CREDO Petroleum Corporation (NASDAQ:CRED) today released the
text of the Report to Shareholders that is included in the
company�s Annual Report for fiscal 2008. The Annual Report will
soon be mailed to shareholders.
The Report to Shareholders contains significant information
about the company, including certain estimates. This information
may be deemed to include �forward-looking statements� as described
in the last paragraph of this press release. Accordingly, readers
are encouraged to carefully review the �forward-looking statements�
section of this press release.
Fellow Shareholders:
Credo had another excellent year in 2008, with record
operating income and our second best earnings report. Of
equal importance, we are off to an�exceptionally strong start in
2009.
We have significantly diversified our business, both
geographically and technically, in the last few years.
We�are also improving the balance between oil and natural gas in
our reserve base.
Credo�s long time shareholders know that we sometimes adopt
contrarian business strategies. That was again the case in
2008. In view of historically high energy prices, we elected
to monetize assets and to postpone drilling activity in
anticipation of a correction.
Although those were difficult decisions at the time, with
hindsight, we know they were good decisions. Credo is now
exceptionally well positioned to be opportunistic in a�distressed
environment.
Time and again, we have proven
that fiscal responsibility and top tier performance are not
mutually exclusive.
This year marks Credo�s thirtieth anniversary. During that time,
we have experienced several economic and energy price cycles, some
of which were devastating to our industry. I take great pride�that
Credo has been a�solid company and a stable work place through all
of those years. We have�never laid-off employees or reorganized our
business, and Credo has made a profit for its shareholders in 29�of
30�years.
In addition, Credo has been a consistent top tier performer. In
2008, Credo was again named one of Forbes Magazine�s �200 Best
Small Companies�, the fourth time in the past eight years. This
recognition adds to a long�list of performance accolades from
sources such as Fortune Magazine�s �100�Fastest Growing Small
Companies� and USA Today�s �Best 25 Stocks in the Past 25 Years�.
We�also often rank high in John S. Herold�s exploration and
production company performance statistics. It is a tribute to our
employees and directors that Credo has been able to�perform at this
level without using debt.
In July 2008, we sold $16.7 million of equity capital at an
opportune time. Earlier in 2008, we concluded that energy prices
were unsustainably high and that our field costs had risen to
excessive levels. That perspective was the primary driver behind
our decision to postpone spending and to focus on raising
capital.
We were among the earliest in our industry to adjust our
business strategy in anticipation of a deteriorating business
climate. Our decision came with the consequence that less drilling
would cause�production to decline. However, I believe the
production decline has already been overcome by outstanding
drilling success early in 2009. The company�s operational and
financial results for 2008 include the following:
- Record operating income, up 42%
to $8.2 million
- Second best earnings in company
history
- $16.7 million equity sale near
market top
- Reserves down 4% on impact of
low product prices at year-end
- Production down 16% due to
strategic postponement of drilling
- Central Kansas Uplift drilling
success increased to 48%
- Central Kansas Uplift acreage
expanded to almost 150,000 gross acres
- Entry into horizontal Bakken oil
play
A strong balance sheet and
significant cash flow provide Credo great flexibility to increase
capital spending.
Financial Strength. Credo has an excellent balance sheet
and a strong financial condition, with ample cash and no debt. At
October�31,�2008, working capital was $24,160,000. Total assets
were $80,560,000, including cash and short-term investments of
$25,376,000, and stockholders� equity was a record $62,211,000.
Despite lower product prices, we expect increased 2009 production
to generate strong operating cash flow.
Our strong financial position enables us to comfortably take
large interests in Credo�s wells. For example, we retained an
average 70�percent working interest in the six wells that Credo has
drilled so far in 2009. Some appear to be excellent wells, and I
expect these to add substantially to Credo�s production and
reserves in 2009. In fact, I believe these wells have more than
reversed the recent production decline.
Business Strategy. To deliver outstanding results, we
must own high quality assets with a cost basis that will yield good
returns in a variety of product price environments. Credo has an
excellent portfolio of assets, and year after year our people have
executed a well designed strategy that has produced outstanding
long term results. During this downturn, we intend to expand the
capabilities of�our geoscience, engineering and land
departments.
New technology is also a key part of our business strategy.
Impressive advances in 3-D seismic have made it easier to unravel
geological complexities and to locate previously hidden deposits of
oil and gas. The Central Kansas Uplift play provides an excellent
example of how 3-D technology has opened a mature area to another
round of highly successful exploration. Another example is the new,
multi-stage, high pressure fracture stimulation technology that we
are using in our Oklahoma stacked carbonate reservoir play.
Proprietary Drilling Results. We recently announced that
Credo participated in drilling a wildcat discovery well that flowed
oil at impressive initial rates during completion testing. Seven
hourly tests on an open choke yielded flow rates ranging between
900�and 1,100�barrels of oil per day when extrapolated to a 24 hour
basis. There has not, however, been a sequential 24-hour test on an
open choke. 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.
During the last few years, we have
successfully expanded into several oil plays in order to achieve
better balance between oil and natural gas in our reserve
base.
Oklahoma. Oklahoma drilling has historically been the
primary driver for Credo�s production growth. We own approximately
75,000�gross acres and have interests in almost 200�wells. After
year-end, Credo completed two�wells on its PoolProffitt Prospect to
test multiple carbonate reservoirs using new fracture stimulation
technology. Both appear to be very good wells, and there are up to
12�additional locations on Credo�s 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 excellent Chester formation. Credo owns a 73%�working
interest.
Central Kansas Uplift. We have 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 Credo�s 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 Credo�s
reserve base. We expect Kansas to make a major contribution to our
reserve and production growth in 2009.
Texas Panhandle. During 2008, we purchased interests in
over 3,800�gross acres in Hemphill County and assumed operatorship
of 11�wells. The new acreage complements the company�s 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 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.
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 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.
Calliope�s 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 Calliope�s focus on
deeper wells.
Natural Gas Price Hedging. Once again in 2008, we did a
substantial amount of natural gas price hedging. Because gas prices
have an enormous impact on our financial performance, we have a
long-standing policy of actively managing prices through hedging.
This plays an important role in maintaining the consistent
long-term performance that creates confidence and credibility with
all of our constituencies.
We are in an enviable position to
build our business in an opportunity rich environment.
Looking Ahead. We are off to an exceptionally strong
start in 2009 with outstanding early drilling success. We also
enter 2009 exceptionally well positioned to build on Credo�s assets
at good fundamental values in a cyclical downturn. The foundation
of Credo today was built during the last severe energy price
downturn. We expect this downturn to present an opportunity rich
environment to expand our business and we are not opposed to using
moderate leverage, if needed, to finance outstanding
opportunities.
Looking ahead includes formulating a viable outlook regarding
the future of the world economy and energy prices. To be
successful, we must be correct about direction as well as timing.
Based on our outlook, we must make some difficult business
decisions. For example, we are curtailing certain new production
due to low product prices because we do not think it is prudent to
sell flush production into a low price environment. We are also
postponing most of our drilling in anticipation of a significant
reduction in the costs of equipment and field services.
Building a company that will prosper through the ups and downs
of business cycles requires that we take a long term view. Our
highly creative people generate opportunities to find and sell a
product that is a consumer staple and a basic necessity in our
society. With these fundamentals at the foundation of our business
strategy, we have proven that Credo can achieve top tier
performance while being fiscally responsible.
We appreciate your support, and we are always mindful of our
duty to uphold the trust you have placed in us through your
ownership of Credo shares.
�
/s/ James T. Huffman
James T. Huffman Chief Executive Officer January 31, 2009 �
CREDO Petroleum Corporation is a publicly traded independent
energy company headquartered in Denver, Colorado. The company is
engaged in the exploration for and the acquisition, development and
marketing of natural gas and crude oil in the Mid-Continent and
Rocky Mountain regions. The company�s stock is traded on the NASDAQ
System under the symbol �CRED� and is quoted daily in the �NASDAQ
Global Market� section of The Wall Street Journal.
This press release 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 press release, other than statements of
historical facts, address matters that the company reasonably
expects, believes or anticipates will or may occur in the future.
Such statements are subject to various assumptions, risks and
uncertainties, many of which are beyond the control of the company.
Investors are cautioned that any such statements are not guarantees
of future performance and that actual results or developments
may�differ materially from those described in the forward-looking
statements. Investors are encouraged to read the "Forward-Looking
Statements" and "Risk Factors" sections included in the company's
Annual Report on Form 10-K for more information. Although the
company may from time to time voluntarily update its prior forward
looking statements, it disclaims any commitment to do so except as
required by securities laws.
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