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Executives

Philip Epstein – CEO and Chairman

Timothy Larkin – EVP and CFO

Robert Dowell – Drilling Manager

Analysts

Raymond Deacon - Brean Capital

Gabriel Daoud – Sidoti & Co.

Jack Aydin – KeyBanc Capital Markets

Ben Macova – WA Capital

Warren Resources, Inc. (WRES) Q1 2013 Earnings Call May 7, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2013 Warren Resources Earnings Conference Call. My name is Andrew and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions). As a reminder this call is being recorded for replay purposes.

And now I would like to turn the call over to Mr. Philip Epstein, Chairman and CEO of Warren Resources. Please proceed sir.

Philip Epstein

Thank you Andrew. Good morning everyone. I am Phil Epstein, Chairman and CEO of Warren Resources. Thanks for joining Warren Resources’ first quarter 2013 earnings call.

With me here in Warren’s New York City office is Tim Larkin, our Executive Vice-President and CFO. Joining us from our Long Beach office is Bob Dowell, our Vice-President and General Manager of our expanding California unit.

I have been on the job for about five months now and I would like to thank all our shareholders for their continuing support. I am happy to say the company is progressing rapidly on multiple front which we’ll discuss today. I also want to say that Warren has a team of intelligent, hardworking and motivated individuals. Many have come to us from large oil & gas companies, some from small and they are attracted to Warren’s entrepreneurial environment where they can apply their skills and innovate new solutions. So a real big thank you to the Warren team. We really appreciate the work.

Now I would like to give an overview of Warren. The sort of a picture we like to present upfront is in the phrase 65 times three. We are 65% oil by reserves, 65% PDP and PDNP by reserves, and our enterprise value was 65% of our SEC PV-10. We have strong cash flow from our California oil operations and improving cash flow from our Wyoming gas properties. Our debt is less than 20% of our PV-10.

At the end of 2012 we had proved reserves of 16.4 million barrels of oil and about 51 Bcf of natural gas. We have a drilling inventory in California of 150 locations, which is in the Wilmington Field, one of the largest fields in the United States and we have a large natural gas operation at Wyoming where we are producing about 24 million cubic feet a day gross. Underlying our large acreage position in Wyoming we have developing prospects for the Niobrara and other stacked oil and gas play which represent significant un-booked upside potential in our portfolio.

We are also looking at high impact opportunities outside our current resource base with the continued focus in California and the Rockies. As such Warren is a company with good assets, good cash flow, strong and motivated management and a flexible balance sheet. All these are measures of a strong platform for organic growth and expansion that’s the basis for our enthusiasm and the reason we are confident we can deliver shareholder’s value.

Before I turn the call over to Tim to cover financial results and Bob to discuss our oil and gas operations I would like to briefly comment on our performance during the first quarter of 2013 and the future direction of the company. Warren had a strong first quarter as sales volumes, oil & gas revenues and operating cash flow each recorded significant gains over 2012. On our current 2013 budget we expect to generate positive cash flow after our capital expenditures. This will provide us with additional liquidity to execute on our growth strategy. As you will hear in more detail from Bob we are actively drilling for oil in both the Wilmington Townlot Unit and our North Wilmington Unit in California and we have two rigs running. NWU in particular holds some exciting upside for us as we ramp up the drilling program with new technology and new expertise after five years.

In Wyoming we are reviewing our Atlantic Rim wells for opportunities to increase natural production. More of that will be coming. We are also evaluating our deep rights position in the Atlantic Rim which includes 72,000 net acres prospective for the Niobrara shale, the Shannon, the Sussex, the Frontier, the Dakota and the Muddy formations.

Our acreage is located in the Washakie Basin in Wyoming adjacent to the Colorado border and in an emerging part of multiple plays. A number of companies have announced drilling success surrounding our position. We are completing a geological analysis of our deep rights and intend to file two more deep federal units with the BLM to protect and commence testing and development of the formations below the base of the Mesa Verde coals.

We are also considering different industry structures for developing our deep rights. These include joint-ventures and participation agreements. We have already started discussions with a number of parties on that front and we are very encouraged. Finally we are analyzing new projects and acquisition opportunities. We are looking at a series of California conventional oil projects where we have offers pending. We are also scouting projects in the Rockies. In both cases our goal is to leverage our technical, regulatory and operating expertise to identify projects where we as a company hold a competitive edge. This process is coming together very well.

As a result we believe that Warren is in a great position to exploit our existing proved and potential reserves and actively seek out acquisitions where we can use our expertise in enhanced oil recovery, horizontal drilling technology and complex natural gas reservoirs to increase shareholder value for you.

With that overview I would like to turn the call over to Tim Larkin, our CFO.

Timothy Larkin

Thanks Philip.

Before I discuss the company’s financial results released earlier today I would like to remind everyone that all statements made during our conference call that are not statements of historical facts 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 cause 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 Philip mentioned, we’re excited about the balance of 2013 and beyond. Our cash flow from operations continues to be strong. We continue to generate positive cash flow after capital expenditures, which puts us in a strong liquidity position. We generated cash flow from operations of $16 million in the first quarter, which represented 24% increase over the first quarter of 2012. Currently we have $50.5 million available under our senior credit facility after paying down an additional $10 million on our facility during March of this year.

Today, we reported net income of $2.8 million for the quarter or $0.04 per diluted share, and adjusted net income of $4.2 million excluding unrealized losses from hedging activities of $1.4 million. Also, we produced 513,000 barrels of oil equivalent for the quarter or approximately 5,700 barrels of oil equivalent per day. We produced 256,000 net barrels of oil for the first quarter or approximately 2,850 net barrels of oil per day compared to 249,000 net barrels produced in the first quarter of 2012, an increase of 3%.

Additionally, natural gas production primarily from our Atlantic Rim project in Wyoming was strong and overall natural gas production was 1.54 billion cubic feet during the first quarter compared to 1.23 billion cubic feet in the first quarter of 2012, an increase of 25%. The average realized oil price for the first quarter of 2013 was $101 per barrel compared to $100 per barrel in the first quarter of 2012. Our average realized price for natural gas in the first quarter was $3.21 per Mcf compared to $2.85 per Mcf in the first quarter of 2012.

The company sells its oil at the Midway Sunset posted price less an approximate discount of $4 per barrel. Midway Sunset is currently selling at a $10 premium to WTI. As a result Warren is currently receiving a $6 premium to WTI. Also during the first quarter, we recorded a net loss from derivatives of $1.6 million, which was comprised of a realized loss from derivatives of $200,000 and an unrealized loss from future derivatives of $1.4 million. In order to protect the company against further declines in oil prices but allowing for unlimited upside to oil prices, the company owns Brent puts for approximately 1,375 barrels of oil per day with a strike price of $70 per barrel through September 30, 2013.

Additionally in order to protect future capital expenditures the company entered into a $104.30 Brent oil swap for 700 barrels oil per day for the period October 1, 2013 to September 30, 2014. The company also owns blended NYMEX natural gas swaps for 9 million cubic feet a day at $3.56 for 2013 and $3.88 for 2014. As a result of increased oil & gas production oil and gas revenues for the first quarter increased 9% to $30.8 million compared to 2012. Total operating expenses increased 12% to $25.7 million during the first quarter of 2013, compared to 2012.

Lease operating expense increased due to increased well work over activity and ad valorem taxes in California. We expect oil LOEs to average approximately $20 per net barrel for 2013. Depletion, depreciation and amortization expense for the first quarter increased 14% to $11.6 million compared to the first quarter of 2012. DD&A was $22.56 per BOE during the first quarter of 2013, compared to $22.25 per BOE during the first quarter of 2012. The increase in DD&A resulted from an increase in oil & gas production.

General and administrative expense remained at $4.3 million during the first quarters of 2013 and 2012. An increase in consulting expense was offset by 10% decrease in salary expense. Interest expense decreased by 3% to $800,000 during the current quarter, due to a decrease in the outstanding balance in our credit facility. Our 2013 drilling and facilities capital expenditure budget is $58 million, $53 million relating to our California oil fields and $5 million relating to our Wyoming natural gas fields.

As the operator of the WTU and the NWU oil assets in California and the Atlantic Rim project in Wyoming, the company has the ability to modify its capital expenditure budget as commodity and financial markets change. We reported second quarter and full year 2013 oil and gas production guidance in our press release disseminated earlier this morning.

Now let me turn the call over to Bob, who will provide you with a brief operational update, Bob.

Robert Dowell

Thank you, Tim. Now I would like to update Warren’s operational details. During the first quarter of 2013 the company drilled and completed three new wells in the Wilmington Townlot Unit in California consisting of two producing wells in the Tar formation and one producing well in the Upper Terminal formation.

30-day initial production rates for each of the new Tar wells averaged 85 barrels of oil per day. These new Tar Wells typically experience a 50% to 60% reduction in producing rates after a few months. This is a normal hyperbolic decline and results in our typical ultimate recoveries of 100,000 to 125,000 barrels of oil per well. Project economics for the two Tar wells indicate a nine to twelve month payout at $85 Midway Sunset pricing.

The new WTU Upper Terminal Well has not had sufficient operating time to calculate a 30-day initial production rate. The Upper Terminal Wells drilled in 2012 had an average 30-day initial production of 85 barrels of oil per day with expected ultimate recoveries of about 150,000 to 200,000 barrels of oil per well. While all wells are different we anticipate the composite 2013 Upper Terminal Well program to follow the performance achieved in 2012. The anticipated project economics for the new Upper Terminal Wells indicate a 14 to 18 month payout at $85 Midway Sunset pricing.

In April, Warren contracted a second drilling rig and commenced drilling a ranger formation producer well in the North Wilmington Unit. The 30-day initial production rates for the new NWU ranger wells are projected to average approximately 80 barrels of oil per day and exhibit typical ranger decline rates with ultimate recoveries expected to be about 125,000 to 200,000 barrels of oil per well. Project economics for the NWU ranger wells indicate a 22 to 30 month payout at $85 Midway Sunset pricing.

The well currently being drilled at the NWU is the first well we drilled since completion of the six well pilot program in 2008. The remaining full field development of the NWU now has 46 wells planned to be drilled comprised of 24 Sinusoidal producing wells and 22 Sinusoidal water injection vehicles. This full field development represents an additional 2.7 million net barrels of oil that were produced from the NWU.

We are continuing to acquire additional lots around our NWU central facility to construct a second drill site to provide the surface locations for the remaining wells in our NWU development plan. For the remainder of 2013, Warren’s California drilling program will consist of 20 new wells and one re-drill. At the WTU we intend to drill three Tar horizontal producers, two Upper Terminal Sinusoidal producers and five ranger Sinusoidal producers. We also intend to drill one Tar and two ranger horizontal water injection wells.

Warren also plans to re-drill the completion interval in WTU 2156 a ranger producing well, initially drilled and completed in 2012. In the NWU we plan to drill four Sinusoidal producers and three Sinusoidal injectors all located in the ranger formation.

Capital expenditures for the first quarter of 2013 in California was $7.5 million. The capital expenditures consisted of $5.5 million for drilling and development operations in the WTU oil properties and $2 million for facility improvements and infrastructure cost. The 2013 capital budget for WTU consists of 30 million for drilling and 5 million for facilities, improvements and other infrastructure costs. The 2013 capital budget for the NWU consists of 30 million for drilling and 5 million for infrastructure improvements.

Warren is continuing to work with AQMD to pursue gas sales as the preferred method of disposing excess gas produced at the WTU. Our supplemental CEQA assessment currently being reviewed by the AQMD is anticipated to be approved by mid-year 2013, barring any unforeseen delays.

Thank you for participating today and I will now return the call to the operator for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ray Deacon, Brean Capital, please proceed. Hello Ray, your line is open please proceed.

Raymond Deacon - Brean Capital

Yes, good morning, sorry about that. My question was about the IP rates on the wells this quarter. Just wondering how much of a relationship is there between the IP rates and the EURs and I guess the results so far look like they confirm a 125,000 barrel EUR and just was also curious if you could talk about next quarter, do you think you will have some results on the ranger at the NWU to talk about?

Robert Dowell

Yes, Ray, this is Bob, the IP rates for the two Tar wells, those wells were drilled towards the edges of the Tar formation and there was some high injection rate in some wells that we passed by. So we are not producing those wells at the same draw down that we have our typical Tar wells in the past. We’re kind of only trying to draw down about 200 to 250 gross barrels a day out of those. If we operated those at the same rates that we have historically in the past, over 300 gross barrels per day, the IPs would be reflective of the wells, the tar wells we’ve drilled in the past. We are doing this to prevent any draw in of additional water. So we don’t impact our ultimate EURs that we anticipate receiving from each of these wells.

So the lower IP rates recall there is a pretty steep decline in the first year, have a minimal impact on the ultimate EURs we anticipate receiving from the tar wells. And yes, in the next release we should have production results. The first well has been placed on production from the NWU and we will certainly have some results to report at that time.

Raymond Deacon - Brean Capital

Okay, got it, great. And maybe just one more follow up I guess, Phil you mentioned acquisitions where you had [Inaudible], would any of those allow you to use your existing production facilities or not, I guess?

Philip Epstein

Not the opportunities we are looking at now. Right now we are looking at some California opportunities which basically are older oil fields that had been abandoned by the majors where there is a lot of drilling data on the vertical basis and so in concept they are similar to the approach of developmental geology in our Wilmington field, but they are not adjacent to them. We are looking at some opportunities adjacent to the Wilmington field but those are going to be some time in the future.

Raymond Deacon - Brean Capital

Okay, thank you.

Operator

Thank you for your question and the next question comes from Gabriel Daoud, Sidoti & Co., please proceed.

Gabriel Daoud – Sidoti & Co.

Hey, good morning guys.

Philip Epstein

Good morning, Gabe.

Gabriel Daoud – Sidoti & Co.

I just had a question on Atlantic Rim and it appears that you guys are I guess comfortable with letting the acreage shrink down and I guess if not what’s the price of natural gas would you guys need to see to drill about 25 wells this year.

Philip Epstein

Thanks, Gabe, that’s a really great question because we’re not at the point of letting contraction happen. We’re actually been running some pretty detailed models as the profitability of drilling some of the additional CBM wells. And at $4 for natural gas given the $0.25 or so basis differential we see some pretty good economics. So we’re not quite ready to drill – pull the trigger on that but we’re getting close. And we have some regulatory discussions to continue to have, as you know, operating in the Rockies involves a lot of wildlife issues and stipulations as to when you can drill but we’re encouraged at least by the economics at $4 gas.

We also have opportunities to do some re-fracing and re-completions. We have quite a few wells that did not have, that were not fraced in all three of the (coals). And we’ve seen some pretty good results from the fracing in our neighbors and so we are encouraged by that as a way to get the production up. I should also add that we have brought on as the manager of our Wyoming Unit, Scott Daves who has a lot of experience. He came from originally Burlington, he has been at Samson. He has 28 years of experience with the (coals). So we are looking for some sort of improved practices in the field from that.

So we’re mildly encouraged by the pricing and potentially will be talking more about drilling there.

Timothy Larkin

Hey, Gabe, this is Tim. I just also want to add that we are pursuing the formation of deep federal units in the Atlantic Rim Project. So even if there were to be a contraction there would be an opportunity for us to form deep federal units and protect the Niobrara and other deep oil and gas bearing formations.

Philip Epstein

Right and just even after the contraction we have basically a two year window to continue to drill on that acreage so our 72000 net acres in the federal unit is well protected and as Tim said we are pursuing the formation of federal units to further perpetuate our rights there.

Gabriel Daoud – Sidoti & Co.

Okay, great so I guess that is one thing I was – I guess getting at the Niobrara would be protected if the acreage does shrink down.

Philip Epstein

That’s our land strategy is to protect that and the other formations, and as I said we are sort of midway through a pretty comprehensive geological, geophysical review and activity around us shows that we have something to look forward to.

Gabriel Daoud – Sidoti & Co.

Great, that actually was going to my next question if you could maybe just provide some more color on the (touch things) for the Niobrara and if there is any updates maybe a JVC maybe happening this year, if you could speak about that a little bit?

Philip Epstein

Sure, Yeah, as you know our neighbor Double Eagle drilled and deep tested a Niobrara, they had oil production. They haven’t released more information but they also indicated gas bearing zones in deeper formation sites. I presume the Frontier and Dakota. So we are encouraged by that and we are also encouraged by some of the plays surrounding us, up North in the Powder River there is a lot of opportunities in the Shannon and Sussex. And actually we have when we bought out Anadarko we acquired six deep wells that had been drilled years ago and had touched on various of these formations including the Niobrara. So we don’t produce those but we know that hydrocarbons existed in those wells from verticals tests.

So what we’ve basically done is put together our geological information. We got a sort of private (data) and we’ve talked to a couple of potentially good exploration partners who are going to take a look at it and put their heads together with ours and see what kind of exploration program they could lead for us. And we would look at some sort of participation most likely where we are contributing the acreage and they are contributing the bulk of the capital.

Gabriel Daoud – Sidoti & Co.

Okay, great, that’s all I had guys, thanks so much.

Philip Epstein

Okay, thanks, Gabe.

Gabriel Daoud – Sidoti & Co.

All right, take care.

Operator

Thank you and your next question comes from the line of Jack Aydin, KeyBanc Capital Markets, please proceed.

Jack N. Aydin – KeyBanc Capital Markets

Good morning, guys, how are you?

Philip Epstein

Good.

Timothy Larkin

Hi, Jack.

Jack Aydin – KeyBanc Capital Markets

You’ve been talking about acquisition, what size of acquisition are you reviewing and what is your appetite in a way in terms of (VAT) and money, you know, consideration, capital consideration.

Philip Epstein

We are looking at really two forms of expansion in growth through acquisition. The first one is relatively small in the amount of initial capital and would be representative of a growth for example in California acquiring an acreage position where there is a good indication by past drilling of oil and then we could apply our regulatory and our technical expertise to derive greater reserves from them. That’s the type of deal which you could do for 5 million -10 million and start drilling out a cash flow. But it represents some really nice add-ons to reserves. That’s a comfort zone we’d like to occupy. Similarly there may be smaller plays in the Rockies that would be basis for us to expand what we’ve done thus far in the Atlantic RIM.

But on the larger side we are talking with various owners of fairly large oil and gas assets, either private companies or assets owned by public companies and we are sort of inching towards some understanding of the size that will be comfortable with us. Our bank group which has supported us all along feels that we could pursue a pretty large acquisition, and this could be an acquisition in the 200 million plus range.

Jack Aydin – KeyBanc Capital Markets

Okay. My next question is on Niobrara. How deep Niobrara in your acreage?

Philip Epstein

I think it’s tested down at around 4,500 to 9,500 feet.

Jack Aydin – KeyBanc Capital Markets

How close you are to getting somebody to JV with or do something with you in that area?

Philip Epstein

Well I think if was putting a timeframe on it I’d say in the next six months we will have something pretty well in hand. I mean what we are doing is developing the prospect, package with the geology and the data, of course that’s the first step. We are rigorously working the land position and we are having a first look by one potential partner right now. So we will see what happens. But I would say sometime in 2013 we are going to know what we have got.

Jack Aydin – KeyBanc Capital Markets

Is that also a timeframe applied for the acquisitions, some kind of acquisition?

Philip Epstein

Yeah small or large, I think 2013 is going to be an important year for the company.

Jack Aydin – KeyBanc Capital Markets

Okay thanks Philip, thanks Tim.

Operator

Thank you. And your next question comes from Ben Macova, WA Capital. Please proceed.

Ben Macova – WA Capital

Hi guys, thanks for taking my question. Have you explored taking advantage of the MLP structure for any of the properties or parts of the business?

Philip Epstein

Yes Ben, we have explored it. In fact we did a pretty complete analysis of it and we had some internal, some external discussions. Our particular conclusion here was that we would like to get bigger, to put more producing barrels into one. I know that MLPs have been done with $200 million range but for that type of monetization which is a good one it would be great if we had more barrels and we had more spuds and probables to move through the Warren company and dropdown into MLP structures. So I am a big believer that you need economy of scale when you do something like that and hopefully if we can gain our scale we can look more concretely at that type of structure which is a great structure.

Ben Macova – WA Capital

Thank you.

Philip Epstein

Okay, thank you.

Operator

Thank you. We have no further questions at this time. (Operator Instructions).

Philip Epstein

Andrew, is that it?

Operator

We have no further questions.

Philip Epstein

Okay, let me just conclude by thanking everybody for participating in this call. I would like to let everybody know that on Wednesday at 9.30 we are going to be ringing the NASDAQ bell.

Timothy Larkin

On May 15th.

Philip Epstein

At May 15th right. May 15th we have been invited to open the NASDAQ and I am sure our stock will reflect that. So thanks everybody and we will talk to you again.

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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