Filing summary
Entity note: The supplied filing is Delta Petroleum Corporation’s Form 10-Q, not a PAR Pacific Holdings, Inc. filing. The summary below reflects the filing text provided.
Business context and reporting period
Delta Petroleum reported for the quarter and nine months ended September 30, 2011. Its continuing business was primarily oil and gas exploration and production in the Rocky Mountain region, particularly the Vega Area of the Piceance Basin. Drilling subsidiary DHS and various divested properties were classified as discontinued operations. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Reported amount |
|---|---|
| Q3 oil and gas sales | $16.5, up 31% from $12.7 in Q3 2010 |
| Q3 net loss attributable to common stockholders | $429.4, or $15.40 per diluted share; compared with net income of $13.9, or $0.49 per diluted share, in Q3 2010 |
| Nine-month oil and gas sales | $51.1, up 8% from $47.1 |
| Nine-month net loss attributable to common stockholders | $458.2, or $16.33 per diluted share; compared with a $148.6 loss in the prior-year period |
| Major Q3 charge | $420.1 impairment of Vega properties and related assets, included in $420.4 of dry-hole costs and impairments |
| Nine-month cash flows | Operating cash provided: $6.5; investing cash used: $5.2; financing cash used: $13.4 |
| Cash and liquidity at September 30 | Cash: $2.1; restricted deposits: $100.0; stated available borrowing under the credit facility: $12.0 |
| Debt and capitalization | Debt excluding acquisition installments and non-recourse DHS debt: $282.9, comprising $21.0 credit-facility debt, $149.7 senior notes and $112.2 carrying value of convertible notes. Debt-to-capitalization ratio: 85.9%. |
| Equity | Total equity fell to $58.3 from $511.6 at December 31, 2010. |
Q3 continuing-operations operating margin was severely negative, principally because of the Vega impairment; the filing does not present a meaningful normalized margin. For the nine months, production was broadly flat at 8.392 billion cubic feet equivalent versus 8.428 billion. Higher realized prices supported sales growth, while oil production declined. Lease operating expense per Mcfe improved to $1.26 from $1.79.
Material changes versus the prior comparable period
- The $420.1 Vega impairment drove the sharp deterioration in Q3 and nine-month operating results. Management cited market indicators and the absence of a definitive offer valuing the company or its assets above aggregate indebtedness.
- Q3 oil and gas sales rose with higher realized prices: natural gas averaged $5.91/Mcf versus $4.44, and oil averaged $71.45/barrel versus $58.71.
- Nine-month G&A declined to $19.2 from $28.8, and interest and financing costs declined to $21.5 from $24.1.
- Unrealized derivative gains were much lower for the nine months: $4.1 versus $28.1. Realized derivative losses were $5.4, including $3.3 paid to settle contracts as required by a credit agreement amendment.
- Cash from operations improved from $25.9 used in the first nine months of 2010 to $6.5 provided in 2011, which management attributed primarily to working-capital changes.
- In June 2011, Delta sold remaining non-core assets to Wapiti for approximately $43.2 gross proceeds. On July 13, 2011, it effected a one-for-ten reverse stock split.
Outlook, liquidity, risks and unusual items
- Going concern: Management disclosed substantial doubt about Delta’s ability to continue as a going concern. It said available capital was insufficient to repay the credit facility at its January 31, 2012 maturity or fund the expected May 1, 2012 put of the $115.0 face-value convertible notes.
- Restructuring alternatives: The company had not received a definitive acquisition offer exceeding aggregate indebtedness or identified significant acceptable additional financing. Management said debt restructuring was likely; failure to resolve liquidity needs would require seeking Chapter 11 protection. Any transaction could be highly dilutive.
- Facility covenant: Delta was not in compliance with the minimum current-ratio covenant at September 30; MBL granted a waiver after quarter-end. The filing also reports a $149.3 working-capital deficiency excluding discontinued operations.
- Operating plan: Management expected liquidity to fund operating expenses, current debt service and a limited Vega development plan through the end of 2011, but said spending depended on capital availability, commodity prices and drilling results. A fourth exploratory test well was expected to commence in Q4; no formal earnings guidance was provided.
- Subsequent events: Delta paid the final $100.0 installment on the EnCana property acquisition on October 27 using restricted cash. On October 31, it sold DHS to its lender for $0.5 and expected to recognize a $6.1 gain. DHS’s $71.9 credit facility debt was non-recourse to Delta.
- Contingency: A court ruled that former working-interest owners shared responsibility for plugging and abandoning an offshore California well; an appeal was pending. The operator estimated Delta’s pro rata cost at approximately $2.6, excluding certain potential expenses. Delta said it could not reasonably estimate its liability.
- Other items: The company recorded a $1.6 loss in a settlement involving a note receivable. A DHS receivable of $2.1 from a Mexican drilling project was reserved as doubtful and was subject to legal collection efforts.
Important facts for investors to verify
- Confirm the intended issuer: the supplied document identifies Delta Petroleum Corporation, not PAR Pacific Holdings, Inc.
- Track the outcome and terms of debt restructuring, strategic-alternatives discussions, and the company’s ability to meet the January and May 2012 obligations.
- Verify the status and terms of the post-quarter MBL covenant waiver and the treatment of remaining credit-facility availability.
- Review the assumptions and valuation inputs behind the $420.1 Vega impairment and assess the effect on reserves and future production.
- Confirm the DHS sale closing effects, including the expected gain and release of related liabilities, and monitor the offshore decommissioning case and potential cost.