Credo Petroleum Corporation (NASDAQ:CRED) today reported first
quarter financial results.
For the first fiscal quarter ended January 31, 2009, Credo
reported a net loss of $9,891,000, or $0.95�per basic share,
reflecting a $10,099,000 after tax, non-cash write-down to reduce
the book carrying value of oil and gas properties and long lived
assets. Last year, first quarter net income was $1,573,000, or
$0.17 per basic share. Lower product prices caused revenue before
hedging gains to fall 44% to $2,108,000 for the first quarter
compared to $3,733,000 last year. Working capital increased 20% to
$15,175,000�compared to $12,643,000 last year.
James T. Huffman, CEO stated, �A write-down is required if the
net book value of the company�s oil and gas properties exceeds a
ceiling which is based primarily on reserves valued at spot prices
on the last day of a quarter. That situation occurred in the first
quarter. Significantly lower market prices for oil and gas at first
quarter-end caused a material reduction in reserve values which in
turn caused the non-cash write-down.
�It is important for shareholders to understand that the
write-down in book asset values resulted primarily from accounting
rules that require valuation of oil and gas reserves on the last
day of the quarter using spot market prices in effect on that date.
That price is not necessarily reflective of the contract prices
Credo received for its oil and gas, or the prices that Credo
expects to receive in the future. The spot prices required to be
used for valuation purposes at first quarter-end were $3.33 per Mcf
for natural gas and $38.25 per barrel for oil. The write-down is
purely a non-cash financial statement adjustment and does not
impact future cash flows or oil and gas reserve quantities. In
fact, we estimate that Credo�s reserves increased at first
quarter-end despite lower product prices.�
Huffman further stated, �The write-down is repugnant to me
because I do not believe that valuations at a predetermined single
point in time are reflective of the long term value of our
business. Nevertheless, in perspective, the loss equates to less
than the prior two years� earnings and it will be recaptured in the
future through lower charges to DD&A.
�I have previously reported that our cost of doing business
increased dramatically as oil and gas prices rose to historical
highs over the past few years. That is reflected in the asset
values recorded on Credo�s books. Therefore, although it is
unpleasant, it is not unexpected that an approximate 70%�drop in
oil and gas prices from their highs last July would cause book
values to exceed market based reserve valuations, thus requiring a
write-down. This has occurred one other time in Credo�s 30-year
history. That write-down was made in 1986 after oil and gas prices
fell about 50% in a short period of time.
�There is a silver lining to asset write-downs because they
lower future DD&A expense to the benefit of future earnings. In
addition, Credo made several excellent new discoveries late in the
first quarter that are not reflected in first quarter production
and financial results. At first quarter-end, the estimated reserves
attributable to those discoveries was limited because there was no
actual production history. Looking at the balance of 2009, we
expect the new discoveries to generate significant new production
which will support strong operating cash flow.�
LOWER PRODUCTION CAUSED BY
DRILLING CURTAILMENTS;INCREASED OIL VOLUMES OFFSET BY LOWER
NATURAL GAS VOLUMES
Oil production set a new record, growing 7% during the first
quarter, following 9% growth last year. First quarter 2009 oil
production was 16,700 barrels compared to 15,700 barrels last year.
Natural gas production fell 7%�to 362 MMcf (million cubic feet)
compared to 392 MMcf last year. Total production, denominated in
equivalent natural gas units, fell to 463 MMcfe (million cubic feet
of gas-equivalent) compared to 486 MMcfe last year. Oil accounted
for 22% of the company�s first quarter�2009 production compared to
19% last year and is expected to further increase as a percentage
of total production during the remainder of the year.
Huffman further stated, �We were among the earliest in our
industry to adjust our business strategy in anticipation of a
deteriorating business climate. Last year we elected to capture the
benefits of historically high energy prices by monetizing assets
through a stock sale completed about mid-year. We also 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.
Nevertheless, hindsight tells us that we made good decisions. As
previously noted, Credo drilled several wells in the first quarter
which resulted in excellent new discoveries that are not reflected
in first quarter production and financial results. We expect the
new discoveries to overcome the first quarter production decline
and to drive an overall production increase for 2009.�
PRODUCT PRICE REALIZATIONS FALL
SHARPLY
Net wellhead natural gas prices for the first quarter fell 33%
to $4.10 per Mcf compared to $6.08 last year. Realized hedging
transactions increased wellhead prices $2.55 per Mcf this year
compared to $2.16 last year. As a result, the company�s total
natural gas price realizations fell 19% to $6.65 per Mcf compared
to $8.24 last year. Wellhead oil prices fell 57% to $36.87 per
barrel compared to $86.39 last year. There were no oil hedging
transactions.
At January 31, 2009, open hedging derivative contracts covered
550,000 MMbtus at NYMEX prices ranging from $8.00 to $10.60, and
covered all production months from February 2009 through
October�2009. Subsequent to January 31, 2009, the February and
March contracts expired and the company realized hedging gains of
$1,129,000 on those contracts. Hedging derivative contracts
subsequent to January 31, 2009, are estimated to range from 30% to
50% of the company�s estimated monthly production at the time the
contract was initiated, taking into consideration estimates for new
production from certain future operations. All open hedge contracts
are indexed to the NYMEX. Average prices in the company�s primary
market are expected to be 15% to 17% below NYMEX prices due to
basis differentials and transportation costs.
STRONG FINANCIAL CONDITION
CONTINUES TO PROVIDEA SOLID FOUNDATION FOR GROWTH
Capital spending for oil and gas drilling activities the first
quarter totaled $4,345,000. In addition, the company paid
$1,812,000 to purchase acreage in the North Dakota portion of the
horizontal Bakken oil play, and it purchased all of the underlying
patents related to the Calliope Gas Recovery System for $4,400,000.
Credo previously owned an exclusive license to the Calliope patents
and the related technology. However, it purchased the underlying
patents in order to establish absolute control over the technology
and to eliminate future costs for individual well licenses. The
acquisition also covered 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.
At January 31, 2009, working capital was $15,175,000. Total
assets were $61,203,000 including cash and short-term investments
of $13,307,000. At first quarter-end, stockholders� equity was
$51,638,000, and the company had no long-term debt.
MANAGEMENT COMMENT
�We are off to a strong drilling start in 2009 with outstanding
early success,� Huffman said. �Fortunately, we began considering
the possibility of a significant energy price and market correction
last summer and prepared Credo to withstand substantially lower
product prices and difficult financial markets. Credo is now
exceptionally well positioned to be opportunistic in a distressed
environment just as we were back in 1986 when we acquired the
assets that are now the backbone of our business. We expect this
downturn to present an opportunity rich environment to expand our
business by capturing outstanding opportunities which will fuel
future growth.�
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, as well as Texas, Kansas and Louisiana. 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.
CREDO PETROLEUM
CORPORATION
FINANCIAL HIGHLIGHTS
� �
Quarter Ended
Quarter Ended
January 31,
January 31,
Condensed Operating
Information
2009
2008 Revenue: Oil and Gas Sales
$
2,108,000
$ 3,733,000 � Expenses: Oil and Gas Production
886,000
852,000 Depreciation, Depletion and Amortization
1,336,000
853,000
Impairment of Oil and Gas
Properties and Long Lived Assets
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) Gain (Loss) on Derivative
Contracts Realized
925,000
847,000 Unrealized �
541,000
� � (316,000 )
1,466,000
531,000 Investment and Other Income (Loss) �
(142,000
)
� (6,000 ) �
1,324,000
� � 525,000 � � Income Before Income Taxes
(16,281,000
)
2,221,000 � Income (Provision) Benefit �
6,390,000
� � (648,000 ) � Net Income
$
(9,891,000
)
$ 1,573,000 � � Basic Income Per share
$
(.95
)
$ .17 � � Diluted Income 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 � �
Condensed Balance Sheet
Information
January 31,
2009
October 31, 2008
Cash and Short-Term Investments
$
13,307,000
$ 25,376,000 Other Current Assets
5,378,000
4,678,000 Oil and Gas Properties, Net
35,725,000
46,456,000 Intangible Assets, Net
4,419,000
1,079,000 Other Assets �
2,374,000
� � 2,971,000 � �
$
61,203,000
� $ 80,560,000 � � Current Liabilities
$
3,510,000
$ 5,894,000 Deferred Income Taxes
4,677,000
11,117,000 Asset Retirement Obligations
1,378,000
1,338,000 Stockholders� Equity �
51,638,000
� � 62,211,000 � �
$
61,203,000
� $ 80,560,000 �
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