Aided by a favorable second quarter earnings report shares of Warren Resources, Inc. (NASDAQ: WRES) spiked to a high of 3.20 on Tuesday, the highest they’ve been since April this year. With shares currently trading around the 2.89 level WRES is well ahead of their 50-day moving average of 2.35 and has closed the gap on their 200-day moving average of 2.97.
Investors have been responding positively to a 12% increase in oil and gas revenues generated by WRES, pushing the $26.9 million of oil and gas revenues from the second quarter 2011 to $30.2 million in the second frame of 2012. That increase in revenue is directly related to the company’s ability to produce record quarterly oil production, jumping 31% compared to their 2011 level.
That increase in production was needed as WRES reported net income of $5.3 million; that compared to a net income of $9.0 million for the second quarter of 2011. The drop in net revenue was expected as a number of factors contributed to a decline in oil and gas prices. According to the press release issued by WRES detailing the quarterly results the average realized price per barrel of oil was $95 for the second quarter of 2012 compared to $97 for the second quarter of 2011. Additionally, the average realized price per thousand cubic feet (“Mcf”) of natural gas was $1.84 for the second quarter of 2012 compared to $4.13 for the second quarter of 2011.
The bulk of WRES’s revenue, over 90%, was generated from oil sales, a reflection on the success they have been having at with their California drilling program. This was pointed out in the comments made by company Chairman and CEO Espy P. Price who stated “We had a strong quarter as production volumes, oil and gas revenues and operating cash flow each recorded significant gains compared to second quarter of 2011. As a result of the 2012 California drilling program, Warren’s oil and gas revenues increased to $30.2 million for the second quarter of 2012 compared to $26.9 million in the second quarter of 2011. This increase resulted from a 31% increase in oil production. Oil sales revenue as a percentage of total revenue was over 90% during the second quarter. Warren is currently producing over 3,800 gross barrels of oil per day (“BOPD”) at our two Wilmington Field units.”
Those two Wilmington Field units consist of the Wilmington Townlot Unit (WTU) and the North Wilmington Unit (NWU). During the second quarter WRES drilled and completed 6 producing wells in the WTU, consisting of four wells in the Tar formation, one sinusoidal producer in the Ranger formation and one sinusoidal producer in the Upper Terminal formation. One additional Upper Terminal well was drilled to casing point and the productive interval will be completed in August. Thirty day initial production rates for each of the new Tar wells averaged 141 BOPD. Thirty day initial production rate for the new Ranger well averaged 60 BOPD, and thirty day initial production for the new Upper Terminal well averaged 114 BOPD.
According to their original 2012 outlook WRES planned to have 17 producers and 6 injectors at WTU and 3 producers and 3 injectors at NWU but delays in securing injection well permits has forced the company to revise those plans, saying they “will complete the 2012 drilling program at WTU in early September after having drilled the 17 producers and one injection well. Warren then plans to commence drilling in the NWU during the fourth quarter of 2012. The drilling schedule at NWU is contingent upon timely approval by the DOGGR of our proposed water injection wells.”
Of course WRES needs more than just “timely approval” for their proposed water injection wells; they need to see some economic stability to increase the demand for oil and thus generated greater profits from their production. That has been a difficult formula to realize as Europe continues to struggle and the demand in North America remains relatively flat despite countless claims that the job reports are showing signs of progress.
Clearly economic growth is the key to success for WRES and if that comes to be and they are capable of maintaining the impressive production levels that they have generated thus far then the current share price could look like a bargain in the near future.