1999, resulted in
restoring a non-producing well to current daily production of
650-675 Mcfg, three barrels of oil and six barrels of water.
During the third quarter of fiscal 1999, the Tracy Federal
#1 well, on which production was restored last year, produced at
a daily rate of approximately 300 Mcfg, four to five barrels of
oil and four to six barrels of water. Subsequent to third
quarter-end, the company sold its 78.25% working interest in the
well for $483,000. The transaction will be recorded in the
fourth quarter. In accordance with full cost accounting
requirements, all sales proceeds will be recorded as a credit to
oil and gas properties and will not affect operating results.
INCOME TAXES
The company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (SFAS 109), which requires the asset and
liability method of accounting for deferred income taxes.
Deferred tax assets and liabilities are determined based on the
temporary differences between the financial statement and tax
basis of assets and liabilities. Deferred tax assets or
liabilities at the end of each period are determined using the
tax rate in effect at that time.
The total future deferred income tax liability under SFAS
109 is extremely complicated for any oil company to calculate due
in part to the long-lived nature of depleting oil and gas
reserves. Accordingly, the liability is subject to continual
recalculation, revision of the numerous estimates required, and
may change significantly in the event of such things as major
acquisitions, divestitures, changes in reserve estimates, changes
in reserve lives, and changes in tax rates or tax laws.
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended July 31, 1999 Compared to Nine Months Ended
July 31, 1998
For the first nine months of 1999, net income increased 75%
to $398,000 compared to $227,000 for the same period last year.
The increase primarily reflects significantly higher natural gas
production levels compared to the year ago period, due primarily
to the Cline #11-1 well and return of the Tracy Federal #1 to
commercial production levels.
Total revenues increased 20% to $2,417,000 in the first nine
months of 1999 compared to $2,011,000 last year. Oil and gas
sales increased $306,000, or 20%, to $1,799,000. Refer to the
table and discussion on pages 7 and 8 for details of oil and gas
prices and volumes for the applicable periods. Total gas price
realizations rose 3% to $2.12 per Mcf compared to $2.05 last
year. Hedging transactions added $.26 per Mcf, or 14%, to the
first nine month's 1999 price realizations. Net wellhead prices
for gas fell 9% to $1.86 per Mcf compared to $2.05 last year.
Net wellhead oil price realizations declined 1% to $14.21 per
barrel compared to $14.31 last year. The net effect of these
price changes and hedging transactions was to increase oil and
gas sales $35,000. Gas volumes increased 19% and oil volumes
increased 14%. The net effect of volume changes was to increase
oil and gas sales by $271,000. Operating income declined 9% due
to certain wells being shut-in due to low oil prices. Investment
income increased 79% due to higher levels of investment and
normal performance fluctuations.
Total costs and expenses were $1,805,000 in the first nine
months of 1999, compared to $1,662,000 last year. General and
administrative expenses increased 6% due to inflationary
pressures and the timing of certain expenditures. Depreciation,
depletion and amortization increased 20% due to higher production
volumes for both natural gas and oil. Oil and gas production
expenses remained virtually unchanged from period to period.
Income taxes were provided at 35% in both periods.
Quarter Ended July 31, 1999 Compared to Quarter Ended July 31,
1998
Net income for the quarter ended July 31, 1999 increased 28%
to $102,000 compared to $80,000 for the same quarter last year.
Total revenues declined 3% to $710,000 in the third quarter
of 1999 compared to $731,000 last year. Oil and gas sales
decreased $4,000, or less than 1%, to $554,000. Refer to the
table and discussion on pages 7 and 8 for details of oil and gas
prices and volumes for the applicable periods. Total gas price
realizations fell 6% to $1.88 per Mcf compared to $2.00 last
year. Hedging losses totaled $.18 per Mcf, for third quarter
1999. Net wellhead prices for gas increased 3% to $2.06 per Mcf
compared to $2.00 last year. Net wellhead oil price realizations
increased 43% to $17.97 per barrel compared to $12.54 last year.
The net effect of these price changes and hedging transactions
was to increase oil and gas sales $22,000. Gas volumes declined
12% and oil volumes increased 13%. The net effect of volume
changes was to decrease oil and gas sales by $26,000. Operating
income declined 9% due to certain wells being shut-in.
Investment income declined slightly due to normal performance
fluctuations.
Total costs and expenses were $554,000 in the third quarter
of 1999, compared to $613,000 last year. General and
administrative expenses decreased 12% due to the timing of
certain expenditures. Depreciation, depletion and amortization
decreased 9% due to completion of the amortization of certain
operating rights, and by decreased oil and gas production. The
3% decrease in oil and gas production expenses principally
reflects costs associated with timing of workovers and repairs.
Income taxes were provided at 35% in both quarters.
<PAGE>
Quarter Ended July 31, 1999, Compared to Quarter Ended April 30,
1999
In the third quarter of fiscal 1999, net income declined to
$102,000 compared to $145,000 in the prior quarter.
Total revenues declined 13% to $710,000 in the third quarter
of 1999 compared to $821,000 in the prior quarter. Oil and gas
sales declined $48,000, or 8%, to $554,000. Refer to the table
and discussion on pages 7 and 8 for details of oil and gas prices
and volumes for the applicable periods. Total gas price
realizations declined 11% to $1.88 per Mcf compared to $2.12 last
quarter. Hedging losses deducted $.18 per Mcf from third quarter
1999 price realizations. Net wellhead prices for gas increased
25% to $2.06 per Mcf compared to $1.65 last quarter. Net
wellhead oil price realizations increased 39% to $17.97 per
barrel compared to $12.89 last quarter. The net effect of these
price changes and hedging transactions was to increase oil and
gas sales by $5,000. Gas and oil volumes both declined by 9%.
The net effect of volume changes was to decrease oil and gas
sales by $53,000. Operating income increased 4% due to the
effect of increases in operators' overhead rates. Investment
income decreased due to normal performance fluctuations.
Total costs and expenses were $554,000 in the third quarter
of 1999, compared to $597,000 last quarter. Depreciation,
depletion and amortization decreased 18% due to lower natural gas
production in the third quarter. The 19% increase in oil and gas
production expenses principally reflects costs associated with
timing of workovers and repairs. General and administrative
expenses declined 18% compared to the prior quarter due to timing
of certain expenditures. Income taxes were provided at 35% in
both quarters.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: September 14, 1999 By: /s/ James T. Huffman
---------------------------
James T. Huffman
President and
Chief Executive Officer
By: /s/ Alford B. Neely
---------------------------
Alford B. Neely
Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS
FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR-TO-DATE,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 315,000
<SECURITIES> 3,165,000
<RECEIVABLES> 696,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,176,000
<PP&E> 14,093,000
<DEPRECIATION> (7,716,000)
<TOTAL-ASSETS> 10,590,000
<CURRENT-LIABILITIES> 580,000
<BONDS> 0
0
0
<COMMON> 367,000
<OTHER-SE> 8,385,000
<TOTAL-LIABILITY-AND-EQUITY> 10,590,000
<SALES> 1,799,000
<TOTAL-REVENUES> 2,417,000
<CGS> 591,000
<TOTAL-COSTS> 1,255,000
<OTHER-EXPENSES> 550,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 612,000
<INCOME-TAX> 214,000
<INCOME-CONTINUING> 398,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 398,000
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.13
</TABLE>
