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 April 30,
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)
Delaware
|
|
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 has submitted
electronically and posted on its corporate web site, if any, every interactive
data file required to be submitted and posted pursuant to Rule 405 of
Regulation S-Y during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files.) Yes
o
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 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
|
June 9,
2008
|
|
Common stock, $.10 par value
|
|
10,306,000
|
Table of Contents
CREDO
PETROLEUM CORPORATION AND SUBSIDIARIES
Quarterly
Report on Form 10-Q For the Period Ended April 30, 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
|
|
April 30,
|
|
October 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,378,000
|
|
$
|
22,332,000
|
|
Short-term investments
|
|
1,861,000
|
|
3,044,000
|
|
Receivables:
|
|
|
|
|
|
Accrued oil and gas sales
|
|
1,900,000
|
|
1,733,000
|
|
Trade
|
|
530,000
|
|
995,000
|
|
Derivative Assets
|
|
1,397,000
|
|
1,745,000
|
|
Other current assets
|
|
382,000
|
|
205,000
|
|
Total current assets
|
|
16,448,000
|
|
30,054,000
|
|
|
|
|
|
|
|
Long-term assets:
|
|
|
|
|
|
Oil and gas properties, at cost, using full cost
method:
|
|
|
|
|
|
Unevaluated oil and gas properties
|
|
6,321,000
|
|
12,280,000
|
|
Evaluated oil and gas properties
|
|
74,080,000
|
|
59,730,000
|
|
Less:
accumulated depreciation, depletion and amortization of oil and gas properties
|
|
(51,554,000
|
)
|
(25,554,000
|
)
|
Net oil and gas properties, at cost, using full cost
method
|
|
28,847,000
|
|
46,456,000
|
|
|
|
|
|
|
|
Intangible
Assets, net of accumulated amortization of $218,000 in 2009 and $595,000 in
2008
|
|
4,310,000
|
|
1,079,000
|
|
|
|
|
|
|
|
Compressor and tubular inventory to be used in
development
|
|
1,800,000
|
|
2,592,000
|
|
|
|
|
|
|
|
Other, net
|
|
396,000
|
|
379,000
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
51,801,000
|
|
$
|
80,560,000
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
780,000
|
|
$
|
3,857,000
|
|
Revenue distribution payable
|
|
682,000
|
|
982,000
|
|
Other accrued liabilities
|
|
558,000
|
|
931,000
|
|
Income taxes payable
|
|
173,000
|
|
124,000
|
|
Total current liabilities
|
|
2,193,000
|
|
5,894,000
|
|
|
|
|
|
|
|
Long Term Liabilities:
|
|
|
|
|
|
Deferred income taxes, net
|
|
1,732,000
|
|
11,117,000
|
|
Asset retirement obligation
|
|
1,402,000
|
|
1,338,000
|
|
Total liabilities
|
|
5,327,000
|
|
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 shares issued
in 2009 and in 2008
|
|
1,066,000
|
|
1,066,000
|
|
Capital in excess of par value
|
|
31,368,000
|
|
31,352,000
|
|
Treasury stock at cost, 354,112 shares in 2009 and 223,000
in 2008
|
|
(2,134,000
|
)
|
(982,000
|
)
|
Retained earnings
|
|
16,174,000
|
|
30,775,000
|
|
Total stockholders equity
|
|
46,474,000
|
|
62,211,000
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
51,801,000
|
|
$
|
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)
|
|
Six Months Ended
April 30,
|
|
Three Months Ended
April 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
Oil sales
|
|
$
|
2,118,000
|
|
$
|
2,671,000
|
|
$
|
1,496,000
|
|
$
|
1,319,000
|
|
Natural gas sales
|
|
2,343,000
|
|
6,004,000
|
|
857,000
|
|
3,623,000
|
|
|
|
4,461,000
|
|
8,675,000
|
|
2,353,000
|
|
4,942,000
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
Oil and gas production
|
|
1,623,000
|
|
1,838,000
|
|
737,000
|
|
986,000
|
|
Depreciation, depletion
and amortization
|
|
2,540,000
|
|
1,751,000
|
|
1,203,000
|
|
898,000
|
|
Write-down
of oil and natural gas properties (Note 3) and impairment of long lived
assets (Note 8)
|
|
24,652,000
|
|
|
|
8,030,000
|
|
|
|
General and administrative
|
|
1,389,000
|
|
697,000
|
|
521,000
|
|
365,000
|
|
|
|
30,204,000
|
|
4,286,000
|
|
10,491,000
|
|
2,249,000
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
(25,743,000
|
)
|
4,389,000
|
|
(8,138,000
|
)
|
2,693,000
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME AND
(EXPENSE)
|
|
|
|
|
|
|
|
|
|
Realized
and unrealized gains (losses) from derivative contracts
|
|
1,927,000
|
|
(3,472,000
|
)
|
461,000
|
|
(4,003,000
|
)
|
Investment and other income (loss)
|
|
(120,000
|
)
|
71,000
|
|
22,000
|
|
77,000
|
|
|
|
1,807,000
|
|
(3,401,000
|
)
|
483,000
|
|
(3,926,000
|
)
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
(23,936,000
|
)
|
988,000
|
|
(7,655,000
|
)
|
(1,233,000
|
)
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
|
|
9,335,000
|
|
(295,000
|
)
|
2,945,000
|
|
353,000
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(14,601,000
|
)
|
$
|
693,000
|
|
$
|
(4,710,000
|
)
|
$
|
(880,000
|
)
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE OF COMMON STOCK BASIC
|
|
$
|
(1.41
|
)
|
$
|
.07
|
|
$
|
(.46
|
)
|
$
|
(.09
|
)
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE OF COMMON STOCK DILUTED
|
|
$
|
(1.41
|
)
|
$
|
.07
|
|
$
|
(.46
|
)
|
$
|
(.09
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of Common Stock and dilutive securities:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
10,358,000
|
|
9,299,000
|
|
10,330,000
|
|
9,302,000
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
10,358,000
|
|
9,363,000
|
|
10,330,000
|
|
9,302,000
|
|
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 Six Months Ended April 30, 2009
(Unaudited)
|
|
|
|
|
|
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 (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
(14,601,000
|
)
|
(14,601,000
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
(1,152,000
|
)
|
|
|
(1,152,000
|
)
|
Compensation expense
associated with unvested portion of previously
granted stock options
|
|
|
|
|
|
16,000
|
|
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance April 30, 2009
|
|
10,660,000
|
|
$
|
1,066,000
|
|
$
|
31,368,000
|
|
$
|
(2,134,000
|
)
|
$
|
16,174,000
|
|
$
|
46,474,000
|
|
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)
|
|
Six Months Ended
|
|
|
|
April 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(14,601,000
|
)
|
$
|
693,000
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Write-down
of oil and natural gas properties and impairment of long lived assets
|
|
24,652,000
|
|
|
|
Depreciation, depletion and amortization
|
|
2,540,000
|
|
1,751,000
|
|
ARO liability accretion
|
|
38,000
|
|
25,000
|
|
Unrealized loss on derivative instruments
|
|
348,000
|
|
4,324,000
|
|
Deferred income taxes
|
|
(9,335,000
|
)
|
6,000
|
|
Loss on short term investments
|
|
208,000
|
|
46,000
|
|
Compensation expense related to stock options
granted
|
|
16,000
|
|
30,000
|
|
Other
|
|
27,000
|
|
59,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Proceeds from short-term investments
|
|
975,000
|
|
|
|
Accrued oil and gas sales
|
|
(167,000
|
)
|
(1,016,000
|
)
|
Trade receivables
|
|
465,000
|
|
(170,000
|
)
|
Other current assets
|
|
(177,000
|
)
|
(104,000
|
)
|
Accounts payable and accrued liabilities
|
|
(981,000
|
)
|
(881,000
|
)
|
Income taxes payable
|
|
(1,000
|
)
|
6,000
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
4,007,000
|
|
4,769,000
|
|
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
|
|
|
Additions to oil and gas properties
|
|
(10,368,000
|
)
|
(4,955,000
|
)
|
Changes in other long-term assets
|
|
(41,000
|
)
|
(467,000
|
)
|
Purchase intangible assets
|
|
(4,400,000
|
)
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
(14,809,000
|
)
|
(5,422,000
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
|
|
|
Purchase of treasury stock
|
|
(1,152,000
|
)
|
|
|
Proceeds from exercise of stock options
|
|
|
|
173,000
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
(1,152,000
|
)
|
173,000
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
(11,954,000
|
)
|
(480,000
|
)
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS:
|
|
|
|
|
|
Beginning of period
|
|
22,332,000
|
|
7,285,000
|
|
|
|
|
|
|
|
End of period
|
|
$
|
10,378,000
|
|
$
|
6,805,000
|
|
|
|
|
|
|
|
Additions to oil and gas properties in current
liabilities
|
|
$
|
398,000
|
|
$
|
1,369,000
|
|
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)
April 30,
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 has 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 six months
ended April 30, 2009 and 2008 were $2,273,000 and $1,697,000
respectively, and were $1,081,000 and $871,000 for the three months ended April 30,
2009 and 2008, 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.
Costs for unevaluated properties, which typically include lease rentals,
geology and seismic costs, are capitalized but are excluded from the
amortizable pool during the evaluation period. When determinations are made
whether the property has proved recoverable reserves or not, or if there is an
impairment, the costs are reclassified to the full cost pool.
7
Table of
Contents
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 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 natural gas prices at April 30, 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 $8,030,000. The weighted average spot prices used in the
ceiling test calculation at April 30, 2009 for oil and natural gas were
$46.22 per barrel and $2.83 per Mcf.
Lower
oil and natural gas prices at January 31, 2009 also caused capitalized
costs of oil and natural gas properties to exceed the ceiling test
limitation. The company recorded a
non-cash write-down of $15,696,000 for the quarter ended January 31,
2009. The weighted average spot prices
used in the ceiling test calculation at January 31, 2009 for oil and
natural gas were $38.25 per barrel and $3.33 per Mcf. The total non-cash write-down, due to ceiling
test limitations, is $23,726,000 through April 30, 2009. 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 six months ended April 30, 2009 and 2008, the company recognized
stock based compensation expense of $16,000 and $30,000 respectively. For the three months ended Aril 30, 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 April 30, 2009
was approximately $48,000 which is expected to be recognized over an average of
1.6 years.
No
options were granted during the six months ended April 30, 2009 or 2008.
8
Table of
Contents
Plan activity for the six months ended April 30, 2009 is set forth
below:
|
|
Six
Months Ended April 30, 2009
|
|
|
|
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at October 31, 2008
|
|
232,769
|
|
$
|
9.04
|
|
$
|
394,000
|
|
Granted
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
Cancelled or forfeited
|
|
(53,706
|
)
|
14.31
|
|
|
|
Outstanding at April 30, 2009
|
|
179,063
|
|
$
|
7.46
|
|
$
|
337,000
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2009
|
|
169,063
|
|
$
|
7.15
|
|
$
|
337,000
|
|
|
|
|
|
|
|
|
|
Weighted average contractual life at April 30, 2009
|
|
|
|
4.9 years
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
Number
|
|
Weighted
Average
|
|
Weighted
|
|
Number
|
|
|
|
Range
of
|
|
Outstanding
|
|
Remaining
|
|
Average
|
|
Exercisable
at
|
|
Weighted
|
|
Exercise
|
|
at
April 30,
|
|
Contractual
|
|
Exercise
|
|
April 30,
|
|
Average
|
|
Prices
|
|
2009
|
|
Life
in Years
|
|
Price
|
|
2009
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 5.93
|
|
139,063
|
|
4.12
|
|
$
|
5.93
|
|
139,063
|
|
$
|
5.93
|
|
$12.78
|
|
40,000
|
|
7.60
|
|
$
|
12.78
|
|
30,000
|
|
$
|
12.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 5.93 -$12.78
|
|
179,063
|
|
4.90
|
|
$
|
7.46
|
|
169,063
|
|
$
|
7.15
|
|
5. NATURAL GAS DERIVATIVES
On February 1, 2009,
the company adopted SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161 requires entities to provide
greater transparency about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) and how derivative instruments and related
hedged items affect an entitys financial position, results of operations, and
cash flows.
The
company is exposed to certain commodity price risks relating to its ongoing
operations. The company periodically
uses natural gas 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
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.
For
the six months ended April 30, 2009 and 2008, the company had realized
gains on derivatives of $2,275,000 and $852,000 respectively, and unrealized
losses of $348,000 and $4,324,000 respectively.
For the quarter ended April 30 2009 and 2008 the company had
realized gains on derivatives of $1,350,000 and $5,000 respectively, and
unrealized losses of $889,000 and $4,008,000, respectively. At April 30, 2009 open derivative
contracts covered 300,000 MMBtus at NYMEX basis prices ranging from $8.04
to $8.41, and cover the production months of May 2009 through October 2009. Average prices in
9
Table of
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the companys primary market are currently 11% 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 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.
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 the balance sheet and changes in fair value are recorded in the
statement of operations as they occur.
At April 30, 2009 the company has outstanding natural gas swap
contracts for 50,000 Mmbtu per month through October 2009. The location and amount of derivative fair
values and related gain (loss) are indicated in the following tables (in
thousands):
Derivatives not designated as
hedging instruments under
|
|
As of April 30, 2009
|
|
SFAS No. 133
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Natural Gas Forward Short Positions
|
|
Derivative Asset
|
|
$
|
1,397
|
|
|
|
|
|
|
|
|
|
|
Amount
of Gain or (Loss) Recognized in Income on Derivatives
|
|
Derivatives not designated as
|
|
Location of Gain/(Loss)
|
|
Six Months
|
|
Three Months
|
|
hedging instruments under
|
|
Recognized in
|
|
Ended
|
|
Ended
|
|
SFAS No. 133
|
|
Income on Derivatives
|
|
April 30, 2009
|
|
April 30, 2009
|
|
Natural Gas Forward Short Positions
|
|
Other
Income and (Expense)
|
|
$
|
1,927
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
6. EARNINGS PER SHARE
The companys calculation of earnings per share of common stock is as
follows:
|
|
Six
Months Ended April 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
Net
|
|
|
|
Income
|
|
Net
|
|
|
|
Income
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
Basic
earnings (loss)
per share
|
|
$
|
(14,601,000
|
)
|
10,358,000
|
|
$
|
(1.41
|
)
|
$
|
693,000
|
|
9,299,000
|
|
$
|
.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive shares
of common
stock from stock options
|
|
|
|
|
|
|
|
|
|
64,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss)
per share
|
|
$
|
(14,601,000
|
)
|
10,358,000
|
|
$
|
(1.41
|
)
|
$
|
693,000
|
|
9,363,000
|
|
$
|
.07
|
|
10
Table of
Contents
|
|
Three Months Ended
April 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
Net
|
|
|
|
Loss
|
|
Net
|
|
|
|
Income
|
|
|
|
Loss
|
|
Shares
|
|
Per Share
|
|
Loss
|
|
Shares
|
|
Per Share
|
|
Basic
earnings (loss)
per share
|
|
$
|
(4,710,000
|
)
|
10,330,000
|
|
$
|
(.46
|
)
|
$
|
(880,000
|
)
|
9,302,000
|
|
$
|
(.09
|
)
|
Effect
of dilutive shares
of common
stock from stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss)
per share
|
|
$
|
(4,710,000
|
)
|
10,330,000
|
|
$
|
(.46
|
)
|
$
|
(880,000
|
)
|
9,302,000
|
|
$
|
(.09
|
)
|
The companys outstanding options were not included in the calculation
of diluted loss per share for the three and six month periods ended April 30,
2009 or the three months ended April 30, 2008 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 April 30, 2009 the companys 2007 Federal tax return had
been audited by the IRS, and the final report reflected approximately $24,000
in additional tax due. 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 8.4 to 17.4 years.
11
Table
of Contents
|
|
April 30,
2009
|
|
|
|
Gross
Carrying
|
|
Accumulated
|
|
|
|
Amount
|
|
Amortization
|
|
Amortized intangible assets:
|
|
|
|
|
|
Calliope intangible assets
|
|
$
|
4,528,000
|
|
$
|
218,000
|
|
|
|
|
|
|
|
Aggregate amortization expense:
|
|
|
|
|
|
For the six months ended April 30, 2009
|
|
|
|
$
|
218,000
|
|
|
|
|
|
|
|
|
|
In
July 2008, the company acquired the third party rights related to 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 natural gas market at January 31, 2009, the company
believed it to be 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 would not occur within the foreseeable future. Based on that assumption, and in accordance
with FASB Statement No. 144
Accounting for the
Impairment or Disposal of Long-Lived Assets
(FAS 144), the
company determined that the sum of the undiscounted value of cash flows to be
derived from future installations of Calliope technology resulting from joint
ventures was minimal. Accordingly, the
company recorded an impairment loss of $926,000 for the quarter ended January 31, 2009.
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
SFAS 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
12
Table
of Contents
non-performance risk with respect to the companys
financial
liabilities. The following table
provides the assets and liabilities carried at fair value measured on a
recurring basis as of April 30, 2009:
|
|
As of April 30,
2009
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(in thousands)
|
|
Asset:
|
|
|
|
|
|
|
|
|
|
Derivative asset (current)
|
|
$
|
|
|
$
|
1,397
|
|
$
|
|
|
$
|
1,397
|
|
Short-term investments
|
|
$
|
285
|
|
$
|
|
|
$
|
1,576
|
|
$
|
1,861
|
|
Level
3 instruments are comprised of the companys investments in professionally
managed limited partnerships. The fair
value represents the net asset value of the companys share in each
partnership. The company identified the
investments as Level 3 instruments due to the fact that quoted prices for the
underlying investments in the partnerships cannot be obtained and there is not
an active market for the underlying investments or the partnerships
shares. The company utilizes the periodic
fund statements along with current fund redemption activity and communication
with investment advisors to determine the valuation of its investment.
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 and six months ended April 30, 2009:
|
|
Three Months
|
|
Six Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
April 30, 2009
|
|
April 30, 2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Balance
as of January 31, 2009 and October 31, 2008, respectively(1)
|
|
$
|
1,637
|
|
$
|
2,764
|
|
Total
gains (losses):
|
|
|
|
|
|
Included
in earnings(2)
|
|
(3
|
)
|
(213
|
)
|
Redemptions
|
|
(58
|
)
|
(975
|
)
|
Balance
as of April 30, 2009
|
|
$
|
1,576
|
|
$
|
1,576
|
|
(1)
This amount is included in short-term investments on
the balance sheet.
(2)
This amount is included in investment and other income
(loss) 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 could acquire
up to $2,000,000 of its common stock. On
April 9, 2009, the Board authorized expanding the repurchase program to
$4,000,000. 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 April 30, 2009, the company acquired
57,014 shares of its common stock at an aggregate cost of $462,000. For the six months ended April 30, 2009,
the company acquired 131,500 shares of its common stock at an aggregate cost of
$1,151,000. A total of
230,440 shares have been repurchased under the program at an average price
per share of $8.13. No shares have been
repurchased subsequent to April 30, 2009 through the date of this report
on Form 10-Q.
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
13
Table of Contents
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 April 30,
2009.
12.
RECENT
ACCOUNTING PRONOUNCEMENTS
In December 2008, the Securities and Exchange Commission adopted
revisions to its oil and gas disclosure requirements that are intended to align
them with current practices and changes in technology. Among other things, the amendments will:
replace the single-day year-end pricing assumption with a twelve-month average
pricing assumption; permit the disclosure of probable and possible reserves;
allow the use of certain technologies to establish reserves; require the
disclosure of the qualifications of the technical person primarily responsible
for preparing the reserves estimates or conducting a reserves audit; require
the filing of the independent reserve engineers summary report; and permit the
disclosure of a reserves sensitivity analysis table to illustrate the impact of
different price and/or cost assumptions on reserves. These amendments are
effective for registration statements filed on or after January 1, 2010,
and for annual reports on Form 10-K for fiscal years ending on December 31,
2009, with early adoption prohibited.
The company is currently evaluating the impact that the adoption of this
pronouncement will have on the companys financial position, results of
operations, and disclosures.
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 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;
14
Table of Contents
·
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 April 30, 2009,
working capital decreased $9,905,000 to $14,255,000 compared to $24,160,000 at October 31,
2008. For the six months ended April 30,
2009, net cash provided by operating activities was $4,007,000 compared to
$4,769,000 for the same period in 2008.
Net income decreased $15,294,000 primarily due to impairment losses of
$24,652,000, a decrease in revenue of $4,214,000 and increased other costs and
expenses of $1,241,000.
For the six months ended April 30, 2009 and 2008, net cash used in
investing activities was $14,809,000 and $5,422,000, respectively. Investing activities primarily included oil
and gas exploration and development expenditures, including Calliope, totaling
$10,368,000 and $4,955,000 respectively.
For the period ended April 30, 2009, the company also purchased the
patents underlying the Calliope Technology for $4,400,000.
At
April 30, 2009, eighty eight percent of the companys 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 April 30, 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
$3,256,000 for the six months ended April 30, 2009 compared to $2,744,000
for the six months ended April 30, 2008. EBITDA is not a GAAP measure of operating
performance. The company uses this
non-GAAP performance measure primarily to compare its 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:
15
Table
of Contents
|
|
Six
Months Ended April 30,
|
|
|
|
2009
|
|
2008
|
|
RECONCILIATION OF EBITDA:
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
(14,601,000
|
)
|
$
|
693,000
|
|
Add Back (Deduct):
|
|
|
|
|
|
Interest Expense
|
|
|
|
5,000
|
|
Income Tax Expense (Benefit)
|
|
(9,335,000
|
)
|
295,000
|
|
Depreciation,
Depletion and Amortization Expense
Including Write-Down and Impairment
|
|
27,192,000
|
|
1,751,000
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
3,256,000
|
|
$
|
2,744,000
|
|
OFF-BALANCE SHEET FINANCING
The
company has no off-balance sheet arrangements at April 30, 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.
|
|
Six
Months Ended April 30,
|
|
|
|
2009
|
|
2008
|
|
%
Change
|
|
Product
|
|
Volume
|
|
Price
|
|
Volume
|
|
Price
|
|
Volume
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (Mcf)
|
|
647,000
|
|
$
|
7.13
|
(1)
|
825,000
|
|
$
|
8.31
|
(2)
|
-21
|
%
|
-14
|
%
|
Oil (bbls)
|
|
54,800
|
|
$
|
38.63
|
|
29,100
|
|
$
|
91.87
|
|
+89
|
%
|
-58
|
%
|
|
|
Three
Months Ended April 30,
|
|
|
|
2009
|
|
2008
|
|
%
Change
|
|
Product
|
|
Volume
|
|
Price
|
|
Volume
|
|
Price
|
|
Volume
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (Mcf)
|
|
285,000
|
|
$
|
7.75
|
(3)
|
433,000
|
|
$
|
8.37
|
(4)
|
-34
|
%
|
-7
|
%
|
Oil (bbls)
|
|
38,100
|
|
$
|
39.25
|
|
13,400
|
|
$
|
98.25
|
|
+184
|
%
|
-60
|
%
|
(1) Includes $3.51 Mcf realized hedging
gain.
(2) Includes $1.03 Mcf realized hedging
gain.
(3) Includes $4.74 Mcf realized hedging
gain
(4) Includes $0.01 Mcf realized hedging
gain.
As
previously reported, during fiscal 2008 and the first two quarters of fiscal
2009, 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 to decline. The decline in
16
Table of Contents
gas
production is evidenced by the above table.
Beginning
in fiscal year 2008, the company has focused its drilling program primarily on
oil prospects. The results of the
drilling program are also evidenced by
the above table. Oil production has
increased 89% for the six months ended April 30, 2009 compared to the same
period in 2008. In the quarter ended April 30,
2009 oil production has increased 184% compared to the same quarter in 2008.
On
a gas equivalent units basis, the production declines the company has
experienced in recent periods have been substantially overcome.
Total production declined only 2% for the six months ended April 30,
2009 from the same period a year ago and for the three months ended April 30, 2009
gas equivalent production is unchanged from last year.
More
importantly, recent drilling discoveries have begun to significantly improve
the balance between oil and gas reserves and oil production.
OPERATIONS
During the first six months 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.
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 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, which is beginning to occur.
The company is currently re-evaluating the timing and extent of its
drilling program.
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.
17
Table of
Contents
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. Production is being curtailed to between
100 and 200 barrels of oil per day.
Two confirmation wells have yielded positive results and a third
confirmation well is scheduled to spud in June 2009.
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 have proved to be commercial wells, and
there are up to 12 additional locations on CREDOs acreage. CREDO owns 50% to 73% working
interest in the wells.
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 the future. 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 in cash for the prospect package last year,
but 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 36 wells on the Uplift,
of which 47% 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.
Credo recently completed shooting 3-D seismic over approximately 100
square miles of the prospect, and the initial interpretation shows many
potential drilling locations in 11 prospect areas. The Company expects to drill two to four
wells per month for the balance of the year.
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. Approximately $2,258,000 (50%) of the
acquisition cost has been reclassified to the full cost pool. The company is currently evaluating well proposals,
and expects to begin drilling this summer in what has become the number one oil
resource play in the U.S. 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.
18
Table
of Contents
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 $4,400,000. 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.
Results of Operations
Six Months Ended April 30,
2009 Compared to Six Months Ended April 30, 2008
For the six months ended April 30,
2009, oil and gas revenues decreased 48% to $4,461,000 compared to $8,675,000
during the same period last year. As the
oil and gas price/volume table on page 16 shows, total gas price
realizations, which reflect realized hedging transactions, decreased 14% to
$7.13 per Mcf and oil price realizations decreased 58% to $38.63 per
barrel. The net effect of these price
changes was to decrease oil and gas realizations by $3,143,000 ($4,565,000
without realized hedges). For the six
months ended April 30, 2009, the companys gas equivalent production
decreased 2%, but due to increased oil production, and the price disparity of
oil and gas, resulted in oil and gas sales increase of $352,000. 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
$191,000, primarily due to market performance and liquidation of the companys
investments, compared to last year.
For the six months ended April 30, 2009,
total costs and expenses, excluding the impairment loss of $24,652,000,
increased 29% to $5,552,000 compared to $4,286,000 for the comparable period in
2008. Oil and gas production expenses
decreased due primarily to reduced field level expenses. 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 39.0% and 29.9%
for the 2009 and 2008 periods, respectively.
Three Months Ended April 30, 2009 Compared to Three Months Ended April 30,
2008
For the three months ended April 30, 2009, total revenues
decreased 52% to $2,353,000 compared to $4,942,000 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 7% to $7.75 per Mcf and oil price
realizations decreased 60% to $39.25 per barrel. The net effect of these price changes was to
decrease oil and gas realizations by $1,766,000 ($3,111,000 without realized
hedges). For the three months ended April 30, 2009,
the companys gas equivalent production remained unchanged, but due to
increased oil production, and the price disparity of oil and gas, resulted in
an oil and gas sales increase of
19
Table of Contents
$523,000. Investment and other
income fell $54,000 due to a generally poorer investment environment and
liquidation of a majority of the companys investment holdings.
For the three months ended April 30,
2009, total costs and expenses, excluding the impairment loss of $8,030,000,
rose 9% to $2,461,000 compared to $2,249,000 for the comparable period in
2008. Oil and gas production expenses
decreased 25% due primarily to decreased field level costs. Depreciation, depletion and amortization
(DD&A) increased primarily due to the increased cost base 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
39.0% and 28.6% 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.
Costs for unevaluated properties, which typically include lease rentals,
geology and seismic costs, are capitalized but are excluded from the
amortizable pool during the evaluation period.
When determinations are made whether the property has proved recoverable
reserves or not, or if there is an impairment, the costs are reclassified to
the full cost pool.
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.
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
20
Table
of Contents
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 natural gas prices at January 31,
2009, the company determined it to be 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 FAS 144
Accounting for the
Impairment or Disposal of Long-Lived Assets
, the company determined
that 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
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 8.4 to
17.4 years. These costs are subject
to potential future impairment if anticipated future Calliope installations do
not occur.
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.
21
Table of
Contents
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 April 30, 2009 open derivative
contracts covered 300,000 MMBtus, approximately 50% of the companys
anticipated 2009 natural gas production during the hedged period, at NYMEX
prices ranging from $8.04 to $8.41 and covered the production months of
May, 2009 through October, 2009.
Acreage prices in the companys primary market are currently
11% below NYMEX prices 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 April 30, 2009 are as
follows:
Natural
Gas Forward Short Positions
|
|
Contract
|
|
Weighted Average
|
|
|
|
Fiscal Quarter Ending
|
|
Volumes MMBtus
|
|
Price per MMBtu
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
July 31, 2009
|
|
150,000
|
|
$
|
8.15
|
|
$
|
711,000
|
|
Oct. 31, 2009
|
|
150,000
|
|
$
|
8.31
|
|
686,000
|
|
Total
|
|
300,000
|
|
|
|
$
|
1,397,000
|
|
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 April 30,
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 April 30, 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,
|
22
Table of Contents
|
|
Commitments and
Contingencies, in Part I, Item I of this Form 10-Q and
incorporated by reference into 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,
as amended, 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 six
months of fiscal year 2009, the company repurchased 131,500 shares of its
common stock on the open market at a weighted average price of $8.76. The purchases were made pursuant to
a stock repurchase plan announced on September 24, 2008 and
extended by the Board of Directors on April 9, 2009. The extended plan authorized repurchases up
to $4,000,000, but could be expanded, suspended or discontinued at any
time. Subsequent to April 30, 2009,
through June 9, 2009, no additional shares have been
repurchased. At April 30, 2009,
the company has repurchased 230,440 shares of common stock at an average
price per share of $8.13.
|
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 plans
|
|
under the plans
|
|
|
|
|
|
|
|
|
|
|
|
Sept.
22, 2008 Oct. 31, 2008
|
|
98,940
|
|
$
|
7.31
|
|
98,940
|
|
$
|
1,277,000
|
|
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
|
|
February
1 28, 2009
|
|
29,104
|
|
$
|
8.56
|
|
29,104
|
|
$
|
338,000
|
|
March
1 31, 2009
|
|
15,110
|
|
$
|
7.49
|
|
15,110
|
|
$
|
225,000
|
|
April
1 30, 2009
|
|
12,800
|
|
$
|
7.76
|
|
12,800
|
|
$
|
2,126,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
230,440
|
|
$
|
8.13
|
|
230,440
|
|
|
|
ITEM 3.
|
|
DEFAULTS UPON SENIOR SECURITIES
|
|
|
|
|
|
None.
|
ITEM 4.
|
|
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
|
|
|
|
|
|
The companys annual
meeting of stockholders was held on April 9, 2009, for the purpose of
electing three Class II directors, ratifying the appointment of Ernst &
Young, LLP as the companys independent registered public accounting firm and
voting on the reincorporation of the company from Colorado to Delaware. Proxies for the meeting were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934
and there was no solicitation in opposition to managements
solicitation. Managements nominees
for Class II directors, as listed in the proxy statement, were elected
with the number of votes set forth below.
|
23
Table
of Contents
Name
|
|
For
|
|
Withheld
|
|
Clarence H. Brown
|
|
9,439,196
|
|
296,360
|
|
James T. Huffman
|
|
7,088,962
|
|
2,646,594
|
|
W. Mark Meyer
|
|
7,111,655
|
|
2,623,901
|
|
Continuing Directors:
On April 9, 2009, Mr. Marlis
Smith was appointed to the companys board of directors as a Class I director
whose term will expire at the companys 2010 annual meeting. After the companys annual meeting on April 9,
2009, the following directors continue to serve their three year term as Class I
directors, which terms will expire at the companys 2010 annual meeting:
Oakley Hall
William F. Skewes
Effective May 1, 2009,
Richard B. Stevens retired from the Board of Directors as a Class III
Director. The following directors
continue to serve their three year terms as Class III directors,
which terms will expire at the companys 2011 annual meeting:
John A. Rigas
H.
Leigh Severance
The results of the other
matters voted upon at the company annual meeting are as follows:
The appointment of Ernst &
Young, LLP as the companys independent registered public accounting firm:
For
|
|
Against
|
|
Abstain
|
|
9,468,539
|
|
66,594
|
|
20,423
|
|
The vote to reincorporate the company from the State of Colorado to the
State of Delaware:
For
|
|
Against
|
|
Abstain
|
|
7,284,905
|
|
1,023,420
|
|
24,234
|
|
|
|
With approval of a
majority of the shares outstanding, the company filed documents to
reincorporate in the State of Delaware on April 10, 2009. This action had no affect on the financial
condition of the company or on its results of operations.
|
|
|
|
ITEM 5.
|
|
OTHER INFORMATION
|
|
|
|
|
|
None.
|
24
Table
of Contents
ITEM 6.
|
|
EXHIBITS
|
|
|
|
|
|
Exhibits are as follow:
|
|
|
|
|
|
3.1 Certificate of
Incorporation in the State of Delaware. (Amended and Restated) 4-09
|
|
|
|
|
|
3.2 Certificate of
Designations-Series A Junior Preferred 4-9-09
|
|
|
|
|
|
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)
|
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:
June 9
, 2009
|
|
25
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