Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the quarterly period ended January 31,
2009
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the transition period from to
Commission
File Number: 0-8877
CREDO
PETROLEUM CORPORATION
(Exact name of
registrant as specified in its charter)
Colorado
|
|
84-0772991
|
(State or other jurisdiction of incorporation or
organization)
|
|
(IRS Employer Identification No.)
|
|
|
|
1801 Broadway, Suite 900, Denver, Colorado
|
|
80202
|
(Address of principal executive offices)
|
|
(Zip Code)
|
303-297-2200
(Registrants telephone
number, including area code)
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
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
|
Accelerated filer
x
|
Non-accelerated filer
o
|
Smaller reporting
company
o
|
|
|
(Do not check if a smaller
reporting company)
|
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Indicate the number of shares outstanding of each of the issuers
classes of common stock, net of treasury
stock, as of the latest
practicable date.
Date
|
|
Class
|
|
Outstanding
|
March 02,
2009
|
|
Common stock, $.10 par value
|
|
10,332,000
|
Table of Contents
CREDO
PETROLEUM CORPORATION AND SUBSIDIARIES
Quarterly
Report on Form 10-Q For the Period Ended January 31, 2009
TABLE OF
CONTENTS
The terms CREDO, Company, we, our, and us
refer to CREDO Petroleum Corporation and its subsidiaries unless the context
suggests otherwise.
2
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated
Balance Sheets
(Unaudited)
|
|
January 31,
|
|
October 31,
|
|
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
11,389,000
|
|
$
|
22,332,000
|
|
Short-term
investments
|
|
1,918,000
|
|
3,044,000
|
|
Receivables:
|
|
|
|
|
|
Accrued oil and
natural gas sales
|
|
1,594,000
|
|
1,733,000
|
|
Trade
|
|
1,125,000
|
|
995,000
|
|
Derivative
Assets
|
|
2,286,000
|
|
1,745,000
|
|
Other current
assets
|
|
373,000
|
|
205,000
|
|
Total current
assets
|
|
18,685,000
|
|
30,054,000
|
|
|
|
|
|
|
|
Long-term
assets:
|
|
|
|
|
|
Oil and natural
gas properties, at cost, using full cost method:
|
|
|
|
|
|
Unevaluated oil
and natural gas properties
|
|
7,648,000
|
|
12,280,000
|
|
Evaluated oil
and natural gas properties
|
|
70,519,000
|
|
59,730,000
|
|
Less:
accumulated depreciation, depletion and amortization
|
|
(42,442,000
|
)
|
(25,554,000
|
)
|
Net oil and
natural gas properties
|
|
35,725,000
|
|
46,456,000
|
|
|
|
|
|
|
|
Intangible
assets, net of amortization of $109,000 in 2009 and $595,000 in 2008
|
|
4,419,000
|
|
1,079,000
|
|
|
|
|
|
|
|
Compressor and
tubular inventory to be used in development of oil and gas properties
|
|
1,989,000
|
|
2,592,000
|
|
|
|
|
|
|
|
Other, net
|
|
385,000
|
|
379,000
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
61,203,000
|
|
$
|
80,560,000
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,829,000
|
|
$
|
3,857,000
|
|
Revenue distribution payable
|
|
673,000
|
|
982,000
|
|
Other accrued liabilities
|
|
834,000
|
|
931,000
|
|
Income taxes payable
|
|
174,000
|
|
124,000
|
|
Total current liabilities
|
|
3,510,000
|
|
5,894,000
|
|
|
|
|
|
|
|
Long Term Liabilities:
|
|
|
|
|
|
Deferred income taxes, net
|
|
4,677,000
|
|
11,117,000
|
|
Asset retirement obligation
|
|
1,378,000
|
|
1,338,000
|
|
Total liabilities
|
|
9,565,000
|
|
18,349,000
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
Preferred stock, no par value, 5,000,000 shares
authorized, none issued
|
|
|
|
|
|
Common stock, $.10 par value, 20,000,000 shares
authorized, 10,660,000 issued in 2009 and 2008
|
|
1,066,000
|
|
1,066,000
|
|
Capital in excess of par value
|
|
31,360,000
|
|
31,352,000
|
|
Treasury stock at cost, 297,000 shares in 2009 and
223,000 shares in 2008
|
|
(1,672,000
|
)
|
(982,000
|
)
|
Retained earnings
|
|
20,884,000
|
|
30,775,000
|
|
Total stockholders equity
|
|
51,638,000
|
|
62,211,000
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
61,203,000
|
|
$
|
80,560,000
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
3
Table of
Contents
CREDO
PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Operations
(Unaudited)
|
|
Three Months Ended
|
|
|
|
January 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Oil and natural
gas sales
|
|
$
|
2,108,000
|
|
$
|
3,733,000
|
|
|
|
|
|
|
|
Costs and
expenses:
|
|
|
|
|
|
Oil and natural
gas production
|
|
886,000
|
|
852,000
|
|
Depreciation,
depletion and amortization
|
|
1,336,000
|
|
853,000
|
|
Write-down of
oil and natural gas properties (Note 3) and impairment of long lived assets
(Note 8)
|
|
16,623,000
|
|
|
|
General and
administrative
|
|
868,000
|
|
332,000
|
|
|
|
19,713,000
|
|
2,037,000
|
|
|
|
|
|
|
|
Income (loss)
from operations
|
|
(17,605,000
|
)
|
1,696,000
|
|
|
|
|
|
|
|
Other income and
(expense)
|
|
|
|
|
|
Realized and
unrealized gain (loss) on derivative contracts
|
|
1,466,000
|
|
531,000
|
|
|
|
|
|
|
|
Investment and
other income (loss)
|
|
(142,000
|
)
|
(6,000
|
)
|
|
|
1,324,000
|
|
525,000
|
|
|
|
|
|
|
|
Income (loss)
before income taxes
|
|
(16,281,000
|
)
|
2,221,000
|
|
Income tax
(provision) benefit
|
|
6,390,000
|
|
(648,000
|
)
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(9,891,000
|
)
|
$
|
1,573,000
|
|
|
|
|
|
|
|
Basic net income
(loss) per share
|
|
$
|
(.95
|
)
|
$
|
.17
|
|
|
|
|
|
|
|
Diluted net
income (loss) per share
|
|
$
|
(.95
|
)
|
$
|
.17
|
|
|
|
|
|
|
|
Weighted average
number of shares of common stock and dilutive securities:
|
|
|
|
|
|
Basic
|
|
10,386,000
|
|
9,295,000
|
|
|
|
|
|
|
|
Diluted
|
|
10,386,000
|
|
9,356,000
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
4
Table of
Contents
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY
For the Three Months Ended January 31, 2009
|
|
|
|
|
|
Capital In
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
Excess Of
|
|
Treasury
|
|
Retained
|
|
Stockholders
|
|
Description
|
|
Shares
|
|
Amount
|
|
Par Value
|
|
Stock
|
|
Earnings
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
October 31, 2008
|
|
10,660,000
|
|
$
|
1,066,000
|
|
$
|
31,352,000
|
|
(982,000
|
)
|
$
|
30,775,000
|
|
$
|
62,211,000
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
(9,891,000
|
)
|
9,891,000
|
)
|
Purchase of
treasury stock
|
|
|
|
|
|
|
|
(690,000
|
)
|
|
|
(690,000
|
)
|
Compensation
expense associated with unvested portion of previously granted stock options
|
|
|
|
|
|
8,000
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
January 31, 2009
|
|
10,660,000
|
|
$
|
1,066,000
|
|
$
|
31,360,000
|
|
(1,672,000
|
)
|
$
|
20,884,000
|
|
$
|
51,638,000
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
5
Table of
Contents
CREDO
PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Three Months Ended
|
|
|
|
January 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(9,891,000
|
)
|
$
|
1,573,000
|
|
Adjustments to
reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Write-down of
oil and natural gas properties and impairment of long-lived assets
|
|
16,623,000
|
|
|
|
Depreciation,
depletion and amortization
|
|
1,336,000
|
|
853,000
|
|
ARO liability
accretion
|
|
19,000
|
|
13,000
|
|
Unrealized
(gain) loss on derivative contracts
|
|
(541,000
|
)
|
316,000
|
|
Deferred income
taxes
|
|
(6,440,000
|
)
|
514,000
|
|
Loss on short
term investments
|
|
210,000
|
|
78,000
|
|
Compensation
expense related to stock options granted
|
|
8,000
|
|
15,000
|
|
Other
|
|
21,000
|
|
11,000
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
Proceeds from short-term
investments
|
|
916,000
|
|
|
|
Accrued oil and
natural gas sales
|
|
139,000
|
|
(572,000
|
)
|
Trade
receivables
|
|
(130,000
|
)
|
(92,000
|
)
|
Other current
assets
|
|
(168,000
|
)
|
(90,000
|
)
|
Accounts payable
and accrued liabilities
|
|
(871,000
|
)
|
(1,045,000
|
)
|
Income taxes
payable
|
|
50,000
|
|
52,000
|
|
|
|
|
|
|
|
NET CASH
PROVIDED BY OPERATING ACTIVITIES
|
|
1,281,000
|
|
1,626,000
|
|
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
|
|
|
Additions to oil
and natural gas properties
|
|
(7,118,000
|
)
|
(3,200,000
|
)
|
Changes in other
long-term assets
|
|
(16,000
|
)
|
(3,000
|
)
|
Purchase
intangible assets
|
|
(4,400,000
|
)
|
|
|
|
|
|
|
|
|
NET CASH USED IN
INVESTING ACTIVITIES
|
|
(11,534,000
|
)
|
(3,203,000
|
)
|
|
|
|
|
|
|
CASH FLOWS USED
BY FINANCING ACTIVITIES:
|
|
|
|
|
|
Purchase of
treasury stock
|
|
(690,000
|
)
|
|
|
|
|
|
|
|
|
NET CASH USED BY
FINANCING ACTIVITIES
|
|
(690,000
|
)
|
|
|
|
|
|
|
|
|
DECREASE IN CASH
AND CASH EQUIVALENTS
|
|
(10,943,000
|
)
|
(1,577,000
|
)
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS:
|
|
|
|
|
|
Beginning of
period
|
|
22,332,000
|
|
7,285,000
|
|
|
|
|
|
|
|
End of period
|
|
$
|
11,389,000
|
|
$
|
5,708,000
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
6
Table of
Contents
CREDO PETROLEUM CORPORATION AND
SUBSIDIARIES
Notes To
Consolidated Financial Statements (Unaudited)
January 31, 2009
1. BASIS OF PRESENTATION
The accompanying unaudited
consolidated financial statements have been prepared in accordance with
U. S. generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U. S. generally
accepted accounting principles for complete financial statements. In the
opinion of management, the consolidated financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the companys results for the periods
presented. For a more complete
understanding of the companys financial condition and accounting policies,
these consolidated financial statements should be read in conjunction with the
companys Annual Report on Form 10-K for the fiscal year ended October 31,
2008. The results for interim periods
are not necessarily indicative of annual results.
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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
The company bases its estimates on historical experience and on various
other assumptions it believes to be reasonable under the circumstances. Although actual results may differ from these
estimates under different assumptions or conditions, the company believes that
its estimates are reasonable and that actual results will not vary
significantly from the estimated amounts.
2. CONCENTRATION OF CREDIT RISK
CREDOs
accounts receivable are primarily from purchasers of the companys oil and
natural gas production and from other exploration and production companies
which own joint working interests in the properties that the company
operates. This industry concentration
could adversely impact the companys overall credit risk, because the companys
customers and working interest owners may be similarly affected by changes in
economic and financial market conditions, commodity prices, and other
conditions. CREDOs oil and gas
production is sold to various purchasers in accordance with the companys
credit policies and procedures. These
policies and procedures take into account, among other things, the
creditworthiness of potential purchasers and concentrations of credit
risk. For most joint working interest
partners, the company may have the right of offset against related oil and
natural gas revenues.
3. OIL AND NATURAL GAS PROPERTIES
Depreciation,
depletion and amortization of oil and natural gas properties for the three
months ended January 31, 2009 and 2008 were $1,192,000 and $826,000
respectively. The company uses the full
cost method of accounting for costs related to its oil and natural gas
properties. Capitalized costs included
in the full cost pool are depleted on an aggregate basis using the
units-of-production method. All costs
incurred in the acquisition, exploration, and development of properties
(including costs of surrendered and abandoned leaseholds, delay lease rentals,
dry holes, and overhead related to exploration and development activities) and
the fair value of estimated future costs of site restoration, dismantlement,
and abandonment activities are capitalized.
The capitalized costs in the full cost pool are subject to a quarterly
ceiling test that limits such pooled costs to the aggregate of the present value
of future net revenues attributable to proved oil and natural gas reserves
discounted at 10 percent plus the lower of cost or market value of
unproved properties less any associated tax effects. The ceiling test is calculated using oil and
natural gas prices in effect as of the
7
Table of
Contents
balance sheet date. If such
capitalized costs exceed the ceiling, the company will record a write-down to
the extent of such excess as a non-cash charge to earnings, unless the company
considers price increases subsequent to the balance sheet date which may reduce
or eliminate a write-down. A write-down
may not be reversed in future periods, even though higher oil and natural gas
prices may subsequently increase the ceiling.
Due to lower oil and natural gas prices at January 31, 2009,
capitalized costs of oil and natural gas properties exceeded the estimated
present value of future net revenues from proved reserves, net of related
income tax considerations, resulting in a non-cash write-down of
$15,697,000. The spot prices used in the
ceiling test calculation at January 31, 2008 for oil and natural gas were
$38.25 per barrel and $3.33 per Mcf.
Given the volatility of oil and natural gas prices, additional write
downs may be required in fiscal 2009.
Changes in oil and natural gas prices have historically had the most
significant impact on the companys ceiling test. In general, the ceiling is lower when prices
are lower. Even though oil and natural
gas prices can be highly volatile over weeks and even days, the ceiling
calculation dictates that prices in effect as of the last day of the test
period be used and held constant. The
resulting valuation is a snapshot as of that day and, thus, is generally not
indicative of a true fair value that would be placed on the companys reserves
by the company or by an independent third party. Therefore, the future net revenues associated
with the estimated proved reserves are not based on the companys assessment of
future prices or costs, but rather are based on prices and costs in effect as
of the end of the test period.
4. STOCK-BASED
COMPENSATION
For
the three months ended January 31, 2009 and 2008, the company
recognized stock based compensation expense of $8,000 and $15,000
respectively. The estimated unrecognized
compensation cost from unvested stock options as of January 31, 2009
was approximately $56,000 which is expected to be recognized over an average of
2.8 years.
No
options were granted during the three months ended January 31, 2009 or
2008.
8
Table of Contents
Plan
activity for the three months ended January 31, 2009 is set forth below:
|
|
Three Months Ended January 31, 2009
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
|
|
Number of
|
|
Exercise
|
|
Intrinsic
|
|
|
|
Options
|
|
Price
|
|
Value
|
|
Outstanding at
October 31, 2008
|
|
232,769
|
|
$
|
9.04
|
|
$
|
394,000
|
|
Granted
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
Cancelled or
forfeited
|
|
(53,706
|
)
|
14.31
|
|
|
|
Outstanding at
January 31, 2009
|
|
179,063
|
|
$
|
7.46
|
|
$
|
560,000
|
|
|
|
|
|
|
|
|
|
Exercisable at
January 31, 2009
|
|
169,063
|
|
$
|
7.15
|
|
$
|
560,000
|
|
|
|
|
|
|
|
|
|
Weighted average
contractual life at January 31, 2009
|
|
|
|
5.15
|
years
|
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
Number
|
|
Weighted Average
|
|
Weighted
|
|
Number
|
|
|
|
Range of
|
|
Outstanding
|
|
Remaining
|
|
Average
|
|
Exercisable at
|
|
Weighted
|
|
Exercise
|
|
at January 31,
|
|
Contractual
|
|
Exercise
|
|
January 31,
|
|
Average
|
|
Prices
|
|
2009
|
|
Life in Years
|
|
Price
|
|
2009
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.93
|
|
139,063
|
|
4.37
|
|
$
|
5.93
|
|
139,063
|
|
$
|
5.93
|
|
$12.78
|
|
40,000
|
|
7.85
|
|
$
|
12.78
|
|
30,000
|
|
$
|
12.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.93 -$12.78
|
|
179,063
|
|
5.15
|
|
$
|
7.46
|
|
169,063
|
|
$
|
7.15
|
|
5. NATURAL GAS
DERIVATIVES
The
company periodically uses derivatives as economic hedges of the price of a
portion of its estimated natural gas production when the potential for
significant downward price movement is anticipated. These transactions typically take the form of
forward short positions and collars based upon the NYMEX futures market, and
are closed by purchasing offsetting positions.
Such contracts do not exceed estimated production volumes and are
authorized by the companys Board of Directors.
Contracts 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.
The
company has elected not to designate its commodity derivatives as cash flow
hedges for accounting purposes.
Accordingly, such contracts are recorded at fair value on its Balance
Sheet and changes in fair value are recorded in the Consolidated Statements of
Operations as they occur.
For
the quarters ended January 31, 2009 and 2008, the company had realized
gains on derivatives of $925,000 and $847,000 respectively, and unrealized
gains of $541,000 and unrealized losses of $316,000 respectively. At January 31, 2009 open derivative
contracts covered 550,000 MMBtus at NYMEX basis prices ranging from $8.00
to $10.60, and cover the production months of February 2009 through October 2009. Average prices in the companys primary
market are expected to be 15% to 17% below NYMEX prices due to basis
differentials and transportation costs.
The company has a hedging line of credit with its bank which is
available, at the discretion of the company, to meet margin calls. To date, the company has not used this
facility and maintains it only as a precaution related to possible margin
calls. The maximum credit line available
is $5,900,000 with interest calculated at the prime rate. The facility is unsecured and has covenants
that require the company to
9
Table of
Contents
maintain $3,000,000 in cash or short term investments, none of which
are required to be maintained at the companys bank, and prohibits funded debt
in excess of $500,000. The line expires November 15,
2010.
6. EARNINGS PER SHARE
The companys calculation of
earnings per share of common stock is as follows:
|
|
Three Months Ended January 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
Net
|
|
|
|
Income
|
|
Net
|
|
|
|
Income
|
|
|
|
Income
|
|
Shares
|
|
Per Share
|
|
Income
|
|
Shares
|
|
Per Share
|
|
Basic earnings
(loss) per share
|
|
$
|
(9,891,000
|
)
|
10,386,000
|
|
$
|
(.95
|
)
|
$
|
1,573,000
|
|
9,295,000
|
|
$
|
.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
dilutive shares of common stock from stock options
|
|
|
|
|
|
|
|
|
|
61,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
(loss) per share
|
|
$
|
(9,891,000
|
)
|
10,386,000
|
|
$
|
(.95
|
)
|
$
|
1,573,000
|
|
9,356,000
|
|
$
|
.17
|
|
The companys outstanding options were not included in the calculation
of diluted loss per share for the period ended January 31, 2009 as their
inclusion would have an antidilutive effect.
7. INCOME TAXES
The company uses 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 is complicated for any
energy company to estimate due in part to the long-lived nature of depleting
oil and gas reserves and variables such as product prices. 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, product price changes, changes in reserve estimates, changes in
reserve lives, and changes in tax rates or tax laws.
As of January 31, 2009 the companys 2007 Federal tax return was
under audit by the IRS. Subsequent to January 31 2009,
the IRS issued its final report.
Approximately $24,000 in additional tax is due related to the companys
2007 tax return. The company remains
subject to examination of Federal and state tax returns, except Colorado, for
the tax years 2005 and 2006, and for the tax years 2004 through 2007 for
Colorado tax returns.
8. INTANGIBLE ASSETS
On
November 6, 2008 the company purchased all of the patents underlying the
Calliope Gas Recovery Technology, all of the related third party interests in
future installations of the technology and patents covering a new fluid lift
technology for shallow wells known as Tractor Seal for $4,400,000. The patents are being amortized on a straight
line basis over the remaining lives ranging from 8.6 to 17.6 years.
On
September 1, 2000, the company acquired an unrestricted, exclusive license
for patented Calliope Gas Recovery System technology. In July 2008, the company acquired the
third party rights resulting from
10
Table of Contents
certain
future Calliope installations for $975,000.
Those third party rights would have resulted principally from Calliope
installations of joint ventures between the company and other natural gas
producing companies.
As
a result of the current natural gas market, the company believes it is more
likely than not that the formation of joint ventures for the installation of
Calliope technology that would have been subject to these third party rights
will not occur within the foreseeable future.
Based on this assumption, and in accordance with FASB Statement No. 144
Accounting for the Impairment or Disposal of
Long-Lived Assets
(FAS 144), the company has determined that,
currently, the sum of the undiscounted value of cash flows to be derived from
future installations of Calliope technology resulting from joint ventures is
minimal. Accordingly, the company has
recorded an impairment loss of $926,000.
|
|
January 31, 2009
|
|
|
|
Gross Carrying
|
|
Accumulated
|
|
|
|
Amount
|
|
Amortization
|
|
Amortized
intangible assets:
|
|
|
|
|
|
Calliope intangible
assets
|
|
$
|
4,528,000
|
|
$
|
109,000
|
|
|
|
|
|
|
|
Aggregate
amortization expense:
|
|
|
|
|
|
For the three
months ended January 31, 2009
|
|
|
|
$
|
109,000
|
|
|
|
|
|
|
|
|
|
The company reviews the value of its
intangible assets in accordance with SFAS 144,
Accounting
for the Impairment or Disposal of Long Lived Assets
, which requires
that it evaluate these assets for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be fully recoverable or that the useful lives of these assets are no longer
appropriate.
9.
FAIR
VALUE MEASUREMENTS
On November 1, 2008, the company adopted FASB Statement No. 157
Fair Value Measurements
, which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting
pronouncements that require or permit fair value measurements; however, it does
not require any new fair value measurements.
The company utilizes derivative contracts to hedge
against the variability in cash flows associated with the forecasted sale of
its anticipated future natural gas production.
These derivatives are carried at fair value on the consolidated balance
sheets. Additionally, the companys
short-term investments consist primarily of
professionally managed limited partnerships which include investments that are
not publicly traded and may have less readily determinable market values.
SFAS No. 157 establishes a valuation hierarchy for disclosure of the
inputs to valuation used to measure fair value.
This hierarchy prioritizes the inputs into three broad levels as
follows:
·
Level 1 inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities.
·
Level 2 inputs are quoted prices for similar
assets and liabilities in active markets or inputs that are observable for the
asset or liability, either directly or indirectly through market corroboration,
for substantially the full term of the financial instrument.
·
Level 3 inputs are measured based on prices
or valuation models that require inputs that are both significant to the fair
value measurement and less observable from objective sources.
A
financial assets or liabilitys classification within the hierarchy is
determined based on the lowest level input that is significant to the fair
value measurement. The determination of
the fair values below incorporates various factors required under SFAS No. 157,
including the impact of the counterpartys non-performance risk with respect to
the companys financial assets and the companys non-performance risk with
respect to the companys financial liabilities.
The following table provides the assets and liabilities
11
Table of Contents
carried
at fair value measured on a recurring basis as of January 31, 2009:
|
|
As of January 31, 2009
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(in thousands)
|
|
Asset:
|
|
|
|
|
|
|
|
|
|
Derivative asset
|
|
$
|
|
|
$
|
2,286
|
|
$
|
|
|
$
|
2,286
|
|
Short-term
investments
|
|
$
|
281
|
|
$
|
|
|
$
|
1,637
|
|
$
|
1,918
|
|
The
following table sets forth a reconciliation of changes in the fair value of
financial assets and liabilities classified as Level 3 in the fair value
hierarchy for the three months ended January 31, 2009:
|
|
Short Term Investments
|
|
|
|
Three Months Ended
|
|
|
|
January 31, 2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance as of
October 31, 2008 (1)
|
|
$
|
2,764
|
|
Total gains or
losses (realized or unrealized):
|
|
|
|
Included in
earnings (2)
|
|
(211
|
)
|
Redemptions
|
|
(916
|
)
|
Balance as of
January 31, 2009 (1)
|
|
$
|
1,637
|
|
(1) This amount is included in short term investments on the
balance sheet.
(2) This amount is included in investment and other income
(expense) on the statement of operations.
10. COMMON STOCK
On September 22, 2008, the companys Board of Directors authorized
a stock repurchase Program. Under the
program, the company may acquire up to $2,000,000 of its common stock. The repurchases may be made on the open
market, in block trades or otherwise.
The stock repurchase program may be expanded, suspended or discontinued
at any time. During the quarter ended January 31,
2009, the company acquired 74,486 shares of its common stock at an aggregate
cost of $690,000.
Subsequent to January 31, 2009, and through March 2, 2009,
the company has repurchased an additional 31,104 shares, bringing the
total shares repurchased to 204,530 at an average price per share of $8.19
under this program.
11. COMMITMENTS AND CONTINGENCIES
The company has been named as a defendant in a lawsuit alleging breach
of contract, and other issues, arising in the normal course of its oil and gas
activities. The company believes that a
contractual agreement requires that disputes be resolved by arbitration. Although the company believes the allegations
are without merit and that the company will ultimately prevail, the ultimate
outcome of this lawsuit, or arbitration, cannot be determined at this time.
The company has no material outstanding commitments at January 31,
2009.
12
Table
of Contents
12. RECENT ACCOUNTING PRONOUNCEMENTS
On December 29, 2008 the Securities and Exchange Commission
announced final approval of new requirements for reporting oil and gas reserves
to be effective in January 2010.
The new
disclosure requirements provide for consideration of new technologies in
evaluating reserves, allow companies to disclose their probable and possible
reserves to investors, report oil and gas reserves using an average price based
on the prior 12-month period rather than year-end prices, and revise the
disclosure requirements for oil and gas operations. The accounting for the limitation on
capitalized costs for full cost companies will also be revised. The new rule is expected to be effective
for years ending on or after December 31, 2009. Early adoption is not permitted. The
company has not yet evaluated the effects on its financial statements and
disclosures.
In March 2008, the FASB issued Statement No. 161 (FAS 161), Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133, which requires additional disclosures about the
objectives of using derivative instruments, the method by which the derivative
instruments and related hedged items are accounted for under FASB Statement No. 133
and its related interpretations, and the effect of derivative instruments and
related hedged items on financial position, financial performance and cash
flows. FAS 161 also requires
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. FAS 161
is effective for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years (fiscal 2010 for the company). The company is in the process of determining
the effects the adoption of FAS 161 will have on its financial
statement disclosures.
In
December 2007 the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115
(FAS
159)
.
This Statement provides all entities with an option to report
selected financial assets and liabilities at fair value. The Statement is effective as of the
beginning of an entitys first fiscal year beginning after November 15,
2007, with early adoption available in certain circumstances. The company does not expect to elect the
options provided by FAS 159.
In November 2007, the FASB issued Statement No. 141 (revised
2007),
Business Combination
(FAS 141(R)) and Statement No. 160,
Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51
(FAS 160). FAS 141(R) will
change how business acquisitions are accounted for and will impact financial
statements both on the acquisition date and in subsequent periods. FAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. FAS 141(R) and FAS 160 are
effective for both public and private companies for fiscal years beginning on
or after December 15, 2008 (fiscal 2010 for the company). FAS 141(R) will be applied
prospectively. FAS 160 requires retroactive adoption of the presentation
and disclosure requirements for existing minority interests. All other
requirements of FAS 160 will be applied prospectively. Early adoption is prohibited for both
standards. Management is currently
evaluating the requirements of FAS 141(R) and FAS 160 and has
not yet determined the impact on its financial statements.
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q includes certain statements that may be
deemed to be forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
All statements included in this Quarterly Report on Form 10-Q,
other than statements of historical facts, address matters that the company
13
Table of Contents
reasonably
expects, believes or anticipates will or may occur in the future. Forward-looking statements may relate to,
among other things:
·
the
companys future financial position, including working capital and anticipated
cash flow;
·
amounts
and nature of future capital expenditures;
·
operating
costs and other expenses;
·
wells
to be drilled or reworked;
·
oil
and natural gas prices and demand;
·
existing
fields, wells and prospects;
·
diversification
of exploration;
·
estimates
of proved oil and natural gas reserves;
·
reserve
potential;
·
development
and drilling potential;
·
expansion
and other development trends in the oil and natural gas industry;
·
the
companys business strategy;
·
production
of oil and natural gas;
·
matters
related to the Calliope Gas Recovery System;
·
effects
of federal, state and local regulation;
·
insurance
coverage;
·
employee
relations;
·
investment
strategy and risk; and
·
expansion
and growth of the companys business and operations.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2009, working capital decreased $8,985,000 to
$15,175,000 compared to $24,160,000 at October 31, 2008. For the three months ended January 31,
2009, net cash provided by operating activities was $1,281,000 compared to
$1,626,000 for the same period in 2008.
Net income decreased $11,464,000 primarily due to impairment losses of
$16,623,000, a decrease in revenue of $1,625,000 and increased other cost and
expenses of $1,053,000.
For the three months ended January 31, 2009 and 2008, net cash used
in investing activities was $11,534,000 and $3,203,000, respectively. Investing activities primarily included oil
and gas exploration and development expenditures, including Calliope, totaling
$6,157,000 and $2,844,000 respectively.
For the period ended January 31, 2009, the company also purchased
the patents underlying the Calliope Technology for $4,400,000.
The average return on the companys investments was a loss of 5.5% for
the three months ended January 31, 2009 compared to a loss of 1.2% for the
same period last year. At January 31, 2009,
89% of the short term investments were being liquidated.
Existing working capital and anticipated cash
flow are expected to be sufficient to fund operations and capital commitments
for at least the next 12 months. At January 31, 2009,
the company had no lines of credit or other bank financing arrangements except
for the hedging line of credit discussed in Note 5. Because earnings are anticipated to be
reinvested in operations, cash dividends are not expected to be paid. The
company has no defined benefit plans and no obligations for post retirement
employee benefits.
The companys adjusted earnings before interest, taxes, depreciation,
depletion and amortization, including impairment losses, (EBITDA) was
$1,678,000 for the three months ended January 31, 2009 compared to
$3,075,000 for the three months ended January 31, 2008. EBITDA is not a GAAP measure of operating
performance. The company uses this
non-GAAP performance measure primarily to compare its
14
Table
of Contents
performance with other
companies in the industry that make a similar disclosure. The company believes that this performance
measure may also be useful to investors for the same purpose. Investors should not consider this measure in
isolation or as a substitute for operating income, or any other measure for
determining the companys operating performance that is calculated in
accordance with GAAP. In addition, because
EBITDA is not a GAAP measure, it may not necessarily be comparable to similarly
titled measures employed by other companies.
Reconciliation between EBITDA and net income is provided in the table
below:
|
|
Three Months Ended January 31,
|
|
|
|
2009
|
|
2008
|
|
RECONCILIATION
OF EBITDA:
|
|
|
|
|
|
Net Income
(loss)
|
|
$
|
(9,891,000
|
)
|
$
|
1,573,000
|
|
Add Back
(Deduct):
|
|
|
|
|
|
Interest Expense
|
|
|
|
1,000
|
|
Income Tax
Expense (Benefit)
|
|
(6,390,000
|
)
|
648,000
|
|
Depreciation,
Depletion and Amortization Expense Including Write-Down and Impairment
|
|
17,959,000
|
|
853,000
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
1,678,000
|
|
$
|
3,075,000
|
|
OFF-BALANCE SHEET FINANCING
The
company has no off-balance sheet arrangements at January 31, 2009.
PRODUCT PRICES AND PRODUCTION
Although
product prices are key to the companys ability to operate profitably and to
budget capital expenditures, they are beyond the companys control and are
difficult to predict. Since 1991, the
company has periodically hedged the price of a portion of its estimated natural
gas production when the potential for significant downward price movement is
anticipated. Hedging transactions
typically take the form of forward short positions, swaps and collars which are
executed on the NYMEX futures market or by indexing to regional index prices
associated with pipelines in proximity to the companys production. The companys current hedges are indexed to
NYMEX. Refer to Note 5 of the
Consolidated Financial Statements for a complete discussion on the companys
hedging activities.
Gas and oil sales volume and price realization comparisons for the
indicated periods are set forth below.
Price realizations include the sales price and the effect of realized
hedging transactions.
|
|
Three Months Ended January 31,
|
|
|
|
2009
|
|
2008
|
|
% Change
|
|
Product
|
|
Volume
|
|
Price
|
|
Volume
|
|
Price
|
|
Volume
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (Mcf)
|
|
362,000
|
|
$
|
6.65
|
(1)
|
392,000
|
|
$
|
8.24
|
(2)
|
-7
|
%
|
-19
|
%
|
Oil (bbls)
|
|
16,700
|
|
$
|
36.87
|
|
15,700
|
|
$
|
86.39
|
|
+7
|
%
|
-57
|
%
|
(1) Includes $2.55 per Mcf realized hedging gain.
(2) Includes $2.16 per Mcf realized hedging gain.
See comments at
Results of Operations
OPERATIONS
During the first quarter of fiscal 2009, the companys operations
continued to focus on its two core projects oil and natural gas drilling and
application of its patented Calliope Gas Recovery System.
15
Table
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The company believes that, in combination,
its drilling and Calliope projects provide an excellent (and possibly unique)
balance for achieving its goal of adding long-lived natural gas reserves and
production at reasonable costs and risks.
However, it should be expected that successful results will occur unevenly
for both the drilling and Calliope projects.
Drilling results are dependent on both the timing of drilling and on the
drilling success rate. Calliope results
are primarily dependent on the timing, volume and quality of Calliope
installations available to the company.
The company will continue to actively pursue adding reserves through
its two core projects in fiscal 2009, and expects these activities to be a
reliable source of reserve additions.
However, the timing and extent of such activities can be dependent on
many factors which are beyond the companys control, including but not limited
to, the cost and quality of oil field services such as drilling rigs,
production equipment and related services, and access to wells for application
of the companys patented gas recovery system on low pressure gas wells. The prevailing price of oil and natural gas
has a significant effect on demand and, thus, the related cost of such services
and wells.
The cost of field services, particularly the cost of drilling wells,
has increased dramatically during the past several years, driven by higher
energy prices. Concurrently, the quality
of field services has diminished markedly due to manpower shortages. The combination of much higher field service
costs and degradation in the quality of the services had a material negative
impact on drilling economics.
Accordingly, the company has delayed additional drilling scheduled for
second quarter 2009 for a period of at least two months in anticipation of
significant improvement in both the cost and quality of drilling services and
materials.
All of the companys oil and natural gas properties are located
on-shore in the continental United States.
The companys future drilling activities may not be successful, and its
overall drilling success rate may change.
Unsuccessful drilling activities could have a material adverse effect on
the companys results of operations and financial condition. Also, the company may not be able to obtain
the right to drill in areas where it believes there is significant potential
for the company.
Recent Drilling Activities.
Proprietary Drilling Results
The company recently announced
that it has participated in drilling a wildcat discovery well that flowed oil
at impressive initial rates during completion testing. For competitive reasons, we have not
disclosed any detailed ownership, location or technical information about the
well. Due to low oil prices, production
is being curtailed to between 100 and 200 barrels of oil per
day. Confirmation drilling has yielded
positive results.
Northern Anadarko Basin
Oklahoma drilling has
historically been the primary driver for CREDOs production growth. CREDO owns approximately 75,000 gross
acres and has interests in almost 200 wells. During the first quarter of fiscal 2009,
CREDO completed two wells on its PoolProffitt Prospect to test multiple
carbonate reservoirs using new fracture stimulation technology. Both appear to be commercial wells, and there
are up to 12 additional locations on CREDOs acreage.
One
of the wells is a new pool discovery in the Hunton formation. During the final 24-hour test, the well
flowed 535 barrels of oil and an estimated 1.0 to 2.0 MMcfg (million
cubic feet of gas) with virgin pressure.
Due to low oil prices and the reservoir character, we are curtailing
production to 100 barrels of oil per day.
The well also found over 150 feet of potential pay in the
Mississippian formation and 31 feet of excellent Chester pay. CREDO owns a 50% working interest. The second well encountered over
150 feet of indicated pay in the Mississippian formation and 35 feet
of Chester formation. The well is
currently being tested. CREDO owns a 73% working
interest.
In Hemphill County,
Texas, the company purchased an additional 3,800 gross acres and assumed
operatorship of 11 wells. The new
acreage complements the companys Humphreys Prospect and brings our total
acreage in the area to approximately 8,300 gross acres. We have drilled two successful wells on the
acreage, and intend to drill more wells in 2009. CREDO owns interests ranging up to 25%.
South Texas
CREDO entered the South Texas joint venture
to use 3-D seismic to explore for deep, highly faulted prospects. The high potential, 17,000-foot wildcat well
drilled to test the Deep Wilcox sand on the Gemini Prospect confirmed the
seismic interpretation and found porous sand.
However, the sand was water wet and the well was plugged and
abandoned. CREDO received approximately
$1,300,000 of
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cash
for the prospect package and retained an 11.25% carried interest in the
test well. The prospect package consists
of two additional Deep Wilcox prospects which are geologically different from
Gemini Prospect. They are being further
evaluated, and if drilled, CREDO will have an 11.25% carried interest in
the next well.
Central Kansas Uplift
The company has
achieved excellent drilling results on the Central Kansas Uplift. To date, CREDO has participated in 33 wells on the Uplift,
of which 48% have been successfully completed as oil
producers. That outstanding success
prompted us to increase CREDOs leasehold position to almost 150,000 gross
and 75,000 net acres. This acreage
provides a good inventory of future drilling opportunities where CREDO owns
interests ranging up to 85 percent.
Drilling on the Uplift is relatively shallow
and costs are moderate, yielding good economics even in the current product
price environment. In addition, the
project is oil targeted, thereby improving the balance between oil and natural
gas in CREDOs reserve base. We expect
Kansas to make a major contribution to our reserve and production growth in 2009.
Bakken Shale
CREDO entered
the horizontal Bakken oil play in 2008 by leasing about 4,700 acres in
North Dakota. The new leases have five
or ten year terms and they are located in the vicinity of the recently
discovered and prolific Parshall Field. Based
on 640 acre spacing units, CREDO has interests in up to 27 well
locations. Breakthroughs in precision
horizontal drilling and multi-stage, high pressure fracture stimulations have
made the Bakken shale a very active resource play. The U.S. Geological Survey recently estimated
that the Bakken contains around 4.0 billion barrels of undiscovered oil.
Calliope Gas Recovery Technology
Calliope Gas Recovery System
We are continuing to actively discuss
commercial Calliope terms with several companies. We have proven beyond any doubt that
Calliope will perform as advertised.
Credo has previously published statistics on its Calliope wells which
show finding costs of about $0.50 per Mcf and total costs to deliver gas
into the pipeline of about $1.00 per Mcf.
The statistics also show that Calliope is very low risk when installed
on suitable wells.
Calliopes low finding
and production costs have become increasingly attractive as the economics on
many industry drilling projects deteriorate due to lower product prices. We also believe that lower natural gas prices
may stimulate divestitures of marginal properties by other companies, including
properties that have Calliope potential.
At year-end, Credo owned an exclusive license to the Calliope patents
and the related technology. However, in
order to establish absolute control over the technology and to eliminate future
costs for individual well licenses, we recently purchased all of the underlying
patents for $4,500,000. This acquisition
also covers an exciting series of new patents, known as Tractor Seal, that is
specifically designed to remove liquids from shallow wells more efficiently
than existing technologies. If
perfected, this new technology will be an excellent complement to Calliopes
focus on deeper wells
17
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Results of Operations
Three Months Ended January 31, 2009 Compared to Three Months Ended
January 31, 2008
For the three months ended January 31, 2009, oil and gas revenues
decreased 44% to $2,108,000 compared to $3,733,000 during the same period last
year. As the oil and gas price/volume
table on page 15 shows, total gas price realizations, which reflect
realized hedging transactions, decreased 19% to $6.65 per Mcf and oil price
realizations decreased 57% to $36.87 per barrel. The net effect of these price changes was to
decrease oil and gas sales by $1,468,000 ($1,546,000 without realized hedges). For the three months ended January 31,
2009, the companys gas equivalent production fell 5% resulting in an oil and
gas sales decrease of $79,000. The company elected to postpone certain
scheduled drilling due to the historically high costs of equipment and field
services. That decision came with the
consequence that less drilling would cause production declines. Investment and other income decreased
$136,000, primarily due to performance of the companys investments, compared
to last year.
For the three months ended January 31,
2009, total costs and expenses, excluding the impairment loss of $16,623 ,000,
increased 52% to $3,090,000 compared to $2,037,000 for the comparable period in
2008. Oil and gas production expenses
increased due primarily to an increased number of operating wells. DD&A increased primarily due to an
increase in the amortizable cost base before the impairment adjustment. General and administrative expenses increased
primarily due to accounting and professional fees and increased salaries and
benefits. The effective tax rate was
39.25% and 29.18% for the 2009 and 2008 periods, respectively.
SIGNIFICANT ACCOUNTING POLICIES
The company believes the following accounting policies and estimates
are critical in the preparation of its consolidated financial statements: the
carrying value of its oil and natural gas properties, the accounting for oil
and gas reserves, and the estimate of its asset retirement obligations.
OIL AND GAS PROPERTIES
The company uses the full cost method of accounting for costs related
to its oil and natural gas properties.
Capitalized costs included in the full cost pool are depleted on an
aggregate basis using the units-of-production method. All costs incurred in the acquisition,
exploration, and development of properties (including costs of surrendered and
abandoned leaseholds, delay lease rentals, dry holes, and overhead related to
exploration and development activities) and the fair value of estimated future
costs of site restoration, dismantlement, and abandonment activities are
capitalized.
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The capitalized costs in the full cost pool are subject to a quarterly
ceiling test that limits such pooled costs to the aggregate of the present
value of future net revenues attributable to proved oil and natural gas
reserves discounted at 10 percent plus the lower of cost or market value of
unproved properties less any associated tax effects. If such capitalized costs exceed the ceiling,
the company will record a write-down to the extent of such excess as a non-cash
charge to earnings, unless the company considers price increases subsequent to
the balance sheet date which may reduce or eliminate a write-down.
At January 31, 2009, capitalized costs of natural gas and oil
properties exceeded the estimated present value of future net revenues from
proved reserves, net of related income tax considerations, resulting in a non-cash
write down of $15,697,000. A write-down
may not be reversed in future periods, even though higher oil and natural gas
prices may subsequently increase the ceiling.
Changes in oil and natural gas prices have historically had the most
significant impact on the companys ceiling test. In general, the ceiling is lower when prices
are lower. Even though oil and natural
gas prices can be highly volatile over weeks and even days, the ceiling calculation
dictates that prices in effect as of the last day of the test period be used
and held constant. The resulting
valuation is a snapshot as of that day and, thus, is generally not indicative
of a true fair value that would be placed on the companys reserves by the
company or by an independent third party.
Therefore, the future net revenues associated with the estimated proved
reserves are not based on the companys assessment of future prices or costs,
but rather are based on prices and costs in effect as of the end of the test
period.
OIL AND GAS RESERVES
The determination of depreciation and depletion expense as well as
ceiling test write-downs related to the recorded value of the companys oil and
natural gas properties are highly dependent on the estimates of the proved oil
and natural gas reserves. Oil and
natural gas reserves include proved reserves that represent estimated
quantities of crude oil and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. There are numerous uncertainties inherent in
estimating oil and natural gas reserves and their values, including many
factors beyond the companys control.
Accordingly, reserve estimates are often different from the quantities
of oil and natural gas ultimately recovered and the corresponding lifting costs
associated with the recovery of these reserves.
ASSET RETIREMENT OBLIGATIONS
The company estimates the future cost of asset retirement obligations,
discounts that cost to its present value, and records a corresponding asset and
liability in its Consolidated Balance Sheets.
The values ultimately derived are based on many significant estimates,
including future abandonment costs, inflation, market risk premiums, useful
life, and cost of capital. The nature of
these estimates requires the company to make judgments based on historical
experience and future expectations.
Revisions to the estimates may be required based on such things as
changes to cost estimates or the timing of future cash outlays. Any such changes that result in upward or
downward revisions in the estimated obligation will result in an adjustment to
the related capitalized asset and corresponding liability on a prospective
basis.
INTANGIBLE ASSETS
The company reviews the value of its
intangible assets in accordance with FASB Statement No. 144 which requires
that it evaluate these assets for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be fully recoverable or that the useful lives of these assets are no longer
appropriate.
On
September 1, 2000, the company acquired an unrestricted, exclusive license
for patented Calliope Gas Recovery System technology. In July 2008, the company acquired the
third party rights resulting from certain future Calliope installations for
$975,000. Those third party rights would
have resulted principally from Calliope installations of joint ventures between
the company and other natural gas producing companies. As a result of the current natural gas
market, the company believes it is more likely than not that the formation of
joint ventures for the installation of Calliope technology that would have been
subject to these third party rights will not occur within the foreseeable
future. Based on this assumption, and in
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accordance
with FAS 144
Accounting for the Impairment or Disposal of
Long-Lived Assets
, the company has determined that, currently, the
sum of the undiscounted value of cash flows to be derived from future
installations of Calliope technology resulting from joint ventures is
minimal. Accordingly, the company has
recorded an impairment loss of $926,000.
On
November 6, 2008 the company purchased all of the patents underlying the
Calliope Gas Recovery Technology, all of the related third party interests in
future installations of the technology and patents covering a new fluid lift
technology for shallow wells known as Tractor Seal for $4,400,000. The patents are being amortized on a straight
line basis over the remaining lives ranging from 8.6 to 17.6 years.
REVENUE RECOGNITION
The company derives its revenue primarily
from the sale of produced natural gas and crude oil. The company reports revenue gross for the
amounts received before taking into account production taxes and transportation
costs which are reported as oil and gas production expenses. Revenue is recorded in the month production
is delivered to the purchaser at which time title changes hands. The company makes estimates of the amount of
production delivered to purchasers and the prices it will receive. The company uses its knowledge of its
properties, their historical performance, the anticipated effect of weather
conditions during the month of production, NYMEX and local spot market prices,
and other factors as the basis for these estimates. Variances between estimates and the actual
amounts received are recorded when payment is received.
A majority of the companys sales are made under contractual
arrangements with terms that are considered to be usual and customary in the
oil and gas industry. The contracts are
for periods of up to five years with prices determined based upon a percentage
of a pre-determined and published monthly index price. The terms of these contracts have not had an
effect on how the company recognizes its revenue.
HEDGING
The
company recognizes all derivatives as fair value hedges on its balance sheet at
fair value at the end of each period.
Changes in the fair value of hedges are recorded in the Consolidated
Statement of Operations.
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The company manages exposure to commodity price fluctuations by
periodically hedging a portion of estimated natural gas production through the
use of derivatives, typically collars and forward short positions in the NYMEX
futures market. At January 31, 2009
open derivative contracts covered 550,000 MMBtus, approximately 35% of the
companys anticipated 2009 natural gas production, at NYMEX prices ranging from
$8.00 to $10.60 and covered the production months of February, 2009
through October, 2009. Actual price
realizations in the companys principal areas of operations (primarily
Oklahoma) are expected to be 15% to 17% below NYMEX prices primarily due to
basis differentials and transportation costs.
However, regional weather conditions and other economic factors can
periodically result in substantially higher basis differentials. Relevant terms of the open derivative
contracts at January 31, 2009 are as follows:
Natural
Gas Forward Short Positions
|
|
Contract
|
|
Weighted Average
|
|
|
|
Fiscal Quarter Ending
|
|
Volumes MMBtus
|
|
Price per MMBtu
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Apr. 30,
2009
|
|
250,000
|
|
$
|
9.54
|
|
$
|
1,271,000
|
|
July 31,
2009
|
|
150,000
|
|
$
|
8.15
|
|
518,000
|
|
Oct. 31,
2009
|
|
150,000
|
|
$
|
8.31
|
|
497,000
|
|
Total
|
|
550,000
|
|
|
|
$
|
2,286,000
|
|
20
Table
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ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of James T.
Huffman, our Chief Executive Officer, and Alford B. Neely, our Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures
as of January 31, 2009. Based on
the evaluation, these officers have concluded that:
our disclosure controls and procedures are effective
to ensure that information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the SECs
rules and forms, and
our disclosure controls and procedures were effective
to ensure that information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934 was accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Internal Control Over Financial Reporting
There has not been any change in our internal control over financial
reporting that occurred during the quarter ended January 31, 2009 that has
materially affected or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II
- OTHER INFORMATION
ITEM 1.
LEGAL
PROCEEDINGS
Reference
is made to Notes to Consolidated Financial Statements (Unaudited) Note 11,
Commitments and Contingencies, in Part I, Item I of this Form 10-Q
and incorporated by reference in this Part II, Item I.
ITEM 1A.
RISK FACTORS
There have been no
material changes from the risk factors previously disclosed in the companys
Annual Report on Form 10-K/A for the fiscal year ended October 31,
2008.
ITEM 2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities.
During the first quarter of fiscal year 2009, the company repurchased
74,486 shares of its common stock on the open market at a weighted average
price of $9.26. The purchases were made
pursuant to a stock repurchase plan announced on September 24, 2008. The plan authorized repurchases up to
$2,000,000, but could be expanded, suspended or discontinued at any time. Subsequent to January 31, 2009, and
through March 2, 2009, the company has repurchased an additional
31,104 shares, bringing the total shares repurchased to 204,530 at an
average price per share of $8.19.
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Issuer Purchases of Equity Securities
|
|
|
|
|
|
Total number
|
|
Maximum
|
|
|
|
|
|
|
|
of shares
|
|
dollar value
|
|
|
|
|
|
|
|
purchased
|
|
of shares
|
|
|
|
|
|
|
|
as part of
|
|
that may yet
|
|
|
|
Total number of
|
|
Average price
|
|
publicly
|
|
be purchased
|
|
Period
|
|
shares purchased
|
|
paid per share
|
|
announced plan
|
|
under the plan
|
|
|
|
|
|
|
|
|
|
|
|
November 1
- 30 2008
|
|
45,954
|
|
$
|
9.45
|
|
45,954
|
|
$
|
843,000
|
|
December 1
- 31 2008
|
|
22,350
|
|
$
|
8.88
|
|
22,350
|
|
$
|
645,000
|
|
January 1 -
31 2009
|
|
6,182
|
|
$
|
9.16
|
|
6,182
|
|
$
|
588,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
74,486
|
|
|
|
74,486
|
|
$
|
588,000
|
|
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM 4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5.
OTHER
INFORMATION
None.
ITEM 6.
EXHIBITS
Exhibits are as
follow:
31.1
Certification
by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act
of 2002
31.2
Certification
by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act
of 2002
32.1
Certification by Chief Executive
Officer and Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act (18 U.S.C. Section 1350)
22
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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.
|
CREDO Petroleum
Corporation
|
|
(Registrant)
|
|
|
|
|
|
By:
|
/s/ James T.
Huffman
|
|
|
James T. Huffman
|
|
|
Chief Executive
Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
By:
|
/s/ Alford B.
Neely
|
|
|
Alford B. Neely
|
|
|
Chief Financial
Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
Date:
March 12, 2009
23
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