WARREN RESOURCES INC - FORM 8-K - EX-99.1 - August 8, 2014

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Exhibit 99.1

        The following are excerpts from the Company's disclosure in connection with its offering of senior notes.


Summary Historical and Pro Forma Combined Financial and Other Data

        The following tables show our summary historical consolidated financial data and our summary unaudited pro forma financial data, each for the periods and as of the dates indicated. The summary historical statement of operations data for the years ended December 31, 2011, 2012 and 2013 and the balance sheet data as of December 31, 2012 and 2013 are derived from our audited consolidated financial statements included in this offering memorandum.

        The summary historical statement of operations data for the three months ended March 31, 2013 and 2014 and the balance sheet data as of March 31, 2014 are derived from our unaudited consolidated financial statements included in this offering memorandum. The historical statement of operations data for the twelve months ended March 31, 2014 is derived by summing our statement of operations data for our year ended December 31, 2013 and the three months ended March 31, 2014 and then deducting our statement of operations data for the three months ended March 31, 2013. The summary unaudited consolidated financial data have been prepared on a consistent basis with our audited consolidated financial statements. In the opinion of management, such summary unaudited consolidated financial data reflect all adjustments (consisting of normal and recurring accruals) considered necessary to present our financial position for the periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year because of the impact of fluctuations in prices received from oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results and other factors.

        The summary unaudited pro forma condensed combined financial data assumes that the Citrus Acquisition, this offering, the issuance of approximately 6.7 million shares of our common stock as part of the consideration for the Citrus Acquisition and the closing of our amended and restated credit facility, including borrowing thereunder to fund a portion of the consideration for the Citrus Acquisition, had taken place on March 31, 2014, in the case of the unaudited pro forma combined balance sheet data, and on January 1, 2013, in the case of the pro forma combined statement of operations data for the year ended December 31, 2013, the three months ended March 31, 2014 and the twelve months ended March 31, 2014.

        These data are subject and give effect to the assumptions and adjustments described in the notes accompanying the unaudited pro forma financial statements included elsewhere in this offering memorandum. The summary unaudited pro forma consolidated financial data are presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the Citrus Acquisition and this offering been consummated on the dates indicated, and do not purport to be indicative of statements of financial position or results of operations as of any future date or for any future period.

        Our historical and pro forma results should be read in conjunction with "Capitalization," "Selected Historical Consolidated Financial Data" and "Management's Discussion and Analysis of Financial

Condition and Results of Operations" included elsewhere herein and our consolidated historical and pro forma financial statements and related notes included in this offering memorandum.

 
   Historical   Pro Forma  
 
   Twelve Months Ended
December 31, 		  Three Months Ended
March 31, 		  Twelve
Months
Ended
March 31,
2014 		   
   Three Months
Ended
March 31, 		  Twelve
Months
Ended
March 31,
2014 		 
 
   Year
Ended
December 31
2013 		 
($ in thousands)
   2011   2012   2013   2013   2014   2013   2014  

Operating revenues

                                                              

Oil and gas sales

   $ 103,371   $ 121,797   $ 127,925   $ 30,819   $ 32,879   $ 129,985   $ 185,964   $ 44,110   $ 61,236   $ 203,089  

Transportation revenue

     —     —     919     —     1,323     2,242     920     —     1,323     2,243  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total revenues

     103,371     121,797     128,844     30,819     34,202     132,227     186,883     44,110     62,559     205,332  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Operating expenses

                                                              

Lease operating expense and taxes

     30,637     33,072     36,779     9,796     9,502     36,485     45,749     11,714     14,670     48,705  

Depreciation, depletion and amortization

     30,517     47,172     44,806     11,570     10,354     43,590     62,328     16,435     16,427     62,320  

Transportation expenses

     —     —     311     —     565     876     1,369     323     1,030     2,075  

General and administrative

     14,819     19,844     15,389     4,317     3,966     15,038     17,879     5,262     4,977     17,593  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total operating expenses

     75,973     100,088     97,285     25,683     24,387     95,988     127,324     33,733     37,104     130,694  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income from operations

     27,398     21,709     31,559     5,136     9,815     36,239     59,559     10,377     25,455     74,638  

Other income (expense)

                                                              

Interest and other income

     77     90     5,362     15     134     5,481     5,362     15     134     5,481  

Interest expense

     (3,188 )   (3,311 )   (2,995 )   (750 )   (754 )   (2,999 )   (28,387 )   (6,554 )   (7,103 )   (28,936 )

Gain (loss) on derivative financial instruments

     (2,726 )   (2,975 )   (3,477 )   (1,565 )   (993 )   (2,904 )   (3,477 )   (1,565 )   (993 )   (2,904 )
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total other income (expense)

     (5,837 )   (6,196 )   (1,110 )   (2,300 )   (1,613 )   (423 )   (26,502 )   (8,104 )   (7,961 )   (26,359 )
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income before taxes

     21,561     15,513     30,449     2,836     8,202     35,816     33,057     2,272     17,494     48,278  

Deferred income tax expense (benefit)

     (78 )   (7 )   64     7     (8 )   49     64     7     (8 )   49  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net income

     21,639     15,520     30,385     2,829     8,210     35,760     32,993     2,265     17,502     48,229  

Less dividends and accretion on preferred shares

     10     10     10     3     3     10     10     3     3     10  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net income applicable to common stockholders

   $ 21,629   $ 15,510   $ 30,375   $ 2,826   $ 8,207   $ 35,757   $ 32,983   $ 2,263   $ 17,499   $ 48,219  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                                           

Other Financial Data:

                                                              

Adjusted EBITDA(1)

     47,245     68,693     77,030     16,854     18,901     79,077     122,552     26,959     40,615     136,208  
(1)
For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to its most directly comparable financial measure calculated and presented in accordance with GAAP, please see "—Non-GAAP Financial Measures and Reconciliations."

 
   Historical    
  
 
   Pro Forma  
 
   As of December 31,   As of March 31,  
 
   As of
March 31,
2014 		 
($ in thousands)
   2011   2012   2013   2013   2014  

Balance Sheet Data:

                                      

Cash and cash equivalents

   $ 10,614   $ 8,475   $ 11,620   $ 10,745   $ 1,834   $ 1,834  

Oil and gas properties

     275,443     301,599     335,354     297,517     332,242     679,388  

Property and equipment (net of accumulated depreciation)

     16,926     17,941     18,772     18,687     18,714     18,714  

Total assets

     323,633     352,744     394,805     353,130     375,687     751,975  

Total debt (including current portion of long-term debt)

     91,151     101,136     96,136     91,136     82,136     411,319  

Total liabilities

     149,542     159,702     168,712     156,768     140,773     477,061  

Total stockholders' equity

   $ 174,091   $ 193,042   $ 226,093   $ 196,362   $ 234,915   $ 274,915  

Non-GAAP Financial Measures and Reconciliations

        In this offering memorandum, the terms "EBITDA" and "Adjusted EBITDA" are used. EBITDA is a non-GAAP financial measure and is equivalent to earnings before interest, income taxes, depletion, depreciation, amortization and accretion expenses. Adjusted EBITDA is EBITDA, further adjusted to exclude stock-based compensation and unrealized gain or losses on derivatives. We believe EBITDA and Adjusted EBITDA are important financial measurement tools that facilitate comparison of our operating performance and provide information about our ability to service or incur indebtedness and pay for our capital expenditures. This information differs from measures of performance determined in accordance with GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. These measures are not necessarily indicative of operating profit or cash flow from operating activities as determined under GAAP and may not be equivalent to similarly titled measures of other companies.

        Our management uses Adjusted EBITDA in a number of ways to assess our combined financial and operating performance, and we believe this measure is helpful to management and investors in identifying trends in our performance. Adjusted EBITDA helps management identify controllable expenses and make decisions designed to help us meet our current financial goals and optimize our financial performance while neutralizing the impact of capital structure on results. Accordingly, we believe this metric measures our financial performance based on operational factors that management can impact in the short-term, namely our cost structure and expenses.

        Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Adjusted EBITDA also has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include that Adjusted EBITDA:

    •
    does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

    •
    does not reflect changes in, or cash requirements for, our working capital needs;

    •
    does not reflect our interest expense, or the cash requirements necessary to service interest on or principal payments of our debt;

    •
    does not reflect certain other non-cash income and expenses; and

    •
    excludes income taxes that may represent a reduction in available cash.

        We reconcile this non-GAAP financial measure to our net income, which is its most directly comparable financial measure calculated and presented in accordance with GAAP. The table below reconciles our historical net income to Adjusted EBITDA.

 
   Historical   Pro Forma  
 
    
    
    
   Three Months Ended
March 31, 		  Twelve
Months
Ended
March 31,
2014 		   
   Three Months Ended
March 31, 		  Twelve
Months
Ended
March 31,
2014 		 
 
   Year Ended December 31,   Year
Ended
December 31,
2013 		 
($ in thousands)
   2011   2012   2013   2013   2014   2013   2014  

Net income (loss)

   $ 21,639   $ 15,520   $ 30,385   $ 2,829   $ 8,210   $ 35,766   $ 32,993   $ 2,265   $ 17,502   $ 48,229  

Adjustments:

                                                              

Income tax expense / (benefit)

   $ (78 ) $ (7 ) $ 64   $ 7   $ (8 ) $ 49   $ 64   $ 7   $ (8 ) $ 49  

Interest expense

     3,188     3,311     2,995     750     754     2,999     28,387     6,554     7,103     28,936  

Depreciation, depletion and amortization

     30,517     47,172     44,806     11,570     10,355     43,590     62,328     16,435     16,427     62,320  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

EBITDA

     55,266     65,966     78,250     15,156     19,311     82,404     123,772     25,261     41,024     139,534  

As further adjusted:

                                                              

Interest (income) and other (income)

     (78 )   (91 )   (5,362 )   (15 )   (134 )   (5,481 )   (5,362 )   (15 )   (134 )   (5,481 )

Stock-based compensation expense

     1,546     2,592     2,062     315     532     2,279     2,062     315     532     2,279  

Unrealized hedging losses / (gains)

     (9,490 )   195     2,080     1,398     (807 )   (125 )   2,080     1,398     (807 )   (125 )
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Adjusted EBITDA

   $ 47,245   $ 68,693   $ 77,030   $ 16,854   $ 18,901   $ 79,077   $ 122,552   $ 26,959   $ 40,615   $ 136,208  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                                           


CAPITALIZATION

        The following table sets forth our unaudited capitalization as of March 31, 2014:

    •
    on an actual basis;

    •
    on an as adjusted basis to give effect to the completion of the Citrus Acquisition, to our closing of the amendment and restatement of our Credit Facility, including related borrowings under our Credit Facility to fund a portion of the acquisition consideration, to our issuance of approximately 6.7 million shares of common stock as part of the acquisition consideration and to the issuance of the notes offered hereby and our application of the estimated net proceeds from this offering in the manner described in "Use of Proceeds."

        This table should be read in conjunction with, and is and is qualified in its entirety by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical financial statements and the accompanying notes included elsewhere in this offering memorandum. See "Summary—Summary Historical and Pro Forma Combined Financial and Other Data" and "Selected Historical Consolidated Financial Data."

 
   As of March 31, 2014  
 
   Actual   As Adjusted  
 
   (in thousands, except share numbers)
  

Cash and cash equivalents

   $ 1,834   $ 1,834  
           
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
           

Long-term debt (including current portion):

              

Debentures(a)

   $ 1,636   $ 1,636  

Credit Facility(b)(c)

     80,500     113,832  

9.000% Senior Notes due 2022

     —     300,000  

Discount on Senior Notes

     —     (4,149 )
           
​ ​ ​ ​ ​ ​ ​ ​

Total long-term debt

     82,136     411,319  

Stockholders' equity:

              

8% convertible preferred stock (10,000,000 shares authorized; 10,703 shares issued and outstanding, actual and as adjusted)

     128     128  

Common stock (100,000,000 shares authorized; 73,550,339 shares issued and outstanding, actual and approximately 80,217,006 shares issued and outstanding, as adjusted)

     7     8  

Additional paid in capital

     471,041     511,041  

Accumulated other comprehensive income

     201     201  

Accumulated deficit

     (236,462 )   (236,462 )
           
​ ​ ​ ​ ​ ​ ​ ​

Total stockholders' equity

     234,915     274,916  
           
​ ​ ​ ​ ​ ​ ​ ​

Total capitalization

   $ 317,051   $ 686,235  
           
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
           
(a)
As of March 31, 2014, we had outstanding $1.6 million of convertible secured debentures that are convertible into shares of our common stock. The principal of the convertible secured debentures is secured at maturity by zero coupon U.S. treasury bonds previously deposited into an escrow account equaling the par value of the debentures and maturing on or before the due date of the debentures. The fair market value of these U.S. treasury bonds at March 31, 2014 was approximately $1.3 million.

(b)
As of March 31, 2014, we had a committed $300.0 million Credit Facility and a borrowing base of $165.0 million. In June 2014, the borrowing base under our Credit Facility was increased to $175.0 million. At March 31, 2014, there were outstanding borrowings of approximately $80.5 million under our Credit Facility and no letters of credit had been issued. In connection with the Citrus Acquisition, we are amending and restating the Credit Facility to provide for a maximum credit amount of $750 million and an initial borrowing base of $225 million.

(c)
As adjusted reflects additional borrowings assumed to be incurred under the Credit Facility in connection with the Citrus Acquisition, prior to consideration of any credit toward the cash purchase price with respect to operations from the July 1, 2014 effective date.

Oil and Natural Gas Acreage

        The following table sets forth our combined acreage position after giving effect to the Citrus Acquisition, as of December 31, 2013 for Warren and June 30, 2014 for Citrus:

 
   Developed   Undeveloped   Total  
 
   Gross   Net   Gross   Net   Gross   Net  

California

     1,590     1,576     1,752     1,425     3,342     3,001  

New Mexico

     1,066     98     2,924     350     3,990     448  

Pennsylvania(1)

     3,631     2,750     3,351     2,539     6,982     5,289  

Texas

     704     176     —     —     704     176  

Wyoming

     30,385     18,462     82,842     69,221     113,227     87,683  

Other

     948     442     1,732     1,601     2,680     2,043  

Total

     38,324     23,504     92,601     75,136     130,925     98,640  
(1)
Consists of acreage to be acquired in the Citrus Acquisition.



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