In the world of investing, sometimes when looking at information about a company, one can be deceived. Not intentionally, but facts can become skewed. After I received a tip from two gentlemen that have a sizeable knowledge of oil/gas exploration and production, I was steered in the direction of Warren Resources Inc (WRES). I had researched this company a couple of weeks ago, but found the stock profile stated they were an unconventional resource company, specializing in coal bed methane and natural gas. Although I had bypassed it before, I looked further and found something completely different.
Warren gets 80% of total production from oil. Over the past six years, this company's CAGR is 59%. Its portfolio is low risk. It has low debt and good liquidity. Its numbers lead me to believe it has very good, consistent management. Warren also has an oily play in the Niobrara I am excited about, but will address later. At the end of 2009 Warren had 10.8 MMBO and 71 BCF in proven reserves. Through the third quarter, average net production was 5150 BOE/d. Warren has 22.6 MMBOE of net proven reserves. Its PV-10 of $443 million at the end of 2009, was figured with $72.42 oil price and $5.78 gas. Much has to do with whether the company can get the oil out. The $10.8 MMBO represents only 2% of the oil reserves in remaining in the Wilmington Units. Warren has interests in 456 gross producing wells. It is the operator in 77% of these wells.
2010 was a good year for Warren. It had record production of 1.3 million BOE the first nine months. Improvements in the oil price has helped. Over 75% of revenue is from oil. Total revenue for the first nine months is $66 million. The company is currently hedged. It has $34 million in cash flow and is spending $20 million on D and F spending. There is added liquidity with $38 million in a credit facilitate. The company has $16 million cash on hand. Debt to book is 35%.
Looking forward Warren is planning to expand current oil production. It will do this by increasing the number of horizontal wells. The company would like to add inventory by 250 over the current number. Also, it plans to increase current gas reserves up to 623 BCF. Oil reserve targets an increase of 30-40 MMBO. Lastly, it aims to enhance water flow and oil well productivity in Wilmington. With respect to unit cost, it believes they can increase margins by decreasing costs. Smart drilling technologies should increase production. Warren also is trying to leverage LEOs lower by upgrading infrastructure. All of its capital expenditures should be funded through internal cash flow. Warren is interested in acquisitions and joint ventures. Legacy oil field additions will be sought in 2011.
The Wilmington oil field in California is the third largest in the United States. Warren believes that approximately 300 MMBO of reserves are recoverable. It is using new technologies and drilling techniques to recover as much of the oil from this field as possible. This is possible through multidrilling and production cellars, sinusoidal horizontal drilling, 3-D reservoir modeling and simulation. The Wilmington Townlot Unit has current gross production of 3100 BOPD. The North Wilmington Unit's gross production is 460 BOPD. The six year program here has been very effective in increasing production. Most importantly, the state of the art 3-D property modeling has painted a geological picture giving Warren the ability to access these acres. The Wilmington Oil Field in the Los Angeles Basin and its Tar formation wells look very profitable. This field at $80 NYMEX is estimated to have a gross margin of $54.50.
Although its expertise in 3-D modeling is important, so is its drilling technology. To optimize well placement, Warren has four types:
Tar Type: Typical horizontal well type. Placed high in the reservoir to avoid water.
Ranger and Terminal Type: Sinusoidal wells in thick and thin sand beds to maximize pay zone.
WTU Ranger C Type: Lateral Sinusoidals in sand channels that optimize productivity.
Ford-U237-Schist Type: Structurally controlled stratigraphic plays.
Warren is working jointly with Anadarko (APC) in the Washakie Basin. This is a gas play involving 125,885 gross acres. Reserve estimates are 1.0 Bcf/well. This site has potential for 1800 gross CBM wells. 200 conventional wells were also approved.
Warren has an 80,000 net acre position in the Niobrara. It will be drilling an exploratory well this year. The company believes this site is an oily play and is optimistic on its reserves.
Since 2005 Warren has increased production every year through 2010. Last year it produced 10,520 MMcfe. The company has decreased historical lease operating expenses from 2007 to 2010. It has existing hedges to help in the poor pricing environment for natural gas. Warren seems cheap here on the basis of enterprise value per proved developed BOE. Its $22.74 compares to Kodiak Oil and Gas (KOG) at $463.74, Clayton Williams Energy Inc (CWEI) at $225, and Magnum Hunter Resources Corp (MHR) at $140.22. Warren's debt/cap ratio is low at 37% (Info from Keybanc's E&P comparable company analysis November 8 of 2010).
WRES has very good assets. Its play in the 3rd largest oil resevoir in the United States and another opportunity in the project in Wyoming provide an advantage over the next few years. The company continues to grow at a fast clip with production up 59% CAGR over the last six years and nothing to show this will decrease anytime soon. What impresses me the most about this company is the scope of technology it is able to provide with such a small market cap. Its expertise in state-of-the-art seismic technology and ability to perform tasks such as sinusoidal wells impressed upon me that the company has an advantage over competitors. Lastly, it has a great inventory going forward for 3 or more years.