?Adding further to the financial woes of E&P company Delta Petroleum Corp., Denver, (Nasdaq: DPTR) Standard & Poor’s Ratings Services has placed its ratings, including the B- corporate credit rating, on the company on CreditWatch with negative implications.


S&P analyst Paul B. Harvey says, “The CreditWatch action reflects our concerns about Delta’s liquidity, potential violations of its financial covenants, and the possibility of a negative redetermination of its borrowing-base, revolving credit facility, whereby outstanding balances could exceed a revised borrowing-base threshold.”


In addition, he says, Delta’s lack of hedges in a falling commodity-price environment, its high cost structure, and its ability to generate free cash flow and maintain adequate liquidity are suspect.


Under its amended $590-million credit facility, Delta could face a redetermination as early as Feb. 1. The existing borrowing base was determined in November 2008 and could be reduced based on the fall of commodity prices.


“Also, to meet capital spending of up to $85 million during 2009, Delta will need to accomplish planned asset divestures in a difficult credit environment to maintain adequate liquidity,” Harvey says.


Additionally, financial covenants are likely to be tight, given expectations for reduced EBITDAX (earnings before interest, taxes, depreciation, amortization and exploration) levels. Debt-leverage covenants started at 4.5 times as of Dec. 31, 2008, and then step down to 4.25 on March 31, 4.0 on June 30, and 3.75 on Sept. 30. Combined, with the removal of stronger 2008 earnings from calculations, debt leverage could breach covenants, Harvey warns.


“We expect to resolve the CreditWatch during (this) quarter. Key near-term-rating drivers include compliance with financial covenants, the success of Delta’s proposed asset sales, potential for a negative borrowing-base revision, and its ability and willingness to manage capital-spending levels and liquidity.”


In October, Delta retained Tristone Capital to sell its Austin Chalk properties in Polk and Tyler counties, Texas, producing 8.8 million cu. ft. equivalent per day. Also in October, it retained Merrill Lynch & Co. and J.P. Morgan to seek a joint-venture partner or buyer for partial interest in the Piceance Basin of Colorado. Delta holds approximately 2.5 trillion cu. ft. equivalent of recoverable gas reserves in the basin.


Tracinda Corp., Beverly Hills, Calif., the private investment company owned by Kirk Kerkorian, holds a 35% stake in Delta that it acquired in March 2008 for $684 million. Tracinda later canceled a cash tender for an additional 13.55% stake in the company for $154 million.

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