Business Context and Reporting Period
Company: Delta Petroleum Corporation (Note: Metadata referenced "PAR PACIFIC HOLDINGS, INC." but the filing text identifies the registrant as Delta Petroleum Corporation).
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Delta is engaged in acquiring, exploring, developing, and producing oil and gas properties, primarily in the Rocky Mountain Region. The company also operates a drilling and trucking segment through its 49.8% owned subsidiary, DHS Drilling Company.
Going Concern Status: The filing explicitly states that ongoing losses, near-term credit maturities, and a working capital deficiency raise substantial doubt about the Company's ability to continue as a going concern. The Company expects to refinance its credit facility maturing in January 2011.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenue | $35.4 million | $110.4 million |
| Net Income (Loss) Attributable to Common Stockholders | $13.9 million | $(148.6) million |
| Operating Loss | $(15.9) million | $(79.2) million |
| Cash and Cash Equivalents (End of Period) | $14.2 million | $14.2 million |
| Net Cash Used in Operating Activities | Filing text does not provide a clear value for the three-month period. | $(26.0) million |
| Total Debt (Current + Long-Term) | Filing text does not provide a clear aggregate value. | $350.2 million (excluding installments payable secured by restricted cash) |
| Working Capital | Deficiency of $85.8 million | Deficiency of $85.8 million |
Material Changes vs. Prior Period
- Profitability: The Company reported a net income of $13.9 million for the three months ended September 30, 2010, a significant improvement from a net loss of $96.8 million in the same period in 2009. This turnaround was driven primarily by a $29.5 million gain on the sale of discontinued operations (Wapiti Transaction) and a $7.1 million unrealized gain on derivative instruments.
- Revenue Growth: Total revenue increased 65% year-over-year for the quarter ($35.4M vs $21.4M). This was fueled by a 500% increase in contract drilling and trucking fees ($15.2M vs $2.5M) due to improved rig utilization, and a 6% increase in oil and gas sales due to higher commodity prices.
- Impairments: Dry hole costs and impairments decreased significantly to a benefit of $(0.3) million in Q3 2010 compared to $53.4 million in Q3 2009. For the nine-month period, impairments were $30.9 million compared to $161.5 million in the prior year.
- Asset Sales: The Company completed the "Wapiti Transaction" in July 2010, selling non-core assets for $130.0 million. Proceeds were used to pay down $108.5 million of debt.
Guidance, Outlook, Risks, and Unusual Items
- Liquidity and Refinancing: The Company's primary credit facility matures on January 15, 2011. Management anticipates replacing this facility but notes that new terms will likely be more expensive and restrictive. There is no assurance that refinancing will be successful.
- Convertible Notes: Holders of $115.0 million in 3 3/4% Senior Convertible Notes have the right to require the Company to purchase the notes starting May 1, 2012. The Company anticipates needing additional capital prior to this date to meet this obligation.
- Capital Expenditures: Due to credit facility covenants, capital expenditures are limited to $10.0 million for the quarter ending December 31, 2010. The Company plans to focus on completing nine previously drilled wells and one deeper evaluation well.
- Unusual Items:
- Discontinued Operations: A $29.5 million gain on the sale of discontinued operations (Wapiti Transaction) significantly impacted Q3 net income.
- Executive Severance: The Company recorded a net benefit of $(0.7) million in Q3 2010 related to the resignation of the President/COO, primarily due to the reversal of $2.3 million in previously recorded equity compensation costs.
- Risks: Substantial doubt exists regarding the Company's ability to continue as a going concern. Risks include the inability to refinance debt, volatility in oil and gas prices, and the outcome of ongoing litigation and investigations (including an investigation by the Export-Import Bank regarding a DHS customer).
Investor Verification Checklist
- Refinancing Status: Verify the current status of negotiations to replace the credit facility maturing January 15, 2011.
- Debt Covenants: Confirm compliance with the "maximum cash on hand" covenant ($10.0 million limit) and capital expenditure restrictions under the amended credit agreement.
- Convertible Note Repurchase: Assess the Company's capital raising strategy to fund the potential repurchase of $115.0 million in convertible notes due May 1, 2012.
- Derivative Exposure: Review the impact of the $1.1 million net derivative asset position and the risk of future commodity price fluctuations on cash flows.
- Legal Proceedings: Monitor the outcome of the arbitration with 212 Resources Corporation and the Export-Import Bank investigation involving DHS.