Credo Reports Financial Results for the Third Quarter and Nine Months Ended July 31, 2012

Third Quarter Oil Production Increased 92% and Achieved 1,187 BOE Per Day

Third Quarter Revenue Increased 42% and EBITDA Increased 30%

Stockholder Meeting to Consider Forestar Merger Set for September 25, 2012

DENVER, Sept. 11, 2012 (GLOBE NEWSWIRE) -- Credo Petroleum Corporation (Nasdaq:CRED), an oil and gas exploration and production company with significant assets in the North Dakota Bakken and Three Forks, Kansas, Nebraska, the Texas Panhandle and Oklahoma, today reported financial results for the quarter and nine months ended July 31, 2012.

Higher oil production volumes continued to drive improved financial performance in the third quarter and nine months ended July 31, 2012. The following table shows the changes in certain financial and operational categories for the third quarter and nine months ended July 31, 2012 compared to the same periods last year.

  3rd Quarter Nine Months
Revenue  + 42% + 53%
EBITDA + 30% + 59%
Net Income - 46% + 42%
Adjusted Net Income - 41% + 20%
Adjusted Net Income excluding merger costs + 55% + 56%
Total Production (BOE) + 41% + 36%
Oil Production (BO) + 92% + 86%

Operating income decreased to $876,000 compared to $1,349,000 in the third quarter last year. Excluding one-time merger related costs of $994,000, operating income would have increased to $1,870,000. Revenue increased to $6,362,000 compared to $4,488,000 in the third quarter last year. Increased revenue was driven by increased production volumes which accounted for 143% of the increase which was partially offset by a decrease in prices. 

For the nine months ended July 31, 2012, operating income increased to $4,807,000 compared to $3,496,000 last year. Excluding one-time merger related costs of $1,026,000, operating income would have increased to $5,833,000. Revenue increased to $18,043,000 compared to $11,806,000 last year. Increased revenue was driven by increased production volumes which accounted for 115% of the revenue increase which was partially offset by a decrease in prices.

EBITDA (a non-GAAP measure; see reconciliation below) for the third quarter of 2012 increased to $3,264,000 compared to $2,509,000 third quarter last year. Excluding one-time merger related costs, EBITDA would have increased to $4,258,000. Net income was $928,000, or $.09 per diluted share, compared to $1,707,000, or $.17 per diluted share third quarter last year. Excluding one-time merger related costs, net income would have increased to $1,810,000, or $.18 per diluted share. Adjusted net income (a non-GAAP measure; see reconciliation below) decreased to $539,000, or $.05 per share, compared to $919,000, or $.09 per share third quarter last year. Excluding one-time merger related costs, adjusted net income would have increased to $1,421,000, or $.14 per share.

For the nine months ended July 31, 2012, EBITDA increased to $10,792,000 compared to $6,778,000 last year. Excluding one-time merger related costs, EBITDA would have increased to $11,818,000. Net income was $3,018,000 or $.30 per diluted share, compared to $2,131,000, or $.21 per diluted share last year.  Excluding one-time merger related costs, net income would have increased to $3,912,000, or $.39 per dilutive share. Adjusted net income increased to $2,997,000, or $.30 per share, compared to $2,499,000, or $.25 per share last year. Excluding one-time merger related costs, adjusted net income would have increased to $3,891,000, or $.39 per share.

DRILLING SUCCESS DRIVES SIGNIFICANT PRODUCTION INCREASES

The Company's oil-focused drilling success yielded a 92% increase in third quarter oil production compared to last year, and an 86% increase for the first nine months of fiscal 2012 compared to the same period last year. Natural gas drilling was suspended in 2009 because of low natural gas prices. As a result, mostly normal declines reduced gas production about 7% in the first nine months of fiscal 2012. 

The following table shows that the Company's comparative production mix has shifted solidly in favor of oil.

  Three Months
Ended July 31
Nine Months
Ended July 31
Production Mix 2012 2011 2012 2011
Crude Oil 67% 49% 63% 46%
Natural Gas 33% 51% 37% 54%

Total production volumes increased 41% in the third quarter to 109,200 BOE, or 1,187 BOE per day, (barrels of oil equivalent based on six Mcf of gas to one barrel of oil) compared to last year. This represents the second consecutive quarter that the Company's total quarterly production has exceeded 1,000 BOE per day.  For the nine months, total production increased 36% to 291,100 BOE, or 1,062 BOE per day.  

The following table shows comparative production volume percentages by region and highlights the shift occurring in the Company's production mix to crude oil in North Dakota, Kansas and Nebraska and away from natural gas in Oklahoma.

  Three Months
Ended July 31
Nine Months
Ended July 31
Production by Region 2012 2011 2012 2011
North Dakota Bakken and Three Forks 27% 12% 23% 12%
Kansas and Nebraska Lansing Kansas City  23% 18% 22% 17%
Texas Panhandle Tonkawa and Cleveland 9% 13% 10% 11%
Other (primarily Oklahoma natural gas) 41% 57% 45% 60%

Michael D. Davis, interim Chief Executive Officer, stated, "Our production volumes reached 1,187 BOE per day during the third quarter which consisted of 67% oil, both new records for the Company.  Despite substantially improved operating results, the one-time costs associated with the potential merger transaction with Forestar had a significant negative impact on both our third quarter and nine month financial results. Nevertheless, we are continuing to have a very successful year."

The following table shows comparative revenue percentages by region and highlights the Company's shift away from natural gas production in Oklahoma in favor of oil production primarily in North Dakota, Kansas and Nebraska.

  Three Months
Ended July 31
Nine Months
Ended July 31
Revenue by Region 2012 2011 2012 2011
North Dakota Bakken and Three Forks 34% 17% 30% 18%
Kansas and Nebraska Lansing Kansas City  32% 29% 31% 27%
Texas Panhandle Tonkawa and Cleveland 7% 12% 8% 9%
Other (primarily Oklahoma natural gas) 27% 42% 31% 46%

WELLHEAD PRICES MIXED

Third quarter wellhead oil prices decreased 12% to $78.00 compared to $88.32 last year. Natural gas prices fell 36% to $3.09 compared to $4.81 last year. For the quarter ended July 31, 2012, the Company had realized crude oil hedging gains of $45,000 compared to losses of $96,000 last year. Third quarter oil hedges had the effect of increasing oil price realizations by $0.61 per barrel to $78.61.  Last year, oil hedges reduced third quarter price realizations by $2.53 per barrel to $85.79.

Wellhead oil prices for the nine months ended July 31, 2012 decreased slightly to $86.64 compared to $87.49 last year. Natural gas prices fell 28% to $3.26 compared to $4.53 last year. For the nine months, the Company had realized crude oil hedging losses of $199,000 compared to $233,000 last year. The nine month oil hedges had the effect of reducing oil price realizations by $1.08 per barrel to $85.56. Last year, oil hedges decreased the nine month price realizations by $2.36 per barrel to $85.13. For the nine months last year, the Company had realized natural gas hedging gains of $59,000. The nine month natural gas hedges had the effect of increasing natural gas price realizations by $0.09 per Mcf to $4.62. There were no natural gas hedges in the current year.

At July 31, 2012, the Company held open short swap hedge positions on 5,000 barrels of oil (five contracts) per month for the production months of August 2012 through December 2012, at prices ranging from $91.95 to $92.21. The hedge is expected to cover approximately 15% to 25% of estimated production for the hedged period. During the third quarter, the Company closed one contract per month at a price of $99.80 per barrel. Unrealized hedging gains were $671,000 for the three months ended July 31, 2012 compared to $1,080,000 last year. Unrealized hedging gains were $32,000 for the nine months ended July 31, 2012 compared to losses of $497,000 last year. The unrealized losses are a non-cash charge calculated at a point in time by applying oil prices as of period end to open hedging contract volumes. Actual realized gains or losses on the hedges are determined based on oil prices at the time each month's hedge contract expires.

RECORD CAPITAL EXPENDITURES
BEING PARTIALLY FINANCED BY BANK BORROWING

Capital expenditures for fiscal 2012 are now expected to be approximately $37.0 million compared to our original budget of $35.0 million, of which approximately 95% will have been earmarked for drilling and completion activities. By the end of fiscal 2012, the Company expects to have drilled seventy five (75) gross (30 net) oil wells. Costs incurred through third quarter-end totaled approximately $30.3 million. Financing has been required to fund a portion of fiscal 2012 capital expenditures. The current borrowing base under the Company's $25 million credit facility is $9.3 million. To date, $8.8 million has been drawn-down under such credit facility with an interest rate of about 3%.

FORESTAR MERGER

On June 3, 2012, the Company signed a merger agreement with Forestar Group Inc. ("Forestar") pursuant to which Forestar will pay $14.50 for each share of the Company's stock, or approximately $146 million in cash. Consummation of the merger is not subject to a financing condition, but is subject to customary closing conditions, including the approval of Credo's stockholders. A special meeting of the Company's stockholders is scheduled to be held on September 25, 2012, at which stockholders will vote whether or not to approve the merger. Proxy materials were mailed on or about August 15, 2012 to stockholders of record on August 10, 2012. The merger has been approved by the boards of directors of the Company and Forestar. Assuming the satisfaction of conditions, the merger could close prior to the Company's fiscal year-end.  Additional information regarding the merger can be found in our Form 8-K filed on June 4, 2012 and our Definitive Proxy Statement filed on August 10, 2012.

About Credo Petroleum

Credo Petroleum Corporation is an independent oil and gas exploration and production company based in Denver, Colorado. The Company has significant operations in the Williston Basin of North Dakota, Kansas, Nebraska, the Anadarko Basin of the Texas Panhandle and northwest Oklahoma, and in southern Oklahoma. Credo uses advanced technologies to systematically explore for oil and gas and, through its patented Calliope Gas Recovery System, to recover stranded reserves from depleted gas reservoirs. For more information, please visit our website at www.credopetroleum.com or contact us at 303-297-2200.

Additional Information Regarding the Proposed Transaction

In connection with the proposed transaction, Credo filed a proxy statement with the Securities and Exchange Commission (the "SEC") on August 10, 2012.  The definitive proxy statement was first mailed to stockholders of Credo on August 15, 2012.  Credo urges investors to read the proxy statement regarding the proposed transaction because it contains important information about the proposed transaction.  You may obtain a free copy of the proxy statement and other related documents filed by Credo with the SEC at the SEC's website at www.sec.gov. The proxy statement may also be obtained for free by accessing Credo's website at www.credopetroleum.com by clicking on the link for "Investor Relations", then clicking on the link for "Proxy Statement".

Participants in the Proposed Transaction

Credo and its directors, executive officers and certain other members of management and employees may be deemed to be participants in the solicitation of proxies from Credo's stockholders in connection with the proposed transaction.  Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of Credo's stockholders in connection with the proposed transaction, including the interests of such participants in the proposed transaction, are set forth in the definitive proxy statement filed with the SEC on August 10, 2012.  You can find information about Credo's executive officers and directors in Credo's definitive proxy statements filed with the SEC on February 28, 2012 and August 10, 2012.

Supplemental Non-GAAP Financial Measures

EBITDA

The Company uses this non‑GAAP operating performance measure primarily to compare its performance with other companies in the industry that make a similar disclosure. The Company believes that this performance measure may also be useful to investors for the same purpose. Investors should not consider this measure in isolation or as a substitute for operating income or any other measure for determining the Company's operating performance that is calculated in accordance with GAAP. In addition, because EBITDA is not a GAAP measure, it may not necessarily be comparable to similarly titled measures employed by other companies. A reconciliation of Net Income to EBITDA (as used by the Company) is set forth below. 

  Three Months Ended
July 31,
Nine Months Ended
July 31,
  2012 2011 2012 2011
     
Net Income as reported $ 928,000 $ 1,707,000 $ 3,018,000 $ 2,131,000
Add Back:    
Income Tax Expense 664,000 622,000 1,625,000 749,000
Depreciation, Depletion and Amortization Expense 2,343,000 1,260,000 6,181,000 3,401,000
Unrealized Derivative (Gains)/Losses (671,000) (1,080,000) (32,000) 497,000
     
EBITDA $ 3,264,000 $ 2,509,000 $ 10,792,000 $ 6,778,000
     
Add Back:    
Merger-related costs 994,000 -- 1,026,000 --
     
Adjusted EBITDA $ 4,258,000 $ 2,509,000 $ 11,818,000 $ 6,778,000

Adjusted Net Income

The following table provides information that the Company believes may be useful to investors that follow the practice of some industry analysts who adjust reported company earnings to match realizations to production settlement months and make other adjustments to exclude certain non-cash items. The following table provides a reconciliation of Net Income to non-GAAP Adjusted Net Income (as used by the Company). 

  Three Months Ended
July 31,
Nine Months Ended
July 31,
  2012 2011 2012 2011
     
Net Income as reported $ 928,000 $ 1,707,000 $ 3,018,000 $ 2,131,000
     
Adjustments for certain non-cash items:    
Unrealized mark-to-market (gain) loss on commodity derivatives $ (671,000) $ (1,080,000) $ (32,000) $ 497,000
Tax impact $ 282,000 $ 292,000 $ 11,000 $ (129,000)
     
Adjusted Net Income $ 539,000 $ 919,000 $ 2,997,000 $ 2,499,000
     
Adjusted Diluted Earnings per Share $ .05 $ .09 $ .30 $ .25
     
Adjusted Net Income excluding merger related costs:    
     
Add back:    
Net Impact of merger-related costs $ 882,000 $ -- $ 894,000 $ --
     
Adjusted Net Income $ 1,421,000 $ 919,000 $ 3,891,000 $ 2,499,000
     
Adjusted Diluted Earnings per Share $ .14 $ .09 $ .39 $ .25

This press release includes certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included in this press release, other than statements of historical facts, address matters that the Company reasonably expects, believes or anticipates will or may occur in the future. Such statements are subject to various assumptions, risks and uncertainties, many of which are beyond the control of the Company. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those described in the forward-looking statements. Investors are encouraged to read the "Forward-Looking Statements" and "Risk Factors" sections included in the Company's Annual Report on Form 10-K/A for more information. Although the Company may from time to time voluntarily update its prior forward looking statements, it disclaims any commitment to do so except as required by securities laws. 

CREDO PETROLEUM CORPORATION
FINANCIAL HIGHLIGHTS
     
Condensed Operating Information    
  Nine Months Ended
July 31, 
 Three Months Ended
July 31, 
 2012 20112012 2011
     
REVENUES:    
Oil sales $ 15,952,000 $ 8,678,000$ 5,691,000 $ 3,358,000
Natural gas sales  2,091,000 3,128,000671,000 1,130,000
 18,043,000 11,806,0006,362,000 4,488,000
COSTS AND EXPENSES:    
Oil and natural gas production  3,521,000 2,893,0001,294,000 1,059,000
Depreciation, depletion and amortization  6,181,000 3,401,0002,343,000 1,260,000
General and administrative   3,534,000 2,016,0001,849,000 820,000
 13,236,000 8,310,0005,486,000 3,139,000
     
Income from Operations  4,807,000 3,496,000876,000 1,349,000
     
Other Income and (Expense)    
Realized and unrealized (losses) from derivative contracts  (167,000) (671,000)716,000 984,000
Investment and other income   3,000 55,000-- (4,000)
 (164,000) (616,000)716,000 980,000
     
INCOME BEFORE INCOME TAXES 4,643,000 2,880,0001,592,000 2,329,000
     
INCOME TAXES  (1,625,000) (749,000)(664,000) (622,000)
     
NET INCOME $ 3,018,000 $ 2,131,000$ 928,000 $ 1,707,000
     
Earnings per share - basic $ .30 $ .21$ .09 $ .17
     
Earnings per share - diluted $ .30 $ .21$ .09 $ .17
     
Weighted average number of shares of Common Stock and dilutive securities:   
Basic   10,041,000 10,042,00010,041,000 10,041,000
     
Diluted   10,088,000 10,078,00010,096,000 10,072,000
 
CREDO PETROLEUM CORPORATION
FINANCIAL HIGHLIGHTS
   
Condensed Balance Sheet InformationJuly 31, 2012 October 31, 2011
Cash and Short-Term Investments$ 2,654,000 $ 4,800,000
Other Current Assets  9,386,000 4,271,000
Oil and Natural Gas Properties, Net73,905,000 49,851,000
Intangible Assets, Net  2,815,000 3,142,000
Other Assets1,286,000 1,857,000
   
 $ 90,046,000 $ 63,921,000
   
Current Liabilities$ 23,515,000 $ 8,248,000
Long-term Debt  6,000,000 --
Deferred Income Taxes  6,149,000 4,524,000
Asset Retirement Obligations  1,444,000 1,213,000
Stockholders' Equity  52,938,000 49,936,000
   
 $ 90,046,000 $ 63,921,000
CONTACT: Michael D. Davis
         Chief Operating Officer
         and CEO (Interim)
         or
         Brian C. Mazeski
         Chief Accounting Officer
         303-297-2200
         Website: www.credopetroleum.com