REVOLVING CREDIT LINE

6 Months Ended

Apr. 30, 2012

5. REVOLVING CREDIT LINE

During fiscal 2012, the Company expects to borrow between $7 million and $12 million to partially finance its drilling activities. During the second quarter of 2012, the Company entered into a Revolving Credit Agreement (the Agreement) with its principal bank, Bank of Oklahoma, NA. The Agreement provides for a $25,000,000 credit facility. The Agreement will mature in December 2016. The credit availability under the Agreement is governed by a Borrowing Base, the determination of which is made semi-annually by the lender based on review of the Company’s reserves at April 30 and October 31. The Borrowing Base under the Agreement could increase or decrease based on such determination. In addition to the semi-annual determinations, the Company and the lender each have discretion at any time, but not more often than once during a calendar year, to have the Borrowing Base redetermined. The initial $7 million Borrowing Base was increased to $9.3 million effective April 30, 2012, and is expected to be increased further as the Company pledges additional collateral.

The Company must elect between one of two interest rates as follows:

(i) a rate that is based on interest rates applicable to dollar deposits in the London interbank market (“LIBOR Rate”) plus 175 to 275 basis points, depending on Borrowing Base utilization; or

(ii) a rate based on the greatest of (a) the prime rate announced by the Bank of Oklahoma; or (b) the federal funds rate plus 1/2 of 1%.

The Agreement includes terms and covenants that place limitations on certain types of activities, including restrictions or requirements with respect to additional debt, liens, asset sales, hedging activities, investments, dividends, mergers, and acquisitions, and also includes two financial covenants. The Company is required to maintain a financial covenant related to the current ratio, where consolidated current assets to consolidated current liabilities is not less than 1.0 to 1.0 at the end of any fiscal quarter. For purpose of the covenant calculation, consolidated current assets is increased by the amount available on the line of credit less any derivative gains or losses included in consolidated current assets or consolidated current liabilities. The Company is also required to maintain a financial covenant related to consolidated funded indebtedness to consolidated EBITDAX, where the ratio at the end of any fiscal quarter is not greater than 3.5 to 1.0. This ratio is calculated using the twelve month period ending with the applicable fiscal quarter. If the Company were to fail to perform its obligations under these covenants or other covenants and obligations, it could cause an event of default and the Agreement could be terminated and amounts outstanding could be declared immediately due and payable by the lender, subject to notice and cure periods in certain cases. Such events of default include non-payment, breach of warranty, non-performance of financial covenants, certain adverse judgments, change of control, or a failure of the liens securing the Borrowing Base.

The Company drew down $2 million on the line of credit during the three months ended April 30, 2012 and that amount remains outstanding as of April 30, 2012. We are accruing interest at a rate of 2.75%, which is based on the LIBOR Rate. We capitalized $11,000 of interest expense to the full cost pool during the three months ended April 30, 2012. Subsequent to April 30, 2012, the Company drew down an additional $4 million on the line of credit to pay accounts payable related to drilling and completion costs.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References+ Details

CREDO PETROLEUM CORP 10-Q