<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 10-KSB
________________________________________________________________
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES ACT OF 1934
For The Fiscal Year Ended October 31, 1998
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACT OF 1934
For the transition period ____________ to _____________
Commission File Number 0-8877
________________________________________________________________
CREDO PETROLEUM CORPORATION
________________________________________________________________
(Exact name of registrant as specified in charter)
Colorado 84-0772991
(State of incorporation) (I.R.S. employer identification
number)
1801 Broadway, Suite 900, Denver, Colorado 80202-3837
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(303) 297-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
2,991,777 Shares Outstanding, Net of Treasury Stock,
at the Close of Business on December 31, 1998
(Title of class and shares outstanding)
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
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 _____
----- -----
As of October 31, 1998, the aggregate market value of common
stock held by non-affiliates of the registrant was approximately
$4,041,000.
DOCUMENTS INCORPORATED BY REFERENCE into Part III hereof - Proxy
Statement to be filed with the Commission in connection with the
company's 1999 Annual Meeting.
<PAGE>
PART I.
ITEM 1. BUSINESS
General
CREDO Petroleum Corporation ( CREDO') was incorporated in
Colorado in 1978. CREDO and its wholly owned subsidiaries, SECO
Energy Corporation and United Oil Corporation ( SECO', United'
and collectively the company'), are Denver, Colorado based
independent oil and gas companies which engage in oil and gas
acquisition, exploration, development and production activities
mostly in the Mid-Continent and Rocky Mountain regions of the
United States. The company operates in eight states and has nine
employees. CREDO is an active operator in the Rocky Mountain
Region and in Kansas. United is an active operator doing
business exclusively in Oklahoma, and SECO primarily owns royalty
interests primarily in the Rocky Mountain region. References to
years as used in this report indicate fiscal years ended October
31.
The company's primary business activities are (i) oil and gas
production, (ii) operation of oil and gas properties for the
company's interest and for the interests of third parties, (iii)
purchasing producing oil and gas properties, and (iv) exploration
for and development of oil and gas reserves.
Oil and Gas Operations
Operations are conducted primarily in the Mid-Continent and Rocky
Mountain regions of the United States. The company owns
producing and non-producing property interests in eight states.
The company's staff oversees the operations of existing
properties, evaluates property acquisition opportunities and
drilling prospects, and oversees drilling and completion of new
wells. Operations are concentrated on shallow to medium depth
properties generally ranging from 7,000 to 10,000 feet. A
portion of the funds necessary for acquisition, exploration or
development of properties is raised through farmouts, joint
ventures, or other similar types of cost sharing arrangements.
Involvement of outside participants reduces the company's return
on individual successful ventures. However, it limits the
company's risk from unsuccessful ventures and provides exposure
to a larger volume of activities than would otherwise be
possible.
The company acts as operator' of 84 wells pursuant to standard
industry Operating Agreements. In addition, the company is
general partner of three private limited partnerships. The
Partnerships are in the production stage of operations.
Markets and Customers
Marketing of the company's oil and gas production is influenced
by many factors which are beyond the company's control and the
exact effect of which cannot be accurately predicted. These
factors include changes in supply and demand, changes in market
prices, regulatory changes, technological advances, access to
attractive foreign exploration prospects, and actions of major
foreign producers.
The company sells its oil production to crude oil purchasing
companies at competitive field prices. Crude oil and condensate
production are readily marketable. Crude oil is cost efficiently
transportable from production centers to demand centers and is,
therefore, subject to world-wide supply and demand. Oil prices
are primarily dependent upon available oil supplies which can
vary significantly depending on production and pricing policies
of OPEC and other major producing countries and on significant
events in major producing regions such as the Persian Gulf War in
1991.
<PAGE>
During 1998, per barrel oil prices fell from the low twenty
dollar range to the low teens. At December 31, 1998, inflation
adjusted oil prices stood at 50 year lows according to the
American Petroleum Institute. The collapse in oil prices during
1998 resulted due to a worldwide inventory glut of crude oil and
refined products. The inventory glut was caused by (i) increased
production from Iraq under the U.N. oil for food deal, (ii)
reduced demand due to the unusually warm Winter of 1997/98 and
Fall of 1998 in the U.S. and Europe, (iii) reduced demand due to
the economic slow down in Asia, and (iv) continuing discovery of
new oil reserves in foreign, non-OPEC countries which has been
driven by new technology and greater access to high potential
exploration prospects in previously restricted areas. Management
cannot reasonably predict the extent or timing of oil price
fluctuations.
Deregulation of natural gas pricing and transportation have
resulted in far-reaching and fundamental changes in the
producing, transportation and marketing segments of the natural
gas industry. Gas price decontrol and the advent of an active
spot market for natural gas have resulted in prices received by
the company being subject to significant fluctuations. Prices
tend to rise in peak demand periods such as fall and winter and
to decline during lower demand periods. The company presently
sells most of its gas through short-term contracts with terms of
one year or less which are designed to obtain the best available
prices and deliverabilities. Virtually all of the company's gas
contracts provide for prices based on monthly spot prices for the
applicable market area. These prices are reduced ( netted') by
the costs of gathering and transporting the gas.
The company periodically hedges the price of a portion of its
natural gas and crude oil production by forward selling in the
futures markets. Information concerning hedging activities is
contained under Management's Discussion and Analysis of
Financial Condition and Results of Operations-Product Prices,
Production and Interest Rates' on page 8 and in Note (1) to the
Consolidated Financial Statements.
Information concerning the company's major customers is included
in Note (5) to the Consolidated Financial Statements. The
company's ability to market its oil and gas is generally not
dependent on a single purchaser.
Refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations' for further information
regarding oil and gas markets and prices.
Competition and Regulation
The oil and gas industry is intensely competitive. The company
competes with larger more well established oil and gas companies
including, on occasion, major companies. The significant areas
of competition are in acquiring oil and gas reserves, acquiring
leases for drilling or development, and selling natural gas. The
primary competitive factors for acquisitions are the price the
company is willing to pay and the financial resources readily
available to the company to fund acquisitions. The primary
factors which affect the company's ability to sell its natural
gas include proximity to markets, proximity to and capacity of
natural gas pipelines and transportation and processing
facilities, and quantities of gas which can be aggregated for
sale. Although both oil and gas are generally readily saleable
at market prices, they compete for market share with each other
and with other energy sources such as coal and nuclear power.
Oil and gas drilling and production operations are regulated by
various Federal, state and local agencies. These agencies issue
binding rules and regulations which increase the company's cost
of doing business and which carry penalties, often substantial,
for failure to comply. It is anticipated that the aggregate
burden on the company of Federal, state and local regulation will
continue to increase particularly in the area of rapidly changing
environmental laws and regulations. The company believes that
its present operations substantially comply with applicable
regulations. To date, such regulations have not had a material
effect on the company's operations, or the costs thereof. There
are no known environmental or other regulatory matters related to
the company's operations which are reasonably expected to
result in material liability to the company. The company does
not believe that capital expenditures related to environmental
control facilities or other regulatory matters will be material
in fiscal 1999.
No prediction can be made as to what legislation or regulations
may be enacted or what additional legislation or regulations may
be proposed.
<PAGE>
ITEM 2. PROPERTIES
General
Capital expenditure for oil and gas activities totaled $1,421,000
(before property sales proceeds) in 1998. During 1998, the
company participated in drilling four gas wells in Oklahoma and
Wyoming, purchased and sold significant interests in coal bed
methane leases in Wyoming, continued to participate in
installation of a waterflood in Oklahoma, and purchased producing
property interests. In addition, the company participated in
development of new technology to enhance recovery of natural gas
reserves from mature wells in low pressure gas reservoirs. For
more complete information regarding these activities, refer to
Management's Discussion and Analysis of Financial Condition and
Results of Operations-Oil and Gas Activities'.
Capital expenditures for oil and gas activities totaled
$1,350,000 (before property sales proceeds) in 1997. During
1997, the company participated in drilling three gas wells in
Oklahoma and Wyoming, participated in installation of a
waterflood in Oklahoma, purchased undeveloped leases in gas prone
areas of Wyoming and Oklahoma, and purchased producing property
interests. For more complete information regarding these
activities, refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations-Oil and Gas
Activities'.
Capital expenditures for oil and gas activities totaled $858,000
(before property sales proceeds) in 1996. During 1996, the
company participated in drilling and new zone completions on
three oil wells and three gas wells located in Oklahoma and
Wyoming of which four were successful and two were dry holes.
The company also expanded its producing property base by
purchasing new or additional interests in 44 wells located in
Oklahoma and Wyoming. These activities added nine wells to the
operated properties managed by the company. Undeveloped acreage
was acquired mostly in gas-prone areas of southwest Wyoming.
At October 31, 1998, approximately 75% of the value of the
company's estimated reserves were concentrated in 26% of the
company's producing wells. The Cline #11-1 well located in Ellis
County, Oklahoma is currently the company's most significant
producing property. It was drilled late in fiscal 1997 and was
placed on production in February 1998. The company owns a 49%
working interest and a 38% net revenue interest in the well and
is the operator. From the time the well commenced production, it
has accounted for approximately 23% of the company's total gas
production and 3% of oil production. At October 31, 1998, 14%
and 2%, respectively, of estimated natural gas and crude reserve
quantities were attributed to the well. Current daily production
on a 16/64ths choke is 2.0 MMcfg, 15 barrels of oil, and a slight
amount of water. Because the well has a limited operating
history, reserves were estimated using the volumetric method
which is less precise than estimation methods which can
incorporate data from a long production and reservoir pressure
history. Accordingly, current reserve estimates must be viewed
as being subject to possible significant revision as more data
about the well becomes available.
<PAGE>
Estimated Proved Oil and Gas Reserves and Future Net Revenues
In 1998, 1997, and 1996, McCartney Engineering, Inc., an
independent petroleum engineering firm, estimated proved reserves
for the company's significant properties which represented 62% in
1998 and 60% in both 1997 and 1996 of the total estimated future
value of estimated reserves. Remaining reserves were estimated
by the company in all years. At October 31, 1998, natural gas
represented 78% and crude oil represented 22% of total reserves
denominated in equivalent barrels using a six Mcf of gas to one
barrel of oil conversion ratio.
The following table sets forth, as of October 31 of the indicated
year, information regarding the company's proved reserves which
is based on the assumptions set forth in Note (5) to the
Consolidated Financial Statements where additional reserve
information is provided. The average price used to calculate
estimated future net revenues was $12.59, $19.97, and $23.96 per
barrel for oil and $2.03, $2.69, and $2.39 per Mcf for gas as of
October 31, 1998, 1997, and 1996, respectively. Amounts do not
include estimates of future Federal and state income taxes.
<TABLE>
<CAPTION>
Estimated Future
Oil Gas Estimated Future Net Revenues
Year (bbls)* (Mcf)* Net Revenues Discounted at 10%
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 314,000 6,676,000 $11,385,000 $7,415,000
1997 368,000 5,868,000 $14,212,000 $8,518,000
1996 364,000 5,816,000 $14,562,000 $8,776,000
</TABLE>
Of 1998, 1997 and 1996 amounts, proved developed reserves were
302,000, 335,000, and 334,000 barrels of oil and 5,909,000,
4,874,000, and 5,048,000 Mcf of gas, respectively.
Production, Average Sales Prices and Average Production Costs
The company's net production quantities and average sales price
per unit for the indicated years are set forth below.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
Product Volume Price Volume Price Volume Price
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 781,000 $ 1.98 545,000 $ 2.21 550,000 $ 1.59
Oil (bbls) 40,000 $14.10 39,000 $20.31 42,000 $19.77
</TABLE>
Average production costs, including production taxes, per unit of
production (using a six to one conversion ratio of Mcfs to
barrels) were $5.00, $5.90, and $5.17 per barrel in 1998, 1997,
and 1996, respectively.
Productive Wells and Developed Acreage
Developed acreage at October 31, 1998 totaled 17,400 net and
89,800 gross acres. At October 31, 1998, the company owned
working interests in 50.60 net (155 gross) wells consisting of
21.77 net (50 gross) oil wells and 28.83 net (105 gross) gas
wells. In addition, the company owned royalty and production
payment interests in approximately 175 oil and gas wells. In
1998, the company divested of or abandoned 1.50 net (three gross)
wells. In the same period, the company acquired interests in
1.07 net (four gross) wells in which it did not previously own an
interest and 2.27 net (12 gross) wells where the company
previously owned an interest.
<PAGE>
Undeveloped Acreage
The following table sets forth the number of undeveloped acres
which will expire during the next five fiscal years (and
thereafter) unless production is established in the interim.
Undeveloped acres held-by-production' represent the undeveloped
portions of producing leases which will not expire until
commercial production ceases. A Net Royalty Acre' is the
equivalent of a 12.5% royalty or production payment interest in
one net working interest acre under lease.
<TABLE>
<CAPTION>
Working
Royalty Interest Acreage Interest Acreage
- -----------------------------------------------------------------
Expiration Net
Year Ending Royalty
October 31 Gross Net Acres Gross Net
- -----------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C>
1999 7,000 7,000 100 6,600 2,000
2000 700 700 - 5,400 1,700
2001 - - - 3,700 2,000
2002 5,300 5,300 100 12,900 1,800
2003 3,700 3,700 100 20,000 2,900
Thereafter 3,500 3,500 - 44,500 14,600
Held-By-Production 107,200 86,100 7,700 11,900 2,600
- -----------------------------------------------------------------
127,400 106,300 8,000 105,000 27,600
=================================================================
</TABLE>
The acreage in the above table is located in eight states
including Oklahoma, Colorado, Wyoming, North Dakota and Utah.
Royalty and production payment interests are referred to
collectively as royalty interests. In general, royalty' and
production payment' interests are non-operated interests which
are not burdened by costs of exploration or lease operations,
while working interests' have operating rights and participate
in such costs. Operating rights in leases underlying the
company's royalties are held by others and, therefore, the
company cannot compel exploration or development of the leases
nor can it control costs of operations.
Drilling and New Zone Recompletions
The following tables set forth the number of gross and net oil
and gas wells in which the company has participated in drilling
or new zone recompletions and the results thereof for the periods
indicated.
<TABLE>
<CAPTION>
Gross Wells
- ----------------------------------------------------------------
Year Ended Total Gross Exploratory Development
-------------------- -------------
October 31 Wells Oil Gas Dry Oil Gas Dry
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 4 - 3 1 - - -
1997 3 - 2 - - 1 -
1996 6 2 1 2 - 1 -
1978-1995 132 9 27 69 15 8 4
- ----------------------------------------------------------------
145 11 33 72 15 10 4
================================================================
</Table
</TABLE>
<TABLE>
<CAPTION>
Net Wells
- ----------------------------------------------------------------
Year Ended Total Net Exploratory Development
------------------- ----------------
October 31 Wells Oil Gas Dry Oil Gas Dry
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1.061 - .811 .250 - - -
1997 1.250 - .750 - - .500 -
1996 1.381 .460 .472 .213 - .235 -
1978-1995 21.925 .941 3.751 10.480 4.350 .919 1.485
- -----------------------------------------------------------------
25.617 1.401 5.784 10.943 4.350 1.654 1.485
=================================================================
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The company is not a party to any material pending legal
proceedings. No such proceedings have been threatened and none
are contemplated by the company.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal 1998.
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The company's common stock is traded on the National Association
of Securities Dealers Automated Quotation System under the symbol
CRED'. Market quotations shown below were reported by the
National Association of Securities Dealers, Inc. and represent
prices between dealers excluding retail mark-up or commissions.
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------
Fiscal Quarter Ended High Low High Low
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
January 31 $3.50 $2.88 $2.06 $1.63
April 30 3.00 2.28 2.13 1.75
July 31 2.94 2.56 2.13 1.94
October 31 2.63 1.63 4.00 1.94
</TABLE>
At December 31, 1998, the company had 4,369 shareholders of
record. The company has never paid a dividend and does not
expect to pay any dividends in the foreseeable future. Earnings
are reinvested in business activities.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
October 31 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 2,835,000 $ 2,690,000 $2,287,000 $2,129,000 $1,931,000
Net income (loss) 328,000 439,000 260,000 251,000 150,000
Per share amounts:
Basic and diluted $.11 $.14 $.08 $.08 $.05
Total assets $10,206,000 $10,546,000 $9,187,000 $8,718,000 $9,150,000
Long-term debt - - - - -
Stockholders'
equity 8,449,000 8,185,000 7,789,000 7,688,000 7,615,000
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The company's working capital and cash flow represent a
significant capital resource and source of liquidity. At fiscal
year-end, October 31, 1998, working capital was $2,907,000. Cash
generated by operating activities totaled $1,259,000 in 1998 and
funds generated from sale of undeveloped properties was $576,000.
Working capital and cash flow were used primarily to fund oil and
gas acquisition and development expenditures totaling $1,421,000
(before sales proceeds from undeveloped properties totaling
$576,000), and to purchase 24,000 shares of treasury stock for
$64,000.
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 acquisitions during the
coming year, issuance of additional stock, bank borrowings or
other forms of debt financing might be considered. At fiscal
year-end, the company had no lines of credit or other bank
financing arrangements. 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 fiscal year- end. The timing
of most capital expenditures for exploration and development is
relatively discretionary. Therefore, the company can normally
plan expenditures to coincide with available funds. The company
has no defined benefit plans and no obligations for post
retirement employee benefits.
<PAGE>
The company has evaluated its computer hardware and software
systems for possible issues related to the year 2000. Although
the company does not believe it has significant exposure related
to year 2000 issues, it has developed a preemptive plan to
upgrade, or replace, certain hardware and software systems, which
is currently on schedule. The cost of hardware and software
replacement is not expected to be material to the company's
financial position or results of operations.
Product Prices, Production and Investment Returns
Numerous uncertainties exist in the oil and gas industry which
could adversely affect the company and which are beyond the
company's ability to predict with reasonable accuracy.
Deregulation of natural gas pricing and transportation have
resulted in far-reaching and fundamental changes in the
producing, transportation and marketing segments of the natural
gas industry. Gas price decontrol and the advent of an active
spot market for natural gas have resulted in gas prices received
by the company being subject to significant fluctuations. Prices
tend to rise in peak demand periods such as the fall and winter,
and to decline during lower demand periods.
Uncertainties also exist with respect to the supply of oil
available to world markets. OPEC and world events such as the
Persian Gulf War and the economic downturn in Asia significantly
influence world-wide supply and demand and prices for petroleum
products. During 1998, per barrel oil prices fell from the low
twenty dollar range to the low teens. At December 31, 1998,
inflation adjusted oil prices stood at 50 year lows according to
the American Petroleum Institute. The collapse in oil prices
during 1998 resulted due to a worldwide inventory glut of crude
oil and refined products. The inventory glut was caused by (i)
increased production from Iraq under the U.N. oil for food deal,
(ii) reduced demand due to the unusually warm Winter of 1997/98
and Fall of 1998 in the U.S. and Europe, (iii) reduced demand due
to the economic slow down in Asia, and (iv) continuing discovery
of new oil reserves in non-OPEC countries which has been driven
by new technology and greater access to high potential
exploration prospects in previously restricted areas. Management
cannot reasonably predict the extent or timing of oil price
fluctuations.
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. Since
1991, the company has occasionally hedged product prices by
forward selling a portion of its production in the NYMEX futures
market. This is done when the price relationship (the basis')
between the futures markets and the cash markets where the
company sells its gas is stable within historical ranges, and
when, in the company's opinion, the current price of a product is
adequate to insure reasonable returns and downside price risks
appear to be substantial. The company closes its hedges by
purchasing offsetting long' positions in the futures market at
then prevailing prices. Accordingly, the gain or loss on the
hedge position will depend on futures prices at the time
offsetting long' positions are purchased. Hedging gains and
losses are included in revenues from oil and gas sales. The
company's most significant hedging risk is that expected
correlations in price movements as discussed above do not occur,
and thus, that gains or losses in one market are not fully offset
to opposite moves in the other market.
During 1998 and 1997, the company hedged substantial portions of
its gas production. Hedge positions in fiscal 1996 were not
significant. Hedging gains and losses were immaterial in all
three years.
<PAGE>
Gas and oil sales volume and price comparisons for the indicated
years ended October 31 are set forth below.
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------
Product Volume Price Volume Price Volume Price
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 781,000 $ 1.98 545,000 $ 2.21 550,000 $ 1.59
% change +43% -10% -1% +39% +20% -4%
Oil (bbls) 40,000 $14.10 39,000 $20.31 42,000 $19.77
% change +3% -31% -7% +3% -7% +20%
</TABLE>
The average interest rate earned on certificates of deposit and
certain short-term investments was approximately 5.8% in 1998,
1997, and 1996. During 1998, the company moved most of its
short-term investments into managed mutual funds and highly
liquid limited partnership interests. This resulted in an
average 12% rate of return for FY 1998.
Oil and Gas Activities
Capital expenditure for oil and gas activities totaled $1,421,000
(before $576,000 of property sales proceeds) in 1998. During the
year, the company participated for an average 27% interest in
four gas wells drilled in Wyoming and Oklahoma. One gas well in
which the company owns a 31% interest was completed as a field
extension on the company's 2,800 gross acre Morrow sand prospect
in Ellis County, Oklahoma. The company presently owns interests
ranging from 31% to 98% in six wells located on this prospect.
The remaining three wells were drilled on the company's 12,000
gross acre Sheridan Coal Bed Methane prospect located in Sheridan
County, Wyoming. The wells were drilled to enhance marketability
of the prospect by proving the presence of natural gas entrained
in coal seams which underlie the prospect. At the time the wells
were drilled, the company owned 25% of the prospect and the
wells. Two of the wells were cased and production tested and are
shut-in awaiting connection to a pipeline being built into the
area. The third well was not intended to be completed for
commercial production and has been plugged. Subsequently, the
company sold one-half (12.5%) of its interest in the prospect and
certain other coal bed methane prospects to a larger independent
oil and gas company. The sales proceeds totaled $541,000
compared to the company's cost basis of $184,000 for the leases
and the wells. All sales proceeds have been recorded as a credit
to oil and gas properties. Plans for additional drilling during
1999 on the Sheridan and other coal bed methane prospects are
currently being evaluated, and may involve a substantial
commitment of capital.
During 1998, the company continued to participate for a 20%
interest in the installation of a new waterflood in Carter
County, Oklahoma, and expanded its producing property base by
purchasing interests in 12 wells located in Oklahoma.
Over the past 18 months, the company has participated in
development of new fluid lift technology for which patents are
pending. The company owns a limited term exclusive license to
use the technology on its wells through February 1999, and
thereafter an indefinite term non-exclusive license. The company
also owns a one-third interest in the licensing entity (which
holds the indefinite term exclusive license to the technology)
and will thereby participate in any benefits from future
licensing, rental or sale of the technology to third parties.
The technology is designed to efficiently lift fluids from
wellbores using down-hole pressure differentials, and is
primarily applicable to mature natural gas wells in low pressure
reservoirs. Application of the technology reduces the
hydrostatic pressure exerted against a producing formation when
fluids build-up in a wellbore, and it increases formation
permeability to gas by drying-out the formation/wellbore
interface. The company believes that application of the
technology to its wells will provide a cost effective, low risk
and repeatable means to significantly increase its gas production
and reserves. The company also believes that the technology has
the potential to create significant cash flows from future
licensing, rental or sale to third parties.
<PAGE>
At October 31, 1998, the company had installed the technology on
three of its gas wells. All of the applications have initially
resulted in gas production rates which have equaled or exceeded
the company's expectations. During fiscal 1998, the company
devoted a substantial portion (approximately 40%) of both its
capital budget and the time of its operations and engineering
staff to development of the technology, identification and
acquisition of properties which are prospects for implementation
of the technology, and to installation and operation of the
technology on company wells. The company anticipates equal or
greater application of its resources to the technology in fiscal
1999 depending primarily on its access to good prospects for
application of the technology.
Capital expenditures for oil and gas activities totaled
$1,350,000 (before property sales proceeds) in 1997. During the
year, the company participated for an average 41% interest in
three gas wells drilled in Oklahoma and Wyoming. All of the
wells were successfully completed for production. In addition,
the company participated for a 20% interest in installation of a
new waterflood in southern Oklahoma which is in the initial
stages of responding. Peak production is expected in 18 to 24
months. The company also expanded its producing property base by
purchasing interests in 30 wells located in Oklahoma and Wyoming,
and purchased undeveloped acreage mostly in gas-prone areas of
Wyoming and Oklahoma.
During 1997, the 13,800 foot Tracy Federal #1 well ceased
producing due to mechanical problems in the wellbore. The Tracy
well was historically the company's largest producing property
accounting for approximately 9% of production and 10% of reserves
at the time it ceased production. After consultation with its
independent reservoir engineer at fiscal year-end 1997, the
company concluded that reserves related to the well no longer
qualified as proved' reserves and wrote-off the reserves as of
its fiscal October 31, 1997 year-end.
During 1998, the company successfully removed the packer from the
well, cleaned out the substance plugging the perforations, and
(over time) returned the well to production at a daily rate of
approximately 270 to 290 Mcfg, three to four barrels of oil, and
four to six barrels of water. The company intends to produce the
well at that rate through the Winter of 1998/99, and then to
evaluate reperforating, acidizing, and installing its proprietary
fluid lift system on the well in Spring of 1999. As a result of
successfully returning the well to production, 496,000 Mcfg and
6,000 barrels of oil were added to the company's proved developed
reserves for the well. The company owns 79% of the well and is
the operator.
The Cline #11-1 well located in Ellis County, Oklahoma is
currently the company's most significant producing property. It
was drilled late in fiscal 1997 and was placed on production in
February 1998. The company owns a 49% working interest and a 38%
net revenue interest in the well and is the operator. From the
time the well commenced production, it has accounted for
approximately 23% of the company's total gas production. At
October 31, 1998, 14% of the company's estimated natural gas
reserve quantities were attributed to the well. Current daily
production on a 14.5/64ths choke is 2.0 MMcfg, 15 barrels of oil,
and a slight amount of water. Because the well has a limited
operating history, reserves were estimated using the volumetric
method which is less precise than estimation methods which can
incorporate data from a long production and reservoir pressure
history. Accordingly, current reserve estimates must be viewed
as being subject to possible significant change as more data
about the well becomes available.
Results of Operations
In 1998, total revenues increased 5% to $2,835,000 compared to
$2,690,000 in 1997. As the above oil and gas price/volume table
shows, total gas price realizations, which reflect hedging
transactions, decreased 10% to $1.98 per Mcf and oil price
realizations fell 31% to $14.10 per barrel. The net effect of
these price changes was to decrease oil and gas sales by
$365,000. Hedging gains and losses were immaterial in both
years. Gas volumes produced increased 43% and oil volumes
produced increased 2%. The net effect of these volume changes
was to increase oil and gas sales by $479,000. The increase in
production resulted from new wells added during the year and at
the end of last year including the Cline #11-1 well discussed
above. Operating income increased 2% as a result of operated
wells added through drilling and acquisitions. Investment income
increased due to reallocation of, and improved performance on,
certain of the company's short-term investments.
<PAGE>
In 1997, total revenues rose 18% to $2,690,000 compared to
$2,287,000 in 1996. Total gas price realizations, which reflect
the effect of hedging transactions, increased 39% to $2.21 per
Mcf and oil price realizations rose 3% to $20.31 per barrel. The
net effect of these price changes was to increase oil and gas
sales by $364,000. Hedging gains and losses were immaterial in
both years. Gas volumes produced declined less than 1% and oil
volumes produced declined 7%. The net effect of these volume
changes was to decrease oil and gas sales by $75,000. The
decline in production resulted from loss of production from the
company's then largest producing well about mid-year 1997 (as
discussed above) and from sale of a non-core waterflood property.
The loss of gas production was substantially offset by increased
production from new wells added during the year and at the end of
last year. Operating income increased 9% as a result of operated
wells added through drilling and acquisitions. Investment income
increased due to improved performance on certain of the company's
managed investments.
In 1998, total costs and expenses increased 16% to $2,329,000
compared to $2,014,000 in 1997. Depreciation, depletion and
amortization ( DD&A') increased 26% compared to 1997 primarily
due to a 43% increase in gas production and 2% increase in oil
production quantities. Oil and gas production expenses increased
11% due to increased costs associated with new wells drilled and
producing property interests purchased during fiscal 1998 and at
the end of last year, and due to significant expenditures to
recover production of the Tracy Federal #1 well. General and
administrative expenses increased 11% primarily as a result of
inflationary pressures on administrative costs. The effective
tax rate was approximately 35% in both years.
In 1997, total costs and expenses increased 7% to $2,014,000
compared to $1,886,000 in 1996. Depreciation, depletion and
amortization ( DD&A') increased 6% compared to 1996 due to loss
of the reserves attributed to the company's then largest
producing well when it ceased producing as discussed above. Oil
and gas production expenses increased 11% due to a full year of
operating costs associated with the interests in new wells
drilled and property interests purchased during fiscal 1996, and
higher production taxes as a result of the higher oil and gas
revenues. General and administrative expenses increased 2%
primarily as a result of inflationary pressures on administrative
costs. The effective tax rate was approximately 35% in both
years.
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Consolidated Balance Sheets, October 31, 1998 and 1997
Consolidated Statements of Operations for the Three Years
Ended October 31, 1998
Consolidated Statements of Stockholders' Equity for
the Three Years Ended October 31, 1998
Consolidated Statements of Cash Flows for the Three Years
Ended October 31, 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
<PAGE>
CONSOLIDATED BALANCE SHEETS
October 31, 1998 and 1997
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Assets 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 349,000 $ 635,000
Short-term investments 2,186,000 2,698,000
Receivables:
Trade 272,000 318,000
Accrued oil and gas sales 272,000 324,000
Other 541,000 58,000
- ----------------------------------------------------------------
Total current assets 3,620,000 4,033,000
- ----------------------------------------------------------------
Oil and gas properties, net, at cost,
using full cost method:
Unevaluated 616,000 867,000
Evaluated 5,885,000 5,477,000
- ----------------------------------------------------------------
Net oil and gas properties 6,501,000 6,344,000
- ----------------------------------------------------------------
Other, net 85,000 169,000
- ----------------------------------------------------------------
$10,206,000 $10,546,000
================================================================
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 662,000 $ 1,442,000
Income taxes payable 51,000 16,000
- ----------------------------------------------------------------
Total current liabilities 713,000 1,458,000
- ----------------------------------------------------------------
Deferred income taxes, net 1,044,000 903,000
- ----------------------------------------------------------------
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, 3,678,000
and 3,666,000 shares issued 367,000 366,000
Capital in excess of par value 6,235,000 6,236,000
Retained earnings 2,967,000 2,639,000
Treasury stock, 648,000
and 624,000 shares at cost (1,120,000)(1,056,000)
- ----------------------------------------------------------------
Total shareholders' equity 8,449,000 8,185,000
- ----------------------------------------------------------------
$10,206,000 $10,546,000
================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended October 31, 1998
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $2,105,000 $1,992,000 $1,703,000
Operating 465,000 458,000 421,000
Investment Income 265,000 240,000 163,000
- ----------------------------------------------------------------
2,835,000 2,690,000 2,287,000
- ----------------------------------------------------------------
Costs and expenses:
Oil and gas production 851,000 767,000 691,000
Depreciation, depletion
and amortization 774,000 614,000 577,000
General and
administrative 704,000 633,000 618,000
- ----------------------------------------------------------------
2,329,000 2,014,000 1,886,000
- ----------------------------------------------------------------
Income before income taxes 506,000 676,000 401,000
Income taxes (178,000) (237,000) (141,000)
- ----------------------------------------------------------------
Net income $ 328,000 $ 439,000 $ 260,000
================================================================
Basic and diluted
income per share $.11 $.14 $.08
================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended October 31, 1998
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Capital In Total
Common Stock Excess Of Retained Treasury Stockholders'
----------------
Shares Amount Par Value Earnings Stock Equity
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances,
November
1, 1995 3,666,000 $366,000 $6,236,000 $1,940,000 $ (854,000) $7,688,000
Purchase of
treasury
stock - - - - (159,000) (159,000)
Net income - - - 260,000 - 260,000
- -----------------------------------------------------------------------------
Balances,
October
31, 1996 3,666,000 366,000 6,236,000 2,200,000 (1,013,000) 7,789,000
Purchase of
treasury
stock - - - - (43,000) (43,000)
Net income - - - 439,000 - 439,000
- ------------------------------------------------------------------------------
Balances,
October
31, 1997 3,666,000 366,000 6,236,000 2,639,000 (1,056,000) 8,185,000
Shares
issued 33,000 3,000 62,000 - - 65,000
Shares
received
and canceled (21,000) (2,000) (63,000) - - (65,000)
Purchase of
treasury
stock - - - - (64,000) (64,000)
Net income - - - 328,000 - 328,000
- ------------------------------------------------------------------------------
Balances,
October
31, 1998 3,678,000 $367,000 $6,235,000 $2,967,000 $(1,120,000) $8,449,000
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended October 31, 1998
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 328,000 $ 439,000 $ 260,000
Noncash expenses included in
net income:
Depreciation, depletion and
amortization 774,000 614,000 577,000
Deferred income taxes 141,000 222,000 124,000
Other 16,000 13,000 14,000
Changes in operating assets
and liabilities:
Proceeds from
short-term investments 2,859,000 2,138,000 2,106,000
Purchase of
short-term investments (2,347,000) (2,307,000) (2,055,000)
Trade receivables 46,000 (175,000) (14,000)
Accrued oil and gas sales 52,000 (89,000) (66,000)
Other current assets (483,000) (22,000) 4,000
Accounts payable (780,000) 731,000 238,000
Income taxes payable 35,000 10,000 6,000
- --------------------------------------------------------------------
Net cash provided by
operating activities 641,000 1,574,000 1,194,000
- --------------------------------------------------------------------
Cash flows from investing activities:
Additions to oil and
gas properties (1,421,000) (1,350,000) (858,000)
Proceeds from sale of oil
and gas properties 576,000 114,000 41,000
Other (18,000) (4,000) (4,000)
- --------------------------------------------------------------------
Net cash used in investing
activities (863,000) (1,240,000) (821,000)
- --------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (64,000) (43,000) (159,000)
- --------------------------------------------------------------------
Net cash provided by (used in)
financing activities (64,000) (43,000) (159,000)
- --------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (286,000) 291,000 214,000
Cash and cash equivalents:
Beginning of year 635,000 344,000 130,000
- --------------------------------------------------------------------
End of year $ 349,000 $ 635,000 $ 344,000
====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
The consolidated financial statements include the accounts of
CREDO Petroleum Corporation and its wholly owned subsidiaries
(the company'). The company engages in oil and gas acquisition,
exploration, development and production activities in the United
States. Certain operations are conducted through three private
limited partnerships (the Partnerships') which, as general
partner, the company manages and controls. The company's general
and limited partner interests in the Partnerships are combined on
the proportionate share basis in accordance with accepted
industry practice. All significant intercompany transactions
have been eliminated. Certain reclassifications have been made
to prior year amounts with no effect on net income. All
references to years in these Notes refer to the company's fiscal
October 31 year.
Cash, Cash Equivalents, and Short-Term Investments
Cash equivalents consist of highly liquid investments with
original maturities of three months or less. Short-term
investments include managed mutual funds, highly liquid limited
partnership interests and certificates of deposit with maturities
of more than three months. Short-term investments are classified
as trading' and are stated at fair value with realized and
unrealized gains and losses immediately recognized. The fair
market value of short-term investments approximates their cost.
Oil and Gas Properties
The company follows the full cost method of accounting for its
oil and gas operations. Under this method all costs incurred in
the acquisition, exploration, and development of oil and gas
properties are capitalized in one cost center, including certain
internal costs directly associated with such activities which
totaled approximately $110,000 in 1998, 1997 and 1996. Proceeds
from sales of oil and gas properties are credited to the cost
center with no gain or loss recognized unless such adjustments
would significantly alter the relationship between capitalized
costs and proved oil and gas reserves. Estimated dismantlement,
restoration, and abandonment costs are approximately offset by
estimated residual values of lease and well equipment.
Accordingly, no accrual for such costs has been recorded.
If capitalized costs, less related accumulated amortization and
deferred income taxes, exceed the full cost ceiling', the excess
is expensed in the period such excess occurs. The full cost
ceiling includes an estimated discounted value of future net
revenues attributable to proved reserves using current product
prices and operating costs, and an estimate of the value of
unproved properties which are included in the cost center. Cost
of oil and gas properties are amortized using the units of
production method. The company's composite depreciation,
depletion and amortization ( DD&A') rate per equivalent barrel
produced was $4.09 in 1998, $4.07 in 1997 and $3.66 in 1996.
Unevaluated properties consist primarily of lease acquisition and
maintenance costs. Evaluation normally takes three to five
years. Of the unevaluated property costs, $316,000 and $228,000
were incurred in 1998 and 1997, respectively. During fiscal
1998, a 50% interest in certain unevaluated properties with a
cost of approximately $185,000 was sold for $541,000. The
proceeds reduce the net carrying value of unevaluated properties
and have no impact on operating results.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------
Natural Gas and Crude Oil Price Hedging
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 as related production occurs but
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.
At October 31, 1998, the company had hedged approximately 83% of
its expected Mid-Continent natural gas production through March,
1999 (approximately 250,000 Mcfg) at an average hedge price of
$2.59. Hedging gains and losses are recognized as adjustments to
oil and gas sales as the hedged product is produced. Hedging
gains and losses were immaterial in all years, and gains and
losses on speculative transactions were also immaterial in all
years. The unrealized gain on the company's open hedge positions
at October 31, 1998 was $52,000.
Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Per Share Amounts
Basic earnings per share is computed using the weighted average
number of shares outstanding. Diluted earnings per share
reflects the potential dilution that would occur if stock options
were exercised using the average market price for the company's
stock for the period. The assumed exercise of stock options
would increase the weighted average shares outstanding from
3,042,000 to 3,137,000 shares in 1998 and 3,049,000 to 3,076,000
in 1997. For 1996, the assumed exercise would have been
anti-dilutive. The assumed conversion had no dilutive effect
compared to basic earnings per share in any of the years.
Impact of New Account Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 130,
Reporting Comprehensive Income' and SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information.' SFAS
No. 130 established standards for reporting and display of
comprehensive income, its components and accumulated balances.
SFAS No. 131 established standards on the way that public
companies report financial information about operating segments
in annual financial statements and requires reporting of selected
information about operating segments in interim financial
statements issued to the public. These Standards are effective
for financial statements for periods beginning after December 15,
1997 and require comparative information for earlier years to be
restated. They are not expected to have a material impact on the
company.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------
The FASB has issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging
Activities.' This statement is effective for all quarters of
fiscal years beginning after June 15, 1999, and will be adopted
by the company effective November 1, 1999. This Standard
requires companies to report the fair-market value of derivatives
on the balance sheet and record in income or other comprehensive
income, as appropriate, any changes in the fair value of the
derivative. The Standard is not expected to have a material
impact on the company.
(2) COMMON STOCK AND PREFERRED STOCK
During 1998 and 1997, the company acquired 24,000 and 23,000
shares of its common stock at a total cost of $64,000 and
$43,000, respectively. These transactions have been recorded as
treasury stock.
The company has authorized 5,000,000 shares of preferred stock
which may be issued in series and with preferences as determined
by the company's Board of Directors. Approximately 100,000
shares of the company's authorized but unissued preferred stock
have been reserved for issuance pursuant to the provisions of the
company's Shareholders' Rights Plan.
The company's 1997 Stock Option Plan (the Plan') authorizes the
granting of incentive and nonqualified options to purchase shares
of the company's common stock. The maximum number of shares
which can be issued cannot exceed 15% of outstanding shares. The
Plan is administered by the Board of Directors which determines
the terms pursuant to which any option is granted. The Board
generally expects that option exercise prices will not be less
than the fair market value of the company's stock on the grant
date, and that vesting will cover two to four years. The Plan
provides that upon a change in control of the company, options
then outstanding will immediately vest and the company will take
such actions as are necessary to make all shares subject to
options immediately salable and transferable.
Options to purchase 50,000 shares of the company's common stock
exercisable at $1.88, outstanding under a stock plan which
expired last year, were not exercised and expired. Under the
Plan, options to purchase 20,000 shares at $1.63 and 415,000
shares at $1.94 were granted during 1998 and 1997, respectively.
During 1998, options to purchase 33,333 shares at $1.94 were
exercised, and options to purchase 30,000 shares at $1.94 were
forfeited. Options to purchase 371,667 and 415,000 shares were
outstanding at October 31, 1998 and 1997, respectively, of which
options to purchase 167,083 and 83,000 shares were exercisable at
$1.94 per share at each of the respective fiscal year-ends. The
weighted average remaining contractual life of outstanding stock
options under the Plan was 3.8 years at October 31, 1998.
Under current accounting rules the company has elected not to
record compensation costs for options granted to employees and
directors since the exercise price is equal to the fair market
value at date of grant. Had compensation cost been recorded, net
income and basic and diluted per share amounts for 1998 would
have been $254,000, or $.08 per share, compared to $328,000, or
$.11 per share, and for 1997 would have been $420,000, or $.14
per share compared to $439,000, or $.14 per share. For the
purpose of this disclosure, the fair value of each option granted
was $.72 in 1998 and $.87 in 1997. The fair value was estimated
on the date of grant using the Black-Scholes option-pricing model
with an expected volatility of 40.0%, a risk-free interest rate
of 6%, no expected dividends and an expected term of 5 years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------
(3) COMMITMENTS
The company leases office facilities under a five year lease
agreement effective January 1, 1996. The lease agreement
requires payments of $44,000 in 1999 escalating ratably over two
years to $46,000 in 2001. Total rental expense in fiscal 1998,
1997, and 1996 was approximately $42,000. The company has no
capital leases and no other operating lease commitments.
(4) INCOME TAXES
The company follows 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.
The income tax expense recorded in the Consolidated Statements of
Operations consists of the following:
<TABLE>
<CAPTION>
Years Ended October 31 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current $ 36,000 $ 15,000 $ 17,000
Deferred 141,000 222,000 124,000
- ---------------------------------------------------------------
$ 177,000 $ 237,000 $ 141,000
===============================================================
</TABLE>
The effective income tax rate differs from the U.S. Federal
statutory income tax rate due to the following:
<TABLE>
<CAPTION>
Years Ended October 31 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 34% 34% 34%
Effect of graduated tax rates 2 7 (4)
State income taxes 2 2 4
Percentage depletion (6) (8) 1
Other, net 3 - -
- ---------------------------------------------------------------
35% 35% 35%
===============================================================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------
The principal sources of temporary differences resulting in
deferred tax assets and tax liabilities at October 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
October 31 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Percentage depletion carryforwards $ 198,000 $ 287,000
Alternative minimum tax carryforwards 40,000 68,000
Investment tax credit carryforwards - 13,000
Gain on property sale 153,000 -
- ---------------------------------------------------------------
Total deferred tax assets 391,000 368,000
- ---------------------------------------------------------------
Deferred tax liabilities:
Intangible drilling, leasehold and
other exploration costs capitalized
for financial reporting purposes but
deducted for tax purposes (1,343,000) (1,184,000)
State taxes and other (92,000) (87,000)
- ---------------------------------------------------------------
Total gross deferred tax liabilities (1,435,000) (1,271,000)
- ---------------------------------------------------------------
Net deferred tax liability $(1,044,000) $ (903,000)
===============================================================
</TABLE>
At October 31, 1998, the company has statutory depletion
carryforwards of $610,000.
(5) SUPPLEMENTARY OIL AND GAS INFORMATION
<TABLE>
<CAPTION>
Capitalized Costs
October 31 1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Unproved properties not
being amortized $ 616,000 $ 867,000 $ 733,000
Properties being amortized 12,991,000 11,895,000 10,793,000
Accumulated depreciation,
depletion and amortization (7,106,000) (6,418,000) (5,890,000)
- ---------------------------------------------------------------
Total capitalized costs $ 6,501,000 $ 6,344,000 $ 5,636,000
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Acquisition, Exploration and Development Costs Incurred
Years Ended October 31 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Property acquisition costs:
Proved $ 14,000 $ 145,000 $ 303,000
Unproved 316,000 114,000 69,000
Exploration costs 390,000 860,000 421,000
Development costs 701,000 231,000 65,000
Sales proceeds (576,000) (114,000) (41,000)
- ---------------------------------------------------------------
Net costs incurred $ 845,000 $ 1,236,000 $ 817,000
===============================================================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------
Major Customers and Operating Region
The company operates exclusively within the United States.
Except for short-term investments, all of the company's assets
are employed in, and all its revenues are derived from, the oil
and gas industry. The company had sales in excess of 10% of
total revenues to oil and gas purchasers as follows: Total
Petroleum, Inc. 18% in 1998 and 20% in 1997; GPM Gas Corporation
14% in 1998 and 12% in 1997; and Duke Energy 20% in 1998.
Oil and Gas Reserve Data (Unaudited)
In 1998, 1997 and 1996, independent petroleum engineers estimated
proved reserves for the company's significant properties which
represented 60% in each year of total estimated future net
revenues. The remaining reserves were estimated by the company.
Reserve definitions and pricing requirements prescribed by the
Securities and Exchange Commission were used. The determination
of oil and gas reserve quantities involves numerous estimates
which are highly complex and interpretive. The estimates are
subject to continuing re-evaluation and reserve quantities may
change as additional information becomes available. Estimated
values of proved reserves were computed by applying prices in
effect at October 31 of the indicated year. The average price
used was $12.59, $19.97 and $23.96 per barrel for oil and $2.03,
$2.69 and $2.39 per Mcf for gas in 1998, 1997 and 1996,
respectively. Estimated future costs were calculated assuming
continuation of costs and economic conditions at the reporting
date.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------
Total estimated proved reserves and the changes therein are
set forth below for the indicated fiscal year.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------
Gas(Mcf) Oil(bbls) Gas(Mcf) Oil(bbls) Gas(Mcf) Oil(bbls)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Balance, November 1 5,868,000 368,000 5,816,000 364,000 5,364,000 363,000
Revisions of
previous estimates 346,000 (25,000) (109,000) 11,000 (96,000) 16,000
Extensions and
discoveries 1,000,000 7,000 462,000 32,000 302,000 4,000
Purchases of
reserves in place 243,000 4,000 248,000 4,000 796,000 23,000
Sales of reserves
in place - - (4,000) (4,000) - -
Production (781,000) (40,000) (545,000)(39,000) (550,000)(42,000)
- ---------------------------------------------------------------------------
Balance, October 31 6,676,000 314,000 5,868,000 368,000 5,816,000 364,000
===========================================================================
Proved developed reserves:
Beginning
of period 4,874,000 335,000 5,048,000 334,000 5,112,000 363,000
===========================================================================
End of period 5,909,000 302,000 4,874,000 335,000 5,048,000 334,000
==========================================================================
</TABLE>
The standardized measure of discounted future net cash flows
from reserves is set forth below as of October 31 of the
indicated fiscal year.
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $ 17,647,000 $ 23,112,000 $ 22,609,000
Future production and
development costs (6,261,000) (8,899,000) (8,047,000)
Future income tax expense (1,790,000) (1,848,000) (1,893,000)
- ------------------------------------------------------------------------
Future net cash flows 9,596,000 12,365,000 12,669,000
10% discount factor (3,346,000) (4,953,000) (5,068,000)
- ------------------------------------------------------------------------
Standardized measure of
discounted future net cash flows $ 6,250,000 $ 7,412,000 $ 7,601,000
========================================================================
</TABLE>
The principal sources of change in the standardized measure of discounted
future cash flows from reserves are set forth below
for the indicated fiscal year.
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Balance, November 1 $ 7,412,000 $ 7,601,000 $ 4,173,000
Sales of oil and gas produced,
net of production costs (1,253,000) (1,225,000) (1,039,000)
Net changes in prices, production
and development costs (2,609,000) (328,000) 2,641,000
Extensions and discoveries, net of
future development and production
costs 1,373,000 389,000 483,000
Revisions of quantity
estimates and other 252,000 (44,000) 87,000
Purchases of reserves in place 296,000 269,000 1,347,000
Sales of reserves in place - (37,000) -
Accretion of discount 741,000 760,000 417,000
Net change in income taxes 38,000 27,000 (508,000)
- -----------------------------------------------------------------------
Balance, October 31 $ 6,250,000 $ 7,412,000 $ 7,601,000
=======================================================================
</TABLE>
<PAGE>
<Audit-Report>
INDEPENDENT AUDITORS' REPORT
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
The Board of Directors and Stockholders
CREDO Petroleum Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheets of
CREDO Petroleum Corporation and subsidiaries as of October 31,
1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the
years in the three year period ended October 31, 1998. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of CREDO Petroleum Corporation and subsidiaries as of
October 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three year
period ended October 31, 1998, in conformity with generally
accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
December 30, 1998
</Audit-Report>
<PAGE>
PART III.
ITEM 9. EXECUTIVE COMPENSATION
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 1998.
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 1998.
PART IV.
ITEM 13. FINANCIAL STATEMENTS AND SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) The Index to Financial Statements is set forth under
Item 8.
(c) Exhibits
3(a)(i) Articles of Incorporation of CREDO Petroleum
& 4(a) Corporation (incorporated by reference to Form 10-K
dated October 31, 1982).
3(a)(ii) Articles of Amendment of Articles of Incorporation,
dated March 9, 1982 (incorporated by reference to Form
10-K dated October 31, 1982).
3(a)(iii) Articles of Amendment of Articles of Incorporation,
dated October 28, 1982 (incorporated by reference to
Form 10-K dated October 31, 1982).
3(a)(iv) Articles of Amendment of Articles of Incorporation
dated April 18, 1984 (incorporated by reference to
Form 10-K dated October 31, 1984).
3(a)(v) Articles of Amendment of Articles of Incorporation
dated April 18, 1984 (incorporated by reference to
Form 10-K dated October 31, 1984).
3(a)(vi) Articles of Amendment of Articles of Incorporation
dated April 2, 1985 (incorporated by reference to Form
10-K dated October 31, 1985).
3(a)(vii) Articles of Amendment of Articles of Incorporation
dated March 25, 1986 (incorporated by reference to
Form 10-K dated October 31, 1986).
<PAGE>
3(a)(viii)Articles of Amendment of Articles of Incorporation
dated March 24, 1988 (incorporated by reference to
Form 10-K dated October 31, 1989).
3(a)(ix) Articles of Amendment to Articles of Incorporation
dated May 11, 1990.
(b)(i) By-Laws of CREDO Petroleum Corporation, as amended
May 27, 1981 (incorporated by reference to Form 10-K
dated October 31, 1981).
3(b)(ii) By-Laws of CREDO Petroleum Corporation, as amended May
27, 1981 and January 30, 1985 (incorporated by
reference to Form 10-K dated October 31, 1985).
3(b)(iii) By-Laws of CREDO Petroleum Corporation, as amended
October 30, 1986 (incorporated by reference to Form
10-K dated October 31, 1986).
3(b)(iv) Amendment to Article X of CREDO Petroleum Corporation's
By-Laws dated March 24, 1988 (incorporated by
reference to the company's definitive proxy dated
February 5, 1988).
4(i) Shareholders' Rights Plan, dated April 11, 1989.
10(a) CREDO Petroleum Corporation Non-qualified Stock Option
Plan, dated January 13, 1981 (incorporated by
reference to Amendment No. 1 to Form S-1 dated
February 2, 1981).
10(b) CREDO Petroleum Corporation Incentive Stock Option
Plan, dated October 2, 1981 (incorporated by reference
to the company's definitive proxy statement, dated
January 22, 1982).
10(b) CREDO Petroleum Corporation 1997 Incentive Stock Option
Plan (incorporated by reference to Form 10-K dated
October 31, 1998).
10(c) Model of Director and Officer Indemnification Agreement
provided for by Article X of CREDO Petroleum
Corporation's By-Laws (incorporated by reference to
Form 10-K dated October 31, 1987).
22 CREDO Petroleum Corporation (a Colorado corporation)
and its subsidiaries SECO Energy Corporation (a Nevada
corporation) and United Oil Corporation (an Oklahoma
corporation) are located at 1801 Broadway, Suite 900,
Denver, CO 80202-3837.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CREDO PETROLEUM CORPORATION
By:/s/ James T. Huffman
----------------------------
James T. Huffman,
Chief Executive Officer
By:/s/ Alford B. Neely
----------------------------
Alford B. Neely
Vice President
and Chief Financial Officer
Date: January 6, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
Date Signature Title
--------------- ------------------------ -------------
January 6, 1999 /s/ William N. Beach Director
------------------------
William N. Beach
January 6, 1999 /s/ Otto P. Butterly Director
------------------------
Otto P. Butterly
January 6, 1999 /s/ William D. Howell Director
------------------------
William D. Howell
January 6, 1999 /s/ James T. Huffman Chairman of the
------------------------
James T. Huffman Board, President,
Treasurer
January 6, 1999 /s/ William F. Skewes Director, Corporate
------------------------
William F. Skewes Secretary, General
Counsel
January 6, 1999 /s/ Richard B. Stevens Director
------------------------
Richard B. Stevens
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CREDO PETROLEUM CORPORATION
By:___________________________
James T. Huffman
Chief Executive Officer
By:___________________________
Alford B. Neely
Vice President
and Chief Financial Officer
Date: January 6, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
Date Signature Title
--------------- ------------------------ -------------
January 6, 1999 ________________________ Director
William N. Beach
January 6, 1999 ________________________ Director
Otto P. Butterly
January 6, 1999 ________________________ Director
William D. Howell
January 6, 1999 ________________________ Chairman of the
James T. Huffman Board, President,
Treasurer
January 6, 1999 ________________________ Director, Corporate
William F. Skewes Secretary, General
Counsel
January 6, 1999 ________________________ Director
Richard B. Stevens
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND COSOLIDATED STATEMENTS OF OPERATIONS
FOUND IN THE COMPANY'S 10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND ACCOMPANYING FOOTNOTES.
[/LEGEND]
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] OCT-31-1998
[CASH] 349,000
[SECURITIES] 2,186,000
[RECEIVABLES] 1,085,000
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 3,620,000
[PP&E] 13,607,000
[DEPRECIATION] 7,106,000
[TOTAL-ASSETS] 10,206,000
[CURRENT-LIABILITIES] 713,000
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 367,000
[OTHER-SE] 8,082,000
[TOTAL-LIABILITY-AND-EQUITY] 10,206,000
[SALES] 2,105,000
[TOTAL-REVENUES] 2,835,000
[CGS] 851,000
[TOTAL-COSTS] 1,625,000
[OTHER-EXPENSES] 704,000
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 506,000
[INCOME-TAX] 178,000
[INCOME-CONTINUING] 328,000
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 328,000
[EPS-PRIMARY] 0.11
[EPS-DILUTED] 0.11
</TABLE>
