Credo Petroleum Corporation (NASDAQ: CRED) today released the
text of the Reports to Shareholders that are included in the
company’s Annual Report for fiscal 2009. The Annual Report will
soon be mailed to shareholders and will be available online early
next week through Credo’s website (www.credopetroleum.com).
These Reports to Shareholders contain important 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.
Report from James T. Huffman, Chairman and Recently Retired
CEO
Fellow Shareholders:
By most performance metrics, Credo had a very respectable year
in 2009 despite the severe economic downturn and much lower energy
prices. Credo’s strong financial position allowed us to further
expand our business during the downturn.
The primary exception to our successes was the company’s
financial results for 2009, which showed the second annual loss in
Credo’s 31 year history. The energy price collapse in the first
half of the year triggered a non-cash write down in the book value
of our oil and gas properties, much like what occurred in 1985 when
a similar situation caused a non-cash write down.
My thoughts on the “point in time” valuation rules that caused
the non-cash write down are well chronicled in past shareholder
communications. Markets and commodity prices are volatile, and
I do not believe that snapshot valuations reflect the
underlying substance of most businesses, including ours.
The capital we raised in 2008 near the energy market top
provided us the flexibility to continue active acreage acquisition
and drilling programs during the subsequent downturn. As a result,
oil production set a new record in 2009, and for the first time,
oil revenue exceeded natural gas revenue.
That accomplishment was driven by our Central Kansas oil
drilling project where state-of-the-art 3-D seismic is
facilitating a success rate of almost 50 percent. Among other
finds, we discovered a significant new field in Barton County,
Kansas. That discovery drove our production increase because Credo
owns 85 percent of the new field.
Credo also continued to acquire acreage in the North Dakota
Bakken/Three Forks oil resource play. The Bakken is the premier oil
resource in the U.S., and our acreage is located in the heart of
the play. We recently reported that Credo’s first well was
completed with an initial production rate of 1,474 barrels of
oil per day equivalent measured over a 24-hour period on a
20/64-inch choke. Our second well is scheduled to spud in about two
months. The success on the first well makes our other nine well
locations in the immediate area prime for development.
The nature of the Kansas and Bakken drilling projects is very
different, providing Credo great diversification in two premier oil
plays. We own a significant inventory of oil-weighted drilling
prospects in both plays with over 150,000 gross acres in Kansas and
interests in about 50 Bakken spacing units.
We delayed drilling in early 2009 because field service costs
had not ratcheted-down in response to much lower oil and gas
prices. Despite those delays, total production increased in 2009
and we replaced 121 percent of the reserves that were produced.
Total production calculated on an energy equivalent basis rose to
1.93 Bcfe at year end 2009. More importantly, the increased oil
component in our portfolio caused production to jump 23 percent
when calculated on the price equivalent basis that goes to our
bottom line.
One of our goals is to preferentially increase oil production
because a Btu of oil is worth about twice as much as a Btu of
natural gas. We achieved that objective in 2009 with a 108 percent
increase in oil production. The economic benefit of this strategy
is clearly shown in our 2009 income statement where oil accounted
for 59 percent of revenues while representing 36 percent of energy
equivalent-production.
The benefits of focusing on oil are also evident in Credo’s
reserves. While reserve quantities calculated on an energy
equivalent basis increased to 20.2 Bcfe, those same reserve
quantities increased to 28.5 Bcfe on a price equivalent basis. Oil
reserves increased 23 percent in 2009 and currently account for 26%
of the company’s total reserves.
Our shareholders know that we have not yet monetized what we
believe to be the potential value of our Calliope Gas Recovery
System. However, that does not mean that we are out of good
options. We have developed new license fee structures that
operators are finding more acceptable. In addition, soft natural
gas prices have cut into drilling budgets, prompting renewed
operator interest in looking for ways to get more gas out of
existing properties. That appetite for adding production without
drilling has translated into significantly more interest in
Calliope.
The most important decision we made in 2009 involved Credo’s
leadership transition. I publicly made known my desire to step
aside as CEO about 18 months ago. In addition to my personal
reasons for doing so, I am convinced that it is time for new and
younger leadership with fresh ideas and plenty of energy to act on
them. Obviously, I am keenly interested in the transition because
my family and I own the second largest stake in Credo and we want
to see Credo continue to grow and prosper. I will also continue as
Chairman of the Board and want to work with a CEO who has the
vision, character and energy to grow our company.
The Board conducted a rigorous CEO search process, considering a
number of outstanding candidates who were drawn to Credo because it
provides a very attractive platform for growth.
Marlis E. Smith, Jr. was ultimately selected primarily because
he is a seasoned entrepreneur and a successful “oil man.” He grew
up in an oil business family and received BA and MBA degrees which
concentrated on the oil business. He has subsequently spent his
entire career in our industry, mostly as a principal and a business
owner. His companies currently own interests in about 450 oil and
gas wells and 125,000 gross acres.
Marlis has hit the ground running because he already knows
Credo’s business. His relationship with Credo goes back 10 years
when he began taking ownership interests in our wells. Since that
time he has participated in drilling about 75 wells operated by
Credo. In April 2009, he accepted our invitation and was elected to
the Board of Directors. That history gives him some very unique
qualifications to be Credo’s CEO, including an excellent knowledge
of our properties, our opportunities, and our employees.
The Board’s goals include doubling Credo’s size in three to four
years, if not sooner. Marlis’ successful business history
demonstrates that he has the background, skills and drive to
achieve that goal.
It has been my privilege to be the Chief Executive of Credo and
to serve its shareholders. Marlis Smith now has the reins. I know
that he will give his undivided attention to the task of growing
Credo, and that he will uphold your trust. His first report
follows.
/s/ James T. HuffmanJames
T. HuffmanChairman of the BoardFebruary 15, 2010
Report from Marlis E. Smith, Jr., President & CEO
Dear Shareholders:
It is an honor to serve as your new CEO. I have been involved in
drilling with Credo for the last ten years, and I have been a
member of the Board of Directors since last April. These two
factors provide me great perspective on the company and its growth
potential.
Credo represents an extremely attractive platform for growth. In
addition to a strong financial position, the company owns a solid
foundation of profitable assets which have excellent potential for
additional exploitation. Credo’s Board made an excellent decision
several years ago to focus on adding oil reserves and production.
As a result of that timely decision, Credo presently has
two projects that provide an excellent inventory of
oil-weighted drilling prospects. These are in addition to the
company’s historical core area of operations comprising about
70,000 acres located in the Texas Panhandle, Anadarko Basin of
Oklahoma and southern Oklahoma.
The Kansas oil project currently consists of 150,000 gross acres
and is just hitting its stride. In addition to our existing
prospect inventory, Credo is actively generating and leasing new
shallow oil prospects in Kansas. Our drilling risks are well
diversified in Kansas and our success rate, after 49 wells, is
about 50 percent. Moreover, costs are moderate at about
$150,000 for a dry hole and $420,000 for a completed well. I favor
committing substantial additional capital to the play because we
have developed a repeatable and successful exploration model.
I am equally excited about the company’s participation in the
premier oil resource play in North America, horizontal drilling in
the Bakken/Three Forks formations. I have been participating in the
play with other operators like ConocoPhillips and Continental
Resources for about five years. As a Credo director, I strongly
urged management to make a significant commitment to the
Bakken/Three Forks.
Credo currently owns interests in about 50 spacing units located
in the Fort Berthold Reservation which is in the heart of the play.
We recently reported an excellent initial production rate on our
first Bakken well, and we announced that our second well in
the same area is scheduled to spud in about two months. Credo
sold-down its 25 percent interest in the first well to 10
percent to reduce our early exposure while we gained horizontal
drilling experience in the area. However, with our recent success
and activity ramping-up on the Reservation, I favor retaining
Credo’s full interest in future wells. In addition, we are looking
at other areas in the play and I hope to expand Credo’s
Bakken/Three Forks exposure.
I am an ardent believer in the company’s Calliope Gas Recovery
System. I have observed the development and application of the
system over the years and I know from firsthand knowledge that
Calliope works as advertised. As CEO, I will commit whatever
resources are necessary to make a priority of monetizing what we
believe is Calliope’s value.
We believe that mergers and acquisitions represent an excellent
way to accelerate Credo’s growth. I have successfully acquired
oil and gas properties for many years, and I am already working on
several possible opportunities for Credo where I hope to have
success this year.
A fair question is whether I plan to devote full time to Credo.
The answer is yes. I have committed to put Credo first and spend
whatever time is required to fulfill my responsibilities at Credo.
As I told the Board, my personal business involves only
non-operated interests in oil and gas properties, and does not
require my day-to-day management. Accountants take care of paying
bills and collecting income. My time was primarily spent in looking
for new deals and opportunities, and that involvement has ceased
since I joined Credo.
In recent years, Credo has successfully built excellent
momentum, particularly in oil drilling plays. My long background
working with Credo and my knowledge of its assets and employees
provides me the ability to sustain that momentum while focusing on
adding projects and building a larger company.
The Board is very supportive of my growth plans for Credo,
including being more aggressive in the area of acquisitions.
I successfully used debt in my personal businesses to purchase
high quality oil and gas properties, and I will not hesitate to do
the same with Credo. However, I am fiscally responsible and I will
not support taking reckless risks.
It is a privilege to be your CEO. I am passionate about the oil
business and I pledge to work hard to grow our company in a prudent
manner. I am also mindful of my responsibility to our shareholders,
and your interests will always come first.
/s/ Marlis E. Smith,
Jr.Marlis E. Smith, Jr.Chief Executive OfficerFebruary 15,
2010
About Credo Petroleum
Credo Petroleum Corporation is an independent exploration,
development and production company based in Denver, Colorado. The
company has significant operations in the Williston Basin of North
Dakota, central Kansas, the Anadarko Basin of North Texas and
northwest Oklahoma, and in southern Oklahoma. Credo uses advanced
technologies to systematically explore for oil and gas and, through
its patented Calliope Gas Recovery System, to recover stranded
reserves from depleted gas reservoirs. For more information, please
visit our website at www.credopetroleum.com or contact us at
303-297-2200.
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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