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WRES > SEC Filings for WRES > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for WARREN RESOURCES INC



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations


The Company has made in this report, and may from time to time otherwise make in other public filings, press releases and discussions with Company management, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the Company's operations, economic performance and financial condition. These forward-looking statements include information concerning future production and reserves, schedules, plans, timing of development, contributions from oil and gas properties, and those statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "estimates," "projects," "target," "goal," "plans," "objective," "should" or similar expressions or variations on such expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations include, but are not limited to, the Company's assumptions about energy markets, production levels, reserve levels, operating results, competitive conditions, technology, the availability of capital resources, capital expenditures and other contractual obligations, the supply and demand for and the price of oil, natural gas and other products or services, the weather, inflation, the availability of goods and services, drilling risks, future processing volumes and pipeline throughput, general economic conditions, either internationally or nationally or in the jurisdictions in which the Company or its subsidiaries are doing business, legislative or regulatory changes, including changes in environmental regulation, environmental risks and liability under federal, state and local environmental laws and regulations, potential environmental obligations, the securities or capital markets, our ability to repay debt and other factors discussed in "Risk Factors" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's 2012 Annual Report on Form 10-K and this Form 10-Q. Warren undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.


We are an independent energy company engaged in the exploration and development of domestic onshore oil and natural gas reserves. We focus our efforts primarily on our waterflood oil recovery programs and horizontal drilling in the Wilmington field within the Los Angeles Basin of California and on the exploration and development of coalbed methane ("CBM") properties located in the Rocky Mountain region. As of March 31, 2013, we owned oil and natural gas leasehold interests in approximately 114,740 gross, 89,000 net acres, approximately 85% of which are undeveloped. Substantially all our undeveloped acreage is located in the Rocky Mountains.

Liquidity and Capital Resources

Our cash and cash equivalents increased $2.3 million to $10.7 million during the three months ended March 31, 2013. This resulted from cash provided from operating activities of $16.0 million being partially offset by cash used in financing activities of $9.8 million and cash used in investing activities of $3.9 million.

Cash provided by operating activities was primarily generated by oil operations. Cash used in financing activities primarily represented a repayment of $10.0 million under the Credit Facility. Cash used in investing activities was primarily spent on oil and gas properties and equipment.

On December 15, 2011, the Company entered into a new, five-year $300 million Second Amended and Restated Credit Agreement with Bank of Montreal, as Administrative Agent (the "Agent"), and various other lenders named therein, and Warren Resources of California, Inc. and Warren E&P, Inc., as Guarantors (the "Credit Facility"). The Credit Facility provides for a revolving credit facility up to the lesser of: (i) $300 million, (ii) the Borrowing Base, or (iii) the Draw Limit requested by the Company. The Credit Facility matures on December 15, 2016, is secured by substantially all of Warren's oil and gas assets, and is guaranteed by the Guarantors, which are two wholly-owned subsidiaries of the Company. In December 2012, the borrowing base was increased to $140 million. The maximum amount available is subject to semi-annual redeterminations of the borrowing base in April and October of each year, based on the value of the Company's proved oil and natural gas reserves in accordance with the lenders' customary procedures and practices. Both the Company and the lenders have the right to request one additional redetermination each year.

The Company is subject to various covenants required by the Credit Facility, including the maintenance of the following financial ratios: (1) a minimum current ratio of not less than 1.0 to 1.0 (including the unused borrowing base and excluding

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unrealized gains and losses on derivative financial instruments), and (2) a minimum annualized consolidated EBITDAX (as defined in the Credit Facility) to net interest expense of not less than 2.5 to 1.0.

Depending on the amount outstanding and the level of borrowing base usage, the annual interest rate on each base rate loan under the Credit Facility will be, at the Company's option, either: (a) a "LIBOR Loan", which has an interest rate equal to the sum of the applicable LIBOR period plus the applicable "LIBOR Margin" that ranges from 1.75% to 2.75%, or (b) a "Base Rate Loan", or any other obligation other than a LIBOR Loan, which has an interest rate equal to the sum of the "Base Rate", calculated to be the higher of: (i) the Agent's prime rate of interest announced from time to time, or (ii) the Federal Funds rate most recently determined by the Agent plus one-half percent, plus an applicable "Base Rate Margin" that ranges from 0.75% to 1.75%. As of March 31, 2013, the Company had borrowed $89.5 million under the Credit Facility and was in compliance with all covenants. If oil and gas commodity prices were to decline to lower levels, the Company may become in violation of Credit Facility covenants in the future. If the Company fails to satisfy its Credit Facility covenants, it would be an event of default. Under such event of default and upon notice, all borrowings would become immediately due and payable to the lending banks. During the three months ended March 31, 2013, the Company incurred $0.6 million of interest expense under the Credit Facility of which approximately $0.1 million was accrued for as of March 31, 2013. The weighted average interest rate as of March 31, 2013 was 2.46%.

Our operations are affected by local, national and worldwide economic conditions. We have relied on the capital markets, particularly for equity securities, as well as the banking and debt markets, to meet financial commitments and liquidity needs if internally generated cash flow from operations is not adequate to fund our capital requirements. Capital markets in the United States and elsewhere have been experiencing extreme adverse volatility and disruption, due in part to the financial stresses affecting the liquidity of the banking system, the real estate mortgage industry and global financial markets generally.

Low commodity prices may restrict our ability to meet our current obligations. As a result, Management has taken several actions to ensure that the Company will have sufficient liquidity to meet its obligations through the next twelve months, including swaps, puts and differential swap agreements for a portion of its 2013 and 2014 production to reduce price volatility and reductions in discretionary expenditures. As of March 31, 2013, approximately 50% of the Company's estimated 2013 oil production is covered with puts, approximately 40% of its estimated natural gas production covered with swaps. If the liquidity of the Company should worsen, the Company would evaluate other measures to further improve its liquidity, including, the sale of equity or debt securities, the sale of certain assets, entering into joint ventures with third parties, volumetric production payments, additional commodity price hedging and other monetization of assets strategies. There is no assurance that the Company will be successful in these capital raising efforts that may be necessary to fund operations during the next twelve months.

During the first three months of 2013, the Company had net income of $2.8 million (which included $1.6 million of losses on derivative financial instruments). This compares to the three months of 2012 when the Company had net income of $3.8 million (which included a $0.9 million of losses on derivative financial instruments). At March 31, 2013, current assets were $7.0 million less than current liabilities. As of March 31, 2013, the Company has a borrowing base of $140 million and $89.5 million outstanding under the Credit Facility.

In the future, if natural gas inventories rise to levels such that no natural gas storage capacity exists, certain U.S. natural gas production will need to be reduced or shut in. Additionally, if commodity prices decline to levels that make it uneconomic to produce oil and natural gas, the Company or its partners may elect to shut in or reduce production. As a result, some or all of the Company's oil and natural gas production may be shut in or curtailed during the next 12 months, which would have a material adverse effect on operations.

The Company's proved reserves may decline in future years. Due to commodity prices, compared to the cost of developing our undeveloped reserves and our estimated lease operating expenses, a portion of our future projects may become uneconomic. The Company's projects have material lease operating expenses. Our oil operations include a secondary recovery waterflood with significant fixed costs. During the first three months of 2013, our oil lease operating expenses were $28.14 per net barrel of oil produced. Our natural gas operations include reinjecting the produced water into deep formations and compressing and transporting the gas with significant fixed costs. During the first three months of 2013, our natural gas lease operating expenses were $1.68 per net mcf of gas produced.

At March 31, 2013, we had approximately 1.4 million vested outstanding stock options issued under our stock based equity compensation plans. Of the total outstanding vested options, 0.1 million had exercise prices above the closing market price $3.22 of our common stock on March 31, 2013.

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Contractual Obligations

The contractual obligations table below assumes the maximum amount under contract is tendered each year. The table does not give effect to the conversion of any bonds to common stock which would reduce payments due. All bonds are secured at maturity by zero coupon U.S. treasury bonds deposited into an escrow account equaling the par value of the bonds maturing on or before the maturity of the bonds. Such U.S. treasury bonds had a fair market value of $1.4 million at March 31, 2013. The table below does not reflect the release of escrowed U.S. treasury bonds to us upon redemption.

                                          Payments due by period *
Contractual Obligations               Less Than      1-3       3-5       More Than
As of March 31, 2013       Total       1 Year       Years     Years       5 Years
                                               (in thousands)
Line of credit            $ 89,500   $         -   $     -   $ 89,500   $         -
Bonds                        1,636           164       280        226           966
Drilling commitments         1,587         1,587         -          -             -
Leases                       7,031           852     1,715      1,619         2,845
Total                     $ 99,754   $     2,603   $ 1,995   $ 91,345   $     3,811

* Does not include estimated interest of $2.7 million less than one year, $5.3 million 1-3 years, $2.2 million 3-5 years and $0.7 million thereafter.


Three months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Oil and gas sales. Revenue from oil and gas sales increased $2.5 million in the first quarter of 2013 to $30.8 million, a 9% increase compared to the same quarter in 2012. This increase primarily resulted from an increase in oil and gas production. Net oil production for the three months ended March 31, 2013 and 2012 was 256 Mbbls and 249 Mbbls, respectively. Net gas production for the three months ended March 31, 2013 and 2012 was 1.5 Bcf and 1.2 Bcf, respectively. The average realized price per barrel of oil for the three months ended March 31, 2013 and 2012 was $101 and $100, respectively. Additionally, the average realized price per Mcf of gas for the three months ended March 31, 2013 and 2012 was $3.21 and $2.85, respectively.

Lease operating expense. Lease operating expense increased 15% to $9.8 million ($19.10 per boe) for the first quarter of 2013 compared to $8.5 million ($18.72 per boe) in the comparable period of 2012. Primarily, this increase resulted from increased workover expense in our Wilmington field.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased $1.5 million for the first quarter of 2013 to $11.6 million, a 14% increase compared to the corresponding quarter last year. The 2013 depletion rate increased to $22.56 per boe compared to $22.24 per boe in 2012. The increase in the 2013 depletion rate compared to the 2012 depletion rate on a boe basis reflects an increase in the full cost pool and higher estimated future development and abandonment costs

General and administrative expenses. General and administrative expenses increased $24 thousand in the first quarter of 2013 to $4.3 million, a 1% increase compared to the corresponding quarter last year. This reflected an increase in consulting and legal expense of $0.2 million being offset by lower salary costs of $0.2 million.

Interest expense. Interest expense decreased $25 thousand to $0.8 million in the first quarter of 2013 compared to the same quarter last year. The increase results from a decrease in borrowings under our Credit Facility from $99.5 million at March 31, 2012 to $89.5 million at March 31, 2013.

Interest and other income. Interest and other income decreased $10 thousand in the first quarter of 2013 to $15 thousand, compared to the same quarter in 2012.

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Gain (loss) on derivative financial instruments. Derivative losses of $1.6 million were recorded during the first quarter of 2013. This amount reflects $0.2 million of realized losses and $1.4 million of unrealized losses resulting from mark to market accounting of our oil and gas swaps, puts, futures contracts and costless collar positions.


Our discussion and analysis of our financial condition and results of operations are based on consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our 2012 Form 10-K includes a discussion of our critical accounting policies.

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