UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-16203

DELTA PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		84-1060803 (I.R.S. Employer Identification No.)

370 17th Street, Suite 4300 Denver, Colorado (Address of principal executive offices)		80202 (Zip Code)

(303) 293-9133
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No þ

285,216,209 shares of common stock, $.01 par value per share, were outstanding as of November 1, 2010.

 

 

INDEX

		Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets — September 30, 2010 and December 31, 2009 (unaudited)			1
Consolidated Statements of Operations — Three Months Ended September 30, 2010 and 2009 (unaudited)			2
Consolidated Statements of Operations — Nine Months Ended September 30, 2010 and 2009 (unaudited)			3
Consolidated Statement of Changes in Equity — Nine Months Ended September 30, 2010 (unaudited)			4
Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2010 and 2009 (unaudited)			5
Notes to Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3. Quantitative and Qualitative Disclosures About Market Risk			51
Item 4. Controls and Procedures			52
PART II OTHER INFORMATION
Item 1. Legal Proceedings			52
Item 1A. Risk Factors			53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 5. Other Information			53
Item 6. Exhibits			54

The terms “Delta,” “Company,” “we,” “our,” and “us” refer to Delta Petroleum Corporation and its consolidated entities unless the context suggests otherwise.

PART I FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)

		September 30,				December 31,
		2010				2009
		(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	14,197			$	61,918
Short-term restricted deposits			100,000				100,000
Trade accounts receivable, net of allowance for doubtful accounts of $2,348 and $100, respectively			15,594				16,654
Property sale purchase price receivable			17,750				—
Deposits and prepaid assets			945				3,103
Inventories			3,965				5,588
Derivative instruments			1,165				—
Other current assets			3,385				5,189
Total current assets			157,001				192,452
Property and equipment:
Oil and gas properties, successful efforts method of accounting:
Unproved			235,612				280,844
Proved			867,036				1,379,920
Drilling and trucking equipment			174,445				177,762
Pipeline and gathering systems			97,696				92,064
Other			15,573				16,154
Total property and equipment			1,390,362				1,946,744
Less accumulated depreciation and depletion			(512,677	)			(800,501	)
Net property and equipment			877,685				1,146,243
Long-term assets:
Long-term restricted deposit			100,000				100,000
Investments in unconsolidated affiliates			3,208				7,444
Deferred financing costs			2,109				3,017
Other long-term assets			6,352				8,329
Total long-term assets			111,669				118,790
Total assets		$	1,146,355			$	1,457,485
LIABILITIES AND EQUITY
Current liabilities:
Credit facility — Delta		$	21,500			$	—
Credit facility — DHS			71,590				83,268
Installment payable on property acquisition			99,785				97,874
Accounts payable			32,410				44,225
Offshore litigation payable			—				13,877
Other accrued liabilities			17,510				13,459
Derivative instruments			—				19,497
Total current liabilities			242,795				272,200
Long-term liabilities:
Installment payable on property acquisition, net of current portion			97,244				95,381
7% Senior notes			149,666				149,609
33/4% Senior convertible notes			107,431				104,008
Credit facility — Delta			—				124,038
Asset retirement obligations			3,942				7,654
Derivative instruments			65				7,475
Total long-term liabilities			358,348				488,165
Commitments and contingencies
Equity:
Preferred stock, $.01 par value:
authorized 3,000,000 shares, none issued			—				—
Common stock, $.01 par value: authorized 600,000,000 shares, issued 285,637,000 shares at September 30, 2010 and 282,548,000 shares at December 31, 2009			2,856				2,825
Additional paid-in capital			1,630,357				1,625,035
Treasury stock at cost; 33,000 shares at September 30, 2010 and 42,000 shares at December 31, 2009			(31	)			(268	)
Accumulated deficit			(1,087,616	)			(939,010	)
Total Delta stockholders’ equity			545,566				688,582
Non-controlling interest			(354	)			8,538
Total equity			545,212				697,120
Total liabilities and equity		$	1,146,355			$	1,457,485

See accompanying notes to consolidated financial statements.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended
		September 30,
		2010				2009
		(In thousands, except per share amounts)
Revenue:
Oil and gas sales		$	20,233			$	19,059
Contract drilling and trucking fees			15,204				2,538
Loss on offshore litigation award and property sales, net			(1	)			(150	)
Total revenue			35,436				21,447
Operating expenses:
Lease operating expense			5,969				6,809
Transportation expense			3,388				2,028
Production taxes			996				717
Exploration expense			368				891
Dry hole costs and impairments			(262	)			53,407
Depreciation, depletion, amortization and accretion — oil and gas			14,410				20,065
Drilling and trucking operating expenses			12,041				2,818
Depreciation and amortization — drilling and trucking			4,801				5,545
General and administrative			10,345				9,953
Executive severance expense, net			(674	)			—
Total operating expenses			51,382				102,233
Operating loss			(15,946	)			(80,786	)
Other income and (expense):
Interest expense and financing costs, net			(9,310	)			(9,706	)
Other income (expense), net			(36	)			220
Realized gain (loss) on derivative instruments, net			(418	)			370
Unrealized gain (loss) on derivative instruments, net			7,124				(5,923	)
Loss from unconsolidated affiliates			(90	)			(454	)
Total other expense			(2,730	)			(15,493	)
Loss from continuing operations before income taxes and discontinued operations			(18,676	)			(96,279	)
Income tax expense			86				265
Loss from continuing operations			(18,762	)			(96,544	)
Discontinued operations:
Income (loss) from results of operations and sale of discontinued operations, net of tax			29,495				(4,429	)
Net income (loss)			10,733				(100,973	)
Less net loss attributable to non-controlling interest			3,209				4,146
Net income (loss) attributable to Delta common stockholders		$	13,942			$	(96,827	)
Amounts attributable to Delta common stockholders:
Loss from continuing operations		$	(15,553	)		$	(92,398	)
Income (loss) from discontinued operations, net of tax			29,495				(4,429	)
Net income (loss)		$	13,942			$	(96,827	)
Basic income (loss) attributable to Delta common stockholders per common share:
Loss from continuing operations		$	(0.06	)		$	(0.34	)
Discontinued operations			0.11				(0.01	)
Net income (loss)		$	0.05			$	(0.35	)
Diluted income (loss) attributable to Delta common stockholders per common share:
Loss from continuing operations		$	(0.05	)		$	(0.34	)
Discontinued operations			0.10				(0.01	)
Net income (loss)		$	0.05			$	(0.35	)

See accompanying notes to consolidated financial statements.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Nine Months Ended
		September 30,
		2010				2009
		(In thousands, except per share amounts)
Revenue:
Oil and gas sales		$	74,734			$	56,786
Contract drilling and trucking fees			36,200				9,425
Gain (loss) on offshore litigation award and property sales, net			(539	)			31,054
Total revenue			110,395				97,265
Operating expenses:
Lease operating expense			20,903				21,273
Transportation expense			11,195				6,653
Production taxes			3,760				3,217
Exploration expense			952				2,422
Dry hole costs and impairments			30,859				161,471
Depreciation, depletion, amortization and accretion — oil and gas			45,540				62,992
Drilling and trucking operating expenses			28,053				10,416
Depreciation and amortization — drilling and trucking			15,599				17,512
General and administrative			33,372				31,545
Executive severance expense, net			(674	)			3,739
Total operating expenses			189,559				321,240
Operating loss			(79,164	)			(223,975	)
Other income and (expense):
Interest expense and financing costs, net			(29,426	)			(41,907	)
Other income (expense), net			(207	)			1,630
Realized gain (loss) on derivative instruments, net			(5,132	)			370
Unrealized gain (loss) on derivative instruments, net			28,072				(27,034	)
Income (loss) from unconsolidated affiliates			893				(3,324	)
Total other expense			(5,800	)			(70,265	)
Loss from continuing operations before income taxes and discontinued operations			(84,964	)			(294,240	)
Income tax expense (benefit)			564				(53	)
Loss from continuing operations			(85,528	)			(294,187	)
Discontinued operations:
Loss from results of operations and sale of discontinued operations, net of tax			(72,212	)			(16,702	)
Net loss			(157,740	)			(310,889	)
Less net loss attributable to non-controlling interest			9,134				16,191
Net loss attributable to Delta common stockholders		$	(148,606	)		$	(294,698	)
Amounts attributable to Delta common stockholders:
Loss from continuing operations		$	(76,394	)		$	(277,996	)
Loss from discontinued operations, net of tax			(72,212	)			(16,702	)
Net loss		$	(148,606	)		$	(294,698	)
Basic income (loss) attributable to Delta common stockholders per common share:
Loss from continuing operations		$	(0.28	)		$	(1.47	)
Discontinued operations			(0.26	)			(0.08	)
Net loss		$	(0.54	)		$	(1.55	)
Diluted income (loss) attributable to Delta common stockholders per common share:
Loss from continuing operations		$	(0.28	)		$	(1.47	)
Discontinued operations			(0.26	)			(0.08	)
Net loss		$	(0.54	)		$	(1.55	)

See accompanying notes to consolidated financial statements.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)

										Additional												Accu-				Total Delta				Non-
		Common stock								paid-in				Treasury stock								mulated				stockholders’				controlling				Total
		Shares				Amount				capital				Shares				Amount				deficit				equity				interest				equity
		(In thousands)
Balance, December 31, 2009			282,548			$	2,825			$	1,625,035				42			$	(268	)		$	(939,010	)		$	688,582			$	8,538			$	697,120
Net loss			—				—				—				—				—				(148,606	)			(148,606	)			(9,134	)			(157,740	)
Employee vesting of treasury stock held by subsidiary			—				—				—				(13	)			194				—				194				(194	)			—
Issuance of vested stock			5,653				56				(56	)			—				—				—				—				—				—
Shares repurchased for withholding taxes			(911	)			(9	)			(736	)			4				43				—				(702	)			—				(702	)
Forfeiture of restricted shares			(1,653	)			(16	)			16				—				—				—				—				—				—
Executive severance — stock-based awards forfeited			—				—				(2,274	)			—				—				—				(2,274	)			—				(2,274	)
Stock based compensation			—				—				8,372				—				—				—				8,372				436				8,808
Balance, September 30, 2010			285,637			$	2,856			$	1,630,357				33			$	(31	)		$	(1,087,616	)		$	545,566			$	(354	)		$	545,212

See accompanying notes to consolidated financial statements.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine Months Ended
		September 30,
		2010				2009
		(In thousands)
Cash flows from operating activities:
Net loss		$	(157,740	)		$	(310,889	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Basis in offshore properties recovered through litigation			—				17,647
Loss on property sales							—
(Gain) loss on sale of drilling rig			—				(1,663	)
Depreciation, depletion, amortization and accretion — oil and gas			45,540				62,992
Depreciation and amortization — drilling and trucking			15,599				17,512
Depreciation, depletion, amortization and accretion — discontinued operations			13,837				19,477
Stock based compensation			8,808				7,433
Executive severance payable in common stock			—				1,700
Executive severance — stock-based awards forfeited			(2,274	)			(2,820	)
Amortization of deferred financing costs			7,156				10,029
Accretion of discount on installments payable			3,774				5,582
Increase in allowance for bad debt			1,437				—
Unrealized (gain) loss on derivative instruments, net			(28,072	)			27,034
Dry hole costs and impairments			30,859				161,471
Impairments — discontinued operations			92,162				—
Gain on sale of discontinued operations			(28,372	)			—
Loss on sale of drilling, trucking and other assets			786				—
(Income) loss from unconsolidated affiliates			(893	)			3,660
Deferred income tax expense (benefit)			564				(53	)
Other			43				(66	)
Net changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable			(318	)			16,869
Decrease in deposits and prepaid assets			(242	)			3,638
Increase in inventories			—				(655	)
(Increase) decrease in other current assets			919				(2,576	)
Decrease in accounts payable			(20,627	)			(18,751	)
Increase (decrease) in other accrued liabilities and offshore litigation payable			(8,904	)			2,588
Net cash provided by (used in) operating activities			(25,958	)			20,159
Cash flows from investing activities:
Additions to property and equipment			(24,959	)			(143,675	)
Additions to drilling and trucking equipment			(1,322	)			(1,648	)
Proceeds from sale of oil and gas properties			115,180				—
Proceeds from sale of drilling assets and other fixed assets			601				8,247
Proceeds from sale of unconsolidated affiliate			3,879				—
Investment in unconsolidated affiliates			—				295
Proceeds from escrow deposit			1,380				—
(Increase) decrease in other long-term assets			81				(419	)
Net cash provided by (used in) investing activities			94,840				(137,200	)
Cash flows from financing activities:
Proceeds from borrowings			86,500				77,000
Repayments of borrowings			(200,716	)			(259,017	)
Payment of deferred financing costs			(1,641	)			(2,272	)
Proceeds from sale of offshore litigation contingent payment rights			—				25,000
Repurchase of offshore litigation contingent payment rights			—				(25,000	)
Stock issued for cash, net			—				246,918
Shares repurchased for withholding taxes			(746	)			(380	)
Net cash provided by (used in) financing activities			(116,603	)			62,249
Net decrease in cash and cash equivalents			(47,721	)			(54,792	)
Cash at beginning of period			61,918				65,475
Cash at end of period		$	14,197			$	10,683
Supplemental cash flow information:
Cash paid for interest and financing costs		$	17,177			$	27,607

See accompanying notes to consolidated financial statements.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(1) Nature of Organization and Basis of Presentation

Delta Petroleum Corporation (“Delta”), a Delaware corporation, and its consolidated subsidiaries (collectively, the “Company”) are principally engaged in acquiring, exploring, developing and producing oil and gas properties. The Company’s core area of operations is the Rocky Mountain Region in which the majority of its proved reserves, production and long-term growth prospects are concentrated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in accordance with those rules, do not include all the information and notes required by generally accepted accounting principles for complete financial statements. As a result, these unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto previously filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of the financial position of the Company and the results of its operations have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the complete fiscal year. Subsequent events were evaluated through the date of issuance of these consolidated financial statements at the time this quarterly report on Form 10-Q was filed with the Securities and Exchange Commission (“SEC”). For a more complete understanding of the Company’s operations and financial position, reference is made to the consolidated financial statements of the Company, and related notes thereto, filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, previously filed with the SEC.

(2) Going Concern

The accompanying financial statements have been prepared assuming the Company will continue as a going concern.

The Company experienced a net loss attributable to Delta common stockholders of $148.6 million for the nine months ended September 30, 2010, and as of September 30, 2010 had a working capital deficiency of $85.8 million, including $21.5 million outstanding under Delta’s Second Amended and Restated Credit Agreement (the “Credit Agreement” or the “credit facility”) which is due on January 15, 2011 and $71.6 million outstanding under the credit agreement of DHS Drilling Company (“DHS”), the Company’s 49.8% subsidiary, which is due on August 31, 2011. In addition, the holders of the Company’s $115.0 million principal amount of 3³/4% Senior Convertible Notes due 2037 have the right to require the Company to purchase all or a portion of such notes on May 1, 2012 (or thereafter on each May 1 in 2017, 2022, 2027 and 2032). The ongoing losses, near term credit maturities, and working capital deficiency raise substantial doubt about the Company’s ability to continue as a going concern.

As of and for the nine months ended September 30, 2010, the Company was in compliance with covenants under its credit facility related to its financial ratios, maximum cash on hand and accounts payable. The Company had $13.5 million of availability under its credit agreement based upon the $35.0 million borrowing base in effect at September 30, 2010, and had cash on hand of $14.2 million.

On April 1, 2010, DHS amended its existing credit facility with Lehman Commercial Paper, Inc. (“LCPI”) and renegotiated certain terms of the agreement, to, among other changes more fully described in Note 7, “Long Term Debt,” bring DHS into compliance with the terms of the agreement, amend the principal repayment schedule, adjust the interest rate, and eliminate or amend certain financial covenants. The DHS facility is non-recourse to Delta.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(2) Going Concern, Continued

The Company does not currently have the liquidity necessary to repay the borrowings under its credit facility due on January 15, 2011. Further, in accordance with the current terms of Delta’s credit facility, the Company is limited to capital expenditures of $18.5 million for the quarter ending December 31, 2010 (based on the original limitation of $10.0 million for the quarter ending December 31, 2010 plus $8.5 million carried forward from the quarter ended September 30, 2010).

In November 2009, the Company retained Morgan Stanley and Evercore Partners to evaluate and advise the Board of Directors on strategic alternatives to enhance shareholder value, including but not limited to the sale of some or all of the Company’s assets, entering into partnerships or joint ventures, or the sale of the entire Company.

On July 23, 2010, the Company entered into a definitive Purchase and Sale Agreement with Wapiti Oil & Gas, L.L.C. to sell various non-core assets (the “Wapiti Transaction”) for cash proceeds of $130.0 million. Also on July 23, 2010, the Company and its credit facility banks entered into the Fourth Amendment to the Second Amended and Restated Credit Agreement (the “Fourth Amendment”) whereby the requisite banks consented to the Wapiti Transaction, subject to specified terms and conditions, including, among other amendments, that the net proceeds from the transaction be used to pay down the balance outstanding under the credit facility and that the borrowing base be reduced to $35.0 million upon consummation of the Wapiti Transaction. Additional amendments to the credit facility are described in Note 7, “Long Term Debt.” The Wapiti Transaction closed on July 30, 2010 with approximately $108.5 million used to reduce amounts outstanding under the credit facility, $3.7 million used to pay transaction related costs, and $17.8 million paid into escrow pending the receipt of third party consents required to transfer ownership of certain properties involved in the Wapiti Transaction. The funds in escrow were released in October 2010 and were used to further reduce amounts outstanding under the Company’s credit facility (see Note 14, “Subsequent Events”). The proceeds from the Wapiti Transaction allowed the Company to substantially reduce its outstanding debt and when combined with the post Wapiti Transaction borrowing base, provided the liquidity necessary to fund the Company’s third and fourth quarter 2010 development plan. Under the credit facility there are no further scheduled or special borrowing base redeterminations before the maturity of the facility in January 2011, and thus, management anticipates having adequate liquidity to fund operations. As noted below, the Company is in the process of refinancing the existing credit facility.

The Wapiti Transaction was a part of a competitive process initiated in conjunction with Delta’s previously announced strategic alternatives process. This process was concluded with the completion of the Wapiti Transaction and the Company’s focus has returned to creating value with its core assets through operations. The Board of Directors may reevaluate the renewal of the strategic alternatives process at a later time.

Taking into consideration the assets sold and proceeds received to date as a result of the strategic alternatives process, the Company will need to raise additional cash capital or complete the refinancing of its existing credit facility with new or existing lenders in order to pay its outstanding borrowings under the credit facility which are due January 15, 2011. As such, the Company expects to replace the existing facility prior to its maturity, although it is expected that the interest terms and covenant

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(2) Going Concern, Continued

requirements will be more expensive and restrictive, respectively, than the current facility’s rates and terms. The initial term of any new credit facility is expected to provide for maturity prior to May 1, 2012, when the holders of the Company’s $115.0 million principal amount of 3³/4% Senior Convertible Notes have the right to require the Company to purchase all or a portion of the notes. As a result, it is anticipated that prior to May 1, 2012, the Company will need to obtain additional capital in order to repay any amounts outstanding under any new credit facility and to purchase any 3 ³/4% Senior Convertible Notes required by the holders of such notes to be purchased by the Company.

There can be no assurance that the actions undertaken by the Company will be sufficient to repay the obligations under the credit agreement when due, or, if not sufficient, or if additional defaults occur, that the lenders will be willing to waive the defaults or amend the agreement. In addition, there can be no assurance that cash flow from operations and other sources of liquidity, including asset sales or joint venture or other industry partnerships, will be sufficient to meet contractual, operating and capital obligations including those under any replacement credit facility. The financial statements do not include any adjustments that might result from the outcome of uncertainty regarding the Company’s ability to raise additional capital, sell assets, or otherwise obtain sufficient funds to meet its obligations.

(3) Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company. All inter-company balances and transactions have been eliminated in consolidation. Certain of the Company’s oil and gas activities are conducted through partnerships and joint ventures, including CRB Partners, LLC and through the date of the Wapiti Transaction, PGR Partners, LLC. The Company includes its proportionate share of assets, liabilities, revenues and expenses from these entities in its consolidated financial statements. As Amber Resources Company of Colorado (“Amber”) is in a net shareholders’ deficit position for the periods presented, the Company has recognized 100% of Amber’s earnings/losses for all periods presented. The Company does not have any off-balance sheet financing arrangements (other than operating leases) or any unconsolidated special purpose entities.

Investments in operating entities where the Company has the ability to exert significant influence, but does not control the operating and financial policies, are accounted for using the equity method. The Company’s share of net income of these entities is recorded as income (losses) from unconsolidated affiliates in the consolidated statements of operations. Investments in operating entities where the Company does not exert significant influence are accounted for using the cost method, and income is only recognized when a distribution is received.

Certain reclassifications have been made to amounts reported in the previous periods to conform to the current presentation. Among other items, revenues and expenses on certain properties that were sold and where there is no continuing involvement, during the nine months ended September 30, 2010 have been reclassified to income (loss) from discontinued operations for all periods presented. Such reclassifications had no effect on net loss attributable to Delta common stockholders.

Cash Equivalents

Cash equivalents consist of money market funds and certificates of deposit. The Company considers all highly liquid investments with maturities at the date of acquisition of three months or less to be cash equivalents.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(3) Summary of Significant Accounting Policies, Continued

Inventories

Inventories consist of pipe and other production equipment not yet in use. Inventories are stated at the lower of cost (principally first-in, first-out) or estimated net realizable value. During the three months ended June 30, 2009, the Company recorded an impairment of $4.3 million to the carrying value of its inventories, which is reflected in the accompanying consolidated statements of operations for the nine months ended September 30, 2009 as a component of dry hole costs and impairments.

Revenue Recognition

Oil and Gas

Revenues are recognized when title to the products transfers to the purchaser. The Company follows the “sales method” of accounting for its natural gas and crude oil revenue. Under that method, the Company recognizes sales revenue on all natural gas or crude oil sold to its purchasers. A liability is recognized only to the extent that the Company has an imbalance on a specific property greater than the expected remaining proved reserves. As of September 30, 2010 and December 31, 2009, the Company’s aggregate natural gas and crude oil imbalances were not material to its consolidated financial statements.

Drilling and Trucking

The Company earns its contract drilling revenues under daywork or turnkey contracts. The Company recognizes revenues on daywork contracts for the days completed based on the dayrate specified in the contract. Turnkey contracts are accounted for on a percentage-of-completion basis. The costs of drilling the Company’s own oil and gas properties are capitalized in oil and gas properties as the expenditures are incurred. Trucking and hauling revenues are recognized based on either an hourly rate or a fixed fee per mile depending on the type of vehicle, the services performed, and the contract terms.

Property and Equipment

The Company accounts for its natural gas and crude oil exploration and development activities under the successful efforts method of accounting. Under such method, costs of productive exploratory wells, development dry holes and productive wells and undeveloped leases are capitalized. Oil and gas lease acquisition costs are also capitalized. Exploration costs, including personnel costs, certain geological or geophysical expenses and delay rentals for gas and oil leases, are charged to expense as incurred. Exploratory drilling costs are initially capitalized, but charged to expense if and when the well is determined not to have found reserves in commercial quantities. The sale of a partial interest in a proved property is accounted for as a cost recovery and no gain or loss is recognized as long as this treatment does not significantly affect the units-of-production amortization rate. A gain or loss is recognized for all other sales of producing properties.

Unproved properties with significant acquisition costs are assessed quarterly on a property-by-property basis and any impairment in value is charged to expense. If the unproved properties are determined to be productive, the related costs are transferred to proved gas and oil properties. Proceeds from sales of partial interests in unproved leases are accounted for as a recovery of cost without recognizing any gain or loss until all costs have been recovered.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(3) Summary of Significant Accounting Policies, Continued

Depreciation and depletion of capitalized acquisition, exploration and development costs are computed on the units-of-production method by individual fields as the related proved reserves are produced.

Drilling equipment is recorded at cost or estimated fair value upon acquisition and depreciated on a component basis using the straight-line method over its estimated useful life ranging from five to 15 years. Pipelines and gathering systems and other property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives ranging from three to 40 years.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

Estimates of expected future cash flows represent management’s best estimate based on reasonable and supportable assumptions and projections. For proved properties, if the expected future cash flows exceed the carrying value of the asset, no impairment is recognized. If the carrying value of the asset exceeds the expected future cash flows, an impairment exists and is measured by the excess of the carrying value over the estimated fair value of the asset. Any impairment provisions recognized are permanent and may not be restored in the future.

The Company assesses proved properties on an individual field basis for impairment on at least an annual basis. For proved properties, the review consists of a comparison of the carrying value of the asset with the asset’s expected future undiscounted cash flows without interest costs. For the three and nine months ended September 30, 2010, the expected future undiscounted cash flows of the assets exceeded the carrying value of the corresponding asset and as such no impairment provision was recognized. As a result of such assessment, the Company recorded an impairment provision to proved properties of $1.9 million for the three months ended September 30, 2009 and $3.1 million for the nine months ended September 30, 2009. The impairment provisions for the three and nine months ended September 30, 2009 are included within dry hole costs and impairments in the accompanying statement of operations.

For unproved properties, the need for an impairment charge is based on the Company’s plans for future development and other activities impacting the life of the property and the ability of the Company to recover its investment. When the Company believes the costs of the unproved property are no longer recoverable, an impairment charge is recorded based on the estimated fair value of the property. As a result of such assessment, the Company recorded impairment provisions attributable to unproved properties of zero and $20.6 million for the three months ended September 30, 2010 and 2009, respectively, and $22.5 million and $103.6 million for the nine months ended September 30, 2010 and 2009, respectively. The $22.5 million impairment for the nine months ended September 30, 2010 included $11.4 million related to the Company’s Columbia River Basin leasehold, $5.0 million related to the Company’s Hingeline leasehold, $3.8 million related to the Company’s Haynesville leasehold, $1.6 million related to the Company’s Delores River leasehold and $661,000 related to the Company’s Howard Ranch leasehold. For the three months ended September 30, 2009, the Company also recorded an impairment of $10.5 million to reduce the Company’s Vega area land carrying value to its estimated fair value. Lastly, the Company recorded impairments of $4.8 million and $1.9 million to reduce the Paradox pipeline carrying value to its estimated fair value during the three months ended June 30, 2010 and 2009, respectively. These impairment provisions are included within dry hole costs and impairments in the accompanying statements of operations for the three and nine months ended September 30, 2010 and 2009.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(3) Summary of Significant Accounting Policies, Continued

During the remainder of 2010, the Company plans to develop and evaluate certain proved and unproved properties. Favorable or unfavorable drilling results or changes in commodity prices may cause a revision to estimates of those properties’ future cash flows. Such revisions of estimates could require the Company to record additional impairment provisions in the period of such revisions.

Asset Retirement Obligations

The Company’s asset retirement obligations arise from the plugging and abandonment liabilities for its oil and gas wells. The Company has no obligation to provide for the retirement of most of its offshore properties as the obligations remained with the seller from whom the Company acquired the properties. The following is a reconciliation of the Company’s asset retirement obligations from January 1, 2010 to September 30, 2010 (in thousands):

Asset retirement obligation — January 1, 2010		$	10,539
Accretion expense			365
Change in estimate			(188	)
Obligations incurred (from new wells)			282
Obligations assumed			—
Obligations on sold properties			(4,034	)
Obligations settled			(1,044	)
Asset retirement obligation — September 30, 2010			5,920
Less: current portion of asset retirement obligation			(1,978	)
Long-term asset retirement obligation		$	3,942

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, if any. For the three months ended September 30, 2010 comprehensive income was $10.7 million and for the three months ended September 30, 2009 comprehensive loss was $101.0 million. For the nine months ended September 30, 2010 and 2009, comprehensive loss was $157.7 million and $310.9 million, respectively.

Financial Instruments

The Company periodically enters into commodity price risk transactions to manage its exposure to oil and gas price volatility. These transactions may take the form of futures contracts, collar agreements, swaps or options. The purpose of the hedges is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices. The Company has not elected hedge accounting and recognizes mark-to-market gains and losses in earnings currently.

The Company is exposed to the fluctuations in natural gas or crude oil prices due to the nature of business in which the Company is primarily involved. In order to mitigate the risks associated with uncertain cash flows from volatile commodity prices and to provide stability and predictability in the Company’s future revenues, the Company periodically enters into commodity price risk management transactions to manage its exposure to gas and oil price volatility.

At September 30, 2010, all of the Company’s outstanding derivative contracts were fixed price swaps. Under the swap agreements, the Company receives the fixed price and pays the floating index price. The Company’s swaps

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(3) Summary of Significant Accounting Policies, Continued

are settled in cash on a monthly basis. By entering into swaps, the Company effectively fixes the price that it will receive for a portion of its production.

The following table summarizes the Company’s open derivative contracts at September 30, 2010:

																		Net Fair Value
												Remaining						Asset (Liability) at
Commodity		Volume						Fixed Price				Term				Index Price		September 30, 2010
																		(In thousands)
Crude oil			1,000			Bbls / Day1		$	52.25			Oct ’10 - Dec ’10				NYMEX — WTI		$	(2,600	)
Crude oil			500			Bbls / Day		$	57.70			Jan ’11 - Dec ’11				NYMEX — WTI			(4,404	)
Natural gas			6,000			MMBtu / Day		$	5.720			Oct ’10 - Dec ’10				NYMEX — HHUB			977
Natural gas			15,000			MMBtu / Day		$	4.105			Oct ’10 - Dec ’10				CIG			705
Natural gas			5,367			MMBtu / Day		$	3.973			Oct ’10 - Dec ’10				CIG			187
Natural gas			12,000			MMBtu / Day		$	5.150			Jan ’11 - Dec ’11				CIG			5,006
Natural gas			3,253			MMBtu / Day		$	5.040			Jan ’11 - Dec ’11				CIG			1,229
																		$	1,100

The pre-credit risk adjusted fair value of the Company’s net derivative assets as of September 30, 2010 was $617,000. A credit risk adjustment of $483,000 to the fair value of the derivatives increased the reported amount of the net derivative assets on the Company’s consolidated balance sheet to $1.1 million.

The Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net derivative assets or net derivative liabilities, whichever the case may be, by commodity and master netting counterparty. The following table summarizes the fair values and location in the Company’s consolidated balance sheet of all derivatives held by the Company as of September 30, 2010 (in thousands):

Derivatives Not Designated as
Hedging Instruments		Balance Sheet Classification				Fair Value
Commodity Swaps		Derivative Instruments — Current Assets, net				$	1,165
Commodity Swaps		Derivative Instruments — Long-Term Liabilities, net					(65	)
Total						$	1,100

The following table summarizes the realized and unrealized gains and losses and the classification in the consolidated statement of operations of derivatives not designated as hedging instruments for the nine months ended September 30, 2010 (in thousands):

						Amount of Gain
Derivatives Not Designated as		Location of Gain (Loss) Recognized in				(Loss) Recognized in
Hedging Instruments		Income on Derivatives				Income on Derivatives
Commodity Swaps		Realized Loss on Derivative Instruments, net — Other Income and (Expense)				$	(5,132	)
Commodity Swaps		Unrealized Gain on Derivative Instruments, net — Other Income and (Expense)					28,072
						$	22,940

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(3)  Summary of Significant Accounting Policies, Continued

Executive Severance Agreements

On May 26, 2009, the Company’s then Chairman of the Board of Directors and Chief Executive Officer, Roger A. Parker, resigned from the Company. In conjunction with Mr. Parker’s resignation, Delta entered into a Severance Agreement, effective as of the close of business on May 26, 2009, whereby Mr. Parker resigned from his positions as Chairman of the Board, Chief Executive Officer and as a director of Delta, as well as his positions as a director, officer and employee of Delta’s subsidiaries. In consideration for Mr. Parker’s resignation and his agreement to (a) relinquish all his rights under his employment agreement, his change-in-control agreement, certain stock agreements, bonuses relating to past and pending transactions benefiting Delta, and any other interests he might claim arising from his efforts as Chairman of our Board of Directors and/or Chief Executive Officer, and (b) stay on as a consultant to facilitate an orderly transition and to assist in certain pending transactions, Delta agreed to pay Mr. Parker $4,700,000 in cash, issue to him 1,000,000 shares of Delta common stock, pay him the aggregate of any accrued unpaid salary, vacation days and reimbursement of his reasonable business expenses incurred through the effective date of the agreement, and provide to him insurance benefits similar to his pre-resignation benefits for a thirty-six month period. The Severance Agreement also contained mutual releases and non-disparagement provisions, as well as other customary terms.

The table below summarizes the total executive severance expense included in the accompanying statements of operations for the nine months ended September 30, 2009 (in thousands):

Cash consideration — immediately available funds		$	1,812
Cash consideration — rabbi trust			2,888
Stock consideration — rabbi trust			1,700
Subtotal			6,400
Performance shares forfeited			(2,293	)
Retention stock forfeited			(525	)
Health, medical and other benefits payable			75
Legal costs and other expenses			82
Total executive severance expense		$	3,739

In accordance with the terms of the Severance Agreement, Mr. Parker received a portion of the cash consideration in immediately available funds, and the remaining cash consideration and the shares were deposited in a rabbi trust and distributed to Mr. Parker on November 27, 2009. The assets of the rabbi trust were required to be consolidated into the financial statements until disbursed.

Equity compensation costs previously recorded in the consolidated financial statements related to performance shares forfeited prior to their derived service period being completed and retention stock forfeited prior to vesting as a result of the Severance Agreement were reversed and reflected as a reduction of executive severance expense.

All transactions associated with the Parker Severance Agreement were recorded in fiscal year 2009.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(3) Summary of Significant Accounting Policies, Continued

On July 6, 2010, John Wallace, the then President, Chief Operating Officer and a Director of the Company, resigned from all of his positions as director, officer and employee of the Company and any of its subsidiaries. In conjunction with such resignation, the Company entered into a severance agreement with Mr. Wallace pursuant to which he agreed to (a) relinquish certain rights under his employment agreement, his change-in-control agreement, certain stock agreements, bonuses relating to past and pending transactions benefiting Delta, and certain other interests he might claim arising from his efforts in his previous capacities with the Company and its subsidiaries, and (b) make himself reasonably available to answer questions to facilitate an orderly transition. Under the terms of his severance arrangement, the Company paid Mr. Wallace a lump sum of $1,600,000, paid him his salary for the full month in which his resignation occurred and for his accrued vacation days, reimbursed him for his reasonable business expenses incurred through the effective date of the agreement, and agreed to provide to him insurance benefits similar to his pre-resignation benefits for the period in which Mr. Wallace is entitled to receive COBRA coverage under applicable law. The severance agreement also contained mutual releases and non-disparagement provisions, as well as other customary terms.

The table below summarizes the total executive severance expense included in the accompanying statements of operations for the nine months ended September 30, 2010 (in thousands):

Cash consideration — immediately available funds		$	1,600
Performance shares forfeited			(2,274	)
Total executive severance expense (benefit)		$	(674	)

Equity compensation costs previously recorded in the consolidated financial statements related to performance shares forfeited prior to their derived service period being completed as a result of the severance agreement were reversed and reflected as a reduction of executive severance expense.

Stock Based Compensation

The Company recognizes the cost of share based payments over the period the employee provides service and includes such costs in general and administrative expense in the statements of operations.

Income (Loss) from Unconsolidated Affiliates

Income (loss) from unconsolidated affiliates includes the Company’s share of earnings or losses from equity method investments. During the nine months ended September 30, 2010, Delta Oilfield Tank Company (“DOTC”) reported continuing losses from operations which, if recorded, would have created a deficit in the investment in DOTC. In accordance with accounting standards, the Company did not recognize its share of the losses for the nine months ended September 30, 2010 as the Company is not obligated to make future capital contributions to DOTC. During the quarter ended June 30, 2009, the Company recorded a $2.1 million impairment provision to its investment in DOTC and a $917,000 impairment provision to its investment in the entity that was expected to operate the Paradox pipeline. These impairment provisions are included within income (loss) from unconsolidated affiliates for the nine months ended September 30, 2009.

During the nine months ended September 30, 2010, the Company sold its 50% interest in Ally Equipment, LLC for $1.5 million, including $250,000 received during the third quarter and five $250,000 quarterly installments to be paid each quarter end commencing on December 31, 2010. The Company recognized a loss of $522,000 on the transaction which is included as a component of income (loss) from unconsolidated affiliates for the three months and nine months ended September 30, 2010.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(3) Summary of Significant Accounting Policies, Continued

At December 31, 2009, the Company owned a 5% interest in Collbran Valley Gas Gathering, LLC (“CVGG”) which operates a pipeline in the Piceance Basin through which the Company transports its produced gas to the sales point. During the fourth quarter of 2009, the Company recorded an impairment of its investment in CVGG to reduce the carrying value to its fair value of $3.5 million. In January 2010, the Company divested its 5% interest in CVGG for cash proceeds of $3.5 million (and a subsequent adjustment of an additional $129,000), plus an additional $2.0 million of proceeds contingent on volume deliveries through the CVGG system of Delta gas between January 1, 2010 and June 30, 2011. Based on current production levels, the Company is not likely to earn the contingent consideration without the initiation of a continuous drilling program which could only be undertaken with additional funding beyond the Company’s existing capital resources.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the results of operations in the period that includes the enactment date. The realizability of deferred tax assets is evaluated based on a “more likely than not” standard, and to the extent this threshold is not met, a valuation allowance is recorded. The Company is currently providing a full valuation allowance on its net deferred tax assets, including the net deferred tax assets of DHS.

Income (Loss) per Common Share

Basic income (loss) per share is computed by dividing net income (loss) attributed to common stock by the weighted average number of common shares outstanding during each period, excluding treasury shares. Diluted income (loss) per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, of convertible preferred stock, convertible debt, stock options, restricted stock and warrants. (See Note 11, “Earnings Per Share”).

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include oil and gas reserves, bad debts, depletion and impairment of oil and gas properties, income taxes, derivatives, asset retirement obligations, contingencies and litigation accruals. Actual results could differ from these estimates.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(3) Summary of Significant Accounting Policies, Continued

Recently Issued and Adopted Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which provides amendments to FASB ASC Topic 820, Fair Value Measurements and Disclosures. The objective of ASU 2010-06 is to provide more robust disclosures about (i) the different classes of assets and liabilities measured at fair value, (ii) the valuation techniques and inputs used, (iii) the activity in Level 3 fair value measurements, and (iv) significant transfers between Levels 1, 2 and 3. ASU 2010-06 is effective for fiscal years and interim periods beginning after December 15, 2009. The Company adopted ASU 2010-06 effective January 1, 2010, which did not have an impact on its consolidated financial statements, other than additional disclosures.

(4) Oil and Gas Properties

Unproved Undeveloped Offshore California Properties

The Company previously owned direct and indirect ownership interests ranging from 2.49% to 100% in five unproved undeveloped offshore California oil and gas properties. Delta and its 92% owned subsidiary, Amber, were among twelve plaintiffs in a lawsuit that was filed in the United States Court of Federal Claims in Washington, D.C. alleging that the U.S. government materially breached the terms of forty undeveloped federal leases, some of which are part of its offshore California properties. During 2009, the Company received net proceeds of $95.8 million after overrides and conveyed its leases back to the United States. Accordingly, the Company no longer has any remaining unproved undeveloped offshore California property interests.

2010 — Divestitures

During the nine months ended September 30, 2010, the Company divested of its interests in certain non-core properties for gross proceeds of $965,000 and the assumption of plugging and abandonment obligations. Proved reserves attributable to these properties were insignificant.

The Company considered the total purchase price in the Wapiti Transaction and allocated the purchase price to the properties using internal discounted cash flow calculations based upon the Company’s estimates of reserves and determined that impairment provisions of $93.2 million related to proved properties and $3.0 million related to unproved properties were required to be recognized during the three months ended June 30, 2010. Based upon the applicable accounting standards, $4.0 million of the impairment provision is included within dry hole costs and impairments in the accompanying statements of operations and the remaining $92.2 million is included within loss on sale of discontinued operations.

Discontinued Operations

In accordance with accounting standards, the results of operations and impairment loss relating to certain of the Wapiti Transaction properties have been reflected as discontinued operations. Properties associated with the Wapiti Transaction in which the Company only sold half of its interest continue to be reported as a component of continuing operations. The fields classified as discontinued operations are fields in which the Company sold all of its interest including the Garden Gulch field, Baffin Bay field, and Bull Canyon field as well as the Company’s interest in its wholly-owned subsidiary Piper Petroleum. In a separate transaction, during the three months ended September 30, 2010, the Company sold its interest in the Howard Ranch field and has included this property as discontinued operations as well.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(4) Oil and Gas Properties, Continued

The following table shows the total oil and gas segment revenues and expenses included in discontinued operations for the above mentioned oil and gas properties for the three and nine months ended September 30, 2010 and 2009 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues		$	1,344			$	2,475			$	9,623			$	8,255
Operating expenses:
Lease operating expense			429				757				2,676				3,740
Transportation expense			181				60				1,459				1,196
Production taxes			116				438				611				544
Depreciation, depletion, amortization and accretion			33				5,649				13,837				19,477
Impairment provision			—				—				92,162				—
Total operating expenses			759				6,904				110,745				24,957
Income (loss) from discontinued operations			585				(4,429	)			(101,122	)			(16,702	)
Income tax expense			—				—				—				—
Income (loss) from results of operations of discontinued properties, net of tax			585				(4,429	)			(101,122	)			(16,702	)
Gain on sale of discontinued operations			28,910				—				28,910				—
Total gain (loss) from discontinued operations		$	29,495			$	(4,429	)		$	(72,212	)		$	(16,702	)

On July 30, 2010, the Company closed on the Wapiti Transaction for cash proceeds of $130.0 million, with approximately $108.5 million used to reduce amounts outstanding under the credit facility, $3.7 million used to pay transaction related costs, and $17.8 million initially paid into escrow pending the receipt of third party consents required to transfer ownership of certain properties involved in the Wapiti Transaction. The escrowed proceeds were received in October 2010. The Company recognized a gain on sale for the closing of the Wapiti Transaction in the three months ended September 30, 2010 of $29.6 million. The recognized gain is subject to revision for normal and customary purchase price adjustments as provided for under the purchase and sale agreement.

On August 27, 2010, the Company closed on the Howard Ranch sale for cash proceeds of $550,000. The Company recognized a loss on sale of $687,000, which is subject to revision for normal and customary purchase price adjustments as provided for under the purchase and sale agreement.

(5) DHS Drilling

On September 30, 2010, the Company owned a 49.8% ownership interest in DHS. The remaining interest is owned by Chesapeake Energy Corporation, 47.2%, and 3% by DHS executive officers and management. Delta has the right to use all of the DHS rigs on a priority basis.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(5) DHS Drilling, Continued

The carrying value of DHS’s drilling rigs and related equipment is assessed for impairment whenever circumstances indicate an impairment may exist. During the quarter ended June 30, 2009, the fleet rig utilization rate declined approximately 68% from the first quarter of 2009 and the average period end contract day rate declined by approximately 29% from the first quarter of 2009. In addition, DHS’s efforts to market spare equipment and observations at industry auctions indicated that with industry-wide active rig counts in decline, spare equipment values had declined. As a result of these indicators of possible impairment, an analysis was performed and an impairment provision of $6.5 million was recorded to reduce the carrying value of three drilling rigs and other spare rig equipment to their respective fair values. No such impairment provisions were recorded during the three and nine months ended September 30, 2010 as rig utilization has continued to improve throughout 2010.

In January 2010, DHS entered into a daywork drilling contract with Desarrollos y Perforaciones De Mexico (“DPM”) to drill geothermal wells for the benefit of the Mexican national electric company (“CFE”) in the state of Puebla. The rig was released in July after drilling two wells. A total of $3,713,000 has been invoiced to DPM for the project with $1,588,000 being collected to date. The balance of $2,125,000 has been reserved as a doubtful account due to concerns regarding collection. Legal action is being taken to collect the amount owed to DHS and the rig is in the Casper, Wyoming yard for minor reconditioning. In addition, another DHS customer has filed bankruptcy during the quarter and its balance of $104,000 has been reserved as a doubtful account as well.

(6) Fair Value Measurements

The Company follows accounting guidance which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires additional disclosures about fair value measurements. As required, the Company applied the following fair value hierarchy:

		Level 1 — Assets or liabilities for which the item is valued based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
		Level 2 — Assets or liabilities valued based on observable market data for similar instruments.
		Level 3 — Assets or liabilities for which significant valuation assumptions are not readily observable in the market; instruments valued based on the best available data, some of which is internally-developed, and considers risk premiums that a market participant would require.

The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Derivative liabilities consist of future oil and gas commodity swap contracts valued using both quoted prices for identically traded contracts and observable market data for similar contracts (NYMEX WTI oil, NYMEX Henry Hub gas and CIG gas swaps — Level 2).

Proved property impairments — The fair values of the proved properties are estimated using internal discounted cash flow calculations based upon the Company’s estimates of reserves and are considered to be level three fair value measurements.

Asset retirement obligations — The initial fair values of the asset retirement obligations are estimated using internal discounted cash flow calculations based upon the Company’s asset retirement obligations, including revisions of the estimated fair values during the nine months ended September 30, 2010 and 2009.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(6) Fair Value Measurements, Continued

The following table lists the Company’s fair value measurements by hierarchy as of September 30, 2010 (in thousands):

Fair Value Measurements

Quoted Prices

Significant

Significant

in Active Markets

Other Observable

Unobservable

for Identical Assets

Inputs

Inputs

Assets (Liabilities)

(Level 1)

(Level 2)

(Level 3)

Recurring

Derivative assets

$

—

$

1,100

$

—

(7) Long Term Debt

Installments Payable on Property Acquisition

On February 28, 2008, the Company closed a transaction with EnCana to jointly develop a portion of EnCana’s leasehold in the Vega Area of the Piceance Basin. The remaining installments payable are recorded in the accompanying consolidated financial statements as current and long-term liabilities at a discounted value. The discount is being accreted on the effective interest method over the term of the installments, including accretion of $1.3 million and $1.9 million for the three months ended September 30, 2010 and 2009, respectively, and accretion of $3.8 million and $5.6 million for the nine months ended September 30, 2010 and 2009, respectively. On October 28, 2010, the Company paid the second of three installments payable related to the transaction (see Note 14, “Subsequent Events”).

7% Senior Unsecured Notes, due 2015

On March 15, 2005, the Company issued 7% senior unsecured notes for an aggregate principal amount of $150.0 million. The Company was in compliance with the covenants under the indenture as of September 30, 2010 (See Note 12, “Guarantor Financial Information”). The fair value of the Company’s senior unsecured notes at September 30, 2010 was approximately $109.5 million.

33/4% Senior Convertible Notes, due 2037

On April 25, 2007, the Company issued $115.0 million aggregate principal amount of 3³/4% Senior Convertible Notes due 2037 (the “Notes”) for net proceeds of $111.6 million after underwriters’ discounts and commissions of approximately $3.4 million. The Notes were recorded based on the estimated fair value of the liability component and the equity component. The debt discount on the liability component is accreted over the expected life of the Notes, including $1.2 million and $1.1 million of accretion for the three months ended September 30, 2010 and 2009, respectively, and $3.4 million and $3.3 million of accretion for the nine months ended September 30, 2010 and 2009, respectively. Combined with the amortization of debt discount, the Notes had an effective interest rate of approximately 7.8% and 7.6% with total interest costs of $2.2 million for each of the three months ended September 30, 2010 and 2009, respectively, and interest costs of $6.6 million and $6.5 million for the nine months ended September 30, 2010 and 2009, respectively. The fair value of the Notes at September 30, 2010 was approximately $88.3 million.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(7) Long Term Debt, Continued

Credit Facility — Delta

On July 23, 2010, Delta entered into the Fourth Amendment to the Second Amended and Restated Credit Agreement, with JPMorgan Chase Bank, N.A., as agent, and certain of the financial institutions that are party to its credit agreement in which, among other changes, the requisite lenders consented to the Wapiti Transaction, subject to specified terms and conditions, including that the net proceeds from the transaction be used to pay down the balance outstanding under the credit facility and that the borrowing base be reduced to $35.0 million upon consummation of the Wapiti Transaction. The Fourth Amendment eliminated all scheduled or special borrowing base redeterminations prior to the maturity of the facility in January 2011. In addition, the Fourth Amendment imposed capital expenditures limitations of $18.0 million for the quarter ending September 30, 2010, $10.0 million for the quarter ending December 31, 2010, and $2.0 million for the period from January 1, 2011 to January 15, 2011, provided that any excess of the limitation over the amount of actual expenditures may be carried forward from an earlier specified period to a subsequent specified period. The Fourth Amendment added a maximum cash on hand covenant which limits the Company’s cash and cash equivalents to $10.0 million at any time, with any excess above such limit required to be used to pay down borrowings under the credit facility within three business days. Finally, the Fourth Amendment requires cash disbursements for general and administrative expenses to be within a 10% variance of projected general and administrative expenses provided to the lending banks in conjunction with the execution of the Fourth Amendment.

The Company was in compliance with its financial ratio covenants, capital expenditures, cash on hand and accounts payable limitations under the Credit Agreement as of September 30, 2010. Based on the Company’s current operating projections, the Company believes it will remain in compliance with the debt covenants through its maturity in January 2011. However, there can be no assurance that the actions undertaken by the Company will be sufficient to repay the obligations under the credit agreement when due, or, if not sufficient, or if additional defaults occur, that the lenders will be willing to waive the defaults or amend the agreement.

Borrowings under the credit facility were $21.5 million at September 30, 2010, with remaining availability of $13.5 million.

Because the credit facility matures in January 2011, the debt is classified as a current liability in the September 30, 2010 consolidated balance sheet.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(7) Long Term Debt, Continued

Credit Facility — DHS

On April 1, 2010, DHS amended its existing credit facility with LCPI and renegotiated certain terms of the agreement including obtaining waivers for all covenant violations through March 31, 2010. The terms of the amended agreement required principal payments of $7,677,713 paid on April 1, 2010 and $2,000,000 paid on each of May 1, 2010, August 1, 2010 and November 1, 2010, with a remaining $2,000,000 principal payment due on January 1, 2011, and a $5,000,000 principal payment due on each of April 1, 2011 and July 1, 2011 with the remaining balance of $57,589,787 due at maturity (August 31, 2011). In addition to the required payments, DHS may be required to prepay any remaining outstanding principal with the “Net Cash Proceeds from any Asset Sale,” as defined by the credit facility, and any such prepayment shall be applied to, first, prepay the immediately succeeding Scheduled Installment in full, second, prepay all interest payable on the immediately succeeding Interest Payment Date in full, third, pay the second succeeding Scheduled Installment in full and fourth, prepay the remaining principal balance of the remaining loans. DHS is also required to prepay the principal amount of the loans in an amount equal to 75% of the “Excess Cash Flow,” as defined by the credit facility, for such fiscal quarter. The only financial covenant remaining in the DHS credit agreement is a minimum EBITDA covenant of $1,000,000 for the three months ending September 30, 2010 and $1,500,000 for each subsequent quarter. In addition, the amendment imposed capital expenditures limitations of $1,200,000 for any fiscal quarter. Notwithstanding the $1,200,000 per quarter limitation on capital expenditures, the amendment imposes aggregate capital expenditure limitations of $3,500,000 for fiscal year 2010 and $2,330,137 for fiscal year 2011. The interest rate has been adjusted to LIBOR plus 625 basis points, subject to a LIBOR floor rate of 2.75%. DHS was in compliance with its amended minimum EBITDA covenant and capital expenditures limitation for the three months ended September 30, 2010.

Because the credit facility matures in August 2011, the debt is classified as a current liability in the September 30, 2010 consolidated balance sheet.

(8) Commitments and Contingencies

The $115.0 million in principal amount of 3³/4% Senior Convertible Notes due 2037 will mature on May 1, 2037 unless earlier converted, redeemed or repurchased. The holders of the Notes have the right to require the Company to purchase all or a portion of the Notes on May 1, 2012, May 1, 2017, May 1, 2022, May 1, 2027, and May 1, 2032 at a price which is required to be paid in cash, equal to 100% of the principal amount of the Notes to be repurchased.

The Company is currently engaged in arbitration with 212 Resources Corporation (“212”) with regard to a dispute involving a May 18, 2008 Oil and Gas Fluid Processing Agreement (the “Agreement”) between 212 and the Company. The Agreement requires 212 to design, construct, and operate “Mobile Pods” to treat and discharge to surface waters fluid produced by the Company’s oil and gas operations in compliance with applicable law and permits, and requires the Company to pay 212 approximately $500,000 per month commencing on the earlier of the date that such Mobile Pod is (a) first Available, or (b) first used to provide the contemplated services. The term “Available,” as used in the Agreement, means the first date that a Mobile Pod is mechanically capable of providing the contemplated services (or would have been mechanically capable of providing such services but for the Company’s failure to perform any of its obligations under the Agreement). On October 27, 2009, 212 filed a Demand for Arbitration and Statement of Claim and alleged that the Company delayed the performance of its duty to obtain permits and construct the site under the Agreement. 212 contends, in essence, that the Company delayed obtaining permits for the operation of the Mobile Pods and that the Company owes the monthly fee for the Mobile Pods for the period commencing on October 1, 2009. The Company has denied 212’s claims and

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(8) Commitments and Contingencies, Continued

contends, in essence, that 212 has still not demonstrated that the Mobile Pods are capable of treating and discharging to surface waters fluid produced by the Company’s oil and gas operations in compliance with applicable law and permits. The Company has also filed counterclaims. The matter is currently set for arbitration on November 29, 2010, but the Company has filed a motion seeking a delay of the hearing for a time sufficient to obtain and analyze a variety of test results to determine whether or not the operation of the Mobile Pods complies with applicable law and permits. While the Company believes it has meritorious defenses to 212’s claims and has valid counterclaims, the Company is unable to predict the ultimate outcome of the arbitration.

The Company’s indirect, 49.8% owned affiliate DHS Drilling Company (“DHS”) and certain of its officers and employees, among others, have been notified by the Office of the Inspector General of the Export-Import Bank of the United States and the U.S. Department of Justice that they are the subject of an investigation in connection with a loan guaranty sought from the Export-Import Bank in the first quarter of 2010 of a loan from a Mexican bank to a DHS customer in Mexico. DHS has cooperated and will continue to cooperate with the investigation, which is currently in its initial stages. This investigation is subject to uncertainties and, as such, DHS is unable to estimate the nature of any possible loss or range of loss that may result. DHS and the Company may also be responsible to indemnify certain officers and employees in connection with their individual defenses relating to the investigation.

(9) Stockholders’ Equity

Preferred Stock

The Company has 3,000,000 shares of preferred stock authorized, issuable from time to time in one or more series. As of September 30, 2010 and December 31, 2009, no shares of preferred stock were outstanding.

Common Stock

During the three months ended March 31, 2010, the Company issued 480,778 fully vested shares to the non-employee members of the Board of Directors in consideration for their service on the Board for the year ended December 31, 2009. On September 16, 2010, the Company granted 5.1 million shares of non-vested common stock to certain employees. The shares vest in full on July 1, 2011.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(9) Stockholders’ Equity, Continued

Treasury Stock

During 2008, DHS implemented a retention bonus plan whereby certain key managers of DHS were granted shares of Delta common stock, one-third of which vest on each one year anniversary of the grant date. In addition, similar incentive grants were made to DHS executives during 2008. The shares of Delta common stock used to fund the grants were proportionally provided by Delta’s issuance of new shares to DHS employees and Chesapeake’s contribution to DHS of Delta shares purchased in the open market. The Delta shares contributed by Chesapeake are recorded at historical cost in the accompanying consolidated balance sheet as treasury stock and will be carried as such until the shares vest. The Delta shares contributed by Delta are treated as non-vested stock issued to employees and therefore recorded as additions to additional paid in capital over the vesting period. Compensation expense is recorded on all such grants over the vesting period.

Stock Based Compensation

The Company recognized stock compensation included in general and administrative expense as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Non-vested stock		$	1,716			$	2,436			$	8,187			$	5,371
Stock options			109				—				109				—
Performance shares			131				358				512				2,062
Total		$	1,956			$	2,794			$	8,808			$	7,433

The Company recognizes the cost of share based payments over the period during which the employee provides service. During the three months ended September 30, 2010, the Company issued 250,000 fully vested stock options at an exercise price of $0.79 per share to the Company’s Chief Executive Officer. Other than the stock option issuance during the third quarter of 2010, the Company had not issued stock options since July 2005 and as all prior outstanding stock options are fully vested, no compensation cost was recognized with respect to stock options in the 2009 periods shown in the table above. Exercise prices for options outstanding under the Company’s various plans as of September 30, 2010 ranged from $0.79 to $15.34 per share. At September 30, 2010, there was no unrecognized compensation cost related to stock options as all outstanding options are vested. At September 30, 2010, the Company had 1,608,000 options outstanding at a weighted average exercise price of $7.25 per share. At September 30, 2010, the Company had 7,775,000 non-vested shares outstanding and 80,000 performance shares outstanding. At September 30, 2010, the total unrecognized compensation cost related to the performance shares and the non-vested portion of restricted stock was $9.3 million which is expected to be recognized over a weighted average period of 1.1 years.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(10) Income Taxes

Income tax expense (benefit) attributable to loss from continuing operations was approximately $86,000 and $265,000 for the three months ended September 30, 2010 and 2009, respectively, and $564,000 and $(53,000) for the nine months ended September 30, 2010 and 2009, respectively.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future results of operations, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, significant book losses during the current and prior periods, and projections for future results of operations over the periods in which the deferred tax assets are deductible, among other factors, management continues to conclude that the Company does not meet the “more likely than not” requirement in order to recognize deferred tax assets and a valuation allowance has been recorded for the Company’s net deferred tax assets at September 30, 2010.

During the three and nine months ended September 30, 2010, DHS recorded net operating losses and as of September 30, 2010 DHS’s deferred tax assets exceeded its deferred tax liabilities. Accordingly, based on significant recent operating losses and projections for future results, a valuation allowance was recorded for DHS’s net deferred tax assets.

During the remainder of 2010 and thereafter, the Company will continue to assess the realizability of its deferred tax assets based on consideration of actual and projected operating results and tax planning strategies. Should actual operating results improve, the amount of the deferred tax asset considered more likely than not to be realizable could be increased. Such a change in the assessment of realizability could result in a decrease to the valuation allowance and corresponding income tax benefit, both of which could be significant.

During the three and nine months ended September 30, 2010 and 2009, no adjustments were recognized for uncertain tax benefits.

(11) Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income (loss) attributable to Delta common stockholders		$	13,942			$	(96,827	)		$	(148,606	)		$	(294,698	)
Basic weighted-average common shares outstanding			275,306				275,465				275,437				189,740
Add: dilutive effects of stock options and unvested stock grants			6,757				—				—				—
Diluted weighted-average common shares outstanding			282,063				275,465				275,437				189,740
Net income (loss) per common share attributable to Delta common stockholders
Basic		$	0.05			$	(0.35	)		$	(0.54	)		$	(1.55	)
Diluted		$	0.05			$	(0.35	)		$	(0.54	)		$	(1.55	)

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(11)  Earnings Per Share, Continued

Potentially dilutive securities excluded from the calculation of diluted shares outstanding include the following (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Stock issuable upon conversion of convertible notes			3,790				3,790				3,790				3,790
Stock options			1,608				1,428				1,608				1,428
Performance share grants			—				150				80				150
Non-vested restricted stock			—				1,270				7,775				1,270
Total potentially dilutive securities			5,398				6,638				13,253				6,638

(12) Guarantor Financial Information

On March 15, 2005, Delta issued $150.0 million of 7% senior notes (“Senior Notes”) that mature in 2015. In addition, on April 25, 2007, the Company issued $115.0 million of 3³/4% Convertible Senior Notes due in 2037 (“Convertible Notes”). Both the Senior Notes and the Convertible Notes are guaranteed by all of the Company’s wholly-owned subsidiaries (“Guarantors”). Each of the Guarantors, fully, jointly and severally, irrevocably and unconditionally guarantees the performance and payment when due of all the obligations under the Senior Notes and the Convertible Notes. DHS, CRBP, and Amber (“Non-guarantors”) are not guarantors of the indebtedness under the Senior Notes or the Convertible Notes.

The following financial information sets forth the Company’s condensed consolidated balance sheets as of September 30, 2010 and December 31, 2009, the condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2010 and 2009 (in thousands). For purposes of the condensed financial information presented below, the equity in the earnings or losses of subsidiaries is not recorded in the financial statements of the issuer.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)

(12) Guarantor Financial Information, Continued

Condensed Consolidated Balance Sheet
September 30, 2010

						Guarantor				Non-Guarantor				Adjustments/
		Issuer				Entities				Entities				Eliminations				Consolidated
Current assets		$	140,921			$	298			$	15,782			$	—			$	157,001
Property and equipment:
Oil and gas properties			1,083,550				—				19,215				(117	)			1,102,648
Drilling rigs and trucking equipment			594				—				173,851				—				174,445
Other			78,871				32,617				1,781				—				113,269
Total property and equipment			1,163,015				32,617				194,847				(117	)			1,390,362
Accumulated depletion and depreciation			(371,084	)			(28,702	)			(112,891	)			—				(512,677	)
Net property and equipment			791,931				3,915				81,956				(117	)			877,685
Investment in subsidiaries			3,570				—				—				(3,570	)			—
Other long-term assets			109,136				2,407				126				—				111,669
Total assets		$	1,045,558			$	6,620			$	97,864			$	(3,687	)		$	1,146,355
Current liabilities		$	162,543			$	(27	)		$	80,279			$	—			$	242,795
Long-term liabilities:
Long-term debt, derivative instruments and deferred taxes			352,605				1,801				—				—				354,406
Asset retirement obligations			3,942				—				—				—				3,942
Total long-term liabilities			356,547				1,801				—				—				358,348
Total Delta stockholders’ equity			526,822				4,846				17,585				(3,687	)			545,566
Non-controlling interest			(354	)			—				—				—				(354	)
Total equity			526,468				4,846				17,585				(3,687	)			545,212
Total liabilities and equity		$	1,045,558			$	6,620			$	97,864			$	(3,687	)		$	1,146,355