Par Petroleum Corp (formerly Delta Petroleum Corporation) is an independent oil and gas company engaged primarily in the exploration for, and the acquisition, development, production, and sale of, natural gas and crude oil. Our core areas of operation are the Rocky Mountain and onshore Gulf Coast Regions, which together comprise the majority of our proved reserves, production and long-term growth prospects. We have a significant development drilling inventory that consists of proved and unproved locations, the majority of which are located in our Rocky Mountain development projects.
We generally concentrate our exploration and development efforts in fields where we can apply our technical exploration and development expertise, and where we have accumulated significant operational control and experience. We also have an ownership interest in a drilling company, providing the benefit of priority access to drilling rigs.
On March 2, 2009, we entered into the First Amendment to our Second Amended and Restated Credit Agreement (the “Forbearance Agreement and Amendment to the Credit Facility”). Under the terms of the Forbearance Agreement and Amendment to the Credit Facility, the lenders under our Second Amended and Restated Credit Agreement (the “Credit Facility”) agreed to forebear from taking certain actions (including accelerating the amounts due under the Credit Facility) in respect of violations of Credit Facility covenants as of December 31, 2008. The Forbearance Agreement and Amendment to the Credit Facility also established a new Borrowing Base of $225 million, representing a decrease of $70 million from the previously existing Borrowing Base, increased the applicable interest rates payable, and requires that we raise substantial additional capital in the next 45 to 105 days (depending on our success) to reduce by not less than $68.8 million the amounts outstanding under the Credit Facility and pay other accounts payable. We are pursuing additional capital from a variety of potential sources, including sales of debt or equity securities, asset sales, joint ventures or other similar industry partnerships.
Overview and Strategy
Our focus is to increase stockholder value by pursuing our corporate strategy, as follows:
Pursue development of our core areas independently and through joint ventures or other industry partnerships Although our capital expenditure budget has been reduced dramatically due to significant declines in commodity prices during the second half of 2008, we currently plan to spend $52 million on our drilling program during 2009. This plan is dependent upon our ability to first raise sufficient capital to comply with our obligations under the Forbearance Agreement and Amendment to the Credit Facility which is described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 21 to the accompanying consolidated financial statements and to pay existing obligations. It is our intention to make further adjustments to this plan as necessary depending upon our liquidity, economic conditions and commodity prices.
In view of current market conditions we intend to more actively utilize joint ventures or other similar industry partnerships or participation arrangements to develop our asset base. In 2008, we announced the sale of 50% of our working interests in our Columbia River Basin acreage, which will be jointly developed going forward; we also announced that we were seeking partners for the development of our Piceance Basin assets, and are continuing to pursue a transaction or transactions with the assistance of Merrill Lynch and JPMorgan. We are currently engaged in other joint venture focused discussions regarding development of several of our other asset areas.
Achieve consistent reserve growth through repeatable development We have experienced significant reserve growth over the past four years through a combination of acquisitions and drilling successes. Although prior to 2006 the majority of our reserve and production growth came through acquisitions, in 2007 and 2008 we achieved significant reserve and production increases as a result of our drilling program. In 2009, we are focused on the efficient deployment of available capital to maintain current reserves and production levels. We anticipate that the majority of our future reserve and production growth will come through the execution of our development drilling program. Our Piceance Basin development drilling inventory generally consists of locations in fields that demonstrate low variance in well performance, which leads to predictable and repeatable field development.
Our reserve estimates change continuously and we evaluate such reserve estimates on a quarterly basis, with an independent engineering evaluation completed on an annual basis. Deviations in the market prices of both crude oil and natural gas and the effects of acquisitions, dispositions and exploratory development activities have a significant effect on the quantities and present and future values of our reserves. Subject to capital availability as noted above, we believe our capital deployment focused in the Rockies will allow us to maintain our 2008 production levels in 2009 until improved commodity prices support more aggressive drilling activity.
Maintain high percentage ownership and operational control over our asset base
As of December 31, 2008, we controlled approximately 893,000 net undeveloped acres, representing approximately 97% of our total net acreage position. We retain a high degree of operational control over our asset base, through a high average working interest or acting as the operator in our areas of significant activity. This provides us with controlling interests in a multi-year inventory of drilling locations, positioning us for continued reserve and production growth through our drilling operations when commodity pricing supports greater growth focused drilling activity. This level of ownership and control also enables us to seek joint ventures or industry partnerships on the acreage. We plan to maintain this advantage to allow us to control the timing, level and allocation of our drilling capital expenditures and the technology and methods utilized in the planning, drilling and completion process, though our ability to control these matters may be diminished by the terms of joint venture or partnership arrangements we may enter into. We believe this flexibility to opportunistically pursue exploration and development projects relating to our properties is particularly valuable in view of the current lower commodity price and limited capital availability environment. We also have a 49.8% interest in DHS Drilling Company (“DHS”), as well as a contractual right of priority access to 19 drilling rigs owned by DHS.
Acquire and maintain acreage positions in high potential resource plays
Although we anticipate that our exploratory drilling efforts during 2009 will be much more limited than in the past, we believe that to the extent permitted by our cash flow our ongoing development of reserves in our core areas should be supplemented with exploratory efforts that may lead to new discoveries in the future. We continually evaluate our opportunities and pursue attractive potential opportunities that take advantage of our strengths. We have significant undeveloped, unproved acreage positions in the Columbia River Basin of Washington and Oregon, the Haynesville shale in Texas, Lighthouse Point in Louisiana and the Central Utah Hingeline, each of which has gained substantial interest within the exploration and production sector due to their relatively unexplored nature and the potential for meaningful hydrocarbon recoveries. There are other mid-size and large independent exploration and production companies conducting drilling activities in these plays. We are currently drilling our first operated well in the Columbia River Basin and expect to be at total depth in the coming months. Currently, our $52 million 2009 capital budget has limited allocation to our other exploratory projects, including a small amount in the Haynesville shale. However, with increased commodity prices or the addition of joint venture partners to fund a portion of the development cost, our plans for 2009 could change with respect to these potentially rewarding exploratory plays.
Pursue a disciplined acquisition strategy in our core areas of operation
Historically we have been successful at growing through targeted acquisitions. Although our multi-year drilling inventory provides us with the opportunity to grow reserves and production organically without acquisitions, we continue to evaluate acquisition opportunities, primarily in our core areas of operation. In addition, we will continue to look to divest assets located in fully developed or non-core areas.
Maintain an active hedging program
Although we liquidated a significant portion of our 2009 hedges for a profit in order to reduce counterparty credit risk, from time to time we manage our exposure to commodity price fluctuations by hedging meaningful portions of our expected production through the use of derivatives, typically costless collars. The level of our hedging activity and the duration of the instruments employed depend upon our view of market conditions, available hedge prices and our operating strategy. We use hedges to limit the risk of fluctuating cash flows used to fund our capital expenditure program. We also typically use hedges in conjunction with acquisitions to achieve expected economic returns during the payout period. As of March 2, 2009, we are unhedged with respect to our 2009 production. However, in accordance with the terms of the Forbearance Agreement and Amendment to the Credit Facility, we expect to put derivative contracts in place to establish a commodity floor price for our anticipated production of a minimum of 40% for the last two quarters of 2009, 70% for the calendar year 2010 and 50% for the calendar year 2011.
Experienced management and operational team with advanced exploration and development technology
Our senior management team has, on average, over 25 years of experience in the oil and gas industry, and has a proven track record of creating value both organically and through strategic acquisitions. Our management team is supported by an active board of directors with extensive experience in the oil and gas industry. Our experienced technical staff utilizes sophisticated geologic and 3-D seismic models to enhance predictability and reproducibility over significantly larger areas than historically possible. We also utilize multi-zone, multi-stage artificial stimulation (“frac”) technology in completing our wells to substantially increase near-term production, resulting in faster payback periods and higher rates of return and present values. Our team has successfully applied these techniques in the completions of our wells in our Rocky Mountain natural gas fields.
During the year ended December 31, 2008, we were primarily engaged in two industry segments, namely the acquisition, exploration, development, and production of oil and natural gas properties and related business activities, and contract oil and natural gas drilling operations.
We intend to focus our 2009 capital spending on development of our core area of operation in the Rocky Mountains, the Piceance Basin, and to a lesser extent on our exploratory efforts in the Columbia River Basin. For the year ending December 31, 2009, we currently plan to spend $52 million on our drilling program, but may adjust this plan depending on our liquidity, economic conditions and commodity prices. The Forbearance Agreement and Amendment to the Credit Facility limits our ability to make capital expenditures beyond this level until we have successfully reduced the amounts outstanding under our credit facility as well as other payables.
Our oil and gas operations have been comprised primarily of production of oil and natural gas, drilling exploratory and development wells and related operations and acquiring and selling oil and natural gas properties. Directly or through wholly-owned subsidiaries, and through Amber Resources Company of Colorado (“Amber”), our 91.68% owned subsidiary, CRB Partners, LLC (“CRBP”) and PGR Partners, LLC (“PGR”), we currently own producing and non-producing oil and natural gas interests, undeveloped leasehold interests and related assets in 17 states, interests in a producing Federal unit offshore California and undeveloped offshore Federal leases near Santa Barbara, California. We intend to continue our emphasis on the drilling of exploratory and development wells, primarily in the Piceance Basin of Colorado and the Columbia River Basin in Washington.
We have oil and gas leases with governmental entities and other third parties who enter into oil and gas leases or assignments with us in the regular course of our business. We have no material patents, licenses, franchises or concessions that we consider significant to our oil and gas operations. The nature of our business is such that it is not seasonal, we do not engage in any research and development activities and we do not maintain or require a substantial amount of products, customer orders or inventory. Our oil and gas operations are not subject to renegotiations of profits or termination of contracts at the election of the federal government. We operate the majority of our properties and control the costs incurred. We have never been a debtor in any bankruptcy, receivership, reorganization or similar proceeding.
Contract Drilling Operations
Through a series of transactions in 2004 and 2005, we acquired and now own an interest in DHS, an affiliated Colorado corporation that is headquartered in Casper, Wyoming. During the second quarter of 2006, DHS engaged in a reorganization transaction pursuant to which it became a subsidiary of DHS Holding Company, a Delaware corporation, and the Company’s ownership interest became an interest in DHS Holding Company. References to DHS herein shall be deemed to include both DHS Holding Company and DHS, unless the context otherwise requires.
DHS is a consolidated entity of Delta. Delta currently owns a 49.8% interest in DHS Holding Company, controls the board of directors of DHS and has priority access to all of DHS’s drilling rigs.
At December 31, 2008, DHS owned 19 drilling rigs with depth ratings of approximately 10,000 to 25,000 feet, only three of which are currently active. We have the right to use all of the rigs on a priority basis, although current economic conditions have resulted in an abundance of available drilling rigs in the Rocky Mountain area at the present time.