You bought 3,000 shares of a stock at about $16 in 2003. It’s the very same stock your dad bought 1,000 shares of about a year earlier at $32. Alas, it’s now $1.58, and speculation is swirling that the company, the nation’s second largest domestic carrier, Delta Air Lines, is headed for Chapter 11 bankruptcy proceedings. And sooner than later.

So what do you do with the stock? That’s what on the mind of Mark Albian, who recently e-mailed me: “Dan, I’m sure you’re familiar with Delta’s Problems, the bankruptcy talk and Merrill Lynch’s recent sell recommendation on the stock. Is the only hope left for me to go to church and pray since I am reluctant to take such a serious loss? Any thoughts?”

First, Mark, it’s worth noting that while Delta has conceded it needs to be financially ready for a Chapter 11 filing, it has also said that no final decision on the matter was imminent.

Delta’s shares, which are being eliminated from the S&P index, attracted some buyers yesterday in response to the news that it would sell one of its subsidiaries to SkyWest for $425 million, but that deal is no great assurance to London investment manager Margaret Conte, who manages $70 million of family assets. She once owned 120,000 shares of Delta, but dumped her position at about $19 after she concluded that “it was a losing battle to fight the surging oil price, which was not about to collapse anytime soon.”

She’s convinced Delta will be unable to escape bankruptcy and said, “I would take whatever money is left and run.” The key, she said, is “there are no catalysts on the horizon that could cause the stock to take off. So why be saddled with dead money? The problem here, I believe, is there are no parachutes for Delta, and bankruptcy looks imminent.”

That, in effect, is also the view of one of Wall Street’s leading airline industry analysts, Merrill’s Michael Linenberg, who figures the recent surge in fuel prices (to $67 a barrel) greatly increases the likelihood of a bankruptcy filing within two months.

Noting that Delta has been in talks with various creditors about additional funding since earlier this year, the analyst believes the recent oil price surge could keep lenders on the sidelines, at least until after a bankruptcy filing. He also notes that since every $1 increase in the per-barrel price of oil affects the carrier’s bottom line by $60 million per annum, Mr. Linenberg thinks Delta’s fuel bill this year could grow by more than $1 billion, in effect wiping out the $1 billion of cost concessions provided by the pilots last year.

He further points out that Delta ended the June quarter with $1.7 billion of unrestricted cash. And it’s his view that an unrestricted cash level of $1.3 billion to $l.4 billion could precipitate a bankruptcy filing.

In addition, the analyst went on, Delta’s Visa/MasterCard processing contract expires this month, and a replacement contract could stipulate a large cash holdback, which could be as much as $400 million.

Given these concerns, Mr. Linenberg thinks the probability of a Delta bankruptcy filing has grown; further, that investors should be mindful of October 17, 2005, when more restrictive bankruptcy legislation becomes effective. That, he added, could be a key factor in Delta’s deciding whether to file for bankruptcy.

But what about the stock? The analyst’s downside case assumes a share price of $1.50 following any Chapter 11 bankruptcy filing by Delta, which, he notes, is in line with where other airline equities have traded under similar circumstances. Interestingly, the stock already traded below that that on Monday when it hit an all-time low of $1.31. In most cases, the equity becomes worthless after a bankruptcy filing, but that’s after several years of trading as an option/penny stock. For example, UAL shares are presently trading at $1.43, almost three years into its bankruptcy, and after the company has stated the equity will be worthless once it has emerged.

On the other hand, the analyst’s upside case for Delta suggests $4 of equity value realized in the event Delta is able to successfully execute an out-of-court restructuring.

Mr. Linenberg notes, too, that Delta’s problems, as well as those of the industry as a whole, transcend the spiraling price of oil. Chief among them: a weak revenue environment, labor woes, overcapacity, and the threat of terrorism.

His bottom line outlook for Delta, not unexpectedly, is abysmal – a loss of $13.35 a share this year, followed by another loss of $6 a share in 2006.

Though he rates the stock a sale, Mr. Linenberg said he would review that rating in the event of a material decline in fuel prices, another round of labor savings, asset sales, a less than expected holdback by its credit card processor, and pension relief. Sounds good if doable, but as one top Merrill strategist put it: “Don’t hold your breath.”