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Warren Resources, Inc. (NASDAQ:WRES)

Q1 2009 Earnings Call

May 06, 2009 10:00 AM ET

Executives

Norman F. Swanton - President, Chairman and Chief Executive Officer

Timothy A. Larkin - Executive Vice President and Chief Financial Officer

Kenneth A. Gobble - President and Chief Operating Officer, Warren E&P

Analysts

Mark Lear - Sidoti & Co.

Richard F. Rossi - Wunderlich Securities

Operator

Good day, ladies and gentlemen. And welcome to the first quarter 2009 Warren Resources Incorporated Earnings Conference Call. My name is Shaquanna, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Norman Swanton, Chairman and CEO of Warren Resources. Please proceed, sir.

Norman F. Swanton

Thank you. Good morning everyone. Thank you for joining us for Warren Resource's first quarter 2009 financial and operating results conference call. I'm here with Tim Larkin, our Executive Vice President and CFO; Ken Gobble, our COO and President of our Operating Subsidiary, Warren E&P is also joining us from Wyoming to discuss our operating results.

Before I turn the microphone over to Tim to cover the financial results, and Ken to discuss our oil and gas operations, I would like to briefly comment on the first quarter of 2009.

First quarter 2009 continued to be a volatile one for the oil and gas industry and Warren Resources. We witnessed average realized oil prices up $35 a barrel for the first quarter of 2009, a decline of 59% from the $85 per barrel realized prices during the first quarter of 2008.

Our average 2009 realized natural gas price is up $2.89 per Mcf, also decreased by 58% from $6.80 per Mcf realized prices in the first quarter of 2008.

Capital markets have seen a little improvement, but caution remains and most investors are still on the sidelines.

Our proactive step of reducing capital expenditures by over 90% and establishing the goal of bringing our capital expenditures into line with cash on hand, cash flow from operations and availability under our senior credit facility led by GE Capital, allowed us to have positive cash flow from operations for the first quarter of 2009. We will continue to follow this strategy until oil and gas commodity prices and capital markets improve.

As you will hear in greater detail from Tim Larkin our CFO, at March 31, 2009 we had 19.4 million in cash on hand. We recently, excuse me, we currently have 115 million drawn under our senior credit facility against our $120 million conforming borrowing base limit.

Our lenders are still working on their spring 2009 borrowing base re-determination, which we expect to receive in the next few weeks. However, Warren does not believe that our spring 2009 $120 million conforming borrowing base re-determination under a senior line of credit with GE Capital will be reduced.

Additionally, we are in full compliance with all terms and covenants under our credit facility, and we believe we will continue to be in compliance throughout 2009.

As earlier announced, we are pursuing other measures to further improve our loan-term liquidity and hopefully to rectify the disconnect between the market value of the company's oil and gas assets versus the current enterprise value of the company. These measures include core and non-core asset sales, joint ventures, volumetric production payments, commodity price hedging and other monetization asset strategies.

With that brief overview, I will turn the call over to Tim Larkin our CFO. Tim?

Timothy A. Larkin

Thanks Norman. Before I discuss the company's first quarter 2009 financial results released earlier today, I would like to remind you that all statements made during our conference call that are not statements of historical fact constitute forward-looking statements, and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in the forward-looking statements. Factors that caused the actual results to differ materially from those in the forward-looking statements are described in our Forms 10-K and 10-Q, other periodic filings with the SEC, and our press releases.

As Norman mentioned, the first quarter of 2009 was a challenging quarter for us. We successfully reduced CapEx to 1.8 million for the quarter, while maintaining production at 2.4 Bcfe or 27 million cubic feet per day. This represented a 31% increase in production over the first quarter of 2008.

Production from our two oil fields in California totaled 253,000 barrels during the first quarter, a 4% increase over the 243,000 barrels produced during the first quarter of 2008.

Additionally, gas production from our Sun Dog Unit in the Atlantic Rim project was strong and overall gas production increased to 127% to 920 million cubic feet during the first quarter, compared to 405 million cubic feet during the same period in 2008.

The average realized oil price for the first quarter of 2009 was $35 per barrel, compared to $85 a barrel during the first quarter of 2008, which is a decrease of 59%.

Our differentials from WTI prices were $12 per barrel in January, $8 per barrel in February and $6 in March of 2009. Our current oil differential in California is approximately $6 per barrel.

Our average realized price for the first quarter or average realized gas price for the first quarter was $2.89 per Mcf, compared to $6.80 per Mcf in the first quarter of 2008, decrease of 58%. Company also recognized the $734,000 gain on its gas hedges.

As a result of reduced commodity prices, total revenues for the first quarter decreased 48% to $12.4 million, compared to 2008. Oil and gas revenues decreased 51% to $11.5 million, compared to 2008.

Total expenses increased 31% to $18.9 million during the first quarter of 2009. Lease operating expense increased 50% to 8.8 million due to fractious stimulations in the Doty Mountain Unit and higher than normal LOEs associated with shutting in the Jack Sparrow Unit.

DD&A increased by 36%, primarily due to increases in production. DD&A was $2.18 per Mcfe in 2009, compared to $2.10 per Mcfe in 2008.

General and administrative expense was $3.3 million for both the first quarter of 2009 and 2008. The 2008 G&A expense was reduced by a bonus over accrual of $250,000 in that period. We expect G&A expense to continue to decline.

Interest expense increased as we had a higher outstanding balance under our credit facility.

For 2009, net cash provided by operating activities was $247,000 in the first quarter, compared to $9.9 million in the first quarter of 2008.

As we mentioned in our press release, management does not believe its $120 million conforming borrowing base under its credit facility will be reduced. We expect our borrowing base re-determination in the next few weeks.

To address liquidity issues, we have reduced our full year 2009 capital expenditure budget to $11 million. As previously disclosed, Warren has entered into certain oil and gas hedges, price swap contracts. As a result, the company is locked in a minimum level of cash flow from operations as the operator of the WTU and NWU oil assets in California and as a co-joint venture of the Atlantic Rim project with Anadarko. The company has the ability to modify its capital expenditure budget accordingly.

We reported second quarter and full year 2009 production guidance in our press release earlier today.

Now, let me turn the microphone over to Ken, who will provide you with a brief operational update. Ken?

Kenneth A. Gobble

Thank you, Tim. I would like to offer, update Warren's operational details. Warren continues to make progress in resolving the regulatory issues with the South Coast Air Quality Management District or AQMD restrictions concerning compliance with air quality standards and permission to install the best available control technology equipment in the WTU. Notice of availability of Warren's environmental analysis document or Sequoia was published by the AQMD on April 17th. This officially started the 30-day public comment period for the Sequoia document.

Once the comment period is closed on or about May 15th, the AQMD will answer comments submitted by the public. Warren expects the Sequoia document will be certified and the permit applications will be approved after the AQMD has answered these comments. Current AQMD gas flaring issues do not affect our production.

Recent changes in economic conditions have required careful evaluation of individual well work over programs in both the WTU and NWU. The company plans to accelerate this work in the coming weeks on wells that will provide reasonable returns on investment with current oil pricing. The company continues to focus on optimization of the Upper Terminal waterflood and other related operational efficiencies in both the WTU and the NWU in order to maximize cash flows from our production in future months.

The company has implemented an asset stimulation program on our active Upper Terminal injector wells in the WTU. Anticipate this work will improve our future water flip performance.

Laboratory work for the Alkaline Surfactant Polymer Flood or ASP of the Upper Terminal Zone and the WTU continued to provide encouraging results. We are anxiously awaiting last results from the Radial Core Flood portion of the lab work. Company plans to complete additional reservoir analysis prior to implementing an ASP pilot in the WTU. At this time ASP appears to provide attractive investment opportunity in the current oil pricing environment.

Warren continues to grow gas production from our Atlantic Rim project in Wyoming. All 116 wells drilled in the Sun Dog Unit are now online and producing. As these wells continue to dewater, Warren expects continued gas production growth from the Sun Dog Unit in 2009 and beyond.

During the first quarter, our primary focus in Sun Dog was increasing facility and infrastructure capacity for the new production. Along with our partners in the project, we set four additional electrical generators that should be online in the next few weeks. This additional electrical generation capability will provide increased water injection capacity in the unit.

We also completed expansion on de-hydration and inlet water separation at our compression facility. One new compressor was installed during the quarter. An additional compressor was recently delivered to the field and should be installed in the next few weeks. Once this compressor is installed, the Sun Dog facility, capacity will be capable of moving approximately 20 million cubic feet of gas per day. One more phase of facility expansion is planned for 2009 that will increase Sun Dog compression capacity to approximately 50 million cubic feet by the end of this year.

The Sun Dog Unit and the Atlantic Rim project also contributed to the company's gas production growth in the first quarter. Results from previously announced fracture stimulation program continued to provide improved gas production.

Production from Doty Mountain has grown to approximately 6.5 million cubic feet per day. Additional stimulation treatment as well as, well completions of the 14 new wells, which were drilled in late 2008 have been delayed until gas pricing improves.

Thank you. And now, I'd like to turn the call back over to Norman for any questions that you may have.

Norman F. Swanton

Thank you, Ken. Operator, we'll now take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mark Lear with Sidoti. Please proceed.

Mark Lear - Sidoti & Co.

Good morning.

Norman Swanton

Good morning, Mark.

Mark Lear - Sidoti & Co.

Just kind of curious what's taking the bank so long and what kind of gives you the confidence to say that you guys aren't looking for a borrowing base reduction here?

Timothy Larkin

Well, I think it's under the current environment. I think that it's taking all banks... it seems to be taking all banks just a little bit longer to make the final re-determination. And it's a little bit further complicated because one of our banks in the syndicate was acquired by Lloyd's, and there is additional due diligence or more eyes are needed for official sign-off. And to answer your second question Mark, it's based upon our meetings and our discussions with management does not believe the conforming borrowing base will be reduced.

Mark Lear - Sidoti & Co.

Got you. I guess switching to operations Ken, I don't know if you said how much you're producing currently out of Sun Dog? And I was just kind of wondering how much do you think that area is constrained given compression issues?

Kenneth Gobble

Right now, our gross gas productions at Sun Dog is about 16.5 million a day. We have considerable amount of pressure on the header there. I think once we get this compressor installed that was recently produced, we'll still probably be constraint to some degree. Our forecast has us constrained on compressing capacity until that next expansion is completed. As long as we have adequate water injection, our in-house model has that unit put now in excess of 40 million a day by year-end.

Mark Lear - Sidoti & Co.

Got you. Thanks a lot.

Kenneth Gobble

Certainly.

Norman Swanton

Mark.

Operator

(Operator Instructions). Your next question comes from the line of Richard Rossi with Wunderlich Securities. Please proceed.

Richard Rossi - Wunderlich Securities

Good morning. Just one quick thing. Looking at the lack of any new wells in the Rim this year, but given the incline rates that you get on CBM, is it possible that as we look out into 2010 that you could see any additional production in 2010 over 2009, out of that part of those properties?

Timothy Larkin

Well, that would certainly be our expectation. Just the moving along lines of the discussion with the question from Mark, we had say production to grow close to a 100% at Sun Dog in 2009. And typically we're forecasting approximately 20, 24 month incline period on those wells.

Richard Rossi - Wunderlich Securities

Okay. That's what I was really coming down to, is it that long period. Okay. All right. Thank you.

Norman Swanton

Welcome.

Operator

At this time, there are no further questions. I would now like to turn the call back over to Mr. Swanton for closing remarks.

Norman Swanton

I would like to thank you all for joining us today and for your interest in Warren Resources. I hope I had conveyed to you how committed we are about executing our operating plan, and capitalizing upon the enormous potential in front of us for the balance of 2009 and beyond. Thank you and good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And have a good day.

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