Business Context and Reporting Period
Company: Delta Petroleum Corporation (Note: Metadata listed "PAR PACIFIC HOLDINGS, INC." but the filing text confirms the registrant is Delta Petroleum Corporation).
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Delta is engaged in acquiring, exploring, developing, and producing oil and gas properties, primarily in the Rocky Mountain and Gulf Coast regions. It also operates a drilling and trucking segment through its subsidiary, DHS Drilling Company. The company operates under the successful efforts method of accounting.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenue | $60.8 million | $186.5 million |
| Net Income (Loss) | $49.8 million | $7.7 million |
| Income from Continuing Ops | $43.1 million | $(9.3) million |
| Operating Cash Flow | N/A | $93.3 million |
| Cash and Equivalents | $79.2 million | $79.2 million |
| Total Debt (Long-term + Current) | $604.9 million | $604.9 million |
| Installments Payable (EnCana) | $283.9 million | $283.9 million |
| Assets Held for Sale | $88.2 million | $88.2 million |
Note: Debt figures exclude the $283.9 million in installments payable on property acquisition, which are secured by restricted deposits.
Material Changes vs. Prior Period
- Profitability Surge: The company reported a net income of $49.8 million for the quarter, a significant turnaround from a net loss of $5.0 million in the same period in 2007. This was primarily driven by a $54.8 million unrealized gain on derivative instruments due to declining commodity prices.
- Revenue Growth: Oil and gas sales increased 112% to $49.0 million (quarterly) and 147% to $156.1 million (year-to-date) compared to 2007, driven by a 64% increase in production and higher average oil and gas prices.
- Impairment Reduction: Unlike the prior year, which included $58.4 million in impairment charges, no impairments were recorded for proved properties in the nine months ended September 30, 2008.
- Capital Structure: Total assets more than doubled from $1.1 billion to $2.3 billion, largely due to the acquisition of EnCana properties and the issuance of 36 million shares to Tracinda Corporation for $667 million in net proceeds.
Guidance, Outlook, Risks, and Unusual Items
- Derivative Gains: A significant portion of the reported income ($54.8 million unrealized gain) stems from mark-to-market adjustments on commodity hedges. The company discontinued cash flow hedge accounting in July 2007, recognizing these gains/losses in current earnings.
- Lehman Brothers Impact: The subsidiary DHS Drilling Company has a credit facility with Lehman Commercial Paper. Due to Lehman's bankruptcy, $54.0 million of available borrowing capacity is not anticipated to be available. Additionally, DHS forfeited a $1.3 million deposit on a rig acquisition due to Lehman's failure to fund.
- Offshore Litigation: The company is a plaintiff in a lawsuit against the U.S. government regarding offshore California leases. A final judgment awarded the company approximately $58.5 million, but the government has petitioned for a rehearing. No payments have been made pending the exhaustion of appeals.
- Subsequent Event: On November 3, 2008, the company entered into a new credit agreement with JPMorgan Chase, increasing the revolving credit facility to $590 million and the borrowing base to $295 million.
- Capital Expenditures: Management indicated a reduction in drilling capital expenditures for the remainder of 2008 and 2009.
Investor Verification Checklist
- Derivative Exposure: Verify the sustainability of earnings given the heavy reliance on unrealized derivative gains ($54.8 million) which are non-cash and volatile.
- Liquidity Constraints: Assess the impact of the Lehman Brothers bankruptcy on the DHS subsidiary's ability to fund operations and the availability of the $54 million credit line.
- Offshore Litigation Recovery: Monitor the status of the U.S. government's petition for rehearing regarding the $58.5 million lease bonus restitution award.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the current ratio and debt-to-EBITDAX ratios, especially given the reduced borrowing base availability prior to the November refinancing.
- Asset Quality: Review the valuation of the $88.2 million in assets held for sale (Midway Loop properties) and the $17.0 million in unproved offshore California properties subject to regulatory delays.