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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2015

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to

 

Commission File No. 000-33275

 

WARREN RESOURCES, INC.

(Exact Name of Registrant as Specified in its Charter.)

 

Maryland
(State or other jurisdiction of
incorporation or organization)

 

11-3024080
(I.R.S. Employer
Identification Number)

 

1114 Avenue of the Americas,
New York, NY
(Address of Principal Executive Offices)

 

10036
(Zip Code)

 

Registrant’s telephone number, including area code:

(212) 697-9660

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 and 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

The aggregate number of Registrant’s outstanding shares on August 4, 2015 was 81,203,466 shares of Common Stock, $0.0001 par value.

 

 

 



Table of Contents

 

WARREN RESOURCES, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART I—

FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

 

 

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014

 

 

 

 

 

Notes to the Consolidated Financial Statements

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

Item 4. Controls and Procedures

 

 

 

 

PART II—

OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

 

 

 

 

Item 1A. Risk Factors

 

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

Item 3. Defaults upon Senior Securities

 

 

 

 

 

Item 4. Mine Safety Disclosures

 

 

 

 

 

Item 5. Other Information

 

 

 

 

 

Item 6. Exhibits

 

 

 

 

 

Signatures

 

 

2



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

WARREN RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,
2015
(Unaudited)

 

December 31,
2014

 

 

 

(in thousands, except share
and per share data)

 

ASSETS 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

15,359

 

$

1,703

 

Accounts receivable — trade

 

8,385

 

20,025

 

Restricted investments in U.S. Treasury Bonds—available for sale, at fair value

 

144

 

142

 

Derivative financial instruments

 

 

4,005

 

Other current assets

 

2,963

 

1,245

 

 

 

 

 

 

 

Total current assets

 

26,851

 

27,120

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Oil and gas properties—at cost, based on full cost method of accounting, net of accumulated depreciation, depletion and amortization and impairment (includes unproved properties excluded from amortization of $211,446 and $204,626 as of June 30, 2015 and December 31, 2014)

 

563,463

 

753,496

 

Property and equipment—at cost, net

 

19,016

 

19,622

 

Restricted investments in U.S. Treasury Bonds—available for sale, at fair value

 

1,291

 

1,280

 

Deferred debt offering costs, net

 

13,335

 

13,942

 

Other assets

 

3,002

 

3,220

 

 

 

 

 

 

 

Total other assets

 

600,107

 

791,560

 

 

 

$

626,958

 

$

818,680

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current maturities of debentures and other long-term liabilities

 

$

381

 

$

381

 

Derivative financial instruments

 

408

 

 

Accounts payable and accruals

 

33,717

 

57,389

 

 

 

 

 

 

 

Total current liabilities

 

34,506

 

57,770

 

 

 

 

 

 

 

Long-Term Liabilities

 

 

 

 

 

First lien credit facility

 

219,665

 

 

Revolving loan credit facility

 

 

134,749

 

Other long-term liabilities, less current portion

 

37,334

 

36,084

 

Derivative financial instruments

 

61

 

 

Senior notes and debentures, less current portion and discount

 

229,058

 

297,525

 

 

 

 

 

 

 

Total long-term liabilities

 

486,118

 

468,358

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

8% convertible preferred stock, par value $.0001; authorized 10,000,000 shares, issued and outstanding, 10,703 shares in 2015 and 2014 (aggregate liquidation preference $128 in 2015 and 2014)

 

128

 

128

 

Common stock — $.0001 par value; authorized, 200,000,000 shares; issued 81,203,466 shares in 2015 and 80,754,225 shares in 2014

 

8

 

8

 

Additional paid-in-capital

 

514,186

 

512,843

 

Accumulated deficit

 

(408,190

)

(220,643

)

Accumulated other comprehensive income, net of applicable income taxes of $133 in 2015 and $141 in 2014

 

202

 

216

 

 

 

 

 

 

 

Total stockholders’ equity

 

106,334

 

292,552

 

 

 

$

626,958

 

$

818,680

 

 

The accompanying notes are an integral part of these financial statements.

 

3



Table of Contents

 

WARREN RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended
June 30, (Unaudited)

 

Six Months Ended
June 30, (Unaudited)

 

 

 

(in thousands, except share

 

(in thousands, except share

 

 

 

and per share data)

 

and per share data)

 

 

 

2015

 

2014

 

2015

 

2014

 

Operating revenues

 

 

 

 

 

 

 

 

 

Oil and gas sales

 

$

25,087

 

$

33,572

 

$

49,677

 

$

66,451

 

Transportation revenue

 

1,130

 

1,422

 

2,318

 

2,745

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

26,217

 

34,994

 

51,995

 

69,196

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Lease operating expense and taxes

 

12,870

 

9,208

 

25,378

 

18,710

 

Depreciation, depletion and amortization

 

19,240

 

10,535

 

36,432

 

20,889

 

Impairment

 

83,506

 

 

174,881

 

 

Transportation expenses

 

409

 

551

 

987

 

1,116

 

General and administrative

 

3,788

 

3,867

 

8,807

 

7,833

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

119,813

 

24,161

 

246,485

 

48,548

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(93,596

)

10,833

 

(194,490

)

20,648

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest and other income

 

4,104

 

2,228

 

4,121

 

2,362

 

Gain on debt extinguishment

 

14,407

 

 

14,407

 

 

Interest expense

 

(6,735

)

(645

)

(11,968

)

(1,399

)

Loss on contingent consideration

 

(140

)

 

(270

)

 

Gain (loss) on derivative financial instruments

 

(3,300

)

(1,668

)

661

 

(2,661

)

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

8,336

 

(85

)

6,951

 

(1,698

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes

 

(85,260

)

10,748

 

(187,539

)

18,950

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax expense (benefit)

 

16

 

(6

)

8

 

(14

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(85,276

)

10,754

 

(187,547

)

18,964

 

 

 

 

 

 

 

 

 

 

 

Less dividends and accretion on preferred shares

 

2

 

2

 

5

 

5

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) applicable to common stockholders

 

$

(85,278

)

$

10,752

 

$

(187,552

)

$

18,959

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share — Basic

 

$

(1.05

)

$

0.15

 

$

(2.31

)

$

0.26

 

Earnings (loss) per share — Diluted

 

$

(1.05

)

$

0.15

 

$

(2.31

)

$

0.26

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Basic

 

81,202,007

 

73,651,858

 

81,036,508

 

73,379,507

 

Weighted average common shares outstanding — Diluted

 

81,202,007

 

73,904,104

 

81,036,508

 

73,558,350

 

 

The accompanying notes are an integral part of these financial statements.

 

4



Table of Contents

 

WARREN RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

Three Months Ended
June 30, (Unaudited)

 

Six Months Ended
June 30, (Unaudited)

 

 

 

(in thousands, except share

 

(in thousands, except share

 

 

 

and per share data)

 

and per share data)

 

 

 

2015

 

2014

 

2015

 

2014

 

Net income (loss)

 

(85,276

)

10,754

 

(187,547

)

18,964

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Gain (loss) on investments available for sale

 

(26

)

9

 

(14

)

20

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(85,302

)

$

10,763

 

$

(187,561

)

$

18,984

 

 

The accompanying notes are an integral part of these financial statements.

 

5



Table of Contents

 

WARREN RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the six months ended
June 30, (Unaudited)

 

 

 

(in thousands)

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(187,547

)

$

18,964

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Accretion of discount on available-for-sale debt securities

 

(34

)

(32

)

Accretion of discount on senior notes

 

45

 

 

Amortization of deferred offering costs

 

607

 

113

 

Depreciation, depletion, amortization and impairment

 

211,313

 

20,889

 

Change in fair value of derivative financial instruments

 

4,474

 

(617

)

Stock option expense

 

1,677

 

1,069

 

Gain on debt extinguishment

 

(14,407

)

 

Deferred tax (benefit)

 

8

 

(14

)

Change in assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable—trade

 

11,640

 

6,767

 

Increase in other assets

 

(1,500

)

(510

)

Decrease in accounts payable and accruals

 

(12,851

)

(7,018

)

Decrease in other long-term liabilities

 

(431

)

(260

)

 

 

 

 

 

 

Net cash provided by operating activities

 

12,994

 

39,351

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase, exploration and development of oil and gas properties

 

(29,330

)

(35,312

)

Purchase of property and equipment

 

(490

)

(982

)

 

 

 

 

 

 

Net cash used in investing activities

 

(29,820

)

(36,294

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from Credit Facility

 

189,559

 

14,500

 

Payments on debt and debentures

 

(158,748

)

(27,525

)

Payments on taxes of vested restricted stock and proceeds from the exercise of options

 

(329

)

102

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

30,482

 

(12,923

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

13,656

 

(9,866

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,703

 

11,620

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

15,359

 

$

1,754

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

15,185

 

$

1,335

 

Noncash investing and financing activities

 

 

 

 

 

Accrued preferred stock dividend

 

$

5

 

$

5

 

Exchange of Senior Notes for First Lien debt

 

$

47,164

 

$

 

 

 

The accompanying notes are an integral part of these financial statements.

 

6



Table of Contents

 

WARREN RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE A—ORGANIZATION

 

Warren Resources, Inc. (the “Company” or “Warren”), was originally formed on June 12, 1990 for the purpose of acquiring and developing oil and gas properties. The Company is incorporated under the laws of the state of Maryland. The Company’s properties are primarily located in California, Pennsylvania, and Wyoming.

 

The accompanying unaudited financial statements and related notes present the Company’s consolidated financial position as of June 30, 2015 and December 31, 2014, the consolidated results of operations for the three and six months ended June 30, 2015 and 2014, the consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2015 and 2014 and consolidated cash flows for the six months ended June 30, 2015 and 2014. The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015. The accounting policies followed by the Company are set forth in Note A to the Company’s financial statements included in Form 10-K for the year ended December 31, 2014. These interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements presented in the Company’s 2014 Annual Report on Form 10-K.

 

NOTE B—STOCK BASED COMPENSATION

 

Stock Options

 

Compensation expense related to stock options and restricted stock awards recognized in operating results (general and administrative expenses) was approximately $0.6 million and $0.5 million for the three months ended June 30, 2015 and June 30, 2014, respectively, and approximately $1.7 and $1.1 million for the six months ending June 30, 2015 and June 30, 2014, respectively.

 

The following assumptions were used to value stock options calculated using the Black-Scholes options pricing model:

 

 

 

Six months ended June 30,

 

 

 

2015

 

2014

 

Dividend yield

 

0

%

0

%

Expected volatility

 

60.72

%

52.8

%

Risk-free interest rate

 

1.9

%

1.0

%

Expected life

 

3.5 years

 

3.5 years

 

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

 

 

Average

 

Average

 

Aggregate

 

 

 

Number

 

Exercise

 

Remaining

 

Intrinsic Value

 

 

 

of Options

 

Price

 

Term (in years)

 

(in thousands)

 

Outstanding at March 31, 2015

 

3,618,126

 

$

2.85

 

 

 

 

 

Granted

 

293,000

 

0.76

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited or expired

 

(280,067

)

2.94

 

 

 

 

 

Outstanding at June 30, 2015

 

3,631,059

 

$

2.67

 

4.10

 

$

 

Exercisable at June 30, 2015

 

643,927

 

$

3.48

 

2.34

 

$

 

 

7



Table of Contents

 

The total intrinsic value of options exercised during the six months ended June 30 , 2015 and 2014 were approximately $0 and $1.0 million respectively.

 

As of June 30, 2015 total unrecognized stock-based compensation expense related to non-vested stock options was approximately $2.9 million, which we expect to recognize over a weighted average period of 2.0 years.

 

Restricted Shares

 

Restricted share activity for the six months ended June 30, 2015 was as follows:

 

 

 

Shares

 

Weighted
Average
Fair Value

 

 

 

 

 

 

 

Outstanding at December 31, 2014

 

689,370

 

$

2.87

 

Granted

 

521,322

 

1.11

 

Vested

 

(697,630

)

1.79

 

Forfeited

 

(27,817

)

3.36

 

Outstanding at June 30, 2015

 

485,245

 

$

2.50

 

 

Restricted stock awards for executive officers and employees generally vest ratably over three years. Fair value of our restricted shares is based on our closing stock price on the date of grant.  As of June 30, 2015, total unrecognized stock-based compensation expense related to non-vested restricted shares was $0.9 million, which is expected to be recognized over a weighted average period of approximately 1.7 years.

 

NOTE C—STOCKHOLDERS’ EQUITY

 

The preferred stock pays an 8% cumulative dividend which is treated as a deduction of additional paid in capital, due to insufficient retained earnings. The holders of the preferred stock are not entitled to vote except as defined by the agreement or as provided by applicable law.  The preferred stock may be voluntarily converted, at the election of the holder, into common stock of the Company based on a conversion rate of one share of preferred stock for 0.50 shares of common stock. The accrual of the dividend is deducted from earnings in the calculation of earnings attributable to common stockholders.

 

Additionally, holders of the preferred stock can elect to require the Company to redeem their preferred stock at a redemption price equal to the liquidation value of $12.00 per share, plus accrued but unpaid dividends, if any, (“Redemption Price”).  Upon the receipt of a redemption election, the Company, at its option, shall either: (1) pay the holder cash in the amount equal to the Redemption Price or (2) issue to the holder shares of common stock in an amount equal to 125% of the redemption price and any accrued and unpaid dividends, based on the weighted average closing “bid” price of the Company’s common stock for the thirty trading days immediately preceding the date of the written redemption election by the holder up to a maximum of 1.5 shares of common stock for each one share of preferred stock redeemed. The Company has accreted the carrying value of its preferred stock to its redemption price using the effective interest method with changes recorded to additional paid in capital. The accretion of preferred stock results in a reduction of earnings applicable to common stockholders.

 

Notwithstanding the forgoing, if the closing “bid” price of the Company’s publicly traded common stock as reported by the NASDAQ stock market, or any exchange on which the shares of common stock are traded, exceeds 133% of the conversion price then in effect for the convertible preferred shares for at least 10 days during any 30-day trading period, the Company has the right to redeem in whole or in part the convertible preferred stock at a redemption price of $12 per share (plus any accrued unpaid dividends) or convert the convertible preferred shares (plus any accrued unpaid dividends) into common stock at the then applicable conversion rate.

 

8



Table of Contents

 

NOTE D—EARNINGS PER SHARE

 

Basic earnings (loss) per share is computed by dividing net earnings (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is based on the assumption that stock options are converted into common shares using the treasury stock method and convertible bonds and preferred stock are converted using the if-converted method. Conversion is not assumed if the results are anti-dilutive.  Potential common shares for the six months ended June 30, 2015 and 2014 of 38,072 and 38,072, respectively, relating to convertible bonds and preferred stock were excluded from the computation of diluted earnings per share because they are anti-dilutive. Potential common shares of 4,116,304 and 2,392,313 relating to stock options and restricted stock were excluded from the computation of diluted earnings per share for the six months ended June 30, 2015 and 2014, respectively, because they are anti-dilutive. At June 30, 2015 the convertible bonds may be converted from the date of issuance until maturity at 100% of principal amount into common stock of the Company at a price of $50.  The preferred stock may be converted at the discretion of the holder or upon meeting certain conditions at the discretion of the Company (see Note C).

 

Basic and diluted net earnings (loss) per share are computed based on the following information:

 

 

 

Three Months
Ended
June 30,
2015

 

Three Months
Ended
June 30,
2014

 

Six Months
Ended
June 30,
2015

 

Six Months
Ended
June 30,
2014

 

 

 

(in thousands, except for per
share data)

 

(in thousands, except for per
share data)

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) applicable to common shareholders

 

$

(85,278

)

$

10,752

 

$

(187,552

)

$

18,959

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding — basic

 

81,202,007

 

73,651,858

 

81,036,508

 

73,379,507

 

Effect of dilutive securities — restricted stock

 

 

 

 

 

Effect of dilutive securities — stock options

 

 

252,246

 

 

178,843

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

81,202,007

 

73,904,104

 

81,036,508

 

73,558,350

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings (loss) per share

 

$

(1.05

)

$

0.15

 

$

(2.31

)

$

0.26

 

Diluted net earnings (loss) per share

 

$

(1.05

)

$

0.15

 

$

(2.31

)

$

0.26

 

 

NOTE E—LONG-TERM LIABILITIES

 

Long-term liabilities consisted of the following for the balance sheets dated:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Line of Credit

 

$

 

$

134,749

 

First Lien Credit Facility

 

219,665

 

 

Derivative Financial Instruments

 

469

 

 

Convertible Debentures

 

1,636

 

1,636

 

Senior Notes

 

230,410

 

300,000

 

Discount on Senior Notes

 

(2,824

)

(3,947

)

Contingent Earn-Out

 

6,800

 

6,530

 

Asset retirement obligations

 

30,751

 

29,771

 

 

 

486,907

 

468,739

 

Less current portion

 

789

 

381

 

Long-term portion

 

$

486,118

 

$

468,358

 

 

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Table of Contents

 

On May 22, 2015, Warren Resources entered into a credit agreement with Franklin Square Capital Partners, LP which provides for a five-year, $250 million term loan facility (the “First Lien Credit Facility”) which matures on May 22, 2020. At the closing of the First Lien Credit Facility, certain of the lenders extended credit in the form of new term loans in the amount of $172.5 million and in the form of commitments for delayed draw term loans for up to an additional $30 million, subject to certain incurrence tests.  The new credit facility encompasses new terms and is collateralized by substantially all of Warren’s assets.  Warren has used the proceeds from the new credit facility to repay the balance on its former credit facility, and has been released from all legal obligations on the former line of credit.

 

Convertible Debentures

 

The convertible debentures may be converted from the date of issuance until maturity at 100% of principal amount into common stock of the Company at a conversion price of $50. Each year the holders of the convertible debentures may tender to the Company up to 10% of the aggregate debentures issued and outstanding. During the three and six months ended June 30, 2015, there were no debenture redemptions.

 

9.000% Senior Notes due 2022

 

To finance the Marcellus Asset Acquisition (See Note L) in 2014, the Company issued the 9.000% senior notes in a private offering at a price equal to 98.617% due to mature on August 1, 2022 (the “Senior Notes”).  Interest is payable on the Senior Notes semi-annually in arrears at a rate of 9.000% per annum on each February 1 and August 1.  On May 22, 2015 as part of the closing of the First Lien Credit Facility, certain of the lenders exchanged at face value $69.59 million of the Company’s previously issued 9.000% Senior Notes due 2022 at a discount for approximately $45.23 million of First Lien Term Loans due 2020 plus accrued unpaid interest of $1.93 million rolled into the First Lien Term Loans as additional borrowing.  The company accounted for this transaction in accordance with ASC 470 and ASC 405 and as a result recognized a gain on the retirement of debt in the amount of $14.4 million during the period.  At June 30, 2015, the face amount of the Senior Notes was $230.41 million and the market value was approximately $110.6 million.

 

We may redeem, at specified redemption prices, some or all of the Senior Notes at any time on or after August 1, 2017.  We may also redeem up to 35% of the Senior Notes using the proceeds of certain equity offerings completed before August 1, 2017.  If we sell certain of our assets or experience certain kinds of changes in control, we may be required to offer to purchase the Senior Notes from the holders.  The Senior Notes will be fully, unconditionally and jointly and severally guaranteed on a senior unsecured basis by certain of our existing subsidiaries and will be fully, unconditionally and jointly and severally guaranteed on a senior unsecured basis by our future domestic subsidiaries, subject to certain exceptions.

 

On July 27, 2015, substantially all of the outstanding Senior Notes were exchanged for an equal principal amount of registered 9.000% senior notes due 2022 pursuant to an effective registration statement on Form S-4 that was declared effective by the Securities and Exchange Commission on June 19, 2015 under the Securities Act (the “Exchange Notes”). The Exchange Notes are identical to the Senior Notes except that the Exchange Notes are registered under the Securities Act and do not have restrictions on transfer, registration rights or provisions for additional interest.

 

NOTE F—ASSET RETIREMENT OBLIGATION

 

The estimated fair value of the future costs associated with dismantlement, abandonment and restoration of oil and gas properties is recorded generally upon acquisition or completion of a well. The net estimated costs are discounted to present values using a risk adjusted rate over the estimated economic life of the oil and gas properties. Such costs are capitalized as part of the related asset. The asset is depleted on the units-of-production method. The associated liability is classified in other long-term liabilities, net of current portion, in the accompanying Consolidated Balance Sheets. The liability is periodically adjusted to reflect (1) new liabilities incurred, (2) liabilities settled during the period, (3) accretion expense, and (4) revisions to estimated future cash flow requirements. The accretion expense is recorded as a component of depreciation, depletion and amortization. The Company has cash held in escrow with a fair market value of $2.8 million that is legally restricted for potential plugging and abandonment liability in the Wilmington field which is recorded in other assets in the Consolidated Balance Sheets. A reconciliation of the Company’s asset retirement obligations is as follows:

 

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Table of Contents

 

 

 

June 30, 2015

 

 

 

(in thousands)

 

Balance at beginning of period

 

$

29,771

 

Liabilities incurred in current period

 

9

 

Liabilities settled in current period

 

(431

)

Accretion expense

 

1,402

 

Balance at end of period

 

$

30,751

 

 

NOTE G—CONTINGENCIES

 

We are party to a variety of legal, administrative, regulatory and government proceedings, claims and inquiries arising in the normal course of business.  Although we cannot predict the outcome of these proceedings with certainty, we do not currently expect these matters to have a material adverse effect on our consolidated financial position or results of operations.

 

There have been no significant changes with respect to the legal matters disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The estimated fair values of financial instruments recognized in the Consolidated Balance Sheets or disclosed within these Notes to Consolidated Financial Statements have been determined using available market information, information from unrelated third party financial institutions and appropriate valuation methodologies, primarily discounted projected cash flows. However, considerable judgment is required when interpreting market information and other data to develop estimates of fair value.

 

Short-term Assets and Liabilities. The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

 

U.S. Treasury Bonds - Trading and Available-For-Sale Securities.  The fair values are based upon quoted market prices for those or similar investments and are reported on the Consolidated Balance Sheets at fair value.

 

Collateral Security Agreement Account (included in other non-current assets). The balance sheet carrying amount approximates fair value, as it earns a market rate.

 

Convertible Debentures. Fair values of fixed rate convertible debentures were calculated using interest rates in effect as of period end for similar instruments with the other terms unchanged.

 

Other Long-Term Liabilities.  The carrying amount approximates fair value due to the current rates offered to the Company for long-term liabilities of the same remaining maturities.

 

First Lien Credit Facility. The carrying amount approximates fair value due to the current rate stipulated in the first lien credit facility agreement.

 

Derivatives. The fair values are based upon observable inputs based on market data obtained from independent sources and are considered Level 2 inputs (quoted prices for similar assets, liabilities (adjusted) and market-corroborated inputs) and are reported on the Consolidated Balance Sheets at fair value.

 

9.000% Senior Notes. The fair value is based upon quoted market prices for those or similar investments and are reported on the Consolidated Balance Sheets at face value, net of discount.

 

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Table of Contents

 

Contingent Earn-Out. The fair value is based on the present value of the amount discounted back at the cost of capital.

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

Fair

 

Carrying

 

Fair

 

Carrying

 

 

 

value

 

amount

 

value

 

amount

 

 

 

(in thousands)

 

Financial assets

 

 

 

 

 

 

 

 

 

Collateral security account

 

$

2,812

 

$

2,812

 

$

3,165

 

$

3,165

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Fixed rate debentures

 

$

3,045

 

$

1,636

 

$

3,035

 

$

1,636

 

Credit Facility

 

 

 

134,749

 

134,749

 

First Lien Credit Facility

 

219,665

 

219,665

 

 

 

Senior Notes

 

110,597

 

227,586

 

195,000

 

296,053

 

Contingent Earn-Out

 

6,800

 

6,800

 

6,530

 

6,530

 

 

FAIR VALUE MEASUREMENTS:

 

Fair value as defined by authoritative literature is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three level hierarchy for measuring fair value. The literature requires fair value measurements be classified and disclosed in one of the following categories:

 

Level 1:  Quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access at the measurement date.

 

Level 2:  Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means. Instruments categorized in Level 2 include non-exchange traded derivatives such as over-the-counter forwards and swaps.

 

Level 3:  Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity for the asset or liability.

 

The following tables present for each hierarchy level our assets and liabilities, including both current and non-current portions, measured at fair value on a recurring basis.

 

June  30, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Restricted investments in US Treasury Bonds — available for sale, at fair value

 

$

1,435

 

$

 

$

 

$

1,435

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Liabilities

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

469

 

$

 

$

469

 

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Restricted investments in US Treasury Bonds — available for sale, at fair value

 

$

1,422

 

$

 

$

 

$

1,422

 

Commodity derivatives

 

$

 

$

4,005

 

$

 

$

4,005

 

 

12



Table of Contents

 

NOTE I — DERIVATIVE FINANCIAL INSTRUMENTS

 

To minimize the effect of a downturn in oil and gas prices and protect our profitability and the economics of our development plans, we enter into crude oil and natural gas hedge contracts. The terms of contracts depend on various factors, including management’s view of future crude oil and natural gas prices. This price hedging program is designed to moderate the effects of a crude oil and natural gas price downturn while allowing us to participate in some commodity price increases. Management regularly monitors the crude oil and natural gas markets and our financial commitments to determine if, when, and at what level some form of crude oil and/or natural gas hedging and/or basis adjustments or other price protection is appropriate. However, we may use a variety of derivative instruments in the future to hedge. The Company has not designated these derivatives as hedges for accounting purposes.

 

The Company routinely enters into derivative contracts with a variety of counterparties, typically resulting in individual derivative instruments with both fair value asset and liability positions. The Company nets the fair values of derivative instruments executed with the same counterparty pursuant to ISDA master agreements, which mitigate the credit risk of the Company’s derivative instruments by providing for net settlement over the term of the contract and in the event of default or termination of the contract.

 

The following table summarizes the open financial derivative positions, as of June 30, 2015, related to oil and gas production. The Company will receive prices as noted in the table below and will pay a counterparty market price based on the NYMEX (for natural gas production) or WTI (for oil production) index price, settled monthly.

 

Product

 

Type

 

Contract Period

 

Volume

 

Price per
Mcf or Bbl

 

NYMEX Oil

 

Swap

 

07/01/15- 09/30/15

 

1,300 Bbl/d

 

$

49.75

 

NYMEX Oil

 

Swap

 

07/01/15- 09/30/15

 

400 Bbl/d

 

$

56.82

 

NYMEX Oil

 

Swap

 

10/01/15- 03/31/16

 

250 Bbl/d

 

$

62.92

 

NYMEX Oil

 

Collar

 

10/01/15- 03/31/16

 

500 Bbl/d

 

$

50.00- 64.00

 

NYMEX Oil

 

Collar

 

07/01/16- 06/30/16

 

250 Bbl/d

 

$

55.00- 69.97

 

NYMEX Oil

 

Collar

 

07/01/16- 12/31/16

 

500 Bbl/d

 

$

50.00- 71.50

 

NYMEX Oil

 

Collar

 

10/01/15- 12/31/15

 

500 Bbl/d

 

$

50.00- 68.15

 

NYMEX Gas

 

Swap

 

07/01/15- 12/31/15

 

3,000 MMBtu/d

 

$

4.16

 

NYMEX Gas

 

Swap

 

07/01/15- 10/31/15

 

10,000 MMBtu/d

 

$

3.18

 

NYMEX Gas

 

Swap

 

07/01/15- 10/31/15

 

10,000 MMBtu/d

 

$

3.14

 

NYMEX Gas

 

Swap

 

07/01/15- 12/31/15

 

15,000 MMBtu/d

 

$

2.92

 

NYMEX Gas

 

Swap

 

07/01/15- 03/31/16

 

5,000 MMBtu/d

 

$

3.02

 

 

The tables below summarize the amount of gains (losses) recognized in income from derivative instruments not designated as hedging instruments under authoritative guidance.

 

Derivatives not designated as

 

For the Three Months

 

For the Six Months

 

Hedging Instrument under

 

Ended June 30,

 

Ended June 30,

 

authoritative guidance

 

2015

 

2014

 

2015

 

2014

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized cash settlements on hedges

 

$

1,137

 

$

(1,477

)

$

5,135

 

$

(3,278

)

Mark-to-market gain (loss) on hedges

 

(4,437

)

(191

)

(4,474

)

617

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(3,300

)

$

(1,668

)

$

661

 

$

(2,661

)

 

13



Table of Contents

 

The table below reflects the line item in our Consolidated Balance Sheet where the fair value of our net derivatives, are included.

 

June 30, 2015

 

 

 

Derivative Assets

 

(in thousands)

 

Balance Sheet
Location

 

Fair Value

 

Commodity—Natural Gas

 

Current

 

$

1,073

 

 

 

 

 

 

 

Total derivatives not designated as hedging instruments

 

 

 

$

1,073

 

 

June 30, 2015

 

 

 

Derivative Liabilities

 

(in thousands)

 

Balance Sheet
Location

 

Fair Value

 

Commodity—Oil

 

Current

 

$

1,481

 

Commodity—Oil

 

Non-current

 

61

 

Total derivatives not designated as hedging instruments

 

 

 

$

1,542

 

 

December 31, 2014

 

 

 

Derivative Assets

 

(in thousands)

 

Balance Sheet
Location

 

Fair Value

 

Commodity—Natural Gas

 

Current

 

$

3,611

 

Commodity—Oil

 

Current

 

394

 

Total derivatives not designated as hedging instruments

 

 

 

$

4,005

 

 

Derivatives Credit Risk

 

The Company does not require collateral or other security from counterparties to support derivative instruments. However, the agreements with those counterparties typically contain netting provisions such that if a default occurs, the non-defaulting party can offset the amount payable to the defaulting party under the derivative contract with the amount due from the defaulting party. As a result of the netting provisions the Company’s maximum amount of loss due to credit risk is limited to the net amounts due to and from the counterparties under the derivative contracts.

 

The Company’s derivative agreements contain provisions that require cross defaults and acceleration of those instruments to any material debt. If the Company were to default on any of its material debt agreements, it would be a violation of these provisions, and the counterparties to the derivative instruments could request immediate payment on derivative instruments that are in a net liability position at that time

 

NOTE J — INCOME TAXES

 

The Company’s effective tax rate differs from the federal statutory tax rate due to changes in the valuation allowance on the Company’s net deferred tax asset.

 

NOTE K — RECENTLY ISSUED ACCOUNTING STANDARDS

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that is intended to simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU will be applied retrospectively as of the date of adoption and is effective for fiscal years beginning after December 15, 2015, and interim periods within those years (early adoption permitted). The Company is currently evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements and related disclosures.

 

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Table of Contents

 

NOTE L — ACQUISITIONS

 

Marcellus Assets

 

On August 11, 2014, we acquired essentially all of the Marcellus Assets of Citrus Energy Corporation (‘‘Citrus’’) and two other working interest owners in exchange for approximately 6.7 million shares of our common stock valued at $41.4 million and cash consideration of $312.5 million, subject to certain post-closing adjustments and certain closing conditions (the ‘‘Marcellus Asset Acquisition’’). The Marcellus Asset Acquisition was accounted for as a business combination in accordance with Accounting Standards Codification (ASC) No. 805, Business Combinations (ASC 805) which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. The purchase price of the Marcellus Assets (in thousands):

 

 

 

December 31, 2014

 

Cash consideration

 

$

312,500

 

Fair value of Warren equity common shares

 

41,400

 

Closing adjustments

 

(7,828

)

Fair value of earn-out provision

 

6,340

 

Fair value of farm-out provision

 

3,410

 

Total purchase price

 

$

355,822

 

 

In connection with the Marcellus Asset Acquisition, a contingent consideration payment was included as part of the purchase and sale agreement with a maximum payout of $8.5 million, based upon proved reserves and price differential factors. The fair value of this consideration is based on a 90% probability of achieving the full payout discounted to present value.

 

The following table presents the initial purchase price allocation of the Marcellus Asset, based on the fair values of assets acquired and liabilities assumed (in thousands):

 

 

 

December 31, 2014

 

Proved oil and gas properties

 

$

171,070

 

Unproved oil and gas properties

 

184,752

 

Total purchase price

 

$

355,822

 

 

Pro Forma Impact of Acquisitions (Unaudited)

 

The following unaudited pro forma combined results of operations are provided for the three and six months ended June 30, 2014 as though the Marcellus Asset Acquisition had occurred prior to that date.  The pro forma combined results of operations for the three and six months ended June 30, 2014 have been prepared by adjusting the historical results of the Company to include the historical results of the Marcellus Assets. These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the period presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any cost savings or other synergies that resulted, or may result, from the Marcellus Asset Acquisition.

 

Future results may vary significantly from the results reflected in this unaudited pro forma financial information because of future events and transactions, as well as other factors.

 

The Company’s historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the Marcellus Asset Acquisition that were factually supportable. Adjustments and assumptions made for this pro forma calculation are consistent with those used in the Company’s pro forma information previously filed with the SEC.

 

 

 

For the Three Months

 

For the Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

(in thousands)

 

2014

 

2014

 

Revenues

 

$

58,522

 

$

121,081

 

Income from Operations

 

21,773

 

46,283

 

 

 

 

 

 

 

Net income

 

$

21,691

 

$

29,433

 

Diluted net income per share

 

$

0.27

 

$

0.37

 

 

15



Table of Contents

 

NOTE M —CAPITALIZED INTEREST

 

The Company capitalizes interest on qualifying assets, which include investments in undeveloped oil and natural gas properties and exploration and development projects for which depletion expense is not currently recognized, and for which exploration or development activities are in progress. The capitalized interest is determined by multiplying the Company’s interest rate on specific borrowing costs, adjusted to include amortization of bond discount and issuance costs, related to the Senior Notes or exchanges of the Senior Notes used to purchase the Marcellus Assets, by the qualifying costs incurred that are excluded from the full cost pool. However, the amount of capitalized interest cannot exceed the amount of gross interest expense incurred in any given period. The capitalized interest amounts are recorded as additions to unevaluated oil and natural gas properties on the unaudited condensed consolidated balance sheets. As the costs excluded are transferred to the full cost pool, the associated capitalized interest is also transferred to the full cost pool.  Interest of $3.4 million and $6.6 million relating to the Senior Notes was capitalized during the three and six months ended June 30, 2015.

 

NOTE N — RECENT DEVELOPMENTS

 

On June 16, 2015, the Company and its wholly-owned subsidiary Warren E&P, Inc., entered into non-exclusive purchase and sale agreements with Escalera Resources, Co., pursuant to which Warren will sell all of its interests in its shallow depth coal bed methane assets, which are located in the Atlantic Rim area of the Washakie Basin in Carbon County, Wyoming, appurtenant midstream pipeline assets, and an undivided 30% of its interest in certain deep rights associated with Warren’s former leases in the Atlantic Rim area, to Escalera with an effective date of April 1, 2015. The total purchase price for these assets will be $47 million, with $42 million payable in cash at closing. Following consummation of the transaction, Warren will retain 70% of the operated deep rights associated with Warren’s former leases in the Atlantic Rim area, across 68,700 gross acres, which are currently being evaluated for potential upside in a number of the deep formations present. The sale is subject to closing conditions and adjustments, including completion of the purchaser’s financing.

 

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The Company has made in this report, and may from time to time otherwise make in other public filings, press releases and discussions with Company management, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the Company’s operations, economic performance and financial condition. These forward-looking statements include information concerning future production and reserves, schedules, plans, timing of development, contributions from oil and gas properties, and those statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions or variations on such expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, the Company’s assumptions about energy markets, production levels, reserve levels, operating results, competitive conditions, technology, the availability of capital resources, capital expenditures and other contractual obligations, the supply and demand for and the price of oil, natural gas and other products or services, the weather, inflation, the availability of goods and services, drilling risks, future processing volumes and pipeline throughput, general economic conditions, either internationally or nationally or in the jurisdictions in which the Company or its subsidiaries are doing business, legislative or regulatory changes, including changes in environmental regulation, environmental risks and liability under federal, state and local environmental laws and regulations, potential environmental obligations, the securities or capital markets, our ability to repay debt and other factors discussed in “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s 2014 Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q and in the Company’s other public filings, press releases and discussions with Company management. Warren undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, subsequent events or otherwise, unless otherwise required by law

 

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Table of Contents

 

Overview

 

We are an independent energy company engaged in the exploration and development of domestic onshore oil and natural gas reserves. We focus our efforts primarily on our waterflood oil recovery programs and horizontal drilling in the Wilmington field within the Los Angeles Basin of California, the drilling and development of natural gas reserves within the Marcellus Shale in Pennsylvania, and the exploration and development of an undeveloped acreage position in the Washakie Basin of Wyoming. As of June 30, 2015, we owned oil and natural gas leasehold interests in approximately 113,307 gross, 84,240 net, acres, approximately 70% of which are undeveloped.

 

On June 16, 2015, we entered into non-exclusive purchase and sale agreements with Escalera Resources, Co., pursuant to which Warren will sell all of its interests in its shallow depth coal bed methane assets, which are located in the Atlantic Rim area of the Washakie Basin in Carbon County, Wyoming, appurtenant midstream pipeline assets, and an undivided 30% of its interest in certain deep rights associated with Warren’s former leases in the Atlantic Rim area, to Escalera with an effective date of April 1, 2015.  The total purchase price for these assets will be $47 million, with $42 million payable in cash at closing.  Following consummation of the transaction, Warren will retain 70% of the operated deep rights associated with Warren’s former leases in the Atlantic Rim area, across 68,700 gross acres, which are currently being evaluated for potential upside in a number of the deep formations present.  The sale is subject to closing conditions and adjustments, including completion of the purchaser’s financing.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents increased approximately $13.7 million to $15.4 million during the six months ended June 30, 2015.  This resulted from cash provided from operating activities of $13.0 million and cash provided by financing activities of $30.5 million, which was offset by cash used in investing activities of $29.8 million.

 

Cash provided by operating activities was primarily generated by oil and gas operations. Cash used in investing activities was primarily spent on capital expenditures for the development of oil and gas properties.  Cash provided by financing activities primarily represents the funds received from our First Lien Credit Facility.

 

Capital additions for the six months ended June 30, 2015 were approximately $12.1 million and consisted of $9.2 million in drilling and development costs in the Marcellus Assets, $1.2 million for facilities in our California properties and $1.2 million for carry over development in our Wyoming properties.

 

On May 22, 2015, Warren Resources entered into a credit agreement with Franklin Square Capital Partners, LP, which provides for a five-year, $250 million First Lien Credit Facility which matures on May 22, 2020. At the closing of the First Lien Credit Facility, certain of the lenders extended credit in the form of new term loans in the amount of $172.5 million and in the form of commitments for delayed draw term loans for up to an additional $30 million, subject to certain incurrence tests.  The new credit facility encompasses new terms and is collateralized by substantially all of Warren’s assets.  Warren used an initial draw down from the new credit facility to repay the balance on its former credit facility, and has been released from all legal obligations on the former line of credit.  Also, as part of the closing of the First Lien Credit Facility, certain of the lenders exchanged $69.59 million of the Company’s previously issued 9.000% Senior Notes due 2022 at a discount for approximately $45.23 million of First Lien Term Loans due 2020 plus accrued unpaid interest of $1.93 million rolled into the First Lien Term Loans as additional borrowing.  As of June 30, 2015 the Company had $219.7 million outstanding on its borrowings under the First Lien Credit Facility, with zero interest accrued.  As of August 4, 2015, no additional borrowings have been drawn under the facility.  The annual interest rate on borrowings under the First Lien Credit Facility is 8.5% plus LIBOR for the applicable LIBOR period (with a minimum LIBOR rate of 1%). At present, the interest rate is 9.5%.

 

The First Lien Credit Facility is subject to prepayment in respect of asset sales, subject to limited reinvestment rights and certain excluded asset sales, provided that the commitments for delayed draw term loans shall be increased by the amount of the net proceeds of certain sales of the Company’s oil and gas properties in excess of $25 million.

 

The First Lien Credit Facility also includes certain covenants, including requirements that (a) during the period commencing on the eighteen (18) month anniversary of the closing date until the twenty-four (24) month anniversary of the closing date, the Consolidated First Lien Leverage Ratio (as defined in the First Lien Credit Facility) for any period of four consecutive fiscal quarters shall not be greater than 5.5 to 1.0, determined as of the last day of each fiscal quarter, and (b) during the period following the end of the twenty-four (24) month anniversary of the closing date until the maturity date of the facility, the Consolidated First Lien Leverage Ratio for any period of four consecutive fiscal quarters shall not be greater than 5.0 to 1.0 as of the last day of each fiscal quarter.

 

The First Lien Credit Facility is subject to other usual and customary conditions, representations, and warranties, including restrictions on certain additional indebtedness, dividends to shareholders, liens, investments, mergers, acquisitions, asset dispositions, repurchase or redemption of our common stock, speculative commodity transactions, transactions with affiliates and other matters. The First Lien Credit Facility is subject to customary events of default. If an event of default occurs and is continuing, the Agent may, or at the request of certain required lenders shall, accelerate amounts due under the First Lien Credit Facility (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable).

 

As part of our plan to manage liquidity risks and in recognition of lower oil prices, we have scaled back our capital expenditure budget and continue to explore opportunities to divest non-core assets.

 

We are also evaluating other measures to further improve our liquidity, including, the sale of equity or debt securities, the sale of certain assets, entering into joint ventures with third parties, volumetric production payments, additional commodity price hedging and other monetization of assets strategies. Management believes that these actions will enable the Company to meet its liquidity requirements through the remainder of 2015.

 

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Table of Contents

 

During the first six months of 2015, the Company reported a net loss of $187.6 million (which included $174.9 million of impairment expense and $0.7 million of gains on derivative financial instruments). This compares to the first six months of 2014 when the Company had net income of $19.0 million (which included $2.7 million of losses on derivative financial instruments). At June 30, 2015, current assets were $7.7 million less than current liabilities.

 

At June 30, 2015, we had approximately 3.6 million outstanding stock options issued under our stock based equity compensation plans. Of the total outstanding vested options, all had exercise prices above the closing market price of $0.46 of our common stock on June 30, 2015.

 

Contractual Obligations

 

The contractual obligations table below assumes the maximum amount under contract is tendered each year. The table does not give effect to the conversion of any bonds to common stock which would reduce payments due. All U.S treasury bonds are secured at maturity by zero coupon U.S. treasury bonds deposited into an escrow account equaling the par value of the bonds maturing on or before the maturity of the bonds. Such U.S. treasury bonds had a fair market value of $1.64 million at June 30, 2015. The table below does not reflect the release of escrowed U.S. treasury bonds to us upon redemption.

 

Contracts assumed related to the Marcellus Assets include a Lateral Demand Fee, a Lateral Commodity Fee, and a Transportation Fee. The Lateral Demand Fee stipulates that the company pay $92,000 per month for a period of 35 months (17 months remain on the contract), for gathering services provided in the Marcellus. The Transportation Fee provides that the Company pay a fixed monthly amount of $1,241,000 for transportation of gas through the interstate pipeline, up to 120,000 dekatherms per day for a term ending in December 2021 (78 months remain on the contract). If the Company exceeds 120,000 dekatherms per day, the agreement states that a monthly fee of $0.34 per dekatherm over the contractually stipulated amount should be paid. The Transportation Overage Fee is not included in the table below. Warren accounts for the aforementioned gathering and transportation fees on the Consolidated Statements of Operations within the lease operating expenses and taxes line item, as incurred.

 

The contracts also call for several additional fees, not included in the table below. The additional fees include a Lateral Commodity Fee of $0.055 per Mcf up to 150 Bcf of gas gathered, Gathering Commodity Rate of $0.04 per Mcf up to 15,000 Mcf per day per month for certain receipt points, a Gathering Demand Rate of $0.10 per Mcf up to 15,000 Mcf per day per month for certain receipt points, and a Compression Fee of $0.205 per Mcf of gas delivered to certain receipt points. For any amount in excess of the 15,000 Mcf delivered to certain receipt points for the Gathering Demand and Commodity Rates the company is obligated to pay 50% of the fees which are adjusted for inflation annually by the CPI index.

 

 

 

Payments due by period *

 

Contractual Obligations
As of June 30, 2015

 

Total

 

Less Than
1 Year

 

1-3
Years

 

3-5
Years

 

More Than
5 Years

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

First Lien Credit Facility

 

$

219,665

 

$

 

$

 

$

219,665

 

$

 

Bonds

 

1,636

 

164

 

280

 

226

 

966

 

Marcellus Lateral Demand Fee

 

1,564

 

1,104

 

460

 

 

 

Derivative Financial Instruments

 

469

 

408

 

61

 

 

 

Senior Notes

 

230,410

 

 

 

 

230,410

 

Marcellus Transportation Fee

 

96,219

 

14,892

 

29,784

 

29,784

 

21,759

 

Leases

 

6,153

 

987

 

1,876

 

1,880

 

1,410

 

Total

 

$

556,116

 

$

17,555

 

$

32,461

 

$

251,555

 

$

254,545

 

 


*      Does not include estimated interest of $41.8 million less than one year, $83.6 million 1-3 years, $81.5 million 3-5 years and $43.5 million thereafter.

 

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RESULTS OF OPERATIONS:

 

Three months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

 

Oil and gas sales. Revenue from oil and gas sales decreased $8.5 million in the second quarter of 2015 to $25.1 million, a 25% decrease compared to the same quarter in 2014.  Net oil production for the three months ended June 30, 2015 and 2014 was 250 Mbbls and 281 Mbbls, respectively, and the average realized price per barrel of oil for the three months ended June 30, 2015 and 2014 was $50.78 and $97.59, respectively.  Net gas production was 7.7 Bcf in the quarter compared with 1.6 Bcf in the prior year with an average realized price of $1.61 per Mcf compared to $3.76 per Mcf in the prior year.  This increase in gas production reflects an additional 6.3 Bcf of gas produced from our recently acquired Marcellus Assets.

 

Transportation Revenue.  We receive fees for transporting first-party gas through our Atlantic Rim intrastate gas pipeline, which connects with the Wyoming Interstate Company (“WIC”) pipeline system. Transportation and gathering revenue totaled $1.1 million for the three months ended June 30, 2015 compared to $1.4 million for the three months ended June 30, 2014.

 

Lease operating expense. Lease operating expense increased 40% to $12.9 million ($8.37 per Boe) for the second quarter of 2015 compared to $9.2 million ($16.67 per Boe) in the comparable period of 2014.  Primarily this increase reflects additional operating expense resulting from our recently acquired Marcellus Assets.

 

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased $8.7 million for the second quarter of 2015 to $19.2 million, a 83% increase compared to the corresponding quarter last year.  This increase results from an increase to our full cost pool as a result of the consummation of the Marcellus Asset Acquisition during the third quarter of 2014.

 

Impairment. The Company recorded impairment expense of $83.5 million for the second quarter of 2015, relating to its ceiling test write down of oil and gas properties.  This resulted from a significant drop in our PV-10 reflecting lower commodity prices in 2015. The trailing twelve month SEC pricing used in our reserve report for oil decreased 22% from $86.71 at December 31, 2014 to $67.53 at June 30, 2015 and twelve month gas prices decreased 23% from $3.12 at December 31, 2014 to $2.40 at June 30, 2015. Further ceiling write-downs may occur in future quarters as average SEC trailing twelve month prices have continued to decline.

 

Transportation Expense.  Pipeline operating expenses totaled $0.4 million for the three months ended June 30, 2015 compared to $0.5 million for th three months ended June 30, 2014.

 

General and administrative expenses.  General and administrative expenses decreased $79 thousand for the second quarter of 2015 to $3.8 million, a 2% decrease compared to 2014. This decrease resulted from cost cutting measures including a reduction in the workforce offset by the additional salaries and overhead from the consummation of the Marcellus Asset Acquisition during the third quarter of 2014.

 

Interest expense. Interest expense increased $6.1 million from $0.6 to $6.7 million in the second quarter of 2015 compared to the same quarter last year.  This increase was due to the issuance of $300 million of 9.000% Senior Notes in August 2014 to partially fund the Marcellus Assets Acquisition. In addition, interest of $3.4 million was capitalized during this period, which relates to the development of the Marcellus Assets.

 

Interest and other income. Interest and other income increased $1.9 million in the quarter compared to the same period last year due to the sale of property in our North Wilmington Unit in California.

 

Gain (loss) on derivative financial instruments.  Derivative losses of $3.3 million were recorded during the second quarter of 2015. This amount reflects $1.1 million of realized gains and $4.4 million of unrealized losses resulting from mark to market accounting of our oil and gas derivatives.

 

Loss on contingent consideration.  A $0.1 million loss from the contingent consideration was recorded for the quarter ending June 30, 2015, related to the Marcellus Asset Acquisition. This amount reflects the fair value adjustment for the contingent consideration payment as part of the purchase and sale agreement with Citrus.

 

Gain (loss) on retirement of debt.  A $14.4 million gain from the retirement of debt was recorded during the quarter ending June 30, 2015, related to the exchange of previously issued 9% Senior Notes for 9.5% First Lien Credit Facility Notes.

 

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Six months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

 

Oil and gas sales. Revenue from oil and gas sales decreased $16.8 million for the six months of 2015 to $50.0 million, a 25% decrease compared to the same period in 2014.  Net oil production for the six months ended June 30, 2015 and 2014 was 511 Mbbls and 557 Mbbls, respectively, and the average realized price per barrel of oil for the six months ended June 30, 2015 and 2014 was $45.38 and $96.26 respectively.  Net gas production was 13.6 Bcf for the first six months compared with 3.2 Bcf in the prior year with an average realized price of $1.94 per Mcf compared to $3.97 per Mcf in the prior year.  This increase in gas production reflects an additional 11.0 Bcf of gas produced from our recently acquired Marcellus Assets.

 

Transportation Revenue.  We receive fees for transporting first-party gas through our Atlantic Rim intrastate gas pipeline, which connects with the Wyoming Interstate Company (“WIC”) pipeline system. Transportation and gathering revenue totaled $2.3 million for the six months ended June 30, 2015 compared to $2.7 million for the six months ended June 30, 2014.

 

Lease operating expense. Lease operating expense increased 36% to $25.4 million ($9.12 per Boe) for the six months of 2015 compared to $18.7 million ($17.08 per Boe) in the comparable period of 2014.  Primarily this increase reflects additional operating expense resulting from our recently acquired Marcellus Assets.

 

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased $15.5 million for the first six months of 2015 to $36.4 million, a 74% increase compared to the comparable period of 2014.  This increase results from an increase to our full cost pool as a result of the consummation of the Marcellus Asset Acquisition during the third quarter of 2014.

 

Impairment. The Company recorded impairment expense of $174.9 million for the first six months of 2015, relating to its ceiling test write down of oil and gas properties.  This resulted from a significant drop in our PV-10 reflecting lower commodity prices in 2015. The trailing twelve month SEC pricing used in our reserve report for oil decreased 22% from $86.71 at December 31, 2014 to $67.53 at June 30, 2015 and twelve month gas prices decreased 23% from $3.12 at December 31, 2014 to $2.40 at June 30, 2015. Further ceiling write-downs may occur in future quarters as average SEC trailing twelve month prices have declined.

 

Transportation Expense.  Pipeline operating expenses totaled $1.0 million for the six months ended June 30, 2015 compared to $1.1 million for the six months ended June 30, 2014.

 

General and administrative expenses.  General and administrative expenses increased $1.0 million for the first six months of 2015 to $8.8 million, a 12% increase compared to 2014. This increase resulted from additional salaries and overhead from the consummation of the Marcellus Asset Acquisition during the third quarter of 2014 offset by cost cutting measures including a reduction in the workforce.

 

Interest expense. Interest expense increased $10.6 million from $1.4 million to $12.0 million for the first six months of 2015 compared to the same period last year.  This increase was due to the issuance of $300 million of 9.000% Senior Notes in August 2014 to partially fund the Marcellus Assets Acquisition. In addition, interest of $6.6 million was capitalized during this period, which relates to the development of the Marcellus Assets.

 

Interest and other income. Interest and other income increased $1.8 million for the first six months of 2015 compared to the same period last year due to the sale of property inour North Wilmington Unit in California.

 

Gain (loss) on derivative financial instruments.  Derivative gains of $0.7 million were recorded during the first six months of 2015. This amount reflects $5.1 million of realized gains and $4.5 million of unrealized losses resulting from mark to market accounting of our oil and gas derivatives.

 

Loss on contingent consideration.   A $0.3 million loss from the contingent consideration was recorded for the six months ending June 30, 2015, related to the Marcellus Asset Acquisition. This amount reflects the fair value adjustment for the contingent consideration payment as part of the purchase and sale agreement with Citrus.

 

Gain (loss) on retirement of debt.  A $14.4 million gain from the retirement of debt was recorded during the six months ending June 30, 2015, related to the exchange of previously issued 9% Senior Notes for 9.5% First Lien Credit Facility Notes.

 

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Table of Contents

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based on consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our 2014 Form 10-K includes a discussion of our critical accounting policies.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Energy Price Risk

 

The Company’s most significant market risk is the pricing for natural gas and crude oil. Management expects energy prices to remain volatile and unpredictable. If energy prices decline significantly, revenues and cash flow would significantly decline.

 

Commodity Risk

 

Our primary market risk exposure is in the price we receive for our oil and natural gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot regional market prices applicable to our U.S. natural gas production. Pricing for oil and natural gas production has been volatile and unpredictable for several years, and we expect this volatility to continue in the future. The prices we receive for production depend on many factors outside of our control, including volatility in the differences between product prices at sales points and the applicable index price.

 

Derivative Instruments and Hedging Activity

 

We have entered into several financial derivative swap contracts to hedge our exposure to commodity price risk associated with anticipated future oil and gas production. We believe we will have more predictability of our crude oil and gas revenues as a result of these financial derivative contracts. The total volumes which we hedge through the use of our derivative instruments varies from period to period, however, subject to market conditions, our objective is to hedge up to at least 50% of our current and anticipated production for the next 12 to 24 months. Our hedge policies and objectives may change significantly as commodities prices or price futures change.

 

We are exposed to market risk on our open derivative contracts of non-performance by our counterparties. We do not expect such non-performance because our contracts are with major financial institutions with investment grade credit ratings. Each of the counterparties to our derivative contracts is a lender in our Senior Credit Agreement. We did not post collateral under any of these contracts as they are secured under the Senior Credit Agreement.

 

The following table summarizes our open financial derivative positions as of August 4, 2015, related to oil and gas production.

 

Product

 

Type

 

Contract Period

 

Volume

 

Price per
Mcf or Bbl

 

NYMEX Oil

 

Swap

 

07/01/15- 09/30/15

 

1,300 Bbl/d

 

$

49.75

 

NYMEX Oil

 

Swap

 

07/01/15- 09/30/15

 

400 Bbl/d

 

$

56.82

 

NYMEX Oil

 

Swap

 

10/01/15- 03/31/16

 

250 Bbl/d

 

$

62.92

 

NYMEX Oil

 

Collar

 

10/01/15- 03/31/16

 

500 Bbl/d

 

$

50.00- 64.00

 

NYMEX Oil

 

Collar

 

07/01/15- 06/30/16

 

250 Bbl/d

 

$

55.00-69.97

 

NYMEX Oil

 

Collar

 

07/01/16- 12/31/16

 

500 Bbl/d

 

$

50.00-71.50

 

NYMEX Oil

 

Collar

 

10/01/16- 12/31/15

 

500 Bbl/d

 

$

50.00-68.15

 

NYMEX Gas

 

Swap

 

07/01/15- 12/31/15

 

3,000 MMBtu/d

 

$

4.16

 

NYMEX Gas

 

Swap

 

07/01/15- 10/31/15

 

10,000 MMBtu/d

 

$

3.18

 

NYMEX Gas

 

Swap

 

07/01/15- 10/31/15

 

10,000 MMBtu/d

 

$

3.14

 

NYMEX Gas

 

Swap

 

07/01/15- 12/31/15

 

15,000 MMBtu/d

 

$

2.92

 

NYMEX Gas

 

Swap

 

01/01/16- 12/31/16

 

15,000 MMBtu/d

 

$

3.16

 

NYMEX Gas

 

Swap

 

11/01/15- 03/31/16

 

15,000 MMBtu/d

 

$

3.18

 

NYMEX Gas

 

Swap

 

07/01/15- 03/31/16

 

5,000 MMBtu/d

 

$

3.02

 

 

Under a swap contract, the counterparty is required to make a payment to us if the index price for any settlement period is less than the fixed price, and we are required to make a payment to the counterparty if the index price for any settlement period is greater than the fixed price.

 

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Other Financial Instruments

 

Other financial instruments consist of the following: cash and cash equivalents, U.S. treasury bonds, collateral security accounts, line of credit and other long-term liabilities. The carrying amounts of these instruments approximate fair market value due to the highly liquid nature of these short-term instruments or they are reported at fair value.

 

Inflation and Changes in Commodity Prices

 

The general level of inflation affects our costs. Salaries and other general and administrative expenses are impacted by inflationary trends and the supply and demand of qualified professionals and professional services. Inflation and commodity price fluctuations affect the costs associated with exploring for and producing oil and natural gas, which have a material impact on our financial performance.

 

Forward-Looking Statements and Risk

 

Certain statements in this report, including statements of the future plans, objectives, and expected performance of the company, are forward-looking statements that are dependent upon certain events, risks and uncertainties that may be outside the company’s control, and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, the market prices of oil and gas, economic and competitive conditions, exploration risks such as drilling unsuccessful wells, higher-than-expected costs, potential liability for remedial actions under existing or future environmental regulations and litigation, potential liability resulting from pending or future litigation, environmental and regulatory uncertainties that could delay or prevent drilling, and not successfully completing, or any material delay of, any development of new or existing fields, expansion, or capital expenditure, legislative and regulatory changes, financial market conditions, political and economic uncertainties of foreign governments, future business decisions, and other uncertainties, all of which are difficult to predict. Forward-looking statements are generally accompanied by words such as “estimate”, “project”, “predict”, “will”, “anticipate”, “plan”, “intend”, “believe”, “expect” or similar expressions that convey the uncertainty of future events or outcomes. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Unless legally required, Warren does not undertake any obligation to update any forward-looking statements, as a result of new information, future events or otherwise. Certain risks that may affect Warren’s results of operations and financial position appear in Part 1, Item 1A “Risk Factors” of Warren’s 2014 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q.

 

There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from reserves and production estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can affect these risks. Fluctuations in oil and natural gas prices or a prolonged continuation of low prices may adversely affect the company’s financial position, results of operations and cash flows.

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as defined in Securities and Exchange Commission (“SEC”) Rule 13a-15(e) and 15d-15(e) as of the end of the period covered by this report.  Based upon that evaluation, management has concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act is communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting or in other factors during the quarter ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The following information should be read in conjunction with the discussion set forth under Part I, Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

We are party to a variety of legal, administrative, regulatory and government proceedings, claims and inquiries arising in the normal course of business. In addition to the other information set forth in this report and our press releases and other reports and materials that we file with the Securities and Exchange Commission, you should carefully consider the factors discussed in “Item 1. Business — Regulation and Environmental Matters” and “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition, operating results or liquidity and the trading price of our common stock.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 1A. Risk Factors

 

Our business has many risks. In addition to the other information set forth in this report and our press releases and other reports and materials that we file with the Securities and Exchange Commission, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition, operating results or liquidity and the trading price of our common stock.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

a.              Not applicable

 

b.              Not applicable

 

c.               Not applicable

 

Item 3. Defaults upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

a)                           Exhibits

 

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Table of Contents

 

Exhibits not incorporated by reference to a prior filing are designated by an (*) and are filed herewith; all exhibits not so designated are incorporated herein by reference to a prior filing as indicated.

 

Exhibit
No.

 

Description

 

 

 

2.1*†

 

Letter Agreement, dated June 16, 2015, by and among Warren Resources, Inc. and Warren E&P, Inc. and Escalera Resources, Co.

 

 

 

2.2*†

 

Purchase and Sale Agreement (Coalbed Methane Assets), dated June 16, 2015 but effective April 1, 2015, by, between and among Warren Resources, Inc. and Warren E&P, Inc. and Escalera Resources, Co.

 

 

 

2.3*†

 

Purchase and Sale Agreement (Midstream Assets), dated June 16, 2015 but effective April 1, 2015, by, between and among Warren Resources, Inc. and Warren E&P, Inc. and Escalera Resources, Co.

 

 

 

3.1(1)

 

Articles of Incorporation of Registrant filed May 20, 2004 (Maryland).

 

 

 

3.2(2)

 

Bylaws of the Registrant, dated June 2, 2004.

 

 

 

3.3(3)

 

Articles Supplementary (Series A 8% Cumulative Convertible Preferred Stock ($.0001 Par Value)) (Maryland).

 

 

 

3.4(4)

 

Certificate of Correction to Articles Supplementary (Series A 8% Cumulative Convertible Preferred Stock) (Maryland).

 

 

 

3.5(5)

 

Articles Supplementary (Series A Institutional 8% Cumulative Convertible Preferred Stock ($.0001 Par Value) (Maryland).

 

 

 

3.6(6)

 

Certificate of Correction to Articles Supplementary (Series A Institutional 8% Cumulative Convertible Preferred Stock) (Maryland).

 

 

 

3.7(7)

 

Articles of Amendment to the Articles of Incorporation of Registrant.

 

 

 

4.1(8)

 

Specimen Stock Certificate for Common Stock (Maryland).

 

 

 

4.2(9)

 

Form of Registration Rights Agreement made as of December 12, 2002, by and between Warren Resources and the Investors in the Series A 8% Cumulative Convertible Preferred Stock

 

 

 

4.3(10)

 

Form of Registration Rights Agreement made as of August 11, 2014, by and between Warren Resources and the Purchasers of Common Stock

 

 

 

4.4(11)

 

Indenture, dated as of August 11, 2014, by and between Warren Resources, Inc., Certain Subsidiaries of Warren Resources, Inc., as Guarantors and U.S. Bank National Association, as Trustee

 

 

 

4.5(12)

 

Form of Note (included in Exhibit 4.4)

 

 

 

4.6(13)

 

Form of Registration Rights Agreement made as of August 11, 2014, by and between Warren Resources and the Initial Purchasers of the 9% Senior Notes due 2022

 

 

 

10.1(14)

 

Credit Agreement dated as of May 22, 2015, among Warren Resources, Inc., as Borrower, Wilmington Trust, National Association, as Administrative Agent, the lenders party thereto, with GSO Capital Partners LP, as Sole Lead Arranger and Sole Bookrunner.

 

 

 

10.2(15)

 

Second Amendment to the Warren Resources, Inc. 2010 Stock Incentive Plan.

 

 

 

31.1*

 

Certification of Chief Executive Officer pursuant to Rule 13a-15(e)/15d-15(e).

 

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Rule 13a-15(e)/15d-15(e).

 

 

 

32.1*

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2*

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

 

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101**

 

Interactive Data File.

 


 

*

 

Filed herewith.

 

**

 

Pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purposes of section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchanges Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

Schedules, exhibits and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K.  The registrant will furnish supplementally a copy of any omitted schedule, exhibit or similar attachment to the Securities and Exchange Commission upon its request.

 

 

 

 

 

(1)

 

Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, Commission File No. 000-33275, filed on March 17, 2005.

 

(2)

 

Incorporated by reference to Exhibit 3.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, Commission File No. 000-33275, filed on August 16, 2003.

 

(3)

 

Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, Commission File No. 000-33275, filed on August 16, 2003.

 

(4)

 

Incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, Commission File No. 000-33275, filed on August 16, 2003.

 

(5)

 

Incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, Commission File No. 000-33275, filed on August 16, 2003.

 

(6)

 

Incorporated by reference to Exhibit 3.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, Commission File No. 000-33275, filed on August 16, 2003.

 

(7)

 

Incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement on Form DEF 14-A filed on April 24, 2014.

 

(8)

 

Incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, Commission File No. 000-33275, filed on March 17, 2005.

 

(9)

 

Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, Commission File No. 000-33275, filed on December 17, 2002.

 

(10)

 

Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, Commission File No. 000-33275, filed August 12, 2014.

 

(11)

 

Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, Commission File No. 000-33275, filed August 12, 2014.

 

(12)

 

Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, Commission File No. 000-33275, filed August 12, 2014.

 

(13)

 

Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K, Commission File No. 000-33275, filed August 12, 2014.

 

(14)

 

Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, Commission File No. 000-33275, dated May 26, 2015.

 

(15)

 

Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, Commission File No. 000-33275, dated June 8, 2015.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

WARREN RESOURCES, INC.

 

(Registrant)

Date: August 4, 2015

 

 

 

 

By:

/s/ Stewart P. Skelly

 

 

Stewart P. Skelly

 

 

Vice President, Chief Financial Officer

 

 

and Chief Accounting Officer

 

26