Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2012, for Par Petroleum Corporation (formerly Delta Petroleum Corporation). The filing is significant due to the company's emergence from Chapter 11 bankruptcy on August 31, 2012. Consequently, the financial statements present the company as a "Successor" entity for the period from September 1 through September 30, 2012, utilizing "fresh start" accounting. Prior periods are presented as the "Predecessor." The company's primary asset is now a 33.34% equity interest in Piceance Energy LLC, a joint venture with Laramie Energy II, LLC.
Key Financial Metrics
| Metric | Successor (Sep 2012) | Predecessor (Jan-Aug 2012) | Predecessor (Sep 2011) |
|---|---|---|---|
| Revenue (Oil & Gas Sales) | $584,000 | $23,079,000 | $51,143,000 |
| Net Loss | $(2,002,000) | $(199,004,000) | $(458,236,000) |
| Operating Loss | $(1,756,000) | $(170,677,000) | $(445,958,000) |
| Cash and Equivalents (End of Period) | $6,535,000 | $1,954,000 | $2,101,000 |
| Total Assets | $111,357,000 | $208,822,000 (Aug 31) | $387,897,000 (Dec 31, 2011) |
| Total Liabilities | $14,264,000 | $355,706,000 (Aug 31) | $337,672,000 (Dec 31, 2011) |
| Long-Term Debt (Net) | $7,146,000 | $0 | $0 |
| Investment in Unconsolidated Affiliates | $95,006,000 | $3,649,000 | $3,649,000 |
Note: Predecessor data for Jan-Aug 2012 includes significant impairment charges of $151.3 million. Successor data reflects only one month of operations post-reorganization.
Material Changes vs. Prior Period
- Reorganization and Fresh Start Accounting: The company emerged from Chapter 11 on August 31, 2012. Predecessor equity was cancelled, and new equity was issued to creditors. Assets and liabilities were remeasured at fair value. Total liabilities dropped significantly from $355.7 million (Predecessor) to $14.3 million (Successor) due to the discharge of compromised debt.
- Asset Structure: The company contributed substantially all of its oil and gas properties to Piceance Energy LLC in exchange for a 33.34% interest. This investment is now the largest asset on the balance sheet ($95 million), whereas previously, the company held direct ownership of proved and unproved properties valued at over $800 million (Predecessor).
- Revenue Decline: Revenue for the one-month Successor period ($584,000) is drastically lower than the Predecessor's nine-month 2011 revenue ($51.1 million) due to the transfer of core assets to the joint venture.
- Debt Restructuring: The Predecessor's senior notes and DIP financing were extinguished. The Successor entered into a new Delayed Draw Term Loan Credit Agreement, borrowing $13 million, with a net carrying value of $7.1 million after discounts.
Guidance, Outlook, and Risks
- Outlook: The company's future profitability depends heavily on the performance of Piceance Energy LLC. Piceance Energy is currently incurring losses due to low natural gas prices and derivative losses. The company expects modest cash flows from retained assets (Point Arguello unit) but anticipates no significant capital expenditures in the near term.
- Liquidity Constraints: Liquidity is constrained by the Piceance Energy Credit Facility, which generally prohibits cash distributions to owners. The company may be required to make capital contributions of up to $20 million to Piceance Energy if approved by the board.
- Key Risks:
- Commodity Prices: Significant exposure to volatile natural gas and oil prices, which directly impact Piceance Energy's ability to generate cash flow.
- Internal Controls: Management disclosed that disclosure controls and procedures were not effective as of September 30, 2012, citing material weaknesses in financial reporting, qualified personnel, and risk assessment.
- Tax Attributes: The company holds approximately $1.4 billion in Net Operating Loss (NOL) carryforwards. Utilization is subject to Section 382 limitations, and stock transfer restrictions are in place to prevent an "ownership change" that could eliminate these losses.
- Joint Venture Control: Laramie Energy manages Piceance Energy's day-to-day operations; Par Petroleum has limited control over operational decisions.
- Unusual Items: The Predecessor recognized $151.3 million in dry hole costs and impairments in the period ending August 31, 2012, related to the reclassification of assets held for sale. The Successor recorded a $1.5 million loss from its unconsolidated affiliate (Piceance Energy) in September 2012.
Investor Verification Checklist
- Verify Piceance Energy Performance: Review the joint venture's production volumes and cash flow, as this is the primary driver of the company's value.
- Assess Capital Contribution Obligations: Confirm the likelihood and timing of the potential $20 million capital call to Piceance Energy and the company's ability to fund it without dilution.
- Monitor Internal Control Remediation: Track progress on fixing the material weaknesses in financial reporting and internal controls identified in Item 4.
- Review NOL Utilization Strategy: Evaluate the company's ability to generate taxable income to utilize its $1.4 billion NOLs before they expire, considering the Section 382 restrictions.
- Check Derivative Liabilities: Monitor the fair value of the warrant liabilities and embedded derivatives ($6.1 million total), which fluctuate with the company's stock price and impact earnings.