Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008, for Delta Petroleum Corporation (referred to in the metadata as Par Pacific Holdings, Inc., but identified as Delta Petroleum Corporation in the filing text). The Company is engaged in acquiring, exploring, developing, and producing oil and gas properties, primarily in the Rocky Mountain and Gulf Coast regions, and operates a drilling and trucking segment through its subsidiary, DHS Drilling Company.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Revenue | $55.99 million | $36.92 million |
| Net Loss | $(21.06) million | $(18.74) million |
| Loss from Continuing Operations | $(24.63) million | $(16.57) million |
| Income from Discontinued Operations (net of tax) | $3.55 million | $2.48 million |
| Cash Provided by Operating Activities | $7.02 million | $12.59 million |
| Cash Used in Investing Activities | $(567.26) million | $(37.78) million |
| Cash Provided by Financing Activities | $588.33 million | $30.56 million |
| Cash and Cash Equivalents (Ending) | $37.88 million | $13.03 million |
| Total Assets | $1,985.94 million | $1,105.20 million |
| Total Liabilities | $793.74 million | $569.49 million |
| Stockholders' Equity | $1,158.36 million | $508.41 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 52% to $55.99 million, driven by a 134% increase in oil and gas sales ($45.44 million vs. $19.44 million). This was due to a 68% increase in production volumes and significant increases in average realized prices (Oil: $89.84/Bbl vs. $52.99/Bbl; Gas: $7.55/Mcf vs. $5.61/Mcf).
- Operating Loss: Operating loss widened to $4.78 million from $16.05 million in the prior year, primarily due to higher revenues offsetting increased operating expenses.
- Derivative Impact: The Company recorded a $14.13 million unrealized loss and a $1.64 million realized loss on derivative instruments, significantly impacting the bottom line. This contrasts with a $1.19 million gain on hedging instruments in Q1 2007.
- Capital Structure: Stockholders' equity more than doubled to $1.16 billion following a $667.1 million equity offering to Tracinda Corporation in February 2008. This capital was used to pay off the Company's credit facility in full.
- Acquisitions: The Company acquired over 1,700 drilling locations in the Piceance Basin from EnCana for a total commitment of $410.5 million, with $110.5 million paid at closing and the remainder structured as long-term installments.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects to accelerate development of key properties, particularly in the Rocky Mountain region, utilizing the strengthened balance sheet. Production from continuing operations increased 68% to 4.7 Mmcfe.
- Derivative Hedging: The Company discontinued cash flow hedge accounting effective July 1, 2007. Consequently, mark-to-market gains and losses are recognized in current earnings. As of March 31, 2008, the Company held a net derivative liability of $17.5 million due to commodity prices exceeding collar ceilings.
- Liquidity: The Company has $37.9 million in cash, $35.0 million in certificates of deposit, and $301.2 million in long-term restricted deposits. The $250 million credit facility has $140 million available borrowing capacity, though it was paid down in February 2008.
- Legal Contingencies:
- Offshore Litigation: The Company is a plaintiff in a lawsuit against the U.S. government regarding offshore California leases. A court awarded restitution of lease bonuses (approx. $58.5 million to Delta), but the government has appealed. No amounts have been recorded pending the outcome of appeals.
- Shareholder Derivative Suit: A consolidated shareholder derivative suit regarding alleged stock option backdating was dismissed in September 2007, but plaintiffs filed a motion to amend the complaint, which is pending.
- Unusual Items: The significant increase in investing cash outflows ($567 million) was driven by the EnCana acquisition and a $301 million restricted deposit. The net loss was exacerbated by non-cash unrealized losses on derivatives.
Investor Verification Checklist
- Derivative Liability: Verify the impact of the $17.5 million derivative liability on future earnings, given the Company's decision to recognize mark-to-market losses in current earnings.
- EnCana Acquisition: Confirm the terms of the $410.5 million EnCana transaction, specifically the $300 million in future installment payments and the associated interest costs.
- Offshore Litigation: Monitor the status of the U.S. government appeal regarding the $58.5 million lease bonus restitution award, as this represents a potential non-operating asset.
- Debt Covenants: Review compliance with financial covenants, specifically the debt-to-EBITDAX ratio (limit 3.75:1) and current ratio (limit 1:1), excluding derivative fair values.
- Reserve Estimates: Assess the 60% increase in proved reserves (to 603 Bcfe) and the associated depletion rates, which decreased to $4.03/Mcfe.