When Delta Petroleum (DPTR) released its third quarter earnings this morning, it led off with a pretty detailed discussion of a dry hole the company drilled in the Columbia River Basin. Delta’s president/COO said the lesson the company learned from the dry hole would focus the company’s efforts on lower-risk projects in Colorado’s Piceance Basin “once natural gas prices recover.” The company’s chairman reinforced that statement by saying that Delta’s value is based on its holdings in the Piceance Basin, and that those assets “were not adequately reflected in [Delta’s] current share price.”

Delta reported an EPS loss of -$0.35, much worse than analysts’ estimates of -$0.11. At the close, Delta shares were off more than 11%, trading at $1.14. The stock’s 52-week range is $0.88-$10.45.

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At the highest price in its 52-week range, Delta’s market cap was about $2.9 billion. At today’s share price, its market cap is around $315 million. The third quarter cost to Delta of the dry hole in the Columbia River Basin was $31 million and another $20.4 million in impairment charges.

More than $50 million for a dry hole represents a real threat to the survival of a mid-cap E&P company like Delta. The company has had to re-negotiate (and reduce) its revolving credit agreement, and it will now go back to its Piceance Basin projects, which it had suspended in order to complete the failed project in the Columbia River Basin.

On top of all this, natural gas prices are beyond bad, currently sitting at less than $5/thousand cubic feet at the Henry Hub, but under $3/thousand cubic feet in the Rocky Mountain region. Increasing production from the Rockies won’t do anything except drive prices down further, unless Delta can get the gas out to higher priced markets. And it’s not easy for a small company to do that, because interstate pipeline capacity is essentially fully utilized. The gas may as well be in the Arctic National Wildlife Refuge.

Don’t be surprised if another E&P company makes a bid for Delta. It’s holdings are reasonably good, but it doesn’t have the cash or credit to develop them.

On top of that, the low price for Rocky Mountain natural gas is barely above costs. A buyer with deeper pockets may find it is more beneficial to leave the gas in the ground and wait for the price to rise.

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