Warren Resources (WRES) 10-Q/A 2007 Q2 Quarterly report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

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

For the Quarterly Period Ended June 30, 2007

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	11-3024080
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
489 Fifth Avenue, New York, New York	10017
(Address of Principal Executive Offices)	(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer o Accelerated filer x Non-accelerated filer 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 2, 2007 was 58,185,549 shares of Common Stock, $0.0001 par value.

WARREN RESOURCES, INC.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q amends the registrant’s Quarterly Report on Form 10-Q, as filed by the registrant with the Securities and Exchange Commission on August 3, 2007, and is being filed solely to amend the following items of the original Form 10-Q:

 In “PART I-FINANCIAL INFORMATION, Item 1 – Financial Statements” is amended:

(a) to insert an additional line in the Consolidated Balance Sheet for “Oil and gas properties – at cost, based on full cost method of accounting, net of accumulated depreciation, depletion and amortization”;

(b) to expand the footnote descriptions contained in Note B – Change in Accounting Principle on page F-6; and

(c) to replace the first two paragraphs of Note G –Contingencies – Termination of repurchase agreements on page F-10.

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Warren Resources, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30, 2007			December 31, 2006
				(Restated, see Note B)
ASSETS
Current Assets
Cash and cash equivalents	$	26,748,498		$	43,021,884
Accounts receivable – trade	8,020,252			5,984,259
Restricted investments in U.S. Treasury Bonds—available for sale, at fair value	118,685			121,855
Other current assets	333,328			3,309,692
Total current assets	35,220,763			52,437,690
Other Assets
Oil and gas properties—at cost, based on full cost method of accounting, net of accumulated depreciation, depletion and amortization (includes unproved properties excluded from amortization of $85,477,004 and $57,101,675 as of June 30, 2007 and December 31, 2006)	354,175,828			253,592,415
Property and equipment—at cost, net	2,516,737			1,751,146
Restricted investments in U.S. Treasury Bonds—available for sale, at fair value	1,068,170			1,096,695
Goodwill	3,430,246			3,430,246
Other assets	4,439,351			4,643,155
Total other assets	365,630,332			264,513,657
	$	400,851,095		$	316,951,347
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current maturities of debentures and other long term liabilities	$	534,513		$	506,628
Accounts payable and accruals	18,029,241			22,455,043
Total current liabilities	18,563,754			22,961,671
Long-Term Liabilities
Debentures, less current portion	2,246,400			2,246,400
Other long-term liabilities, less current portion	7,315,636			6,766,868
Line of credit	30,000,000			—
	39,562,036			9,013,268
Commitments and Contingencies
Stockholders’ Equity
8% convertible preferred stock, par value $.0001; authorized 10,000,000 shares, issued and outstanding, 271,436 shares in 2007 and 272,000 shares in 2006 (aggregate liquidation preference $3,257,232 in 2007 and $3,264,000 in 2006)	3,249,907			3,252,897
Common stock - $.0001 par value; authorized, 100,000,000 shares; issued 58,185,549 in 2007 and 54,143,054 shares in 2006	5,819			5,414
Additional paid-in-capital	424,612,863			371,035,151
Accumulated deficit	(84,517,816		)	(88,729,921		)
Accumulated other comprehensive income, net of applicable income taxes of $74,000 in 2007 and $92,000 in 2006	102,587			140,922
	343,453,360			285,704,463
Less common stock in Treasury—at cost; 632,250 shares in 2007 and 2006	728,055			728,055
Total stockholders’ equity	342,725,305			284,976,408
	$	400,851,095		$	316,951,347

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

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NOTE B – CHANGE IN ACCOUNTING PRINCIPLE

The Company has adopted the full cost method of accounting for its oil and gas properties.  Previously, the Company followed the successful efforts method of accounting for its oil and gas activities. Warren believes that the full cost method is preferable for a company that is actively involved in the exploration and development of oil and gas reserves. Additionally, the full cost method is used by the majority of Warren’s peers and management believes the change will improve the comparability of Warren’s financial statements with its peer group. Warren’s financial results have been retroactively restated to reflect the full cost method of accounting.

As prescribed by full cost accounting rules, all costs associated with property acquisition, exploration and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of oil and gas properties as well as other internal costs that can be specifically identified with acquisition, exploration and development activities are also capitalized. Proceeds received from disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement costs are depleted on the equivalent unit-of-production method, based on proved oil and gas reserves as determined by independent petroleum engineers.

In accordance with full cost accounting rules, Warren is subject to a limitation on capitalized costs. The capitalized cost of oil and gas properties, net of accumulated depreciation, depletion and amortization, may not exceed the estimated future net cash flows from proved oil and gas reserves discounted at 10 percent, plus the lower of cost or fair market value of unproved properties as adjusted for related tax effects. If capitalized costs exceed this limit (the “ceiling limitation”), the excess must be charged to expense. Warren did not have any adjustment to earnings due to the ceiling limitation for the periods presented herein.

The costs of certain unevaluated oil and gas properties and exploratory wells being drilled are not included in the costs subject to amortization. Warren assesses costs not being amortized for possible impairments or reductions in value and if a reduction in value has occurred, the portion of the carrying cost in excess of the current value is transferred to costs subject to amortization.

As a result of the change in accounting principle, our accumulated deficit as of January 1, 2006 increased from $82,861,220 as originally reported using the successful efforts method to $95,164,631 using the full cost method. There was no change in cash flows from operations during these periods presented below.

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A comparison of the Company’s previously presented net income, earnings per share, oil and gas properties and accumulated deficit under the successful efforts method of accounting to its financial statements under the full cost method as disclosed herein, as follows:

Income Statement

Three months ended June 30, 2007

	As computed		As reported
	under		under		Effect
	Successful		Full		of
	Efforts		Cost		change
Oil and gas sales	$	13,347,043	$	13,347,043	$	—
Turnkey contracts with affiliated partnerships	—				—
Oil and gas sales from marketing activities	320,792				(320,792		)
Well Services	325,679				(325,679		)
Interest and other income	558,433		558,433		—
	14,551,947		13,905,476		(646,471		)
Production and exploration	5,357,200		5,165,860		(191,340		)
Turnkey contracts	—				—
Cost of marketed oil and gas sales	320,791				(320,791		)
Well services	250,093				(250,093		)
Depreciation, depletion, amortization and impairment	4,252,331		2,582,059		(1,670,272		)
General and administrative	2,764,273		2,964,014		199,741
Interest	431,255		431,255		—
	13,375,943		11,143,188		(2,232,755		)
Income before provision for income taxes	1,176,004		2,762,288		1,586,284
Deferred income tax expense	18,000		18,000		—
Net income	1,158,004		2,744,288		1,586,284
Less dividends and accretion on preferred shares	66,952		66,952		—
Net income applicable to common stockholders	$	1,091,052	$	2,677,336	$	1,586,284
Earnings per share - basic	$	0.02	$	0.05	$	0.03
Earnings per share - diluted	$	0.02	$	0.05	$	0.03
Depreciation, depletion, amortization and impairment expense per Mcfe	$	2.80	$	1.70	$	(1.10	)

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Income Statement

Six months ended June 30, 2007

	As computed		As reported
	under		under		Effect
	Successful		Full		of
	Efforts		Cost		change
Oil and gas sales	$	22,828,728	$	22,828,728	$	—
Turnkey contracts with affiliated partnerships					—
Oil and gas sales from marketing activities	694,547				(694,547		)
Well Services	630,385				(630,385		)
Interest and other income	1,399,275		1,399,275		—
	25,552,935		24,228,003		(1,324,932		)
Production and exploration	9,381,821		9,180,799		(201,022		)
Turnkey contracts	354,355				(354,355		)
Cost of marketed oil and gas sales	681,761				(681,761		)
Well services	609,719				(609,719		)
Depreciation, depletion, amortization and impairment	6,845,447		4,590,303		(2,255,144		)
General and administrative	5,431,933		5,631,673		199,740
Interest	588,123		588,123		—
	23,893,159		19,990,898		(3,902,261		)
Income before provision for income taxes	1,659,776		4,237,105		2,577,329
Deferred income tax expense	25,000		25,000		—
Net income	1,634,776		4,212,105		2,577,329
Less dividends and accretion on preferred shares	134,068		134,068		—
Net income applicable to common stockholders	$	1,500,708	$	4,078,037	$	2,577,329
Earnings per share - basic	$	0.03	$	0.08	$	0.05
Earnings per share - diluted	$	0.03	$	0.07	$	0.04
Depreciation, depletion, amortization and impairment expense per Mcfe	$	2.53	$	1.70	$	(0.83	)

Balance sheet

June 30, 2007

	As computed			As reported
	Under			under			Effect
	Successful			Full			of
	Efforts			Cost			change
Total current assets	$	35,220,763		$	35,220,763		$	—
Oil and gas properties, at cost net of accumulated depreciation, depletion and amortization	358,506,410			354,175,828			(4,330,582		)
Property and equipment	2,516,737			2,516,737			—
Other assets	8,937,767			8,937,767			—
	405,181,677			400,851,095			(4,330,582		)
Current liabilities	18,563,754			18,563,754			—
Long term liabilities	39,562,036			39,562,036			—
Preferred stock	3,249,907			3,249,907			—
Common stock	5,819			5,819			—
Additional paid in capital	424,612,863			424,612,863			—
Accumulated deficit	(80,187,234		)	(84,517,816		)	(4,330,582		)
Accumulated other comprehensive income	102,587			102,587			—
Common stock in Treasury	(728,055		)	(728,055		)	—
	$	405,181,677		$	400,851,095		$	(4,330,582	)

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Income Statement

Three months ended June 30, 2006  

	As originally		As
	reported		reported
	under		under		Effect
	Successful		Full		of
	Efforts		Cost		change
Oil and gas sales	$	7,634,160	$	7,634,160	$	—
Turnkey contracts with affiliated partnerships	119,913				(119,913		)
Oil and gas sales from marketing activities	503,369				(503,369		)
Well Services	209,632				(209,632		)
Interest and other income	1,225,910		1,225,910		—
	9,692,984		8,860,070		(832,914		)
Production and exploration	3,176,007		2,793,392		(382,615		)
Turnkey contracts	94,881				(94,881		)
Cost of marketed oil and gas sales	484,667				(484,667		)
Well services	164,840				(164,840		)
Depreciation, depletion, amortization and impairment	1,745,394		1,425,577		(319,817		)
General and administrative	2,357,786		2,357,786		—
Interest	182,981		99,030		(83,951		)
	8,206,556		6,675,785		(1,530,771		)
Income before provision for income taxes	1,486,428		2,184,285		697,857
Deferred income tax expense	56,000		56,000		—
Net income	1,430,428		2,128,285		697,857
Less dividends and accretion on preferred shares	45,222		45,222		—
Net income applicable to common stockholders	$	1,385,206	$	2,083,063	$	697,856
Earnings per share - basic	$	0.03	$	0.04	$	0.01
Earnings per share - diluted	$	0.03	$	0.04	$	0.01
Depreciation, depletion, amortization and impairment expense per Mcfe	$	1.97	$	1.61	$	(0.36	)

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Income Statement

Six months ended June 30, 2006

	As originally		As
	reported		reported
	under		under		Effect
	Successful		Full		Of
	Efforts		Cost		change
Oil and gas sales	$	14,443,601	$	14,443,601	$	—
Turnkey contracts with affiliated partnerships	546,510		—		(546,510		)
Oil and gas sales from marketing activities	1,518,414		—		(1,518,414		)
Well Services	457,921		—		(457,921		)
Interest and other income	2,558,988		2,558,988		—
	19,525,434		17,002,589		(2,522,845		)
Production and exploration	6,155,628		5,605,421		(550,207		)
Turnkey contracts	800,597		—		(800,597		)
Cost of marketed oil and gas sales	1,476,673		—		(1,476,673		)
Well services	460,323		—		(460,323		)
Depreciation, depletion, amortization and impairment	3,218,826		2,824,088		(394,738		)
General and administrative	4,630,905		4,630,905		—
Interest	373,098		204,202		(168,896		)
	17,116,050		13,264,616		(3,851,434		)
Income before provision for income taxes	2,409,384		3,737,973		1,328,589
Deferred income tax expense	123,000		123,000		—
Net income	2,286,384		3,614,973		1,328,589
Less dividends and accretion on preferred shares	216,148		216,148		—
Net income applicable to common stockholders	$	2,070,236	$	3,398,825	$	1,328,589
Earnings per share - basic	$	0.04	$	0.06	$	0.02
Earnings per share - diluted	$	0.04	$	0.06	$	0.02
Depreciation, depletion, amortization and impairment expense per Mcfe	$	1.84	$	1.61	$	(0.23	)

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Balance Sheet

December 31, 2006

	As originally			As
	reported			reported
	under			under			Effect
	Successful			Full			of
	Efforts			Cost			change
Total current assets	$	52,437,690		$	52,437,690		$	—
Oil and gas properties, at cost net of accumulated depreciation, depletion and amortization	260,500,325			253,592,415			(6,907,910		)
Property and equipment	1,751,146			1,751,146			—
Other assets	9,170,096			9,170,096			—
	323,859,257			316,951,347			(6,907,910		)
Current liabilities	22,961,671			22,961,671			—
Long term liabilities	9,013,268			9,013,268			—
Preferred stock	3,252,897			3,252,897			—
Common stock	5,414			5,414			—
Additional paid in capital	371,035,151			371,035,151			—
Accumulated deficit	(81,822,011		)	(88,729,921		)	(6,907,910		)
Accumulated other comprehensive income	140,922			140,922			—
Common stock in Treasury	(728,055		)	(728,055		)	—
	$	323,859,257		$	316,951,347		$	(6,907,910	)

Costs not subject to amortization include acquisition and exploration costs of unproved properties in the Atlantic Rim and Pacific Rim coalbed methane projects in south central Wyoming. These costs are excluded from amortized capital costs until it is determined whether or not proved reserves can be assigned to the properties. Currently, these coalbed methane wells are dewatering. The excluded properties are assessed quarterly for impairment. The inclusion of these costs in amortized capital costs is expected to be completed within the next two years.

The following is a summary of Warren’s oil and gas properties not subject to amortization as of June 30, 2007:

	Costs incurred in
	Six months ended June 30,		Fiscal year		Fiscal year		Fiscal year		Prior to
	2007		2006		2005		2004		2004		Total
Acquisition costs	$	15,471,707	$	1,937,296	$	1,508,256	$	1,364,896	$	13,181,907	$	33,464,062
Exploration costs	5,273,430		7,311,251		2,178,875		4,143,591		12,415,607		31,322,754
Development costs	7,630,192		7,843,750		—		—		—		15,473,942
Capitalized Interest	—		—		1,749,343		1,397,031		2,069,872		5,216,246
Total oil and gas properties not subject to amortization	$	28,375,329	$	17,092,297	$	5,436,474	$	6,905,518	$	27,667,386	$	85,477,004

NOTE G – CONTINENCIES the first two paragraphs under “Termination of repurchase agreements” are replaced and amended to read as follows:

“For partnerships formed from 1999 to 2001, investor partners previously had a right to have their interests repurchased by the Company at a formula price seven years from the date of the original partnership formation. During the second quarter of 2007, Warren acquired the respective oil and gas assets of all of the partnerships formed from 2000 to 2003.  The acquisitions are accounted for as the purchase of a business. The Company accounted for the transaction using the non-discounted closing price of its publicly traded common stock based upon the average closing price as defined in the referenced acquisition agreements. As consideration for the oil and gas properties acquired, Warren issued an aggregate of 3,482,074 shares of our unregistered restricted common stock to the five separate partnerships. The number of restricted shares of Common Stock issued as consideration was determined in accordance with the acquisition agreements based upon a 20% discount from the weighted average sales price for Warren’s publicly traded Common Stock for the sixty-one (61) calendar days ended May 31, 2007. During that period, the weighted average sales price was $13.50 per share, and the 20% discounted price was $10.80 per share. The effective date of those acquisitions was April 1, 2007 and their closing date was June 20, 2007.  The reserves attributable to the oil and gas properties of the five drilling partnerships are approximately 9.9 Bcfe of

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proved developed producing reserves. Warren also attributed an estimated fair market value for related water injection wells and unproved dewatering wells that were in the partnerships.  In accordance with their five respective partnership agreements, the sale of substantially all of the oil and gas properties by the five partnerships formed from 2000 to 2003 terminated any repurchase rights that their investor partners previously held.

Also, during the second quarter of 2007, Warren acquired the respective oil and gas assets of the two partnerships formed in 1999.   The acquisitions are accounted for as the purchase of a business. The Company accounted for the transaction using the non-discounted closing price of its publicly traded common stock based upon the average closing price as defined in the referenced acquisition agreements. As consideration, Warren paid an aggregate of $1.8 million in cash and the balance by issuing 414,139 shares of our unregistered restricted common stock to the two separate partnerships. The number of restricted shares of Common Stock issued as consideration was determined in accordance with the acquisition agreements based upon a 20% discount from the weighted average sales price for Warren’s publicly traded Common Stock for the period January 1, 2007 through March 31, 2007. During that period, the weighted average sales price was $11.22 per share, and the 20% discounted price was $8.98 per share. The effective date of those two acquisitions was April 1, 2007 and their closing date was June 30, 2007.  In accordance with their respective partnership agreements, the sale of substantially all of the oil and gas properties by the two partnerships formed in 1999 terminated any repurchase rights that their investor partners previously held.”

###

With the exception of the foregoing, no other information in the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 has been supplemented, updated or amended.  All information in the original Form 10-Q, as amended by this Amendment No. 1, speaks as of the date of the original filing of the original Form 10-Q and does not reflect any subsequent information or events, except as presented in this Amendment No. 1 and except for Exhibits 31.1, 31.2 and 32.1.

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: October 5, 2007		/s/ Timothy A. Larkin
	By:	Timothy A. Larkin
		Executive Vice President, Chief Financial Officer and Principal Accounting Officer

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