CREDO Petroleum Reports Strong Interim 2007 Results



CREDO Petroleum reported record financial and operating results for the nine months ended July 31, 2007.

For the first nine months of 2007, net income increased 8% to an all time high. For the period, net income was $4,737,000 on revenue of $12,993,000 compared to net income of $4,373,000 on revenue of $12,255,000 last year. On a per diluted share basis, net income was $.50 for the first nine months compared to $.46 last year. Earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA") increased 8% to $9,427,000 compared to $8,711,000 last year.

Third quarter 2007 net income grew 8% to $1,391,000 on revenue of $4,047,000 compared to net income of $1,286,000 on revenue of $3,969,000 last year. On a per diluted share basis, net income was $.15 for the third quarter compared to $.14 last year. Earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA") increased to $2,834,000 compared to $2,797,000 last year.

James T. Huffman, CREDO's President, said, "We are continuing to achieve outstanding results following record growth over the past four years. At the same time, we are proactively running CREDO's business to mitigate the risks caused by rising field costs and the current oversupply of natural gas.

"Sharp focus on maintaining our economic goals is holding our gross margin before taxes at about 50% of revenues. We are also rapidly building cash resulting in a 51% increase in working capital compared to this same period last year.

"CREDO has previously reported that we are high-grading drilling prospects due to rapidly escalating field services costs and degradation in the quality of services due to manpower shortages. In many cases, we have deferred less robust projects until we see improvement in the field services sector. As a result, our capital spending is 22% lower than last year.

"The downside of high-grading drilling prospects and capital spending restraint is that our replacement rate for production and reserves has slowed. We are addressing this by focusing on ramping-up our Calliope business and by concentrating on high potential drilling prospects. If gas prices continue to be soft, acquisition opportunities will also improve.

"We believe the current oversupply of natural gas will be temporary. Nevertheless, we have taken a proactive approach to revenue management by hedging natural gas prices. For fiscal 2007, we have realized $1,713,000 of hedging gains through expiration of the September natural gas contract. We are substantially hedged through the fall and winter at a weighted average NYMEX price of $9.09.

"These are normal cycles in our industry. A similar cycle was short lived last year, and will again be temporary if other companies proactively address these issues. In the meantime, our first priority is to manage CREDO in a manner that we believe will best serve the long term interest of our shareholders."

Production volumes set nine-month record despite lower third quarter production.

For the nine months, production rose slightly and achieved an all time record high. Production was 1,740 MMcfe (million cubic feet of gas-equivalent) compared to 1,716 MMcfe last year. Natural gas production fell 1% to 1,517 MMcf compared to 1,528 MMcf last year. Oil production increased 19% to 37,200 barrels.

For the third quarter, production fell 10%, from an all time record high last year. Production was 567 MMcfe compared to 633 MMcfe last year. Natural gas production fell 12% to 494 MMcf compared to 563 MMcf last year and oil production increased 4% to 12,100 barrels.

"The third quarter production decline is primarily a result of the outstanding success we had last year from two high rate discoveries," Huffman said. "Combined production from the two wells peaked at about 10 MMcf per day. They have excellent permeability resulting in high production rates, which recover the gas in place faster than wells in tight sands. This results in quick payouts and exceptional rates of return. These wells set the bar high last year, and holding production steady this year represents very solid performance."

Hedging Gains Offset Lower Wellhead Gas Prices

For the nine months, net wellhead natural gas prices fell 10% to $5.95 per Mcf compared to $6.64 last year. Hedging transactions added $.77 per Mcf compared to an $.18 loss last year. As a result, total natural gas price realizations increased 4% to $6.72 per Mcf compared to $6.46 last year. Wellhead oil prices fell 8% to $56.52 per barrel compared to $61.74 last year.

Net wellhead natural gas prices for the third quarter rose 2% to $5.80 per Mcf compared to $5.70 last year. Hedging transactions added $.41 per Mcf. There were no hedging transactions last year. As a result, total natural gas price realizations rose 9% to $6.21 per Mcf compared to $5.70 last year. Wellhead oil prices fell 5% to $62.36 per barrel compared to $65.80 last year.

At third quarter end, the August hedge had been closed at a gain of $227,000. Open natural gas hedges totaled 970 MMcf and covered the production months of September 2007 through March 2008. The average monthly price on open hedges (NYMEX basis) ranged from $7.96 per Mcf in the fall to $9.53 in the winter. These hedges are intended to cover between 65% and 80% of the company's current production base without taking into consideration estimates of new production from future operations. All open hedge contracts are indexed to the NYMEX. Average prices in the company's primary market areas are expected to be 15% to 17% below NYMEX prices due to basis differentials and transportation costs.

Strong financial conditions provide solid foundation for growth.

At July 31, 2007, working capital was $13,510,000, up 51% from last year. Cash and short-term investments totaled $13,003,000, up 27% from last year. The company's only long-term debt is a $163,000 exclusive license obligation.

Capital Spending

Capital spending for the nine months ended July 31, 2007 totaled $6,421,000, down 22% from last year. The company's business focuses on two core projects -- natural gas drilling and application of its patented Calliope Gas Recovery System. The company believes that, in combination, the drilling and Calliope projects provide a superb and unique formula for achieving its goal of adding long-lived natural gas reserves and production at reasonable costs and risks.

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