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

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

286,027,476 shares of common stock, $.01 par value per share, were outstanding as of May 5, 2011.

 

 

INDEX

		Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets — March 31, 2011 and December 31, 2010 (unaudited)			1
Consolidated Statements of Operations — Three Months Ended March 31, 2011 and 2010 (unaudited)			2
Consolidated Statement of Changes in Equity — Three Months Ended March 31, 2011 (unaudited)			3
Consolidated Statements of Cash Flows — Three Months Ended March 31, 2011 and 2010 (unaudited)			4
Notes to Consolidated Financial Statements (unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			36
PART II OTHER INFORMATION
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 5. Other Information			38
Item 6. Exhibits			39

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)

		March 31,				December 31,
		2011				2010
		(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	5,539			$	14,190
Short-term restricted deposits			100,000				100,000
Trade accounts receivable, net of allowance for doubtful accounts of $100 and $100, respectively			9,084				7,373
Assets held for sale — DHS subsidiary			69,300				74,093
Deposits and prepaid assets			1,617				1,720
Inventories			3,109				3,446
Other current assets			4,496				4,821
Total current assets			193,145				205,643
Property and equipment:
Oil and gas properties, successful efforts method of accounting:
Unproved			230,117				230,117
Proved			878,234				871,986
Pipeline and gathering systems			93,613				93,558
Other			13,766				14,452
Total property and equipment			1,215,730				1,210,113
Less accumulated depreciation and depletion			(406,342	)			(400,384	)
Net property and equipment			809,388				809,729
Long-term assets:
Investments in unconsolidated affiliates			3,460				3,377
Deferred financing costs			1,554				1,832
Other long-term assets			3,252				3,531
Total long-term assets			8,266				8,740
Total assets		$	1,010,799			$	1,024,112
LIABILITIES AND EQUITY
Current liabilities:
Credit facility — Delta		$	32,632			$	—
Installment payable on property acquisition			98,507				97,874
Accounts payable			23,853				27,615
Liabilities related to assets held for sale — DHS subsidiary			81,765				81,633
Other accrued liabilities			12,847				11,066
Derivative instruments			6,666				574
Total current liabilities			256,270				218,762
Long-term liabilities:
7% Senior notes			149,703				149,684
33/4% Senior convertible notes			109,756				108,593
Credit facility — Delta			—				29,130
Asset retirement obligations			4,034				3,929
Derivative instruments			7,280				2,419
Total long-term liabilities			270,773				293,755
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 286,126,000 shares at March 31, 2011 and 285,138,000 shares at December 31, 2010			2,861				2,851
Additional paid-in capital			1,635,390				1,633,217
Treasury stock at cost; 30,000 shares at March 31, 2011 and 33,000 shares at December 31, 2010			(55	)			(279	)
Accumulated deficit			(1,149,183	)			(1,121,342	)
Total Delta stockholders’ equity			489,013				514,447
Non-controlling interest			(5,257	)			(2,852	)
Total equity			483,756				511,595
Total liabilities and equity		$	1,010,799			$	1,024,112

See accompanying notes to consolidated financial statements.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
		(In thousands, except per share amounts)
Revenue:
Oil and gas sales		$	23,056			$	29,599
Loss on property sales			—				(429	)
Total revenue			23,056				29,170
Operating expenses:
Lease operating expense			4,605				6,941
Transportation expense			3,952				3,353
Production taxes			932				1,410
Exploration expense			43				226
Dry hole costs and impairments			143				354
Depreciation, depletion, amortization and accretion			13,461				15,288
General and administrative expense			6,629				10,250
Total operating expenses			29,765				37,822
Operating loss			(6,709	)			(8,652	)
Other income and (expense):
Interest expense and financing costs, net			(6,806	)			(8,702	)
Other income (expense)			(69	)			69
Realized loss on derivative instruments, net			(440	)			(4,113	)
Unrealized gain (loss) on derivative instruments, net			(10,953	)			17,272
Income (loss) from unconsolidated affiliates			83				(8	)
Total other income and (expense)			(18,185	)			4,518
Loss from continuing operations before income taxes and discontinued operations			(24,894	)			(4,134	)
Income tax expense			239				275
Loss from continuing operations			(25,133	)			(4,409	)
Discontinued operations:
Loss from results of operations and sale of discontinued operations, net of tax			(5,132	)			(11,583	)
Net loss			(30,265	)			(15,992	)
Less net loss attributable to non-controlling interest included in discontinued operations			2,424				3,195
Net loss attributable to Delta common stockholders		$	(27,841	)		$	(12,797	)
Amounts attributable to Delta common stockholders:
Loss from continuing operations		$	(25,133	)		$	(4,409	)
Loss from discontinued operations, net of tax			(2,708	)			(8,388	)
Net loss		$	(27,841	)		$	(12,797	)
Basic loss attributable to Delta common stockholders per common share:
Loss from continuing operations		$	(0.09	)		$	(0.02	)
Discontinued operations			(0.01	)			(0.03	)
Net loss		$	(0.10	)		$	(0.05	)
Diluted loss attributable to Delta common stockholders per common share:
Loss from continuing operations		$	(0.09	)		$	(0.02	)
Discontinued operations			(0.01	)			(0.03	)
Net loss		$	(0.10	)		$	(0.05	)

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, 2010			285,138			$	2,851			$	1,633,217				33			$	(279	)		$	(1,121,342	)		$	514,447			$	(2,852	)		$	511,595
Net loss			—				—				—				—				—				(27,841	)			(27,841	)			(2,424	)			(30,265	)
Employee vesting of treasury stock held by subsidiary			—				—				(135	)			(3	)			224				—				89				(29	)			60
Issuance of vested stock			988				10				(10	)			—				—				—				—				—				—
Shares repurchased for withholding taxes			—				—				(1	)			—				—				—				(1	)			—				(1	)
Stock based compensation			—				—				2,319				—				—				—				2,319				48				2,367
Balance, March 31, 2011			286,126			$	2,861			$	1,635,390				30			$	(55	)		$	(1,149,183	)		$	489,013			$	(5,257	)		$	483,756

See accompanying notes to consolidated financial statements.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
		(In thousands)
Cash flows from operating activities:
Net loss		$	(30,265	)		$	(15,992	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation, depletion, amortization — oil and gas			13,461				15,288
Depreciation, depletion, amortization — discontinued operations			2,669				13,470
(Gain) loss on sale of drilling assets — discontinued operations			500				(62	)
Dry hole costs and impairments			143				354
Stock based compensation			2,367				3,389
Amortization of deferred financing costs, bond discount, and installments payable discount			2,699				3,800
Unrealized (gain) loss on derivative contracts			10,953				(17,272	)
(Income) loss from unconsolidated affiliates			(83	)			8
Deferred income tax expense			239				275
Other			(248	)			422
Net changes in operating assets and liabilities:
(Increase) in trade accounts receivable			(1,711	)			(237	)
(Increase) decrease in deposits and prepaid assets			103				(76	)
(Increase) in inventories			(64	)			—
(Increase) in other current assets			—				16
Increase (decrease) in accounts payable			925				(9,183	)
(Decrease) in offshore litigation payable			—				(13,877	)
Increase (decrease) in other accrued liabilities			2,128				1,927
Increase (decrease) in assets held for sale working capital, net			1,794				809
Net cash provided by (used in) operating activities			5,610				(16,941	)
Cash flows from investing activities:
Additions to property and equipment			(17,305	)			(9,349	)
Additions to drilling and trucking equipment			(158	)			(703	)
Proceeds from sale of oil and gas properties			—				766
Proceeds from sale of drilling assets			38				130
Proceeds from sale of other fixed assets			61				37
Proceeds from sale of unconsolidated affiliates			559				3,500
Proceeds from escrow deposit			—				1,380
Decrease in other long-term assets			7				244
Net cash used in investing activities			(16,798	)			(3,995	)
Cash flows from financing activities:
Proceeds from borrowings			30,202				24,000
Repayments of borrowings			(26,700	)			(55,000	)
Payment of deferred financing costs			(964	)			—
Stock repurchased for withholding taxes			(1	)			(2	)
Net cash provided by (used in) financing activities			2,537				(31,002	)
Net decrease in cash and cash equivalents			(8,651	)			(51,938	)
Cash at beginning of period			14,190				61,918
Cash at end of period		$	5,539			$	9,980
Supplemental cash flow information:
Cash paid for interest and financing costs		$	1,410			$	2,893
DHS interest payable capitalized to principal balance (non-cash financing transaction)		$	1,616			$	—

See accompanying notes to consolidated financial statements.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010

(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, 2010. 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, 2010, previously filed with the SEC.

(2) Going Concern

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

On July 30, 2010, the Company closed on a definitive Purchase and Sale Agreement with Wapiti Oil & Gas, L.L.C. (“Wapiti”) to sell all or a portion of its interests in various non-core assets primarily located in Colorado, Texas and Wyoming (the “Wapiti Transaction”) for cash proceeds of $130.0 million.

On December 29, 2010, the Company entered into a Third Amended and Restated Credit Agreement (the “MBL Credit Agreement”), with Macquarie Bank Limited (“MBL”), as administrative agent and issuing lender as more fully described in Note 7, “Long-Term Debt.” The MBL Credit Agreement provides for a revolving loan and a term loan, each with a maturity date of January 31, 2012. The revolving loan has an initial borrowing base of $30.0 million. On March 14, 2011, the Company entered into an amendment to the MBL Credit Agreement that increased the availability under the term loan at the time from $6.2 million to $25.0 million, and does not require repayment of the term loan until the January 2012 maturity date. Specifically, among other changes, the amendment provided for an increase in the term loan commitment from $20.0 million to $25.0 million and removed the requirement that advances under the term loan be subject to approval of a development plan. In addition, so long as Delta is not in default under the MBL Credit Agreement, Delta is not required to comply with certain cash management provisions, including the previous requirement to repay any term loan advances outstanding on a monthly basis with 100% of net operating cash flows. The Company was in compliance with its financial covenants under the MBL Credit Agreement as of March 31, 2011.

Proceeds from the Wapiti Transaction and the MBL Credit Agreement were used to substantially reduce amounts outstanding under the Company’s prior credit facility, as well as to extend the maturity of the remaining balance under that credit facility from January 15, 2011 to January 31, 2012, and to fund capital expenditures. Despite these improvements to the financial position of the Company, during the first quarter of 2011, the Company experienced a net loss attributable to Delta common stockholders of $27.8 million, and at March 31, 2011 had a working capital deficiency, excluding discontinued operations, of $50.7 million, including $32.6 million outstanding under the MBL Credit Agreement (which is classified as a current liability in the accompanying balance sheet). In addition to the amounts outstanding under the Company’s credit facility which are due on January 31, 2012, the holders of the Company’s $115.0 million 3³/₄% senior convertible notes have the option to require the Company to repurchase the notes at par on May 1, 2012.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(2) Going Concern, Continued

The DHS Drilling Company (“DHS”) credit facility debt of $71.2 million at March 31, 2011 is included in the accompanying consolidated balance sheets as a component of liabilities related to assets held for sale. DHS has entered into a forbearance agreement that currently expires on May 13, 2011. Although DHS is in ongoing negotiations with its lender, Lehman Commercial Paper, Inc. (“LCPI”) to modify the terms of the existing DHS credit facility, there can be no assurance that DHS will be able to renegotiate the terms of its debt agreement or obtain an extension to the forbearance agreement that expires on May 13, 2011. If DHS is unable to extend the forbearance agreement or modify the terms of its debt agreement, and if LCPI exercises its default rights upon expiration of the forbearance period, including demanding immediate payment of all amounts outstanding under the debt agreement, DHS is not anticipated to have sufficient capital to repay the amounts due. The DHS facility is non-recourse to Delta. Subsequent to year-end, the Board of Directors of DHS engaged transaction advisors to commence a strategic alternatives process, focused on a sale of DHS or substantially all of its assets. There can be no assurance that the terms offered by a potential buyer or buyers, if any, will be acceptable to the DHS shareholders, including Delta. Additionally, the consummation of certain transactions are subject to the approval of LCPI and the proceeds received will be required to be used to pay down amounts outstanding under its LCPI credit facility.

While the Wapiti Transaction and the MBL Credit Agreement significantly improved the Company’s financial position, the Company does not have the capital on hand necessary to repay its credit facility borrowings due on January 31, 2012 or fund the purchase of convertible notes if the holders of such notes elect to require the company to repurchase such notes on May 1, 2012.

The Company believes that the amounts available under the Company’s credit facility, as recently amended, combined with projected net cash from operating activities, will provide sufficient liquidity to fund its operating expenses, the limited Vega Area capital development planned, and maintain current debt service obligations. To the extent cash flows from operating activities are not sufficient to support future capital expenditures beyond those currently planned, and in order to address the January 2012 maturity of the Company’s credit facility and the potential mandatory redemption in May 2012 of the $115.0 million senior convertible notes, the Company will need to seek additional sources of long-term capital (including the issuance of equity, debt instruments, sales of assets and joint venture financing), as well as consider other potential corporate transactions such as a sale of the Company. The timing, structure, terms, size, and pricing of any such financing or transaction will depend on investor interest and market conditions, as well as the Company’s drilling and completion results, and there can be no assurance that the Company will be able to obtain any such financing or consummate any such transaction, and if so, that it will be on terms satisfactory to the Company which raises substantial doubt about the Company’s ability to continue as a going concern. 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 Delta and its consolidated subsidiaries (collectively, 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 (“CRBP”) and through the date of the Wapiti Transaction, PGR Partners, LLC (“PGR”). The Company includes its proportionate share of assets, liabilities, revenues and expenses from these entities in its consolidated financial statements. 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.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(3) Summary of Significant Accounting Policies, Continued

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 or held for sale during the three months ended March 31, 2011 have been reclassified from continuing operations to discontinued operations for all periods presented. In addition, the assets and liabilities of DHS have been separately reflected in the accompanying consolidated balance sheets as assets held for sale and liabilities related to assets held for sale. Such reclassifications had no effect on net loss (See Note 4, “Discontinued Operations”).

     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, then evaluated quarterly and 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.

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 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 months ended March 31, 2011 and 2010, the expected future undiscounted cash flows of the assets exceeded the carrying value of the corresponding asset and as such no impairment provisions were recognized.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(3) Summary of Significant Accounting Policies, Continued

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. For the three months ended March 31, 2011 and 2010, no significant impairments were recorded.

During the remainder of 2011, 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.

     Exploratory Well Costs

		Three Months Ended
		March 31, 2011
Balance at beginning of year		$	6,200
Additions to capitalized exploratory well costs pending the determination of proved reserves			5,817
Exploratory well costs included in property divestitures			—
Reclassified to proved oil and gas properties based on the determination of proved reserves			—
Capitalized exploratory well costs charged to dry hole expense			—
Balance at end of period		$	12,017
Exploratory well costs capitalized for one year or less after after completion of drilling			12,017
Exploratory well costs capitalized for greater than one year after completion of drilling			—
Balance at end of period		$	12,017

The table does not include amounts that were capitalized and either subsequently expensed or reclassified to producing well costs in the same period. During 2010, the Company spud a deep test well in the Vega Area to explore the Company’s Piceance leasehold below the currently productive Williams Fork zone. Completion activities on the well began in February 2011. A second deep test well was spud during the three months ended March 31, 2011. Completion activities on the second well began during April 2011.

     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, 2011 to March 31, 2011 (in thousands):

Asset retirement obligation — January 1, 2011		$	5,146
Accretion expense			75
Change in estimate			(82	)
Obligations incurred (from new wells)			31
Obligations on sold properties			(118	)
Asset retirement obligation — March 31, 2011			5,052
Less: Current portion of asset retirement obligation			(1,018	)
Long-term asset retirement obligation		$	4,034

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(3) Summary of Significant Accounting Policies, Continued

     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 March 31, 2011 comprehensive loss attributable to Delta common stockholders was $27.8 million and for the three months ended March 31, 2010 comprehensive loss attributable to Delta common stockholders was $12.8 million.

     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, valuations of marketable securities, income taxes, derivatives, asset retirement obligations, contingencies and litigation accruals. Actual results could differ from these estimates.

(4) Discontinued Operations

During the third quarter of 2010, the Company closed the Wapiti Transaction, selling all or a portion of its interest in various non-core assets primarily located in Colorado, Texas, and Wyoming for gross proceeds of $130.0 million. In accordance with accounting standards, the results of operations and impairment losses relating to certain of the Wapiti Transaction properties have been reflected as discontinued operations for all periods presented. 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 separate transactions in 2010, the Company sold its interest in the Howard Ranch field and the Laurel Ridge field and has included these properties as discontinued operations as well.

During the three months ended March 31, 2011, the Board of Directors of DHS engaged transaction advisors to commence a strategic alternatives process, focused on a sale of DHS or substantially all of its assets. As such, in accordance with accounting standards, the results of operations relating to DHS have been reflected as discontinued operations. In addition, the assets and liabilities of DHS have been separately reflected in the accompanying consolidated balance sheets as assets held for sale and liabilities related to assets held for sale.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(4) Discontinued Operations, Continued

The following table shows the oil and gas segment and drilling segment revenues and expenses included in discontinued operations for the above mentioned oil and gas properties for the three months ended March 31, 2011 and 2010 (in thousands):

		Three Months Ended												Three Months Ended
		March 31, 2011												March 31, 2010
		Oil & Gas				Drilling				Total				Oil & Gas				Drilling				Total
Revenues:
Oil and gas sales		$	—			$	—			$	—			$	4,854			$	—			$	4,854
Contract drilling and trucking fees			—				14,263				14,263				—				9,932				9,932
Total Revenues			—				14,263				14,263				4,854				9,932				14,786
Operating Expenses:
Lease operating expense			—				—				—				1,230				—				1,230
Transportation expense			—				—				—				574				—				574
Production taxes			—				—				—				271				—				271
Depreciation, depletion, amortization and accretion — oil and gas			—				—				—				7,898				—				7,898
Drilling and trucking operating expenses			—				13,101				13,101				—				7,889				7,889
Depreciation and amortization — drilling and trucking(1)			—				2,669				2,669				—				5,572				5,572
General and administrative expense			—				1,033				1,033				—				1,137				1,137
Total operating expenses			—				16,803				16,803				9,973				14,598				24,571
Other income and (expense):
Interest expense and financing costs, net			—				(2,041	)			(2,041	)			—				(1,860	)			(1,860	)
Other income (expense)			—				(551	)			(551	)			—				62				62
Total other income and (expense)			—				(2,592	)			(2,592	)			—				(1,798	)			(1,798	)
Loss from discontinued operations			—				(5,132	)			(5,132	)			(5,119	)			(6,464	)			(11,583	)
Income tax expense			—				—				—				—				—				—
Loss from results of operations of discontinued operations, net of tax			—				(5,132	)			(5,132	)			(5,119	)			(6,464	)			(11,583	)
Gain on sales of discontinued operations			—				—				—				—				—				—
Loss from results of operations and sale of discontinued operations, net of tax		$	—			$	(5,132	)		$	(5,132	)		$	(5,119	)		$	(6,464	)		$	(11,583	)

(5) DHS Drilling

The carrying value of DHS’s drilling rigs and related equipment is assessed for impairment whenever circumstances indicate an impairment may exist. No such impairment provisions were recorded during the three months ended March 31, 2011 and 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 $3.7 million has been invoiced to DPM for the project with $1.6 million being collected to date. The balance of $2.1 million has been reserved as a doubtful account due to concerns regarding collection, which is included as a component of assets held for sale — DHS subsidiary. Legal action is being taken to collect the amount owed to DHS and the rig is currently under contract.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(6) 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 installment payable is recorded in the accompanying consolidated financial statements as a current liability at a discounted value. The discount is being accreted on the effective interest method over the term of the installments, including accretion of $600,000 and $1.3 million for the three months ended March 31, 2011 and 2010, respectively.

     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 March 31, 2011 (See Note 13, “Guarantor Financial Information”). The fair value of the Company’s senior unsecured notes at March 31, 2011 was approximately $118.1 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 for net proceeds of $111.6 million after underwriters’ discounts and commissions of approximately $3.4 million. The convertible notes will mature on May 1, 2037 unless earlier converted, redeemed or repurchased, but each holder of convertible notes has the option to require the Company to purchase any outstanding convertible notes on each of May 1, 2012, May 1, 2017, May 1, 2022, May 1, 2027 and May 1, 2032 at a price equal to 100% of the principal amount of the convertible notes to be purchased, payable in cash. The convertible 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 convertible notes, including $1.2 million and $1.1 million of accretion for the three months ended March 31, 2011 and 2010, respectively. Combined with the amortization of debt discount, the convertible 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 March 31, 2011 and 2010, respectively. The fair value of the convertible notes at March 31, 2011 was approximately $94.2 million.

     Credit Facility — Delta

On December 29, 2010, the Company entered into the MBL Credit Agreement, which provides for a revolving loan and a term loan, each with a maturity date of January 31, 2012. The revolving loan has an initial borrowing base of $30.0 million and bears interest at prime plus 6% per annum for prime rate advances and LIBOR plus 7% per annum for LIBOR advances. The borrowing base for the revolving loan is subject to a semi-annual re-determination based on reserve reports as of each January 1 and July 1 as reported by the Company to MBL on or before each April 1 and October 1, respectively. At March 31, 2011, $7.6 million was outstanding under the revolving loan. On March 14, 2011, the Company entered into an amendment to the MBL Credit Agreement that increased the availability under the term loan at the time from $6.2 million to $25.0 million and removed the requirement that advances under the term loan be subject to approval of a development plan. In addition, so long as Delta is not in default under the MBL Credit Agreement, Delta is not required to comply with certain cash management provisions, including the previous requirement to repay any term loan advances outstanding on a monthly basis with 100% of net operating cash flows. As a result of the amendment, amounts outstanding under the term loan bear interest at prime plus 9.5% through September 30, 2011 and prime plus 11.0% thereafter for prime rate advances and at LIBOR plus 10.5% for LIBOR advances through September 30, 2011 and LIBOR plus 12.0% thereafter for LIBOR advances. At March 31, 2011, $25.0 million was outstanding under the term loan. The revolving loan and the term loan are subject to quarterly financial covenants, in each case as defined in the MBL Credit Agreement and described in summary here, including maintenance of a minimum current ratio of 1:1, minimum quarterly net operating cash flow of $8.6 million, and maximum quarterly general and administrative expenses (excluding equity based compensation) of $5.0 million.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(6) Long Term Debt, Continued

In addition, the Company may not permit its trade payables to be outstanding more than 90 days following the receipt of applicable invoices. At March 31, 2011, the Company was in compliance with its financial covenants under the MBL Credit Agreement.

     Credit Facility — DHS

DHS did not pay its scheduled principal and interest payments due on January 3 and April 1, 2011 and as a result, entered into a forbearance agreement that currently expires on May 13, 2011. In conjunction with the forbearance agreement, the missed interest payments were capitalized to the principal balance of the loan on January 3 and April 1, 2011, respectively, and the loan now bears interest at the default rate of 11% per annum. The DHS credit agreement financial covenants require a minimum EBITDA of $1.5 million per quarter and a capital expenditures limitation of $1.2 million for any fiscal quarter and $2.3 million in the aggregate for fiscal year 2011. DHS was not in compliance with its minimum EBITDA covenant and capital expenditures limitation for the three months ended March 31, 2011. The DHS credit facility debt of $71.2 million at March 31, 2011 is included in the accompanying consolidated balance sheets as a component of liabilities related to assets held for sale. The DHS credit facility is non-recourse to Delta.

(7) 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, gas, and natural gas liquids commodity swap contracts valued using both quoted prices for identically traded contracts and observable market data for similar contracts (NYMEX WTI oil, CIG gas, and Mont Belvieu natural gas liquids 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 three months ended March 31, 2011 and 2010, and are considered to be Level 3 fair value measurements.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(7) Fair Value Measurements, Continued

The following table lists the Company’s fair value measurements by hierarchy as of March 31, 2011 and December 31, 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)				Total
Recurring
Derivative liabilities — March 31, 2011		$	—			$	(13,946	)		$	—			$	(13,946	)
Derivative liabilities — December 31, 2010			—				(2,993	)			—				(2,993	)

(8) Commodity Derivative Instruments

The Company periodically enters into commodity price risk transactions to manage its exposure to oil, gas, and natural gas liquids price volatility. These transactions may take the form of futures contracts, collar agreements, swaps or options. The purpose of the transactions 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, natural gas liquids, 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 March 31, 2011, 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 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 March 31, 2011:

																Net Fair Value
												Remaining				Asset (Liability) at
Commodity		Volume						Fixed Price				Term		Index Price		March 31, 2011
																(In thousands)
Crude oil			500			Bbls / Day		$	57.70			Apr ’11 - Dec ’11		NYMEX - WTI		$	(6,529	)
Crude oil			96			Bbls / Day		$	91.05			Apr ’11 - Dec ’11		NYMEX - WTI			(412	)
Crude oil			497			Bbls / Day		$	91.05			Jan ’12 - Dec ’12		NYMEX - WTI			(2,438	)
Crude oil			396			Bbls / Day		$	91.05			Jan ’13 - Dec ’13		NYMEX - WTI			(1,386	)
Natural gas			12,000			MMBtu / Day		$	5.150			Apr ’11 - Dec ’11		CIG			3,119
Natural gas			3,253			MMBtu / Day		$	5.040			Apr ’11 - Dec ’11		CIG			748
Natural gas			38			MMBtu / Day		$	4.440			Apr ’11 - Dec ’11		CIG			4
Natural gas			12,052			MMBtu / Day		$	4.440			Jan ’12 - Dec ’12		CIG			(844	)
Natural gas			10,301			MMBtu / Day		$	4.440			Jan ’13 - Dec ’13		CIG			(1,638	)
Natural gas liquids(1)			36,597			Gallons / Day		$	0.913			Apr ’11 - Dec ’11		MT. BELVIEU			(1,901	)
Natural gas liquids(1)			30,617			Gallons / Day		$	0.832			Jan ’12 - Dec ’12		MT. BELVIEU			(1,922	)
Natural gas liquids(1)			12,286			Gallons / Day		$	0.767			Jan ’13 - Dec ’13		MT. BELVIEU			(747	)
																$	(13,946	)

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(8) Commodity Derivative Instruments, Continued

The pre-credit risk adjusted fair value of the Company’s net derivative liabilities as of March 31, 2011 was $16.3 million. A credit risk adjustment of $2.4 million to the fair value of the derivatives increased the reported amount of the net derivative liabilities on the Company’s consolidated balance sheet to $13.9 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 March 31, 2011 and December 31, 2010 (in thousands):

Derivatives Not Designated as				March 31, 2011				Dec. 31, 2010
Hedging Instruments		Balance Sheet Classification		Fair Value				Fair Value
Liabilities
Commodity Swaps		Derivative Instruments — Current Liabilities, net		$	(6,666	)		$	(574	)
Commodity Swaps		Derivative Instruments — Long-Term Liabilities, net			(7,280	)			(2,419	)
Total				$	(13,946	)		$	(2,993	)

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 three months ended March 31, 2011 and 2010 (in thousands):

				March 31, 2011				March 31, 2010
				Amount of				Amount of Gain
				Loss Recognized				(Loss) Recognized
Derivatives Not Designated as		Location of Gain (Loss) Recognized in		in Income				in Income
Hedging Instruments		Income on Derivatives		on Derivatives				on Derivatives
Commodity Swaps		Realized Loss on Derivative Instruments, net — Other Income and (Expense)		$	(440	)		$	(4,113	)
Commodity Swaps		Unrealized Gain (Loss) on Derivative Instruments, net — Other Income and (Expense)			(10,953	)			17,272
				$	(11,393	)		$	13,159

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.

Decommissioning of Offshore California Leases

The Company formerly owned a 2.41934% working interest in OCS Lease 320 in the Sword Unit, Offshore California, and its 91.68% owned subsidiary, Amber Resources Company of Colorado (“Amber”) formerly owned a 0.97953% working interest in the same lease. Lease 320 was conveyed back to the United States at the conclusion of litigation with the government (Amber Resources Co., et al. vs. United States, Civ. Act. No. 2-30 filed in the United States Court of Federal Claims) when the courts determined that the government had breached that lease (among others) and was liable to the working interest owners for damages; however, the government now contends that the former working interest owners are still obligated to permanently plug and abandon an exploratory well that was drilled on the lease and to clear the well site. The former operator of the lease commenced litigation against the government in United States District Court for the District of Columbia (Noble Energy Corp. vs. Kenneth L. Salazar, Secretary United States Department of the Interior, et al No. 1:09-cv-02013-EGS) seeking a declaratory judgment that the former working

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(9) Commitments and Contingencies, Continued

interest owners are not responsible for these costs as a result of the government’s breach of the lease. On April 22, 2011, the Court entered a judgment in favor of the government, ruling that the working interest owners jointly and severally share the responsibility to permanently plug and abandon the subject well, and that this duty was not discharged by the government’s breach of contract. The former operator has stated that it intends to appeal this ruling. It is currently unknown whether or not the appeal will be successful, or what the actual costs of decommissioning the well would be if the former working interest owners are ultimately held liable. If the working interest owners are held liable, the Company and Amber would be responsible for the payment of their respective proportionate shares of the cost.

In addition, the Company formerly owned a 24.21692% interest in Lease 409 (Non-unitized), a 5.88682% interest in Lease 415 (Point Sal) and a 7.03049% interest in Lease 416 (Point Sal), all of which are located offshore California in the Santa Maria Basin and were assigned back to the government at the conclusion of the Amber litigation discussed above. These leases were operated by a different operator who has commissioned a site clearance study for the decommissioning of operations on the affected leases, but has reserved the right to possibly later take the position that there is no obligation to engage in decommissioning efforts for specified legal and/or regulatory reasons. It is currently unknown whether or not decommissioning efforts will ultimately be undertaken, or what the associated costs would be.

212 Resources

In the fiscal quarter ended March 31, 2011, the Company was engaged in an arbitration with 212 Resources Corporation (“212”) that was filed with the American Arbitration Association on October 27, 2009. The matter was set for arbitration on January 24, 2011, but was ultimately settled pursuant to a final Settlement Agreement executed by the parties on January 25, 2011. In accordance with the Settlement Agreement, the Company paid $1.5 million to 212 in consideration of mutual releases of claims and the termination of the underlying agreement.

DHS Rig Matter

The Company’s indirect, 49.8% owned affiliate DHS and certain of its employees, among others, have been notified by the Office of the Inspector General, Office of Investigations, of the Export-Import Bank of the United States, and the U.S. Department of Justice, that DHS and certain of its and the Company’s employees are the subject of an investigation in connection with a loan guarantee sought from the Export-Import Bank in the first quarter of 2010 of a loan from a Mexican bank sought by a DHS customer in Mexico. DHS has cooperated and will continue to cooperate with the investigation. This investigation is subject to uncertainties, and, as such, DHS is unable to estimate the nature of any possible liability that may result.

(10) Stockholders’ Equity

     Preferred Stock

The Company has 3.0 million shares of preferred stock authorized, issuable from time to time in one or more series. As of March 31, 2011 and December 31, 2010, no shares of preferred stock were outstanding.

     Common Stock

During the three months ended March 31, 2011 and 2010, the Company issued 988,000 and 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 years ended December 31, 2010 and 2009, respectively.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(10) Stockholders’ Equity, Continued

     Stock Based Compensation

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

		Three Months Ended
		March 31,
		2011				2010
Non-vested stock(1)		$	2,264			$	3,031
Performance shares			103				358
Total		$	2,367			$	3,389

The Company recognizes the cost of share based payments over the period during which the employee provides service. Exercise prices for options outstanding under the Company’s various plans as of March 31, 2011 ranged from $0.79 to $15.34 per share. At March 31, 2011, there was no unrecognized compensation cost related to stock options as all outstanding options are vested. At March 31, 2011, the Company had 1,503,000 options outstanding at a weighted average exercise price of $7.50 per share. At March 31, 2011, the Company had 7,255,000 non-vested shares outstanding and 80,000 performance shares outstanding. At March 31, 2011, the total unrecognized compensation cost related to the performance shares and the non-vested portion of restricted stock was $4.6 million which is expected to be recognized over a weighted average period of 0.6 years.

(11) Income Taxes

Income tax expense (benefit) attributable to loss from continuing operations was approximately $239,000 and $275,000 for the three months ended March 31, 2011 and 2010, 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 of ASC 740 in order to recognize deferred tax assets and a valuation allowance has been recorded for the Company’s net deferred tax assets at March 31, 2011.

During the three months ended March 31, 2011 and 2010, DHS recorded net operating losses and as of March 31, 2011 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 2011 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 months ended March 31, 2011 and 2010, no adjustments were recognized for uncertain tax benefits.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(12) 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
		March 31,
		2011				2010
Net loss attributable to Delta common stockholders		$	(27,841	)		$	(12,797	)
Basic weighted-average common shares outstanding			278,772				275,691
Add: dilutive effects of stock options and unvested stock grants			—				—
Diluted weighted-average common shares outstanding			278,772				275,691
Net loss per common share attributable to Delta common stockholders
Basic		$	(0.10	)		$	(0.05	)
Diluted		$	(0.10	)		$	(0.05	)

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

		Three Months Ended
		March 31,
		2011				2010
Stock issuable upon conversion of convertible notes			3,790				3,790
Stock options			1,503				1,428
Performance share grants(1)			80				150
Non-vested restricted stock			7,255				6,801
Total potentially dilutive securities			12,628				12,169

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010
(Unaudited)

(13) Guarantor Financial Information

On March 15, 2005, Delta issued $150.0 million of 7% 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. Both the senior notes and the convertible notes are guaranteed by all of the Company’s wholly-owned subsidiaries. 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 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 March 31, 2011 and December 31, 2010, the condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010 and the condensed consolidated statements of cash flows for the three months ended March 31, 2011 and 2010. 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.

Condensed Consolidated Balance Sheet
March 31, 2011

						Guarantor				Non-Guarantor				Adjustments/
		Issuer				Entities				Entities				Eliminations				Consolidated
Current assets		$	122,571			$	322			$	71,095			$	(843	)		$	193,145
Property and equipment:
Oil and gas properties			1,089,437				—				19,215				(301	)			1,108,351
Other			74,647				32,732				—				—				107,379
Total property and equipment			1,164,084				32,732				19,215				(301	)			1,215,730
Accumulated depletion and depreciation			(377,525	)			(28,817	)			—				—				(406,342	)
Net property and equipment			786,559				3,915				19,215				(301	)			809,388
Investment in subsidiaries			(1,689	)			—				—				1,689				—
Other long-term assets			5,859				2,407				—				—				8,266
Total assets		$	913,300			$	6,644			$	90,310			$	545			$	1,010,799
Current liabilities		$	174,531			$	(26	)		$	82,608			$	(843	)		$	256,270
Long-term liabilities:
Long-term debt, derivative instruments and deferred taxes			264,938				1,801				—				—				266,739
Asset retirement obligations			4,034				—				—				—				4,034
Total long-term liabilities			268,972				1,801				—				—				270,773
Total Delta stockholders’ equity			475,054				4,869				7,702				1,388				489,013
Non-controlling interest			(5,257	)			—				—				—				(5,257	)
Total equity			469,797				4,869				7,702				1,388				483,756
Total liabilities and equity		$	913,300			$	6,644			$	90,310			$	545			$	1,010,799

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March, 2011 and 2010
(Unaudited)

(13) Guarantor Financial Information, Continued

Condensed Consolidated Balance Sheet
December 31, 2010

						Guarantor				Non-Guarantor				Adjustments/
		Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Current assets		$	130,252			$	322			$	75,069			$	—			$	205,643
Property and equipment:
Oil and gas properties			1,083,005				—				19,215				(117	)			1,102,103
Other			75,333				32,677				—				—				108,010
Total property and equipment			1,158,338				32,677				19,215				(117	)			1,210,113
Accumulated depletion, depreciation and amortization			(371,622	)			(28,762	)			—				—				(400,384	)
Net property and equipment			786,716				3,915				19,215				(117	)			809,729
Investment in subsidiaries			1,157				—				—				(1,157	)			—
Other long-term assets			6,333				2,407				—				—				8,740
Total assets		$	924,458			$	6,644			$	94,284			$	(1,274	)		$	1,024,112
Current liabilities		$	137,155			$	(26	)		$	81,633			$	—			$	218,762
Long-term liabilities
Long-term debt, derivative instruments and deferred taxes			288,025				1,801				—				—				289,826
Asset retirement obligation and other liabilities			3,929				—				—				—				3,929
Total long-term liabilities			291,954				1,801				—				—				293,755
Total Delta stockholders’ equity			498,201				4,869				12,651				(1,274	)			514,447
Non-controlling interest			(2,852	)			—				—				—				(2,852	)
Total equity			495,349				4,869				12,651				(1,274	)			511,595
Total liabilities and equity		$	924,458			$	6,644			$	94,284			$	(1,274	)		$	1,024,112

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March, 2011 and 2010
(Unaudited)

(13) Guarantor Financial Information, Continued

Condensed Consolidated Statement of Operations
Three Months Ended March 31, 2011

						Guarantor				Non-Guarantor				Adjustments/
		Issuer				Entities				Entities				Eliminations				Consolidated
Total revenue		$	23,056			$	—			$	—			$	—			$	23,056
Operating expenses:
Oil and gas expenses			9,489				—				—				—				9,489
Exploration expense			43				—				—				—				43
Dry hole costs and impairments			88				55				—				—				143
Depreciation and depletion			13,461				—				—				—				13,461
General and administrative			6,604				—				25				—				6,629
Total operating expenses			29,685				55				25				—				29,765
Operating loss			(6,629	)			(55	)			(25	)			—				(6,709	)
Other income and (expense)			(18,186	)			—				1				—				(18,185	)
Income tax expense			(239	)			—				—				—				(239	)
Discontinued operations			—				—				(4,831	)			(301	)			(5,132	)
Net loss			(25,054	)			(55	)			(4,855	)			(301	)			(30,265	)
Less income (loss) attributable to non-controlling interest			—				—				2,424				—				2,424
Net loss attributable to Delta common stockholders		$	(25,054	)		$	(55	)		$	(2,431	)		$	(301	)		$	(27,841	)