Par Pacific Holdings - 10-Q quarterly report FY

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

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66,390,907 shares of common stock, $.01 par value per share, were outstanding as of August 1, 2007.

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

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES

Delta Petroleum Corporation (“Delta” or the “Company”) was organized December 21, 1984 as a Colorado corporation and is principally engaged in acquiring, exploring, developing and producing oil and gas properties. On January 31, 2006, the Company reincorporated in the State of Delaware. The Company’s core areas of operation are the Rocky Mountain and 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 federal units offshore California, near Santa Barbara, and developed and undeveloped oil and gas properties in the continental United States.

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 filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. 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, 2006, previously filed with the Securities and Exchange Commission (“SEC”).

     Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Delta, Amber Resources Company of Colorado (“Amber”), Piper Petroleum Company (“Piper”), CRB Partners, LLC (“CRBP”), PGR Partners, LLC (“PGR”), DHS Holding Company and DHS Drilling Company (collectively “DHS”), DPCA LLC (“DPCA”) and other subsidiaries with minimal net assets or activity (collectively, the “Company”). All inter-company balances and transactions have been eliminated in consolidation. As Amber is in a net shareholders’ deficit position for the periods presented, the Company has recognized 100% of Amber’s earnings/losses for all periods presented. The Company does not have any off-balance sheet financing arrangements (other than operating leases) or any unconsolidated special purpose entities.

During June 2007, the Company acquired a 50% non-controlling ownership interest in Delta Oilfield Tank Company, LLC (“Delta Oilfield”) for cash consideration of $4.0 million. Delta Oilfield is accounted for using the equity method of accounting and is an unconsolidated affiliate of the Company.

In conjunction with the Delta Oilfield investment, the Company entered into an agreement to finance up to $9.0 million for construction of a plant expansion. As of June 30, 2007, the Company had advanced $3.1 million to Delta Oilfield under this agreement which is included in other long term assets in the accompanying consolidated balance sheets. The loan is payable quarterly in an amount equal to 75% of distributable cash, as defined, with any remaining balance due December 31, 2010.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

Certain of the Company’s oil and gas activities are conducted through partnerships and joint ventures, including CRBP and PGR. The Company includes its proportionate share of assets, liabilities, revenues and expenses from these entities in its consolidated financial statements.

Certain reclassifications have been made to amounts reported in previous years to conform to the current year presentation. Among other items, revenues and expenses on properties that were sold during the six months ended June 30, 2007 have been reclassified to income from discontinued operations for all periods presented. Such reclassifications had no effect on net income.

     Cash Equivalents

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

     Assets Held for Sale

Assets held for sale as of June 30, 2007 represent certain interests in Oklahoma that were designated by our Board of Directors to be sold within one year.

Assets held for sale as of December 31, 2006 represented Kansas properties that were sold during the three months ended March 31, 2007 and certain interests in Oklahoma that are expected to be sold within one year.

     Inventories

Inventories consist of pipe and other production equipment. Inventories are stated at the lower of cost (principally first-in, first-out) or estimated net realizable value.

     Investment in LNG project

On March 30, 2006, the Company sold its long-term minority investment in a liquid natural gas (“LNG”) project for total proceeds of $2.1 million. The Company recorded a gain on sale of $1.1 million ($657,000 net of tax).

     Minority Interest

Minority interest represents the 50.6% (45% for Chesapeake Energy Corporation, 5.6% for DHS executive officers and management) investors of DHS at June 30, 2007 and December 31, 2006.

     Investment in Unconsolidated Affiliates

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 and include the Company’s 50% investment in Delta Oilfield and other minor investments. The Company’s share of net income of these entities is recorded as other income in the consolidated statements of operations. Investments in operating entities where the Company does not exert significant influence are accounted for using the cost method, and income is only recognized when a distribution is received. These investments in unconsolidated affiliates are carried as a single amount in our consolidated balance sheets totaling $9.7 million and $2.9 million as of June 30, 2007 and December 31, 2006, respectively.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

     Revenue Recognition

     Oil and gas

Revenues are recognized when title to the products transfers to the purchaser. The Company follows the “sales method” of accounting for its natural gas and crude oil revenue, so that the Company recognizes sales revenue on all natural gas or crude oil sold to its purchasers, regardless of whether the sales are proportionate to the Company’s ownership in the property. A receivable or 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 June 30, 2007 and December 31, 2006, the Company’s aggregate natural gas and crude oil imbalances were not material to its consolidated financial statements.

     Drilling and Trucking

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

     Property and Equipment

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

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

Depreciation and depletion of capitalized acquisition, exploration and development costs is 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 their estimated useful lives. 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.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

     Impairment of Long-Lived Assets

Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 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 No. 144 are permanent and may not be restored in the future.

The Company assesses developed properties on an individual field basis for impairment on at least an annual basis. For developed 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 an impairment provision of approximately $57.5 million for the six months ended June 30, 2007 primarily related to the Howard Ranch and Fuller fields in Wyoming ($37.5 million and $10.3 million, respectively), and the South Angleton field in Texas ($8.8 million), primarily due to lower Rocky Mountain natural gas prices and marginally economic deep zones on the Howard Ranch Prospect. The Company recorded no impairment provision to developed properties for the six months ended June 30, 2006.

For undeveloped properties, the need for an impairment 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 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 no impairment provision attributable to undeveloped properties for the six months ended June 30, 2007 and 2006.

During the remainder of 2007, we are continuing to develop and evaluate certain proved and unproved properties on which favorable or unfavorable results or commodity prices may cause us to revise in future quarters our estimates of those properties’ future cash flows. Such revisions of estimates could require us to record an impairment in the period of such revisions.

     Goodwill

Goodwill represents the excess of the cost of the acquisitions by DHS of C&L Drilling in May 2006, Rooster Drilling in March 2006, and Chapman Trucking in November 2005 over the fair value of the assets and liabilities acquired. For goodwill and intangible assets recorded in the financial statements, an impairment test is performed at least annually in accordance with the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). No impairment of goodwill was indicated as a result of the Company’s impairment test performed during the third quarter of 2006. The annual goodwill impairment test will be performed during the third quarter of 2007.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

     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, 2007 to June 30, 2007 (amounts in thousands):

     Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, if any. The components of comprehensive income (loss) for the three and six months ended June 30, 2007 and 2006 are as follows:

     Financial Instruments

The Company periodically enters into commodity price risk transactions to manage its exposure to oil and gas price volatility. These transactions may take the form of futures contracts, collar agreements, swaps or options. The purpose of the hedges is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices. All transactions are accounted for in accordance with requirements of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). Accordingly, unrealized gains and losses related to the change in fair market value of derivative contracts which qualify and are designated as cash flow hedges are recorded in accumulated other comprehensive income or loss, to the extent the hedge is effective, and such amounts are reclassified to gain (loss) on effective derivative instruments as the associated production occurs.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

At June 30, 2007, the Company’s outstanding derivative contracts were collars. Under a collar agreement the Company receives the difference between the floor price and the index price only when the index price is below the floor price; and the Company pays the difference between the ceiling price and the index price only when the index price is above the ceiling price. The Company’s collars are settled in cash on a monthly basis. By entering into collars, the Company effectively provides a floor for the price that it will receive for the hedged production; however, the collar also establishes a maximum price that the Company will receive for the hedged production when prices increase above the ceiling price. The Company enters into collars during periods of volatile commodity prices in order to protect against a significant decline in prices in exchange for foregoing the benefit of price increases in excess of the ceiling price on the hedged production.

Derivative contracts that do not qualify or are not designated for hedge accounting treatment are recorded as derivative assets and liabilities at market value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as a component of other income or expense in the consolidated statement of operations. While such derivative contracts do not qualify for hedge accounting, management believes these contracts are an effective component of commodity price risk activities.

The following table summarizes our open derivative contracts at June 30, 2007 and indicates those that qualify for hedge accounting and those that do not qualify for hedge accounting:

The net fair value of the Company’s derivative instruments was an asset of approximately $7.6 million at June 30, 2007 and an asset of $7.4 million on August 1, 2007.

The net gains (losses) on effective derivative instruments recognized in the Company’s statements of operations were $3.4 million and ($3.0) million for the three months ended June 30, 2007 and 2006, respectively, and $4.5 million and ($4.8) million for the six months ended June 30, 2007 and 2006, respectively. These gains (losses) are recorded as an increase or (decrease) in revenues.

In March 2007, the Company cash settled its remaining 2007 oil hedges for proceeds of approximately $2.3 million. Of this amount, approximately $683,000 was recorded as an increase to revenue during the three months ended June 30, 2007 and the remainder will be recorded during 2007 in the time periods production was scheduled to occur.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

Effective July 1, 2007, the Company elected to discontinue cash flow hedge accounting on a prospective basis. Beginning July 1, 2007, the Company will recognize mark-to-market gains and losses in current earnings instead of deferring those amounts in accumulated other comprehensive income for the contracts that qualify as cash flow hedges. The net derivative gains in accumulated other comprehensive income as of June 30, 2007 related to those derivatives that were previously accounted for under hedge accounting will be reclassified to earnings as the original hedged transactions occur. The accumulated other comprehensive income balance at June 30, 2007 was $8.3 million, all of which is expected to be reclassified into earnings within the next twelve months.

In July 2007, the Company entered into WTI crude oil collar contracts for fourth quarter 2007 production and 2008 oil production on 1,200 Bbls per day. The floor price is $65.00 and the ceiling price ranges from $80.35 for the fourth quarter 2007 to $79.83 for the fourth quarter 2008.

     Stock Option Plans

Prior to July 1, 2005, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.

In December 2004, Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share Based Payment” (“SFAS No. 123R”) was issued, which now requires the Company to recognize the grant-date fair value of stock options and other equity based compensation issued to employees in the statement of operations. The cost of share based payments is recognized over the period the employee provides service. The Company adopted SFAS No. 123R effective July 1, 2005 using the modified prospective method and recognized compensation expense related to stock options of zero and $335,000, relating to employee provided services during the three months ended June 30, 2007 and 2006, respectively, and $319,000 and $808,000 for the six months ended June 30, 2007 and 2006, respectively.

     Non-Qualified Stock Options — Directors and Employees

On December 14, 2004, the stockholders ratified the Company’s 2004 Incentive Plan (the “2004 Plan”) under which it reserved up to an additional 1,650,000 shares of common stock for issuance. Although grants of shares of common stock were made under the 2004 Plan during the 2006 fiscal year, no stock options were issued by the Company during that period.

On January 29, 2007, the stockholders ratified the Company’s 2007 Performance and Equity Incentive Plan (the “2007 Plan”). Subject to adjustment as provided in the 2007 Plan, the number of shares of Common Stock that may be issued or transferred, plus the amount of shares of Common Stock covered by outstanding awards granted under the 2007 Plan, may not in the aggregate exceed 2,800,000. The 2007 Plan supplements the Company’s 1993, 2001 and 2004 Incentive Plans. The purpose of the 2007 Plan is to provide incentives to selected employees and directors of the Company and its subsidiaries, and selected non-employee consultants and advisors to the Company and its subsidiaries, who contribute and are expected to contribute to the Company’s success and to create stockholder value.

Incentive awards under the 2007 Plan may include non-qualified or incentive stock options, limited appreciation rights, tandem stock appreciation rights, phantom stock, restricted shares, stock bonuses or cash bonuses. Options issued to date under the Company’s various incentive plans have been non-qualified stock options as defined in such plans.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

Exercise prices for options outstanding under the Company’s various plans as of June 30, 2007 ranged from $1.75 to $15.46 per share and the weighted-average remaining contractual life of those options was 4.13 years. The Company has not issued stock options since the adoption of SFAS No. 123R. At June 30, 2007, the Company had 2,273,776 options outstanding.

On February 9, 2007, the Company issued executive performance share grants to each of the Company’s four executive officers that provide that the shares of common stock awarded will vest if the market price of Delta stock reaches and maintains certain price levels. The awards will vest in five tranches on the dates that the average daily closing price of Delta’s common stock equals or exceeds a defined price for a specified number of trading days within any period of 90 calendar days (a “Vesting Threshold”). The Vesting Threshold for the first tranche is $40, for the second tranche it is $50, for the third tranche it is $60, for the fourth tranche it is $75 and for the fifth tranche it is $90. Upon attaining the Vesting Threshold for each of the first, second and third tranches, 100,000 of Mr. Parker’s shares would vest for each such tranche, 70,000 of Mr. Wallace’s shares would vest for each such tranche and 40,000 of Mr. Nanke’s and Mr. Freedman’s shares would each vest for each such tranche. Upon attaining the Vesting Thresholds for each of the fourth and fifth tranches, 150,000 of Mr. Parker’s shares would vest for each such tranche, 105,000 of Mr. Wallace’s shares would vest for each such tranche and 60,000 of Mr. Nanke’s and Mr. Freedman’s shares would each vest for each such tranche. Each award provides for the lapse of the $75 and $90 tranches if the $40 tranche has not vested on or before March 31, 2008, and the lapse of the $50 and $60 tranches if the $40 tranche has not vested on or before March 31, 2009. In addition, the grants will lapse and be forfeited to the extent not vested prior to a termination of the executive’s employment, and will be forfeited to the extent not vested on or before January 29, 2017. The awards also provide for a minimum 364-day period between achievement of two vesting thresholds, subject to acceleration of vesting upon a change in control at a price in excess of one or more of the stock price thresholds, with proportional vesting should a change in control occur at a price in excess of one threshold, but below the next threshold.

The performance share grants were valued at $18.4 million, in the aggregate, with derived service periods over which the value of each tranche will be expensed ranging from 1 to 5 years. Equity compensation of $3.1 million related to the performance share grants was included in general and administrative expense during the six months ended June 30 2007.

     Income Taxes

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

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

     (2) Summary of Significant Accounting Policies, Continued

     Income (Loss) per Share

Basic income (loss) per share is computed by dividing net income (loss) attributed to common stock by the weighted average number of common shares outstanding during each period, excluding treasury shares. Diluted income (loss) per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, of convertible preferred stock, convertible debt, stock options, restricted stock and warrants. (See Footnote 9, “Income (Loss) Per Share”).

     Use of Estimates

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

     Recently Issued Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 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. SFAS No. 157 aims to improve the consistency and comparability of fair value measurements by creating a single definition of fair value. The Statement emphasizes that fair value is not entity-specific, but instead is a market-based measurement of an asset or liability. SFAS No. 157 upholds the requirements of previously issued pronouncements concerning fair value measurements and expands the required disclosures. This Statement is effective for the fiscal year commencing January 1, 2008. The Company has not yet completed its assessment of how adoption of this pronouncement may impact the Company’s financial position or results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 was issued to provide interpretive guidance on how the effects of the carryover reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 are effective for the December 31, 2006 year-end. The adoption of SAB 108 had no impact on our financial position or results of operations.

Effective January 1, 2007, the Company adopted 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 six months ended June 30, 2007, no adjustments were recognized for uncertain tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions in income tax benefit/expense. No interest and penalties related to uncertain tax positions were accrued at June 30, 2007.

The tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions in which we operate, although no material changes to unrecognized tax positions are expected within the next twelve months.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

     Unproved Undeveloped Offshore California Properties

The Company has direct and indirect ownership interests ranging from 2.49% to 100% in five unproved undeveloped offshore California oil and gas properties with aggregate carrying values of $13.7 million and $12.5 million at June 30, 2007 and December 31, 2006, respectively. These property interests are located in proximity to existing producing federal offshore units near Santa Barbara, California and represent the right to explore for, develop and produce oil and gas from offshore federal lease units. Preliminary exploration efforts on these properties have occurred and the existence of substantial quantities of hydrocarbons has been indicated. The recovery of the Company’s investment in these properties will require extensive exploration and development activities (and costs) that cannot proceed without certain regulatory approvals that have been delayed and is subject to other substantial risks and uncertainties.

The Company and its 92% owned subsidiary, Amber Resources, are among twelve plaintiffs in a lawsuit that was filed in the United States Court of Federal Claims (the “Court”) in Washington, D.C. alleging that the U.S. government materially breached the terms of forty undeveloped federal leases, some of which are part of the Company’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 thirty six of the forty total federal leases that are the subject of the litigation.

The Court has further ruled under a restitution theory of damages that the government must give back to the current lessees the more than $1.1 billion in lease bonuses it had received at the time of sale. Together with Amber, the Company’s net share of the $1.1 billion award is approximately $120 million. This award is subject to appeal and the government has filed a motion for reconsideration of the ruling as it relates to a single lease owned entirely by the Company. The value attributed to this lease represents significantly more than half of the net amount that would be received by the Company under the summary judgment. In its motion for reconsideration, the government has asserted that the affected lease is not being returned in substantially the same condition that it was in at the time it was initially granted because, allegedly, a significant portion of the hydrocarbons has been drained by wells that were drilled on an immediately adjacent lease. The Company currently believes that the government’s assertion is without merit and is vigorously contesting it; however, the Company cannot predict with certainty the ultimate outcome of this matter.

On January 12, 2007, the Court entered an order of final judgment awarding the lessees restitution of the original lease bonuses paid for thirty five of the forty lawsuit leases. This order does not include the lease that is the subject of the motion for reconsideration discussed above. The government has appealed the order of final judgment and contends that, among other things, the Court erred in finding that it breached the leases, and in allowing the current lessees to stand in the shoes of their predecessors for the purposes of determining the amount of damages that they are entitled to receive. The current lessees are also appealing the order of final judgment to, among other things, challenge the Court’s rulings that they cannot recover their and their predecessors’ sunk costs as part of their restitution claim. No payments will be made until all appeals have either been waived or exhausted.

     Acquisitions During the Six Months Ended June 30, 2007

On June 8, 2007, the Company issued 475,000 shares of common stock valued at approximately $9.9 million using the 5-day average closing price to acquire an additional interest in one well already owned and operated by the Company, and an additional interest in a non-operated property, both located in Polk County, Texas.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

On March 9, 2007, the Company issued 754,000 shares of common stock valued at approximately $13.8 million using the 5-day average closing price for additional interests in two wells already owned and operated by the Company located in Polk County, Texas.

On March 1, 2007, the Company paid $3.5 million for interests in producing properties and 39,000 undeveloped net acres in Fremont County, Wyoming.

In March 2007, the Company executed an earn-in agreement with Encana whereby the Company can earn up to 6,000 net acres in the Piceance Basin with the drilling of 128 wells during the next 36 months. The Company is committed to drill 64 total wells, eight of which must be completed by October 31, 2007. The remaining wells are required to be completed by June 1, 2009. The Company is liable for $250,000 per undrilled well in the event the drilling obligations are not met.

     Fiscal 2006 – Dispositions

During December 2005, Delta transferred its ownership in approximately 427,000 gross acres (64,000 net acres) of non-operated interests in the Columbia River Basin to CRBP. In January and March 2006, Delta sold a combined 44% minority interest in CRBP. As the sale involved unproved properties, no gain on the partial sale of CRBP could be recognized until all of the cost basis of CRBP had been recovered. Accordingly, the Company recorded a $13.0 million gain, ($8.1 million net of tax) and an $11.2 million reduction to property during the first quarter of 2006 as a result of closing the transaction. Delta now owns a net interest of just over 32,300 acres in the Columbia River Basin through its remaining ownership of CRBP and additional interests in 345,000 net acres in the Columbia River Basin from previous transactions.

In March 2006, the Company sold approximately 26% of PGR. This transaction involved both proved and unproved property interests and accordingly, to the extent the sale of PGR related to unproved properties, no gain could be recognized as all of the unproved cost basis was not yet recovered. The Company recorded a gain of $5.9 million, $3.7 million net of tax, and a $3.4 million offset to property during the first quarter of 2006 as a result of the transaction. The Company retains a 74% interest in PGR.

     Discontinued Operations

In accordance with SFAS No. 144, the results of operations and gain (loss) relating to the sale of the following property interests have been reflected as discontinued operations.

On March 30, 2007, the Company completed the sale of certain non-core properties located in New Mexico and East Texas for cash consideration of approximately $31.5 million, prior to customary purchase price adjustments. The sale resulted in a loss of approximately $10.8 million.

On March 27, 2007, the Company completed the sale of certain non-core properties located in Australia for cash consideration of approximately $6.0 million. The sale resulted in an after-tax gain of $2.0 million.

On January 10, 2007, the Company completed the sale of certain non-core properties located in Padgett field, Kansas for cash consideration of $5.6 million. The transaction resulted in a gain on sale of properties of $297,000.

On August 21, 2006, the Company completed the sale of the properties acquired with the Castle acquisition in April 2006. During the three months ended June 30, 2006 the Company recorded a $6.1 million extraordinary gain in accordance with SFAS No. 141.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

On August 11, 2006, the Company sold certain non-operated East Texas interests for sales proceeds of $14.6 million and a gain of $9.8 million ($6.1 million net of tax).

On June 1, 2006, the Company completed the sale of certain properties located in Pointe Coupee Parish, Louisiana, for cash consideration of $8.9 million with an effective date of May 1, 2006. The transaction resulted in an after-tax gain on sale of oil and gas properties of $596,000.

The following table shows the total revenues and income included in discontinued operations for the above mentioned oil and gas properties for the three and six month periods ended June 30, 3007 and 2006:

On March 5, 2007, DHS purchased a Mid Continent Unit 36AE drilling rig (“Rig 18”) for cash consideration of $7.6 million funded with borrowings on the DHS credit facility. The rig is an 800 horsepower rig with a depth rating of 10,500 feet. The rig is currently operating in the Rocky Mountain Region.

     7% Senior Unsecured Notes, due 2015

On March 15, 2005, the Company issued 7% senior unsecured notes for an aggregate amount of $150.0 million, which pay interest semiannually on April 1 and October 1 and mature in 2015. The net proceeds were used to refinance debt outstanding under our credit facility which included the amount required to acquire the Manti properties. The notes were issued at 99.50% of par and the associated discount is being amortized to interest expense over the term of the notes. The indenture governing the notes contains various restrictive covenants that may 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, 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 June 30, 2007. (See Footnote 10, “Guarantor Financial Information”). The fair value of the Company’s senior unsecured notes at June 30, 2007 was approximately $133.5 million.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

     3³/4% Senior Convertible Notes, due 2037

On April 25, 2007, the Company issued $115.0 million aggregate principal amount of 3³/4% Senior Convertible Notes due 2037 (the “Notes”) for net proceeds of $111.6 million after underwriters’ discounts and commissions of approximately $3.4 million. The Notes 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, 2007. The Notes will mature on May 1, 2037 unless earlier converted, redeemed or repurchased. The Notes will be 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 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 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 June 30, 2007 was approximately $114.5 million.

     Credit Facility

In the fourth quarter of 2006, the Company amended its credit facility with JP Morgan Chase Bank, N.A. At June 30, 2007, the $250.0 million credit facility had an available borrowing base of approximately $130.0 million (increased to $140.0 million in August 2007) with zero outstanding. On April 25, 2007, the credit facility was paid in full with a portion of the proceeds from the Company’s equity and debt offerings. The borrowing base is redetermined semiannually and can be increased with future drilling success. The facility has variable interest rates based upon the ratio of outstanding debt to the borrowing base. Rates vary between prime + .25% and 1.00% for base rate loans and between Libor + 1.5% and 2.25% for Eurodollar loans. The loan is collateralized by substantially all of the Company’s oil and gas properties. The Company is required to meet certain financial covenants for the quarter ended June 30, 2007 which include a current ratio of 1 to 1, net of derivative instruments, and a consolidated debt to EBITDAX (earnings before interest, taxes, depreciation, amortization and exploration) of less than 4.25 to 1 for the quarter ended June 30, 2007, 4.0 to 1 for the quarters ending September 30 and December 31, 2007, and 3.75 to 1 for the end of each quarter thereafter. The financial covenants only include subsidiaries which the Company owns 100%. At June 30, 2007, the Company was in compliance with its quarterly debt covenants and restrictions.

     Unsecured Term Loan

In December 2006 the Company entered into an agreement with JP Morgan Chase Bank N.A., for a $25.0 million unsecured term loan with interest at LIBOR plus a margin of 3.5% at December 31, 2006. The note was paid in full in January 2007 with the proceeds from the $56.4 million equity offering.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

     Credit Facility – DHS

On May 4, 2006, DHS entered into a new $100.0 million senior secured credit facility with JP Morgan Chase Bank, N.A and initially borrowed $75.0 million. The facility had a delayed draw feature that was utilized during the three months ended March 31, 2007 to borrow an additional $15 million of which $9.5 million has been subsequently repaid. Borrowings on the facility bear interest at LIBOR plus 300 basis points. The facility includes financial covenants which require a maximum debt to EBITDA ratio of 2.50 to 1.00 (with such ratio decreasing to 2.25 to 1.00 for the quarters ending March 31, 2008 through December 31, 2008 and 2.00 to 1.00 for the fiscal quarters ending March 31, 2009 through March 31, 2012) and a minimum EBITDA to interest expense ratio of 4.50 to 1.00 (with such ratio increasing to 5.00 to 1.00 for the fiscal quarters ending March 31, 2008 and thereafter). The facility matures on May 4, 2012 and requires quarterly principal payments of 0.25% of the amount outstanding. In addition, an annual mandatory prepayment is required each April based on a percentage of excess cash flow (as defined) during the preceding fiscal year, although no such payment was required in April 2007. The facility is non-recourse to Delta. At June 30, 2007, DHS was in compliance with its quarterly debt covenants and restrictions.

     Five Year Maturities of Long-Term Debt

Borrowing availability under the Delta bank credit facility at June 30, 2007 was approximately $130.0 million and zero under the DHS facility. Maturities of long-term debt, in thousands of dollars based on contractual terms, are as follows:

Within the past two 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 of the Company. 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 the Company’s 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

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

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 2006, and has been orally informed through counsel that the US Attorney has closed the matter. The Company further believes that the SEC has also closed its informal inquiry.

During September and October of 2006, three separate shareholder derivative actions were filed on the Company’s behalf in US District Court for the District of Colorado relating to the options backdating issue, all of which have been consolidated into a single action. The consolidated complaint alleges 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 allege 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 allege 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 seeks 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. A discovery stay has been granted while the court considers various motions to dismiss the action.

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 in the amount of $964,000, plus prejudgment interest, have been granted by the trial court and upheld on appeal. 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.

Management does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

     Preferred Stock

The Company has 3,000,000 shares of preferred stock authorized, issuable from time to time in one or more series. As of June 30, 2007 and December 31, 2006, no preferred stock was issued.

     Common Stock

On June 8, 2007, the Company issued 475,000 shares of common stock valued at approximately $9.9 million to acquire an additional interest in one well already owned and operated by the Company, and an additional interest in a non-operated property, both located in Polk County, Texas.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

On April 25, 2007, the Company received net proceeds of $140.3 million from a public offering of 7,130,000 shares of the Company’s common stock.

On March 9, 2007, the Company issued 754,000 shares of common stock valued at approximately $13.8 million to acquire additional interests in two wells already owned and operated by the Company located in Polk County, Texas.

On February 9, 2007, the Company issued 1.5 million non-vested shares as executive performance share grants to the Company’s four executive officers that provide that the shares of common stock awarded will vest if the market price of Delta stock reaches and maintains certain price levels (See Footnote 2, “Summary of Significant Accounting Policies”).

On January 25, 2007, the Company received net proceeds of $56.4 million from a public offering of 2,768,000 shares of the Company’s common stock.

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109. Income tax expense (benefit) attributable to income (loss) from continuing operations was $12.9 million and ($2.4) million, for the three months ended June 30, 2007 and 2006, respectively, and $5.5 million and $5.3 million for the six months ended June 30, 2007 and 2006, 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 six months ended June 30, 2007, and projections for future results of operations over the periods in which the deferred tax assets are deductible, among other factors, management concluded that as of June 30, 2007 the Company no longer meets the “more likely than not” requirement of SFAS No. 109 in order to recognize deferred tax assets. Accordingly, for the three and six months ended June 30, 2007, the Company recorded in income tax expense an additional valuation allowance of $44.9 million offsetting the Company’s deferred tax assets. The Company’s deferred tax assets consist primarily of net operating loss carryforwards that expire between 2007 and 2027. The recognition of the valuation allowance does not affect the Company’s ability to utilize its net operating loss carryforwards to offset future taxable income.

During the remainder of 2007 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, contemplated transactions occur or tax planning strategies change, 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.

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

Effective January 1, 2007, the Company adopted 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 six months ended June 30, 2007, no adjustments were recognized for uncertain tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense. No interest and penalties related to uncertain tax positions were accrued at June 30, 2007.

The tax years 2003 through 2006 for federal returns and 2002 through 2006 for state returns remain open to examination by the major taxing jurisdictions in which we operate, although no material changes to unrecognized tax positions are expected within the next twelve months.

The following table sets forth the computation of basic and diluted income (loss) per share:

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)

Delta issued 7% Senior Notes (“Notes”) on March 15, 2005, for the aggregate amount of $150.0 million, which pay interest semiannually on April 1st and October 1st and mature in 2015. The net proceeds were used to refinance debt outstanding under the Company’s credit facility. The Notes are guaranteed by Piper Petroleum Company and certain other 100% owned subsidiaries of the Company (“Guarantors”). The Guarantors, fully, jointly and severally, irrevocably and unconditionally guarantee the performance and payment when due of all the obligations under the Notes. Big Dog, Shark, DHS, CRBP, PGR, DPCA and Amber (“Non-guarantors”) are not guarantors of the indebtedness under the Notes.

The following financial information sets forth the Company’s condensed consolidated balance sheets as of June 30, 2007 and December 31, 2006, the condensed consolidated statements of operations for the three and six months ended June 30, 2007 and 2006, and the condensed consolidated statements of cash flows for the six months ended June 30, 2007 and 2006 (in thousands).

DELTA PETROLEUM CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007 and 2006
(Unaudited)