Business context and reporting period
Filing identity mismatch: The supplied filing is Delta Petroleum Corporation’s Form 10-Q for the quarter ended June 30, 2011, not a PAR Pacific Holdings, Inc. filing. This summary therefore describes Delta Petroleum. Delta was principally engaged in oil and gas exploration and production, focused on the Rocky Mountain region; its drilling subsidiary, DHS, was reported as discontinued operations.
Financial statements are unaudited. Dollar amounts below are in millions unless noted. The filing retroactively reflects a 1-for-10 reverse stock split effective July 13, 2011.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue from continuing operations | $16.9 | $14.7 | $34.6 | $33.9 |
| Operating loss | $(8.4) | $(49.5) | $(17.7) | $(61.5) |
| Loss from continuing operations | $(8.8) | $(53.3) | $(35.5) | $(61.1) |
| Net loss attributable to Delta common stockholders | $(1.0) | $(149.8) | $(28.8) | $(162.5) |
| Diluted loss per share | $(0.03) | $(5.43) | $(1.03) | $(5.90) |
- Q2 2011 discontinued operations contributed a $9.3 million gain, including the Wapiti asset-sale gain; this substantially reduced the reported net loss. Six-month discontinued operations contributed a $5.8 million net gain.
- Six-month operating cash flow was $0.1 million, investing cash flow $8.0 million, and financing cash flow $(18.4) million. Cash declined $10.3 million to $3.9 million. Capital expenditures were $32.1 million on an accrual basis; cash additions to property and equipment were $36.7 million.
- At June 30, cash was $3.9 million, alongside $100.0 million of short-term restricted deposits. The company reported a $139.0 million working-capital deficiency excluding discontinued operations.
- Delta’s debt, excluding acquisition installments and DHS debt, totaled $275.7 million: $15.0 million under its credit facility, $149.7 million of 7% senior notes, and $111.0 million carrying value of convertible notes with $115.0 million principal. The MBL facility matured January 31, 2012; convertible-note holders could require repayment at par on May 1, 2012. Delta reported compliance with MBL financial covenants at June 30.
- Assets held for sale were $66.7 million and related liabilities $76.1 million, including DHS credit-facility debt of $69.9 million. DHS debt was non-recourse to Delta. Delta’s total assets were $975.8 million and total equity $486.7 million.
- Net derivative liabilities were $5.6 million. Interest expense and financing costs were $8.0 million in Q2 and $14.8 million for the six months.
Material changes versus prior comparable periods
- Q2 oil and gas sales rose 14% to $16.9 million, driven by higher realized prices: oil averaged $86.87/bbl versus $58.29, and gas $5.31/Mcf versus $4.92. Six-month sales were nearly flat at $34.6 million; higher oil prices were offset by lower gas prices and a 1% production decline.
- Q2 continuing operating loss narrowed sharply from the prior year, in part because 2010 included $29.9 million of dry-hole costs and impairments. Six-month dry-hole and impairment charges fell to $0.4 million from $30.2 million.
- Operating-cost improvements included lower lease operating expense and general and administrative expense. Six-month G&A fell 37% to $13.1 million, which management attributed to lower stock compensation, consulting fees, and staffing costs.
- Six-month derivative results shifted from a $20.9 million unrealized gain in 2010 to a $2.6 million unrealized loss in 2011. Realized derivative losses were $5.5 million in 2011, including $3.3 million paid to terminate part of the oil-hedge portfolio.
- On June 28, Delta sold remaining non-core oil and gas interests to Wapiti for approximately $43.2 million gross cash proceeds. Proceeds helped reduce borrowing and fund capital spending. The sale and DHS’s sale of substantially all Chapman Trucking assets were recorded in discontinued operations.
Outlook, risks and unusual items
- Going concern: Management stated it lacked adequate capital to repay the January 2012 MBL facility maturity or fund the anticipated May 2012 convertible-note put. The filing says this uncertainty raises substantial doubt about Delta’s ability to continue as a going concern. Delta was seeking long-term capital through equity, debt, asset sales, joint ventures, or other transactions.
- In July 2011, Delta’s board engaged Macquarie Capital and Evercore to lead a strategic-alternatives process, including a potential company sale. The filing gives no assurance that financing or a transaction would be completed on acceptable terms. Management expected available liquidity and operating cash flow to support planned operating costs, limited Vega Area development, and current debt service through 2011.
- Capital plans centered on completing two previously drilled Williams Fork wells and an exploratory test well in the Vega Area; spending could change with drilling results, commodity prices, and capital availability. A deep test well was reported completed and on sales July 21, after quarter-end.
- DHS missed scheduled debt payments, breached financial covenants, and was under a forbearance agreement then scheduled to expire August 8, 2011. It owed approximately $71.9 million including accrued interest, and its lender could demand repayment or foreclose on rigs. An August 3, 2011 forbearance agreement is listed as an exhibit; confirm its terms and subsequent status.
- Other risks include commodity-price volatility, reserve and impairment-estimation uncertainty, and the possibility that the strategic process disrupts operations or fails to address liquidity. DHS and certain personnel were subject to a U.S. government investigation; potential liability was not estimable. Delta also disclosed an appealed court ruling concerning potential offshore California well-plugging obligations; costs were unknown.
- Delta reported effective disclosure controls and no material quarterly change in internal control over financial reporting. A valuation allowance remained against deferred tax assets; reported tax benefits included non-cash tax allocation effects.
Most important facts for investors to verify
- Confirm the issuer identity: the source is Delta Petroleum Corporation, not PAR Pacific Holdings, Inc.
- Verify post-filing outcomes for the January 2012 MBL maturity, May 2012 convertible-note put, and Delta’s strategic-alternatives process.
- Check the August 2011 DHS forbearance extension, lender negotiations, DHS sale process, and whether DHS obligations remained non-recourse to Delta.
- Assess unrestricted liquidity separately from the $100 million restricted deposit, and reconcile the reported working-capital deficit, debt maturities, and available borrowing capacity.
- Evaluate whether Vega drilling and production results, commodity prices, and hedge settlements support the planned capital program and cash-flow assumptions.
- Review the potential exposure and procedural status of the offshore decommissioning litigation and the DHS-related government investigation.