Warren Resources: Well-oiled returns

With oil prices hitting $107 per barrel on Monday and OPEC holding its production levels steady, commodities continue to be an intriguing play. One small-cap player positioned to benefit from the supply crunch that’s pushed prices upward is Warren Resources (Nasdaq: WRES).

Founded in 1990 and headquartered in New York with a market cap of $655 million, Warren operates as an independent energy company. It engages in the acquisition, exploration, and development of oil and natural gas reserves in the United States. Its primary exploration and development activities are focused in the Rocky Mountains and the Los Angeles Basin of California.

Warren is a leading developer of coalbed methane natural gas (CBM) in the Rocky Mountain region. Although the land is largely undeveloped, the company has two core areas that are believed to have significant CBM resources: Washakie Basin, in southwestern Wyoming, and the Powder River Basin in northeastern Wyoming. The company owns natural gas and oil interests in Southern California that account for a significant portion of its revenue, along with ownership of natural gas and oil interests in Texas, New Mexico and North Dakota.
 
Its drilling, production and land operations are conducted through its wholly owned subsidiary, Warren E&P, which was founded as the Petroleum Development Corporation in 1973. Warren Resources completed its IPO in December of 2004 and has yet to look back. Despite a pullback in its share price last week, the company’s stock still trades nearly 15% above its year-earlier level.

For the fourth-quarter ended Dec. 31, Warren reported net income of $4 million, or $0.07 per diluted share, on $20.2 million in sales. These results came in short of analysts’ predictions, which were calling for net income of $0.09 per diluted share. However, total revenue was up 110% on a year-over-year basis.

Despite the earnings shortfall, one analyst is particularly impressed with the company’s operating efficiency. In an interview with SmallCapInvestor.com, Mark Lear, an analyst for Sidoti & Co., said Warren is “putting up peer-group leading production growth.”

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