of 2 2009 Factiva, Inc. All rights reserved. Warren Resources Aims to

Warren Resources Aims to Raise Output By Alex Davidson Dow Jones Newswires 952 words 1 February 2006 The Wall Street Journal English (Copyright (c) 2006, Dow Jones & Company, Inc.) Warren Resources Inc. has a lofty goal: to post a triple-digit percentage increase in its production of oil and natural gas so it can become a more independent production company. The New York concern acquired lucrative oil and natural-gas properties last year while slashing its debt to $2.6 million from $46.5 million, sending its stock up 74% in 2005. Warren, aiming to lessen its dependence on partnerships and to develop energy assets for its sole benefit, is hoping now that its properties in California and Wyoming will yield robust supplies of oil and gas to sustain its transition into a self-sufficient energy concern, the company says. Based on the potential of Warren's portfolio of properties, Wall Street is speculating that the company might be acquired. That speculation, in turn, has insulated the company's shares from the influences on energy prices. If its production of oil and gas comes in less than expected, or if energy prices fall sharply, Warren's financial position might be in jeopardy, observers said. Norman Swanton, chairman and chief executive of Warren Resources, said in an interview that the company will achieve its triple-digit production increase by using secondary recovery techniques as the company moves in to extract oil from properties after legacy oil companies have sold properties. One such technology involves pumping water into old wells, extracting the mixture and then filtering out components to yield pure oil -- a technique Warren Resources is using on a project in California. "I view it as more of a manufacturing process than as an exploratory process," Mr. Swanton said. Warren Resources went public at the end of 2004 at $7.50 a share. Its stock closed Monday at $17.50, after reaching a 52-week high of $18.35 on Jan. 24. Its 52-week low was $8.01 on April 15. To meet its production-expansion goal, Warren Resources plans to spend $103 million of its $108 million 2006 capital budget on drilling, a 315% increase over the company's 2005 drilling expenditures, Mr. Swanton says. About 56%, or $61 million, of the new capital budget will be spent at the company's Wilmington Townlot Unit, a former Exxon Mobil Corp. site in the Los Angeles basin. There, Warren Resources plans to drill 45 development wells and 26 water-injection wells, employing the water technique to extract oil from old wells. Analysts agree the Wilmington lot and the adjacent 875-acre North Wilmington unit, recently acquired, should provide Warren Resources with enough supply by themselves to let the company meet its production-growth goal. A major means of hitting that target, though, is at the company's Atlantic Rim coal-bed methane project in Wyoming, where the federal Bureau of Land Management will decide in August whether to allow full-scale development drilling. Mr. Swanton said the federal government owns 75% of land involved in the Atlantic Rim project, while the other 25% is private land. "Within [its California fields] alone, there's probably resources capable of allowing that sort of growth," Jefferies &Co. analyst Frank Bracken said of Warren's production goal. "Really, though, the very large increment at Warren that could be responsible for material, long-term growth in reserve growth is in the Wyoming play."

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The Wyoming property benefits the company two ways: First, part of the 270,080-acre project, co-operated by Anadarko Petroleum Corp., is expected by Warren to yield a maximum of 2,000 natural-gas wells, supporting a project spanning about 30 to 50 years; second, the vast acreage possibly will let Warren drill more wells in the future. "I think that ultimately the business plan of this company will be to develop its assets sufficiently so that they are well-defined and cash-flow positive," Mr. Bracken said. "At some point in time, I think that selling out to a larger company isn't outside the realm of possibility." Mr. Bracken said he doesn't own Warren Resources shares. Jefferies makes a market in the securities of Warren and acted in December 2004 as co-manager of an initial public offering of equity for the energy company. The starting point of Warren's strategy has been to get land with proven oil and gas stocks, said Irene Haas, an analyst at Sanders Morris Harris in Los Angeles. Now that Warren Resources has such holdings, it wants to drill, she added. Ms. Haas said she doesn't own Warren Resources shares. Sanders Morris has an investment-banking relationship with the company. Warren's acquisition of vast properties has many speculating on whether it will remain independent or be acquired. Mr. Swanton said he wouldn't rule out anything in the long term, but in the short term, he said: "We're not building the company to sell it, we're building it for our shareholders." Even if the company realizes its drilling goals, Warren Resources' production revenue may not be enough to let the company produce positive cash flow from operating activities by the end of 2006, the company said in November in a Securities and Exchange Commission filing. The company said in the filing that it expects increased production and exploration expenses, which might potentially offset financial gains made through realizing robust oil and gas reserves and thwart its goal of being less dependent on joint ventures. Potential hurdles that might trip up Warren include a decision by the federal government to deny exploration at the Wyoming site and a tumbling of energy prices, which might lessen current demand for commodities. License this article from Dow Jones Reprint Service Document J000000020060201e22100044

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