Warren Resources (WRES) 10-Q 2013 Q2 Quarterly report

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, 2013

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)

1114 Avenue of the Americas, New York, NY	10036
(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 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 5, 2013 was 72,972,808 shares of Common Stock, $0.0001 par value.

WARREN RESOURCES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I—	FINANCIAL INFORMATION
	Item 1. Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012
	Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012
	Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012
	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

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WARREN RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30, 2013 (Unaudited)			December 31, 2012
	(in thousands, except share and per share data)
ASSETS
Current Assets
Cash and cash equivalents	$	7,352		$	8,475
Accounts receivable — trade	19,930			18,110
Restricted investments in U.S. Treasury Bonds—available for sale, at fair value	134			142
Derivative financial instruments	895			—
Other current assets	1,965			1,096
Total current assets	30,276			27,823
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 $18,491 and $20,507 as of June 30, 2013 and December 31, 2012)	313,135			301,599
Property and equipment—at cost, net	18,957			17,941
Restricted investments in U.S. Treasury Bonds—available for sale, at fair value	1,211			1,273
Other assets	4,020			4,108
Derivative financial instruments	310			—
Total other assets	337,633			324,921
	$	367,909		$	352,744
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current maturities of debentures and other long-term liabilities	$	1,590		$	1,790
Accounts payable and accruals	41,846			29,278
Derivative financial instruments	—			385
Total current liabilities	43,436			31,453
Long-Term Liabilities
Debentures, less current portion	1,472			1,472
Other long-term liabilities, less current portion	27,204			26,710
Derivative financial instruments	—			567
Line of credit	89,500			99,500
	118,176			128,249
Commitments and Contingencies
Stockholders’ Equity
8% convertible preferred stock, par value $.0001; authorized 10,000,000 shares, issued and outstanding, 10,703 shares in 2013 and 2012 (aggregate liquidation preference $128 in 2013 and 2012)	128			128
Common stock - $.0001 par value; authorized, 100,000,000 shares; issued 72,972,808 shares in 2013 and 72,440,898 shares in 2012	7			7
Additional paid-in-capital	469,707			468,406
Accumulated deficit	(263,044		)	(275,058		)
Accumulated other comprehensive income, net of applicable income taxes of $149 in 2013 and $188 in 2012	227			287
	207,025			193,770
Less common stock in Treasury—at cost; 632,250 shares in 2013 and 2012	728			728
Total stockholders’ equity	206,297			193,042
	$	367,909		$	352,744

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

3

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 and per share data)						(in thousands, except share and per share data)
	2013			2012			2013			2012
Operating revenues
Oil and gas sales	$	30,735		$	30,178		$	61,554		$	58,532
Operating expenses
Lease operating expense and taxes	8,330			7,177			18,126			15,677
Depreciation, depletion and amortization	11,810			11,232			23,381			21,337
General and administrative	3,930			6,217			8,247			10,510
Total operating expenses	24,070			24,626			49,754			47,524
Income from operations	6,665			5,552			11,800			11,008
Other income (expense)
Interest and other income	16			20			31			45
Interest expense	(724		)	(830		)	(1,474		)	(1,605		)
Gain (loss) on derivative financial instruments	3,260			489			1,695			(389		)
Total other income (expense)	2,552			(321		)	252			(1,949		)
Income before taxes	9,217			5,231			12,052			9,059
Deferred income tax expense (benefit)	32			(28		)	39			(11		)
Net income	9,185			5,259			12,013			9,070
Less dividends and accretion on preferred shares	2			2			5			5
Net income applicable to common stockholders	$	9,183		$	5,257		$	12,008		$	9,065
Earnings per share — Basic	$	0.13		$	0.07		$	0.17		$	0.13
Earnings per share — Diluted	0.13			0.07			0.17			0.13
Weighted average common shares outstanding — Basic	72,283,896			71,062,658			72,138,686			71,043,874
Weighted average common shares outstanding — Diluted	72,852,877			71,958,314			72,723,453			72,094,323

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

4

WARREN RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended June 30, (Unaudited)					Six Months Ended June 30, (Unaudited)
	(in thousands, except share and per share data)					(in thousands, except share and per share data)
	2013			2012		2013			2012
Net income	$	9,185		$	5,259	$	12,013		$	9,070
Other comprehensive income
Holding gain (loss) on available for sale investments	(49		)	43		(60		)	17
Comprehensive income	$	9,136		$	5,302	$	11,953		$	9,087

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

5

WARREN RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the six months ended June 30, (Unaudited)
	(in thousands)
	2013			2012
Cash flows from operating activities:
Net income	$	12,013		$	9,070
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of discount on available-for-sale debt securities	(30		)	(29		)
Amortization of deferred offering costs	106			102
Depreciation, depletion and amortization	23,381			21,337
Change in fair value of derivative financial instruments	(2,156		)	(1,642		)
Gain on sale of US treasury bonds — available for sale	—			(4		)
Stock option expense	945			848
Deferred tax expense (benefit)	39			(11		)
Change in assets and liabilities:
Decrease (increase) in accounts receivable—trade	(1,489		)	726
Increase in other assets	(869		)	(43		)
Increase in accounts payable and accruals	1,666			2,713
Decrease in other long-term liabilities	(1,194		)	(858		)
Net cash provided by operating activities	32,412			32,209
Cash flows from investing activities:
Purchase, exploration and development of oil and gas properties	(22,113		)	(43,920		)
Purchase of property and equipment	(1,766		)	(731		)
Proceeds from US treasury bonds — available for sale	—			13
Net cash used in investing activities	(23,879		)	(44,638		)
Cash flows from financing activities:
Proceeds from line of credit	—			10,000
Payments on debt and debentures	(10,017		)	(91		)
Proceeds from the exercise of stock options	361			—
Issuance of common stock, net	—			37
Net cash provided by (used in) financing activities	(9,656		)	9,946
Net decrease in cash and cash equivalents	(1,123		)	(2,483		)
Cash and cash equivalents at beginning of period	8,475			10,614
Cash and cash equivalents at end of period	$	7,352		$	8,131
Supplemental disclosure of cash flow information
Cash paid for interest, net of amounts capitalized	$	1,347		$	1,632
Noncash investing and financing activities
Accrued preferred stock dividend	5			5

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

6

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, Wyoming and New Mexico.

The accompanying unaudited financial statements and related notes present the Company’s consolidated financial position as of June 30, 2013 and December 31, 2012, the consolidated results of operations for the three and six months ended June 30, 2013 and 2012, the consolidated statements of comprehensive income for the three and six months ended June 30, 2013 and 2012 and consolidated cash flows for the six months ended June 30, 2013 and 2012. 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, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013. 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, 2012. These interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements presented in the Company’s 2012 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 and $0.5 million for the three months ended June 30, 2013 and June 30, 2012, respectively, and approximately $0.9 and $0.8 million for the six months ending June 30, 2013 and June 30, 2012, respectively.

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

	Six months ended June 30,
	2013		2012
Dividend yield	0	%	0	%
Expected volatility	70.9	%	73.5	%
Risk-free interest rate	0.5	%	0.5	%
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, 2013	1,966,203		$	2.11
Granted	316,322		3.02
Exercised	(105,732	)	1.61
Forfeited or expired	(36,500	)	7.29
Outstanding at June 30, 2013	2,140,293		$	2.22	2.63	$	1,272
Exercisable at June 30, 2013	1,255,887		$	1.75	1.25	$	1,271

7

The total intrinsic value of options exercised during the six months ended June 30, 2013 and 2012 were approximately $461,000 and $107,000 respectively.

As of June 30, 2013 total unrecognized stock-based compensation expense related to non-vested stock options was approximately $1.2 million, which we expect to recognize over a weighted average period of 2.1 years.

Restricted Shares

Restricted share activity for the six months ended June 30, 2013 was as follows:

	Shares		Weighted Average Fair Value
Outstanding at December 31, 2012	1,606,460		$	2.54
Granted	886,331		1.87
Vested	(376,331	)	3.52
Forfeited	(138,679	)	3.15
Outstanding at June 30, 2013	1,977,781		$	2.01

Restricted stock awards for executive officers and employees 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, 2013, total unrecognized stock-based compensation expense related to non-vested restricted shares was $3.6 million, which is expected to be recognized over a weighted average period of approximately 1.6 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

NOTE D—EARNINGS PER SHARE

Basic earnings per share is computed by dividing net earnings applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is based on the assumption that stock options and warrants 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, 2013 and June 30, 2012 of 38,072 and 52,093 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 2,794,021 and 1,705,448 respectively, relating to stock options and restricted stock were excluded from the computation of diluted earnings per share for the six months ended June 30, 2013 and 2012, respectively, because they are anti-dilutive. Stock options have a weighted average exercise price of $2.22 and $2.90 at June 30, 2013 and June 30, 2012, respectively. At June 30, 2013 the convertible bonds may be converted at 100% of principal 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 per share are computed based on the following information:

	Three Months Ended June 30, 2013		Three Months Ended June 30,  2012		Six Months Ended June 30, 2013		Six Months Ended June 30, 2012
	(in thousands, except for per share data)				(in thousands, except for per share data)
Net earnings applicable to common shareholders	$	9,183	$	5,257	$	12,008	$	9,065
Weighted average shares outstanding — basic	72,283,896		71,062,658		72,138,686		71,043,874
Effect of dilutive securities — restricted stock	11,822		—		15,592		—
Effect of dilutive securities — stock options	557,159		895,656		569,175		1,050,449
Weighted average shares outstanding - diluted	72,852,877		71,958,314		72,723,453		72,094,323
Basic net earnings per share	$	0.13	$	0.07	$	0.17	$	0.13
Diluted net earnings per share	$	0.13	$	0.07	$	0.17	$	0.13

9

NOTE E—LONG-TERM LIABILITIES

Long-term liabilities, excluding derivative financial instruments (see Note I), consisted of the following for the balance sheets dated:

	June 30,		December 31,
	2013		2012
	(in thousands)
Line of Credit	$	89,500	$	99,500
Convertible debentures	1,636		1,636
Asset retirement obligations	25,530		25,236
Litigation allowance	3,100		3,100
	119,766		129,472
Less current portion	1,590		1,790
Long-term portion	$	118,176	$	127,682

On December 15, 2011, the Company entered into a five-year $300 million Second Amended and Restated Credit Agreement with Bank of Montreal. This replaced the prior $250 million credit agreement with GE Business Financial Services, Inc. The Credit Facility provides for a revolving credit facility up to the lesser of: (i) $300 million, (ii) the Borrowing Base, or (iii) the Draw Limit requested by the Company. The Credit Facility matures on December 15, 2016, is secured by substantially all of Warren’s oil and gas assets, and is guaranteed by the two wholly-owned subsidiaries of the Company. In May 2013, the borrowing base was increased to $145 million. The maximum amount available is subject to semi-annual redeterminations of the borrowing base in April and October of each year, based on the value of the Company’s proved oil and natural gas reserves in accordance with the lenders’ customary procedures and practices.  Both the Company and the lenders have the right to request one additional redetermination each year.  Credit line interest of approximately $0.1 million was accrued as of June 30, 2013. As of June 30, 2013, the Company has $89.5 million outstanding on its borrowing base.

The Company is subject to certain covenants under the terms of the Credit Facility which include, but are not limited to, the maintenance of the following financial ratios (1) minimum current ratio of current assets (including unused borrowing base in current assets) to current liabilities of 1.0 to 1.0 and (2) a minimum annualized consolidated EBITDAX (as defined by the Credit Facility) to net interest expense of 2.5 to 1.0. The Company is in compliance with these covenants as of June 30, 2013.

Depending on the amount outstanding and the level of borrowing base usage, the annual interest rate on each base rate loan under the Credit Facility will be, at the Company’s option, either: (a) a “LIBOR Loan”, which has an interest rate equal to the sum of the applicable LIBOR period plus the applicable “LIBOR Margin” that ranges from 1.75% to 2.75%, or (b) a “Base Rate Loan”, or any other obligation other than a LIBOR Loan, which has an interest rate equal to the sum of the “Base Rate”, calculated to be the higher of: (i) the Agent’s prime rate of interest announced from time to time, or (ii) the Federal Funds rate most recently determined by the Agent plus one-half percent, plus an applicable “Base Rate Margin” that ranges from 0.75% to 1.75%. The weighted average interest rate as of June 30, 2013, was 2.45%.

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 conversion price of $50. Each year the holders of the convertible bonds may tender to the Company up to 10% of the aggregate bonds issued and outstanding. During the six months ended June 30, 2013, there were no bond redemptions.

10

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 $3.2 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:

	June 30,
	2013
	(in thousands)
Balance at beginning of period	$	25,236
Liabilities incurred in current period	395
Liabilities settled in current period	(1,194		)
Accretion expense	1,093
Balance at end of period	$	25,530

NOTE G—CONTINGENCIES

In 2005, Warren recorded a provision for $1.8 million relating to a contingent liability that the Company may face as a result of a lawsuit originally filed in 1998 by Gotham Insurance Company in the 81st Judicial District Court of Frio County, Texas (Gotham Insurance Company v. Pedeco, Inc., et al.,) seeking a refund of approximately $1.8 million paid by Gotham and other insurers under an insurance policy issued for a well blow-out that occurred in 1997. After several appeals to the Texas Court of Appeals and the Texas Supreme Court, the case was remanded to the trial court for further proceedings. Both parties filed Motions for Summary Judgment in mid-2009, and on November 19, 2009, the trial court heard oral arguments on both Motions for Summary Judgment. On January 22, 2010, the court granted Gotham’s Motion for Summary Judgment for restitution in the amount of $1,823,156 and also awarded prejudgment interest at the rate of 5% per annum in the amount of $976,011. As a result of the January 2010 Summary Judgment, Warren recorded an additional provision of $1.3 million in the fourth quarter of 2009 relating to this contingent liability. On July 7, 2010, Warren E&P posted a supersedeas bond with the court and commenced to appeal the order of the trial court to the Texas Court of Appeals. The San Antonio Court of Appeals assigned and transferred this appeal to the El Paso Court of Appeals. On March 14, 2011, Warren filed its appellate brief with the El Paso Court of Appeals. The El Paso Court of Appeals held oral arguments of the case on January 12, 2012. On April 18, 2012 the Texas Court of Appeals reversed the judgment of the trial court and rendered its appellate decision in favor of Warren ruling that Gotham Insurance take nothing against Warren. Additionally, the Texas Court of Appeals ordered that Warren can recover all costs of the appeal from Gotham Insurance. In response to the April 18, 2012 ruling, on June 4, 2012, Gotham filed a petition with the Texas Supreme Court seeking a review of the ruling. On September 26, 2012, Warren filed a reply brief in opposition to Gotham’s petition. The Court asked for further briefing and on December 18, 2012 Gotham filed a brief on the merits of their appeal. On February 6, 2013, Warren filed its brief in response to Gotham’s brief. On April 19, 2013, the Supreme Court granted Gotham’s petition for a review of the Court of Appeals ruling. The Court has set oral arguments on the merits of the appeal for October 8, 2013. We do not anticipate a decision or order from the Texas Supreme Court until mid-2014. In the event the Texas Supreme Court reverses the Texas Court of Appeals ruling and finds in Gotham’s favor, Warren would be responsible for the final judgment in the amount of $2,967,070.10, plus post-judgment interest, and potentially court costs and attorney’s fees.

The Company is a party to various other matters of litigation arising in the normal course of business. Management believes that the ultimate outcome of the matters will not have a material effect on the Company’s financial condition or results of operations.

11

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.

Line of Credit. The carrying amount approximates fair value due to the current rates offered to the Company for lines of credit.

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.

	June 30, 2013				December 31, 2012
	Fair		Carrying		Fair		Carrying
	value		amount		value		amount
	(in thousands)
Financial assets
Collateral security account	$	3,165	$	3,165	$	3,164	$	3,164
Financial liabilities
Fixed rate debentures	$	2,072	$	1,636	$	2,190	$	1,636
Line of credit	89,500		89,500		99,500		99,500

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,

12

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, 2013

Assets	Level 1		Level 2		Level 3		Total
	(in thousands)
Restricted investments in US Treasury Bonds — available for sale, at fair value	$	1,345	$	—	$	—	$	1,345
Commodity derivatives	$	—	$	1,205	$	—	$	1,205

December 31, 2012

Assets	Level 1		Level 2		Level 3		Total
	(in thousands)
Restricted investments in US Treasury Bonds — available for sale, at fair value	$	1,415	$	—	$	—	$	1,415

Liabilities	Level 1		Level 2		Level 3		Total
	(in thousands)
Commodity derivatives	$	—	$	952	$	—	$	952

13

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. Currently, our derivatives are in the form of puts and a gas differential swap.  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 following table summarizes the open financial derivative positions as of June 30, 2013, 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
Oil	Brent Put	04/01/13  09/30/13	1,375 Bbl/d	$	70.00
Oil	Brent Swap	10/01/13  09/30/14	700 Bbl/d	$	104.30
Gas	Swap	04/01/13  12/31/13	7,000 MMBtu/d	$	3.39
Gas	Swap	01/01/14  12/31/14	7,000 MMBtu/d	$	3.79
Gas	Swap	05/01/13  12/31/14	2,000 MMBtu/d	$	4.18

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	2013			2012			2013			2012
(in thousands)
Realized cash settlements on hedges	$	(509	)	$	(474	)	$	(677	)	$	(854	)
Unrealized gain (loss) on hedges	3,769			963			2,372			465
Total	$	3,260		$	489		$	1,695		$	(389	)

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

14

June 30, 2013

	Derivative Assets
(in thousands)	Balance Sheet Location	Fair Value
Commodity—Oil	current	$	961
Commodity—Natural Gas	current	(66		)
Commodity—Oil	Non-current	457
Commodity—Natural Gas	Non-current	(147		)
Total derivatives not designated as hedging instruments		$	1,205

December 31, 2012

	Derivative Liabilities
(in thousands)	Balance Sheet Location	Fair Value
Commodity—Natural Gas	current	$	(457	)
Commodity—Oil	current	72
Commodity—Oil	Non-current	(567		)
Total derivatives not designated as hedging instruments		$	(952	)

Derivative’s 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.

As of June 30, 2013, the counterparty to the Company’s commodity derivative contracts consisted of one financial institution. The Company’s counterparty is also a lender under the Company’s Senior Credit Agreement. As a result, the counterparty to the Company’s derivative agreements shares in the collateral supporting the Company’s Senior Credit Agreement. The Company is not generally required to post additional collateral under derivative agreements.

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 December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” requiring additional disclosures about offsetting and related arrangements. ASU 2011-11 is effective retrospectively for annual reporting periods beginning on or after January 1, 2013. Also, in January 2013, the FASB issued ASU No. 2013-01, “Balance Sheet (Topic 210). Clarifying the Scope of Disclosures about offsetting Assets and Liabilities.” ASU 2013-01 limited the disclosures required by ASU No. 2011-11. We adopted these new requirements in first quarter 2013 and they did not have a material effect on our consolidated financial statements.

15

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 2012 Annual Report on Form 10-K, this 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.

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 and on the exploration and development of coalbed methane (“CBM”) properties located in the Rocky Mountain region. As of June 30, 2013, we owned oil and natural gas leasehold interests in approximately 123,157 gross, 92,880 net acres, approximately 85% of which are undeveloped. Substantially all our undeveloped acreage is located in the Rocky Mountains.

Liquidity and Capital Resources

Our cash and cash equivalents decreased $1.1 million to $7.4 million during the six months ended June 30, 2013.  This resulted from cash provided from operating activities of $32.4 million being offset by cash used in investing activities of $23.9 million and cash used in financing activities of $9.6 million.

Cash provided by operating activities was primarily generated by oil operations. Cash used in financing activities primarily represented a repayment of $10 million under the Credit Facility. Cash used in investing activities was primarily spent on oil and gas properties and equipment.

Capital expenditures for the six months ended June 30, 2013 were $25.8 million and consisted of $21.5 million for drilling and development in our California properties and $4.3 million for drilling and development in our Wyoming properties.

On December 15, 2011, the Company entered into a five-year $300 million Second Amended and Restated Credit Agreement with Bank of Montreal, as Administrative Agent (the “Agent”), and various other lenders named therein, and Warren Resources of California, Inc. and Warren E&P, Inc., as Guarantors (the “Credit Facility”). The Credit Facility provides for a revolving credit facility up to the lesser of: (i) $300 million, (ii) the Borrowing Base, or (iii) the Draw Limit requested by the Company. The Credit Facility matures on December 15, 2016, is secured by substantially all of Warren’s oil and gas assets, and is guaranteed by the Guarantors, which are two wholly-owned subsidiaries of the Company. In May 2013, the borrowing base was increased to $145 million. The maximum amount available is subject to semi-annual

16

redeterminations of the borrowing base in April and October of each year, based on the value of the Company’s proved oil and natural gas reserves in accordance with the lenders’ customary procedures and practices.  Both the Company and the lenders have the right to request one additional redetermination each year.

The Company is subject to various covenants required by the Credit Facility, including the maintenance of the following financial ratios: (1) a minimum current ratio of not less than 1.0 to 1.0 (including the unused borrowing base and excluding unrealized gains and losses on derivative financial instruments), and (2) a minimum annualized consolidated EBITDAX (as defined in the Credit Facility) to net interest expense of not less than 2.5 to 1.0.

Depending on the amount outstanding and the level of borrowing base usage, the annual interest rate on each base rate loan under the Credit Facility will be, at the Company’s option, either: (a) a “LIBOR Loan”, which has an interest rate equal to the sum of the applicable LIBOR period plus the applicable “LIBOR Margin” that ranges from 1.75% to 2.75%, or (b) a “Base Rate Loan”, or any other obligation other than a LIBOR Loan, which has an interest rate equal to the sum of the “Base Rate”, calculated to be the higher of: (i) the Agent’s prime rate of interest announced from time to time, or (ii) the Federal Funds rate most recently determined by the Agent plus one-half percent, plus an applicable “Base Rate Margin” that ranges from 0.75% to 1.75%. As of June 30, 2013, the Company had borrowed $89.5 million under the Credit Facility and was in compliance with all covenants. If oil and gas commodity prices were to decline to lower levels, the Company may become in violation of Credit Facility covenants in the future. If the Company fails to satisfy its Credit Facility covenants, it would be an event of default. Under such event of default and upon notice, all borrowings would become immediately due and payable to the lending banks. During the six months ended June 30, 2013, the Company incurred $1.3 million of interest expense under the Credit Facility of which approximately $0.1 million was accrued for as of June 30, 2013. The weighted average interest rate as of June 30, 2013 was 2.45%.

Our operations are affected by local, national and worldwide economic conditions. We have relied on the capital markets, particularly for equity securities, as well as the banking and debt markets, to meet financial commitments and liquidity needs if internally generated cash flow from operations is not adequate to fund our capital requirements. Capital markets in the United States and elsewhere have been experiencing extreme adverse volatility and disruption, due in part to the financial stresses affecting the liquidity of the banking system, the real estate mortgage industry and global financial markets generally.

Low commodity prices may restrict our ability to meet our current obligations. As a result, Management has taken several actions to ensure that the Company will have sufficient liquidity to meet its obligations through the next twelve months, including swaps, puts and differential swap agreements for a portion of its 2013 and 2014 production to reduce price volatility and reductions in discretionary expenditures. As of June 30, 2013, approximately 50% of the Company’s estimated 2013 oil production is covered with puts and swaps, approximately 40% of its estimated natural gas production covered with swaps.  If the liquidity of the Company should worsen, the Company would evaluate other measures to further improve its 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. There is no assurance that the Company will be successful in these capital raising efforts that may be necessary to fund operations during the next twelve months.

During the first six months of 2013, the Company had net income of $12 million (which included $1.7 million of gains on derivative financial instruments). This compares to the six months of 2012 when the Company had net income of $9.1 million (which included a $0.4 million of losses on derivative financial instruments). At June 30, 2013, current assets were $13.2 million less than current liabilities. As of June 30, 2013, the Company has a borrowing base of $145 million and $89.5 million outstanding under the Credit Facility.

In the future, if natural gas inventories rise to levels such that no natural gas storage capacity exists, certain U.S. natural gas production will need to be reduced or shut in.  Additionally, if commodity prices decline to levels that make it uneconomic to produce oil and natural gas, the Company or its partners may elect to shut in or reduce production.  As a result, some or all of the Company’s oil and natural gas production may be shut in or curtailed during the next 12 months, which would have a material adverse effect on operations.

The Company’s proved reserves may decline in future years.  Due to commodity prices, compared to the cost of developing our undeveloped reserves and our estimated lease operating expenses, a portion of our future projects may become uneconomic.  The Company’s projects have material lease operating expenses.  Our oil operations include a secondary recovery waterflood with significant fixed costs.  During the first six months of 2013, our oil lease operating expenses were $24.79 per net barrel of oil produced. Our natural gas operations include reinjecting the produced water into deep

17

formations and compressing and transporting the gas with significant fixed costs. During the first six months of 2013, our natural gas lease operating expenses were $1.69 per net mcf of gas produced.

At June 30, 2013, we had approximately 2.1 million outstanding stock options issued under our stock based equity compensation plans. Of the total outstanding vested options, 0.1 million had exercise prices above the closing market price $2.55 of our common stock on June 30, 2013.

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 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 $1.3 million at June 30, 2013.  The table below does not reflect the release of escrowed U.S. treasury bonds to us upon redemption.

	Payments due by period *
Contractual Obligations As of June 30, 2013	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
	(in thousands)
Line of credit	$	89,500	$	—	$	—	$	89,500	$	—
Bonds	1,636		164		280		226 -		966
Drilling commitments	1,253		1,253		—		—		—
Leases	6,911		613		1,729		1,613		2,956
Total	$	99,300	$	2,030	$	2,009	$	91,339	$	3,922

* Does not include estimated interest of $2.7 million less than one year, $5.3 million 1-3 years, $1.5 million 3-5 years and $0.7 million thereafter.

RESULTS OF OPERATIONS:

Three months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Oil and gas sales. Revenue from oil and gas sales increased $0.6 million in the second quarter of 2013 to $30.7 million, a 2% increase compared to the same quarter in 2012.  This increase primarily resulted from an increase in gas production and gas pricing.  Net gas production for the three months ended June 30, 2013 and 2012 was 1.6 Bcf and 1.2 Bcf, respectively.  Net oil production for the three months ended June 30, 2013 and 2012 was 262 Mbbls and 293 Mbbls, respectively. The average realized price per Mcf of gas for the three months ended June 30, 2013 and 2012 was $3.60 and $1.84, respectively.  Additionally, the average realized price per barrel of oil for the three months ended June 30, 2013 and 2012 was $96 and $95, respectively.

Lease operating expense. Lease operating expense increased 16% to $8.3 million ($15.81 per boe) for the second quarter of 2013 compared to $7.2 million ($14.38 per boe) in the comparable period of 2012. Primarily, this increase resulted from increased workover expense in our Wilmington field.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased $0.6 million for the second quarter of 2013 to $11.8 million, a 5% increase compared to the corresponding quarter last year.  This increase reflected an increase in the full cost pool and higher estimated future development and abandonment costs. The 2013 depletion rate decreased to $22.42 per boe compared to $22.50 per boe in 2012.

General and administrative expenses. General and administrative expenses decreased $2.3 million in the second quarter of 2013 to $3.9 million, a 37% decrease compared to the same quarter last year. In, the second quarter of 2012 the Company recorded a $2.0 million severance accrual payable to the Company’s former Chief Executive Officer. In addition, for the second quarter of 2013 overhead and salary costs decreased $0.3 million compared to the same period last year.

18

Interest expense. Interest expense decreased $0.1 million to $0.7 million in the second quarter of 2013 compared to the same quarter last year.  The decrease results from a decrease in borrowings under our Credit Facility from $99.5 million at June 30, 2012 to $89.5 million at June 30, 2013.

Interest and other income. Interest and other income decreased $4 thousand in the second quarter of 2013 to $16 thousand, compared to the same quarter in 2012.

Gain (loss) on derivative financial instruments.  Derivative gains of $3.3 million were recorded during the second quarter of 2013. This amount reflects $0.5 million of realized losses and $3.8 million of unrealized gains resulting from mark to market accounting of our oil and gas swaps, puts and future contract positions.

RESULTS OF OPERATIONS:

Six months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Oil and gas sales. Revenue from oil and gas sales increased $3.0 million in the first six months of 2013 to $61.6 million, a 5% increase compared to the same period in 2012.  This increase primarily resulted from an increase in gas production and gas pricing.  Net gas production for the six months ended June 30, 2013 and 2012 was 3.1 Bcf and 2.5 Bcf, respectively.  Net oil production for the six months ended June 30, 2013 and 2012 was 518 Mbbls and 542 Mbbls, respectively. The average realized price per Mcf of gas for the six months ended June 30, 2013 and 2012 was $3.40 and $2.34, respectively.  Additionally, the average realized price per barrel of oil for the six months ended June 30, 2013 and 2012 was $98 and $97, respectively.

Lease operating expense. Lease operating expense increased 16% to $18.1 million ($17.43 per boe) for the six months ended June 2013 compared to $15.7 million ($16.44 per boe) in the comparable period of 2012. Primarily, this increase resulted from increased workover expense in our Wilmington field.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased $2.0 million for the six months ended June 2013 to $23.4 million, a 10% increase compared to the corresponding quarter last year.  This increase reflected an increase in the full cost pool and higher estimated future development and abandonment costs. The 2013 depletion rate increased to $22.49 per boe compared to $22.38 per boe in 2012.

General and administrative expenses. General and administrative expenses decreased $2.3 million for the first six months of 2013 to $8.2 million, a 22% decrease compared to the same period last year. In, the second quarter of 2012 the Company recorded a $2.0 million severance accrual payable to the Company’s former Chief Executive Officer. In addition, for the six months ended June 2013 overhead and salary costs decreased $0.3 million compared to the same period last year.

Interest expense. Interest expense decreased $0.1 million to $1.5 million in the first six months of 2013 compared to the same period last year.  The decrease results from a decrease in borrowings under our Credit Facility from $99.5 million at June 30, 2012 to $89.5 million at June 30, 2013.

Interest and other income. Interest and other income decreased $14 thousand in the first six months of 2013 to $31 thousand, compared to the same period in 2012.

Gain (loss) on derivative financial instruments.  Derivative gains of $1.7 million were recorded during the first six months of 2013. This amount reflects $0.7 million of realized losses and $2.4 million of unrealized gains resulting from mark to market accounting of our oil and gas swaps, puts and future contract positions.

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 2012 Form 10-K includes a discussion of our critical accounting policies.

19

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 and a put contract 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, generally 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 6, 2013, 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
Oil	Brent Put	04/01/13  09/30/13	1,375 Bbl/d	$	70.00
Oil	Brent Swap	10/01/13  09/30/14	700 Bbl/d	$	104.30
Oil	Brent Swap	01/01/14  12/31/14	800 Bbl/d	$	102.12
Gas	Swap	04/01/13  12/31/13	7,000 MMBtu/d	$	3.39
Gas	Swap	01/01/14  12/31/14	7,000 MMBtu/d	$	3.79
Gas	Swap	05/01/13  12/31/14	2,000 MMBtu/d	$	4.18

Interest Rate Risk

At June 30, 2013, we had debt outstanding under our Credit Facility of $89.5 million.  Depending on the amount outstanding and the level of borrowing base usage, the annual interest rate on each base rate loan under the Credit Facility will be, at the Company’s option, either: (a) a “LIBOR Loan”, which has an interest rate equal to the sum of the applicable LIBOR period plus the applicable “LIBOR Margin” that ranges from 1.75% to 2.75%, or (b) a “Base Rate Loan”, or any other obligation other than a LIBOR Loan, which has an interest rate equal to the sum of the “Base Rate”, calculated to be the higher of: (i) the Agent’s prime rate of interest announced from time to time, or (ii) the Federal Funds rate most recently determined by the Agent plus one-half percent, plus an applicable “Base Rate Margin” that ranges from 0.75% to 1.75%.

20

We are exposed to interest rate risk on our variable interest rate debt. If interest rates increase, our interest expense would increase and our available cash flow would decrease.

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 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 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 2012 Annual Report on Form 10-K.

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.

21

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, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Information with respect to this item may be found in Note F to the Consolidated Financial Statements (Part I, Item 1), which is incorporated herein by reference.

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, 2012, and in our Registration Statement on Form S-3, which became effective on April 4, 2013, 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
	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 Number	Description
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

22

	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
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.

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 7, 2013
	By:	/s/ Stewart P. Skelly
		Stewart P. Skelly
		Vice President, Chief Financial Officer and Chief Accounting Officer

23