<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 April 30, 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
May 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 April 30, 1999
_______________________________________________________________
PART I - FINANCIAL INFORMATION (unaudited)
Consolidated Balance Sheets
As of April 30, 1999 and October 31, 1998
Consolidated Statements of Earnings and Changes in Retained
Earnings For the Six and Three Month Periods Ended
April 30, 1999 and 1998
Consolidated Statements of Cash Flows
For the Six Month Periods Ended April 30, 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
April 30, October 31,
1999 1998
---------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 149,000 $ 349,000
Short term investments 3,086,000 2,186,000
Receivables:
Trade 354,000 272,000
Accrued oil and gas sales 269,000 272,000
Other 36,000 541,000
----------- -----------
3,894,000 3,620,000
----------- -----------
OIL AND GAS PROPERTIES, net, at cost, full cost method:
Unevaluated 674,000 616,000
Evaluated 5,674,000 5,885,000
----------- -----------
6,348,000 6,501,000
----------- -----------
OTHER, net 27,000 85,000
----------- -----------
$10,269,000 $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 $ 363,000 $ 662,000
Income taxes payable 51,000 51,000
----------- -----------
414,000 713,000
----------- -----------
DEFERRED INCOME TAXES 1,204,000 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 3,263,000 2,967,000
Treasury stock, at cost,
699,000 shares in 1999 and
648,000 shares in 1998 (1,214,000) (1,120,000)
----------- -----------
8,651,000 8,449,000
----------- -----------
$10,269,000 $10,206,000
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Statements of Earnings And Changes in
Retained Earnings - Unaudited
Six Months Six Months Quarter Quarter
Ended Ended Ended Ended
April 30, April 30, April 30, April 30,
1999 1998 1999 1998
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $ 1,245,000 $ 920,000 $ 602,000 $ 484,000
Operating 217,000 239,000 101,000 116,000
Investment income
and other 245,000 120,000 118,000 44,000
----------- ----------- ---------- ----------
1,707,000 1,279,000 821,000 644,000
----------- ----------- ---------- ----------
COSTS AND EXPENSES:
Oil and gas
production 381,000 364,000 177,000 182,000
Depreciation,
depletion and
amortization 481,000 350,000 224,000 190,000
General and
administrative 389,000 334,000 196,000 171,000
----------- ----------- ---------- ----------
1,251,000 1,048,000 597,000 543,000
----------- ----------- ---------- ----------
INCOME BEFORE
INCOME TAXES 456,000 231,000 224,000 101,000
INCOME TAXES (160,000) (84,000) (79,000) (38,000)
----------- ----------- ---------- ----------
NET INCOME 296,000 147,000 145,000 63,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 2,967,000 2,639,000 3,118,000 2,723,000
----------- ----------- ---------- ----------
RETAINED EARNINGS,
END OF PERIOD $ 3,263,000 $ 2,786,000 $3,263,000 $2,786,000
=========== =========== ========== ==========
BASIC AND DILUTED
NET INCOME
PER SHARE $ .10 $ .05 $ .05 $ .02
=========== =========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Six Months Ended
April 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 296,000 $ 147,000
Noncash expenses included in net income:
Depreciation, depletion and amortization 481,000 350,000
Deferred income taxes 160,000 84,000
Other 4,000 6,000
Changes in operating assets and liabilities:
Proceeds from short term investments 850,000 1,884,000
Purchase of short term investments (1,750,000) (1,191,000)
Trade receivables (82,000) (21,000)
Accrued oil and gas sales 3,000 35,000
Accrued interest - 2,000
Other 505,000 24,000
Accounts payable (299,000) (851,000)
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 168,000 469,000
----------- -----------
INVESTING ACTIVITIES:
Oil and gas properties, net (274,000) (906,000)
Changes in long-term assets - (25,000)
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (274,000) (931,000)
----------- ----------
FINANCING ACTIVITIES:
Purchase of treasury stock (94,000) (21,000)
----------- ----------
NET CASH USED BY FINANCING ACTIVITIES (94,000) (21,000)
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (200,000) (483,000)
CASH AND CASH EQUIVALENTS:
Beginning of Period 349,000 635,000
----------- -----------
End of Period $ 149,000 $ 152,000
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
CREDO PETROLEUM CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
April 30, 1999
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a
significant capital resource and source of liquidity. At second
quarter end, working capital was $3,480,000, up 20% from the
fiscal year ended October 31, 1998. Cash flow from operating
activities before working capital changes totaled $941,000 for
the six months, up 60% from the same period last year. Cash flow
was used to fund net oil and gas property expenditures totaling
$274,000 and purchases of treasury stock costing $94,000. 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 second 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>
The company's present natural gas hedge spanned fiscal 1998
and 1999, covering the months of July 1998 through October 1999.
At April 30, 1999, the remaining portion of the hedge totaled
400,000 Mcfg (thousand cubic feet gas) at an average price of
$2.04 per Mcf and represented approximately 71% of expected
natural gas production for the months of May through
October 1999.
Hedging gains, included in oil gas income, were
approximately $102,000 and $100,000 for the quarters ended
April 30 and January 31, 1999, respectively, and were
approximately $202,000 for the six months ended April 30, 1999.
At April 30, 1999, hedging losses related to futures contract
months beyond second quarter end (May through October) have been
deferred and will be recognized as the related production occurs.
These losses totaled $110,000 of which $25,000 are realized and
$85,000 are unrealized. Beginning in May 1999, natural gas
prices rose sharply above the company's $2.04 average hedge price
as fundamentals have steadily improved. Accordingly, the company
expects to realize a loss on the remaining portion of the hedge.
Hedged positions and hedging gains and losses during the
comparable periods in the prior year were not significant.
Oil and gas sales volume and price comparisons for the
indicated periods are set forth below.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
April 30, 1999 April 30, 1998 Percent Percent
---------------- ---------------- Volume Price
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 453,500 $ 2.23(1) 324,300 $ 2.12 + 40% + 5%
Oil (bbls) 19,400 $12.11 17,700 $14.46 + 10% - 16%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
April 30, 1999 April 30, 1998 Percent Percent
------------------ ------------------ Volume Price
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 215,900 $ 2.12(2) 188,800 $ 1.96 + 14% + 8%
Oil (bbls) 11,200 $12.89 8,200 $13.94 + 37% - 8%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
April 30, 1999 January 31, 1999 Percent Percent
------------------ ------------------ Volume Price
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 215,900 $ 2.12(2) 237,600 $ 2.32(3) - 9% - 9%
Oil (bbls) 11,200 $12.89 8,200 $11.29 + 37% + 14%
</TABLE>
(1) Includes $.45 Mcf hedging gain.
(2) Includes $.47 Mcf hedging gain.
(3) Includes $.42 Mcf hedging gain.
Significant increases in gas production compared to prior
year reflect (i) sales from new wells placed on production during
1998, (ii) three 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 has been
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, and from sales of oil from certain wells whose
production was previously withheld due to low oil prices.
<PAGE>
The Cline #11-1 well is the company's largest producing
property. The company owns 49% of the well and is the operator.
During the first half of 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.
Since being placed on production in February 1998, the well has
produced at the rate expected by the company of 1.5 to 2.1 Mcfgd
(depending on choke size) and minor amounts of oil and water.
However, measured surface casing pressures have been declining at
a higher rate than expected possibly 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 those estimates continue to be
reasonable. However, current reserves estimates must be viewed
as being subject to change (possibly significant) 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 U.S. Patent Office
has indicated that the patent application for the technology has
been allowed, and the patent will issue shortly. 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 April 30, 1999,
the company has installed the technology 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. Installation is currently in process on a fifth
well.
The Tracy Federal #1 well continues to produce at a daily
rate of approximately 310 Mcfg, four to five barrels of oil and
four to six barrels of water. The company intends to produce the
well at this rate and to evaluate installing its proprietary
fluid lift system on the well during 1999.
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
Six Months Ended April 30, 1999 Compared to Six Months Ended
April 30, 1998
For the first half of 1999, net income increased 101% to
$296,000 compared to $147,000 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 new Cline #11-1 well and return of the Tracy Federal #1 to
commercial production levels.
Total revenues increased 33% to $1,707,000 in the first half
of 1999 compared to $1,279,000 last year. Oil and gas sales
increased $325,000, or 35%, to $1,245,000. 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 5% to $2.23 per Mcf compared to $2.12 last
year. Hedging transactions added $.45 per Mcf, or 25%, to the
first half 1999 price realizations. Net wellhead prices for gas
fell 16% to $1.78 per Mcf compared to $2.12 last year. Net
wellhead oil price realizations declined 16% to $12.11 per barrel
compared to $14.46 last year. The net effect of these price
changes and hedging transactions was to increase oil and gas
sales $16,000. Gas volumes increased 40% and oil volumes
increased 10%. The net effect of volume changes was to increase
oil and gas sales by $309,000. Operating income declined 9% due
to certain wells being shut-in due to low oil prices. Investment
income increased 104% due to higher levels of investment and
improved performance of professionally managed investments.
Total costs and expenses were $1,251,000 in the first half
of 1999, compared to $1,048,000 last year. General and
administrative expenses increased 16% due to inflationary
pressures and the timing of certain expenditures. Depreciation,
depletion and amortization increased 37% due to significantly
higher (40%) gas production levels and the accelerated write-off
of the remaining value of certain operating rights. The
5% increase in oil and gas production expenses primarily reflect
costs associated with higher production levels and timing of
workovers and repairs. Income taxes were provided at 35% in both
periods.
Quarter Ended April 30, 1999 Compared to Quarter Ended
April 30, 1998
Net income for the quarter ended April 30, 1999 increased
130% to $145,000 compared to $63,000 for the same quarter last
year.
Total revenues increased 27% to $821,000 in the second
quarter of 1999 compared to $644,000 last year. Oil and gas
sales increased 24% to $602,000. 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 8% to $2.12 per Mcf compared to $1.96 last year. Hedging
transactions added $.47 per Mcf, or 28%, to second quarter 1999
price realizations. Net wellhead prices for gas fell 16% to
$1.65 per Mcf compared to $1.96 last year. Net wellhead oil
price realizations declined 8% to $12.89 per barrel compared to
$13.94 last year. The net effect of these price changes and
hedging transactions was to increase oil and gas sales $22,000.
Gas volumes increased 14% and oil volumes increased 37%. The net
effect of volume changes was to increase oil and gas sales by
$96,000. Operating income declined 13% due to certain wells
being shut-in due to low oil prices. Investment income increased
168% due to higher levels of investment and improved performance
of professionally managed investments.
Total costs and expenses were $597,000 in the second quarter
of 1999, compared to $543,000 last year. General and
administrative expenses increased 15% due to inflationary
pressures and the timing of certain expenditures. Depreciation,
depletion and amortization increased 18% due to significantly
higher (19%) gas and oil 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 April 30, 1999, Compared to Quarter Ended
January 31, 1998
In the second quarter of fiscal 1999, net income declined
slightly to $145,000 compared to $151,000 in the prior quarter.
Total revenues declined 7% to $821,000 in the second quarter
of 1999 compared to $886,000 in the prior quarter. Oil and gas
sales declined 6% to $602,000. 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 9% to $2.12 per Mcf compared to $2.32 last quarter.
Hedging transactions added $.47 per Mcf, or 28%, to second
quarter 1999 price realizations. Net wellhead prices for gas
fell 13% to $1.65 per Mcf compared to $1.90 last quarter. Net
wellhead oil price realizations increased 14% to $12.89 per
barrel compared to $11.29 last quarter. The net effect of these
price changes and hedging transactions was to decrease oil and
gas sales $36,000. Gas volumes declined 9% and oil volumes
increased 37%. The net effect of volume changes was to decrease
oil and gas sales by $5,000. Operating income declined 13% due
to certain wells being shut-in due to low oil prices. Investment
income decreased slightly.
Total costs and expenses were $597,000 in the second quarter
of 1999, compared to $654,000 last quarter. Depreciation,
depletion and amortization decreased 13% due to lower natural gas
production in the second quarter and the charge for accelerated
write off of the remaining value of certain operating rights in
the first quarter. The 13% decrease in oil and gas production
expenses principally reflects costs associated with timing of
workovers and repairs. General and administrative expenses
remained virtually unchanged between quarters. 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: June 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> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<CASH> 149,000
<SECURITIES> 3,086,000
<RECEIVABLES> 659,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,894,000
<PP&E> 13,881,000
<DEPRECIATION> (7,533,000)
<TOTAL-ASSETS> 10,269,000
<CURRENT-LIABILITIES> 414,000
<BONDS> 0
0
0
<COMMON> 367,000
<OTHER-SE> 8,284,000
<TOTAL-LIABILITY-AND-EQUITY> 10,269,000
<SALES> 1,245,000
<TOTAL-REVENUES> 1,707,000
<CGS> 381,000
<TOTAL-COSTS> 862,000
<OTHER-EXPENSES> 389,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 456,000
<INCOME-TAX> 160,000
<INCOME-CONTINUING> 296,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 296,000
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
