Attached files

file filename
EX-31.2 - EX-31.2 - PAR PETROLEUM CORP/COd404652dex312.htm
EX-32.1 - EX-32.1 - PAR PETROLEUM CORP/COd404652dex321.htm
EX-31.1 - EX-31.1 - PAR PETROLEUM CORP/COd404652dex311.htm
EX-32.2 - EX-32.2 - PAR PETROLEUM CORP/COd404652dex322.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended June 30, 2012

 

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

For the transition period from             to             

Commission file number 0-16203

 

 

 

LOGO

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  x    No  ¨

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  x    No  ¨

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   ¨    Accelerated filer   x
Non-accelerated filer   ¨      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  ¨    No  x

28,576,067 shares of common stock, $.01 par value per share, were outstanding as of August 17, 2012.

 

 

 


Table of Contents

INDEX

 

     Page No.  

PART I FINANCIAL INFORMATION

  

Item 1. Consolidated Financial Statements

  

Consolidated Balance Sheets – June 30, 2012 and December 31, 2011 (unaudited)

     1   

Consolidated Statements of Operations – Three Months Ended June 30, 2012 and 2011 (unaudited)

     2   

Consolidated Statements of Operations – Six Months Ended June 30, 2012 and 2011 (unaudited)

     3   

Consolidated Statement of Changes in Equity – Six Months Ended June 30, 2012 (unaudited)

     4   

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2012 and 2011 (unaudited)

     5   

Notes to Consolidated Financial Statements (unaudited)

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     36   

Item 4. Controls and Procedures

     36   

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

     37   

Item 1A. Risk Factors

     37   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     37   

Item 5. Other Information

     38   

Item 6. Exhibits

     38   

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

I


Table of Contents

PART I FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     Jun 30,
2012
    December 31,
2011
 
     (In thousands, except share data)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 4,356      $ 12,862   

Trade accounts receivable, net of allowance for doubtful accounts of $254 and $100, respectively

     1,028        5,606   

Prepaid assets

     3,416        3,399   

Prepaid reorganization costs

     1,296        1,301   

Inventories

     —          180   
  

 

 

   

 

 

 

Total current assets

     10,096        23,348   
  

 

 

   

 

 

 

Property and equipment:

    

Oil and gas properties, successful efforts method of accounting:

    

Unproved

     72,081        72,081   

Proved

     688,759        688,521   

Land

     4,000        4,000   

Other

     71,582        71,567   
  

 

 

   

 

 

 

Total property and equipment

     836,422        836,169   

Less accumulated depreciation and depletion

     (485,736     (475,609
  

 

 

   

 

 

 

Net property and equipment

     350,686        360,560   
  

 

 

   

 

 

 

Long-term assets:

    

Investments in unconsolidated affiliates

     3,657        3,649   

Other long-term assets

     313        340   
  

 

 

   

 

 

 

Total long-term assets

     3,970        3,989   
  

 

 

   

 

 

 

Total assets

   $ 364,752      $ 387,897   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Liabilities not subject to compromise

    

Debtor in possession financing

   $ 51,742      $ 45,047   

Accounts payable

     3,405        2,582   

Other accrued liabilities

     1,492        149   

Accrued reorganization and trustee expense

     3,131        851   

Liabilities subject to compromise

    

7% Senior notes

     115,000        115,000   

3¾% Senior convertible notes

     150,000        150,000   

Accounts payable

     8,627        13,597   

Other accrued liabilities

     4,990        6,939   
  

 

 

   

 

 

 

Total current liabilities

     338,387        334,165   
  

 

 

   

 

 

 

Long-term liabilities:

    

Liabilities not subject to compromise

    

Asset retirement obligations

     3,620        3,507   
  

 

 

   

 

 

 

Total liabilities

     342,007        337,672   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity:

    

Preferred stock, $0.01 par value: authorized 3,000,000 shares, none issued

     —          —     

Common stock, $0.01 par value; authorized 200,000,000 shares, issued shares at June 30, 2012 and 28,841,177 shares at December 31, 2011

     288        288   

Additional paid-in capital

     1,643,285        1,641,390   

Accumulated deficit

     (1,620,828     (1,591,453
  

 

 

   

 

 

 

Total Delta stockholders’ equity

     22,745        50,225   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 364,752      $ 387,897   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

1


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended
June 30,
 
     2012     2011  
     (In thousands, except per share amounts)  

Revenue:

    

Oil and gas sales

   $ 7,703      $ 16,882   
  

 

 

   

 

 

 

Operating expenses:

    

Lease operating expense

     3,149        3,563   

Transportation expense

     2,794        3,625   

Production taxes

     502        611   

Exploration expense

     1        233   

Dry hole costs and impairments

     —          273   

Depreciation, depletion, amortization and accretion

     4,899        10,528   

General and administrative expense

     3,725        6,471   
  

 

 

   

 

 

 

Total operating expenses

     15,070        25,304   
  

 

 

   

 

 

 

Operating loss

     (7,367     (8,422
  

 

 

   

 

 

 

Other income and (expense):

    

Interest expense and financing costs, net

     (2,604     (7,997

Other income

     (39     233   

Realized loss on derivative instruments, net

     —          (5,010

Unrealized gain on derivative instruments, net

     —          8,341   

Income from unconsolidated affiliates

     7        131   
  

 

 

   

 

 

 

Total other expense

     (2,636     (4,302
  

 

 

   

 

 

 

Loss from continuing operations before income taxes reorganization items and discontinued operations

     (10,003     (12,724

Income tax expense (benefit)

     —          (3,938
  

 

 

   

 

 

 

Loss from continuing operations

     (10,003     (8,786

Reorganizational items

    

Professional fees and administrative costs

     5,908        —     

(Gain) loss on settlement of liabilities

     2        —     

Discontinued operations:

    

Gain from results of operations and sale of discontinued operations, net of tax

     —          9,320   
  

 

 

   

 

 

 

Net income (loss)

     (15,913     534   

Less net (gain) loss attributable to non-controlling interest included in discontinued operations

     —          (1,497
  

 

 

   

 

 

 

Net loss attributable to Delta common stockholders

   $ (15,913   $ (963
  

 

 

   

 

 

 

Amounts attributable to Delta common stockholders:

    

Loss from continuing operations

   $ (15,913   $ (8,786

Gain (loss) from discontinued operations, net of tax

     —          7,823   
  

 

 

   

 

 

 

Net loss

   $ (15,913   $ (963
  

 

 

   

 

 

 

Basic loss attributable to Delta common stockholders per common share: (1)

    

Loss from continuing operations

   $ (0.55   $ (.31

Discontinued operations

     —          .28   
  

 

 

   

 

 

 

Net loss

   $ (0.55   $ (0.03
  

 

 

   

 

 

 

Diluted loss attributable to Delta common stockholders per common share: (1)

    

Loss from continuing operations

   $ (0.55   $ (0.31

Discontinued operations

     —          0.28   
  

 

 

   

 

 

 

Net loss

   $ (0.55   $ (0.03
  

 

 

   

 

 

 

 

(1) All common share amounts (except par value and par value per share amounts) have been retroactively restated as of June 30, 2011 to reflect the Company’s one-for-ten reverse common stock split effective July 13, 2011, as described in Note 10 – Stockholders’ Equity to these consolidated financial statements.

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Six Months Ended
June 30,
 
     2012     2011  
     (In thousands, except per share amounts)  

Revenue:

    

Oil and gas sales

   $ 17,613      $ 34,597   
  

 

 

   

 

 

 

Operating expenses:

    

Lease operating expense

     6,815        6,958   

Transportation expense

     5,286        7,568   

Production taxes

     799        1,461   

Exploration expense

     1        276   

Dry hole costs and impairments

     1        416   

Depreciation, depletion, amortization and accretion

     10,226        22,479   

General and administrative expense

     7,745        13,100   
  

 

 

   

 

 

 

Total operating expenses

     30,873        52,258   
  

 

 

   

 

 

 

Operating loss

     (13,260     (17,661
  

 

 

   

 

 

 

Other income and (expense):

    

Interest expense and financing costs, net

     (4,862     (14,803

Other income (expense)

     (10     164   

Realized loss on derivative instruments, net

     —          (5,450

Unrealized gain (loss) on derivative instruments, net

     —          (2,612

Income from unconsolidated affiliates

     9        214   
  

 

 

   

 

 

 

Total other income and (expense)

     (4,863     (22,487
  

 

 

   

 

 

 

Loss from continuing operations before income taxes and discontinued operations

     (18,123     (40,148

Income tax expense (benefit)

     —          (4,633
  

 

 

   

 

 

 

Loss from continuing operations

     (18,123     (35,515

Reorganizational items

    

Professional fees and administrative costs

     11,635        —     

(Gain) loss on settlement of liabilities

     (383     —     

Discontinued operations:

    

Gain (loss) from results of operations and sale of discontinued operations, net of tax

     —          5,785   
  

 

 

   

 

 

 

Net loss

     (29,375     (29,730

Less net loss attributable to non-controlling interest included in discontinued operations

     —          927   
  

 

 

   

 

 

 

Net loss attributable to Delta common stockholders

   $ (29,375   $ (28,803
  

 

 

   

 

 

 

Amounts attributable to Delta common stockholders:

    

Loss from continuing operations

   $ (29,375   $ (35,515

Gain (loss) from discontinued operations, net of tax

     —          6,712   
  

 

 

   

 

 

 

Net loss

   $ (29,375   $ (28,803
  

 

 

   

 

 

 

Basic loss attributable to Delta common stockholders per common share: (1)

    

Loss from continuing operations

   $ (1.02   $ (1.27

Discontinued operations

     —          .24   
  

 

 

   

 

 

 

Net loss

   $ (1.02   $ (1.03
  

 

 

   

 

 

 

Diluted loss attributable to Delta common stockholders per common share: (1)

    

Loss from continuing operations

   $ (1.02   $ (1.27

Discontinued operations

     —          0.24   
  

 

 

   

 

 

 

Net loss

   $ (1.02   $ (1.03
  

 

 

   

 

 

 

 

(1) All common share amounts (except par value and par value per share amounts) have been retroactively restated as of June 30, 2011 to reflect the Company’s one-for-ten reverse common stock split effective July 13, 2011, as described in Note 10 – Stockholders’ Equity to these consolidated financial statements.

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

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(1)      Amount      deficit     equity     interest      equity  
     (In thousands)  

Balance, December 31, 2011

     28,841      $ 288       $ 1,641,390         —         $ —         $ (1,591,453   $ 50,225      $ —         $ 50,225   

Net loss

     —          —           —           —           —           (29,375     (29,375     —           (29,375

Forfeitures

     (58     —           —           —           —           —          —          —           —     

Stock based compensation

     —          —           1,895         —           —           —          1,895        —           1,895   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2012

     28,783      $ 288       $ 1,643,285         —         $ —         $ (1,620,828   $ 22,745      $ —         $ 22,745   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended  
     June 30,  
     2012     2011  
     (In thousands)  

Cash flows from operating activities:

    

Net loss

   $ (29,375   $ (29,730

Adjustments to reconcile net loss to cash provided by (used in) operating activities:

    

Depreciation, depletion, amortization – oil and gas

     10,226        22,479   

Depreciation, depletion, amortization – discontinued operations

     —          5,464   

Interest capitalized into note balance

     1,696        —     

Loss on sale of drilling assets – discontinued operations

     —          (2,438

Loss on sale of oil and gas assets – discontinued operations

     —          (8,946

Loss on sale of other assets

     126        —     

Dry hole costs and impairments

     —          416   

Stock based compensation

     1,895        4,762   

Amortization of deferred financing costs, bond discount, and installments payable discount

     —          6,198   

Unrealized (gain) loss on derivative contracts

     —          2,612   

Income from unconsolidated affiliates

     (9     (214

Deferred income tax expense

     —          478   

Other

     28        (395

Net changes in operating assets and liabilities:

    

(Increase) decrease in trade accounts receivable

     4,585        (67

Increase in deposits and prepaid assets

     (17     (897

Increase in inventories

     —          (64

Increase in other current assets

     —          (17

Increase (decrease) in accounts payable

     (4,594     112   

Increase in accrued reorganization costs

     2,285        —     

Decrease in other accrued liabilities

     —          (1,854

Increase in assets held for sale working capital, net

     —          2,213   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (13,154     112   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property and equipment

     (420     (36,727

Additions to drilling and trucking equipment – assets held for sale

     —          (822

Proceeds from sale of oil and gas properties

     42        41,216   

Proceeds from sale of drilling assets – assets held for sale

     —          3,367   

Proceeds from sale of other fixed assets

     26        61   

Proceeds from sale of unconsolidated affiliates

     —          898   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (352     7,993   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from borrowings

     5,000        49,202   

Repayments of borrowings

     —          (66,617

Payment of deferred financing costs

     —          (979

Stock repurchased for withholding taxes

     —          (7
  

 

 

   

 

 

 

Net cash used in financing activities

     5,000        (18,401
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (8,506     (10,296

Cash at beginning of period

     12,862        14,190   
  

 

 

   

 

 

 

Cash at end of period

   $ 4,356      $ 3,894   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for interest and financing costs

   $ 3,049      $ 10,011   
  

 

 

   

 

 

 

DHS interest payable capitalized to principal balance (non-cash financing transaction)

   $ —        $ 3,566   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(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, 2011. 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, 2011, previously filed with the SEC.

(2) Reorganization under Chapter 11

On December 16, 2011 Delta and certain of its subsidiaries filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware. Accordingly, the Company urges that caution be exercised with respect to existing and future investments in the Company’s equity securities.

For the duration of the Company’s Chapter 11 proceedings, the Company’s operations, including the Company’s ability to develop and execute a business plan, are subject to the risks and uncertainties associated with the bankruptcy process. As such, and because the Company’s structure, including its number of outstanding shares, shareholders, majority shareholders, assets, liabilities, officers and/or Directors may be significantly different following the outcome of its pending bankruptcy proceedings as compared to its status immediately prior to filing for Chapter 11 bankruptcy, the description of business operations, planned operations and properties described may not accurately reflect the Company’s operations and business plans following its bankruptcy reorganization.

On December 16, 2011, the Company filed a motion in the United States Bankruptcy Court for the District of Delaware (the “Court” or “Bankruptcy Court”) for joint administration of the Delta Petroleum Corporation case, the Amber Resources Company of Colorado case, the DPCA, LLC case, the Delta Exploration Company, Inc. case, the Delta Pipeline, LLC case, the DLC, Inc. case, the CEC, Inc. case, the Castle Texas Production Limited Partnership case and the Castle Exploration Company, Inc. case. The Court approved the Order for Joint Administration and the cases are jointly administered under the Delta Petroleum Corporation Case No. 11-14006.

On December 27, 2011, the Debtors filed a motion (the “Sale Motion”) pursuant to Sections 105, 363, and 365 of the Bankruptcy Code for an order authorizing the sale, free and clear of all liens, claims and encumbrances and for the assumption and assignment of executory contracts. The Sale Motion requested an order to approve bid procedures, approves form and manner of notice of the sales, approval of the form and manner of notice of the assumption and assignment including any cure amounts of executor contracts and unexpired leases, establishment of a sale auction date, establishment of a sale hearing date and grants of related relief. On January 11, 2012, the Bankruptcy Court issued an order approving these matters. On March 20, 2012, Delta announced that it was seeking court approval to amend the bidding procedures for its upcoming auction. On March 22, 2012, the Bankruptcy Court approved the revised procedures.

 

 

6


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(2) Reorganization under Chapter 11, Continued

 

On May 8, 2012, the Debtors obtained approval from the bankruptcy court to select Laramie Energy II, LLC (“Laramie”) as the sponsor of a plan of reorganization. Delta entered into a non-binding term sheet describing a transaction by which Laramie and Delta intend to form a new joint venture, to be called Piceance Energy LLC (“Piceance Energy”). The assets of Piceance Energy are anticipated to consist of both Laramie’s and Delta’s current Piceance Basin assets. Piceance Energy would be owned 66.66% by Laramie and 33.34% by a newly reorganized Delta Petroleum (“Reorganized Delta”) or “Par Petroleum. In addition to the 33.34% membership interest, Piceance Energy would distribute $75 million to Reorganized Delta to be used to pay bankruptcy expenses and to repay secured debt. Reorganized Delta would retain its interest in the Point Arguello unit of offshore California and other miscellaneous assets and certain tax attributes, and may retain its interest in Amber depending on how Amber’s Chapter 11 bankruptcy proceedings and claims reconciliation are resolved. Based upon the Plan as confirmed by the Bankruptcy Court, the common stock of Reorganized Delta would be owned by Delta’s creditors, and Delta’s current shareholders would not receive any consideration under the Plan.

Under the Plan, Delta’s priority non-tax claims and secured claims will be unimpaired in accordance with section 1124(1) of the Bankruptcy Code. Each general unsecured claim and noteholder claims will receive its pro-rata share of new common stock of Par Petroleum in full satisfaction of its claims.

The deadline for the submission of most claims in the Company’s bankruptcy case expired on March 23, 2012. Total claims submitted against the Company amounted to $3,694 million including duplicate claims filed against each entity, unsupported claims, and other adjustments netting to a reconciled claim total of approximately $350.5 million.

(3) Going Concern

The Company is operating pursuant to Chapter 11 of the Bankruptcy Code and its continuation as a going concern is contingent upon, among other things, its ability to complete a plan of reorganization under the Bankruptcy Code. These matters create substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not reflect any adjustments relating to the recoverability of assets and the classification of liabilities that might result from the outcome of these uncertainties. In addition, a plan of reorganization could materially change the amounts and classifications reported in the consolidated financial statements which do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of the consummation of the transactions under the Plan.

As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under Chapter 11, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Credit Agreement), in amounts other than those reflected in the accompanying consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications in the historical consolidated financial statements. The accompanying consolidated financial statements do not include any direct adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the Chapter 11 Cases.

 

7


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(3) Going Concern, Continued

 

The Reorganizations Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “ASC”), which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Amounts that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the quarter ending December 31, 2011. The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. In addition, cash provided by and used for reorganization items must be disclosed separately. The Company has applied the Reorganizations Topic of the ASC effective as of the Petition Date (as defined herein), and has segregated those items as outlined above for all reporting periods subsequent to such date.

(4) 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. 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.

Until November 2011, the Company owned a 49.8% interest in DHS Drilling Company (“DHS”), an affiliated Colorado corporation that is headquartered in Casper, Wyoming. Delta representatives constituted a majority of the members of the Board of DHS and Delta had the right to use all of the rigs owned by DHS on a priority basis and, accordingly, DHS was consolidated in these financial statements until we disposed of DHS in 2011. During the second quarter of 2006, DHS engaged in a reorganization transaction pursuant to which it became a subsidiary of DHS Holding Company, a Delaware corporation, and the Company’s ownership interest became an interest in DHS Holding Company. References to DHS include both DHS Holding Company and DHS, unless the context otherwise requires.

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 oil and gas properties and DHS that were sold have been reclassified from continuing operations to discontinued operations for all periods presented. In addition, the assets and liabilities of DHS, and oil and gas properties that were sold or held for sale, 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 5, “Discontinued Operations”).

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 oil and gas properties and DHS that were sold have been reclassified from continuing operations to discontinued operations for all periods presented. In addition, the assets and liabilities of DHS, and oil and gas properties that were sold or held for sale, 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 5, “Discontinued Operations”).

 

8


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(4) Summary of Significant Accounting Policies, Continued

 

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.

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 and six months ended June 30, 2012 and 2011, 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.

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 and six months ended June 30, 2012 and 2011, no significant impairments were recorded.

 

9


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(4) Summary of Significant Accounting Policies, Continued

 

At June 30, 2012, the Company’s oil and gas assets were classified as held for use and no impairment charges resulted from the analysis performed at June 30, 2012 as the estimated undiscounted net cash flows exceeded the carrying amounts for all properties. Subsequent to the end of the reporting period, in August 2012, the Bankruptcy Court approved a plan of sale of substantially all of the Company’s assets and accordingly these assets will be classified as held for sale in reporting periods subsequent to June 30, 2012 and will be subject to a material write-down to fair value at that time. The Company’s assets may be further adjusted in the future due to the outcome of the Chapter 11 Cases or the application of “fresh start” accounting upon the Company’s emergence from Chapter 11..

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, 2012 to June 30, 2012 (in thousands):

 

Asset retirement obligation – January 1, 2012

   $  3,799   

Accretion expense

     128   

Change in estimate

     —     

Obligations incurred (from new wells)

     —     

Obligations settled

     —     

Obligations on sold properties

     —     
  

 

 

 

Asset retirement obligation – June 30, 2012

     3,927   

Less: Current portion of asset retirement obligation

     (308
  

 

 

 

Long-term asset retirement obligation

   $ 3,619   
  

 

 

 

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.

(5) Discontinued Operations

During the second quarter of 2011, the Company closed the 2011 Wapiti Transaction, selling the remaining portion of its interests in non-core assets primarily located in Texas and Wyoming for gross cash proceeds of approximately $43.2 million. On October 31, 2011, Delta sold its stock , representing a 49.8% ownership interest, in DHS Drilling to DHS Drilling’s lender, LCPI, for $500,000. In accordance with accounting standards, the results of operations relating to these properties have been reflected as discontinued operations for all periods presented. In addition, the assets and liabilities related to the oil and gas properties in the 2011 Wapiti Transaction have been separately reflected in the accompanying consolidated balance sheet as of March 31, 2011 as assets held for sale and liabilities related to assets held for sale.

The results of operations relating to property interests sold in the 2011 Wapiti Transaction have been reflected as discontinued operations. During the first quarter 2011, DHS Drilling engaged transaction advisors to commence a strategic alternatives process focused on a sale of DHS Drilling or substantially all of its assets. As such, in accordance with accounting standards, the results of operations relating to DHS Drilling have been reflected as discontinued operations.

 

10


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(5) Discontinued Operations, Continued

 

The Company had no activity from discontinued operations in the three or six months ended June 30, 2012. The following table shows the oil and gas segment and drilling segment revenues and expenses included in discontinued operations as described above for the three months and six months ended June 30, 2011 (in thousands):

 

     Three Months Ended
June 30, 2011
    Six Months Ended
June 30, 2011
 
     Oil & Gas     Drilling     Total     Oil & Gas     Drilling     Total  

Revenues:

            

Oil and gas sales

   $ 4,594      $ —        $ 4,594      $ 9,935      $ —        $ 9,935   

Contract drilling and trucking fees

     —          12,129        12,129        —          26,393        26,393   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

     4,594        12,129        16,723        9,935        26,393        36,328   

Operating Expenses:

            

Lease operating expense

     1,307        —          1,307        2,517        —          2,517   

Transportation expense

     12        —          12        22        —          22   

Production taxes

     321        —          321        404        —          404   

Depreciation, depletion, amortization and accretion – oil and gas

     1,286        —          1,286        2,795        —          2,795   

Impairment provision

     —          —          —          —          —          —     

Drilling and trucking operating expenses

     —          9,406        9,406        —          22,507        22,507   

Depreciation and amortization – drilling and trucking(1)

     —          —          —          —          2,669        2,669   

General and administrative expense

     —          1,051        1,051        —          2,084        2,084   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     2,926        10,457        13,383        5,738        27,260        32,998   

Operating income (loss)

     1,668        1,672        3,340        4,197        (867     3,330   

Other income and (expense):

            

Interest expense and financing costs, net

     —          (2,091     (2,091     —          (4,129     (4,129

Other income (expense)

     —          124        124        —          (428     (428
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expense)

     —          (1,967     (1,967     —          (4,557     (4,557
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

     1,668        (295     1,373        4,197        (5,424     (1,227

Income tax expense(2)

     (615     —          (615     (1,550     —          (1,550
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from results of operations of discontinued operations, net of tax

     1,053        (295     758        2,647        (5,424     (2,777

Gain on sales of discontinued operations, net of tax(3)

     5,645        2,917        8,562        5,645        2,917        8,562   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain (loss) from results of operations and sale of discontinued operations, net of tax

   $ 6,698      $ 2,622      $ 9,320      $ 8,292      $ (2,507   $ 5,785   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Depreciation and Amortization – Drilling and Trucking. Depreciation and amortization expense – drilling decreased to zero for the three months ended June 30, 2011 as compared to $2,669 thousand for the prior quarter. The decrease is due to not recording depreciation expense beginning in March 2011 in accordance with accounting rules related to the asset held for sale treatment of DHS.

(2) 

Income tax expense. For the three months ended June 30, 2011, the Company recorded a tax benefit of $3.9 million due to a non-cash income tax benefit related to gains from discontinued oil and gas operations. Generally accepted accounting principles, or GAAP, require all items be considered, including items recorded in discontinued operations, in determining the amount of tax benefit that results from a loss from continuing operations that should be allocated to continuing operations. In accordance with GAAP, the Company recorded a tax benefit on our loss from continuing operations, which was exactly offset by income tax expense on discontinued operations.

(3) 

Gain on sales of discontinued operations – oil and gas. On June 28, 2011, the Company closed on a transaction with Wapiti Oil & Gas to sell its remaining interests in various non-core assets primarily located in Texas and Wyoming (the “2011 Wapiti Transaction”) for gross cash proceeds of approximately $43.2 million. In accordance with accounting standards, the Company recognized a $5.6 million gain on sale ($8.9 million gain, net of $3.3 million of tax) for the three months ended June 30, 2011 that is reflected in discontinued operations. Gain on sales of discontinued operations – drilling. In June 2011, DHS sold substantially all of its Chapman Trucking assets for $3.3 million in proceeds and a gain of $2.9 million. Proceeds were used to reduce DHS bank debt.

 

11


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(6) Debt

Debtor in Possession Credit Agreement

On December 21, 2011, we entered into a senior secured debtor-in-possession credit facility (the “DIP Credit Facility”) in December 2011 in connection with the bankruptcy filing. Up to $57.5 million may be borrowed under the DIP Credit Facility, of which approximately $45 million was initially drawn by the Company to repay all amounts outstanding under the previous Credit Agreement, which was then terminated. The DIP credit facility was amended in March 2012 to increase the maximum borrowing capacity by $1.4 million to $58.9 million. All of the loans under the DIP Credit Facility are term loans. The interest rate under the DIP Credit Facility is 13% plus 6% per annum in payment-in-kind interest (PIK). The initial maturity date of the DIP Credit Facility was June 30, 2012. The Company has subsequently entered into a series of forbearance agreements extending maturity date to August 30, 2012. As of June 30, 2012 $50.0 million in borrowings and $1.5 million in accrued PIK interest were outstanding under the facility.

The Company is the borrower under the DIP Credit Facility and certain of its wholly-owned subsidiaries are guarantors of the Company’s obligations thereunder. Borrowings under the DIP Credit Facility are secured by substantially all of the assets of the Company and the guarantors. The DIP Credit Facility includes certain covenants relating to the bankruptcy process and other operational and financial covenants, including covenants that limit the Company’s ability to (or to permit any subsidiaries to) (i) merge with other companies; (ii) create liens on its property; (iii) incur additional indebtedness; (iv) enter into transactions with affiliates, except on an arms-length basis; (v) enter into sale leaseback transactions; (vi) pay dividends or make certain other restricted payments; (vii) make certain investments; or (viii) sell its assets.

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 that was due and paid on November 1, 2011. 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 and six months ended June 30, 2011, respectively. No accretion was recorded in 2012 as the final note payment was made in 2011.

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 bankruptcy filing constituted an event of default on the notes resulting in all principal, interest and other amounts due relating to the Notes becoming immediately due and payable. The notes are reported in liabilities subject to compromise at June 30, 2012 and December 31, 2011.

3 3/4% Senior Convertible Notes, due 2037

On April 25, 2007, the Company issued $115.0 million aggregate principal amount of 3 3/4% Senior Convertible Notes due 2037 for net proceeds of $111.6 million after underwriters’ discounts and commissions of approximately $3.4 million. The bankruptcy filing constituted an event of default on the notes resulting in all principal, interest and other amounts due relating to the Notes becoming immediately due and payable. The notes are reported in liabilities subject to compromise at June 30, 2012 and December 31, 2011.

 

12


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(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 six months ended June 30, 2012 and 2011, and are considered to be Level 3 fair value measurements.

 

13


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

 

(8) Commitments and Contingencies

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 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. On May 11, 2011, the former operator filed an appeal of this ruling to the United States Court of Appeals for the District of Columbia Circuit. The Court of Appeals did not rule in either party’s favor, but instead issued an order on March 2, 2012 vacating the judgment and sending the case back to the District Court with instructions to vacate the previous order by the government to permanently plug and abandon the well, and to remand the case to the Department of the Interior for a more extensive explanation as to why it interprets its regulations to require that the former owners permanently plug and abandon the well notwithstanding the government’s breach of the lease. It is currently unknown whether or not the former operator will ultimately be successful in the litigation. In September 2011, however, the Company received an estimate from the operator indicating that, based on available information of resources to mobilize and demobilize a rig to the well, the Company’s pro rata share of the estimated cost of decommissioning the well would be approximately $756,000. The estimate that was provided does not contain any anticipated expenditures for the preparation of an environmental impact study, regulatory permitting matters at any level or any expenditure estimates for potentially required costs of containment equipment. The operator has indicated that the estimate is subject to material fluctuations in cost based upon rig mobilization costs and other factors. The actual costs of decommissioning the well could be materially different from the estimate provided by the operator. As a non-operator in this well the Company is unable to determine a reasonable estimate of the liability, if any, at this time. If the former working interest owners are ultimately held liable, it is likely that the former operator will assert that the Company is responsible for the payment of its proportionate share of the actual cost of any decommissioning operation, and the former operator has filed a claim in the Company’s bankruptcy case seeking reimbursement in such event. The Company believes that if the former operator’s claim is allowed, it would be treated as a pre-petition unsecured claim that would be dealt with as part of the plan of reorganization.

(9) Stockholders’ Equity

The Plan, if consummated, will result in the cancellation of the shares held by our current shareholders.

Preferred Stock

The Company has 3.0 million shares of preferred stock authorized and issuable from time to time in one or more series. As of June 30, 2012 and December 31, 2011, no shares of preferred stock were outstanding.

Common Stock

On July 12, 2011, the shareholders of the Company approved a one-for-ten reverse split of the common stock of the Company which became effective on July 13, 2011. All references in these financial statements to the number of common shares or options, price per share and weighted average number of common shares outstanding prior to the 1:10 reverse stock split have been adjusted to reflect this stock split on a retroactive basis, unless otherwise noted.

Also on July 12, 2011, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to reduce the number of authorized shares of common stock to 200,000,000 from 600,000,000 shares. Presentation of authorized shares of common stock and basic and diluted loss per share has been adjusted on a retroactive basis.

 

14


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(9) Stockholders’ Equity, Continued

 

During the three months ended March 31, 2012 and 2011, the Company issued zero and 98,800 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, 2011 and 2011, respectively. On June 10, 2011, the Company granted 3,308 fully vested shares in conjunction with the resignation of a member of the Board of Directors in consideration for service in 2011 through the date of his resignation. On June 21, 2011, the Company granted 489,227 shares of non-vested common stock to certain employees. The shares vest in full on the earlier of a change in control or July 1, 2012. In conjunction with this grant, the Company agreed to establish a “floor” price for the value of the shares on the date of vesting equal to the value of the shares on the grant date ($5.50 per share). In the event that the market price of the shares on the date of vesting is lower than the floor price on the date of vesting, the difference will be paid to the employees in cash. The compensation expense for the shares consists of a fixed equity component ($5.50 per share) and a variable liability component (based on the difference between the market price of the shares, if lower, and the floor price of the shares), both of which are included as a component of general and administrative expense in the accompanying consolidated statements of operations.

Stock Based Compensation

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Non-vested stock(1)

   $ 1,461       $ 2,346       $ 2,823       $ 4,610   

Performance shares

     —           49         —           152   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,461       $ 2,395       $ 2,823       $ 4,762   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Non-vested stock includes zero and $48,000 for the three months ended June 30, 2012 and 2011, respectively, and zero and $96,000 for the six months ended June 30, 2012 and 2011, respectively, that relates to DHS which is included as a component of discontinued operations in the accompanying consolidated statements of operations.

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 June 30, 2012 ranged from $7.90 to $153.40 per share. At June 30, 2012, there was no unrecognized compensation cost related to stock options as all outstanding options are vested. At June 30, 2012, the Company had 150,050 options outstanding at a weighted average exercise price of $74.46 per share. At June 30, 2012, all compensation cost related to non-vested portion of restricted stock had been recognized.

(10) Income Taxes

Income tax expense (benefit) attributable to loss from continuing operations was approximately ($3.9) million for the three months ended June 30, 2011and ($4.6) million for the six months ended 2011. Also included in the three months ended June 30, 2011 was a current tax benefit related to a tax refund received as a result of a tax law change that allowed us to carry-back operating losses to a period in which we previously paid tax. There was no income tax expense in 2012.

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 June 30, 2012.

 

15


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(10) Income Taxes, Continued

 

During the three months ended June 30, 2011 DHS recorded net operating losses and as of June 30, 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 2012 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 six months ended June 30, 2012 and 2011, 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
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Net loss attributable to Delta common stockholders

   $ (15,913   $ (963   $ (29,375   $ (28,803
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted-average common shares outstanding

     28,806        27,873        28,812        27,878   

Add: dilutive effects of stock options and unvested stock grants

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted-average common shares outstanding

     28,806        27,873        28,812        27,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share attributable to Delta common stockholders

        

Basic

   $ (0.55   $ (0.03   $ (1.02   $ (1.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.55   $ (0.03   $ (1.02   $ (1.03
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Stock issuable upon conversion of convertible notes

     379         379         379         379   

Stock options

     150         150         150         150   

Non-vested restricted stock

     558         1,212         558         1,212   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total potentially dilutive securities

     1,087         1,741         1,087         1,741   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(12) 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 3 3/4% 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 June 30, 2011 and December 31, 2010, the condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010 and the condensed consolidated statements of cash flows for the six months ended June 30, 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

June 30, 2012

 

     Issuer     Guarantor
Entities
    Non-Guarantor
Entities
     Adjustments/
Eliminations
    Consolidated  

Current assets

   $ 9,121      $ 102      $ 873       $ —        $ 10,096   

Property and equipment:

           

Oil and gas properties

     741,625        —          19,215         —          760,840   

Other

     73,020        2,562        —           —          75,582   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total property and equipment

     814,645        2,562        19,215         —          836,422   

Accumulated depletion and depreciation

     (485,734     (2     —           —          (485,736
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net property and equipment

     328,911        2,560        19,215         —          350,686   

Investment in subsidiaries

     4,126        —          —           (4,126     —     

Other long-term assets

     1,563        2,407        —           —          3,970   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 343,721      $ 5,069      $ 20,088       $ (4,126   $ 364,752   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities not subject to compromise:

   $ 59,754      $ —        $ 16       $ —        $ 59,770   

Liabilities subject to compromise

     276,817        1,800        —           —          278,617   

Long-term liabilities:

           

Asset retirement obligations

     3,620        —          —           —          3,620   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     340,191        1,800        16         —          342,007   

Total Delta stockholders’ equity

     3,530        3,269        20,072         (4,126     22,745   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 343,721      $ 5,069      $ 20,088       $ (4,126   $ 364,752   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

17


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(12) Guarantor Financial Information, Continued

 

Condensed Consolidated Balance Sheet

December 31, 2011

 

     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Adjustments/
Eliminations
    Consolidated  

Current assets

   $ 22,354      $ 88       $ 906       $ —        $ 23,348   

Property and equipment:

            

Oil and gas properties

     741,387        —           19,215           760,602   

Other

     73,007        2,560         —           —          75,567   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total property and equipment

     814,394        2,560         19,215           836,169   

Accumulated depletion, depreciation and amortization

     (475,609     —           —           —          (475,609
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net property and equipment

     338,785        2,560         19,215         —          360,560   

Investment in subsidiaries

     4,154        —           —           (4,154     —     

Other long-term assets

     1,582        2,407         —           —          3,989   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 366,875      $ 5,055       $ 20,121       $ (4,154   $ 387,897   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities not subject to compromise:

   $ 48,625      $ —         $ 4       $ —        $ 48,629   

Liabilities subject to compromise

     283,732        1,804              285,536   

Long-term liabilities

            

Asset retirement obligation and other liabilities

     3,507        —           —           —          3,507   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     335,864        1,804         4         —          337,672   

Total Delta stockholders’ equity

     31,010        3,251         20,118         (4,154     50,225   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     31,010        3.251         20,118         (4,154     50,225   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 366,874      $ 5,055       $ 20,122       $ (4,154   $ 387,897   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(12) Guarantor Financial Information, Continued

 

Condensed Consolidated Statement of Operations

Three Months Ended June 30, 2012

 

     Issuer     Guarantor
Entities
    Non-Guarantor
Entities
    Adjustments/
Eliminations
     Consolidated  

Total revenue

   $ 7,703      $ —        $ —        $ —         $ 7,703   

Operating expenses:

           

Oil and gas expenses

     6,445        —          —          —           6,445   

Exploration expense

     1        —          —          —           1   

Dry hole costs and impairments

     —          —          —          —           —     

Depreciation and depletion

     4,899        —          —          —           4,899   

General and administrative

     3,694        8        23        —           3,725   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     15,039        8        23        —           15,070   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating income (loss)

     (7,336     (8     (23     —           (7,367

Other income and (expense)

     (2,666     29        1        —           (2,636

Reorganizational items

     (5,910     —          —          —           (5,910

Income tax benefit (expense)

     —          —          —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss) attributable to Delta common stockholders

   $ (15,912   $ 21      $ (22   $ —         $ (15,913
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Condensed Consolidated Statement of Operations

Three Months Ended June 30, 2011

 

     Issuer     Guarantor
Entities
    Non-Guarantor
Entities
    Adjustments/
Eliminations
     Consolidated  

Total revenue

   $ 16,882      $ —        $ —        $ —         $ 16,882   

Operating expenses:

           

Oil and gas expenses

     7,799        —          —          —           7,799   

Exploration expense

     233        —          —          —           233   

Dry hole costs and impairments

     367        (94     —          —           273   

Depreciation and depletion

     10,528        —          —          —           10,528   

General and administrative

     6,424        21        26        —           6,471   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     25,351        (73     26        —           25,304   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating income (loss)

     (8,469     73        (26     —           (8,422

Other income and (expense)

     (4,314     11        1        —           (4,302

Income tax benefit

     3,938        —          —          —           3,938   

Discontinued operations

     6,698        —          2,622        —           9,320   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss)

     (2,147     84        2,597        —           534   

Net income attributable to non-controlling interest

     (1,497     —          —          —           (1,497
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss) attributable to Delta common stockholders

   $ (3,644   $ 84      $ 2,597      $ —         $ (963
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

19


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(12) Guarantor Financial Information, Continued

 

Condensed Consolidated Statement of Operations

Six Months Ended June 30, 2012

 

     Issuer     Guarantor
Entities
    Non-Guarantor
Entities
    Adjustments/
Eliminations
     Consolidated  

Total revenue

   $ 17,613      $ —        $ —        $ —         $ 17,613   

Operating expenses:

           

Oil and gas expenses

     12,900        —          —          —           12,900   

Exploration expense

     1        —          —          —           1   

Dry hole costs and impairments

     —          1        —          —           1   

Depreciation and depletion

     10,226        —          —          —           10,226   

General and administrative

     7,689        15        41        —           7,745   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     30,816        16        41        —           30,873   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating income (loss)

     (13,203     (16     (41     —           (13,260

Other income and (expenses)

     (4,897     33        1        —           (4,863

Reorganizational items

     (11,252            (11,252

Income tax benefit

     —          —          —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss) attributable to Delta common stockholders

   $ (29,352   $ 17      $ (40   $ —         $ (29,375
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Condensed Consolidated Statement of Operations

Six Months Ended June 30, 2011

 

     Issuer     Guarantor
Entities
    Non-Guarantor
Entities
    Adjustments/
Eliminations
     Consolidated  

Total revenue

   $ 34,597      $ —        $ —        $ —         $ 34,597   

Operating expenses:

           

Oil and gas expenses

     15,987        —          —          —           15,987   

Exploration expense

     276        —          —          —           276   

Dry hole costs and impairments

     455        (39     —          —           416   

Depreciation and depletion

     22,479        —          —          —           22,479   

General and administrative

     13,028        21        51        —           13,100   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     52,225        (18     51        —           52,258   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating income (loss)

     (17,628     18        (51     —           (17,661

Other income and (expenses)

     (22,500     11        2        —           (22,487

Income tax benefit

     4,633        —          —          —           4,633   

Discontinued operations

     8,292        —          (2,507     —           5,785   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss)

     (27,203     29        (2,556     —           (29,730

Less net loss attributable to non-controlling interest

     927        —          —          —           927   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss) attributable to Delta common stockholders

   $ (26,276   $ 29      $ (2,556   $ —         $ (28,803
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

20


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(12) Guarantor Financial Information, Continued

 

Condensed Consolidated Statement of Cash Flows

Six Months Ended June 30, 2012

 

     Issuer     Guarantor
Entities
     Non-Guarantor
Entities
    Consolidated  

Cash provided by (used in):

         

Operating activities

   $ (13,138   $ 25       $ (41   $ (13,154

Investing activities

     (360     —           8        (352

Financing activities

     5,000        —           —          5,000   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (8,498     25         (33     (8,506

Cash at beginning of the period

     11,895        61         906        12,862   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash at the end of the period

   $ 3,397      $ 86       $ 873      $ 4,356   
  

 

 

   

 

 

    

 

 

   

 

 

 

Condensed Consolidated Statement of Cash Flows

Six Months Ended June 30, 2011

 

     Issuer     Guarantor
Entities
     Non-Guarantor
Entities
    Consolidated  

Cash provided by (used in):

         

Operating activities

   $ (680   $ 1       $ 791      $ 112   

Investing activities

     5,345        1         2,647        7,993   

Financing activities

     (14,915     —           (3,486     (18,401
  

 

 

   

 

 

    

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (10,250     2         (48     (10,296

Cash at beginning of the period

     13,154        61         975        14,190   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash at the end of the period

   $ 2,904      $ 63       $ 927      $ 3,894   
  

 

 

   

 

 

    

 

 

   

 

 

 

(13) Subsequent Events

On December 16, 2011, Delta and its subsidiaries Amber Resources Company of Colorado (“Amber”), DPCA, LLC, Delta Exploration Company, Inc., Delta Pipeline, LLC, DLC, Inc., CEC, Inc. and Castle Texas Production Limited Partnership filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On January 6, 2012 Castle Exploration Company, Inc., a subsidiary of Delta Pipeline, LLC, also filed a voluntary petition under Chapter 11 in the Bankruptcy Court. Delta and its subsidiaries included in the bankruptcy petitions collectively as the “Debtors.”

On December 27, 2011, the Debtors filed a motion requesting an order to approve matters relating to a proposed sale of Delta’s assets, including bidding procedures, establishment of a sale auction date and establishment of a sale hearing date. On January 11, 2012, the Bankruptcy Court issued an order approving these matters. On March 20, 2012, Delta announced that it was seeking court approval to amend the bidding procedures for its upcoming auction to allow bids relating to potential plans of reorganization as well as asset sales. On March 22, 2012, the Bankruptcy Court approved the revised procedures.

 

21


Table of Contents

DELTA PETROLEUM CORPORATION

AND SUBSIDIARIES

(Debtor in Possession)

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

(13) Subsequent Events, Continued

 

Following the auction, the Debtors obtained approval from the Bankruptcy Court to proceed with Laramie Energy II, LLC (“Laramie”) as the sponsor of a plan of reorganization (the “Plan”). In connection with the Plan, Delta entered into a non-binding term sheet describing a transaction by which Laramie and Delta intend to form a new joint venture called Piceance Energy LLC (“Piceance Energy”). On June 4, 2012, Delta entered into a Contribution Agreement (the “Contribution Agreement”) with Piceance Energy and Laramie to effect the transactions contemplated by the term sheet. Under the Contribution Agreement, each of Delta and Laramie will contribute to Piceance Energy their respective assets in the Piceance Basin. Following the contribution, Piceance Energy will be owned 66.66% by Laramie and 33.34% by Delta (referred to after the closing of the transaction as “Reorganized Delta”). At the closing, Piceance Energy will enter into a new credit agreement, borrow $100 million under that agreement, and distribute $75 million to Reorganized Delta and $25 million to Laramie. Reorganized Delta will use its distribution to pay bankruptcy expenses and to repay secured debt. The distribution from Piceance Energy to Reorganized Delta and Laramie will be subject to adjustment to give effect to the transaction effective date of July 31, 2012. Reorganized Delta will also enter into a new credit facility and will borrow an estimated $15 million under that facility at closing, and will use those funds primarily to pay bankruptcy claims and expenses.

Following the closing, Reorganized Delta will retain its interest in the Point Arguello unit offshore California and other miscellaneous assets and certain tax attributes, including significant net operating losses, and may retain its interest in Amber depending upon the outcome of Amber’s own Chapter 11 bankruptcy proceedings and claims reconciliation process. Based upon the Plan as confirmed by the Bankruptcy court the common stock of Reorganized Delta will be owned by Delta’s creditors, and Delta’s current shareholders will not receive any consideration under the Plan.

Contemporaneously with the closing, Delta will enter into a Limited Liability Company Agreement with Laramie that will govern the operations of Piceance Energy. Under that agreement, Laramie will act as the manager of Piceance Energy, and will control the day-to-day operations of Piceance Energy and will appoint a majority of the members of its board of managers. Reorganized Delta will have veto rights over certain matters and the right to appoint the remaining members of Piceance Energy’s board of managers.

In addition, Laramie and Piceance Energy will enter into a Management Services Agreement pursuant to which Laramie will agree to provide certain services to Piceance Energy for a fee of $650,000 per month.

Also contemporaneously with the closing, Delta will amend and restate its Certificate of Incorporation and Bylaws. Under the amended and restated documents, Delta’s name will be changed to “Par Petroleum Corporation.” In addition, the amended and restated Certificate of Incorporation will contain restrictions that will render void certain transfers of Reorganized Delta’s stock that involve a holder of five percent or more of its shares. The purpose of this provision is to preserve certain tax losses that may have value. Under the amended and restated Bylaws, Reorganized Delta’s board of directors will have either five or six members, each of whom will be appointed by current creditors pursuant to a Stockholders’ Agreement they will enter into at closing.

On June 4, 2012, the Debtors filed a disclosure statement relating to the Plan. The Plan was confirmed on August 15, 2012 and is expected to be completed on or about August 31, 2012.

Upon satisfaction of the remaining material contingencies to complete the implementation of the Plan, under the Reorganization Topic of the ASC, the Company will be required to apply the provisions of fresh start accounting to its financial statements on the Effective Date because (i) the reorganization value of the assets of the emerging entity immediately before the date of confirmation was less than the total of all post-petition liabilities and allowed claims and (ii) the holders of the existing voting shares of the Predecessor Company’s common stock immediately before confirmation received less than 50 percent of the voting shares of the emerging entity.

The adoption of fresh start accounting will result in a new reporting entity. All of the new entity’s assets and liabilities will be recorded at their estimated fair values upon the Effective Date and the Predecessor Company’s retained deficit and accumulated other comprehensive income will be eliminated. Under the Plan, Delta’s priority non-tax claims and secured claims will be unimpaired in accordance with section 1124(1) of the Bankruptcy Code. Each general unsecured claim and noteholder claims will receive its pro rata share of new common stock of Par Petroleum in full satisfaction of its claims.

In accordance with fresh start accounting, the Company will record the debt and equity at fair value utilizing the total enterprise value of approximately $176 million, which was determined in conjunction with the confirmation of the Plan in part based on a set of financial projections for the post-emergence entity. The enterprise value was dependent upon achieving the future financial results set forth in the Company’s projections, as well as the realization of certain other assumptions. These projections were prepared in connection with the Plan and the Bankruptcy Cases. The projections were based on information available to the Company and assumptions known to the Company. Projections are inherently subject to uncertainties and risks and the Company’s actual results and financial condition will likely vary from those contemplated by the projections and other financial information provided to the Bankruptcy Court.

 

22


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”).

We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect us and to take advantage of the “safe harbor” protection for forward-looking statements afforded under federal securities laws. From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about us. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “propose,” “potential,” “predict,” “forecast,” “believe,” “expect,” “anticipate,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. Except for statements of historical or present facts, all other statements contained in this report are forward-looking statements. The forward-looking statements may appear in a number of places and include statements with respect to, among other things: business objectives and strategies, including our focus on the Vega Area of the Piceance Basin; operating strategies; oil and gas reserve estimates (including estimates of future net revenues associated with such reserves and the present value of such future net revenues); estimates of future production of oil and natural gas; marketing of oil and natural gas; expected future revenues and earnings, and results of operations; future capital, development and exploration expenditures (including the amount and nature thereof); anticipated compliance with and impact of laws and regulations; and expected outcomes relating to our bankruptcy proceedings.

These statements by their nature are subject to certain risks, uncertainties and assumptions and will be influenced by various factors. Should any of the assumptions underlying a forward-looking statement prove incorrect, actual results could vary materially. In some cases, information regarding certain important factors that could cause actual results to differ materially from any forward-looking statement appears together with such statement. In addition, the factors described under Critical Accounting Policies and Risk Factors, as well as other possible factors not listed, could cause actual results to differ materially from those expressed in forward-looking statements, including, without limitation, the following:

 

 

deviations in and volatility of the market prices of both crude oil and natural gas produced by us;

 

 

the availability of capital on an economic basis, or at all, to fund our existing and future financial obligations;

 

 

lower natural gas and oil prices negatively affecting our ability to generate cash from operations or borrow or otherwise raise capital;

 

 

risks associated with bankruptcy process, including the risk that we will effectively assume unexpected liabilities as a result, or not obtain the expected benefits, of the transaction contemplated by the Contribution Agreement, and the risk that the Contribution Agreement will not close;

 

 

declines in the values of our natural gas and oil properties resulting in write-downs;

 

 

the impact of current economic and financial conditions on our ability to raise capital;

 

 

a continued imbalance in the demand for and supply of natural gas in the U.S.;

 

23


Table of Contents
 

the results of exploratory drilling activities;

 

 

expiration of oil and natural gas leases that are not held by production;

 

 

uncertainties in the estimation of proved reserves and in the projection of future rates of production;

 

 

timing, amount, and marketability of production;

 

 

third party curtailment, or processing plant or pipeline capacity constraints beyond our control;

 

 

our ability to find, acquire, develop, produce and market production from new properties;

 

 

effectiveness of management strategies and decisions including those of the management of Piceance Energy LLC, of which we will own a 33.34% interest following consummation of the transactions contemplated by the Contribution Agreement;

 

 

the strength and financial resources of our competitors;

 

 

climatic conditions;

 

 

changes in the legal and/or regulatory environment and/or changes in accounting standards policies and practices or related interpretations by auditors or regulatory entities;

 

 

unanticipated recovery or production problems, including cratering, explosions, fires and uncontrollable flows of oil, gas or well fluids;

 

 

the timing, effects and success of our acquisition, disposition and exploration and development activities;

 

 

our ability to fully utilize income tax net operating loss and credit carry-forwards; and

 

 

the ability and willingness of counterparties to our commodity derivative contracts, if any, to perform their obligations.

Many of these factors are beyond our ability to control or predict. These factors are not intended to represent a complete list of the general or specific factors that may affect us.

All forward-looking statements speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements above and other cautionary statements included in this report. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

We caution you not to place undue reliance on these forward-looking statements. We urge you to carefully review and consider the disclosures made in this Form 10-Q and our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

Bankruptcy Matters

Bankruptcy Filing

On December 16, 2011, Delta and its subsidiaries Amber Resources Company of Colorado (“Amber”), DPCA, LLC, Delta Exploration Company, Inc., Delta Pipeline, LLC, DLC, Inc., CEC, Inc. and Castle Texas Production Limited Partnership filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On January 6, 2012 Castle Exploration Company, Inc., a subsidiary of Delta Pipeline, LLC, also filed a voluntary petition under Chapter 11 in the Bankruptcy Court. We refer to Delta and its subsidiaries included in the bankruptcy petitions collectively as the “Debtors.”

 

24


Table of Contents

For the duration of our Chapter 11 proceedings, our operations, including our ability to develop and execute a business plan, are subject to the risks and uncertainties associated with the bankruptcy process as described below under “Risk Factors.” As such, and because our structure, the number of our outstanding shares, shareholders, majority shareholders, assets, liabilities, officers and/or directors will likely be significantly different following the outcome of the bankruptcy proceedings, the description of business operations, planned operations and properties included in this report may not accurately reflect our operations, properties and business plans following the bankruptcy process.

Contribution Agreement

On December 27, 2011, the Debtors filed a motion requesting an order to approve matters relating to a proposed sale of the company’s assets, including bidding procedures, establishment of a sale auction date and establishment of a sale hearing date. On January 11, 2012, the Bankruptcy Court issued an order approving these matters. On March 20, 2012, Delta announced that it was seeking court approval to amend the bidding procedures for its upcoming auction to allow bids relating to potential plans of reorganization as well as asset sales. On March 22, 2012, the Bankruptcy Court approved the revised procedures.

Following the auction, which was held between April 24 – 25, 2012, the Debtors obtained approval from the Bankruptcy Court to proceed with Laramie Energy II, LLC (“Laramie”) as the sponsor of a plan of reorganization (the “Plan”). In connection with the Plan, Delta entered into a non-binding term sheet describing a transaction by which Laramie and Delta intend to form a new joint venture called Piceance Energy, LLC (“Piceance Energy”). In June 2012, Delta entered into a Contribution Agreement (the “Contribution Agreement”) with Piceance Energy and Laramie to effect the transactions contemplated by the term sheet. Under the Contribution Agreement, each of Delta and Laramie will contribute to Piceance Energy their respective assets in Mesa and Garfield Counties, Colorado. Following the contribution, Piceance Energy will be owned 66.66% by Laramie and 33.34% by Delta. We sometimes refer to Delta as it will exist following the closing of the transaction as “Reorganized Delta.” At the closing, Piceance Energy will enter into a new credit agreement, borrow $100 million under that agreement, and distribute $75 million to Reorganized Delta and $25 million to Laramie. Reorganized Delta will use its distribution to pay bankruptcy expenses and other administration expense claims, secured debt, and priority claims. The distribution from Piceance Energy to Reorganized Delta and Laramie will be subject to adjustment to give effect to the transaction effective date of July 31, 2012. Reorganized Delta will also enter into a delay draw term loan credit facility of up to $30 million.

Following the closing, Reorganized Delta will retain its interest in Amber, its interest in the Point Arguello unit offshore California, other miscellaneous assets and certain tax attributes, including significant net operating losses. It is anticipated that the common stock of Reorganized Delta will be owned by Delta’s creditors, and Delta’s current shareholders will not receive any consideration under the Plan.

Contemporaneously with the closing, we will enter into a Limited Liability Company Agreement with Laramie that will govern the operations of Piceance Energy. Under that agreement, Laramie will act as the manager of Piceance Energy, and will control the day-to-day operations of Piceance Energy and will appoint a majority of the members of its board of managers. Reorganized Delta will have veto rights over certain matters and the right to appoint the remaining members of Piceance Energy’s board of managers. In addition, Laramie and Piceance Energy will enter into a Management Services Agreement pursuant to which Laramie will agree to provide certain services to Piceance Energy for a fee of $650,000 per month.

Also contemporaneously with the closing, we will amend and restate our Certificate of Incorporation and our Bylaws. Under the amended and restated documents, our name will be changed to “Par Petroleum Corporation.” In addition, the amended and restated Certificate of Incorporation will contain restrictions that will limit the ability of holders of five percent or more of our newly issued common stock as of the closing to acquire or dispose of shares in certain circumstances, limit the ability of other persons to become five percent holders and render void certain transfers of our stock that involve a holder of five percent or more of our shares. The purpose of this provision is to preserve certain tax losses that we believe may have value. Under the amended and restated bylaws, our board of directors will have either five or six members, each of whom will be appointed by current creditors of ours pursuant to a Stockholders’ Agreement they will enter into at closing.

 

25


Table of Contents

The Contribution Agreement includes customary representations, warranties, covenants and indemnities by the parties as well as customary closing conditions and termination rights. Subject to satisfaction of the closing conditions, the transaction is expected to occur on or before August 31, 2012.

On June 4, 2012, the Debtors filed a disclosure statement and the Plan, and holders of Delta’s notes, representing approximately 79.7% of the total amount of claims of the noteholders (collectively, the Supporting Noteholders”), the Debtors and Laramie agreed in form and substance to the terms of a Plan Support Agreement. The Bankruptcy Court approved the disclosure statement on July 6, 2012. The Debtors solicited creditors eligible to vote on the Plan, and received sufficient votes to confirm the Plan. The Plan, as amended, was confirmed on August 16, 2012. and is expected to be completed on or about August 31, 2012.

Upon satisfaction of the remaining material contingencies to complete the implementation of the Plan, under the Reorganization Topic of the ASC, the Company will be required to apply the provisions of fresh start accounting to its financial statements on the Effective Date because (i) the reorganization value of the assets of the emerging entity immediately before the date of confirmation was less than the total of all post-petition liabilities and allowed claims and (ii) the holders of the existing voting shares of the Predecessor Company’s common stock immediately before confirmation received less than 50 percent of the voting shares of the emerging entity.

The adoption of fresh start accounting will result in a new reporting entity. All of the new entity’s assets and liabilities will be recorded at their estimated fair values upon the Effective Date and the Predecessor Company’s retained deficit and accumulated other comprehensive income will be eliminated. Under the Plan, Delta’s priority non-tax claims and secured claims will be unimpaired in accordance with section 1124(1) of the Bankruptcy Code. Each general unsecured claim and noteholder claims will receive its pro rata share of new common stock of Par Petroleum in full satisfaction of its claims.

In accordance with fresh start accounting, the Company will record the debt and equity at fair value utilizing the total enterprise value of approximately $176 million, which was determined in conjunction with the confirmation of the Plan in part based on a set of financial projections for the post-emergence entity. The enterprise value was dependent upon achieving the future financial results set forth in the Company’s projections, as well as the realization of certain other assumptions. These projections were prepared in connection with the Plan and the Bankruptcy Cases. The projections were based on information available to the Company and assumptions known to the Company. Projections are inherently subject to uncertainties and risks and the Company’s actual results and financial condition will likely vary from those contemplated by the projections and other financial information provided to the Bankruptcy Court.

The foregoing description of the Contribution Agreement, the Limited Liability Company Agreement, the Management Services Agreement, the amended and restated Certificate of Incorporation and Bylaws, and the Stockholders’ Agreement is qualified in its entirety by the full text of those documents, which are attached as exhibits to our annual report on Form 10-K for the year ended December 31, 2011.

Under the Plan, Delta’s priority non-tax claims and secured claims will be unimpaired in accordance with section 1124(1) of the Bankruptcy Code. Each general unsecured claim and noteholder claims will receive its pro-rata share of new common stock of Par Petroleum in full satisfaction of its claims

Laramie Properties

Laramie is a Denver-based company primarily focused on finding and developing natural gas reserves from unconventional gas reservoirs within the Rocky Mountain Region. Its predecessor company, Laramie Energy, LLC (“Laramie I”), sold all of its oil and gas assets in May 2007 to Plains Exploration & Production Company, Inc. Laramie was formed in June 2007 by Laramie I executives and former employees and by affiliates of the private equity investors in Laramie I. Laramie is backed by equity capital commitments funded by Laramie’s management team, EnCap Investments, Avista Capital, and DLJ Merchant Banking Partners (an affiliate of Credit Suisse Securities).

 

26


Table of Contents

All of the assets Laramie and Delta are contributing to Piceance Energy are located within Garfield and Mesa Counties, Colorado and are within a 10-mile radius in the Piceance Basin geologic province. All of Laramie’s and Delta’s oil and gas reserves produce from the same geologic formations, the Mesaverde and Mancos Formations, and some of the acreage is contiguous. Laramie and its predecessor company have drilled over 300 natural gas wells with over a 99% success rate in the Piceance Basin.

The foregoing description of the Laramie Properties was provided by Laramie.

As of April 30, 2012, the proven reserves that Laramie is contributing Piceance Energy consist of the following (unaudited):

 

     Net Gas
MMCF
     Net Oil
MBbls
     Net NGLs
MBbls
     Equivalent
Mmcfe
 

Proved Developed Producing

     49,466         157         2,734         66,812   

Proved Developed Behind Pipe

     7,094         22         395         9,592   

Proven Undeveloped

     343,249         1,276         18,051         459,211   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     399,809         1,455         21,180         535,615   
  

 

 

    

 

 

    

 

 

    

 

 

 

Recent Developments

2012 Operations Overview

During the first six months of 2012 we have focused on the restructuring of the Company while operating as a debtor in possession under Chapter 11 of the U.S. Bankruptcy Code. Operations focused on maintaining and operating existing oil and gas properties with no significant exploration or drilling activities.

Liquidity and Capital Resources

Our sources of liquidity and capital resources historically have been cash provided through the issuance of debt and equity securities when market conditions permit, operating activities, sales of oil and gas properties, and borrowings under our credit facilities. Since the bankruptcy filing, our principal sources of liquidity have been borrowings under the DIP Credit Facility described below and cash flows from operating activities. The primary uses of our capital resources have been in the operation of oil and gas properties, professional fees, and bankruptcy expenses.

Our Credit Facility

Prior to the entry into the DIP Credit Facility as described below, we maintained a credit agreement with Macquarie Bank Limited (“MBL”) as administrative agent and issuing lender (the “MBL Credit Agreement”). The MBL Credit Agreement provided for a revolving loan and a term loan each with a maturity date of January 31, 2012. The revolving loan bore interest at prime plus 6% per annum for prime rate advances and LIBOR plus 7% per annum for LIBOR advances. Advances under the term loan bore interest at prime plus 8% per annum for prime rate advances and LIBOR plus 9% for LIBOR advances.

We entered into our senior secured debtor-in-possession credit facility (the “DIP Credit Facility”) in December 2011 in connection with the bankruptcy filing. Up to $57.5 million may be borrowed under the DIP Credit Facility, of which approximately $12.5 million was initially available to the Company. All of the loans under the DIP Credit Facility are term loans. The interest rate under the DIP Credit Facility is 13% plus 6% per annum in payment-in-kind interest. The initial maturity date of the DIP Credit Facility was June 30, 2012; we subsequently entered into forbearance agreements extending that date to August 30, 2012. As of December 31, 2011, approximately $45 million in borrowings were outstanding under the facility. Initial borrowings under the DIP Credit Facility were used to repay all amounts outstanding under the MBL Credit Agreement, which was then terminated.

 

27


Table of Contents

The Company is the borrower under the DIP Credit Facility and certain of its wholly-owned subsidiaries are guarantors of the Company’s obligations thereunder. Borrowings under the DIP Credit Facility are secured by substantially all of the assets of the Company and the guarantors. The DIP Credit Facility includes certain covenants relating to the bankruptcy process and other operational and financial covenants, including covenants that limit the Company’s ability to (or to permit any subsidiaries to) (i) merge with other companies; (ii) create liens on its property; (iii) incur additional indebtedness; (iv) enter into transactions with affiliates, except on an arms-length basis; (v) enter into sale leaseback transactions; (vi) pay dividends or make certain other restricted payments; (vii) make certain investments; or (viii) sell its assets.

Notes

The bankruptcy filing constituted an event of default under the Company’s 7% Series A Senior Notes due 2015 (the “7% Notes”) and the Company’s 3 3/4% Convertible Senior Note due 2037 (the “3 3/4% Notes” and, together with the 7% Notes, the “Notes”). Under the indentures governing the Notes, all principal, interest and other amounts due relating to the Notes became immediately due and payable. The ability of the holders of the Notes to seek remedies to enforce their rights under the indentures was automatically stayed as a result of the filing of the bankruptcy filings, and the creditors’ rights of enforcement are subject to the applicable provisions of the Bankruptcy Code.

Contribution Agreement and Related Credit Agreements

We entered into the Contribution Agreement in June 2012 in connection with the bankruptcy process. Following the closing of the transaction contemplated by the Contribution Agreement, our principal source of liquidity will be borrowings under the Exit Credit Facility. The Exit Credit Facility is a four year delayed draw term loan that allows for three separate draws of up to $30 million. The Exit Credit Facility will charge 9.75% annual interest payable quarterly in either cash or paid-in-kind at the Company’s option. The loan will be secured by (i) a perfected, first-priority security interest in all of the Company’s assets other than its equity interest in Piceance Energy, and (ii) a perfected, second-lien security interest in all of the Company’s equity interest in Piceance Energy. The loan is also subject to certain prepayment penalties. As consideration for granting the loan, we have also issued warrants to the Exit Credit Facility lenders in amounts ranging from 5.1% to 6.1% of total equity outstanding depending upon the total amounts drawn under the facility. The Exit Credit Facility lenders will be parties who currently hold notes and will be major stockholders following completion of the Plan transactions.

Our principal asset following the closing of the Contribution Agreement transaction will be a minority interest in Piceance Energy. Piceance Energy’s primary sources of liquidity will be cash from operations and borrowings under its credit facility, which we refer to as the “Piceance Energy Credit Facility.” We also expect to have modest cash flows from certain assets not being contributed to Piceance Energy pursuant to the Contribution Agreement.

Cash Flows

 

     Six Months Ended June 30,  
     2012     2011  
     (in thousands)  

Cash provided by (used in) operating activities

   $ (13,154   $ 112   

Cash provided by (used in) investing activities

   $ (352   $ (7,993

Cash provided by (used in) financing activities

   $ 5,000      $ (18,401

Net cash use by operating activities was $13 million in the six months ended June 30, 2012 compared with cash provided of $112,000 in the six months ended June 30, 2011. Cash flows from operating activities in the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 were primarily impacted by the decreased level of operations in 2012 compared to 2011.

Net cash used in investing activities was $352,000 in the six months ended June 30, 2012 compared with $8.0 million in the six months ended June 30, 2011. The primary investing activities in the six months ended June 30, 2012 were additions to oil and gas properties compared to additions and proceeds from the sale of oil and gas properties in June 30, 2011.

 

28


Table of Contents

Net cash provided by financing activities was $5 million in the six months ended June 30, 2012 compared to net cash used in provided by financing activities of $18 million in the six months ended June 30, 2011. The financing activities in the six months ended June 30, 2012 was borrowings on the DIP credit facility compared to repayments of debt with proceeds from the sale of properties in 2011.

Results of Operations

The following discussion and analysis relates to items that have affected our results of operations for the three and six months ended June 30, 2012 and 2011. This analysis should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included in this Form 10-Q.

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Net Loss Attributable to Delta Common Stockholders. Net loss attributable to Delta common stockholders was $15.9 million, or $0.55 per diluted common share, for the three months ended June 30, 2012, compared to a net loss attributable to Delta common stockholders of $963,000, or a loss of $.03 per diluted common share, for the three months ended June 30, 2011. The change in net loss for the two periods was primarily from the due to reorganization costs incurred in 2012 and the significant gain on sales of assets in June 2011. Explanations of significant items affecting comparability between periods are discussed by financial statement caption below.

Oil and Gas Sales. During the three months ended June 30, 2012, oil and gas sales decreased 54% to $7.7 million, as compared to $16.9 million for the comparable period a year earlier. The decrease was principally the result of a decline in oil and gas production along with lower natural gas prices. The average natural gas price received during the three months ended June 30, 2012 decreased to $3.10 per Mcf compared to $5.31 per Mcf for the year earlier period. The average oil price received during the three months ended June 30 2012 increased to $93.41 per Bbl compared to $86.87 per Bbl for the prior year period.

Production and Cost Information

Production volumes, average prices received and cost per equivalent Mcf for the three months ended June 30, 2012 and 2011 are as follows: Three Months Ended

 

     Three Months Ended
June 30,
 
     2012      2011  

Production – Continuing Operations:

     

Oil (Mbbl)

     23         38   

Gas (Mmcf)

     1,772         2,550   

Total Production (Mmcfe) – Continuing Operations

     1,913         2,781   

Average Price – Continuing Operations:

     

Oil (per barrel)

   $ 93.41       $ 86.87   

Gas (per Mcf)

   $ 3.10       $ 5.31   

Costs (per Mcfe) – Continuing Operations:

     

Lease operating expense

   $ 1.65       $ 1.28   

Transportation expense

   $ 1.46       $ 1.30   

Production taxes

   $ 0.26       $ 0.22   

Depletion expense

   $ 2.35       $ 3.54   

Realized derivative losses (per Mcfe)

   $ —         $ (1.80

Lease Operating Expense. Lease operating expenses for the three months ended June 30, 2012 decreased to $3.1 million from $3.6 million in the prior year. Lease operating expenses per Mcfe increased from $1.28 per Mcfe for the three months ended June 30, 2011 to $1.65 per Mcfe for the three months ended June 30, 2012 primarily due to operating costs associated with our properties offshore California.

Transportation Expense. Transportation expense for the three months ended June 30, 2012 decreased to $2.7 million from $3.6 million in the prior year. Transportation expense per Mcfe for the three months ended June 30, 2012 increased slightly to $1.46 per Mcfe from $1.30 per Mcfe. The change on a per unit basis is primarily the result of adjusted terms and rates with the provider.

 

29


Table of Contents

Production Taxes. Production taxes for the three months ended June 30, 2012 were $502,000, as compared to prior year costs of $611,000. Production taxes as a percentage of oil and gas sales were 6.5% and 3.6% for the three months ended June 30, 2012 and 2011, respectively. The change in the 2012 quarterly percentage was primarily due to adjustments in the effective Colorado severance and local ad valorem withholding tax rates.

Depreciation, Depletion, Amortization and Accretion. Depreciation, depletion and amortization expense decreased 42% to $3.7 million for the three months ended June 30, 2012, as compared to $6.4 million for the comparable year earlier period. Depletion expense for the three months ended June 30, 2012 decreased to $4.4 million from $11.2 million for the three months ended June 30, 2011 primarily due to lower production levels and revised reserve estimates. Accordingly, our depletion rate decreased from $3.54 per Mcfe for the three months ended June 30, 2011 to $2.35 per Mcfe for the current year period.

General and Administrative Expense. General and administrative expense decreased 42% to $3.7 million for the three months ended June 30, 2012, as compared to $6.5 million for the comparable prior year period. The decrease in general and administrative expenses is attributed to a decrease in non-cash stock compensation expense and to reduced staffing as a result of attrition and a reduction in force since 2011 resulting in lower cash compensation and administrative operating expense.

Discontinued Operations. The results of operations relating to property interests sold in the 2011 Wapiti Transaction have been reflected as discontinued operations. During the three and six months ended June 30, 2011, 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.

The Company has no activity from discontinued operations in the three or six months ended June 30, 2012. The following table shows the oil and gas segment and drilling segment revenues and expenses included in discontinued operations as described above for the three months and six months ended June 30, 2011 (in thousands):

 

     Three Months Ended
June 30, 2011
    Six Months Ended
June 30, 2011
 
     Oil & Gas     Drilling     Total     Oil & Gas     Drilling     Total  

Revenues:

            

Oil and gas sales

   $ 4,594      $ —        $ 4,594      $ 9,935      $ —        $ 9,935   

Contract drilling and trucking fees

     —          12,129        12,129        —          26,393        26,393   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

     4,594        12,129        16,723        9,935        26,393        36,328   

Operating Expenses:

            

Lease operating expense

     1,307        —          1,307        2,517        —          2,517   

Transportation expense

     12        —          12        22        —          22   

Production taxes

     321        —          321        404        —          404   

Depreciation, depletion, amortization and accretion – oil and gas

     1,286        —          1,286        2,795        —          2,795   

Impairment provision

     —          —          —          —          —          —     

Drilling and trucking operating expenses

     —          9,406        9,406        —          22,507        22,507   

Depreciation and amortization – drilling and trucking(1)

     —          —          —          —          2,669        2,669   

General and administrative expense

     —          1,051        1,051        —          2,084        2,084   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     2,926        10,457        13,383        5,738        27,260        32,998   

Operating income (loss)

     1,668        1,672        3,340        4,197        (867     3,330   

Other income and (expense):

            

Interest expense and financing costs, net

     —          (2,091     (2,091     —          (4,129     (4,129

Other income (expense)

     —          124        124        —          (428     (428
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expense)

     —          (1,967     (1,967     —          (4,557     (4,557
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

     1,668        (295     1,373        4,197        (5,424     (1,227

Income tax expense(2)

     (615     —          (615     (1,550     —          (1,550
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from results of operations of discontinued operations, net of tax

     1,053        (295     758        2,647        (5,424     (2,777

Gain on sales of discontinued operations, net of tax(3)

     5,645        2,917        8,562        5,645        2,917        8,562   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain (loss) from results of operations and sale of discontinued operations, net of tax

   $ 6,698      $ 2,622      $ 9,320      $ 8,292      $ (2,507   $ 5,785   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents
(1)

Depreciation and Amortization – Drilling and Trucking. Depreciation and amortization expense – drilling decreased to zero for the three months ended June 30, 2011 as compared to $2,669 thousand for the prior quarter. The decrease is due to not recording depreciation expense beginning in March 2011 in accordance with accounting rules related to the asset held for sale treatment of DHS.

(2) 

Income tax expense. For the three months ended June 30, 2011, the Company recorded a tax benefit of $3.9 million due to a non-cash income tax benefit related to gains from discontinued oil and gas operations. Generally accepted accounting principles, or GAAP, require all items be considered, including items recorded in discontinued operations, in determining the amount of tax benefit that results from a loss from continuing operations that should be allocated to continuing operations. In accordance with GAAP, the Company recorded a tax benefit on our loss from continuing operations, which was exactly offset by income tax expense on discontinued operations.

(3) 

Gain on sales of discontinued operations – oil and gas. On June 28, 2011, the Company closed on a transaction with Wapiti Oil & Gas to sell its remaining interests in various non-core assets primarily located in Texas and Wyoming (the “2011 Wapiti Transaction”) for gross cash proceeds of approximately $43.2 million. In accordance with accounting standards, the Company recognized a $5.6 million gain on sale ($8.9 million gain, net of $3.3 million of tax) for the three months ended June 30, 2011 that is reflected in discontinued operations. Gain on sales of discontinued operations – drilling. In June 2011, DHS sold substantially all of its Chapman Trucking assets for $3.3 million in proceeds and a gain of $2.9 million. Proceeds were used to reduce DHS bank debt.

 

31


Table of Contents

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Net Loss Attributable to Delta Common Stockholders. Net loss attributable to Delta common stockholders was $29.4 million or $1.02 per diluted common share, for the six months ended June 30, 2012 compared to $28.8 million, or $1.03 per diluted common share, for the six months ended June 30, 2011, There were a number of items affecting comparability between periods including lower volumes, lower prices and reorganization costs of $11.6 million in 2012. Explanations of significant items affecting comparability between periods are discussed by financial statement caption below.

Oil and Gas Sales. During the six months ended June 30, 2012, oil and gas sales were $17.6 million, as compared to $34.6 million for the comparable period a year earlier. The decrease is oil and gas sales is a 30% reduction in production and a 36% decrease in gas prices. The average natural gas price received during the six months ended June 30, 2012 decreased to $3.42 per Mcf compared to $5.31 per Mcf for the year earlier period. The average oil price received during the six months ended June 30, 2012 increased to $91.39 per Bbl compared to $82.31 per Bbl for the year earlier period.

Production and Cost Information

Production volumes, average prices received and cost per equivalent Mcf for the six months ended June 30, 2012 and 2011 are as follows:

 

     Six Months Ended
June 30,
 
     2012      2011  

Production – Continuing Operations:

     

Oil (Mbbl)

     54         77   

Gas (Mmcf)

     3,708         5,323   

Total Production (Mmcfe) – Continuing Operations

     4,032         5,784   

Average Price – Continuing Operations:

     

Oil (per barrel)

   $ 91.39       $ 82.31   

Gas (per Mcf)

   $ 3.42       $ 5.31   

Costs (per Mcfe) – Continuing Operations:

     

Lease operating expense

   $ 1.69       $ 1.20   

Transportation expense

   $ 1.31       $ 1.31   

Production taxes

   $ 0.20       $ 0.25   

Depletion expense

   $ 2.33       $ 3.67   

Realized derivative losses (per Mcfe)

   $ —         $ (0.94

Lease Operating Expense. Lease operating expenses for the six months ended June 30, 2012 decreased to $6.8 million compared to $6.9 million in the the six months ended June 30, 2012. Lease operating expenses per Mcfe increased from $1.20 per Mcfe for the six months ended June 30, 2011 to $1.69 per Mcfe for the six months ended June 30, 2012 primarily due to operating costs associated with our properties offshore California.

Transportation Expense. Transportation expense for the six months ended June 30, 2012 was $5.3 million compared to $7.6 million for the six months ended June 30, 2011. Transportation expense per Mcfe for the six months ended June 30, 2012 and 2011 remained constant at $1.31 per Mcfe.

Production Taxes. Production taxes for the six months ended June 30, 2012 were $800,000 or 45% lower than prior year costs of $1.5 million. Production taxes as a percentage of oil and gas sales were 4.5% and 4.2% for the six months ended June 30, 2012 and 2011, respectively.

Depreciation, Depletion, Amortization and Accretion. Depreciation, depletion and amortization expense decreased 55% to $10.2 million for the six months ended June 30, 2012, as compared to $22.5 million for the comparable year earlier period. Depletion expense for the six months ended June 30, 2012 was $9.3 million compared to $21.2 million for the six months ended June 30, 2011. Our depletion rate decreased to $2.33 per Mcfe for the six months ended June 30, 2012 from $3.67 per Mcfe for the prior year period primarily due to lower production levels and revised reserve estimates.

 

32


Table of Contents

General and Administrative Expense. General and administrative expense decreased 41% to $7.7 million for the six months ended June 30, 2012, as compared to $13.1 million for the comparable prior year period. The decrease in general and administrative expenses is attributed to a decrease in non-cash stock compensation expense, lower corporate consulting fees and to reduced staffing as a result of attrition and a reduction in force btween the periods resulting in lower cash compensation and operating expense.

Income Tax Expense (Benefit). Due to our continued losses, we were required by the “more likely than not” threshold for assessing the realizability of deferred tax assets, to record a valuation allowance for our deferred tax assets beginning with the second quarter of 2007.

Capital and Exploration Expenditures

Our capital and exploration expenditures for the six months ended June 30, 2012 and 2011 were as follows (in thousands):

 

     2012      2011  

CAPITAL AND EXPLORATION EXPENDITURES:

     

Property acquisitions:

     

Unproved

   $ —         $ 24   

Proved

     —           —     

Oil and gas properties

     238         31,266   

Drilling and trucking equipment

     —           821   

Pipeline and gathering systems

     —           (39
  

 

 

    

 

 

 

Total (1)

   $ 238       $ 32,072   
  

 

 

    

 

 

 

 

(1) 

Capital expenditures in the table above are presented on an accrual basis. Additions to property and equipment in the consolidated statement of cash flows reflect capital expenditures on a cash basis, when payments are made.

Contractual and Long-term Debt Obligations

On December 21, 2011, we entered into a senior secured debtor-in-possession credit facility (the “DIP Credit Facility”) in December 2011 in connection with the bankruptcy filing. Up to $57.5 million may be borrowed under the DIP Credit Facility, of which approximately $45 million was initially drawn by the Company to repay all amounts outstanding under the previous Credit Agreement, which was then terminated. The DIP credit facility was amended in March 2012 to increase the maximum borrowing capacity by $1.4 million to $58.9 million. All of the loans under the DIP Credit Facility are term loans. The interest rate under the DIP Credit Facility is 13% plus 6% per annum in payment-in-kind interest (PIK). The initial maturity date of the DIP Credit Facility was June 30, 2012. The Company has subsequently entered into a series of forbearance agreements extending maturity date to August 30, 2012. As of June 30, 2012 $50.0 million in borrowings and $1.5 million in accrued PIK interest were outstanding under the facility.

On March 15, 2005, the Company issued 7% senior unsecured notes for an aggregate principal amount of $150.0 million. The bankruptcy filing constituted an event of default on the notes resulting in all principal, interest and other amounts due relating to the Notes becoming immediately due and payable. The notes are reported in liabilities subject to compromise at March 31, 2012 and December 31, 2011.

3 3/4% Senior Convertible Notes, due 2037

On April 25, 2007, the Company issued $115.0 million aggregate principal amount of 3 3/4% Senior Convertible Notes due 2037 for net proceeds of $111.6 million after underwriters’ discounts and commissions of approximately $3.4 million. The bankruptcy filing constituted an event of default on the notes resulting in all principal, interest and other amounts due relating to the Notes becoming immediately due and payable. The notes are reported in liabilities subject to compromise at March 31, 2012 and December 31, 2011.

 

33


Table of Contents

Other Contractual Obligations

Our asset retirement obligation arises from the costs necessary to plug and abandon our oil and gas wells. The majority of the expenditures related to this obligation will not occur during the next five years.

We lease our corporate office in Denver, Colorado under an operating lease which will expire in October 2012. We have additional operating lease commitments which represent office equipment leases and lease obligations primarily relating to field vehicles and equipment.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations were based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our significant accounting policies are described in Note 3 to our consolidated financial statements. We have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. We analyze our estimates, including those related to oil and gas reserves, bad debts, oil and gas properties, income taxes, derivatives, contingencies and litigation, and base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Successful Efforts Method of Accounting

We account for our natural gas and crude oil exploration and development activities utilizing the successful efforts method of accounting. Under this 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 and 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 unit-of-production amortization rate. A gain or loss is recognized for all other sales of producing properties.

The application of the successful efforts method of accounting requires managerial judgment to determine the proper classification of wells designated as developmental or exploratory which will ultimately determine the proper accounting treatment of the costs incurred. The results from a drilling operation can take considerable time to analyze, and the determination that commercial reserves have been discovered requires both judgment and industry experience. Wells may be completed that are assumed to be productive and actually deliver gas and oil in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. Wells are drilled that have targeted geologic structures that are both developmental and exploratory in nature, and an allocation of costs is required to properly account for the results. Delineation seismic costs incurred to select development locations within an oil and gas field are typically considered development costs and are capitalized, but often these seismic programs extend beyond the reserve area considered proved, and management must estimate the portion of the seismic costs to expense. The evaluation of gas and oil leasehold acquisition costs requires managerial judgment to estimate the fair value of these costs with reference to drilling activity in a given area. Drilling activities in an area by other companies may also effectively condemn leasehold positions.

The successful efforts method of accounting can have a significant impact on the operational results reported when we are entering a new exploratory area in hopes of finding a gas and oil field that will be the focus of future development drilling activity. The initial exploratory wells may be unsuccessful and will be expensed. Seismic costs can be substantial which will result in additional exploration expenses when incurred.

 

34


Table of Contents

Reserve Estimates

Estimates of gas and oil reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of gas and oil that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable gas and oil reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing future gas and oil prices, the availability and cost of capital to develop the reserves, future operating costs, severance taxes, development costs and workover gas costs, all of which may in fact vary considerably from actual results. The future drilling costs associated with reserves assigned to proved undeveloped locations may ultimately increase to an extent that these reserves may be later determined to be uneconomic. For these reasons, estimates of the economically recoverable quantities of gas and oil attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected therefrom may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of our gas and oil properties and/or the rate of depletion of the gas and oil properties. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.

Impairment of Gas and Oil Properties

We review our oil and gas properties for impairment quarterly or whenever events and circumstances indicate a decline in the recoverability of their carrying value. We estimate the expected future cash flows of our developed proved properties and compare such future cash flows to the carrying amount of the proved properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we will adjust the carrying amount of the oil and gas properties to their fair value. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures and production costs, and a discount rate commensurate with the risk associated with realizing the expected cash flows projected.

Given the complexities associated with gas and oil reserve estimates and the history of price volatility in the gas and oil markets, events may arise that would require us to record an impairment of the recorded book values associated with gas and oil properties. 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 six months ended June 30, 2012 and 2011, 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.

For unproved properties, the need for an impairment charge is based on our plans for future development and other activities impacting the life of the property and our ability to recover our investment. When we believe 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 six months ended June 30, 2012 and 2011, no significant impairments were recorded.

At June 30, 2012, our oil and gas assets were classified as held for use and no impairment charges resulted from the analysis performed at June 30, 2012 as the estimated undiscounted net cash flows exceeded the carrying amounts for all properties. Subsequent to the end of the reporting period, in August 2012, the Bankruptcy Court approved a plan of sale of substantially all of our assets and accordingly these assets will be classified as held for sale in reporting periods subsequent to June 30, 2012 and will be subject to a material write-down to fair value at that time. Our assets may be further adjusted in the future due to the outcome of the Chapter 11 Cases or the application of “fresh start” accounting upon the Company’s emergence from Chapter 11.

Asset Retirement Obligation

We account for our asset retirement obligations under applicable FASB guidance which requires entities to record the fair value of a liability for retirement obligations of acquired assets. Our asset retirement obligations arise from the plugging and abandonment liabilities for our oil and gas wells. The fair value is estimated based on a variety of assumptions including discount and inflation rates and estimated costs and timing to plug and abandon wells.

Deferred Tax Asset Valuation Allowance

We use 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 estimated future tax effects attributable to temporary differences and carryforwards. Ultimately, realization of a deferred tax benefit depends on the existence of sufficient taxable income within the carryback/carryforward period to absorb future deductible temporary differences or a carryforward. In assessing the realizability of deferred tax assets, management must consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers all available evidence (both positive and negative) in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence. As a result of management’s current assessment, we maintain a significant valuation allowance against our deferred tax assets. We will continue to monitor facts and circumstances in our reassessment of the likelihood that operating loss carryforwards and other deferred tax attributes will be utilized prior to their expiration. As a result, we may determine that the deferred tax asset valuation allowance should be increased or decreased. Such changes would impact net income through offsetting changes in income tax expense or benefit.

 

35


Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Rate and Price Risk

We historically managed our exposure to commodity price fluctuations by hedging meaningful portions of our expected production through the use of derivatives, which may from time to time include costless collars, swaps, or puts. The level of our hedging activity and the duration of the instruments employed depended upon our view of market conditions, available hedge prices and our operating strategy. We had no open derivative positions at June 30, 2012.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

An evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that, as of March 31, 2012, the Company’s disclosure controls and procedures were not effective, due to the existence of material weaknesses as discussed below.

 

 

Financial Reporting and Closing Process: The Company did not maintain an effective financial reporting and closing process to prepare financial statements in accordance with generally accepted accounting principles (GAAP). The Company determined that controls over timely and complete financial statement reviews, effective journal entry controls, and appropriate reconciliation processes were missing or ineffective. This material weakness resulted in material misstatements in the cash flow statement and accounting for deferred taxes that were corrected prior to the issuance of the financial statements. Further, the Company was unable to complete regulatory filings timely as required by the rules of the SEC.

 

 

Qualified Personnel: The Company lacked a sufficient number of qualified accounting personnel in key financial reporting positions to operate processes and controls over the year end close process. As a result, a reasonable possibility exists that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

 

 

Risk Assessment: The Company’s risk assessment controls did not address the impact of significant events, such as the filing of the bankruptcy petition, when evaluating the design and operating effectiveness of controls and the impact of such events on their financial statements. This material weakness resulted in mistatements in accounting for deferred financing costs and pre-petition liabilities that were corrected prior to the issuance of the financial statements. Furthermore, a reasonable possibility exists that a material mistatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

 

Control Monitoring: The Company’s controls for monitoring the adequacy of the design and operating effectiveness of internal control over financial reporting across the Company were ineffective. As a result, a reasonable possibility exists that material misstatements in the Company’s financial statements will not be prevented or detected on a timely basis.

 

 

Significant Estimates: The Company’s controls related to the review of various financial statement accounts involving significant estimates and judgments, including impairment testing for oil and gas properties, accounting for income taxes, asset retirement obligations, and oil & gas reserve assumptions were missing or ineffective. As a result, a reasonable possibility exists that material misstatements in the Company’s financial statements will not be prevented or detected on a timely basis.

 

 

Information and Communication: The Company’s controls for communicating employees’ internal control responsibilities, providing employees with information in sufficient detail and on time to enable them to carry out their responsibilities, and establishing adequate lines of communication across the organization to enable employees to discharge their financial reporting responsibilities were ineffective. As a result, a reasonable possibility exists that material misstatements in the Company’s financial statements will not be prevented or detected on a timely basis.

 

36


Table of Contents

Until our material weaknesses are remediated, there is a reasonable possibility that a material misstatement of the Company’s financial statements would not be prevented or detected on a timely basis. As a result, Delta has contracted with experienced financial and accounting consultants to assist in the preparation of the financial statements for the periods covered by the Company’s delinquent periodic reports.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of our business. As of the date of this report, no legal proceedings are pending against us that we believe individually or collectively could have a materially adverse effect upon our financial condition, results of operations or cash flows, except as follows:

We formerly owned a 2.41934% working interest in OCS Lease 320 in the Sword Unit, Offshore California, and 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 the Amber litigation 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 has commenced litigation against the United States seeking a declaratory judgment that the former working interest owners are not responsible for these costs as a result of the government’s breach of the lease. It is currently unknown whether or not the litigation will be successful, or what the costs of decommissioning the well would be if the former working interest owners are ultimately held liable.

M.J. Farms, LTD vs. Exxon Mobile Corp., et al (Docket No. 24,055-B Div A) filed in the 7th Judicial District Court in Catahoula Parish, Louisiana on April 27, 2006 is an action against the named defendants for environmental damages. The action was settled against the main defendant and as part of the settlement, the main defendants acquired the rights to sue all of the other companies that formerly owned interests in the affected properties. There are over 50 companies named as third party defendants in the action, two of which are Castle Exploration Company, Inc., a subsidiary of Borrower’s wholly-owned subsidiary, DPCA LLC, and the Borrower. A Motion for Relief of Stay, has been filed in the United States Bankruptcy Court by Missiana, LLC, Benedict Corporation and L.W. Wickes requesting the Bankruptcy Court to lift the stay so that the litigation can proceed in the Louisiana Court. Should any liability on behalf of the Delta Petroleum be determined, any claims of Missiana, LLC, Benedict Corporation and L.W. Wickes, would be enforced through the Bankruptcy Court in accordance with Delta Petroleum’s confirmed plan. It is currently unknown if the Borrower has any liability and to the extent the Borrower is liable, what costs the Borrower may be obligated to contribute towards a settlement.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition and/or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the six months quarter ended June 30, 2012, we did not have any sale of securities in transactions that weere not registered under the Securities Act of 1933, as amended (“Securities Act”) that have not been reported in a Form 8-K.

 

37


Table of Contents

Item 5. Other Information

None.

Item 6. Exhibits.

Exhibits are as follows:

 

31.1    Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith electronically.
31.2    Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith electronically.
32.1    Certification of principal executive officer pursuant to 18 U.S.C. Section 1350. Filed herewith electronically.
32.2    Certification of principal financial officer pursuant to 18 U.S.C. Section 1350. Filed herewith electronically.

 

 

38


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

DELTA PETROLEUM CORPORATION

(Registrant)

By:   /s/ Carl E. Lakey
  Carl E. Lakey, President and
  Chief Executive Officer

 

By:   /s/ John T. Young
  John T. Young,
  Chief Financial Officer

Date: August 31, 2012

 

39


Table of Contents
  31.1       Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith electronically.
  31.2       Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith electronically.
  32.1       Certification of principal executive officer pursuant to 18 U.S.C. Section 1350. Filed herewith electronically.
  32.2       Certification of principal financial officer pursuant to 18 U.S.C. Section 1350. Filed herewith electronically.