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Warren Resources Inc. (NASDAQ:WRES)

Q1 2010 Earnings Call

May 05, 2010 10:00 am ET

Executives

Norman Swanton - Chairman, President and CEO

Tim Larkin - EVP and CFO

Ken Gobble - President and COO

Analysts

Duane Grubert

Operator

Good day ladies and gentlemen, and welcome to the first quarter 2010 Warren Resources Inc. Earnings Conference Call. My name is Caitlin and I will be your operator for today. At this time all participants are in a listen only mode.

Later 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 your host for today’s call Mr. Norman Swanton Chairman and CEO of Warren Resources. Please proceed.

Norman Swanton

Thank you operator. Welcome ladies and gentlemen to Warren Resources first quarter 2010 financial and operating results conference call. I am pleased to be here with Tim Larkin our Executive Vice President and Chief Financial Officer and Ken Gobble our Chief Operating Officer and President of our Operating Subsidiary Warren E&P. Before I turn the microphone over to Tim to cover the financial results and Ken to discuss our operating results, I would like to briefly review some first quarter 2010 highlights.

During the first quarter of 2010 oil & gas revenue increased 87% to $21.6 million compared to the first quarter of 2009. And our net earnings were $7.2 million for the quarter or $0.10 per deluded share, compared to a net loss of $6.6 million for the first quarter of 2009 or $0.11 per diluted share representing a $0.21 per share positive swing between quarters.

Well higher oil and gas prices amplified first quarter financial results I believe the gains in the operating results in the first quarter of 2010 are the true drivers of future share holder value. Particularly our reduction of least operating expenses by 11% compared to the first quarter of 2009.

I am also excited that we have resumed drilling oil wells in Wilmington Field in California. And we successfully completed our first new horizontal tar well last Friday in cellar number one. We slid the drilling rig to a second location and cellar one 12 feet south in four hours of the rigs released from the first well and immediately commenced drilling our second horizontal tar well.

We drilled our second horizontal tar well over the past weekend and completed the well earlier today. Both new wells showed good resistance while drilling the tar formations. While it will take a week or two for the first two tar wells to clean up before you will have reliable initial production data. Preliminary results look encouraging.

Based on implications of these and other operating results, I believe we are now on our way to creating a large highly targeted drilling inventory, which should demonstrate the untapped potential of our oil reserves in the Wilmington Field unit in California and the natural gas reserves in the large emerging Atlantic rim Coalbed Methane Project in Wyoming.

Additionally, I am confident that we will favorably resolve our environmental permitting issues in California in the near future. Although we and the oil industry have confronted severe challenges over the past year and a half, we have come out of the storm, a leaner and more focused company with stronger levels of cash flow and greater financial liquidity.

Also, I believe we have built a successful environmentally sensitive model for urban development for redeveloping legacy oil fields such as our Wilmington Townlot Unit in California which was newly zoned to develop up to 540 new wells in the WT new Unit.

Additionally our Atlantic Rim Coalbed Methane project in Wyoming is covered by our federally approved environmental impact statement which permits the development of 1,800 Coalbed Methane Wells in the Atlantic Rim project.

Our long-term outlook has never been better. We will continue to focus building a large high-quality drilling inventory that will lay the foundation to deliver strong sustainable growth in domestic oil & gas production reserves and profitability for the years ahead in both of our core US drilling areas. With that overview I will turn the call over to Tim Larkin, our CFO, Tim?

Timothy Larkin

Thanks, Norman. Before I discuss the company’s first quarter 2010 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 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 are described in our forms 10-K and 10-Q, other periodic filings with the SEC and our press releases.

During the first quarter our cash flow from operations continued to improve our balance sheet and liquidity position. Also as Norman mentioned, we are drilling oil wells in California for the first time since the fourth quarter of 2008.

As of March 31, 2010 current assets exceeded current liabilities by more than $14 million. And after paying down another $4.9 million of debt during the first quarter we have $35 million available under our senior credit facility. We expect to fully fund our 2010 capital expenditures with cash flow from operations.

We had a very good first quarter; we had net income of $7.2 million for the quarter or $0.10 per diluted share and adjusted net income of $6.1 million or $0.09 per diluted share excluding unrealized gains from hedging activities of $1.1 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 $2.2 million. Also we maintained our oil and gas production at 2.4 Bcfe or 27 million cubic feet a day, equivalent per quarter, for the quarter, per day for the quarter.

Production from our two oil fields in California totaled 223,000 barrels during the first quarter, 12% decrease from the 253,000 barrels produced during the first quarter of 2009.

Additionally, natural gas production from our Atlantic Rim project was strong and overall natural gas production increased 17% to 1.1 billion cubic feet during the first quarter compared to 920 million cubic feet during the same period in 2009.

The average realized oil price for the first quarter of 2010 was $71 per barrel compared to $35 per barrel during the first quarter of 2009, an increase of 101%.

Our first quarter Wilmington oil differentials from NYMEX prices were $8 per barrel. Also during the first quarter, we had a realized gain from hedging activities of $800,000 and an unrealized non-cash gain from future hedges of $1.1 million. Our average realized gas price for the first quarter was $5.50 per Mcf compared to $2.89 per Mcf in the first quarter of 2009.

As a result of improved commodity prices, oil and gas revenues for the first quarter increased 87% to $21.6 million compared to 2009. Total operating expenses decreased 11% to $15.5 million during the first quarter of 2010 compared to 2009. Lease operating expense decreased 18% to $7.2 million, due to more focused operations and lower property taxes in California.

DD&A for the first quarter decreased 10% to $4.8 million compared to the first quarter of 2009. DD&A was $1.99 per Mcfe during the first quarter of 2010 compared to $2 and 18 cents per Mcfe during the first quarter of 2009. This decrease in DD&A on a per Mcfe basis resulted from lower escalated future development costs as of March 31, 2010 compared to 2009.

General and administrative expense increased 6% to $3.5 million during the first quarter of 2010. This increase resulted from additional stock option expense of $200,000 compared to 2009. In total we recorded non-cash stock option expense of $733,000 during the first quarter of 2010.

Interest expense decreased 44% to $872,000 as we paid down $4.9 million under our credit facility during the first quarter of 2010. Net cash flow provided by operating activities was $8 million during the first quarter of 2010 compared to $247,000 during the first quarter of 2009.

We forecasted in 2010 capital expenditure budget of $30 million, this includes expenditures of $25 million for our oil fields in California and $5 million for our Atlantic rim natural gas project in Wyoming.

As I mentioned previously, we expect to fund our 2010 capital expenditure budget with cash flow from operations. Yesterday, our vendors reaffirmed our borrowing base at $120 million. The next re-determination is scheduled to be completed in October 2010.

Currently Warren has liquidity of $35 million under it’s credit facility. The company intends to continue to pay down debt if cash flow continues to exceed capital expenditures. This will reduce interest expense while increasing the company’s availability of funds under the facility.

Warren has entered into certain oil & 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 venture of the Atlantic Rim project with Anadarko, the company has the ability to modify its capital expenditure budget as commodity and financial markets change. We reported a second quarter and full year 2010 production and capital expenditure guidance in our press release, released earlier today.

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

Ken Gobble

Thank you Tim. I would like to update Warren’s operational details. Warren placed the first well of our 2010 WTU development program on production made first. This well was a horizontal tar producer and was the first planned well to test the potential of the Tar D1-A sand to the northwest of the existing Tar production in the Units. The well was not included in Warren’s proved reserve base, therefore the results from this first well could increase the company’s total proved reserves and increase the drillable well inventory in the Unit.

All initial data in the well including formation resistance obtained while drilling and the physical placement of the well bore into the top of the sand lead us to believe the well will produce at or near our bore cap. Initial production rates are not yet available as we bring these wells on slowly to allow the gravel pack completion to cure. We expect to have accurate initial production data for this well in the next week. Warren has also just finished completing the second well of our 2010 program. Production from this second well should commence in the next day or two.

The second well has been drilled, and casing has been set to the kick off point of the lateral in the Tar D1-A stand in 2008. The second well is included in the companies proved undeveloped reserve base.

Both of the first few wells were completed below the companies expected development expenses. The company continues to work on facility upgrades and both the WTU and NWU properties in California.

This facility work is designed to increase system redundancy and efficiency. In addition of the fortune of the company’s 2010 facility investment is targeting areas that need to be improved, or expanded for future development drilling in both units.

Warren has partners in the Atlantic Rim Project completed the 9 well fracture stimulation program in the Sun Dog unit. Gas production rates on these wells were increased, but problems have been encountered keeping the downhole pumps operating in the wells after stimulation.

Surface separators have been installed on several of these wells to allow them to continue to produce and clean up until it’s possible to run the pumps back into the wells. The company expects to stimulate additional wells in Sun Dog later in 2010.

Southern wells that were previously drilled in the Doty Mountain unit were completed and placed on production in the first quarter. The compression facility in the unit was also expanded to 13.5 million cubic feet per day. Gas production in Doty Mountain continues to increase and is currently approximately 11 million cubic feet a day.

Warren is planning to stimulate additional wells and expand compression facilities to approximately 20 million cubic feet a day in Doty Mountain during the second half of 2010. Thank you and I’d like to turn the call back over to Norman.

Norman Swanton

Thank you Ken, operator we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Duane Grubert, please proceed.

Duane Grubert

Yeah, Norm, can you go through the air emissions resolution in terms of how much gas gets flared, how much gas gets used on sight in your microturbines and ultimately how much gas gets re-injected, recognizing you have a constraint now just walking through or could you do with those three methods of getting rid of the gas?

Norman Swanton

Ken, would you like to take that one?

Ken Gobble

Sure. We’re allowed to flare approximately 100 Mcf a day out there Duane. And most of the gas to oil ratio out there in that unit is quite low. As you mentioned we are also burning some of the you are consuming some of that produced gas on site and our heater-treater and also most microturbines. And between all three of those alternatives that we have available to us right now, we’re in that 200 to 225 Mcf a day range. Ultimately, of course, we’ll the resolution to this issue will allow us to inject our produced gas underground.

Duane Grubert

And so eventually you’ll be capable of re-injecting all of it, is that right?

Ken Gobble

That’s correct. You know really what caused this issue with additional gas was when we drilled a few of the wells in that Tar zone, that were near top of that structure and they have some more gas associated with that oil production than what we were used to seeing out there.

Duane Grubert

Okay, and then separately you had this drilling hiatus since the fourth quarter of ‘08, that gave you some time to think about the program and learn some stuff. You had formerly been talking with some enthusiasm about ASP pilot aim and so forth.

What have you learnt in the last year or so that maybe is different in your development intent today than what you would have articulated when you were drilling in late ’08?

Ken Gobble

You know, when we first took over operations specifically in the WTU our plan was to develop and down-space a pattern water flood in the upper terminal. And I think from what we have learned, you know a lot of that was a paint from the date of, from the development of those upper terminal wells was we believe now that we would be much more successful tarring those segregated sands with horizontal laterals.

Something similar that we did NWU in ’07 and ’08 were we targeted a section of the sands with slimy soil to develop as many sands as we could. And I think as we forward that will be the direction of additional development.

We are still very much encouraged by the lab result and the research that we have completed on the ASP front. And I think that, you know as oil prices continue to rebound that also is a very viable option for both those properties.

Duane Grubert

And just for some pattern recognition, is OXY Active in it’s of the Wilmington field and are they doing any horizontal work at all?

Ken Gobble

Yes, yes and yes Duane.

Operator

(Operator instructions) The next question comes from the line of [Kamine Bernali]. Please Proceed.

Unidentified Analyst

Yes hi, just a very quick question. You’ve given your LOE for California and I’m wondering if you could do that as well for the Wyoming asset for natural gas?

Tim Larkin

Well, we’re current proceeding taxes at 13% because based upon estimated with our realized price will be and we’re estimating compression at $0.60 of them and we are estimating the other lease operating expenses at $1.10 in Mcf. Does that sound right Ken?

Ken Gobble

That’s pretty close. Production taxes were 12.5% up here but that’s really in the ballpark. The only thing that I would add is that in the short-term we see a lot of potential there to increase production rapidly by expanding the program fracture stimulating the existing wells and on the existing wells that work will, a good portion of that work will land on our lease operating expense in the short-term.

Operator

This concludes the question-and-answer session of the call. I would now like to turn the call over to Mr. Swanton for closing remarks.

Norman Swanton

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

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentations, you may now disconnect. Have a great day.

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