Delta Petroleum Sells More Assets (DPTR, XOM)

Struggling oil and gas producer Delta Petroleum Corp. (NASDAQ: DPTR) has agreed to sell $130 million in “non-core assets” to privately held Wapiti Oil & Gas L.L.C. The company plans to use the funds to pay down debt on its senior credit facility.

That’s not all good news. As part of the deal, Delta was forced to cut its credit line to $35 million. Last December, Delta reduced its credit facility from $225 million to $185 million. In Apri,l the company’s borrowing limit was $145 million.

In its quarterly report, Delta included the dreaded “going concern” statement, noting that it “does not currently have the capital on hand necessary to repay its credit facility borrowings due on January 15, 2011 or develop its properties at the pace desired based on current commodity prices.” Since that filing, on May 10th, Delta’s shares have fallen 57%, from around $1.40/share to $0.80.

Delta had entered an agreement with Opon International LLC to sell a 37.5% working interest in Delta’s Vega Area asset in the Piceance Basin to Opon for $400 million. Unfortunately for Delta, the deal was called off in early July when Opon failed to secure financing. The deal was never popular with investors, who sent Delta’s shares down 18% on the day it was announced.

Delta’s problems really started when the company took a $50 million charge in the third quarter of 2009 due to a dry hole in the Columbia River Basin. The stock fell to a 52-week low in December before Exxon Mobil Corp. (NYSE: XOM) announced its purchase of XTO Energy for $40 billion. That breathed new life into all natural gas stocks, including Delta, which jumped more than 20%. But the company’s lack of cash and its ever-diminishing line of credit weighed too heavily.

Shareholders seem to like the deal with Wapiti, though. At this morning’s opening bell Delta shares shot up nearly 20%. That burst is likely just temporary. The company has very little cash available, less than $10 million at its last quarterly report. Further, a stipulation in its renegotiated credit line allows the company to spend just $28 million on capex in the second half of 2010.

Delta’s remaining assets, mostly in the Piceance Basin, are proved but undeveloped. The cost of developing the assets makes it unlikely that a buyer will come forward unless that buyer is willing to just sit on the assets until natural gas prices rise and make development economically viable.

Today’s euphoria over the sale to Wapiti can’t last.

Paul Ausick