WRES- Warren Resources

[moustachio]

Warren Resources is an oil and gas company that I believe is being mispriced as if it is primarily an oil company even though it is not, due to a transformational acquisition that closed just before/during the oil price plunge. http://finance.yahoo.com/news/warren-resources-acquires-marcellus-assets-101449928.html

 

It appears next year that gas revenues will exceed oil revenues, yet the last trade was 1.50 and the 52 WK high is 7.02. So, this company's market cap has gone down to less than a 1/4 of where it was, which is further than most oil only companies, yet it isn't primarily an oil company anymore. Also it isn't a shale driller with high oil costs(oil assets are in California), and yet it's price decline is still more than most of them. As an example of how cheap this is, in their investor presentation they show LTM Pro forma EBITDA of 139.5 million... the current market cap is 121 million. Obviously, earnings and cash flow from their oil operations will plunge, but assuming they manage to ride it out and oil normalizes in price a little the upside is obvious. Even if oil prices remain low, one would think that reducing capex for oil drilling and increasing for gas would still leave the company doing quite well(and still ridiculously cheap).

 

To be fair, this plunge isn't just due to macro. The company is pretty highly leveraged since it just did a large acquisition financed primarily with debt. http://finance.yahoo.com/news/warren-resources-closes-300m-senior-212502531.html Also, the CEO stupidly did not hedge oil for 2015. Coincidentally, he resigned and the CEO Of Citrus Energy(the big acquisition) has now become the CEO. The previous CEO had a financial background, and IMO did a a fairly excellent job up until failing to hedge oil prices, but the new CEO has a long operational background with the assets that will probably be the focus for the near term future. He also has a large equity stake in WRES that was part of payment for the acquisition. The market dropped on the CEO resigning, but to me it looks like it is probably a positive in the current environment.

 

I don't have time right now to write much more, but check out their investor presentation: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjUyMDk5fENoaWxkSUQ9LTF8VHlwZT0z&t=1

 

Also, believe it or not, the yahoo finance board for WRES has some very intelligent people and discussions. If you don't mind weeding through some spam posts and garbage there is good stuff there.

 

Any thoughts? I'm going to be honest and say that I don't have a good understanding of how lenders redetermine borrowing bases for E&P companies. WRES's was just reaffirmed http://finance.yahoo.com/news/warren-resources-announces-reaffirmation-borrowing-120000190.html , but does anyone have thoughts on that in the future and how it will affect their financial status?

 

Disclosure: LONG WRES

[thepupil]

this seems very interesting, thanks moustachio.

 

to demonstrate i've learned nothing from the PWE thread about book value and its lack of relevance, here's a company that just did a large, gas-dominated acquisition with cash from HY bonds and stock. the stock was issued at $6.00 and the bonds at $98. now the stock is at $1.50 and the bonds (the 9% of 2022) are at $70 and yield 15.8% to maturity.

 

I am the patsy at the poker table here and know nothing about how to analyze this company.

 

The only thing I know is that  new shareholders (and bondholders for those so inclined to be a little more senior) get to buy in for a lot less than what was just paid.

 

Cue Valuetrap saying it's sketchy and the reserves aren't there and more knowledgable minds poo pooing my ignorant line of thought

[ItsAValueTrap]

They are very good at destroying value.  G&A as a percentage of revenues is over 10% over the past decade.  That's a red flag to me because most oil and gas companies get below 10%.

Bloated insider salaries seem to account for a lot of the G&A.  The 10-K and DEF 14a doesn't seem to mention "investor relations", travel, entertainment, or corporate aircraft (other areas that would explain why G&A is so high).  Anybody else want to play the game of "where did all the money go"?

 

It may or may not be cheap.  I don't know.

[moustachio]

They are very good at destroying value.  G&A as a percentage of revenues is over 10% over the past decade.  That's a red flag to me because most oil and gas companies get below 10%.

Bloated insider salaries seem to account for a lot of the G&A.  The 10-K and DEF 14a doesn't seem to mention "investor relations", travel, entertainment, or corporate aircraft (other areas that would explain why G&A is so high).  Anybody else want to play the game of "where did all the money go"?

 

It may or may not be cheap.  I don't know.

 

True enough. I don't think that really affects the investment thesis though. They were also increasing value(revenue, reserves, etc) while G&A was overly high. That was also under previous CEOs. The current ("interim") CEO had a lot lower G&A at his company before it was acquired. http://www.sec.gov/Archives/edgar/data/892986/000104746914006387/a2220910zex-99_1.htm Perhaps if he stays on he will trim the fat a little and make the cost structure resemble the company he built.

 

Maybe he will shut down some of their offices:

"        Our principal executive offices are located at 1114 Avenue of the Americas, 34th Floor, New York, NY 10036, and our telephone number is (212) 697-9660. We lease approximately 4,178 square feet of office space for our New York office under a lease that expires in May 2023. Our oil and gas operations office in Casper, Wyoming occupies 1,174 square feet under a lease that expires in October 2014 and our oil and gas operations office in Long Beach, California occupies 14,201 square feet of space under a lease that expires in April 2020. We also have field offices in Roswell, New Mexico and Rawlins, Wyoming. We believe that our facilities are adequate for our current operations and that we can obtain additional leased space if needed. "

[moustachio]

There has been insider buying in the past week. WRES Is up almost 12% today. Insider buying isn't a big deal for a stock like this right now because he whole industry is beaten down and full of bargains, but I think this is the best among them that I know of.

[JAllen]

I don't like the debt they have.

 

 

But anyways, they just published an update on their business, 2015 capex, and hedges as of 12/9.  They're curtailing development in CA.

 

 

http://globenewswire.com/news-release/2014/12/10/690094/10111773/en/Warren-Resources-Announces-2015-Capital-Budget-and-Production-Guidance.html?f=22&fvtc=2&fvtv=1

[undervalued]

How is this company different than XCO or SD? They are both natural gas producer. Their revenue are mostly from natural gas and just recently started moving into oil.

[moustachio]

I don't like the debt they have.

 

 

But anyways, they just published an update on their business, 2015 capex, and hedges as of 12/9.  They're curtailing development in CA.

 

 

http://globenewswire.com/news-release/2014/12/10/690094/10111773/en/Warren-Resources-Announces-2015-Capital-Budget-and-Production-Guidance.html?f=22&fvtc=2&fvtv=1

 

Their debt is obviously problematic. There is a fair possibility that they will breach their debt covenant next year. However, unless realized gas prices drop significantly and oil drops and stays at depressed levels I don't think they will be unable to service their debt, grow gas production as mentioned in the press release, and be ready to prosper when oil prices rise again.

 

I like that press release. It shows they realize the situation and are adapting. Its unfortunate for the company that the previous CEO dropped the ball on hedges, but the current management seems to have quickly shown that they understand the gravity of the situation and the need to show that you can't continue with business as usual in this oil price environment. I believe the current CEO has 30 years in the industry.

 

With all that said, I tend to think that oil prices will drift lower though because while $60 oil will slow down production growth, I don't think it will reverse it. If you look at what US companies are saying, they seem to be reducing CAPEX but still projecting growth. If the supply glut is as much as some have said it will take lower prices yet to balance supply and demand. There might be better buying opportunities to come.

[moustachio]

How is this company different than XCO or SD? They are both natural gas producer. Their revenue are mostly from natural gas and just recently started moving into oil.

 

I stopped following SD and haven't followed XCO. SD used to, and apparently still does, have trouble turning much of a profit, over promised and under delivered, and was difficult to fully figure out due to things like the trusts they have. WRES has fewer moving parts, though admittedly less historic visibility in the Marcellus due to a large part of the company being private before being acquired. SD certainly looks cheap by some metrics, but from my perspective its tough to look at it and really figure it out. Their growth is largely financed by debt instead of cash flow and with asset sales and what not its tough to get a good feel for the company.

 

So I don't really have much useful to say, other than that if I have time I should look at more O&G companies. They may get even cheaper...

[Guest wellmont]

Warren Resources is an oil and gas company that I believe is being mispriced as if it is primarily an oil company even though it is not, due to a transformational acquisition that closed just before/during the oil price plunge. http://finance.yahoo.com/news/warren-resources-acquires-marcellus-assets-101449928.html

 

It appears next year that gas revenues will exceed oil revenues, yet the last trade was 1.50 and the 52 WK high is 7.02. So, this company's market cap has gone down to less than a 1/4 of where it was, which is further than most oil only companies, yet it isn't primarily an oil company anymore. Also it isn't a shale driller with high oil costs(oil assets are in California), and yet it's price decline is still more than most of them. As an example of how cheap this is, in their investor presentation they show LTM Pro forma EBITDA of 139.5 million... the current market cap is 121 million. Obviously, earnings and cash flow from their oil operations will plunge, but assuming they manage to ride it out and oil normalizes in price a little the upside is obvious. Even if oil prices remain low, one would think that reducing capex for oil drilling and increasing for gas would still leave the company doing quite well(and still ridiculously cheap).

 

To be fair, this plunge isn't just due to macro. The company is pretty highly leveraged since it just did a large acquisition financed primarily with debt. http://finance.yahoo.com/news/warren-resources-closes-300m-senior-212502531.html Also, the CEO stupidly did not hedge oil for 2015. Coincidentally, he resigned and the CEO Of Citrus Energy(the big acquisition) has now become the CEO. The previous CEO had a financial background, and IMO did a a fairly excellent job up until failing to hedge oil prices, but the new CEO has a long operational background with the assets that will probably be the focus for the near term future. He also has a large equity stake in WRES that was part of payment for the acquisition. The market dropped on the CEO resigning, but to me it looks like it is probably a positive in the current environment.

 

I don't have time right now to write much more, but check out their investor presentation: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjUyMDk5fENoaWxkSUQ9LTF8VHlwZT0z&t=1

 

Also, believe it or not, the yahoo finance board for WRES has some very intelligent people and discussions. If you don't mind weeding through some spam posts and garbage there is good stuff there.

 

Any thoughts? I'm going to be honest and say that I don't have a good understanding of how lenders redetermine borrowing bases for E&P companies. WRES's was just reaffirmed http://finance.yahoo.com/news/warren-resources-announces-reaffirmation-borrowing-120000190.html , but does anyone have thoughts on that in the future and how it will affect their financial status?

 

Disclosure: LONG WRES

 

stock has gone down but how much has the EV gone down? NG stocks have been clocked in the US even as the price of gas has been relatively stable. so it's no surprise that a levered ng play is down a lot. so is upl.

[JAllen]

A more interesting company, IMO, because the debt trades at $.50 yet there's still more than $500M of common and preferred market cap, to short is GDP.

 

 

If anyone's interested I attached a roughly prepared spreadsheet I made earlier.  Some of the numbers are estimated but should be close enough to begin analysis.

 

 

If their Tuscaloosa acreage is worth much then the debt could be interesting, especially if you hedge your entire position with preferred or common.

[moustachio]

Interesting, but what is the borrow cost and what do you expect it to be if oil goes even lower?

[nafregnum]

They are very good at destroying value.  G&A as a percentage of revenues is over 10% over the past decade.  That's a red flag to me because most oil and gas companies get below 10%.

Bloated insider salaries seem to account for a lot of the G&A.  The 10-K and DEF 14a doesn't seem to mention "investor relations", travel, entertainment, or corporate aircraft (other areas that would explain why G&A is so high).  Anybody else want to play the game of "where did all the money go"?

 

It may or may not be cheap.  I don't know.

 

Here's my small contribution to the question "Where did all the money go?"

 

But first, I want to say thanks to all of you.  This information is really helpful as I try to dig deeper -- part of me says this is an easy double or triple in the next two years, but I'm not sure how much I want to risk... and I'm not sure if I should pull out.

 

Since you posted, the price is digging it's 52 week lows again at around 1.16.  The interim CEO bought 160k shares at around 1.46 around December 10 and that's reassuring.  I started buying right around that time too, and tried averaging down a little.

Now WRES is 5% of my portfolio (it was 8%) and I'm getting nervous...  Could they go bankrupt and I lose the rest of that 5% ?  I want to follow Warren Buffet's rules of investing (1. don't lose money.  2. don't forget rule 1)  If they won't go bankrupt then it seems like an easy double.

 

Research: I re-read their Q3 conference call transcript, and the latest SEC filings.  I was surprised only to see natural gas hedges and no oil hedges for 2015.  I've been trying to find as many of the employees as I can on LinkedIn to see if any extra information is there.  It seems like they have a diverse management team which I would think counts as a positive, but it also seems like there are a LOT of VPs and Senior VPs and such for a company with 62 or so employees.  Perhaps inflated salaries are a big contributor of the +10% G&A.  When I first bought in, I didn't know their HQ is in New York -- that may be another factor in the high G&A.  The current interim chairman is a 1977 Yale Law graduate who had a top floor apartment in the Trump World Tower that a Saudi prince offered 34.5M to buy in 2010 -- here are links:

 

http://www.forbes.com/profile/dominick-dalleva/

http://abovethelaw.com/2010/10/lawyerly-lairs-a-yale-law-grad-and-former-simpson-associate-seeks-to-sell-a-34-5-million-condo/

 

On page 9 of those pictures they have links to other pictures.  This is a negative in my book just because it looks like we have different lifestyle values, and it's in the "New York Vortex" that Guy Spier talks about in his "Education of a Value Investor" book.  Anyway, he has around 500k shares of WRES currently, and it probably hurts a lot that he just saw 3 to 4 million turn into $600k in 6 months.  I'm trying to noodle out what the psychological forces at play might be there, but my big hope is that there isn't an incentive to just throw in the towel for any of the top leadership.

 

There are a LOT of questions I want to research, like whether the interim CEO lives an extravagant lifestyle.  It's difficult to sort out.  He was president of Citrus Energy which still exists and operates - its website says it is a closely held private company owned by Lance (now CEO @ Warren) and David Oberbrockling.  They sold their Marcellus assets to Warren for around 340M in August 2014.  I imagine they sold at a nice profit but I don't know if there's any way to know.  If he's swimming in cash maybe he'd take a devil-may-care attitude as to whether Warren sinks or swims. 

 

I read the Senior Note $300M at 9% debt agreement -- I read about the covenants of having a ratio of 1 and having 2.5x EBIT to Interest payments ratio, but I feel like I'm not versed enough in this area of reading the fine print to be investing at all... That said, I plunked down real money and now I get to learn a real lesson.  :o

 

Another example of high exec pay from an old report:

 

General and administrative expenses. General and administrative expenses increased $5.0 million in 2012 to $19.8 million, a 34% increase compared to 2011. This increase resulted from the severance packages payable to the Company's former Chief Executive Officer and two former Officers totaling $3.5 million ($2.4 million in cash and $1.1 million in non-cash related to the accelerated vesting of stock options). Additionally, consulting expense increased $1.0 million during 2012. 

 

So whoever was the CEO before Epstein got a really big severance back then...  Epstein got a big severance too from the looks of the change of director SEC filings.  Maybe this is what you do in the New York Vortex, maybe everyone does it, but it seems kind of expensive to me (going by gut feel, not by any statistical comparison to other companies of similar size)

 

Hedged Gas:

 

According to the Dec 10 press release, their guidance for natural gas production is around 36 billion cubic feet.  That would come out to around 100 million cubic feet per day.  It looks like one MMcf is equal to 1000 MMbtu, so the figures below show that they have 26 million cubic feet per day hedged through the end of March -- I heard they aim to hedge about 50% of production, so maybe they're pumping around 50 to 60 MMcf per day currently and hope to ramp that up above 100 MMcf per day by the end of the year. (?) 

 

Gas Swap NYMEX $4.18 3,000 MMBtu/d 01/01/15 -12/31/15

Gas Swap NYMEX $4.02 3,000 MMBtu/d 01/01/15 -06/30/15

Gas Swap NYMEX $4.54 20,000 MMBtu/d 01/01/15 -03/31/15

 

So would this mean that after March the biggest hedge goes away ... it looks like the current price has fallen from above $4 to just under $3 (a 25% drop?) since maybe October -- from the graph on http://www.eia.gov/naturalgas/weekly/

 

At first, I thought this was an oil company that was being hit hard by irrational Mr Market ... and my first naive investment thesis was "I read good things from a respected guy on Seeking Alpha about this in the summer.  It was at 6 back then, and then it dropped 50% and held at 3 a few months, and then in December it was at 1.50 so I bet something irrational is happening and I should buy some."  Since then I've read a few good books and learned I should've done a LOT more research before pulling the trigger (btw it was the Guy Spiers book and The Dhando Investor and Greenblat's Little Book, and now Excess Returns -- one of those books said to sign up at CoFB) ... so now I'm trying to do the research I should've done in the beginning. 

 

If they're not going to go bankrupt, then I want to hold on ... I don't know what happens if they breach their debt covenants though: do they get a slap on the wrist with a wet noodle or do they go bankrupt?

 

Here's one scenario I came up with (low end of guidance, low prices of natural gas and oil)

 

36 BBcf at 2.50 per MMcf comes to $90 million  (price is $3 instead of $2.50 now) -- am I even playing with the right numbers I wonder...

Add 900 thousand barrels of oil at $45 per barrel for another $40.5 million

 

If they make $130 million and spend $20 million on G&A, $27 million on the Senior Note interest, and $54 million in leasing, and $64 million on depreciation, depletion and amortization then that comes to 165 million in expenses but I haven't counted interest on the revolving credit (there is 300M with Bank of Montreal and 110M is available, and they have an 80M capital expense budget for the year mostly spent in Marcellus -- all of which is new assets for them.)

 

To argue the other story--they said their Marcellus wells are producing with a lot better dropoff rates than they projected.

 

Here are questions I'm trying to answer now, if anyone wants to chime in I'd be thrilled --

 

* moustachio, have your thoughts changed any on WRES, have you been digging further, or made a determination and moved on to other ideas?

 

* Are there any other legal methods for me to gather scuttlebutt information?  For example, would it be wrong to try to contact people who stayed at Citrus after the sale to get an idea of how their old coworkers feel now that they're part of Warren?

 

* Did I only buy because of "Liking bias" or "Familiarity bias" because the company had "Warren" in its name?

 

* Should I stay or should I go now?

If I go there will be trouble

An' if I stay it (could) be double

 

:)

[nafregnum]

Here's an amazingly bad price target if the last paragraph is any indication of the quality of the research: it doesn't even mention the Marcellus natural gas resources.  I guess it highlights why getting information from source material is so important:

 

http://stafforddaily.com/warren-resources-inc-receives-average-target-price-of-3-5/332107/

 

[moustachio]

If they're not going to go bankrupt, then I want to hold on ... I don't know what happens if they breach their debt covenants though: do they get a slap on the wrist with a wet noodle or do they go bankrupt?

 

They will likely breach their debt covenants. What happens then is up to the banks. From my understanding, if they are likely to be able to make interest payments, then the bank is likely to give them a penalty, but not force them into bankruptcy. That isn't a sure thing though, and bad things can happen to common shareholders when debt covenants get breached. At least the current CEO has a lot of skin in the game. 

 

If they make $130 million and spend $20 million on G&A, $27 million on the Senior Note interest, and $54 million in leasing, and $64 million on depreciation, depletion and amortization then that comes to 165 million in expenses but I haven't counted interest on the revolving credit (there is 300M with Bank of Montreal and 110M is available, and they have an 80M capital expense budget for the year mostly spent in Marcellus -- all of which is new assets for them.)

 

You are lumping in non-cash expenses(depreciation, depletion and amortization) in with cash expenses. I'm not going to comment on the rest because I don't really go in-depth and do financial modeling, especially since there are a number of unknown numbers at this point, both commodity prices and company specific numbers due to the large acquisition.

 

 

* moustachio, have your thoughts changed any on WRES, have you been digging further, or made a determination and moved on to other ideas?

 

I still have a long position, but I'm thinking of closing it out or reducing it, with the possibility of adding in the future. The next earnings report is very soon, and hopefully we will gain more visibility about the coming year, and perhaps I'll have a better idea then.  I think the oil market and related companies might go sideways for a while, and there might be better opportunities elsewhere for the moment. I think there is a tremendous opportunity in the long term here, but its very tough to see how the market will respond with such an excessive debt load and poor commodity pricing. It might be well over a year before WRES can significantly grow or commodity prices rise enough for the debt burden to not weigh them down so much.

[moustachio]

Here is an example of another energy company having their financial covenants revised:

 

http://finance.yahoo.com/news/baytex-announces-revised-2015-budget-221500468.html

 

Amendments to Bank Credit Facilities

 

We have unsecured revolving credit facilities consisting of a $1.0 billion Canadian facility and a US$200 million U.S. facility that mature June 2018. At the end of December, we had approximately $565 million in undrawn capacity on these facilities. The revolving credit facilities do not require any mandatory principal payments prior to maturity and can be further extended beyond June 2018 with the consent of the lenders.

 

The unsecured revolving credit facilities had established financial covenants of senior debt to EBITDA (twelve month trailing) at or below 3.0:1, senior debt to book capitalization at or below 0.5:1 and total debt to EBITDA (twelve month trailing) at or below 4.0:1. In response to the precipitous drop in crude oil prices, our banking syndicate has agreed to revise the financial covenants. Effective for the quarter ending December 31, 2014, our revised financial covenants will be:

 

    Senior Debt(1) to EBITDA(2) ratio of 4.75:1 for a period up to and including the quarter ending June 30, 2016; stepping down to 4.5:1 for the quarters ending September 30, 2016 and December 31, 2016 and stepping down to 3.5:1 thereafter;

 

    Senior Debt to Book Capitalization(3) ratio of 0.65:1 for a period up to and including the quarter ending December 31, 2016; stepping down to 0.55:1 thereafter; and

 

    Total Debt(4) to EBITDA ratio of 4.75:1 for a period up to and including the quarter ending December 31, 2016; stepping down to 4.0:1 thereafter.