Going Concern

9 Months Ended

Sep. 30, 2011

Going Concern [Abstract]

Going Concern

(2) Going Concern

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

During the nine months ended September 30, 2011, the Company experienced a net loss attributable to Delta common stockholders of $458.2 million, and at September 30, 2011 had a working capital deficiency, excluding discontinued operations, of $149.3 million, including $21.0 million outstanding under the Third Amended and Restated Credit Agreement (the “MBL Credit Agreement”) with Macquarie Bank Limited (“MBL”) as administrative agent and issuing lender (which is classified as a current liability in the accompanying balance sheet). On June 28, 2011, the Company closed on a transaction with Wapiti Oil & Gas, L.L.C. (“Wapiti”) to sell its remaining interests in various non-core assets primarily located in Texas and Wyoming (the “2011 Wapiti Transaction”) for gross cash proceeds of approximately $43.2 million. Proceeds from the 2011 Wapiti Transaction were used to further reduce amounts outstanding under the MBL Credit Agreement, as well as to fund capital expenditures. The MBL Credit Agreement, as amended, provides for a revolving loan and a term loan, each with a maturity date of January 31, 2012. At September 30, 2011, $6.0 million was outstanding under the revolving loan and $15.0 million was outstanding under the term loan. In addition to the amounts outstanding under the MBL Credit Agreement which are due on January 31, 2012, the holders of the Company’s $115.0 million 3³/₄% senior convertible notes have the option to require the Company to repurchase the notes at par on May 1, 2012 and thus, such amount is also classified as a current liability in the accompanying balance sheet.

While the 2011 Wapiti Transaction and the MBL Credit Agreement provided capital to the Company that helped to improve its financial position at that time, the Company does not currently have adequate capital to repay its credit facility borrowings due on January 31, 2012 or fund the purchase of convertible notes if the holders of such notes elect to require the Company to repurchase such notes on May 1, 2012, as expected.

In July 2011, the Board of Directors of the Company announced that it had engaged Macquarie Capital (USA) Inc. and Evercore Group, L.L.C. to act as advisors to the Company in conducting a strategic alternatives process in order to maximize shareholder value and address the 2012 debt maturities. In the strategic alternatives process, the board of directors has considered a wide variety of possible transactions, including the sale of the company, issuances of equity or debt securities, sales of assets, joint ventures and volumetric production payment financing, as well as other potential corporate transactions. With respect to a potential sale of the company or its assets, the Company solicited offers from a significant number of potential purchasers, including domestic and foreign industry participants and private equity firms, and has engaged in substantive negotiations with several such potential purchasers. However, the Company has not received any definitive offer with respect to an acquisition of the company or its assets that implies a value of the assets that is greater than its aggregate indebtedness, and has not been able to identify any significant source of additional financing that is likely to be available on acceptable terms. Accordingly, based on the results of the process to date, the Company believes that a restructuring of the Company’s indebtedness is likely to be necessary. The Company is continuing to discuss potential transactions with potential purchasers and expects to engage in discussions with certain holders of its outstanding senior notes. There can be no assurance that these discussions will lead to a definitive agreement on acceptable terms, or at all, with any party. Any transaction that is agreed to could be highly dilutive to existing stockholders. If the Company is unsuccessful in consummating a transaction or transactions that address the Company’s liquidity issues, the Company will be required to seek protection under chapter 11 of the U.S. Bankruptcy Code.

The timing, structure, terms, size, and pricing of any transaction consummated as a result of the strategic alternatives process will depend many factors beyond the Company’s control, and there can be no assurance that the Company will be able to obtain any such financing or consummate any such transaction, and if so, that it will be on terms satisfactory to the Company. These factors along with the liquidity issues discussed above raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the uncertainty regarding the Company’s ability to raise additional capital, sell assets, or otherwise obtain sufficient funds to meet its obligations.

The Company believes that the amounts available under the MBL Credit Agreement, as amended, combined with projected net cash from operating activities, will provide sufficient liquidity to fund its operating expenses, the limited Vega Area capital development plan, and maintain current debt service obligations until the January 2012 maturity of the Company’s credit facility.

The DHS Drilling Company (“DHS”) credit facility debt of $71.9 million at September 30, 2011 is included in the accompanying consolidated balance sheets as a component of liabilities related to assets held for sale. The DHS facility is non-recourse to Delta. During the first quarter of 2011, the Board of Directors of DHS engaged transaction advisors to commence a strategic alternatives process, focused on a sale of DHS or substantially all of its assets. Subsequent to quarter end, Delta sold its stock in DHS to DHS’s lender, Lehman Commercial Paper, Inc. (“LCPI”), for $500,000. See Note 15, Subsequent Events.