UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): February 8, 2016

 

Warren Resources, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code:  (720) 403-8125

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

Item 5.02.     Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

 

On February 8, 2016, Warren Resources, Inc. (the “Company”) entered into the First Amendment (the “First Amendment”)  to the Separation Agreement and General Release dated December 28, 2015 (the “Separation Agreement”) with Mr. Stewart Skelly, the Company’s former Vice President and Chief Financial Officer.  Under the terms of the First Amendment, Mr. Skelly has agreed to waive reimbursement of all further COBRA premiums to which he is entitled under the Separation Agreement in consideration for a lump sum payment of $5,000 from the Company. All other provisions of the Separation Agreement remain in full force and effect.

 

The information in this Item 5.02 does not constitute a complete summary of the First Amendment or the Separation Agreement and is qualified in its entirety by reference to the complete text of the First Amendment, which is attached hereto as Exhibit 10.1, and the complete text of the Separation Agreement, which is attached as Exhibit 10.5 to the Current Report on Form 8-K dated January 5, 2016.

 

Item 7.01.   Regulation FD Disclosure.

 

On February 9, 2016, the Company issued a press release announcing its 2015 year-end reserves and 2016 forecast and providing an update on debt restructuring. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and incorporated by reference herein.

 

The information in this Item 7.01, including Exhibit 99.1 attached hereto, is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section and shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, except as otherwise expressly stated in such filing.

 

Item 9.01              Financial Statements and Exhibits.

 

(d)           Exhibits:

 

Exhibit Number		Description
10.1		First Amendment to the Separation Agreement and General Release with Stewart Skelly, dated February 8, 2016
99.1		Press release dated February 9, 2016

 

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SIGNATURES

 

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

 

		WARREN RESOURCES, INC.
Date:      February 9, 2016	By:	/s/ Frank T. Smith, Jr.
		Name:	Frank T. Smith, Jr.
		Title:	Senior Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit Number		Description
10.1		First Amendment to the Separation Agreement and General Release with Stewart Skelly, dated February 8, 2016
99.1		Press release dated February 9, 2016

 

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Exhibit 10.1

 

First Amendment

to the

Separation Agreement and General Release

dated

December 28, 2015

 

This First Amendment (the “First Amendment”) to the Separation Agreement and General Release dated December 28, 2015 (the Separation Agreement”) is entered into by and between Stewart P. Skelly, an individual (“Executive”) and Warren Resources, Inc., a Maryland corporation (the “Company”), effective February 8, 2016 (the “First Amendment Effective Date”). Capitalized terms used and not otherwise defined herein are used as defined in the Separation Agreement.

 

WHEREAS, the Company and the Executive agreed under Section 2(b) of the Separation Agreement that, in return for Executive’s commitments and obligations under the Separation Agreement, the Company would reimburse Executive for any COBRA premiums until the earlier of (a) the date that the Executive becomes covered by the medical plan of a subsequent employer, (ii) the date he is no longer eligible for continued medical coverage pursuant to COBRA, and (iii) August 6, 2016 (inclusive);

 

WHEREAS, the intent of this provision was to cover Executive’s health care costs through the period specified above;

 

WHEREAS, the Executive is able to maintain health coverage for his family through the relevant period for a cost that is significantly lower than the COBRA consideration; and

 

WHEREAS, the Executive is willing to waive his right to reimbursement for all remaining future months of COBRA coverage in return for a lump sum payment equal to $5,000;

 

NOW THEREFORE, in consideration of the foregoing premises and certain other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Executive and Company hereby mutually agree as follows:

 

1.              Separation Benefits - Healthcare. As of the First Amendment Effective Date, all remaining future payments due to Executive under Section 2(b) of the Separation Agreement are hereby waived and cancelled, and shall no longer be due or payable, in exchange for a lump sum payment to Executive in the amount of $5,000, which shall be payable to Executive within five (5) business days of the First Amendment Effective Date.

 

All other terms of the First Amendment shall remain in full force and effect.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the First Amendment Effective Date.

 

	DEPARTING EXECUTIVE
	/s/ Stewart P. Skelly
	Stewart P. Skelly
	WARREN RESOURCES, INC.
	By:	/s/ James A. Watt
	Name: James A. Watt
	Title: President and Chief Executive Officer

 

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Exhibit 99.1

 

 

Warren Resources Announces Year-end 2015 Reserves and Production and Provides 2016 Forecast

 

DENVER, February 9, 2016 (GLOBE NEWSWIRE) — Warren Resources, Inc. (Nasdaq: WRES) (“Warren”) today announced year-end 2015 total net estimated proved reserves as appearing in its reserve report prepared by Netherland Sewell and Associates (“NSAI”).  Warren also announced its full year 2016 forecast and the initiation of efforts to restructure its outstanding debt.

 

Year-end 2015 vs Year-end 2014 Reserves using SEC Pricing

 

As of December 31, 2015, Warren had estimated net proved reserves of 241.3 Bcfe, which included 12.9 MMbls of oil and 163.7 Bcf of gas.  The PV-10 value of these reserves was approximately $96 million, based on the SEC mandated price deck of $42.81 per barrel of oil and $1.74 per Mcf of gas.  This compares with year-end 2014 total net estimated proved reserves of 428.1 Bcfe, which included 16.8 MMbls of oil and 327.3 Bcf of gas.  The PV-10 value of these reserves was $609.1 million, based on the SEC mandated price deck of $86.71 per barrel of oil and $3.22 per Mcf of gas.  Reserves declined dramatically year over year due to significant decreases in commodity pricing, which resulted in totally eliminating some reserves and reduction in the life span of many others that were included in the 2014 report.

 

Year-end 2015 Reserves using Modified Strip Pricing

 

Warren also prepared 2015 year-end reserve estimates for its properties using modified strip pricing based on West Texas Intermediate for oil and Henry Hub for gas, which reflected prices of $43.00 per barrel for oil and $2.50 per Mcf for gas in 2016, $47.00 per barrel for oil and $2.80 per Mcf for gas in 2017 and $52.06 per barrel for oil and $3.17 per Mcf for gas in 2018 and later years, with all such prices being adjusted for local differentials.

 

Using this modified strip pricing, Warren had estimated net proved reserves of 377.1 Bcfe at year-end 2015, which included 14.3 MMbl of oil and 291.2 Bcf of gas.  The PV-10 of these reserves was $215.5 million.  Probable reserves based on this price deck amounted to another 10.9 MMbl of oil and 44.3 Bcf of gas as of December 31, 2015, which constituted an incremental PV-10 value of $73.4 million.  In addition, based on this price deck, possible reserves as of year-end 2015 were 9.4 MMbl of oil and 59.8 Bcf of gas, constituting an additional incremental PV-10 value of $98.9 million.  Accordingly, total proved, possible and probable (“3P”) reserves based on this price deck were 603 Bcfe with a PV-10 value of $387.8 million as of December 31, 2015.

 

Asset Composition

 

Using this modified strip pricing, as of December 31, 2015, Warren’s California properties account for 100% of oil volumes, 46% of proved reserve PV-10 and 56% of 3P PV-10.

 

 

Warren’s Pennsylvania and Wyoming properties are all gas properties and account for the remainder of PV-10 values.  Pennsylvania properties account for 42% of proved PV-10 value and 37% of 3P PV-10 value.  Wyoming properties account for 12% of Warren’s proved PV-10 value and 6% of its 3P PV-10 value.

 

Full Year 2016 Forecast

 

Production

 

Warren’s net range of production volumes forecast for full year 2016 based on the currently available information as compared to 2015 production volumes is set forth below:

 

		2015 Actual		2016 Low		2016 High
Oil (MMbl)		980		723		883
Gas (Bcf)		28.0		20.2		24.6

 

Using the mid-point of the forecast range of production, Warren estimates that 2016 oil production will decline by approximately 18%.  Warren also estimates that 2016 gas production will decline by approximately 20%.  These forecasted decreases reflect Warren’s assumption that it will expend no new drilling capital on any of the properties in 2016.  However, Warren plans to maintain investments in all properties and areas for all appropriate safety related measures, and it plans to continue work-over programs.

 

Financial

 

The following table sets forth cash projections from Warren’s financial forecast for full year 2016 based on currently available information as compared to 2015 actual amounts.  All 2016 estimates are based in part on Warren’s assumption that production volumes will be at the mid-point of the ranges specified above.  Total revenue of $61.1 million assumes approximately $4.6 million in transportation fees associated with the Atlantic Rim Pipeline in Wyoming in addition to estimated oil and gas production revenues.

 

		2015 Actual (MM$)		2016 Forecast (MM$)
Total Revenue		89.4		61.1
LOE, Gathering Fees & Taxes		49.6		39.0
G&A		17.6		12.7
Cash Interest		30.4		37.3

 

As a result of decreased production and ongoing negotiations with vendors and pipeline operators, Warren anticipates that Lease Operating Expenses (“LOE”), field gathering and transportation fees and taxes will decline by $10.6 million, or 21%, in 2016 to $39.0 million.  Warren also forecasts General and Administrative Expenses (“G&A”) will be $12.7 million in 2016, versus $17.6 million in 2015, reflecting a 28% decrease.  For 2015 this includes $2.6 million of stock based compensation and for 2016 stock based

 

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compensation is projected to be $1.8 million.  Expected cash interest increases in 2016 to $37.3 million, reflecting a full year of cash interest on the first lien credit facility put in place in May of 2015.  In arriving at these estimates, Warren has assumed average prices of $29.24 per barrel of oil and $1.47 per Mcf of gas, whereas in 2015 Warren realized average pricing of $41.38 per barrel of oil and $1.61 per Mcf of gas.  The only capital expenditures currently included in Warren’s 2016 plan are for facility and pipeline work in California.  Even with these planned reductions in G&A and total LOE, projected cash expenses exceed projected revenues in 2016.

 

Debt Restructuring

 

Based on the projections detailed above, Warren has initiated discussions with its creditors regarding a restructuring of its debt obligations.  As of December 31, 2015, Warren’s first lien creditors held debt of $235 million in principal amount, second lien creditors held debt of $51 million in principal amount, and investors held $167 million principal amount of Warren’s unsecured senior notes.  Warren had $26.8 million in cash at year end 2015.

 

Additionally, Warren recently announced that it would not make the approximately $7.5 million interest payment due February 1, 2016 on its unsecured notes, and instead anticipates utilizing the applicable 30-day grace period to initiate negotiations with note holders.  If Warren cannot come to a workable agreement regarding an out-of-court restructuring, it will have to seek protection from its creditors through a bankruptcy proceeding in order to preserve and maximize value for its stakeholders.

 

James A. Watt, Warren’s President and CEO, commented, “These are very difficult times for Warren and its industry peers.  We are making significant cuts in both G&A and overall operating costs, but we must seek further concessions from our various debt holders and vendors to survive what is anticipated to be a lengthy downturn in commodity prices.”

 

Forward-Looking Statements

 

Portions of this press release contain 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.  A number of factors may cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this release.  Warren believes that its expectations are based on reasonable assumptions.  No assurance, however, can be given that such expectations will prove to have been correct.  Some factors that could cause actual results to differ materially from those in the forward-looking statements, include, but are not limited to: the market prices of oil and gas and hedging activities undertaken in relation thereto; financial market conditions and the availability of liquidity; lenders’ willingness to waive or amend financial covenants applicable to Warren; delisting of Warren’s stock; changes in expected levels of oil and gas reserve estimates and production estimates; the inability to drill wells on a substantial portion of Warren’s acreage due to insufficient capital, market conditions or other factors; the timing and results of drilling and other development activities; any inability to hold substantial leases; governmental and environmental regulations and permitting requirements and delays; the availability of capital and credit market conditions; unsuccessful exploratory activities; unexpected cost increases; delays in completing production, treatment and transportation facilities; the availability and cost of obtaining equipment and technical personnel;

 

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operating hazards; risks associated with the availability of acceptable transportation arrangements; unanticipated operational problems; potential liability for remedial actions under existing or future environmental regulations; changes in tax, environmental and other laws applicable to Warren’s business as well as general domestic and international economic and political conditions; concentration of customers; inability to replace reserves as they are produced; climate change; computer security breaches; and factors that may affect Warren’s common stock, including the numbers of shares subject to registration rights; stock price volatility; anti-takeover measures in Warren’s organizational documents; and any failure to make appropriate assumptions or estimates in the preparation of Warren’s financial statements or to maintain adequate internal control over financial reporting.  All forward-looking statements are made only as of the date hereof and, unless legally required, Warren undertakes no obligation to update any such statements, whether as a result of new information, future events or otherwise.  Further information on risks and uncertainties that may affect Warren’s operations and financial performance, and the forward-looking statements made herein, is available in Warren’s filings with the Securities and Exchange Commission (www.sec.gov), including its Annual Report on Form 10-K under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other public filings and press releases.

 

About Warren Resources

 

Warren Resources, Inc. is an independent energy company engaged in the acquisition, exploration, development and production of domestic oil and natural gas reserves.  Warren’s activities are primarily focused on oil in the Wilmington field in the Los Angeles Basin in California, natural gas in the Marcellus Shale in Pennsylvania, and the Washakie Basin of Wyoming.

 

Contact:

 

Dan Collins, Investor Relations

(888) 387-1575

 

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