_________________________________________________________________
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, 2000
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, 2000: 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, 2000
________________________________________________________________
PART I - FINANCIAL INFORMATION (unaudited)
Consolidated Balance Sheets
As of April 30, 2000 and October 31, 1999
Consolidated Statements of Earnings and Changes in Retained
Earnings For the Six and Three Month Periods Ended
April 30, 2000 and 1999
Consolidated Statements of Cash Flows
For the Six Month Periods Ended April 30, 2000 and 1999
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,
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 305,000 $ 184,000
Short term investments 5,133,000 4,055,000
Receivables:
Trade 385,000 443,000
Accrued oil and gas sales 361,000 362,000
Other 63,000 77,000
----------- -----------
6,247,000 5,121,000
----------- -----------
OIL AND GAS PROPERTIES, net, at cost,
full cost method:
Unevaluated 540,000 788,000
Evaluated 5,105,000 5,126,000
----------- -----------
5,645,000 5,914,000
----------- -----------
OTHER, net 89,000 43,000
----------- -----------
$11,981,000 $11,078,000
=========== ===========
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 $ 767,000 $ 739,000
Income taxes payable 68,000 147,000
----------- -----------
835,000 886,000
----------- -----------
DEFERRED INCOME TAXES 1,465,000 1,227,000
----------- -----------
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 shares issued 367,000 367,000
Capital in excess of par value 6,235,000 6,235,000
Retained earnings 4,294,000 3,578,000
Treasury stock, at cost,
699,000 shares in 2000 and 1999 (1,215,000) (1,215,000)
----------- -----------
9,681,000 8,965,000
----------- -----------
$11,981,000 $11,078,000
=========== ===========
See accompanying notes.
</TABLE>
<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,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $1,316,000 $1,245,000 $ 680,000 $ 602,000
Operating 212,000 217,000 102,000 101,000
Investment income and
other 345,000 245,000 92,000 118,000
Non-recurring
litigation settlement 345,000 - - -
---------- ---------- ---------- ----------
2,218,000 1,707,000 874,000 821,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Oil and gas production 434,000 381,000 180,000 177,000
Depreciation, depletion
and amortization 288,000 481,000 149,000 224,000
General and
administrative 443,000 389,000 216,000 196,000
---------- ---------- ---------- ----------
1,165,000 1,251,000 545,000 597,000
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES 1,053,000 456,000 329,000 224,000
INCOME TAXES (337,000) (160,000) (105,000) (79,000)
---------- ---------- ---------- ----------
NET INCOME 716,000 296,000 224,000 145,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 3,578,000 2,967,000 4,070,000 3,118,000
---------- ---------- ---------- ----------
RETAINED EARNINGS,
END OF PERIOD $4,294,000 $3,263,000 $4,294,000 $3,263,000
========== ========== ========== ==========
BASIC NET INCOME
PER SHARE $ .24 $ .10 $ .08 $ .05
========== ========== ========== ==========
DILUTED NET INCOME
PER SHARE $ .23 $ .10 $ .07 $ .05
========== ========== ========== ==========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Six Months Ended
April 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 716,000 $ 296,000
Noncash expenses included in net income:
Depreciation, depletion and amortization 288,000 481,000
Deferred income taxes 238,000 160,000
Other 7,000 4,000
Changes in operating assets and liabilities:
Proceeds from short term
investments 948,000 850,000
Purchase of short term investments (2,026,000) (1,750,000)
Trade receivables 58,000 (82,000)
Accrued oil and gas sales 1,000 3,000
Other 14,000 505,000
Accounts payable 28,000 (299,000)
Income tax payable (79,000) -
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 193,000 168,000
----------- -----------
INVESTING ACTIVITIES:
Oil and gas properties, net (19,000) (274,000)
Changes in long-term assets (53,000) -
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (72,000) (274,000)
----------- -----------
FINANCING ACTIVITIES:
Purchase of treasury stock - (94,000)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES - (94,000)
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 121,000 (200,000)
CASH AND CASH EQUIVALENTS:
Beginning of Period 184,000 349,000
----------- -----------
End of Period $ 305,000 $ 149,000
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
CREDO PETROLEUM CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
April 30, 2000
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 $5,412,000, up 28% from the
fiscal year ended October 31, 1999. Cash flow from operating
activities before working capital changes totaled $1,249,000 for
the six months, up 33% from the same period last year. Cash flow
was used to fund oil and gas property expenditures totaling
$537,000, before $518,000 of property sales proceeds. 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 2000 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 covers the months of
May 2000 through October 2000. At April 30, 2000, open hedge
positions totaled 120,000 Mcfg (thousand cubic feet gas) at an
average price of $3.01 per Mcf and represented approximately 33%
of expected natural gas production for the months of May through
October 2000.
No hedging losses are included in oil and gas income for the
three and six month periods ended April 30, 2000. Hedging gains
were approximately $102,000 and $203,000 for the three and six
month periods ended April 30, 1999, respectively. At April 30,
2000, 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 $17,000 of which $2,000 are realized and $15,000
are unrealized. Beginning in May 2000, natural gas prices rose
sharply above the company's $3.01 average hedge price as
fundamentals have steadily improved. Accordingly, the company
expects to realize a significant hedging loss on the remaining
portion of the hedge which should be offset by increased cash
market prices expected to be received by the company.
Oil and gas sales volume and price comparisons for the
indicated periods are set forth below.
<TABLE>
<CAPTION>
Six Months Six Months Percent Percent
Ended April 30, 2000 Ended April 30, 1999 Volume Price
-------------------- --------------------
Product Volume Price Volume Price Change Change
------- ------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 345,400 $ 2.39 453,500 $ 2.23(1) - 24% + 7%
Oil (bbls) 19,100 $25.66 19,400 $12.11 - 2% +111%
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Percent Percent
Ended April 30, 2000 Ended April 30, 1999 Volume Price
-------------------- --------------------
Product Volume Price Volume Price Change Change
------- ------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 170,700 $ 2.46 215,900 $ 2.12(2) - 21% + 16%
Oil (bbls) 9,600 $27.04 11,200 $12.89 - 14% +110%
(1) Includes $.45 Mcf hedging gain.
(2) Includes $.47 Mcf hedging gain.
</TABLE>
The decline in fiscal 2000 oil and gas production for the
six month and three month periods compared to the same periods
last year primarily reflects the sale of the Tracy Federal #1
well and a steep (but expected) production decline on the Cline
#11-1 well, both as discussed below.
During the fourth quarter of fiscal 1999, the company sold
its 78% interest in the Tracy Federal #1 well for $487,000. The
well accounted for 6% of the company's gas production for both
the three and six month periods ended April 30, 1999. At the
time of the sale, the well was producing approximately 300 Mcfgd.
The sale was precipitated by declining production rates and
concern that the wellbore was loading-up' with fluids which
could not be efficiently removed due to the well's depth, its
remote location, and pipeline restraints. Proved reserves
attributed to the well at the time of sale were 455,000 Mcfg and
6,000 barrels of oil. Sale proceeds were recorded as a reduction
to oil and gas property costs.
During fiscal 1999, the Cline #11-1 was the company's
largest producing well accounting for 28% of gas production for
both the three and six month periods ended April 30, 1999.
Production from the well has declined steeply and accounted for
only 7% and 9%, respectively, of the company's gas production for
the comparable three and six month periods ended April 30, 2000.
The well is completed in a Basal Morrow sand which has good
porosity and very high deliverability. That sand is depleting at
a rapid rate due to its high delivery rates and limited areal
extent. As previously reported, the steep production decline
rate was indicated by rapidly falling reservoir pressure. The
Basal Morrow sand in the Cline #11-1 well has been very prolific
for the area having produced 1.05 Bcfg and 6,700 barrels of oil
in 26 months. The current daily production rate is 290 Mcfg and
four barrels of water. The well also contains three productive
Morrow sands located up-hole from the Basal sand which have not
been opened for production pending depletion of the Basal Morrow
sand. Combined estimated reserves and production from the upper
sands are expected to exceed those of the Basal sand, however,
the upper sands are not as porous and, thus, are expected to
produce at significantly lower rates than the Basal sand. The
company owns 49% of the well and is the operator.
<PAGE>
Lower fiscal 2000 gas production resulting from the rapid
production decline on the Cline #11-1 well and sale of the Tracy
Federal #1 well (both described above) was partially offset by
new wells added which accounted for 16% and 21% of the company's
gas production for the three and six month periods ended April
30, 2000, respectively. One such well, the J. C. Carroll #1, on
which the company installed the patented fluid lift technology
discussed below, is presently the company's largest producing
well accounting for 15% and 12% of the company's gas production
for the three and six month periods ended April 30, 2000,
respectively. The well is currently producing 600 to 630 Mcfgd.
The Carroll well was expected to contribute a greater percentage
of production in both periods, however, it was down approximately
one-half of the first quarter of fiscal 2000 and one-third of the
second quarter of fiscal 2000 due to down-hole pressure control
problems related to down-hole valves being cut by sand produced
from the Morrow formation. After several attempts, the company
successfully modified the valves, and the well has produced since
late February 2000 without recurrence of the problem. Estimated
reserves attributed to the well are 1.5 Bcfge of which the
company's share is 886,000 Mcfge. The well has a very limited
operating history using the new fluid lift technology, and
accordingly, production levels and reserve estimates must be
viewed as being subject to significant change as more data about
the well becomes available. The company owns a 75% working
interest and a 60% net revenue interest in the J. C. Carroll well
and is the operator.
As previously reported, the company participated in
developing new fluid lift technology for low-pressure
(significantly depleted) gas reservoirs. This patented
technology employs down-hole pressure differentials to
efficiently lift fluids from the wellbores. Among other things,
removing the fluids from the wellbore reduces the hydrostatic
pressure against the formation thereby allowing gas to flow into
the wellbore. The technology is most effective in wells deeper
than 10,000 feet where conventional fluid lift systems lose
efficiency. The technology is installed on a total of five
wells, including the J. C. Carroll well discussed above. All but
one have equaled or exceeded expectations. The J. C. Carroll
well ranks as the company's largest producing well while another
application ranks as the company's fourth largest well. The
company is currently installing the technology on an 18,600 foot
well located in western Oklahoma. Three additional installations
or expected to be completed on 12,000 foot, or deeper, wells
during the next six to eight months. The company believes that
the technology will prove to be a cost effective, low risk, and
repeatable means to significantly increase its gas production and
reserves.
During fiscal 1999 and the first quarter of fiscal 2000, the
company participated in a significant wildcat drilling program to
develop coal bed methane (CBM) reserves on its 13,000 gross acre
(1,253 net acre) Sheridan Prospect located on the west side of
Wyoming's Powder River Basin. Approximately 100 wells were
drilled on the prospect. The company estimated that its share of
drilling and infrastructure (gathering, electricity, water
disposal, etc.) costs incurred was $600,000 to $700,000. There
has been no significant production from the prospect, and the
company's share of total costs to fully develop the prospect
ranged up to $3,000,000. During the second quarter of fiscal
2000, the company sold its remaining interest in the Sheridan
Prospect for approximately $375,000 plus assumption by the buyer
of all drilling and infrastructure costs incurred by the company
from inception of the project. The company also retained a small
overriding royalty interest in the prospect. Sales proceeds were
recorded as a reduction in oil and gas property costs.
The company also owns 17,000 gross (3,900 net) acres of CBM
leases located on the eastern side of the Powder River Basin,
including the 5,000 gross acre Recluse Prospect in which the
company owns a 10% interest. Subsequent to second quarter-end,
approximately 20 wells have been drilled on the Recluse Prospect
that have been logged and are awaiting completion for production.
Logs indicate that the prospect area contains productive coals.
<PAGE>
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.
RESULTS OF OPERATIONS
Six Months Ended April 30, 2000 Compared to Six Months Ended
April 30, 1999
For the six months ended April 30, 2000, net income
increased 142% to $716,000 compared to $296,000 for the same
period last year.
Total revenues increased 30% to $2,218,000 in the first half
of 2000 compared to $1,707,000 last year. Oil and gas sales
increased $71,000, or 6%, to $1,316,000. 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 7% to $2.39 per Mcf compared to $2.23 last year. Hedging
transactions increased first half 1999 price realizations by $.45
per Mcf, or 25%. There were no hedging transactions during the
first half of fiscal 2000. Net wellhead prices for gas increased
34% to $2.39 per Mcf compared to $1.78 last year. Net wellhead
oil price realizations increased 111% to $25.66 per barrel
compared to $12.11 last year. The net effect of these price
changes, including hedging transactions, was to increase oil and
gas sales $337,000. Gas volumes declined 24% and oil volumes
declined 2%. The net effect of volume changes was to reduce oil
and gas sales by $266,000. Operating income was slightly lower
due to sale of several marginal operated properties. Investment
income increased 41% due to a substantial increase in funds
invested which was partially offset by lower earnings rates on
professionally managed investments.
Non-recurring litigation settlement income of $345,000
resulted from settlement of a lawsuit related to investment
losses incurred by the company in 1990.
Total costs and expenses fell 7% to $1,165,000 in the first
half of fiscal 2000 compared to $1,251,000 last year. General
and administrative expenses rose 14% due to inflationary
pressures and the timing of certain expenditures. Depreciation,
depletion and amortization fell 40% primarily due to proceeds
from sale of certain oil and gas properties reducing the property
amortization base, certain operating rights becoming fully
amortized during fiscal 1999, and lower gas production volumes in
fiscal 2000 compared to fiscal 1999. The 14% increase in oil and
gas production expenses primarily reflects increased production
taxes on higher oil and gas revenues and costs associated with
timing of workovers and repairs. Income taxes were provided at
32% in fiscal year 2000 and 35% in the prior year.
<PAGE>
Quarter Ended April 30, 2000 Compared to Quarter Ended April 30,
1999
Net income for the quarter ended April 30, 2000 increased
54% to $224,000 compared to $145,000 for the same quarter last
year.
Total revenues increased 6% to $874,000 in the second
quarter of 2000. Oil and gas sales increased 13% to $680,000.
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 16% to $2.46 per Mcf compared to
$2.12 last year. Hedging transactions increased second quarter
price realizations $.47 per Mcf, or 28%. Net wellhead prices for
gas increased 49% to $2.46 per Mcf compared to $1.65 last year.
Net wellhead oil price realizations increased 110% to $27.04 per
barrel compared to $12.89 last year. The net effect of these
price changes and hedging transactions was to increase oil and
gas sales $232,000. Gas volumes declined 21% and oil volumes
declined 14%. The net effect of volume changes was to reduce oil
and gas sales by $154,000. Operating income did not vary
significantly between the periods. Investment income fell 22%
due to lower earnings rates on professionally managed investments
which were partially offset by increased funds invested.
Total costs and expenses fell 9% to $545,000 in the second
quarter of 2000 compared to $597,000 last year. General and
administrative expenses rose 10% due to inflationary pressures
and the timing of certain expenditures. Depreciation, depletion
and amortization fell 33% primarily due to proceeds from sale of
certain oil and gas properties reducing the property amortization
base and lower gas production in fiscal 2000 compared to fiscal
1999. The slight increase in oil and gas production expenses
reflects increased production taxes on higher oil and gas sales
revenue which was mostly offset by reduced lease operating
expenses resulting from correction in the second quarter of
overstated first quarter 2000 lease operating expenses. Income
taxes were provided at 32% in fiscal year 2000 and 35% in 1999.
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 13, 2000 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
