Philip Epstein - Chairman and CEO
Stewart Skelly - VP and CFO
Bob Dowell - VP and General Manager
Warren Resources Inc. (WRES) Q2 2013 Results - Earnings Call Transcript August 7, 2013 12:00 PM ET
Good day ladies and gentlemen and welcome to the second quarter 2013 Warren Resources earnings conference call. My name is Ganeda and I will be your operator for today.
At this time all participants are in listen-only mode, later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Philip Epstein, Chairman and CEO of Warren Resources. Please proceed.
Good morning everyone I am Philip Epstein, Warren’s Chairman and CEO. Thank you for joining us for Warren Resources second quarter 2013 financial operating results conference call.
With me in New York City our headquarter here is Stewart Skelly; our recently appointed Vice President and CFO. Stewart’s been with Warren for over 13 years and has served as our controller for the last 10 years. Stewart’s got a solid understanding of Warren’s financials. Stewart steps in to the shoes of Tim Larkin, who many of you know and he is also here with me today in New York. Tim’s leading our M&A activities. It's an important area for growth for Warren and he is available to answer any questions you may have considering our strategy in that area.
Also joining us from our Long Beach office is Bob Dowell, our Vice President and General Manager of our expanding California unit. Bob will provide updates on our active drilling program in our Wilmington field, as well as provide color on our Wyoming coalbed methane drilling program. I am happy to say that the company is progressing rapidly on multiple fronts, which we will discuss today.
But before I provide an overview of the second quarter, I would like to address Warren’s first venture in to the Monterey Oil Formation and our acquisitions team first transaction since my arrival. As we announced on Monday, we're acquiring an undivided 62.5% working interest in the Leroy Pine project area. It consists of various oil and gas mineral leases, totaling about 1,610 acres. The Leroy Pine projects located in the Santa Maria Valley oil field in the Santa Barbara County, California. The project area is originally developed by Unocal from 1937 to 1994. Unocal drilled 24 wells that produced a total of 6 million barrels of oil before exiting the project.
We anticipate drilling 19 producing wells targeting the Monterey oil formation and two disposal wells. Our estimated net acquisition drilling and development cost for the project are approximately $16 million. Warren expects the commence drilling operations in October of ‘13, and production operations in January of ’14. Warren will be the operator of the Leroy Pine project. The project’s a reactivation of an older oil field with substantial well control which substantially reduces our exploration risk.
In addition, according to the US Energy Department estimates, the Monterey Shale formation in California accounts for approximately two-thirds of the oil shale reserves in the United States. The Leroy Pine project allows Warren to leverage its operational and regulatory skill sets in the development of California oil projects, which was evidenced by our much large Wilmington oil field development. Warren’s drill and learned approach in Leroy Pine will be a stepping stone to the company’s development of additional opportunities in the Monterey oil formation and other opportunities within California.
While it’s a relatively small project, it sits directly in our geological and operating knowledge base. It’s a type of Bolton project that will let us competitively expand in California and that we’ve talked about in the past with various investors in our presentations.
So now for the second quarter overview of Warren, Warren have a strong second quarter of sales volumes in oil and gas revenue each recorded gains over 2012. Our current 2013 budget, we expect to generate cash flow approximately equal to capital expenditures. This will provide us with continued liquidity to execute on our growth strategy. As you will see hear in more detail from Bob, we continue to actively drill for oil in both the Wilmington Townlot unit and the north Wilmington unit in California with two rigs currently operating.
While we had some mechanical issues early in the quarter, we are currently producing about 3900 barrels of oil per day from our two Wilmington units which is up from the last quarter considerably. In Wyoming, we are executing and I previously announced 25 wells coalbed methane drilling programs in our Atlantic Rim area. Today we have successfully drilled 18 wells, we have fracture stimulated 14 wells, and we are producing 8 wells with the remainder of waiting on hookup. Each of these wells has a deordering period estimated at up to 12 months before reaching peak production. However gas is flowing in the completed wells and results look very encouraging.
We continue to evaluate our deep rights in Wyoming in our large Atlantic Rim position which include 72,000 net acres; these acres are perspective for the Niobrara shale, the Shannon, the Sussex, the Frontier, the Dakota formations. Our large acreage position is located in the Washakie Basin in Wyoming just north to Colorado border and in an emerging part of multiple plays. A number of companies have announced drilling success surrounding our position and acreage acquisitions in the area accelerating. We have been informed that major independents are planning on drilling Niobrara wells near our acreage in 2013 and 2014, all these are very good signs for our positions.
We are completing a geological analysis of our deep rights and we brought our geological team to bear on this and intend to file a number of federal units with the BLM to protect and commence testing and development of the formations below the Mesa Verde coals. As we’ve discussed before we are also reviewing different industry structures for Warren to exploit its deep rights. These include joint-ventures, farm-outs, carried interest and participation agreements. We're having ongoing discussions with a number of very high quality exploration companies on that front who are attracted to our substantial acreage position, which gives a lot of running room for a successful venture.
Finally we are analyzing new projects and acquisition opportunities. In addition to Leroy Pine, we're looking at additional California oil projects and are in the early stage of discussions and analysis on a number of very substantial opportunities, which again will leverage on our skill sets. We are also scouting out projects in the Rockies. In all cases we are attempting to use our technical, regulatory and operating expertise to identify projects where we as a company have a competitive edge. This process is coming together well, and I'd like to thank the Warren team for their hard work and execution in pursuing this growth strategy.
As a result we believe that Warren is in a great position to continue to exploit our existing proved and potential reserves and actively seek out attractive acquisitions where we can use our expertise in enhanced oil recovery, horizontal drilling technology and complex natural gas reservoirs to increase shareholder value. On a final note, I'd like to comment on our recent financing activities. In May and June we explored an opportunistically $200 million senior note private debt financing. As we neared pricing in early June, the bond market materially weakened. So we decided to postpone the offering. However, in the course of our presentation, we made dozens of high quality institutions and we're happy to have acquainted them with Warren’s strong asset base drilling inventory and growth strategy. We look forward to revisiting the market when conditions improve.
With that overview, I'll turn the call over to our new CFO, Stewart Skelly, Stewart?
Thank you, Philip. As Warren’s newly appointed CFO, I am very excited to begin this role and look forward to having built the company in the months and years ahead. 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 provision of the Private Securities Litigation Reform Act of 1995.
Actual results could vary materially from those contained in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in our Form 10-K and 10-Q, another periodic filings with the SEC and our press releases.
As Philip mentioned, we had an active second quarter and we're excited about the balance of the year and beyond. Our cash flow from operations continues to be strong and we're in a solid liquidity position. We generated cash flow from operations of $16.4 million in the second quarter and currently have $50.5 million available under our senior credit facility after drawing down $5 million in July to help fund capital expenditures.
Today, we reported net income of $9.2 million for the quarter or $0.13 per diluted share, our adjusted income of $5.4 million when you exclude unrealized gains from hedging activities of $3.8 million. This compares to net income of $5.3 million or $0.07 per share in the second quarter of 2012, our adjusted income of $4.3 million when you exclude unrealized gains from hedging of $1 million in the second quarter of 2012.
In addition, we produced 527,000 barrels of oil equivalent for the second quarter of 2013. This represents a 5% increase over the 499,000 barrels of oil equivalent produced in the same period in 2012.
Natural gas production in our Atlantic Rim project in Wyoming was strong. An overall natural gas production increased 29% to 1.6 billion cubic feet during the second quarter compared to one-time 2 billion cubic feet in the second quarter of the prior year.
This increase in natural gas is driven by our acquisition of Anadarko’s working interest in 2012. Oil production was 262,000 net barrels for the second quarter, compared to 293,000 net barrels produced on the same period in 2012.
The average realized oil price for the second quarter was $96 per barrel, compared to $95 realized in last year. Our average realized natural gas price in the second quarter was $3.60 per Mcf compared to $1.84 per Mcf in the second quarter of 2012.
Also during the second quarter, we recorded a net gain and derivatives of $3.3 million which comprised an unrealized mark-to-market non-cash gain of $3.8 million and this was partially offset by realized losses on settled derivatives on the quarter of $500,000. The company currently owns Brent puts for approximately 1,375 barrels of oil per day with the strike price of $70 per barrel through September 30, 2013. Additionally, the company has entered into two Brent oil swaps.
One at $104.30 or 700 barrels per day for the period of October 1, 2013 through September 30, 2014 and the other swap are $102.12 for 800 barrels a day for the calendar the year 2014. Company also owns blended NYMEX natural gas swaps for 9 million cubic feet a gas per day at $3.56 for 2013 and $3.88 for 2014.
As a result of increased gas production and pricing, our revenues for the second quarter of 2013 increased 2% to $30.7 million compared to $30.2 million in 2012. Total operating expenses decreased 2% to $24.1 million during the second quarter of 2013.
G&A expenses for the second quarter decreased $2.3 million compared to the prior year which reflected lower salary and overhead in 2013 and also $2 million severance expense relating to the departure of prior CEO which was record in the second quarter of 2012.
Lease operating expense increased $1.2 million during the quarter due to additional well work over activity and Ad-valorem taxes in California and also higher production taxes in Wyoming resulting from higher realized GAAP prices during the period.
Depletion, depreciation and amortization expense for the second quarter increased 5% to $11.8 million compared to the same period in the prior year. DD&A was $22.42 per BOE during the second quarter, compared to $22.50 during the second quarter of the prior year.
This increase in DD&A resulted from an increase in total oil & gas production and an increase in development cost and over the prior year. Interest expense decreased 13% to $724,000 during the current quarter, due to a decrease in the outstanding balance of our credit facility during the period.
As a result of the recently Leroy Pine's acquisition, we've increased our 2013 capital expenditure budget from $73 million to $76 million. This reflects $56 million of capital expenditures relating to our California oilfields and $20 million relating to our Wyoming natural gas fields.
As the operator of our oil assets in California and gas assets in Wyoming, the company has the ability to modify its capital expenditure budget as commodity and financial markets change. We reported third quarter and full year 2013 oil and gas production guidance in our press release disseminated this morning.
Our full year gas guidance remained at 6Bcf to 6.5 Bcf and full year oil guidance has been narrowed and ranges from 1,125,000 barrels of oil 1,175,000 barrels of oil for 2013.
Now let me turn the call over to Bob, who will provide you with a brief operational update.
Thank you, Stewart. Now I would like to update Warren’s operational details. During the second quarter of 2013, the company drilled and completed eight new wells in the Wilmington Townlot Unit or WTU in California consisting of six producing wells and two injection wells. Three producing wells and one injection well were drilled in the Tar formation and three producing wells and one injection well were drilled in the ranger formation.
The 30-day initial production rates for each of the new tar wells averaged 100 barrels of oil per day. These new tar wells typically experienced a 50% to 60% decline in producing rates after few months. This is the normal hyperbolic decline and results in a typical ultimate recoveries of 100,000 to 125,000 barrels of oil per well.
Project economics for these three tar wells indicate a nine to 12 month payout at $85 per barrel Midway Sunset pricing. The 30-day production rate for the first ranger well drilled in the second quarter of 2013 was 17 barrels of oil per day. Although this well has similar open hole characteristics, as other nearby ranger wells, it had a slightly lower resistivity and production response has not met expectations. The ranger formation in this area will be studied further to determine why production levels in this well are lower.
The other two ranger wells were placed on production in late June and are currently being evaluated to determine their 30-day initial production rates. We anticipate the production response in all three ranger wells to improve once water injector support from the recently drilled nearby injection well is fully achieved and gross production rates should increase.
The anticipated project economics for the new ranger wells indicated 24 to 27 month payout at $85 per barrel Midway Sunset pricing and include the cost of one-fourth of the new injection well.
As planned, Warren commenced drilling in the North Wilmington Unit or NWU on April 7, 2013. As of the end of the second quarter of 2013, the company drilled and completed four new wells in the ranger formation. These wells consisted of three producing wells and one injection well. The 30-day initial production rates for the new, three new ranger wells averaged 44 barrels of oil per day. The production response in these three producing ranger wells is anticipated to improve once water injection support from the new injection well is obtained.
Gross production rate should increase as a result of increased injection support. These ranger wells are anticipated to exhibit typical decline rates and ultimate recoveries are expected to be about 125,000 to 200,000 barrels of oil per well. Project economics for the NWU ranger wells indicate a 24 to 30 months payout at $85 per barrel Midway Sunset pricing and include the cost of one-half of a new injection well.
The wells currently being drilled with NWU and the first wells to be drilled since completion of the company’s six well pilot program in 2008, the remaining full field development of the NWU now has 42 wells to be drilled consisting of 21 Sinusoidal producing wells and 21 Sinusoidal water injection wells.
For the remainder of 2013, Warren’s drilling program will consist of eight new wells and one well that will be redrilled. In the WTU, we intend to drill three additional Tar horizontal producing wells and one upper terminal Sinusoidal producing well. We also intend to drill one ranger horizontal water injection well.
Warren also plans to redrill the completion interval in WTU 2156 which was a ranger producing wells that was initially drilled and completed in 2012. The WTU drilling program is projected to be completed by the end of September 2013.
In the NWU, we will drill two Sinusoidal producing wells and one Sinusoidal injection well in the ranger formation. We should complete our planned NWU drilling program by the end of August 2013.
Capital expenditures for the second quarter of 2013 in California were $21.5 million. The capital expenditures consisted of $19.7 million for the drilling and development operations in the Wilmington oil field properties and $1.8 million for facility improvements and infrastructure cost. The 2013 capital budget for the WTU consists of $30 million for drilling and $5 million for facility improvements and other infrastructure cost.
The 2013 capital budget for the NWU consists of $13 million for drilling and $5 million for infrastructure improvements. Warren is continuing to work with the South Coast Air Quality Management District or AQMD to pursue gas sales as the preferred method of disposing of excess gas produced at the WTU.
We have been advised that our supplemental CEQA assessment is currently being reviewed by the AQMD’s CEQA staff and is anticipated to be improved in the third quarter of 2013, barring any unforeseen delays. During the second quarter of 2013, the company commenced its 25 well coalbed methane or CBM drilling program in our Atlantic Rim area located in Wyoming.
These relatively shallow wells are vertically drilled to depths between 1600 feet and 3200 feet. Once drilled three coal scenes are selectively perforated, hydraulically fractured stimulated and placed on production. At the close of the second quarter of 2013, we had drilled 11 wells, fractured stimulated five of those wells and placed one well on production.
Since the end of the second quarter of 2013, we have drilled an additional seven wells, fracture stimulated an additional nine of those wells and placed seven wells on production. The remaining six wells are waiting to be hooked up to the surface piping. All of the 25 new CBM wells are expected to be drilled and completed by November 15, 2013.
The company anticipates steady increasing gas production from each well, which should peak in about 12 months as the dewatering or the desorption process continues. Gross gas production from the CBM wells that have been drilled and placed on production to-date is currently limited due to a short-term water handling and disposal constraints. An additional water disposal well will be completed in August and tied into the disposal system, which should help alleviate this bottleneck.
This added injection capacity will allow for a reduction of a water gathering system pressure and enhance desorption of gas, thereby increasing gas production. Warren is also in the process of adding an additional connection to its existing water gathering system to lower the water system operating pressure. As the pressure continues to drop, the amount of gas will increase and the volume of water will decrease.
Capital expenditures for the second quarter of 2013 in Wyoming were $4.3 million. The 2013 capital budget for Wyoming consists of $15 million for drilling and $5 million for facility improvements and other infrastructure costs.
Thank you for participating today and I now return the call to the operator for any questions.
The last thing and just wanted to comment on one thing Bob was talking about our Wyoming gas operations, and so things are moving along quite well there, but we haven’t adjusted guidance there since we're still waiting through the dewatering process, probably in the next earnings call we can give a little more update on that guidance. And on the oil guidance as Stewart said, we narrowed the guidance from to 1,125,000 barrels to 1,175,000 barrels for the full year. So, we'll be addressing that again in our next conference call.
So thank and we'll turn it back to you operator.
Thank you. (Operator Instructions) Your first question comes from the line of Ben [Macova] with Cavalier Capital. Please proceed.
Can you provide us with an update on any MLP thoughts?
Sure. We're looking at a couple of structures and opportunities and we're talking with not just banks but other entities which we might seek to find the structure which allows us to pursue the MLP. Basically, when I first came in and we did an analysis of the MLP opportunity, we found that there were our assets were quite suited for particularly our more steady state oil production in California and then the [CBM] gas is awfully well suited both with the low decline rates.
The new drill wells in California, as Bob said, declined at a 50%-60% rate and so you don’t want to throw those in to the MLP but you can bifurcate between their more steady state and the newer production. So we're pursuing that kind of idea. I would hope that we can get assets a larger asset base in order to make an MLP more solid foundation for us but we recognize that is an excellent source of capital for monetizing yet still controlling your [PDC] and recycling that capital back into the development of spuds and new projects. So it’s an area that we are constantly looking at and we may have something on the table in the next couple of quarters.
Okay, great. And then on lease operating expenses, looks good this quarter, can we expect Q3 and Q4 to be similar to this or at least lower than what we saw in Q4 last year?
Yeah. This is Stewart Skelly here. Yeah, you should see similar lease operating expenses and continued for throughout the year. And because of the Anadarko acquisition we now own a 100% of a midstream assets or gas LOEs have decreased considerably. And on the oil side, we’re probably looking between 22 to 22.50, we are expecting for the remaining part of the year. So this should be less than last year, yeah.
(Operator Instructions). And at this time, we have no further questions. I would now like to turn the call back over to Mr. Philip Epstein for any closing remarks.
Okay, thank you. We thank everybody for joining this call and we continue to execute on our strategy of bolt-on acquisitions like Leroy Pine. As we shown in our CBM play, we’ve lowered our LOE cost considerably due to our ownership of the midstream assets and as we bring those wells on, we will be reporting results to you. So thank you everybody and we look forward to the next conference call.
Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.
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