- Successful drilling of two Upper Marcellus wells under
budget.
- Reduced lease operating expenses per Mcfe by
43%.
- Increased production by 129% to 7.5 Bcfe.
- Right sized capital spending program to fund within
cash flow.
Warren Resources, Inc. (Nasdaq: WRES) today reported its first
quarter 2015 financial and operating results, including a net loss
of $102.3 million, or ($1.26) per basic and diluted share, which
includes a non-cash ceiling test write-down of its oil and gas
properties totaling $91.4 million. This compares to net income of
$8.2 million, or $0.11 per basic and diluted share, reported in the
first quarter of 2014. First quarter 2015 adjusted net loss* was
$10.9 million compared to adjusted net income of $7.9 million in
the first quarter of 2014.
In announcing the results, Lance Peterson, Interim Chief
Executive Officer, commented, "Warren has responded to a volatile
commodity market environment and has taken action to position the
Company to weather these challenging times. We acted quickly to
right-size capital spending, operating costs and G&A to get
ahead of a commodity market downturn. We are focusing on
operational programs that will allow us to optimize production,
build reserves, and seize opportunities in our key markets. We
increased our hedging activity to protect the Company against
further deterioration of oil and gas prices. We are actively
working on initiatives to increase liquidity and position Warren to
respond quickly to a future commodity price recovery and be able to
react to opportunities that we feel will develop over the near
term. Warren will continue to execute on a business strategy that
ensures our financial health while positioning us for growth, and I
remain optimistic about Warren's potential in the months
ahead."
First Quarter of 2015 Results
Revenue from oil and gas sales decreased $8.3 million in the
first quarter of 2015 to $24.6 million, which represents a 25%
decrease versus the same quarter in 2014. Net oil production for
the three months ended March 31, 2015 and 2014 was 262 Mbbls and
276 Mbbls, respectively, and the average realized price per barrel
of oil for the three months ended March 31, 2015 and 2014 was
$40.23 and $94.90, respectively. Net gas production was 5.9 Bcf in
the first quarter of 2015 compared with 1.6 Bcf in the prior year
with an average realized price of $2.38 per Mcf compared to $4.18
per Mcf in the prior year. This increase in gas production reflects
an additional 4.6 Bcf of gas produced from our recently acquired
Marcellus Assets. In addition, Warren curtailed approximately 1.4
Bcf of Marcellus gas during the quarter due to pricing.
Warren receives fees for transporting first-party gas through
our Atlantic Rim intrastate gas pipeline, which connects with the
Wyoming Interstate Company ("WIC") pipeline system. Transportation
and gathering revenue totaled $1.2 million for the three months
ended March 31, 2015 compared to $1.3 million for the three months
ended March 31, 2014.
Lease operating expense increased 32% to $12.5 million for the
first quarter of 2015 compared to $9.5 million in the comparable
period of 2014. The increase in total lease operating expense
reflects additional operating expense resulting from our recently
acquired Marcellus Assets of $3.9 million, which were partially
offset by savings we are implementing in our Wilmington Field in
California and Atlantic Rim project in Wyoming. This represented a
substantial reduction in lease operating expense per Boe, from
$17.50 per Boe in the first quarter of 2014 to $10.05 per Boe in
the first quarter of 2015.
Depreciation, depletion and amortization expense increased $6.8
million for the first quarter of 2015 to $17.2 million, a 66%
increase compared to the corresponding quarter last year. This
increase results from an increase to our full cost pool as a result
of the acquisition of the Marcellus Assets during the third quarter
of 2014.
The Company recorded an impairment of $91.4 million at March 31,
2015 relating to its ceiling test write down of oil and gas
properties. This resulted from a significant drop in the value of
our proved reserves based on lower commodity prices in 2015. The
trailing twelve month SEC pricing used in our reserve report for
oil decreased 15% from $86.71 at December 31, 2014 to $73.55 at
March 31, 2015 and for gas the decrease was 14% from $3.12 at
December 31, 2014 to $2.70 at March 31, 2015.
Pipeline operating expenses remained flat at $0.6 million for
the three months ended March 31, 2015 and the three months ended
March 31, 2014.
General and administrative expenses increased $1.1 million for
the first quarter of 2015 to $5.0 million, a 27% increase compared
to 2014. This increase resulted from additional salaries and
overhead from the acquisition of the Marcellus Assets during the
third quarter of 2014 as well as additional stock option expense
reflecting executive bonuses paid in equity in lieu of cash.
Interest expense increased $4.5 million to $5.2 million in the
first quarter of 2015 compared to the same quarter last year. This
increase was due to the issuance of $300 million of 9% Senior Notes
in August 2014 to partially fund the Marcellus Asset acquisition.
In addition, interest of $3.2 million was capitalized during this
period, which relates to the development of the Marcellus
Asset.
Derivative gains of $4.0 million were recorded during the first
quarter of 2015. This amount reflects $4.0 million of realized
gains and approximately $38 thousand of unrealized losses resulting
from mark to market accounting of our oil and gas derivatives.
Operational Update
Marcellus, Pennsylvania
Marcellus net production volumes in the first quarter of 2015
were 4.6 Bcf, or 51.5 MMcf/d compared to expectations of 6.2 Bcf.
Production volumes from the Marcellus were lower than initial
guidance during the first quarter primarily due to voluntary
curtailment of approximately 15 Mmcf/day of production in response
to weak realized pricing on the interstate pipelines. Production
curtailments ceased towards the end of the first quarter, after
which time production levels have been at approximately 75
Mmcf/day.
Warren's Marcellus operations for the first quarter included
drilling two Upper Marcellus locations and establishing production
from two wells completed in the fourth quarter of 2014. Both
operations were completed successfully at 5% below budget during
the first quarter. The Upper Marcellus locations were drilled and
casing set, and are currently waiting on completion. Warren
production results from the two newly completed wells have also
been strong, with combined initial production rates in excess of 30
Mmcf/day gross and 30 day average rates of production for the two
wells under a choked flow regime being 22 Mmcf/day gross.
Completion of the Upper Marcellus locations is planned for the
second part of the year. The Upper Marcellus represents significant
upside potential for the Company, with no proved reserves currently
booked for the 48 additional Upper Marcellus locations identified
across Warren's acreage.
Realized natural gas prices averaged $2.42/Mcf in the Marcellus
in the first quarter of 2015, compared to $2.90/Mcf from the fourth
quarter of 2014.
Warren's capital expenditures totaled $6.3 million in the
Marcellus in the first quarter of 2015.
Wilmington Field, California
Warren did not drill any new wells in the first quarter of 2015
at either the Wilmington Townlot Unit ("WTU") or the North
Wilmington Unit ("NWU"). Our operations have focused on optimizing
current production levels and reducing lease operating expenses
along with supplier costs. We have also reduced staffing levels as
a result of the reduction in drilling/well workover
activities.
First quarter capital expenditures for the Wilmington Field were
$0.5 million. These capital expenditures were for facilities,
infrastructure costs and other related items.
Realized oil prices averaged $40/Bbl for the first quarter of
2015, compared to $95/Bbl in the same period in 2014 and $63/Bbl
from the fourth quarter of 2014.
Wyoming Coalbed Methane (CBM)
Warren did not drill any new wells in the first quarter of 2015
in the Spyglass Hill Unit in the Atlantic Rim area of Wyoming,
pending recovery of pricing and conclusion of a modified
operational plan in light of previously discussed dewatering
studies completed on the unit. In the interim, our operations are
focused on optimizing current production levels and reducing lease
operating expenses along with supplier costs.
Realized natural gas prices averaged $2.38/Mcf in Wyoming in the
first quarter of 2015, compared to $4.18/Mcf in the same period in
2014 and $2.91/Mcf in the fourth quarter of 2014.
Debt and Liquidity
Our cash and cash equivalents increased approximately $1.3
million to $3.0 million during the three months ended March 31,
2015. This resulted from cash provided from operating
activities of $6.0 million and cash provided by financing
activities of $18.7 million being offset by cash used in investing
activities of $23.4 million.
Cash provided by operating activities was primarily generated by
oil and gas operations. Cash used in investing activities was
primarily spent on capital expenditures for the development of oil
and gas properties. Cash provided by financing activities
primarily represents the funds received from our credit line.
Capital additions for the three months ended March 31, 2015 were
approximately $8 million and consisted of $6.3 million in drilling
and development costs in the Marcellus Assets, $0.5 million for
facilities in our California properties and $1.2 million of
development costs in our Wyoming properties.
As of March 31, 2015, the Company had borrowed $153.7 million
under its five year credit facility and as of May 6, 2015, we had a
total outstanding under the facility of $158.7 million and a cash
balance of $8.8 million. The borrowing base on our credit
facility is subject to semi‑annual redeterminations in the Spring
and Fall of each year as well as other discretionary
redeterminations upon the occurrence of specified events. We expect
that our borrowing base will be reduced, perhaps significantly,
upon conclusion of the semi-annual Spring redetermination due to
reductions that are being made to bank price decks in response to
the recent declines in oil and gas pricing. In the event that
market conditions continue to deteriorate, the Company's ability to
comply with maintenance covenants under the credit facility may
also be impacted. We continue to manage liquidity risks carefully
in light of these factors, and have accordingly scaled back our
capital expenditure budget and are also evaluating other measures
to further improve our liquidity, including the sale of equity or
debt securities, the sale of certain assets, entering into joint
ventures with third parties, additional commodity price hedging and
other monetization of assets strategies. Management believes that
these actions will enable the Company to meet its liquidity
requirements through the remainder of 2015.
Production Guidance
Despite reductions in 2015 development activity in
the Wilmington field, Warren continues to
expect strong total production, primarily due to continued
outperformance of gas production from the Marcellus as compared to
type curves. In addition, with a relatively moderate projected
base decline rate in the waterflood properties of
the Wilmington field and a strong inventory of locations
in that field, Warren is well positioned to return to oil
production growth once oil prices recover.
The table below sets forth Warren's net production
forecast for second quarter and full year 2015 based on the
information available at the time of this release.
|
Three Months ending |
Full Year ending |
|
June 30, 2015 |
December 31, 2015 |
Oil (MBbl) |
235 – 255 |
900 – 1,000 |
Gas (MMcf) |
7,000 – 8,000 |
36,000 – 37,000 |
Oil Equivalent (MBoe) |
1,402 – 1,588 |
6,900 – 7,167 |
Gas Equivalent (MMcfe) |
8,410 – 9,530 |
41,400 – 43,000 |
Hedges
The Company's current hedges in place as of May 6, 2015 are as
noted in the table below:
Type |
Benchmark |
Price |
Quantity |
Period |
|
|
|
|
|
Oil Hedges |
|
|
|
|
Swap |
NYMEX Oil |
$50.00 |
1,300 Bbl/d |
02/01/15 - 09/30/15 |
Swap |
NYMEX Oil |
$57.00 |
400 Bbl/d |
03/01/15 - 09/30/15 |
Collar |
NYMEX Oil |
$50.00-$64.55 |
500 Bbl/d |
10/01/15 – 03/31/16 |
Collar |
NYMEX Oil |
$50.00-$69.10 |
500 Bbl/d |
10/01/15 – 12/31/15 |
Collar |
NYMEX Oil |
$50.00-$72.50 |
500 Bbl/d |
01/01/16 – 12/31/16 |
|
|
|
|
|
Natural Gas Hedges |
|
|
|
|
Swap |
NYMEX Gas |
$4.18 |
3,000 MMBtu/d |
01/01/15 - 12/31/15 |
Swap |
NYMEX Gas |
$4.02 |
3,000 MMBtu/d |
01/01/15 - 06/30/15 |
Swap |
NYMEX Gas |
$3.20 |
10,000 MMBtu/d |
04/01/15 - 10/31/15 |
Swap |
NYMEX Gas |
$3.16 |
10,000 MMBtu/d |
04/01/15 - 10/31/15 |
Swap |
NYMEX Gas |
$2.94 |
15,000 MMBtu/d |
02/01/15 - 12/31/15 |
Swap |
NYMEX Gas |
$2.97 |
10,000 MMBtu/d |
03/01/15 - 06/30/15 |
Swap |
NYMEX Gas |
$3.05 |
5,000 MMBtu/d |
04/01/15 - 03/31/16 |
Financial and Statistical Data Tables
Following are financial highlights for the comparative three
months ended March 31, 2015 and March 31, 2014. All production
volumes and dollars are expressed on a net revenue interest
basis.
|
Three Months Ended March
31, (Unaudited) |
|
|
(in thousands, except share
and per share data) |
|
|
2015 |
2014 |
Operating revenues |
|
|
Oil and gas sales |
$ 24,590 |
$ 32,879 |
Transportation revenue |
1,188 |
1,323 |
|
|
|
Total revenues |
25,778 |
34,202 |
|
|
|
Operating expenses |
|
|
Lease operating expense and taxes |
12,508 |
9,502 |
Depreciation, depletion and
amortization |
17,191 |
10,354 |
Impairment |
91,375 |
-- |
Transportation expenses |
577 |
565 |
General and administrative |
5,019 |
3,966 |
|
|
|
|
|
|
Total operating expenses |
126,670 |
24,387 |
|
|
|
Income (loss) from operations |
(100,892) |
9,815 |
|
|
|
Other income (expense) |
|
|
Interest and other income |
17 |
134 |
Interest expense |
(5,234) |
(754) |
Loss on contingent consideration |
(130) |
-- |
Gain (loss) on derivative financial
instruments |
3,960 |
(993) |
|
|
|
Total other income (expense) |
(1,387) |
(1,613) |
|
|
|
Income (loss) before taxes |
(102,279) |
8,202 |
|
|
|
Deferred income tax benefit |
(8) |
(8) |
|
|
|
Net income (loss) |
(102,271) |
8,210 |
|
|
|
Less dividends and accretion on preferred
shares |
3 |
3 |
|
|
|
Net income (loss) applicable to common
stockholders |
$ (102,274) |
$ 8,207 |
|
|
|
Earnings (loss) per share — Basic |
$ (1.26) |
$ 0.11 |
Earnings (loss) per share — Diluted |
(1.26) |
0.11 |
|
|
|
Weighted average common shares
outstanding — Basic |
80,869,169 |
73,104,129 |
Weighted average common shares
outstanding — Diluted |
80,869,169 |
73,215,840 |
Production Volumes and Commodity Price
Realizations
|
For the Three Months
Ended March 31 (unaudited) |
|
2015 |
2014 |
|
|
|
Production: |
|
|
Gas – MMcf |
5,899 |
1,603 |
Oil – MBbls |
262 |
276 |
Total Equivalents (MBoe) |
1,245 |
543 |
Total Equivalents (MMcfe) |
7,470 |
3,258 |
|
|
|
Realized Prices (before hedges): |
|
|
Gas ($/Mcf) |
$ 2.38 |
$ 4.18 |
Oil – ($/Bbl) |
40.23 |
94.90 |
Total Equivalents ($/Boe) |
19.75 |
60.54 |
Total Equivalents ($/Mcfe) |
3.29 |
10.09 |
Explanation and Reconciliation of Non-GAAP Financial
Measures
The Company reports its financial results in accordance with
accounting principles generally accepted in the United States
of America ("GAAP"). However, management believes certain
non-GAAP measures provide useful information for investors because
the Company utilizes non-GAAP measures internally to evaluate the
performance of its operations, and many of those same measures are
commonly used by industry analysts to evaluate a company's
operations, as well as for comparison purposes to industry
peers.
- Adjusted net income, a non-GAAP measure,
excludes from the calculation of net income, the impact of
unrealized non-cash gains or losses related to the mark to market
of hedging contracts, as well as other non-recurring items and
other extraordinary items. Management views this measure as
offering a more accurate picture of our current business operations
because unrealized hedging gains and losses are accounting
adjustments and have no cash impact on our operations.
Additionally, by excluding non-recurring items, adjusted net income
enables a better comparison of the ongoing prospects of the
business to previous periods.
- Discretionary cash flow, a non-GAAP measure,
excludes the impact of changes in working capital from the
calculation of cash flow from operations. Management views this
measure as useful because it is widely accepted by the investment
community as a means of measuring a company's ability to fund its
capital expenditures, while at the same time excluding the
fluctuations caused by changes in current assets and
liabilities.
- EBITDA (earnings before interest expenses,
income taxes, depreciation and amortization) is a non-GAAP measure.
Management views this measure as useful because it indicates the
Company's ability to generate cash flow at a level that can sustain
its operations and support its capital investment program. EBITDA
is a commonly used measure by the Company and industry peers to
evaluate and compare operational performance, as well as plan our
capital expenditure programs. EBITDA is not a calculation based on
GAAP, and, in measuring our Company's performance, should not be
considered as an alternative to net income/(loss) applicable to
common shareholders, which is the most directly comparable GAAP
financial measure.
Investors should not consider these non-GAAP measures in
isolation or as substitutes for income or loss from operations,
cash flow from operations or any other measures for determining a
Company's operating performance that is calculated in accordance
with GAAP. In addition, because adjusted net income, discretionary
cash flow and EBITDA are non-GAAP measures, they may not
necessarily be comparable to similarly titled measures employed by
other companies or research analysts, which may calculate these
figures differently than we do, limiting their usefulness as
comparative measures. A reconciliation of net income to adjusted
net income, cash flow from operations to discretionary cash flow
and net income to EBITDA for the three months ended March 31,
2015 and 2014 is provided in tables below.
Adjusted Net Income
The following table reconciles net income applicable to common
shares to adjusted income (in thousands):
|
For the Three Months
Ended March 31 |
|
|
|
|
2015 |
2014 |
|
|
|
Net income (loss) applicable to common
shares |
$ (102,274) |
$ 8,207 |
Unrealized derivative (gains) losses |
38 |
(807) |
Severance expense* |
-- |
476 |
Impairment |
91,375 |
-- |
Adjusted net income
(loss) |
($10,861) |
7,876 |
Adjusted net income (loss) per
fully diluted share |
($0.13) |
$ 0.11 |
*Warren changed its
reconciliation methodology in 3Q14 to reflect an adjustment for
severance expense vs. "non-recurring G&A" in prior
quarters. |
Discretionary Cash Flow
The following table reconciles net cash provided by operating
activities to discretionary cash flow* (in thousands):
|
For the Three Months
Ended March 31 |
|
|
|
|
2015 |
2014 |
|
|
|
Net cash provided by operating
activities |
$5,992 |
$15,491 |
Net changes in working capital |
2,040 |
2,830 |
Discretionary cash
flow* |
$8,032 |
$18,321 |
Discretionary cash flow per fully
diluted share |
$0.10 |
$0.25 |
|
|
|
*Cash flow from operations before
changes in working capital |
EBITDA
The following table reconciles net income to EBITDA (in
thousands):
|
For the Three Months
Ended March 31 |
|
|
|
|
2015 |
2014 |
|
|
|
Net income (loss) applicable to common
shares |
$ (102,274) |
$8,207 |
Interest Expense |
5,234 |
754 |
Income Tax Expense (Benefit) |
(8) |
(8) |
DD&A |
17,191 |
10,354 |
EBITDA |
$ (79,857) |
$19,307 |
About Warren Resources
Warren Resources, Inc. is an independent energy company engaged
in the acquisition, exploration, development and production of
domestic oil and natural gas reserves. Warren's activities are
primarily focused on oil in the Wilmington field in the Los Angeles
Basin in California, and natural gas in the Marcellus Shale in
Pennsylvania and Washakie Basin in Wyoming.
Forward-Looking Statements
Portions of this press release contain 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. A
number of factors may cause actual results to differ materially
from the projections, anticipated results or other expectations
expressed in this release. Warren believes that its expectations
are based on reasonable assumptions. No assurance, however, can be
given that such expectations will prove to have been correct. Some
factors that could cause actual results to differ materially from
those in the forward-looking statements, include, but are not
limited to: changes in oil and gas prices and hedging activities
undertaken in relation thereto; changes in expected levels of oil
and gas reserve estimates and production estimates; the inability
to drill wells on a substantial portion of our acreage due to
insufficient capital, market conditions or other factors; the
timing and results of drilling and other development activities;
any inability to hold substantial leases; governmental and
environmental regulations and permitting requirements and delays;
the availability of capital and credit market conditions;
unsuccessful exploratory activities; unexpected cost increases;
delays in completing production, treatment and transportation
facilities; the availability and cost of obtaining equipment and
technical personnel; operating hazards; risks associated with the
availability of acceptable transportation arrangements;
unanticipated operational problems; potential liability for
remedial actions under existing or future environmental
regulations; changes in tax, environmental and other laws
applicable to our business as well as general domestic and
international economic and political conditions; concentration of
customers; inability to replace reserves as they are produced;
climate change; computer security breaches; and factors that may
affect our common stock including the numbers of shares subject to
registration rights; stock price volatility; anti-takeover measures
in our organizational documents; and any failure to make
appropriate assumptions or estimates in the preparation of our
financial statements or to maintain adequate internal control over
financial reporting. All forward-looking statements are made only
as of the date hereof and, unless legally required, the Company
undertakes no obligation to update any such statements, whether as
a result of new information, future events or otherwise. Further
information on risks and uncertainties that may affect Warren's
operations and financial performance, and the forward-looking
statements made herein, is available in the Company's filings with
the Securities and Exchange Commission (www.sec.gov),
including its Annual Report on Form 10-K under the headings "Risk
Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in other public filings
and press releases. * Please refer to the section titled
"Explanation and Reconciliation of Non-GAAP Financial Measures" at
the end of this release for additional information on non-GAAP
measures including adjusted net income, discretionary cash flow and
EBITDA. For adjusted net income, please additionally refer to the
footnote in the adjusted net income reconciliation regarding the
change in methodology adopted in the third quarter of 2014
CONTACT: Jeff Keeler
212-697-9660