Warren Resources, Inc, (NASDAQ:WRES)
Q3 2013 Earnings Call
November 6, 2013 10:00 am ET
Philip Epstein - Chairman & CEO
Stewart Skelly - President & CFO
Bob Dowell - VP and General Manager
Good day, ladies and gentlemen, and welcome to the Quarter Three 2013 Warren Resources Earnings Conference Call. My name is Juliana and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.
And I would like to turn the call over to Mr. Philip Epstein, Chairman and CEO of Warren Resources. Please proceed, sir.
Thank you, Juliana. Good morning everyone. I am Philip Epstein, Chairman and CEO of Warren Resources. Welcome to Warren’s third quarter 2013 financial and operating results conference call.
I'd like to start by saying this has been an exceptional and exciting quarter for Warren. We achieved record oil and gas revenues and our net income is the highest since 2008 when as you recall gas prices peaked above $9 per Mcf. Operationally, the company is hitting on all cylinders. Financially, we are finding cost savings and efficiencies even as we expand our footprint.
I’ve been CEO and Chairman of Warren for 11 months now and I would like to thank Warren’s employees for their all out effort to achieve outstanding results for our shareholders and positioning the company for the next phase of its growth.
With me here in Warren’s New York City headquarters is Stewart Skelly; our Vice President and CFO. This is Stewart’s first full quarter as CFO. Congratulations Stewart. Stewart will provide details on our excellent financial performance.
Also joining us from our Long Beach office is Bob Dowell, our Vice President and General Manager of our California unit. Bob recently took the reigns in our 2013 Wyoming drilling program. Bob will provide updates on results of operations for our Wilmington field in the Los Angeles Basin as well as our new Leroy Pine project in Santa Barbara County. He will also provide details on our successful coalbed methane drilling program on our very large 86,000 net acre Atlantic Rim project in Wyoming.
I’m pleased to say that Warren continues to progress rapidly on several fronts. Here are the highlights. Warren reported net income of $14.7 million or $0.20 per share for the quarter. These strong results were driven by higher production in sales volumes, improved commodity prices and expense containment. Our gas sales volumes increased by 29% and realized gas prices increased 21% over the third quarter of 2012.
In our 2013 budget, we expect to generate cash flow approximately equal to capital expenditures even as we grow our reserve base. We will provide -- this will provide us with continued liquidity to execute on our growth strategy.
As you will hear in more detail from Bob, Warren executed its 2013's California drilling program in our Wilmington Field on time inline with budget and without any permitting or regulatory issues or delays. As a result of drilling 18 new producing wells and five injection wells, we are currently producing approximately 4100 gross barrels of oil per day, which is among the highest oil production rate in company history.
As many of you know, the Wilmington Field is the third largest oil field in the United States based upon production to-date. Warren owns and operates about 10% of the field and we hold about 99% working interest on our acreage. This is an exceptional company asset with five stacked oil zones. Currently, we’ve identified over 100 drilling locations on our acreage and have begun planning our 2014 drilling program which will include wells in the deeper formation, the deeper Ford formation, which Bob will talk a little bit about. As such Wilmington continues to be an exciting asset for the company and a source of our continued production and cash flow.
In Wyoming, we are successfully concluding our 27-well CBM drilling program. This comes in below budget and with strong results. Our CBM wells target three coal formation at depths to 3,000 feet. The first 23 wells currently on production are producing in aggregate approximately 3100 Mcf of gas per day. Several of the wells are producing over 350 Mcf of gas per day. As is typical with CBM, each of these wells has dewatering period estimated it up to 12 months before reaching peak production.
While early in the analysis based on current gas prices the CBM drilling program is tracking to our targeted returns. These positive economic results benefit to a large extent from our 100% ownership of the midstream pipeline and infrastructure serving the Atlantic Rim.
Our 2013 CBM program represents Warren’s first activity as operator in the Atlantic Rim when we took over from Anadarko. In that capacity, we’ve conducted an extensive geological analysis and we have been able to gain efficiencies in drilling high-grade locations and execute targeted hydraulic fracing, fracturing and completions methods to minimize water flow and maximize gas returns.
We believe the Atlantic Rim represents a very large substantially unbooked resource for Warren. We’ve identified well in excess of 150 additional drilling locations on this acreage and look forward to an expanded 2014 drilling program.
Underlying our Atlantic Rim CBM play, our 71,000 net acres prospective for the Niobrara Shale, the Shannon, the Sussex, the Frontier and Dakota formations. We continue to geologically evaluate and high-grade our deep rights position. Our large acreage position is just north of the Colorado border and in an emerging part of multiple plays. We are in discussions with experienced exploration companies regarding possible joint ventures, farm-outs or participation agreements to exploit our deep rights. We believe the deep rights also represent exciting unbooked potential for Warren which we will continue to hold by drilling our successful CBM play.
On the acquisition front, effective August 30, 2013, we successfully closed our Leroy Pine transaction which Warren will operate. This project represents our first entry into the Monterey oil formation and consist of an undivided 62.5% working interest in approximately 1600 gross acres. The Leroy Pine project is located in the Santa Maria Valley oil field in Santa Barbara County, California. The acquisition was Warren’s first step-out project in California in eight years. The area was developed by Unocal between 1937 and 1994 and Unocal drilled 24 wells that produced a total of 6 million barrels of oil. This oil provides us with great well control and the grounds for a successful project.
As Bob will go into greater detail, we spudded our first well on the project on October 29, 2013 on our timeframe and we plan to drill a total of three producing wells in 2013 and another 16 producing wells and two water disposal wells in 2014. Our estimated net acquisition drilling and development cost for the projects are approximately $16 million.
While relatively small Leroy Pine sits directly in our geological and operating sweet spot. It’s the type of bolt-on project that will let us competitively expand in California and we’re currently scouting and reviewing additional transactions much the same.
On a larger front, in the third quarter, we actively reviewed and bid on two multi-hundred million potential acquisitions, one, oil, and one gas both in the Rockies, and financing was planned without any equity issuance. While we were not the winning bidder, I’m happy to say that Warren has established this successful process for sourcing, analyzing, and financing very significant acquisitions where Warren can exercise its operational and technical expertise.
In the future I anticipate further improvements in production volumes as well as additional expense reductions on a barrel equivalent basis as we look to grow Warren developing our excellent drilling inventory and secure acquisitions in our core areas. As a result, Warren is in a great position to effectively compete and grow the enterprise using our expertise in enhanced oil recovery, horizontal drilling technology and complex natural gas reservoirs in each case to increase shareholder value.
It’s been a great 11 months for me as CEO of the company and I look forward to the future growth.
With that overview, I will turn the call over to Stewart Skelly, our CFO. Stewart?
Thank you, Philip, and thanks to everybody for joining our call today. 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 could cause actual results to differ materially from those in the forward-looking statements are described in our Forms 10-K and 10-Q, and other periodic filings with the SEC and our press releases.
The third quarter was a very good quarter for the company. We reported net income of $14.7 million or $0.20 per diluted share compared to net income of $2.4 million or $0.03 per share reported in the third quarter of last year. In addition, production increased 12% to 552,000 barrels of oil equivalent for the quarter compared to 495,000 barrels of oil equivalent produced in the same period of 2012.
Natural gas production from our Atlantic Rim in Wyoming also continues to be strong. And overall natural gas production increased 29% to 1.55 billion cubic feet during the third quarter of 2013 compared to 1.2 Bcf in the third quarter of 2012.
Oil production for the quarter was 294,000 net barrels, which was flat when compared with the same period of last year. The average realized oil price for the third quarter was $100 per barrel compared to $95 per barrel in the third quarter of 2012. Our average realized natural gas price in the third quarter was $3.41 per Mcf compared to $2.82 per Mcf in the third quarter of 2012.
Also during this quarter we recorded a net loss and derivatives of $1.2 million which was comprised of an unrealized mark-to-market non-cash loss of $1 million and a realized loss on cash settled derivatives of $200,000. As a reminder, the company has entered into two Brent oil swaps, one at $104.30 for 700 barrels per day for the period October 1, 2013 through September 30, 2014, and the other are $102.12 for 800 barrels per day for all of calendar year 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 gas production and pricing, oil and gas revenues for the third quarter increased 11% to a record $34.7 million. Total operating expenses decreased 6% to $23.4 million during the third quarter of 2013.
G&A expenses for the third quarter decreased 29% to $3.1 million when compared to 2012 which reflects lower salary, lower stock option expense and general lower overhead in 2013. Lease operating expense increased $2.2 million to $9.3 million due to additional well work over cost in Wyoming and higher ad valorem taxes and work over expenses in California.
Depletion, depreciation and amortization expense for the third quarter decreased 17% to $11 million compared to the third quarter of the prior year. DD&A was $19.89 per BOE during the third quarter of 2013 compared to $26.75 per BOE during the third quarter of 2012. This decrease in DD&A resulted from the addition of more proved gas reserves to our reserve base during the third quarter of 2013 as a result of gas pricing and our  CBM drilling program.
During the quarter the company completed an evaluation of post production cost and taxes chargeable to royalty owners in the Wilmington Townlot Unit. As a result of this review, we recorded another income a non-recurring amount of $5.3 million reflecting the recapture of prior period expenses. Lease operating expenses will also be lower as a result of this change going forward.
Interest expense decreased 11% to $760,000 during the current quarter due to a decrease in the outstanding balance of our credit facility.
Our cash flow from operations continues to be strong and we believe our balance sheet and liquidity position are both in great shape. We generated cash flow from operations of $25.7 million in the third 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.
As the operator of our 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 full year 2013 oil and production guidance in a press release disseminated this morning. A full year gas guidance remains at 6 Bcf to 6.5 Bcf and we expect our oil production to range between 1.1 million barrels and 1,115,000 barrels for 2013.
Now let me turn the call over to Bob who will provide you with a brief operational update. Bob?
Thank you, Stewart. Now I would like to update you on Warren’s operational information and details. During the third quarter of 2013 the company drilled and completed six new wells in the Wilmington Townlot Unit or WTU in California. These wells consisted of five producing wells and one injection well. Three producing wells were drilled in the Tar formation, one sinusoidal producing well and one injection well were drilled in the Ranger formation and one producing well was drilled in the Upper Terminal formation. The 30 day initial production rates for each of the new Tar wells average 91 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 115,000 of barrels of oil per well. Project economics for the three Tar wells indicate a 15 to 20 month payout at $85 per barrel Midway Sunset pricing.
The 30 day initial production rate for the Ranger well drilled in the third quarter of 2013 was 52 barrels of oil per day. New Ranger wells typically experience a 30% to 40% reduction in producing rates after a few months. Again this was a normal hyperbolic decline and results in our ultimate typical recoveries of 100,000 to 110,000 barrels of oil per well.
We anticipate that the production response in all of three of the 2013 Ranger wells will improve once water injection support from the recently drilled injection wells is fully achieved. The anticipated project economics for the new Ranger well indicate a 25 to 30 month payout at $85 per barrel Midway Sunset pricing and include the cost of one-fourth of a new injection well.
The Upper Terminal wells drilled in the third quarter of 2013 was placed on production in late September and is currently being evaluated to determine its 30 day initial production rate.
Our 16 well 2013 WTU drilling program was completed on October1, 2013. The Warren drilling rig was then relocated to an existing well, the WTU 2156 to commence a re-drilling and re-completion procedure in the Ranger formation. Upon completion of this well our drilling rig will be shutdown, serviced and prepared for commencement of the 2014 WTU drilling program.
In 2014, our drilling program at the WTU is anticipated to complete, continue to expand the development of highly targeted wells from the WTU’s 80 plus well drilling inventory. In 2014, we will also begin developing the deeper Ford zone that was successfully tested in 2011. Warren received DOGGR approval for injection support into the Ford formation in 2013 and now has a complete development plan to implement in 2014.
During the third quarter of 2013, the company drilled and completed two new wells in the North Wilmington Unit or NWU in California consisting of one producing well and one injection well. The 30 day initial production rate for the new Ranger well averaged 38 barrels of oil per day. The production response in the five new 2013 producing wells is anticipated to improve once water injection support from the two new injection wells is obtained.
Gross production rates 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 month payout at $85 per barrel Midway Sunset pricing and include the cost of one half of a new injection well.
The seven well 2013 NWU drilling program was completed on August 11, 2013. The rig we contracted was demobilized and removed from the NWU drill site. The seven new wells drilled in 2013 are the first wells drilled at NWU since completion of the company’s six well pilot program in 2008. The remaining full field development of the NWU now has 39 wells to be drilled consisting of 19 sinusoidal producing wells and 20 sinusoidal injection wells.
We anticipate that the 2014 drilling program in the NWU will continue expanding the development of highly targeted wells from the NWU’s 39 well drilling inventory. Completion of the drilling in the Eastern portion of the NWU will be concluded in 2014 when the 8 new wells are drilled from the existing Satellite 7 drill site. Warren is currently completing land acquisition transactions for a second drill site to be conducted -- to be constructed in 2015 and 2016 that will allow for full development of the Western portion of the NWU.
Capital expenditures for the third quarter of 2013 in California were $14.7 million. The capital expenditures consisted of $13.1 million for drilling and development operations in the Wilmington oilfield properties and $1.6 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 costs. The 2013 capital budget for the NWU consists of $13 million for the 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. In late September, the AQMD advised that our project was being worked on in earnest to get it finished. The next step after AQMD approves the final draft will be the issuance of a notice to the public that comments will be due in about 30 days.
On October 29, 2013, Warren commenced drilling operations on the Leroy number one well located on our most recent acquisition, the Leroy Pine Project in Santa Barbara County, California. The Leroy Pine Project represents Warren’s first step-out project in California in nearly eight years. Our two phase development plan incorporates the drilling of three producing wells in 2013 and another 16 producing wells and two water disposal wells in 2014. This project is targeting the Monterey Formation, which by U.S. Energy Department estimates, accounts for approximately two-thirds of the oil shale reserves in the Unites States. Our estimated net acquisition drilling and development cost for this project are approximately $16 million.
Now I'd like to shift our discussion to our other operating asset located in the Atlantic Rim area of Wyoming. During the third quarter of 2013, the company drilled 16 new coalbed methane or CBM wells in the Spyglass Hill Unit and subsequently completed the planned 27 wells in the 2013 drilling program. Of the 16 new wells drilled, 13 of those wells were fracture stimulated as of September 30, 2013. A total of 16 new wells were placed on production by the end of the third quarter. All of the 27 new CBM wells are expected to be placed on production by November 15, 2013.
The company has satisfied the annual drilling requirements by drilling and completing at least 25 gross CBM wells in 2013 and as a result, the Spyglass Hill Unit will remain in effect until at least June 10, 2014.
We are currently in the process of adding additional connection to our existing water gathering system to lower the water system operating pressure. A temporary transfer station to store and pump the water is under construction and should reduce current tubing pressures on these new wells. Ultimately, these steps will lower the casing pressure below 50 pounds per square inch further the de-watering process and accelerate gas production. As the pressure continues to drop, the amount of gas will increase and the volume of water will decrease. The company anticipates steadily increasing gas production from each well which should peak in approximately 12 months as the de-watering or desorption process continues.
Capital expenditures for the third quarter of 2013 in Wyoming were $10.9 million. The 2013 capital budget for Wyoming consists of $15 million for drilling and $5 million for facility improvements and other infrastructure costs.
The 2014 Atlantic Rim Drilling program is presently being planned and will consist of 48 new CBM wells that will all be fracture stimulated. The company is also reviewing additional re-completion candidates for fracture stimulation opportunities to capture additional gas reserves currently not being produced.
Thank you for participating today, and I will now return the call to the operator for any questions.
Thank you. (Operator Instructions). Your first question comes from the line of Jack Aydin, KeyBanc Capital Markets. Please proceed, sir.
Hi this is Robert here for Jack.
I just want to get a little detail on the $5.3 million of other income. Can you break that down in terms of was the entire portion from recapture of prior period expenses? And if so, was that all for last year or what periods was that for?
That was prior period post-production expenses and ad valorem taxes that we went back at this point for years to recapture. And it was all with respect to the Wilmington Townlot Unit.
That is correct.
Okay. And then, what -- what do you expect the impact to be on LOE going forward? How did your reevaluation I guess change here your view on LOEs?
Yeah. On a go-forward basis, know we looked at all of the costs that we're incurring we looked at the leases, we looked at -- where we could charge then. On a go-forward basis, we should see our LOEs in the field reduce by about $1.75 million to $2 million which equates to about $1.75 per barrel.
Okay, okay. So the LOE will be lower going forward, but you won't necessarily have additional recaptures that’s not necessarily recurring?
Right, right that is correct, Robert yes, will -- it will just be reflected as a reduction in our LOE expense.
Okay. And then regarding permitting in 2014, you said you have your Ford wells already approved by DOGGR? What about the remainder of your other planned drilling?
Yes, Robert, hi, this is Bob. Normally the only permitting that takes any period of time is for water injection wells. And so we submitted -- the Ford has not been injected to for over 40 years. So we submitted the injection well proposal to the Division of Oil and Gas and Geothermal Resources earlier this year to get approval for the injection into that zone so that when we begin drilling in early next year we have clear approval to begin drilling both the producers and injectors. There are no permits -- there are permits issued for producing wells, however, those are normally given in a 3 to 10 day type period.
Thank you. You have no questions at this time. (Operator Instructions). Sir, you have no questions at this time. I would now like to turn the call over to Philip Epstein for his closing remarks.
Okay, thank you, operator. Well I'd like to thank everybody for listening. I think we've been very successful this quarter and throughout the year. I want to emphasize that we have -- we develop some extremely I think successful systems for developing our understanding of where to take the company. We've looked at some smaller acquisitions like Leroy Pine; we have a couple of those still on deck. And we hope to be concluding some of them in the next couple of quarters. And we're pretty active -- we've been very active in the larger transaction mode. We have the cash flow and we have a balance sheet with a lot of liquidity.
And as I indicated before the two large transactions we looked at while we were not contemplating the issuance of equity, so our goal is to take our strong resource base, our strong cash flow, our good inventory and to grow the company in part through acquisitions and leverage off of our equity.
I also want to emphasize that we've got a great new understanding of our Atlantic Rim. Our geologic team and our technical team has done a thorough analysis of that asset. That asset was somewhat neglected by the prior operator in terms of developing a game plan going forward in terms of understanding the different pay zones and how to accurately frac through while minimizing water. We think we have cracked that code.
And I think our 2013 program will bear good fruit in that respect, but it also opens up an enormous resource base for us. As indicated I think we have well over a 150 locations. These are gas assets that will grow in the company's inventory and reserve base and are extremely profitable to us even with today's strip pricing because we were successful in acquiring the 60 mile pipeline that carries the gas to CIG and the associated infrastructure. So we’re pretty excited about the go-forward there.
Bob indicated we have about 48 wells currently on the drawing board for 2014 and we expect continued cost savings there. We brought those wells in well under budget and of course we're looking forward to the desorption process where the gas increasing in volume.
So with that we are moving forward and we'd like to thank everybody for their continued support. And we’ll talk to you next quarter. Thank you very much.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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