Par Pacific Holdings - 10-Q quarterly report FY

(Mark One)

For the transition period from __________ to __________

Commission file number 0-16203

(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           No      

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 

102,809,108 shares of common stock, $.01 par value per share, were outstanding as of May 1, 2009.

Contingent Payment Rights Purchase Agreement by and between the Company and Tracinda Corporation, dated as of March 26, 2009. Incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K filed April 1, 2009.

Amendment Letter to First Amendment to Second Amended and Restated Credit Agreement dated April 14, 2009, among Delta Petroleum Corporation, JPMorgan Chase Bank, N.A. and certain other financial institutions named therein. Incorporated by reference from Exhibit 10.3 to the Company’s Form 8-K filed April 15, 2009.

Forbearance Agreement dated as of April 22, 2009 among DHS Holding Company, DHS Drilling Company and Lehman Commercial Paper, Inc. under that certain Amended and Restated Credit Agreement dated as of August 15, 2008, as amended by that certain Amendment No. 1, dated as of September 19, 2008. Filed herewith electronically.

Second Amendment Letter to First Amendment to Second Amended and Restated Credit Agreement dated April 30, 2009, by and among Delta Petroleum Corporation, JPMorgan Chase Bank, N.A. and certain other financial institutions named therein. Incorporated by reference from Exhibit 10.4 to the Company’s Form 8-K filed May 1, 2009.

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith electronically.

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith electronically.

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. Filed herewith electronically.

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. Filed herewith electronically.

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

PART I FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND
COMPREHENSIVE LOSS
(Unaudited)

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

Delta Petroleum Corporation (“Delta” or the “Company”), a Delaware corporation, is principally engaged in acquiring, exploring, developing and producing oil and gas properties. The Company’s core areas of operation are the Rocky Mountain and onshore Gulf Coast regions, which comprise the majority of its proved reserves, production and long-term growth prospects. The Company owns interests in developed and undeveloped oil and gas properties in the continental United States and developed and undeveloped oil and gas properties in federal units offshore California, near Santa Barbara.

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, 2008. 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. 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, 2008, previously filed with the Securities and Exchange Commission (“SEC”).

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying financial statements, the Company experienced a net loss attributable to Delta common stockholders of $25.6 million for the quarter ended March 31, 2009, has a working capital deficiency of $441.8 million, including $293.8 million outstanding under its credit agreement and $93.6 million outstanding under the credit agreement of DHS Drilling Company (“DHS”), the Company’s 49.8% subsidiary, which amounts are currently classified as current liabilities, and is facing significant immediate and long-term obligations in excess of its existing sources of liquidity, which raise substantial doubt about the Company’s ability to continue as a going concern.

At December 31, 2008, the Company was not in compliance with the current ratio and accounts payable covenants under its credit agreement. At March 31, 2009, the Company was not in compliance with its current ratio, maximum debt to EBITDAX ratio, and accounts payable covenants under its credit agreement. In addition, pursuant to a redetermination made as of February 1, 2009, the borrowing base under the credit agreement will be reduced upon the successful completion of the Company’s capital raising efforts to $225.0 million, which will require a repayment of $70.0 million based on outstanding borrowings of $293.8 million at March 31, 2009. The lenders entered into the First Amendment to the Company’s Second Amended and Restated Credit Agreement (the “Forbearance Agreement and Amendment to the Credit Facility”) dated March 2, 2009 under which they agreed not to take action with respect to ongoing defaults or borrowing base deficiencies for a period of at least 45 days or longer, dependent on the progress of the Company’s capital raising efforts, and to amend the terms of the credit facility for 2009. Subsequently, on April 14, 2009, the Company entered into an amendment letter to the Forbearance Agreement and Amendment to the Credit Facility with the lenders that extended the forbearance period termination date from April 15, 2009 to May 1, 2009, and on April 30, 2009 entered into a second amendment letter extending that date to May 15, 2009 (the “Amendment Letters”). (See Note 14, “Subsequent Events”.)

At March 31, 2009, DHS was in compliance with its quarterly financial covenants. However, under the revised agreement, DHS has an obligation to provide to LCPI by March 31 of each year audited financial statements reported on without a going concern qualification or exception by the independent auditor. DHS was not able to provide audited financial statements not containing an explanatory paragraph related to its ability to continue as a going concern, and accordingly, DHS was not in compliance with this covenant at March 31, 2009. Subsequently, on April 22, 2009, DHS entered into a Forbearance Agreement (the “DHS Forbearance”) with LCPI in which LCPI agreed to forbear until May 15, 2009 from exercising its rights and remedies under the credit agreement including, among other actions, acceleration of all amounts due under the credit agreement or foreclosure on the DHS rigs and other assets pledged as collateral, including accounts receivable. The DHS facility is non-recourse to Delta.

In conjunction with the DHS Forbearance, DHS paid a fee of $250,000 and made a $1.25 million prepayment on the facility. During the forbearance period, DHS must use 75% of any accounts receivable collected to pay down its credit facility. As of March 31, 2009, DHS had customer receivables of $30.1 million. As a result of these events, the Company has classified the entire $93.6 million of debt outstanding under the DHS credit facility as a current liability in the accompanying consolidated balance sheet as of March 31, 2009.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

The Company is subject to contractual obligations to jointly develop a portion of EnCana’s leasehold in the Vega Area of the Piceance Basin. Under the terms of the agreement dated February 28, 2008, the Company has committed to fund $410.1 million, of which $110.5 million was paid at the closing and installments of $99.6 million, $100.0 million, and $100.0 million are payable November 1, 2009, 2010, and 2011, respectively. These remaining installments are collateralized by a letter of credit, which in turn is collateralized by cash on deposit in a restricted account. The installment payments are recorded in the accompanying consolidated financial statements as current and long-term liabilities at a discounted value, initially of $280.1 million, based on an imputed interest rate of 2.58%.

The Company had $139.6 million of accounts payable at March 31, 2009, which if not timely paid could result in liens filed against the Company’s properties or withdrawal of trade credit provided by vendors, which in turn could limit the Company’s ability to conduct operations on its properties.

As contemplated by the Forbearance Agreement and Amendment to the Credit Facility, and the Amendment Letters thereto, the Company is engaged in capital raising efforts to raise net proceeds of at least $140.0 million on or before the amended forbearance termination date. The Company would use such net proceeds to make payments in the amount of at least $70.0 million to reduce amounts outstanding under the Company’s credit agreement and use the remaining amount for working capital, primarily for reduction of accounts payable. In addition, the Company is actively engaged in or pursuing potential capital raising activities, such as potential joint ventures, or other industry partnerships, or non-core asset dispositions. In addition, the Company has reduced its capital expenditure program and has implemented additional cost saving measures, including a reduction in force affecting approximately one-third of the Company’s personnel and salary reductions for executive officers and certain members of senior management.

Depending on the amount of proceeds obtained from capital raising efforts, the Company will evaluate the need to raise additional capital. There can be no assurance that the actions undertaken by the Company will be sufficient to repay the obligations under the credit agreement at the conclusion of the periods contemplated by the Forbearance Agreement and Amendment to the Credit Facility, and Amendment Letters thereto, or, if not sufficient, or if additional defaults occur under that facility, that the lenders will be willing to waive the defaults or amend the facility. In addition, there can be no assurance that cash flow from operations and other sources of liquidity, including asset sales or joint venture or other industry partnerships, will be sufficient to meet contractual, operating and capital obligations. The financial statements do not include any adjustments that might result from the outcome of uncertainty regarding the Company’s ability to raise additional capital, sell assets, or otherwise obtain sufficient funds to meet its obligations.

The consolidated financial statements include the accounts of Delta and its consolidated subsidiaries (collectively, the “Company”). All inter-company balances and transactions have been eliminated in consolidation. Certain of the Company’s oil and gas activities are conducted through partnerships and joint ventures, including CRB Partners, LLC (“CRBP”) and PGR Partners, LLC (“PGR”). The Company includes its proportionate share of assets, liabilities, revenues and expenses from these entities in its consolidated financial statements. As Amber Resources Company of Colorado (“Amber”) is in a net shareholders’ deficit position for the periods presented, the

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

Company has recognized 100% of Amber’s earnings/losses for all periods presented. The Company does not have any off-balance sheet financing arrangements (other than operating leases) or any unconsolidated special purpose entities.

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 properties that were held for sale during the three months ended March 31, 2008 but were not subsequently sold, have been reclassified from discontinued operations to continuing operations for all periods presented. Such reclassifications had no effect on net loss.

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

Marketable securities include long-term investments classified as available for sale securities. As of March 31, 2009, the marketable securities are recorded in long-term assets in the accompanying consolidated balance sheet with changes in their fair market value recorded in accumulated other comprehensive loss. If the issuers of the securities continue to be unable to successfully close future auctions and their credit ratings further deteriorate, the Company may be required to record additional impairment charges on these investments.

Non-controlling interest represents the 50.2% (47.2% owned by Chesapeake Energy Corporation (“Chesapeake”) and 3.0% owned by DHS executives) interest in DHS at March 31, 2009 and December 31, 2008.

Revenues are recognized when title to the products transfers to the purchaser. The Company follows the “sales method” of accounting for its natural gas and crude oil revenue. Under that method, the Company recognizes sales revenue on all natural gas or crude oil sold to its purchasers. A liability is recognized only to the extent that the Company has an imbalance on a specific property greater than the expected remaining proved reserves. As of March 31, 2009 and December 31, 2008, the Company’s aggregate natural gas and crude oil imbalances were not material to its consolidated financial statements.

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

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

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

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

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

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

Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) requires that long-lived assets be 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. 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 in accordance with SFAS 144 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. As a result of such assessment, the Company recorded impairment provisions to developed properties of $895,000 and zero for the three months ended March 31, 2009 and 2008, respectively.

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

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

investment. When the Company believes the costs of the undeveloped property are no longer recoverable, an impairment charge is recorded based on the estimated fair value of the property. As a result of such assessment, the Company recorded impairment provisions attributable to unproved properties of $350,000 for the three months ended March 31, 2009.

During the remainder of 2009, the Company will continue to evaluate certain proved and unproved properties on which favorable or unfavorable results or changes in natural gas or crude oil prices may cause a revision to future estimates of those properties’ future cash flows. Such revisions of estimates could require the Company to record impairments in the period of such revisions.

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, 2009 to March 31, 2009 (amounts in thousands):

Comprehensive loss includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, if any. The components of comprehensive loss for the three months ended March 31, 2009 and 2008 are as follows (amounts in thousands):

The Company periodically enters into commodity price risk transactions to manage its exposure to oil and gas price volatility. These transactions may take the form of futures contracts, collar agreements, swaps or options. The purpose of the hedges is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices. Prior to July 1, 2007, these transactions were accounted for as cash flow hedges in accordance with requirements of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Effective July 1, 2007, the Company elected to

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

discontinue cash flow hedge accounting on a prospective basis and recognize mark-to-market gains and losses in earnings currently instead of deferring those amounts in accumulated other comprehensive income for the contracts that qualify as cash flow hedges.

The Company is exposed to the fluctuations in natural gas or crude oil prices due to the nature of business in which the Company is primarily involved. In order to mitigate the risks associated with uncertain cash flows from volatile commodity prices and to provide stability and predictability in the Company’s future revenues, the Company periodically enters into commodity price risk management transactions to manage its exposure to gas and oil price volatility. Further, the Company was required by the Forbearance Agreement and Amendment to the Credit Facility to execute derivative contracts to hedge anticipated oil and gas production equal to minimums of 40% for the last two quarters of 2009, 70% for the calendar year 2010 and 50% for the calendar year 2011. As a result, the Company entered into oil and gas commodity swap contracts during the quarter ended March 31, 2009 to hedge the Company’s price volatility exposure associated with the Company’s anticipated gas and oil production based on the required volumes as set forth per the Forbearance Agreement and Amendment to the Credit Facility.

At March 31, 2009, all of the Company’s outstanding derivative contracts were fixed price swaps. Under the swap agreements, the Company receives the fixed price and pays the floating index price. The Company’s swaps are settled in cash on a monthly basis. By entering into swaps, the Company effectively fixes the price that it will receive for the hedged production.

The following table summarizes the Company’s open derivative contracts at March 31, 2009:

The pre-credit risk adjusted fair value of the Company’s net derivative liabilities as of March 31, 2009 was $10.3 million. A credit risk adjustment of $4.8 million to the fair value of the derivatives required by Statement 157 reduced the reported amount of the net derivative liabilities on the Company’s consolidated balance sheet to $5.5 million.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

The following table summarizes the fair values and location in the Company’s consolidated balance sheet of all derivatives held by the Company as of March 31, 2009:

The following table summarizes the unrealized losses and the classification in the consolidated statement of operations of derivatives not designated as hedging instruments for the quarter ended March 31, 2009:

The Company follows SFAS No. 123 (Revised 2004) “Share Based Payment” (“SFAS 123R”) to value stock options and other equity based compensation issued to employees. The cost of share based payments is recognized over the period the employee provides service and is included in general and administrative expense in the statements of operations.

The Company uses the asset and liability method of accounting for income taxes as set forth in SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the results of operations in the period that includes the enactment date. Deferred tax assets are evaluated based on the “more likely than not” requirements of SFAS 109, and to the extent this threshold is not met, a valuation allowance is recorded. The Company is currently providing a full valuation allowance on its net deferred tax assets, including the net deferred tax assets of DHS.

Basic income (loss) per share is computed by dividing net income (loss) attributed to common stock by the weighted average number of common shares outstanding during each period, excluding treasury shares. Diluted income (loss) per share is computed by adjusting the average number of common shares outstanding for the

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

dilutive effect, if any, of convertible preferred stock, convertible debt, stock options, restricted stock and warrants. (See Note 10, “Earnings Per Share”).

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

In October 2008, the FASB issued FSP No. 157-3 which was effective upon issuance. FSP No. 157-3 clarifies the application of SFAS 157 in a market that is not active and provides key considerations for determining the fair value of a financial asset when the market for that financial asset is inactive. The Company has considered the guidance provided by FSP 157-3 in its determination of estimated fair values as of March 31, 2009 and the application of the interpretation did not have a material impact on its consolidated financial statements.

In March 2008, the FASB affirmed FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)”. The FSP requires the proceeds from the issuance of convertible debt instruments to be allocated between a liability component (debt issued at a discount) and an equity component. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. The FSP was adopted effective January 1, 2009. This FSP changes the accounting treatment for the Company’s 3³/4% Senior Convertible Notes issued April 25, 2007 and was applied retrospectively upon adoption. The fair value of the liability and equity components were determined based on the Company’s estimated borrowing rate at the date of issuance and, as a result, the liability component was approximately $92.7 million and the equity component was approximately $22.3 million. Based on these components at the issue date the Company recorded a reduction to the carrying value of the Notes of $22.3 million upon adoption of the FSP, with a corresponding increase in additional paid in capital. The accompanying consolidated financial statements include accretion of the resulting debt discount of approximately $4.2 million and $2.7 million for the years ended December 31, 2008 and 2007, respectively. The remaining discount will be amortized through May 2012 when the holders of the Notes can first require the Company to purchase all or a portion of the Notes. Combining the cash interest cost with the amortization of debt discount, the Notes have an effective interest rate of 8.2% with total interest cost of $8.5 million and $5.7 million in each of the years ended December 31, 2008 and 2007.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS 161”). This Statement requires enhanced disclosures for derivative and hedging activities. This statement was effective for the Company on January 1, 2009. The Company has included the new required disclosures in these financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any resulting goodwill, and any non-controlling interest in the acquiree. The Statement also provides for disclosures to enable

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R was effective for the Company on January 1, 2009 and must be applied prospectively to business combinations completed on or after that date. The initial adoption of this statement had no impact on these financial statements.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for non-controlling interests (“minority interests”) in subsidiaries. SFAS 160 clarifies that a non-controlling interest in a subsidiary should be accounted for as a component of equity separate from the parent’s equity. SFAS 160 was effective for the Company on January 1, 2009 and must be applied prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively. The adoption of this statement had the effect of increasing total equity by the amount of the non-controlling interest and changing other presentations in the accompanying financial statements.

On December 31, 2008, the SEC published final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the Petroleum Resource Management System, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, permitting disclosure of probable and possible reserves, and changes to the pricing used to determine reserves based on a 12-month average price rather than a period end spot price. The average is to be calculated using the first-day-of-the-month price for each of the 12 months that make up the reporting period. The new rules are effective for annual reports for fiscal years ending on or after December 31, 2009. Early adoption is not permitted. The Company is currently assessing the impact that the adoption will have on its consolidated financial statements and disclosures.

In April 2009, the FASB issued Staff Position (“FSP”) No. FAS 157-4, “Determining Fair Value When the Volume or Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). The adoption of FSP 157-4 is not expected to have a material impact on the Company’s consolidated financial statements, other than additional disclosures. FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased and requires that companies provide interim and annual disclosures of the inputs and valuation technique(s) used to measure fair value. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009 and is to be applied prospectively.

In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1”). The adoption of FSP 107-1 is not expected to have an impact on the Company’s consolidated financial statements, other than requiring additional disclosures. FSP 107-1 requires disclosures about fair value of financial instruments in financial statements for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 is effective for interim and annual reporting periods ending after June 15, 2009.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

Prior to March 31, 2009, the Company owned direct and indirect ownership interests ranging from 2.49% to 100% in five unproved undeveloped offshore California oil and gas properties with an aggregate carrying value of $17.0 million at December 31, 2008. These property interests are located in proximity to existing producing federal offshore units near Santa Barbara, California and represented the right to explore for, develop and produce oil and gas from offshore federal lease units. The ownership rights in each of these properties were retained under various suspension notices issued by the Mineral Management Service (MMS) of the U.S. federal government whereby, as long as the owners of each property were progressing toward defined milestone objectives, the owners’ rights with respect to the properties continued to be maintained. The issuance of the suspension notices was necessitated by the numerous delays in the exploration and development process resulting from regulatory requirements imposed on the property owners by federal, state and local agencies.

In 2001, however, a Federal Court in the case of California v. Norton, et al. ruled that the MMS did not have the power to grant suspensions on the subject leases without first making a consistency determination under the Coastal Zone Management Act (“CZMA”), and ordered the MMS to set aside its approval of the suspensions of the Company’s offshore leases and to direct suspensions for a time sufficient for the MMS to provide the State of California with the required consistency determination. In response to the ruling in the Norton case, the MMS made a consistency determination under the CZMA and the leases were then still valid.

Further actions to develop the leases were then delayed, however, pending the outcome of a separate lawsuit (the “Amber Case”) that was filed in the United States Court of Federal Claims (the “Court”) in Washington, D.C. by the Company, its 92%-owned subsidiary, Amber Resources Company of Colorado (“Amber”), and 10 other property owners alleging that the U.S. government materially breached the terms of 40 undeveloped federal leases, some of which are part of the Company’s and Amber’s offshore California properties. On November 15, 2005 and October 31, 2006, the Court granted summary judgment as to liability and partial summary judgment as to damages with respect to 36 of the 40 total federal leases that are the subject of the litigation. Under a restitution theory of damages, the Court ruled that the government must return to the current lessees the more than $1.1 billion in lease bonuses it had received at the time of sale. On January 12, 2008, the Court entered an order of final judgment awarding the lessees restitution of the original lease bonuses paid for 35 of the 40 lawsuit leases. Under this order the Company is entitled to receive a gross amount of approximately $58.5 million and Amber is entitled to receive a gross amount of approximately $1.5 million as reimbursement for the lease bonuses paid for all lawsuit leases other than Lease 452, which is a single lease owned entirely by the Company and separated from the main body of the litigation by a motion for reconsideration, as discussed below.

The order of final judgment for the $60.0 million portion attributable to the Company and Amber was affirmed in all respects by the United States Court of Appeals for the Federal Circuit. The government did not seek review of the decision by the Supreme Court, and on April 10, 2009 the Company tendered assignment of all of the affected properties to the government and demanded payment in full. The Company believes that the government’s obligation to promptly certify and pay the full amount of the judgment is non-discretionary at this point, and on April 10, 2009 the plaintiffs filed a motion with the Court requesting an order requiring the government to file its certifications with the Department of the Treasury within 10 days after the Court issues its order enforcing the judgment and requiring that the judgment be paid within 14 days thereafter. On April 27, 2009 the government filed a response in which it asserted that the motion was moot with respect to 29 of the leases because the amounts attributable to those leases are currently being processed for payment, but argued that it should not be required to pay amounts due with respect to six leases in which there are minority interests held by non-lessee parties until these minority interest owners themselves tender their interests in the leases. The plaintiffs believe that the government’s argument with respect to the six leases is without merit, and oral argument on the motion has been set for May 6, 2009. The amount due to the Company that is not attributable to the six referenced leases is $56.6 million.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

As mentioned above, Lease 452 was separated from the main body of the litigation by a motion filed by the government on January 19, 2006 seeking reconsideration of the Court’s ruling as it related to Lease 452. In seeking reconsideration, the government asserted that the Company should not be able to recover lease bonus payments for Lease 452 because, allegedly, a significant portion of the hydrocarbons had been drained by wells that were drilled on an immediately adjacent lease. The amount of lease bonus payments attributable to Lease 452 is approximately $92.0 million. A trial on the motion for reconsideration was completed in January 2008 and oral arguments were completed in June 2008. On February 25, 2009 the Court entered a judgment in the Company’s favor in the amount of $91.4 million with respect to its claim to recover lease bonus payments for Lease 452. On April 24, 2009 the government filed a notice of appeal of this judgment. No calendar has yet been established for briefing and oral argument.

Although no payments will be made until all appeals have either been waived or exhausted and any delay tactics overcome, the judgment in the Amber Case was no longer appealable as of March 31, 2009. Accordingly, the Company recorded a receivable of $60.0 million for the proceeds of the offshore litigation and a related gain of $31.3 million after recovery of its $17.4 million cost basis and consideration of estimated contractual obligations and overriding royalty interests payable. When the Company ultimately receives the proceeds as a result of the Amber Case, and in the event the Company ultimately receives any proceeds as a result of the litigation related to Lease 452, it will be obligated to pay a portion of the proceeds to owners of royalty interests in the litigation proceeds, and to pay related litigation expenses and to fulfill certain pre-existing contractual commitments to third parties.

In March 2009, the Company entered into a Contingent Payment Rights Purchase Agreement (the “Purchase Agreement”) with Tracinda Corporation, a holder of approximately 39.4% of the Company’s outstanding common stock. Subject to the terms and conditions of the Purchase Agreement, on March 26, 2009, Tracinda Corporation purchased a contingent payment right for $14.9 million, and subsequently purchased an additional contingent payment right for $10.1 million on April 1, 2009 following the Company’s receipt of an opinion of an independent investment banking firm relating to the transaction, as required under its 7% senior notes indenture for transactions with affiliates. The contingent payment rights provide Tracinda with the right to receive up to $27.9 million of the net proceeds that the Company anticipates receiving in connection with its claims and the claims of Amber related to the Amber Case. The Company will also be obligated to pay $766,300 of the litigation proceeds to Ogle Properties, LLC pursuant to the terms of an agreement that was initially entered into in 1994 in connection with the acquisition of seven of the leases that later became the subject of the litigation (Leases 409, 415, 416, 421, 422, 460 and 464), and was most recently amended in October of 2002. In addition, overriding royalty interests in the litigation proceeds were granted in connection with the acquisition and financing of Leases 451, 452 and 453 in December of 1999. As a result of these overrides, Kaiser-Francis Oil Company is entitled to receive 5% of the net amount of the litigation proceeds received from Lease 453, BWAB Limited Liability Company is entitled to receive 3%, and each of Aleron H. Larson, Jr. and Roger A. Parker is entitled to receive 1%. The amount of litigation proceeds attributable to Lease 453 is $41.3 million. Each of these persons will also be entitled to receive similar percentages of litigation proceeds received from Lease 452, the gross amount of which is currently $91.4 million. Lease 451 is not subject to this litigation or separate litigation. Pursuant to an agreement dated November 2, 2000, the Company is also obligated to pay the owners of the Point Arguello Unit 20% of the net cash amount of litigation proceeds received from Leases 452 and 453 after deducting all compensation to be paid to attorneys and all reasonable and necessary expenses incurred. The net amounts of these payments are currently estimated to be approximately $7.4 million with respect to Lease 453 and approximately $16.5 million with respect to Lease 452.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

In accordance with SFAS No. 144, the results of operations and the gain (loss) relating to the sale of discontinued properties have been reflected as discontinued operations. For the three months ended March 31, 2009, there were no discontinued operations and for the three months ended March 31, 2008, gain on sale of discontinued operations includes a minor adjustment to the gain on a previously disposed of property.

Effective January 1, 2008, the Company adopted SFAS 157 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 by SFAS 157, the Company applied the following fair value hierarchy:

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.

The Company’s available for sale securities include investments in auction rate debt securities. Due to the lack of liquidity of these investments, the valuation assumptions are not readily observable in the market and are valued based on broker models using internally developed unobservable inputs (Level 3). Derivative assets consist of future oil and gas commodity swap contracts valued using both quoted prices for identically traded contracts and observable market data for similar contracts (NYMEX WTI oil, NYMEX Henry Hub gas and CIG gas swaps – Level 2).

The following table lists the Company’s fair value measurements by hierarchy as of March 31, 2009 (in thousands):

There was no change in the value of the Company’s Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three months ended March 31, 2009.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

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. Under the terms of the agreement, the Company has committed to fund $410.1 million, of which $110.5 million was paid at the closing and installments of $99.6 million, $100.0 million, and $100.0 million are payable November 1, 2009, 2010, and 2011, respectively. These remaining installments are collateralized by a letter of credit, which in turn is collateralized by cash on deposit in a restricted account. The installment payments are recorded in the accompanying consolidated financial statements as current and long-term liabilities at a discounted value, initially of $280.1 million, based on an imputed interest rate of 2.58%. The discount is being accreted on the effective interest method over the term of the installments, including accretion of $1.8 million for the quarter ended March 31, 2009.

On March 15, 2005, the Company issued 7% senior unsecured notes for an aggregate principal amount of $150.0 million. Interest is payable semiannually on April 1 and October 1 and the notes mature in 2015. The notes were issued at 99.50% of par and the associated discount is being accreted to interest expense over the term of the notes. The indenture governing the notes contains various restrictive covenants that limit the Company’s and its subsidiaries’ ability to, among other things, incur additional indebtedness, repurchase capital stock, pay dividends, make certain investments, sell assets, and consolidate, merge or transfer all or substantially all of the assets of the Company and its restricted subsidiaries. These covenants may limit the discretion of the Company’s management in operating the Company’s business. The Company was not in default (as defined in the indenture) under the indenture as of March 31, 2009. (See Note 11, “Guarantor Financial Information.”) The fair value of the Company’s senior unsecured notes at March 31, 2009 was approximately $51.0 million.

On April 25, 2007, the Company issued $115.0 million aggregate principal amount of 3³/4% Senior Convertible Notes due 2037 (the “Notes”) for net proceeds of $111.6 million after underwriters’ discounts and commissions of approximately $3.4 million. The Notes were recorded based on the estimated fair value of the liability component and the equity component, initially $92.7 million for the liability component and $22.3 million for the equity component. The debt discount on the liability component is accreted over the expected life of the Notes, including $1.1 million and $1.0 million for the three months ended March 31, 2009 and 2008, respectively. The remaining discount will be amortized through May 2012 when the holders of the Notes can first require the Company to purchase all or a portion of the Notes. The Notes bear interest at a rate of 3³/4% per annum, payable semi-annually in arrears, on May 1 and November 1 of each year, beginning November 1, 2008. Combined with the amortization of debt discount, the Notes have an effective interest rate of approximately 8.2% with total interest costs of $3.2 million for each of the three month periods ended March 31, 2009 and 2008, respectively. The Notes mature on May 1, 2037 unless earlier converted, redeemed or repurchased. The holders of the Notes have the right to require the Company to purchase all or a portion of the Notes on May 1, 2012, May 1, 2017, May 1, 2022, May 1, 2027, and May 1, 2032. The Notes are convertible at the holder’s option, in whole or in part, at an initial conversion rate of 32.9598 shares of common stock per $1,000 principal amount of Notes (equivalent to a conversion price of approximately $30.34 per share) at any time prior to the close of business on the business day immediately preceding the final maturity date of the Notes, subject to prior repurchase of the Notes. The conversion rate may be adjusted from time to time in certain instances. Upon conversion of a Note, the Company will have the option to deliver shares of common stock, cash or a combination of cash and shares of common stock for the Notes surrendered. In addition, following certain fundamental changes that may occur prior to maturity, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such fundamental changes by a number of additional shares of common stock. Although the Notes do not

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

contain any financial covenants, the Notes contain covenants that require the Company to properly make payments of principal and interest, provide certain reports, certificates and notices to the trustee under various circumstances, cause its wholly-owned subsidiaries to become guarantors of the debt, maintain an office or agency where the Notes may be presented or surrendered for payment, continue its corporate existence, pay taxes and other claims, and not seek protection from the debt under any applicable usury laws. The fair value of the Notes at March 31, 2009 was approximately $18.4 million.

On November 3, 2008, the Company entered into a Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. and certain other financial institutions (the “Credit Facility”), which, among other changes, increased the amount of its revolving credit facility to $590.0 million. The Company was required to meet certain financial covenants beginning with the quarter ended December 31, 2008 including a current ratio of greater than 1 to 1 and consolidated net debt to consolidated EBITDAX (as defined in the amended credit agreement) for the preceding four consecutive fiscal quarters of less than 4.50 to 1.0 for the period ending December 31, 2008. At December 31, 2008, the Company was in compliance with its maximum debt to EBITDAX ratio, but did not meet its minimum current ratio and accounts payable covenants. At March 31, 2009, the Company was not in compliance with its current ratio, maximum debt to EBITDAX ratio, and accounts payable covenants under its credit agreement. In addition, we have had mechanics and materialman liens filed against certain of our assets. While we have entered into payment schedules with certain of the lienholders or are disputing certain of the underlying payment obligations, the existence of these liens resulted in a breach of a covenant in the Delta Credit Facility that was waived until May 15, 2009 by the Forbearance Agreement and Amendment to the Credit Facility. Accordingly, the Company classified the $293.8 and $294.5 million of debt outstanding under the bank credit facility at March 31, 2009 and December 31, 2008, respectively, as a current liability in the accompanying consolidated balance sheets.

On March 2, 2009, the Company entered into the First Amendment to the Second Amended and Restated Credit Agreement (the “Forbearance Agreement and Amendment to the Credit Facility”) with JPMorgan Chase Bank, N.A., as agent, and certain of the financial institutions that are party to its credit agreement in which, among other changes, the lenders provided the Company relief for a period ending April 15, 2009 at the earliest and no later than June 15, 2009, dependent upon the progress of the Company’s capital raising efforts, from acting upon their rights and remedies as a result of the Company’s violation of accounts payable and current ratio covenants. The Forbearance Agreement and Amendment to the Credit Facility waived the March 31, 2009 current ratio covenant requirement, and, if the Company successfully completes its capital raising efforts, replaces the previous consolidated net debt to consolidated EBITDAX covenant with a senior secured debt to consolidated EBITDAX requirement for the preceding four consecutive fiscal quarters to be less than 4.0 to 1.0. In accordance with the Forbearance Agreement and Amendment to the Credit Facility, the borrowing base will be reduced upon the successful completion of the Company’s capital raising efforts from $295.0 million to $225.0 million, with a conforming borrowing base of $185.0 million until the next scheduled redetermination date (September 1, 2009). The Forbearance Agreement and Amendment to the Credit Facility requires that the Company raise net proceeds of at least $140.0 million through its capital raising efforts on or before the forbearance termination date and that the Company reduce its amounts outstanding under the facility to not more than $225.0 million and pay accounts payable with such net proceeds. The revised variable interest rates are based on the ratio of outstanding credit to conforming borrowing base and vary between Libor plus 2.5% to Libor plus 5.0% for Eurodollar loans and prime plus 1.625% to prime plus 4.125% for base rate loans. The Forbearance Agreement and Amendment to the Credit Facility changed the maturity date to January 15, 2011. The Forbearance Agreement and Amendment to the Credit Facility also required that the Company execute derivative contracts to put in place a commodity floor price for anticipated production equal to a minimum of 40% for the last two quarters of 2009, 70% for the calendar year 2010 and 50% for the calendar year 2011.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

Subsequently on April 14, 2009, the Company entered into an amendment letter to the Forbearance Agreement and Amendment to the Credit Facility with the lenders that extended the forbearance period termination date from April 15, 2009 to May 1, 2009 and on April 30, 2009 entered into a second amendment letter extending that date to May 15, 2009 (the “Amendment Letters”). (See Note 14, “Subsequent Events”).

On August 15, 2008, DHS entered into a new agreement with Lehman Commercial Paper, Inc. (“LCPI”) to amend its existing LCPI credit facility. The revised agreement increased the borrowing base from $75.0 million to $150.0 million. Total debt outstanding at March 31, 2009 under the facility is $93.6 million. Because of LCPI’s bankruptcy and default, DHS does not have any additional borrowing capacity under the LCPI facility. At March 31, 2009, DHS was in compliance with its quarterly financial covenants. However, under the revised agreement, DHS has an obligation to provide to LCPI by March 31 of each year audited financial statements reported on without a going concern qualification or exception by the independent auditor. DHS was not able to provide audited financial statements not containing an explanatory paragraph related to its ability to continue as a going concern, and, accordingly, DHS was not in compliance with this covenant at March 31, 2009.

Subsequently, on April 22, 2009, DHS entered into a Forbearance Agreement (the “DHS Forbearance”) with LCPI in which LCPI agreed to forbear until May 15, 2009 from exercising its rights and remedies under the credit agreement including, among other actions, acceleration of all amounts due under the credit facility or foreclosure on the DHS rigs and other assets pledged as collateral, including accounts receivable. The DHS facility is non-recourse to Delta.

In conjunction with the DHS Forbearance, DHS paid a fee of $250,000 and made a $1.25 million prepayment on the facility. During the forbearance period, DHS must use 75% of any accounts receivable collected to pay down its credit facility. As of March 31, 2009, DHS had customer receivables of $30.1 million, $25.0 million of which are due from Delta. As a result of these events, the Company has classified the entire $93.6 million of debt outstanding under the DHS credit facility as a current liability in the accompanying consolidated balance sheet as of March 31, 2009.

Within the past few years, there has been significant focus on corporate governance and accounting practices in the grant of equity based awards to executives and employees of publicly traded companies, including the use of market hindsight to select award dates to favor award recipients. After being identified in a third-party report as statistically being at risk for possibly backdating option grants, in May 2006 the Company’s Board of Directors created a special committee comprised of outside directors. The special committee, which was advised by independent legal counsel and advisors, undertook a comprehensive review of the Company’s historical stock option practices and related accounting treatment. In June 2006 the Company received a subpoena from the U.S. Attorney for the Southern District of New York and an inquiry from the staff of the SEC related to its stock option grants and related practices. The special committee of the Company’s Board of Directors reported to the Board that, while its review revealed deficiencies in the documentation of the Company’s option grants in prior years, there was no evidence of option backdating or other misconduct by the Company’s executives or directors in the timing or selection of the Company’s option grant dates, or that would cause the Company to conclude that its prior accounting for stock option grants was incorrect in any material respect. The Company provided the results of the internal investigation to the U.S. Attorney and to the SEC in August of 2006, and were subsequently informed by both agencies that the matter had been closed.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

During September and October of 2006, three separate shareholder derivative actions were filed on the Company’s behalf in U.S. District Court for the District of Colorado relating to the options backdating issue, all of which were consolidated into a single action. The consolidated complaint alleged that certain of the Company’s executive officers and directors engaged in various types of misconduct in connection with certain stock option grants. Specifically, the plaintiffs alleged that the defendant directors, in their capacity as members of the Company’s Board of Directors and its Audit or Compensation Committee, at the behest of the defendants who are or were officers and to benefit themselves, backdated the Company’s stock option grants to make it appear as though they were granted on a prior date when the Company’s stock price was lower. They alleged that these backdated options unduly benefited the defendants who are or were officers and/or directors, resulted in the Company issuing materially inaccurate and misleading financial statements and caused the Company to incur substantial damages. The action also sought to have the current and former officers and directors who are defendants disgorge to the Company certain options they received, including the proceeds of options exercised, as well as certain equitable relief and attorneys’ fees and costs. On September 26, 2007, the Court entered an Order dismissing the action for failing to plead sufficient facts to support the claims that were made in the complaint, and stayed the dismissal for 10 days to allow the Plaintiffs to file a motion for leave to file an amended complaint. Extensions were granted and the Plaintiffs filed such a motion on October 29, 2007. On September 29, 2008, the Court entered an Order granting Plaintiff’s motion for leave to amend. On October 14, 2008, the defendants (including the Company as a nominal defendant) filed a joint motion to dismiss the Second Amended Complaint. No ruling has yet been made on the joint motion.

As a result of the acquisition of Castle Energy in April 2006, the Company’s wholly-owned subsidiary, DPCA LLC, as successor to Castle, became party to Castle’s ongoing litigation with the Longs Trust in District Court in Rusk County, Texas. The Longs Trust litigation, which was originally the subject of a jury trial in November 2000, has been separated into two pending suits, one in which the Longs Trust is seeking relief on contract claims regarding oil and gas sales and gas balancing under joint operating agreements with various Castle entities, and the other in which Castle’s claims for unpaid joint interest billings and attorneys’ fees have been granted by the trial court and upheld on appeal. At a hearing on March 26, 2009 the Court awarded a final judgment to the Company in the amount of $659,400. The Company intends to vigorously defend the Longs Trust breach of contract claims. The Company has not accrued any recoveries associated with the judgment against the Longs Trust, but will do so when and if they are ultimately collected. Mediation has been scheduled to occur in June 2009.

On March 20, 2009, a complaint was filed in Benton County Superior Court, Washington naming the Company and several individuals as defendants (Civil Action Number 09-2-00752-4). The plaintiffs allege in the Complaint that the negligence of the Company and the other defendants caused the plaintiffs to suffer injuries and other damages as a result of a rig accident that occurred on the Gray Well in the Columbia River Basin on July 25, 2008. The Company’s insurance carriers have been notified and tender letters have been forwarded to certain contractors, including DHS Drilling Company, to provide defense pursuant to the terms of the related contracts with those parties. No answer has yet been filed in this case.

The Company is currently engaged in litigation with certain of its vendors regarding amounts claimed to be due for goods and services. More specifically, on December 19, 2008 separate actions were filed in Denver District Court, Colorado by Treadway Trucking, LLC (Case Number 2008CV10932) and Renegade Oilfield Services (Case Number 2008CV10908) seeking monetary damages in unspecified amounts claimed to be past due. The Company disputes the amounts claimed to be due and has moved for the two actions to be consolidated. The

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

Company has also asserted counterclaims against both parties for damages sustained by the Company for illegal dumping of hazardous materials by such parties on private land.

On March 16, 2009, a complaint was filed in Laramie County District Court, Wyoming by Bar S, Inc. and Riatta Enterprises, LLC (Civil Docket Number 173-575) seeking an aggregate of $820,000 for amounts claimed to be past due for services allegedly rendered to the Company. The Company disputes the amounts claimed to be due and has filed an answer.

Litigation has also been commenced against the Company by two other vendors seeking payment of amounts due, but both have agreed to payment schedules with the Company and the litigation is in abatement as long as payments continue to be made as agreed. In addition, we have had mechanics and materialman liens filed against certain of our assets. While we have entered into payment schedules with certain of the lienholders or are disputing certain of the underlying payment obligations, the existence of these liens resulted in a breach of a covenant in the Delta Credit Facility that was waived until May 15, 2009 by the Forbearance Agreement and Amendment to the Credit Facility.

The Company has 3,000,000 shares of preferred stock authorized, issuable from time to time in one or more series. As of March 31, 2009 and December 31, 2008, no shares of preferred stock were issued.

During the three months ended March 31, 2009, 60,000 shares of restricted common stock were issued to directors of the Company as a component of their annual compensation. In addition, tranches 2 and 3 of the executive performance shares issued in February 2007 lapsed on March 31, 2009 and accordingly 500,000 shares were forfeited. Finally, approximately 127,000 shares of restricted common stock were forfeited during the quarter, the majority of which were forfeited by employees who were subject to a reduction in force.

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

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

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

The Company recognizes the cost of share based payments over the period during which the employee provides service. As all outstanding stock options are vested, no compensation cost was recognized with respect to stock options in either period shown in the table above. Exercise prices for options outstanding under the Company’s various plans as of March 31, 2009 ranged from $1.87 to $15.34 per share and the weighted-average remaining contractual life of those options was 4.5 years. The Company has not issued stock options since the adoption of SFAS 123R, although it has the discretion to issue options again in the future. At March 31, 2009, the Company had 1,498,000 options outstanding at a weighted average exercise price of $8.50. At March 31, 2009, the Company had 1,022,000 non-vested shares outstanding and 250,000 performance shares outstanding.

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109. Income tax benefit attributable to loss from continuing operations was approximately $583,000 and $597,000 for the three months ended March 31, 2009 and 2008, respectively.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future results of operations, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, significant book losses during the current and prior periods, and projections for future results of operations over the periods in which the deferred tax assets are deductible, among other factors, management continues to conclude that the Company does not meet the “more likely than not” requirement of SFAS 109 in

order to recognize deferred tax assets and a valuation allowance has been recorded for the Company’s net deferred tax assets at March 31, 2009. During the quarter ended March 31, 2009, DHS recorded significant net operating losses and as of March 31, 2009 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 2009 and beyond, 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.

The Company previously adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109, or FIN 48. FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements in accordance with SFAS No. 109. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. Upon the adoption of FIN 48, the Company had no unrecognized tax benefits. During the three months ended March 31, 2009 and 2008, no adjustments were recognized for uncertain tax benefits.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

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

Potentially dilutive securities excluded from the calculation of diluted shares outstanding include the following: 3,790,000 shares issuable upon conversion of the 3³/4% Senior Convertible Notes for each period presented; 250,000 and 750,000 shares issuable pursuant to the February 9, 2008 performance share grants for the three months ended March 31, 2009 and 2008, respectively; 1,498,000 and 2,137,000 stock options for the three months ended March 31, 2009 and 2008, respectively; and 1,022,000 and 701,000 unvested shares issuable upon vesting under various employee grants for the three months ended March 31, 2009 and 2008, respectively.

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

The following financial information sets forth the Company’s condensed consolidated balance sheets as of March 31, 2009 and December 31, 2008, the condensed consolidated statements of operations for the three months ended March 31, 2009 and 2008, and the condensed consolidated statements of cash flows for the three months ended March 31, 2009 and 2008 (in thousands). For purposes of the condensed financial information presented below, the equity in the earnings or losses of subsidiaries is not recorded in the financial statements of the issuer.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2009 and 2008
(Unaudited)