Warren Resources, Inc. Q4 2009 Earnings Call Transcript

Mar. 3.10 | About: Warren Resources, (WRES)

Warren Resources, Inc. (NASDAQ:WRES)

Q4 2009 Earnings Call Transcript

March 3, 2010 10:00 am ET

Executives

Norman Swanton – Chairman, President and CEO

Tim Larkin – EVP and CFO

Ken Gobble – President and COO

Analysts

Leo Mariani – RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2009 and full year Warren Resources Inc. earnings conference call. My name is Liana, and I will be your operator for today.

At this time, all participants are in a listen-only mode and 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 your conference over to your host for today Mr Norman Swanton, Chairman and CEO. Please proceed.

Norman Swanton

Good morning, everyone. Thank you for joining us for Warren Resources’ fourth quarter and full year 2009 financial and operating results conference call. We are conducting the conference call this morning from our Long Beach office, Tim Larkin, our Executive Vice President and CFO is joining us from our New York City headquarters; and Ken Gobble, our COO and President of our operating subsidiary Warren E&P, is also joining us from our Casper, Wyoming office 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 our performance for 2009 and the future direction of the company.

I am pleased to report that Warren has emerged from the economic recession, credit crisis, and low energy price environment with significantly improved operating performance, solid liquidity, and plans to resume drilling and development activities in the Wilmington oil field in California and the Atlantic Rim coalbed methane project in Wyoming commencing in the second quarter of 2010.

As the worldwide economies recover from the recession, we witnessed continuing pricing improvement for oil in the fourth quarter of 2009. Warren had average realized oil prices of $67.82 per barrel for the fourth quarter of 2009, representing an increase of 47% above the $46.14 per barrel realized prices during the fourth quarter of 2008.

From an oil and gas production growth perspective, during 2009 production increased 7% to a record 9.6 Bcfe from 9.0 Bcfe in 2008. I believe that this achievement is quite impressive when considered in light of the fact that Warren did not drill any wells in 2009. As we have said many times, our high quality Atlantic Rim coalbed methane production in Wyoming continues to show incline in rates of production from existing wells. Similarly, in our Wilmington, California secondary recovery water flood project, the oil wells are long-lived with relatively shallow production declines. I believe that 2009 production performance is indicative of the long-term production potential of our oil and gas assets.

Our October 2009 successful $30 million equity public offering gave us a solid capital base with significantly improved liquidity to execute our drilling programs for 2010 and beyond. Additionally, our proactive programs to reduce operating expenses, reining capital expenditures, and upgrade facilities to operate safely and efficiently made significant progress, as we generated positive cash flow from operating activities of $22.5 million in a challenging price environment in 2009.

Prior to resuming drilling in 2010, we undertook the development of an extensive drilling inventory consisting of highly targeted horizontal oil producers and water injection wells to be drilled in the Tar and Upper Terminal reservoirs in the Wilmington Townlot Unit and the Ranger reservoir in the North Wilmington unit in the Wilmington oil field in California.

The drilling inventory was based upon interpretation of over a 100 modern logs, 150 over logs, fresh cut cores from drilling, updated reservoir characterization, highly targeted measurement while drilling programs, geoscientists [ph] software, 3D property modelling and simulation programs.

Additionally, we plan to continue this petrophysical and geological modelling throughout 2010 to determine the full potential of the Ranger Ford and the 237 (inaudible) reservoirs which could contribute a significant number of additional new horizontal and direction wells to our ultimate drilling inventory. For example, the eight new Tar well drilling locations in our 2010 drilling program in the Wilmington Townlot Unit were developed as part of the new highly targeted drilling inventory. We are also considering drilling a test well in 2010 to the deeper Ford formation at the WTU, which formation has been quite productive in recent years by other operators in the Wilmington field.

Finally, in 2010, we plan to increase compression capabilities in our Atlantic Rim Doty Mountain Unit in Wyoming and water injection rates in our Atlantic Rim Sun Dog Unit, which should increase coalbed methane production significantly without having to drill new wells. We also believe we may have an additional large source of unbooked potential reserves in the Wilmington oil field in California from the Ranger and Upper Terminal formations from application of enhanced oil recovery techniques such as the Alkaline Surfactant Polymer or ASP Flood to create significant incremental oil reserves beyond our total water flood oil reserves.

Based on our 2009 operating results, I believe we are on our way to demonstrating the huge untapped potential for proving up significant amounts of additional oil reserves in the Wilmington field units in California and the large natural gas reserves in the emerging Atlantic Rim coalbed methane project in Wyoming.

Although we have confronted significant challenges, we will prudently build upon this excellent platform to internally generate sufficient cash flows to resume drilling and to grow production and reserves for the years ahead. Accordingly in 2010, we believe that we can return to strong production and reserve growth.

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

Tim Larkin

Thanks Norman. Before I discuss the company’s fourth quarter and full year 2009 financial results released earlier today, I would like to remind everyone that all statements made during the 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 could cause actual results to defer 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.

The October 2009 equity offering and our cash flow from operations significantly improved our balance sheet and liquidity position during 2009. As of December 31, 2009 current assets exceeded current liabilities by $11 million, and we have over $30 million available under our senior credit facility. Additionally, our liquidity position continues to improve on a monthly basis. We plan to commence drilling activities in the second quarter of 2010 and expect to fully fund our 2010 capital expenditures budget with discretionary cash flow.

We had a very good fourth quarter. We had a net loss of $200,000 for the quarter or net income of $2.9 million or $0.04 a share, excluding losses from hedging activities of $3.1 million. Additionally during the quarter, we generated $8 million of cash flow from operations. We accomplished this while simultaneously reducing capital expenditures for the quarter to $1.4 million. Also we maintained production at 2.4 Bcfe or 27 million cubic feet per day for the quarter. Production from our two oil fields in California totalled 237,000 barrels during the fourth quarter, a 6% decrease from the 252,000 produced during the fourth quarter of 2008.

Additionally, natural gas production from our Atlantic Rim project was strong and overall gas production increased 6% to 1 billion cubic feet of natural gas during the fourth quarter compared to 963 million cubic feet during the same period in 2008. The average realized oil price for the fourth quarter of 2009 was $68 a barrel compared to $46 a barrel during the fourth quarter of 2008, an increase of 47%.

Our Wilmington oil differentials from WTI prices were $8 per barrel during the fourth quarter. During the fourth quarter, we had a realized loss from hedging activities of $2.3 million and an unrealized non-cash loss from future hedges of $800,000. Our average realized gas price for the fourth quarter was $4.05 per Mcf compared to $4.04 per Mcf in the fourth quarter of 2008.

As a result of improved commodity prices, oil and gas revenues for the fourth quarter increased 23% to $20.2 million compared to 2008. Total operating expenses decreased significantly compared to 2008 to $16 million during the fourth quarter of 2009. This decrease compared to 2008 resulted from the impairment expense recorded during the fourth quarter of 2008. Lease operating expense decreased 31% to $7.1 million, due to a reduction in California and Wyoming lease operating expenses, primarily due to a more focused operations.

DD&A for the fourth quarter decreased 53% to $4.9 million compared to the fourth quarter of 2008. DD&A was $1.99 per Mcfe during the fourth quarter of 2009 compared to $4.19 per Mcfe during the fourth quarter of 2008. This decrease in DD&A on a per Mcf basis resulted from the ceiling tax impairment recorded during the fourth quarter of 2008.

General and administrative expense increased 24% to $4.1 million during the fourth quarter. This increase resulted from the recording of an additional litigation expense of $1.3 million, resulting from a negative summary judgment decision in the Gotham litigation case during the fourth quarter of 2009. We plan to appeal this ruling. This offset reductions in payroll and consulting expenses during 2009. Additionally during the fourth quarter of 2009, we recorded a non-cash stock option expense totaling $464,000.

Interest expense decreased 15% to $1.2 million, as we paid down $25.1 million under our credit facility during the fourth quarter of 2009. Net cash flow provided by operating activities was $8 million during the fourth quarter of 2009 compared to $7 million during the fourth quarter of 2008. For the full year, production from California totalled 953,000 barrels during 2009, a 6% decrease from the 1 million barrels produced during 2008.

Additionally natural gas production from our Atlantic Rim project increased 33% to 3.9 billion cubic feet during 2009 compared to 2.9 billion cubic feet during 2008. The average realized oil price for 2009 was $54 a barrel compared to $89 per barrel during 2008, a decrease of 39%. The average Wilmington oil differentials from WI prices were $7 per barrel during 2009.

During 2009, we had a realized loss from hedging activities of $1.5 million and an unrealized non-cash loss from future hedges of $9.5 million. Our average realized natural gas price for 2009 decreased 51% to $3.09 per Mcf compared to $6.28 per Mcf in 2008. As a result of reduced commodity prices, oil and gas revenues for 2009 decreased 41% to $63 million compared to 2008.

Total operating expenses decreased significantly to $60 million during 2009. This decrease compared to 2008 resulted from the impairment expense recorded during the fourth quarter of 2008. Lease operating expense decreased 13% to $27 million due to a reduction in California and Wyoming lease operating expenses primarily due to more focused operations.

DD&A for 2009 decreased 14% to $21 million compared to 2008. DD&A was $2.15 per Mcfe during 2009 compared to $2.67 per Mcfe in 2008. This decrease in DD&A on a per Mcfe basis resulted from the ceiling tax impairment recorded during the fourth quarter of 2008.

General and administrative expense decreased 14% to $13 million during 2009; this decrease resulted from reductions in payroll and consulting expense during 2009, which was offset by the recording of an additional litigation expense of $1.3 million, resulting from the Gotham litigation case mentioned previously. Additionally during 2009, we recorded a non-cash stock option expense totaling $1.9 million. Net cash provided by operating activities was $23 million during 2009 compared to $62 million during 2008.

The forecast for the 2010 capital expenditure budget is of $30 million. This includes expenditures of $25 million in our oil fields in California and $5 million in our Atlantic Rim natural gas project in Wyoming. As I previously mentioned, we expect to fund our 2010 capital expenditure budget with discretionary cash flow. In November 2009, our lenders reaffirmed our borrowing days at $120 million. The next re-determination is scheduled for April 1, 2010.

During the fourth quarter, Warren paid down $25 million and had liquidity of $30 million under the facility. The company intends to continue to pay down the credit facility if cash flow continues to exceed capital expenditures. We will reduce interest expense while increasing the availability of funds.

Warren has entered into certain oil and gas price swap contracts, costless collars, and NYMEX to CIG differential swap contracts. As a result, the company has locked in a minimum level of cash flow from operations. As the operator of WTU and NWU oil assets in California and co-joint venturer of the Atlantic Rim project with Anadarko, the company has the ability to modify its capital expenditure budget as commodity and financial markets change. The reported first quarter and full year 2010 production and capital expenditure guidance in our press release was released earlier today.

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

Ken Gobble

Thank you Tim. I would like to update Warren’s operational details.

The company with its partners in the Atlantic Rim project implemented a work over project in the fourth quarter of 2009 in an attempt to increase water injection capacity in the Sun Dog Unit. Result of this work was somewhat mix with marginal increase in injection rates. We do intend to test the injection potentials deeper zones in the unit in the second half of 2010 after the Wall-like [ph] stipulations expire in mid July.

The partners moved forward with the planned fracture stimulation of nine existing producing wells in the Sun Dog Unit. The majority of these wells continue to clean up and have not yet been producing over consistent periods to quantify per well production rates, however initial results are favorable and compare with those seen after similar stimulation programs in our Doty Mountain Unit. We plan to stimulate an additional ten wells in the Sun Dog Unit in the second half of 2010.

We have begun to complete the wells that were drilled in late 2008 but not completed in the Doty Mountain Unit, due to the low natural gas pricing environment at the time. The majority of these wells were fracture stimulated and were placed on production in early 2010. We also expanded the compression capacity in the Doty Mountain Unit late in the fourth quarter of 2009, and current capacity in the unit is approximately 13.5 million cubic feet per day. We plan to stimulate an additional ten existing wells in the Doty Mountain Unit and expand the unit’s infrastructure, as needed in the second half of 2010.

Warren continues to progress quarter resolution of 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 Wilmington Townlot Unit in California. The AQMD is currently reviewing the responses to the comments received from the public comment period. Warren anticipates that the AQMD’s final certification of the environmental document and approval of our permits will take place in the second quarter of 2010.

Warren is planning to resume drilling in the Wilmington Townlot Unit in the second quarter of 2010. This program will consist of a mix of offset locations in the Tar D1A zone and targeted sinusoidal horizontal wells in the Upper Terminal formation. The company plans to test the concepts of sinusoidal development in the unit in front of a more aggressive future drilling program, if results are favorable.

Thank you, and now I would like to turn the call back to Norman.

Norman Swanton

Thank you Ken. Operator, we will now take questions.

Question-and-Answer Session

Operator

(Operator instructions) We have a question from the line of Leo Mariani of RBC Capital Markets. Please proceed.

Leo Mariani – RBC Capital Markets

Good morning.

Norman Swanton

Good morning.

Tim Larkin

Good morning Leo.

Leo Mariani – RBC Capital Markets

With respect to California, I guess the delays have kind of continued to mount here, it sounds like you guys are going to go ahead and commence drilling in the second quarter with or without a final approval from the AQMD, is that correct?

Norman Swanton

Yes.

Leo Mariani – RBC Capital Markets

Okay. And clearly you are going to focus on the Tar, can you give us – you mentioned as well some Upper Terminal sinusoidal wells, could you give us a breakdown of what is going to get drilled in the Tar versus what is going to get drilled on the sinusoidal project development [ph] terminal?

Norman Swanton

Ken, you want to take that?

Ken Gobble

We are looking at seven Tar wells and then one injector in the Tar, and right now we are considering two Upper Terminal sinusoidals and Leo, we may add a Ford well to that.

Leo Mariani – RBC Capital Markets

Okay. I think from the comments you guys mentioned about good results in the Ford’s (inaudible) operators, can you give us some more color on that?

Ken Gobble

You know, those wells out there, even in the WTU unit that were drilled previously quite some time back, those wells averaged – total EURs were near somewhere between 175 and 200,000. It is a relatively stratified sand [ph] section not really big sand [ph] packages like the (inaudible) Tar, but I think it is definitely a zone that has been largely overlooked in that area in the WTU.

Leo Mariani – RBC Capital Markets

Those EURs you are quoting, are those vertical well EURs or you are talking about horizontal wells?

Ken Gobble

Leo, those were all vertical.

Norman Swanton

Directional is probably right.

Ken Gobble

Actually in time, I think most of them are relatively straight.

Norman Swanton

Okay.

Leo Mariani – RBC Capital Markets

So clearly you could add some upside if you guys are drilling some horizontal wells up there.

Norman Swanton

Definitely a possibility, yes.

Leo Mariani – RBC Capital Markets

Okay. I guess, do you have any access to any of the results by RC for example, doing any horizontal wells in that formation?

Norman Swanton

I am not certain that they have actually drilled any horizontal wells to be honest with you, I could not comment on that but I do know that yes, if you are looking at the EURs and the other portion of that incline, there are some pretty impressive production there.

Leo Mariani – RBC Capital Markets

Got you. I guess, jumping over to the GAAP side, it sounds like you guys have got nice increases in the last couple of months on your two main deals there at Doty and Sun Dog, I guess do you anticipate production to kind of continue to incline, I guess, at this point the winter snips kicked in, you are not allowed to get in there and do anymore work, is that right to recommence in July?

Norman Swanton

That is correct Leo, you know, we are really trying to wind down the stimulation programs and the completions that we were working in late Q4 and January and February, we expect significant increases in gas production with the modest stimulation program that I mentioned that we plan to implement in the second half of 2010.

Leo Mariani – RBC Capital Markets

Okay.

Norman Swanton

I think if you look at our gas forecast for the year, we do have roughly, if I am not mistaken Tim, about 18%, 20% growth settled in right now --

Tim Larkin

Right.

Norman Swanton

I think will be very achievable.

Leo Mariani – RBC Capital Markets

Okay. What are your plans at the end of EU [ph] this year?

Norman Swanton

Primarily some infrastructure investments there. We also have some infrastructure development for future drilling. I would expect that any program, any development program there will take place in 2011 at the soonest, and I think that you will see us probably leverage the work that we do on the sinusoidal program and WTU into that unit in the future.

Leo Mariani – RBC Capital Markets

Alright, thanks guys.

Norman Swanton

Thank you Leo.

Tim Larkin

Thanks Leo.

Operator

(Operator instructions) There are no more questions at this time. I would like to turn the call back to Norman Swanton for closing remarks.

Norman Swanton

I would like to thank all of you for joining us today and for your interest in Warren Resources. Thank you and good day.

Operator

Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!