UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-KSB
_____________________________________________________________
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES ACT OF 1934
For The Fiscal Year Ended October 31, 2002
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period _____________ to _____________
Commission File Number 0-8877
_____________________________________________________________
CREDO PETROLEUM CORPORATION
_____________________________________________________________
(Exact name of registrant as specified in charter)
Colorado 84-0772991
(State of incorporation) (I.R.S. employer
identification number)
1801 Broadway, Suite 900, Denver, Colorado 80202-3837
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(303) 297-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
3,280,000 Shares Outstanding, Net of Treasury Stock,
at the Close of Business on December 31, 2002
(Title of class and shares outstanding)
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
-----
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 _____
----- -----
Issuer's revenues for its most recent fiscal year: $5,358,000
As of December 31, 2002, the aggregate market value of common
stock held by non-affiliates of the registrant was
approximately $24,757,000.
DOCUMENTS INCORPORATED BY REFERENCE into Part III hereof - Proxy
Statement to be filed with the Commission in connection with the
company's 2003 Annual Meeting.
PART I.
ITEM 1. BUSINESS
General
CREDO Petroleum Corporation ("CREDO") was incorporated in
Colorado in 1978. CREDO and its wholly owned subsidiaries, SECO
Energy Corporation and United Oil Corporation ("SECO", "United"
and collectively "the company"), are Denver, Colorado based
independent oil and gas companies which engage in oil and gas
acquisition, exploration, development and production activities
mostly in the Mid-Continent and Rocky Mountain regions of the
United States. The company operates in eight states and has ten
employees. CREDO is an active operator in Kansas and the Rocky
Mountain Region. United is an active operator doing business
exclusively in Oklahoma, and SECO owns royalty interests
primarily in the Rocky Mountain region. References to years as
used in this report indicate fiscal years ended October 31.
Business Activities
The company's primary business activities consist of
(i) exploration for and development of oil and gas reserves,
(ii) application of its patented Calliope TM Gas Recovery System
("Calliope") to low pressure gas wells, (iii) oil and gas
production, (iv) purchasing producing oil and gas properties, and
(v) operation of oil and gas properties for the company's
interest and for the interests of third parties.
Except for development, testing and application of Calliope,
operations are concentrated on medium depth properties generally
ranging from 7,000 to 10,000 feet. The company enters into
various types of cost sharing arrangements with industry
participants on most of its operating activities. Applications
of Calliope are concentrated below 10,000 feet and, to date, have
not required external sources of capital.
The company acts as "operator" of 89 wells pursuant to standard
industry Operating Agreements, and it owns working and royalty
interests in approximately 822 wells which are operated by
outside parties. In addition, the company is general partner of
three private limited partnerships. The Partnerships are in the
production stage of operations and their results are
proportionately consolidated in the company's financial
statements.
Over the past five years, the company has participated in
developing, testing, refining, and patenting Calliope. The
technology is designed to efficiently lift fluids from wellbores
using pressure differentials, and is primarily applicable to
mature natural gas wells in low pressure reservoirs at depths
below 8,000 feet. During 2000, the company purchased an
unrestricted, exclusive license to the technology. The term of
the license is 10 years, and it can be extended an additional
five years to cover the entire 15 year term of the patent. At
fiscal year end, Calliope was installed on eight wells ranging in
depth from 6,500 feet to 18,600 feet. Of the eight applications,
three rank as the company's first, second and fourth largest
producing wells in terms of reserve quantities. Two Calliope
applications were not economic due to wellbore problems (scaling
and a casing leak) unrelated to the technology. The company
believes it has proven Calliope's breadth and economic viability
on actual field applications of wells it owns and operates.
Markets and Customers
Marketing of the company's oil and gas production is influenced
by many factors which are beyond the company's control and the
exact effect of which cannot be accurately predicted. These
factors include changes in supply and demand, market prices,
regulation, and actions of major foreign producers. The fall in
oil prices to below $10.00 per barrel in 1999 and the subsequent
recovery to over $30.00 in 2000 and 2002 demonstrates oil's
extreme price volatility.
Oil production is sold to crude oil purchasing companies at
competitive spot field prices. Crude oil and condensate
production are readily marketable. Crude oil prices are subject
to world-wide supply and demand, and are primarily dependent upon
available supplies which can vary significantly depending on
production and pricing policies of OPEC and other major producing
countries and on significant events in major producing regions.
Gas price decontrol, the advent of an active spot market for
natural gas, changes in supply and demand for natural gas, and
weather patterns cause natural gas prices to be subject to
significant fluctuations. The company presently sells virtually
all of its gas under one to five year contracts with major
pipeline companies. The sales price is typically based on
monthly "spot" (Index) prices for the applicable production
region. Title to the gas normally passes to the pipeline at
meters located near the wells. The Index prices are reduced
("netted") by certain pipelines charges.
Natural gas prices were very volatile during calendar 2001 and
2002. Henry Hub monthly Index prices averaged $4.26 per MBtu
(thousand Btus) in 2001 compared to $3.22 in 2002. During 2001,
daily spot gas prices rose to historic highs of over $10.00 per
MBtu. However, as the year progressed, demand was lost due to a
combination of high prices forcing demand out of the market and
the warmest U.S. winter on record. That caused the supply of gas
left in storage at the end of the 2001-2002 heating season to be
abnormally high and resulted in a significant price reversal late
in 2001 and in 2002. However, during the summer of 2002 gas
storage refill data indicated a bullish imbalance between North
American supply and demand. That caused prices to strengthen
throughout the 2002 storage refill season and is bullish for 2003
prices. Management cannot reasonably predict the extent or
timing of natural gas price fluctuations.
As discussed elsewhere in this Form 10-KSB, the company
periodically hedges the price of a portion of its natural gas
production by forward selling on the NYMEX futures market.
Information concerning the company's major customers is included
in Note (6) to the Consolidated Financial Statements. The
company's ability to market its oil and gas is generally not
dependent on a single purchaser.
Refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further information
regarding oil and gas markets and prices.
Competition and Regulation
The oil and gas industry is highly competitive. As a small
independent oil and gas company, the company must compete against
companies with substantially larger financial and other resources
in all aspects of its business.
Oil and gas drilling and production operations are regulated by
various Federal, state and local agencies. These agencies issue
binding rules and regulations which increase the company's cost
of doing business and which carry penalties, often substantial,
for failure to comply. It is anticipated that the aggregate
burden on the company of Federal, state and local regulation will
continue to increase particularly in the area of rapidly changing
environmental laws and regulations. The company believes that
its present operations substantially comply with applicable
regulations. To date, such regulations have not had a material
effect on the company's operations, or the costs thereof. There
are no known environmental or other regulatory matters related to
the company's operations which are reasonably expected to result
in material liability to the company. The company does not
believe that capital expenditures related to environmental
control facilities or other regulatory matters will be material
in fiscal 2003. The company cannot predict what subsequent
legislation or regulations may be enacted or what effect it will
have on the company's business.
ITEM 2. PROPERTIES
General
In fiscal 2002, capital spending totaled $2,464,000, the second
highest level in the company's history. The company's business
focused on two core projects--natural gas drilling along the
Anadarko Shelf of Oklahoma and application of its patented
Calliope Gas Recovery System. During the year, the company
drilled thirteen wells in Oklahoma with interests ranging from 7%
to 40%. Eleven of the wells were successful, one was a dry hole
and one is undergoing extended evaluation. In addition, 281 coal
bed methane wells were drilled on acreage in Wyoming where the
company owns small royalty interests. Oklahoma drilling was
concentrated in Ellis and Harper Counties on the company's 11,000
gross acre Sand Creek Prospect and its 3,000 gross acre Two
Springs Prospect where eight wells were drilled. The wells
targeted the Morrow and Chester formations between 7,500 and
9,000 feet. Calliope operations were focused on production of a
multimedia presentation for use in introducing Calliope to other
companies and on acquiring wells for new Calliope installations.
Near the end of the year, the company purchased nine wells
intended for new Calliope installations.
In fiscal 2001, capital expenditures totaled $2,688,000, the
highest level in company history. CREDO's business focused on
two core projects--natural gas drilling along the Anadarko Shelf
of Oklahoma and application of Calliope. During the year, the
company participated in drilling 11 gas wells in Oklahoma and
Wyoming which were successfully completed as commercial gas
wells. The company's interest in the wells ranged from 5% to
60%. Oklahoma drilling was concentrated in Ellis and Harper
Counties on the company's Sand Creek and Two Springs Prospects
with encouraging results. In Wyoming, electrical, gathering and
water disposal infrastructures were installed for the 22 coal bed
methane wells drilled last year on the company's 10% owned
Recluse property. The company also significantly refined and
extended the limits of its Calliope technology. The company
believes that it has proved the economic viability and breadth of
the Calliope system.
For more complete information regarding these activities, refer
to "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Oil and Gas Activities".
The company's reserves, and the value of those reserves, are
concentrated in relatively few properties. At October 31, 2002,
approximately 70% of the gross value of the company's estimated
proved reserves is concentrated in 20% of its properties (in most
cases individual wells). The company's two most valuable
producing properties are Calliope wells (the Bradford and Carroll
wells) which represent 13% the company's gross reserve value.
The two original wells drilled in late 2001 and early 2002 on the
company's Sand Creek Prospect in Oklahoma (the Glendena and
Redfearn wells) and a well drilled in 2002 on the company's Two
Springs Prospect (Emet well) represent 12% of such value.
Approximately 600 coal bed methane royalty interest wells located
on one property in Sheridan County, Wyoming and a waterflood
project in southern Oklahoma account for 6% of such value.
All of these properties, or wells, have limited production
histories. In the case of the Calliope wells the limited history
is based on the application of Calliope. Accordingly, estimates
of reserve quantities and values must be viewed as being subject
to significant change as more data about the properties becomes
available. In addition, Calliope wells are generally mature
wells. As such, they contain old down-hole equipment, like
tubulars, that is more subject to failure than new equipment.
The failure of such equipment, particularly casing, can result in
complete loss of a well.
Estimated Proved Oil and Gas Reserves and Future Net Revenues
McCartney Engineering, Inc., an independent petroleum engineering
firm, estimated proved reserves for the company's significant
properties which represented 62% in 2002, 62% in 2001 and 63% in
2000 of the total estimated future value of estimated reserves.
Remaining reserves were estimated by the company in all years.
At October 31, 2002, natural gas represented 82% and crude oil
represented 18% of total reserves denominated in equivalent
barrels using a six Mcf of gas to one barrel of oil conversion
ratio.
The following table sets forth, as of October 31 of the indicated
year, information regarding the company's proved reserves which
is based on the assumptions set forth in Note (6) to the
Consolidated Financial Statements where additional reserve
information is provided. The average price used to calculate
estimated future net revenues was $26.76, $20.61 and $31.82 per
barrel for oil and $3.74, $2.87 and $4.33 per Mcf for gas as of
October 31, 2002, 2001 and 2000, respectively. Amounts do not
include estimates of future Federal and state income taxes.
Estimated Future
Oil Gas Estimated Future Net Revenues
Year (bbls)* (Mcf)* Net Revenues Discounted at 10%
--------------------------------------------------------------
2002 337,000 9,415,000 $29,774,000 $18,035,000
2001 330,000 9,121,000 $21,843,000 $13,874,000
2000 373,000 7,413,000 $31,475,000 $18,700,000
* Of 2002, 2001 and 2000 amounts, proved developed reserves were
298,000, 296,000 and 340,000 barrels of oil and 8,459,000,
8,249,000 and 6,511,000 Mcf of gas, respectively.
Production, Average Sales Prices and Average Production Costs
The company's net production quantities and average price
realizations per unit for the indicated years are set forth
below. Price realizations include the sales price and hedging
gains or losses.
2002 2001 2000
-----------------------------------------------------------------
Product Volume Price Volume Price Volume Price
-----------------------------------------------------------------
Gas (Mcf) 1,298,000 $ 3.00 800,000 $ 5.00 668,000 $ 2.84
Oil (bbls) 37,000 $22.01 44,000 $26.45 39,000 $27.88
Average production costs, including production taxes, per unit of
production (using a six to one conversion ratio of Mcfs to
barrels) were $5.10, $6.40 and $6.21 per barrel in 2002, 2001 and
2000, respectively.
Productive Wells and Developed Acreage
Developed acreage at October 31, 2002 totaled 23,200 net and
120,500 gross acres. At October 31, 2002, the company owned
working interests in 58.30 net (196 gross) wells consisting of
19.02 net (46 gross) oil wells and 39.28 net (150 gross) gas
wells. In addition, the company owned royalty and production
payment interests in approximately 715 oil and gas wells. In
2002, the company sold 3.55 net (9 gross) wells. In the same
period, the company drilled and acquired interests in 8.17 net
(20 gross) wells in which it did not previously own an interest.
Undeveloped Acreage
The following table sets forth the number of undeveloped acres
(90% located in the Mid-Continent and Rocky Mountain Regions)
which will expire during the next five fiscal years (and
thereafter) unless production is established in the interim.
Undeveloped acres "held-by-production" represent the undeveloped
portions of producing leases which will not expire until
commercial production ceases.
Royalty Working
Interest Acreage Interest Acreage
----------------------------------------------------------------
Expiration
Year Ending
October 31 Gross Net Gross Net
----------------------------------------------------------------
2003 5,800 100 4,200 600
2004 7,600 100 14,800 3,800
2005 1,700 500 17,800 6,600
2006 500 100 6,900 1,600
2007 - - 5,500 1,800
Thereafter 3,300 100 7,200 1,200
Held-By-Production 146,300 7,800 11,800 2,600
--------------------------------------------------------------
165,200 8,700 68,200 18,200
==============================================================
In general, "royalty" and "production payment" interests are
non-operated interests which are not burdened by costs of
exploration or lease operations, while "working interests" have
operating rights and participate in such costs.
Drilling and New Zone Recompletions
The following tables set forth the number of gross and net oil
and gas wells in which the company has participated and the
results thereof for the periods indicated.
Gross Wells
----------------------------------------------------------------
Year Ended Total Gross Exploratory Development
------------------ ------------------
October 31 Wells Oil Gas Dry Oil Gas Dry
----------------------------------------------------------------
2002 13 - 7(1) 1 - 5 -
2001 11 - 9(2) - - 2 -
2000 32 1 22(3) 4 - 4 1
1978-1999 178 11 64 72 15 12 4
----------------------------------------------------------------
234 12 102 77 15 23 5
================================================================
Net Wells
----------------------------------------------------------------
Year Ended Total Net Exploratory Development
------------------ -----------------
October 31 Wells Oil Gas Dry Oil Gas Dry
----------------------------------------------------------------
2002 3.212 - 2.707(1) .250 - .255 -
2001 2.236 - 2.097(2) - - .139 -
2000 4.021 .156 2.448(3) .550 - .367 .500
1978-1999 29.458 1.401 9.485 10.943 4.350 1.794 1.485
----------------------------------------------------------------
38.927 1.557 16.737 11.743 4.350 2.555 1.985
================================================================
(1) One well (.675 net well) is presently being completed and is
not responding as anticipated and is undergoing extended
evaluation.
(2) Includes two shallow coal bed methane gas wells at less than
1,000 feet in depth in which the company owns
approximately 5%.
(3) Shallow coal bed methane gas wells at less than 1,000 feet in
depth in which the company owns approximately 10%.
ITEM 3. LEGAL PROCEEDINGS
The company is not a party to any material pending legal
proceedings. No such proceedings have been threatened and none
are contemplated by the company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal 2002.
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The company's common stock is traded on the National Association
of Securities Dealers Automated Quotation System under the symbol
"CRED". Market quotations shown below were reported by the
National Association of Securities Dealers, Inc. and represent
prices between dealers excluding retail mark-up or commissions.
2002 2001
----------------------------------------------------------------
Fiscal Quarter Ended High Low High Low
----------------------------------------------------------------
January 31 $ 6.75 $ 5.10 $ 7.69 $ 4.75
April 30 7.70 5.76 7.50 6.31
July 31 9.85 7.50 10.30 6.29
October 31 8.82 6.55 7.75 4.87
At December 31, 2002, the company had 3,758 shareholders of
record. The company has never paid a dividend and does not
expect to pay any dividends in the foreseeable future. Earnings
are reinvested in business activities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At fiscal year-end October 31, 2002, working capital was
$6,630,000. Cash generated by operating activities (before
working capital changes) totaled $2,870,000 in 2002. Cash flow
was used primarily to fund oil and gas exploration and
development expenditures totaling $2,464,000 and to increase
working capital.
Existing working capital and anticipated cash flow are expected
to be sufficient to fund fiscal 2003 operations. At fiscal
year-end, the company had no lines of credit or other bank
financing arrangements. Because earnings are anticipated to be
reinvested in operations, cash dividends are not expected to be
paid in the foreseeable future. Commitments for future capital
expenditures were not material at fiscal year-end. The company
has no defined benefit plans and no obligations for post
retirement employee benefits.
Product Prices, Production and Investments
Gas price decontrol, the advent of an active spot market for
natural gas, changes in supply and demand for natural gas, and
weather patterns cause natural gas prices to be subject to
significant fluctuations. The company presently sells virtually
all of its gas under one to five year contracts with major
pipeline companies. The sales price is typically based on
monthly "spot" (Index) prices for the applicable production
region. Title to the gas normally passes to the pipeline at
meters located near the wells. The Index prices are reduced
("netted") by certain pipelines charges.
Significant world events and OPEC's production and pricing
policies influence worldwide supply and demand and prices for
crude oil and petroleum products. Since 1998, crude oil prices
have ranged widely from approximately $10.00 to $30.00 per
barrel.
Although product prices are key to the company's ability to
operate profitably and to budget capital expenditures, they are
beyond the company's control and are difficult to predict. Since
1991, the company has periodically hedged natural gas prices by
forward selling a portion of its production in the NYMEX futures
market. This is generally done when the price relationship (the
"basis") between the futures markets and the cash markets where
the company sells its gas is stable within historical ranges, and
when, in the company's opinion, the current price is adequate to
insure reasonable returns at a time when downside price risks
appear to be substantial. The company closes its hedges by
purchasing offsetting "long" positions in the futures market at
then prevailing prices. Accordingly, the gain or loss on the
hedge position will depend on futures prices at the time
offsetting "long" positions are purchased. Hedging gains and
losses are included in revenues from oil and gas sales. The
company's most significant hedging risk is that expected
correlations in price movements as discussed above do not occur,
and thus, that gains or losses in one market are not fully offset
by opposite moves in the other market. During the past three
years, the company hedged portions of its estimated future gas
production. Hedging transactions resulted in gains of $505,000
in 2002 and $663,000 in 2001 and losses of $141,000 in 2000. At
October 31, 2002, the company's open hedge positions totaled
450,000 Mcf covering the months of December 2002 through March
2003 at an average price of $4.12 per Mcf. The hedge represented
approximately 100% of the company's estimated gas production for
those months. Subsequently, hedges for all months except March
2003 (110,000 Mcf at $4.07) were closed and a $129,000 gain was
realized.
Gas and oil sales volume and price realization comparisons for
the indicated years ended October 31 are set forth below. Price
realizations include the sales price and hedging gains and
losses.
2002 2001 2000
-----------------------------------------------------------------
Product Volume Price Volume Price Volume Price
-----------------------------------------------------------------
Gas (Mcf) 1,298,000 $ 3.00 800,000 $ 5.00 668,000 $ 2.84
% change +62% -40% +20% +76% -22% +33%
Oil (bbls) 37,000 $22.01 44,000 $26.45 39,000 $27.88
% change -16% -17% +14% -5% - +78%
The 2002 and 2001 increases in natural gas volumes resulted
primarily from successful drilling in Oklahoma. Oil production
increased in 2001 as production from a waterflood project peaked
and then fell in 2002 as the project began a normal decline.
Most other oil and condensate volumes are associated with gas
production and, therefore, vary from well to well depending on
the volume and "richness" of gas produced.
Surplus cash is invested with professional money managers. The
average return on CREDO's investments was three percent in 2002,
four percent in 2001, and 14 percent in 2000. At year-end
approximately 70% of the investments were with managers who
specialize in market timing using U.S. mutual funds. Remaining
investments are in managed partnerships that use various
strategies to minimize their correlation to stock market
movements. Most of the investments are highly liquid and
management believes they represent a responsible approach to cash
management. In management's opinion, the greatest risk to our
investments is the potential for negative market impact from
unexpected, major adverse news, like the September 11th terrorist
attacks.
Oil and Gas Activities
Fiscal 2002 capital spending totaled $2,464,000, the second
highest level in the company's history. During the year the
company continued to focus on its two core projects--natural gas
drilling along the Anadarko Shelf of Oklahoma and application of
its patented Calliope Gas Recovery System.
Drilling Activities. In fiscal 2002, the company drilled
thirteen wells in Oklahoma with interests ranging from 7% to 40%.
Eleven of the wells were successful and one was a dry hole and
one is undergoing extended evaluation. In addition, 281 coal bed
methane wells were drilled on acreage in Wyoming where the
company owns small royalty interests. Oklahoma drilling was
concentrated in Ellis and Harper Counties on the company's
11,000 gross acre Sand Creek Prospect and its 3,000 gross acre
Two Springs Prospect where eight wells were drilled. The wells
targeted the Morrow and Chester formations between 7,500 and
9,000 feet.
To date, 14 wells have been drilled on the two prospects of which
11 were successful, two were dry holes, and one is undergoing
extended evaluation. Two of the wells are exceptional for the
area. The Glendena well was completed in October 2001 and the
Redfearn in April 2002, both from the same Morrow reservoir. The
wells each commenced production at 3.0 MMcfg (million cubic feet
of gas) per day and are still producing between 1.7 and 1.9 MMcfg
per day. To date, they have produced 1.10 and .64 Bcfg (billion
cubic feet of gas), respectively. The two wells accounted for
38% of the company's 2002 production and were primarily
responsible for the increase in the company's 2002 production.
The wells accounted for only 8% of the company's estimated proved
reserves values at year-end because their exceptionally high
production rates have resulted in rapid depletion of reserves.
Both the Sand Creek and the Two Springs Prospects have ample room
for additional wells to be drilled, and the company believes that
more exceptional wells are likely. The recently drilled Hudson
Trust well, located about one mile east of the Redfearn well, has
tested 2.5 MMcfgd from a "natural" (no acid or fracture
stimulation) completion with good pressures. Logs and other data
look very similar to the Redfearn well. The Hudson Trust well is
waiting pipeline connection and the company owns a 32% working
interest. The company also owns 45% of the section to the south.
That section is bounded on the north by the Hudson Trust well and
on the west by the Glendena well and looks very promising for
drilling.
Drilling is not restricted to the Sand Creek and Two Springs
Prospects. The company has drilled wells and is generating
prospects elsewhere on the Northern Anadarko Shelf, in the
Oklahoma Panhandle, and north-central Oklahoma. Except for
royalty interests, the company currently has no significant
interests in the Wyoming coal bed methane play.
The company replaced 122% of the reserves produced in 2002 and
its reserve replacement cost was $6.58 per barrel of
oil-equivalent (BOE). According to John S. Herold, Inc.'s Global
Upstream Performance Review--2002 Final Report, the company's
historic three and five-year average reserve replacement costs
have been in the top quartile of its peer group.
Calliope Gas Recovery System. The company owns the exclusive
right to a patented technology known as the Calliope Gas Recovery
System. Calliope achieves substantially lower flowing bottom
hole pressure than conventional production methods because it
does not rely on reservoir pressure to lift liquids. In most of
the applications to date, Calliope has developed more reserves
than the average new well drilled by the company, and at one-half
the cost and a small fraction of the risk.
The company believes that it has proven Calliope will add 0.5 to
2.0 Bcfg to many dead and uneconomic wells and that Calliope is a
new generation of gas recovery technology for many low pressure
gas wells. Calliope systems are currently installed on six
company-owned wells. In terms of undiscounted reserve values at
fiscal year-end 2002, Calliope wells rank first, second, ninth
and tenth among the company's most valuable producing wells. The
six producing Calliope wells account for 19% of the company's
reserve value. The 11,800-foot J. C. Carroll well provides an
excellent example of Calliope's potential. When the well was
purchased for salvage value in 1999, it had not produced
commercially in five years. Calliope immediately restored
production to 660 Mcfg (thousand cubic feet of gas) per day and
the well is still producing about 410 Mcfg per day. Calliope has
already recovered over 0.5 Bcfg from the Carroll well and the
company estimates it will recover an additional 1.2 Bcfg.
Late in fiscal 2002, the company purchased nine wells intended
for new Calliope installations. Each well has substantial
Calliope reserve potential ranging from several hundred million
to 2.0 billion cubic feet of gas. Installations are expected to
be completed on three of the wells in the first calendar quarter
of 2003. The remaining wells are in various stages of
evaluation. It should be expected that some of the wells will
not prove suitable for a Calliope installation.
The company's objective is to install Calliope on more wells. To
that end, the company is preparing a multimedia presentation
about Calliope to be used to introduce Calliope to certain
companies with the objective of joint venturing, licensing, or
providing Calliope for a fee. Management expects the final
presentation to be complete in March 2003.
Reserves. At fiscal year-end, approximately 70% of the gross
value of the company's estimated proved reserves is concentrated
in 20% of its properties (in most cases individual wells). The
company's two most valuable producing properties are Calliope
wells (the Bradford and Carroll wells) which represent 13% of the
company's gross reserve value. The Glendena and Redfearn wells
(discussed above) and the Emet well drilled in 2002 on the
company's Two Springs Prospect (Emet well) represent 12% of such
value. Approximately 600 coal bed methane royalty interest wells
located on one property in Sheridan County, Wyoming and a
waterflood project in southern Oklahoma account for 6% of such
value.
All of these properties, or wells, have limited production
histories. In the case of the Calliope wells the limited history
is based on the application of Calliope. Accordingly, estimates
of reserve quantities and values must be viewed as being subject
to significant change as more data about the properties becomes
available. In addition, Calliope wells are generally mature
wells. As such, they contain old down-hole equipment, like
tubulars, that is more subject to failure than new equipment.
The failure of such equipment, particularly casing, can result in
complete loss of a well.
Results of Operations
In 2002, total revenues fell 8% to $5,358,000 compared to
$5,807,000 in 2001. As the oil and gas price/volume table on
page 8 shows, total gas price realizations, which reflect hedging
transactions, fell 40% to $3.00 per Mcf and oil price
realizations fell 17% to $22.01 per barrel. The net effect of
these price changes was to decrease oil and gas sales by
$1,604,000. Hedging gains were $505,000 in 2002 compared to
$663,000 in 2001. Gas volumes produced rose 62% and oil volumes
produced declined 16%. The net effect of these volume changes
was to increase oil and gas sales by $1,139,000. The increase in
gas volumes resulted primarily from successful drilling in 2002
and 2001. The decline in oil volumes produced was primarily due
to a waterflood project that peaked in 2001 and started a normal
decline in 2002. Operating income rose 7% due to drilling
supervision income and additional operated wells. Investment
income and other declined 9% due primarily to market conditions
during fiscal 2002 that limited investment opportunities for the
market timers that manage the bulk of the company's investments.
In 2001, total revenues rose 38% to $5,807,000 compared to
$4,204,000 in 2000. As the oil and gas price/volume table on
page 8 shows, total gas price realizations, which reflect hedging
transactions, rose 76% to $5.00 per Mcf and oil price
realizations fell 5% to $26.45 per barrel. The net effect of
these price changes was to increase oil and gas sales by
$1,388,000. Hedging gains were $663,000 in 2001 compared to
hedging losses of $141,000 in 2000. Gas volumes and oil volumes
produced rose 20% and 14%, respectively. The net effect of these
volume changes was to increase oil and gas sales by $804,000.
The increase in gas production resulted from new wells added
during the year. Operating income rose 9% due to drilling
supervision income and additional operated properties.
Investment income and other declined 60% due primarily to a
volatile and down trending stock market during fiscal 2001 which
limited investment opportunities for the market timers that
manage the bulk of the company's investments.
In 2002, total costs and expenses rose 21% to $3,602,000 compared
to $2,987,000 in 2001. Oil and gas production expenses rose 14%
due to three major well workovers that cost approximately
$106,000. Depreciation, depletion and amortization ("DD&A")
increased 43% primarily due to a net increase in production
volume. Two wells that accounted for 38% of the company's 2002
production delivered gas at much higher than normal rates for
area wells. This resulted in a higher than normal depletion
rate. General and administrative expenses rose 11% due to
inflationary pressures. Interest expense relates to the
exclusive license agreement note payment. The effective tax rate
was 27% in 2002 and 29% in 2001.
In 2001, total costs and expenses rose 30% to $2,987,000 compared
to $2,307,000 in 2000. The 22% increase in oil and gas
production expenses primarily reflects increased production taxes
on higher oil and gas sales revenue. DD&A increased 58% due to
increases in oil and gas production and amortization of the cost
of an exclusive license agreement which was not effective in the
prior year. General and administrative expenses rose 14% due to
inflationary pressures and additional staffing. Interest expense
relates to the exclusive license agreement note payment that was
not effective in the prior year. The effective tax rate was
29% in 2001 and 2000.
Cautionary Statement Pursuant to Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
This Form 10-KSB 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 Form 10-KSB, 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.
ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Consolidated Balance Sheets, October 31, 2002 and 2001
Consolidated Statements of Operations for the Three Years
Ended October 31, 2002
Consolidated Statements of Stockholders' Equity for
the Three Years Ended October 31, 2002
Consolidated Statements of Cash Flows for the Three Years
Ended October 31, 2002
Notes to Consolidated Financial Statements
Independent Auditors' Report
CONSOLIDATED BALANCE SHEETS
October 31, 2002 and 2001
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
---------------------------------------------------------------
Assets 2002 2001
---------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 1,324,000 $ 819,000
Short-term investments 5,586,000 5,283,000
Receivables:
Trade 577,000 317,000
Accrued oil and gas sales 535,000 367,000
Other 390,000 241,000
---------------------------------------------------------------
Total current assets 8,412,000 7,027,000
---------------------------------------------------------------
Oil and gas properties, net, at cost,
using full cost method:
Unevaluated 1,690,000 1,549,000
Evaluated 7,987,000 7,120,000
---------------------------------------------------------------
Net oil and gas properties 9,677,000 8,669,000
---------------------------------------------------------------
Exclusive license agreement, net of
amortization of $152,000 and $82,000 548,000 618,000
---------------------------------------------------------------
Other, net 174,000 156,000
---------------------------------------------------------------
$ 18,811,000 $ 16,470,000
===============================================================
Liabilities and Stockholders' Equity
---------------------------------------------------------------
Current liabilities:
Accounts payable and
accrued liabilities $ 1,733,000 $ 1,126,000
Income taxes payable 49,000 110,000
---------------------------------------------------------------
Total current liabilities 1,782,000 1,236,000
---------------------------------------------------------------
Deferred income taxes, net 2,314,000 1,935,000
---------------------------------------------------------------
Exclusive license obligation,
less current obligations
of $48,000 and $44,000 408,000 456,000
---------------------------------------------------------------
Commitments
---------------------------------------------------------------
Stockholders' equity:
Preferred stock, without par value,
5,000,000 shares authorized,
none issued - -
Common stock, $.10 par value,
20,000,000 shares authorized,
3,678,000 shares issued 367,000 367,000
Capital in excess of par value 6,453,000 6,453,000
Retained earnings 8,209,000 6,927,000
Accumulated other
comprehensive income 37,000 14,000
Treasury stock, 398,000
and 502,000 shares at cost (759,000) (918,000)
---------------------------------------------------------------
Total stockholders' equity 14,307,000 12,843,000
---------------------------------------------------------------
$ 18,811,000 $ 16,470,000
===============================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended October 31, 2002
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
----------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------
Revenues:
Oil and gas sales $ 4,698,000 $ 5,163,000 $ 2,971,000
Operating 488,000 456,000 417,000
Investment income
and other 172,000 188,000 471,000
Non-recurring
litigation settlement - - 345,000
----------------------------------------------------------------
5,358,000 5,807,000 4,204,000
----------------------------------------------------------------
Costs and expenses:
Oil and gas production 1,291,000 1,135,000 934,000
Depreciation, depletion
and amortization 1,202,000 842,000 533,000
General and
administrative 1,060,000 957,000 840,000
Interest 49,000 53,000 -
----------------------------------------------------------------
3,602,000 2,987,000 2,307,000
----------------------------------------------------------------
Income before
income taxes 1,756,000 2,820,000 1,897,000
Income taxes (474,000) (818,000) (550,000)
----------------------------------------------------------------
Net income $ 1,282,000 $ 2,002,000 $ 1,347,000
================================================================
Basic income per share $.40 $.64 $.45
Diluted income per share $.39 $.61 $.43
===============================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended October 31, 2002
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------------
Accumulated
Capital In Other Total
Common Stock Excess Of Retained Comprehensive Treasury Stockholders'
--------------------
Shares Amount Par Value Earnings Income Stock Equity
-------------------------------------------------------------------------------------------------------------------------
Balances, October 31, 1999 3,678,000 $ 367,000 $ 6,235,000 $ 3,578,000 $ - $(1,215,000) $ 8,965,000
Stock options issued
to consultant - - 36,000 - - - 36,000
Purchase of treasury stock - - - - - (1,000) (1,000)
Exercise of stock options - - - - - 40,000 40,000
Net income - - - 1,347,000 - - 1,347,000
-------------------------------------------------------------------------------------------------------------------------
Balances, October 31, 2000 3,678,000 367,000 6,271,000 4,925,000 - (1,176,000) 10,387,000
Comprehensive income:
Net income - - - 2,002,000 - - 2,002,000
Other comprehensive income,
net of tax: Change in fair
value of derivatives - - - - 14,000 - 14,000
---------
Comprehensive income - - - - - - 2,016,000
Stock options
issued to consultant - - 12,000 - - - 12,000
Income tax benefit from
exercise of nonqualified
stock options and
premature dispositions - - 170,000 - - - 170,000
Purchase of treasury stock - - - - - (129,000) (129,000)
Exercise of stock options - - - - - 387,000 387,000
-------------------------------------------------------------------------------------------------------------------------
Balances,
October 31, 2001 3,678,000 367,000 6,453,000 6,927,000 14,000 (918,000) 12,843,000
Comprehensive income:
Net income - - - 1,282,000 - - 1,282,000
Other comprehensive income,
net of tax: Change in fair
value of derivatives - - - - 23,000 - 23,000
---------
Comprehensive income - - - - - - 1,305,000
Purchase of treasury stock - - - - - (71,000) (71,000)
Exercise of stock options - - - - - 230,000 230,000
-------------------------------------------------------------------------------------------------------------------------
Balances, October 31, 2002 3,678,000 $ 367,000 $ 6,453,000 $ 8,209,000 $ 37,000 $ (759,000) $14,307,000
=========================================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended October 31, 2002
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------
Cash flows from
operating activities:
Net income $ 1,282,000 $ 2,002,000 $ 1,347,000
Non-cash expenses included in
net income:
Depreciation, depletion and
amortization 1,202,000 842,000 533,000
Deferred income taxes 379,000 527,000 181,000
Other 7,000 21,000 48,000
Changes in operating assets
and liabilities:
Proceeds from
short-term investments 4,836,000 3,209,000 2,418,000
Purchase of
short-term investments (5,139,000) (3,866,000) (2,989,000)
Trade receivables (260,000) (90,000) 216,000
Accrued oil and gas sales (168,000) 105,000 (110,000)
Other current assets (126,000) 12,000 (31,000)
Accounts payable
and accrued liabilities 603,000 191,000 156,000
Income taxes payable (61,000) (140,000) 129,000
--------------------------------------------------------------------------
Net cash provided by
operating activities 2,555,000 2,813,000 1,898,000
--------------------------------------------------------------------------
Cash flows from investing
activities:
Additions to oil and
gas properties (2,464,000) (2,688,000) (1,855,000)
Proceeds from sale
of oil and gas
properties 376,000 34,000 552,000
Acquisition of exclusive
license agreement - - (159,000)(1)
Other (77,000) (42,000) (175,000)
--------------------------------------------------------------------------
Net cash used in
investing activities (2,165,000) (2,696,000) (1,637,000)
--------------------------------------------------------------------------
Cash flows from
financing activities:
Proceeds from exercise
of stock options 230,000 387,000 40,000
Purchase of treasury stock (71,000) (129,000) (1,000)
Principal payment on
exclusive license obligation (44,000) (40,000) -
--------------------------------------------------------------------------
Net cash provided by
financing activities 115,000 218,000 39,000
--------------------------------------------------------------------------
Increase in cash and
cash equivalents 505,000 335,000 300,000
Cash and cash equivalents:
Beginning of year 819,000 484,000 184,000
--------------------------------------------------------------------------
End of year $ 1,324,000 $ 819,000 $ 484,000
==========================================================================
(1) Supplemental Disclosure of Non-Cash Investing and Financial
Activities: In fiscal 2000, the company had an obligation for
acquisition of an exclusive license agreement of $540,000.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2002
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
---------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
The consolidated financial statements include the accounts of
CREDO Petroleum Corporation and its wholly owned subsidiaries
(the "company"). The company engages in oil and gas acquisition,
exploration, development and production activities in the United
States. Certain operations are conducted through three private
limited partnerships (the "Partnerships") which, as general
partner, the company manages and controls. The company's general
and limited partner interests in the Partnerships are combined on
the proportionate share basis in accordance with accepted
industry practice. All significant intercompany transactions
have been eliminated. Certain reclassifications have been made
to prior year amounts with no effect on net income. All
references to years in these Notes refer to the company's fiscal
October 31 year.
Cash, Cash Equivalents, and Short-Term Investments
Cash equivalents consist of highly liquid investments with
original maturities of three months or less. At
October 31, 2002, short-term investments are approximately
70% allocated to professional money managers who specialize in
market timing using U.S. mutual fund groups. These managers
generally enter and exit stock fund trades on a frequent and
short-term basis and use mutual fund money market accounts when
not invested in stock funds. Other short-term investments
consist primarily of professionally managed limited partnerships
which provide readily determinable market values. The
partnerships are invested primarily in financial instruments.
Unrealized gains on limited partnerships total $28,000 and
$97,000 at October 31, 2002 and 2001, respectively. Short-term
investments are classified as "trading" and are stated at fair
value with realized and unrealized gains and losses immediately
recognized.
Oil and Gas Properties
The company follows the full cost method of accounting for its
oil and gas operations. Under this method all costs incurred in
the acquisition, exploration, and development of oil and gas
properties are capitalized in one cost center, including certain
internal costs directly associated with such activities which
totaled $200,000 in 2002, 2001 and 2000. Proceeds from sales of
oil and gas properties are credited to the cost center with no
gain or loss recognized unless such adjustments would
significantly alter the relationship between capitalized costs
and proved oil and gas reserves. Estimated dismantlement,
restoration, and abandonment costs are approximately offset by
estimated residual values of lease and well equipment.
Accordingly, no accrual for such costs has been recorded.
If capitalized costs, less related accumulated amortization and
deferred income taxes, exceed the "full cost ceiling," the excess
is expensed in the period such excess occurs. The full cost
ceiling includes an estimated discounted value of future net
revenues attributable to proved reserves using current product
prices and operating costs, and an estimate of the value of
unproved properties which are included in the cost center. Cost
of oil and gas properties are amortized using the units of
production method. The company's composite depreciation,
depletion and amortization ("DD&A") rate per equivalent barrel
produced was $4.27 in 2002, $4.06 in 2001, and $3.21 in 2000.
Unevaluated properties consist primarily of lease acquisition and
maintenance costs. Evaluation normally takes three to five
years. Of the unevaluated property costs, $98,000 and $121,000
were incurred in 2002 and 2001, respectively.
Natural Gas and Crude Oil Price Hedging
The company periodically hedges the price of its oil and gas
production when the potential for significant downward price
movement is anticipated. Hedging transactions take the form of
forward, or "short," selling in the NYMEX futures market, and are
closed by purchasing offsetting "long" positions. Such hedges,
which are accounted for as cash flow hedges, do not exceed
anticipated production volumes, are expected to have reasonable
correlation between price movements in the futures market and the
cash markets where the company's production is located, and are
authorized by the company's Board of Directors. Hedges 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. All other futures transactions are accounted for as
speculative transactions and gains and losses are immediately
recognized in other income.
Hedging gains and losses are recognized as adjustments to oil and
gas sales as the hedged product is produced. The company had
hedging gains of $505,000 and $663,000 in 2002 and 2001,
respectively, and hedging losses of $141,000 in 2000. Gains and
losses on speculative transactions were immaterial in all years.
The company has recorded in other comprehensive income net
deferred gains of approximately $53,000 ($37,000 net of tax)
related to natural gas hedging transactions of which gains of
$72,000 were realized and losses of $19,000 were unrealized. Any
hedge ineffectiveness, which is currently immaterial, is
immediately recognized in other income. At October 31, 2002, the
company's open hedge position totaled 450,000 Mcf covering the
months of December 2002 through March 2003 at an average price of
$4.12 per Mcf. The hedge represented approximately 100% of the
company's estimated gas production for those months.
Subsequently, hedges for all months except March 2003 (110,000
Mcf at $4.07) were closed and a $129,000 gain was realized.
Accounting Estimates
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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements
include the estimate of proved oil and gas reserve quantities and
the related present value of estimated future net cash flows
therefrom.
Per Share Amounts
Basic income per share is computed using the weighted average
number of shares outstanding. Diluted income per share reflects
the potential dilution that would occur if stock options were
exercised using the average market price for the company's stock
for the period. The assumed exercise of stock options would
increase the weighted average shares outstanding from 3,245,000
to 3,316,000 in 2002, 3,110,000 to 3,271,000 in 2001, and from
2,981,000 to 3,175,000 in 2000.
Impact of New Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" that requires entities to
record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should
be allocated to expense using a systematic and rational method.
This statement is effective for fiscal years beginning after
June 15, 2002. The effect of this standard on the company's
results of operations and financial position is not expected to
be material.
(2) COMMON STOCK AND PREFERRED STOCK
The company has authorized 5,000,000 shares of preferred stock
which may be issued in series and with preferences as determined
by the company's Board of Directors. Approximately
100,000 shares of the company's authorized but unissued preferred
stock have been reserved for issuance pursuant to the provisions
of the company's Shareholders' Rights Plan.
The company's 1997 Stock Option Plan (the "Plan"), as amended and
restated effective October 25, 2001, authorizes the granting of
incentive and nonqualified options to purchase shares of the
company's common stock. The Plan is administered by the Board of
Directors which determines the terms pursuant to which any option
is granted. The Plan provides that upon a change in control of
the company, options then outstanding will immediately vest and
the company will take such actions as are necessary to make all
shares subject to options immediately salable and transferable.
Plan activity is set forth below.
Years Ended October 31 2002 2001 2000
--------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
--------------------------------------------------------------------------
Outstanding at 295,000 $ 3.66 366,667 $ 2.33 361,667 $ 2.10
beginning
of year
Granted 15,000 8.35 125,000 4.90 45,000 4.55
Exercised (114,100) 2.01 (196,667) 1.97 (20,000) 1.94
Cancelled
or forfeited (100,000) 4.88 - - (20,000) 1.63
-------------------------------------------------------------------------
Outstanding
at end of year 95,900 $ 5.07 295,000 $ 3.66 366,667 $ 2.33
=========================================================================
Options are exercisable at weighted average exercise prices as
follows: 57,566 in 2002 at $4.56; 22,084 in 2003 at $4.95; 8,750
in 2004 at $5.90; 3,750 in 2005 at $8.35; and 3,750 in 2006 at
$8.35. Options expire with weighted average exercise prices as
follows: 13,000 in 2004 at $3.19, 42,900 in 2005 at $4.53,
25,000 in 2006 at $5.00, and 15,000 in 2007 at $8.35. The
weighted average remaining contractual life of options
outstanding at October 31, 2002 is 3.0 years.
Under current accounting rules the company has elected to follow
APB 25 for recognizing the costs associated with employee stock
options, and is only subject to the disclosure items of FASB 123.
Had compensation cost been recorded under FASB 123, net income
and per share amounts for 2002 would have been $1,179,000, or
$.36 per share basic and $.36 per share diluted, for 2001 would
have been $1,872,000, or $.60 per share basic and $.57 per share
diluted, and for 2000 would have been $1,257,000, or $.42 per
share basic and $.40 per share diluted. For the purpose of this
disclosure, the fair value of each option granted was $3.75 in
2002, $2.41 in 2001 and $2.26 in 2000. All options were granted
with an exercise price equal to the market price on the date of
grant. The fair value was estimated on the date of grant using
the Black-Scholes option-pricing model with an expected
volatility of 53% in 2002, 58% in 2001 and 48% in 2000, a
risk-free interest rate of 4% in 2002 and 6% for 2001 and 2000,
no expected dividends, and an expected term of 5 years.
(3) COMMITMENTS
The company leases office facilities under a five year lease
agreement which was amended to extend the lease term for an
additional five years effective May 1, 2001. The lease agreement
requires payments of $42,000 in 2003 through 2005 and $21,000 in
2006. Total rental expense in fiscal 2002 was $42,000, $43,000
in 2001 and $46,000 in 2000. The company has no capital leases
and no other operating lease commitments.
(4) INCOME TAXES
The company follows 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. At
October 31, 2002, the company had $363,000 of statutory depletion
carry forward for tax return purposes and $70,000 for financial
statement purposes.
The income tax expense recorded in the Consolidated Statements of
Operations consists of the following:
Years Ended October 31 2002 2001 2000
--------------------------------------------------------------
Current $ 95,000 $ 291,000 $ 369,000
Deferred 379,000 527,000 181,000
--------------------------------------------------------------
$ 474,000 $ 818,000 $ 550,000
==============================================================
The effective income tax rate differs from the U.S. Federal
statutory income tax rate due to the following:
Years Ended October 31 2002 2001 2000
--------------------------------------------------------------
Federal statutory
income tax rate 34% 34% 34%
State income taxes 2 2 3
Percentage depletion (9) (7) (8)
--------------------------------------------------------------
27% 29% 29%
==============================================================
The principal sources of temporary differences resulting in
deferred tax assets and tax liabilities at October 31, 2002 and
2001 are as follows:
October 31 2002 2001
--------------------------------------------------------------
Deferred tax assets:
Gain on property sales $ 334,000 $ 371,000
--------------------------------------------------------------
Total deferred tax assets 334,000 371,000
--------------------------------------------------------------
Deferred tax liabilities:
Intangible drilling, leasehold
and other exploration costs
capitalized for financial
reporting purposes but
deducted for tax purposes (2,436,000) (2,133,000)
State taxes and other (212,000) (173,000)
--------------------------------------------------------------
Total deferred tax liabilities (2,648,000) (2,306,000)
--------------------------------------------------------------
Net deferred tax liability $(2,314,000) $(1,935,000)
==============================================================
(5) EXCLUSIVE LICENSE AGREEMENT OBLIGATION
On September 1, 2000, the company acquired an unrestricted,
exclusive license for recently patented technology. The initial
license term is ten years and includes an option to extend the
term to the remaining life of the patents. The licensor will
receive a net 8.3% carried interest in any installation of the
technology. The license purchase price is $1,115,000, of which
$380,000 has been paid. The balance, which is due in seven
remaining annual increments of $105,000, is recorded at
10% present value. The related assets are being amortized over
10 years on a straight-line basis. If the option to extend the
license after the initial ten-year term is exercised, the cost
will be $94,000 per year to the expiration of the last patent.
(6) SUPPLEMENTARY OIL AND GAS INFORMATION
Capitalized Costs
October 31 2002 2001 2000
---------------------------------------------------------------------------
Unproved properties not being
amortized $ 1,690,000 $ 1,549,000 $ 1,601,000
Properties being amortized 18,027,000 16,080,000 13,374,000
Accumulated depreciation,
depletion and amortization (10,040,000) (8,960,000) (8,240,000)
---------------------------------------------------------------------------
Total capitalized costs $ 9,677,000 $ 8,669,000 $ 6,735,000
===========================================================================
Acquisition, Exploration and Development Costs Incurred
Years Ended October 31 2002 2001 2000
---------------------------------------------------------------------------
Property acquisition costs net
of divestiture proceeds:
Proved $ - $ - $ -
Unproved 14,000 87,000 (315,000)
Exploration costs 2,007,000 2,481,000 1,289,000
Development costs 67,000 86,000 329,000
---------------------------------------------------------------------------
Net costs incurred $ 2,088,000 $ 2,654,000 $ 1,303,000
===========================================================================
Major Customers and Operating Region
The company operates exclusively within the United States.
Except for cash investments, all of the company's assets are
employed in, and all its revenues are derived from, the oil and
gas industry. The company had sales in excess of 10% of total
revenues to oil and gas purchasers as follows: Duke Energy 40%
in 2002, 30% in 2001, and 10% in 2000; Enogex, Inc. 15% in 2001
and 11% in 2000; Ultramar Diamond Shamrock 15% in 2000; GPM Gas
Corporation 17% in 2000.
Oil and Gas Reserve Data (Unaudited)
In 2002, 2001, and 2000, independent petroleum engineers
estimated proved reserves for the company's significant
properties which represented approximately 63% in each year of
total estimated future net revenues. The remaining reserves were
estimated by the company. Reserve definitions and pricing
requirements prescribed by the Securities and Exchange Commission
were used. The determination of oil and gas reserve quantities
involves numerous estimates which are highly complex and
interpretive. The estimates are subject to continuing re-evaluation
and reserve quantities may change as additional
information becomes available. Estimated values of proved
reserves were computed by applying prices in effect at October 31
of the indicated year. The average price used was $26.76, $20.61
and $31.82 per barrel for oil and $3.74, $2.87 and $4.33 per Mcf
for gas in 2002, 2001 and 2000, respectively. Estimated future
costs were calculated assuming continuation of costs and economic
conditions at the reporting date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2002
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
-----------------------------------------------------------------------------
Total estimated proved reserves and the changes therein are set forth below
for the indicated fiscal year.
2002 2001 2000
-----------------------------------------------------------------------------
Gas(Mcf) Oil(bbls) Gas(Mcf) Oil(bbls) Gas(Mcf) Oil(bbls)
-----------------------------------------------------------------------------
Proved reserves:
Balance,
November 1 9,121,000 330,000 7,413,000 373,000 6,683,000 321,000
Revisions of
previous
estimates (239,000) 20,000 82,000 (9,000) 169,000 28,000
Extensions and
discoveries 1,715,000 28,000 2,404,000 5,000 1,206,000 63,000
Purchases of
reserves
in place 141,000 - 22,000 5,000 36,000 -
Sales of
reserves
in place (25,000) (4,000) - - (13,000) -
Production (1,298,000) (37,000) (800,000) (44,000) (668,000) (39,000)
-----------------------------------------------------------------------------
Balance,
October 31 9,415,000 337,000 9,121,000 330,000 7,413,000 373,000
=============================================================================
Proved developed reserves:
Beginning
of period 8,249,000 296,000 6,511,000 340,000 5,704,000 287,000
=============================================================================
End of period 8,459,000 298,000 8,249,000 296,000 6,511,000 340,000
=============================================================================
The standardized measure of discounted future net cash flows from reserves
is set forth below as of October 31 of the indicated fiscal year.
2002 2001 2000
-----------------------------------------------------------------------------
Future cash inflows $ 44,244,000 $ 32,952,000 $ 43,981,000
Future production and
development costs (14,469,000) (11,109,000) (12,506,000)
Future income tax expense (6,552,000) (4,589,000) (7,142,000)
-----------------------------------------------------------------------------
Future net cash flows 23,223,000 17,254,000 24,333,000
10% discount factor (9,157,000) (6,294,000) (9,877,000)
-----------------------------------------------------------------------------
Standardized measure of
discounted future net cash flows $ 14,066,000 $ 10,960,000 $ 14,456,000
=============================================================================
The principal sources of change in the standardized measure of discounted future
cash flows from reserves are set forth below for the indicated fiscal year.
2002 2001 2000
-----------------------------------------------------------------------------
Balance, November 1 $ 10,960,000 $ 14,456,000 $ 7,924,000
Sales of oil and gas produced,
net of production costs (3,407,000) (4,028,000) (2,037,000)
Net changes in prices, production
and development costs 3,587,000 (8,661,000) 5,910,000
Extensions and discoveries, net of
future development and production
costs 3,039,000 4,132,000 3,194,000
Revisions of quantity
estimates, timing, and other (218,000) 1,883,000 964,000
Purchases of reserves in place 320,000 110,000 93,000
Sales of reserves in place (122,000) - (34,000)
Accretion of discount 1,096,000 1,446,000 792,000
Net change in income taxes (1,189,000) 1,622,000 (2,350,000)
-----------------------------------------------------------------------------
Balance, October 31 $ 14,066,000 $ 10,960,000 $ 14,456,000
=============================================================================
INDEPENDENT AUDITORS' REPORT
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
The Board of Directors and Stockholders
CREDO Petroleum Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheets of
CREDO Petroleum Corporation and subsidiaries as of
October 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows
for each of the years in the three year period ended October 31,
2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of CREDO Petroleum Corporation and subsidiaries as of
October 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the years in the three year
period ended October 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
HEIN + ASSOCIATES LLP
Denver, Colorado
December 24, 2002
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 2002.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 2002.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 2002.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the company's Proxy Statement to be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of the company's fiscal year 2002.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a)(i) Articles of Incorporation of CREDO Petroleum
& 4(a) Corporation (incorporated by reference to Form 10-K
dated October 31, 1982).
3(a)(ii) Articles of Amendment of Articles of Incorporation,
dated March 9, 1982 (incorporated by reference to
Form 10-K dated October 31, 1982).
3(a)(iii) Articles of Amendment of Articles of Incorporation,
dated October 28, 1982 (incorporated by reference to
Form 10-K dated October 31, 1982).
3(a)(iv) Articles of Amendment of Articles of Incorporation
dated April 18, 1984 (incorporated by reference to
Form 10-K dated October 31, 1984).
3(a)(v) Articles of Amendment of Articles of Incorporation
dated April 18, 1984 (incorporated by reference to
Form 10-K dated October 31, 1984).
3(a)(vi) Articles of Amendment of Articles of Incorporation
dated April 2,1985 (incorporated by reference to
Form 10-K dated October 31, 1985).
3(a)(vii) Articles of Amendment of Articles of Incorporation
dated March 25, 1986 (incorporated by reference to
Form 10-K dated October 31, 1986).
3(a)(viii) Articles of Amendment of Articles of Incorporation
dated March 24, 1988 (incorporated by reference to
Form 10-K dated October 31, 1989).
3(a)(ix) Articles of Amendment to Articles of Incorporation
dated May 11, 1990.
(b)(i) By-Laws of CREDO Petroleum Corporation, as amended
May 27, 1981 (incorporated by reference to Form 10-K
dated October 31, 1981).
3(b)(ii) By-Laws of CREDO Petroleum Corporation, as amended
May 27, 1981 and January 30, 1985 (incorporated by
reference to Form 10-K dated October 31, 1985).
3(b)(iii) By-Laws of CREDO Petroleum Corporation, as amended
October 30, 1986 (incorporated by reference to
Form 10-K dated October 31, 1986).
3(b)(iv) Amendment to Article X of CREDO Petroleum
Corporation's By-Laws dated March 24, 1988
(incorporated by reference to the company's
definitive proxy dated February 5, 1988).
4(i) Shareholders' Rights Plan, dated April 11, 1989.
4(ii) Amendment to Shareholders' Rights Plan, dated
February 24, 1999 (incorporated into Part II of the
company's Form 10-QSB dated January 31, 1999).
10(a) CREDO Petroleum Corporation Non-qualified Stock
Option Plan, dated January 13, 1981 (incorporated by
reference to Amendment No. 1 to Form S-1 dated
February 2, 1981).
10(b) CREDO Petroleum Corporation Incentive Stock Option
Plan, dated October 2, 1981 (incorporated by
reference to the company's definitive proxy
statement, dated January 22, 1982).
10(b) CREDO Petroleum Corporation 1997 Stock Option Plan
(incorporated by reference to Form 10-KSB dated
October 31, 1998).
10(c) Model of Director and Officer Indemnification
Agreement provided for by Article X of CREDO
Petroleum Corporation's By-Laws (incorporated by
reference to Form 10-K dated October 31, 1987).
10(d) CPC Exclusive License Agreement, dated
September 1, 2000 (incorporated by reference to
Form 10-KSB dated October 31, 2000).
10(e) CREDO Petroleum Corporation 1997 Stock Option Plan,
as amended and restated effective October 25, 2001
(incorporated by reference to Form 10-KSB dated
October 31, 2001).
21 CREDO Petroleum Corporation (a Colorado corporation)
and its subsidiaries SECO Energy Corporation
(a Nevada corporation) and United Oil Corporation
(an Oklahoma corporation) are located at
1801 Broadway, Suite 900, Denver, CO 80202-3837.
99.1 Certification by Chief Executive Officer under
Section 906 of the Sarbanes-Oxley Act
(18 U.S.C. Section 1350) (Filed herewith)
99.2 Certification by Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act
(18 U.S.C. Section 1350) (Filed herewith)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the
company carried out an evaluation, under the supervision and with
the participation of the company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-14(c). "Disclosure controls and
procedures" are controls and procedures that are designed to
ensure that information required to be disclosed by the company
in reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and
forms. Based upon that evaluation, the company's Chief Executive
Officer and Chief Financial Officer concluded that the company's
disclosure controls and procedures are effective for these
purposes as of the date of the evaluation.
There have been no significant changes in the company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ James T. Huffman
-----------------------------
James T. Huffman,
Chief Executive Officer
(Principal Executive Officer)
By: /s/ John A. Alsko
-----------------------------
John A. Alsko
Vice President and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
Date: January 23, 2003
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
Date Signature Title
---------------- ----------------------- -----------------
January 23, 2003 /s/ William N. Beach Director
-----------------------
William N. Beach
January 23, 2003 /s/ Clarence H. Brown Director
-----------------------
Clarence H. Brown
January 23, 2003 /s/ Oakley Hall Director
-----------------------
Oakley Hall
January 23, 2003 /s/ James T. Huffman Chairman of the Board,
----------------------- President, Treasurer
James T. Huffman
January 23, 2003 /s/ William F. Skewes Director,
----------------------- Corporate
William F. Skewes Secretary,
General Counsel
January 23, 2003 /s/ Richard B. Stevens Director
-----------------------
Richard B. Stevens
CERTIFICATIONS
I, James T. Huffman, Chief Executive Officer of CREDO Petroleum
Corporation, certify that:
1. I have reviewed this annual report on Form 10-KSB of CREDO
Petroleum Corporation;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 23, 2003
/s/ James T. Huffman
-----------------------------
James T. Huffman
Chief Executive Officer
I, John A. Alsko, Vice President and Chief Financial Officer of
CREDO Petroleum Corporation, certify that:
1. I have reviewed this annual report on Form 10-KSB of CREDO
Petroleum Corporation;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 23, 2003
/s/ John A. Alsko
-----------------------------
John A. Alsko
Vice President and
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit No. Description
99.1 Certification by Chief Executive Officer under
Section 906 of the Sarbanes-Oxley Act
(18 U.S.C. Section 1350)
99.2 Certification by Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act
(18 U.S.C. Section 1350)