Credo Petroleum has reported financial results for the first six months and quarter ended April 30, 2009.
For the first six months of 2009, Credo reported a net loss of $14,601,000, or $1.41 per basic share, reflecting a $15,038,000 after tax, non-cash write-down to reduce the book carrying value of oil and gas properties and long lived assets. Last year, first half net income was $693,000, or $0.07 per basic share. Lower product prices caused revenue to fall 49% to $4,461,000 for the first half compared to $8,675,000 last year. Working capital increased 35% to $14,255,000 compared to $10,569,000 last year.
For the second quarter ended April 30, 2009, the company reported a net loss of $4,710,000, or $.46 per basic share, reflecting an additional $4,898,000, after tax, non-cash write-down to reduce the book carrying value of oil and gas properties. Last year, the company reported a second quarter net loss of $880,000, or $.09 per basic share due to hedging losses. Lower product prices caused revenue to fall 52% to $2,353,000 for the second quarter compared to $4,942,000 last year.
James T. Huffman, CEO, stated, "An asset write-down is required if the net book value of the company's oil and gas properties exceeds a ceiling which is based primarily on reserves valued at spot prices on the last day of a quarter. At the end of our first quarter, the spot price for natural gas of $3.33 per Mcf triggered such a write-down. Subsequently, at our second quarter end, the spot price of natural gas fell another 15% to $2.83, triggering an additional write-down. April natural gas prices fell back to 2000 levels as the current recession caused a significant decline in industrial demand.
"It is important for shareholders to understand that the write-downs in book asset values resulted primarily from accounting rules that require "point in time" valuation of oil and gas reserves on the last day of the quarter using spot market prices in effect on that date. That price is not necessarily reflective of the contract prices Credo received for its oil and gas, or the prices that Credo expects to receive in the future. The write-down is purely a non-cash financial statement adjustment and does not impact future cash flows or oil and gas reserve quantities.
Huffman further stated, "The requirement to write-down assets based on prices at a single point in time during a severe recession is repugnant to me because I do not believe that the valuations reflect the long term value of our business. However, in perspective, the first half loss equates to less than two and one half years' historical earnings and should be recaptured in the future through lower charges to DD&A.
"I have previously reported that our cost of doing business increased dramatically as oil and gas prices rose to historic highs over the past few years. That was reflected in the asset values recorded on Credo’s books. Therefore, although it is unpleasant, it is not unexpected that an approximate 75% drop in natural gas prices and 63% drop in oil prices from their highs last July would cause book values to exceed market-based reserve valuations, thus requiring a write-down. This has occurred one other year in Credo's 30-year history. That write-down was made in 1986 after oil and gas prices fell about 50% in a short period of time. There is, however, a silver lining to asset write-downs because they lower future DD&A expense to the benefit of future earnings."
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