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** **

 

** **

**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 March 31, 2011**

** **

**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 o 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 May 3, 2011 was 71,419,977 shares of Common Stock, $0.0001 par value.

 

 

 

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Table of Contents

 

**WARREN RESOURCES, INC.**

 

**TABLE OF CONTENTS**

 
| PART I—  | FINANCIAL INFORMATION                                                                                 |   |   |
|--------------------|-------------------------------------------------------------------------------------------------------|--------|--------|
|               |                                                                                                  |   |   |
|               | Item 1. Financial Statements (Unaudited)                                                              |   |   |
|               |                                                                                                  |   |   |
|               | Consolidated Balance Sheets as of March 31, 2011   and December 31, 2010                    |   |   |
|               |                                                                                                  |   |   |
|               | Consolidated Statements of Operations for the three   months ended March 31, 2011 and 2010       |   |   |
|               |                                                                                                  |   |   |
|               | Consolidated Statements of Cash Flows for the three   months ended March 31, 2011 and 2010       |   |   |
|               |                                                                                                  |   |   |
|               | 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. Removed and Reserved                                                                        |   |   |
|               |                                                                                                  |   |   |
|               | Item   5. Other Information                                                                           |   |   |
|               |                                                                                                  |   |   |
|               | Item 6.   Exhibits                                                                                    |   |   |
|               |                                                                                                  |   |   |
|               | Signatures                                                                                            |   |   |

 

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**PART I—FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**Warren Resources, Inc. and Subsidiaries**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                            | ** ** | **March 31,   2011   (Unaudited)**                                             | ** **  | **December 31,   2010** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|-------------|------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                            | ** ** | **(in thousands, except share   and per share data)** | ** **  |
| **ASSETS**                                                                                                                                                                                                                                                                            |       |                                                                                |        |                         |       |
| Current Assets                                                                                                                                                                                                                                                                        |       |                                                                                |        |                         |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                             |       | $                                                                                   | 9,191       |                         | $          | 11,092 |   |
| Accounts receivable — trade                                                                                                                                                                                                                                                      |       | 12,618                                                                              |        | 12,512                       |       |
| Restricted investments in U.S. Treasury   Bonds—available for sale, at fair value                                                                                                                                                                                                |       | 110                                                                                 |        | 110                          |       |
| Other current assets                                                                                                                                                                                                                                                                  |       | 1,919                                                                               |        | 1,040                        |       |
|                                                                                                                                                                                                                                                                                  |       |                                                                                |        |                         |       |
| Total current assets                                                                                                                                                                                                                                                                  |       | 23,838                                                                              |        | 24,754                       |       |
|                                                                                                                                                                                                                                                                                  |       |                                                                                |        |                         |       |
| 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   $25,810 and $25,732 as of March 31, 2011 and December 31, 2010) |       | 228,845                                                                             |        | 231,746                      |       |
| Property and equipment—at cost, net                                                                                                                                                                                                                                              |       | 14,392                                                                              |        | 10,817                       |       |
| Restricted investments in U.S. Treasury Bonds—available   for sale, at fair value                                                                                                                                                                                                |       | 988                                                                                 |        | 987                          |       |
| Derivative financial instruments                                                                                                                                                                                                                                                      |       | 335                                                                                 |        | 392                          |       |
| Other assets                                                                                                                                                                                                                                                                          |       | 3,848                                                                               |        | 3,900                        |       |
|                                                                                                                                                                                                                                                                                  |       |                                                                                |        |                         |       |
| Total other assets                                                                                                                                                                                                                                                                    |       | 248,408                                                                             |        | 247,842                      |       |
|                                                                                                                                                                                                                                                                                  | ** ** | **$**                                                                               | **272,246** | ** **                   | **$**      | **272,596** | ** ** |
|                                                                                                                                                                                                                                                                                  |       |                                                                                |        |                         |       |
| **LIABILITIES AND STOCKHOLDERS’   EQUITY**                                                                                                                                                                                                                                       |       |                                                                                |        |                         |       |
| ** **                                                                                                                                                                                                                                                                            |       |                                                                                |        |                         |       |
| Current Liabilities                                                                                                                                                                                                                                                                   |       |                                                                                |        |                         |       |
| Current maturities of debentures and other   long-term liabilities                                                                                                                                                                                                                    |       | $                                                                                   | 2,860       |                         | $          | 3,631 |   |
| Accounts payable and accruals                                                                                                                                                                                                                                                         |       | 21,269                                                                              |        | 24,414                       |       |
| Derivative financial instruments                                                                                                                                                                                                                                                      |       | 12,370                                                                              |        | 9,625                        |       |
|                                                                                                                                                                                                                                                                                  |       |                                                                                |        |                         |       |
| Total current liabilities                                                                                                                                                                                                                                                             |       | 36,499                                                                              |        | 37,670                       |       |
|                                                                                                                                                                                                                                                                                  |       |                                                                                |        |                         |       |
| Long-Term Liabilities                                                                                                                                                                                                                                                                 |       |                                                                                |        |                         |       |
| Debentures, less current portion                                                                                                                                                                                                                                                      |       | 1,486                                                                               |        | 1,486                        |       |
| Other long-term liabilities, less current portion                                                                                                                                                                                                                                     |       | 12,814                                                                              |        | 12,663                       |       |
| Derivative financial instruments                                                                                                                                                                                                                                                      |       | 1,444                                                                               |        | 603                          |       |
| Line of credit                                                                                                                                                                                                                                                                        |       | 69,500                                                                              |        | 69,500                       |       |
|                                                                                                                                                                                                                                                                                  |       |                                                                                |        |                         |       |
|                                                                                                                                                                                                                                                                                  |       | 85,244                                                                              |        | 84,252                       |       |
|                                                                                                                                                                                                                                                                                  |       |                                                                                |        |                         |       |
| Commitments and Contingencies                                                                                                                                                                                                                                                         |       |                                                                                |        |                         |       |
|                                                                                                                                                                                                                                                                                  |       |                                                                                |        |                         |       |
| Stockholders’ Equity                                                                                                                                                                                                                                                             |       |                                                                                |        |                         |       |
| 8% convertible preferred stock, par value $.0001;   authorized 10,000,000 shares, issued and outstanding, 10,703 shares and   10,703 in 2011 and 2010, respectively (aggregate liquidation preference $128   in 2011 and $128 in 2010)                                                |       | 128                                                                                 |        | 128                          |       |
| Common stock — $.0001 par value; authorized,   100,000,000 shares; issued 71,419,977 shares in 2011 and 71,338,149 shares in   2010                                                                                                                                              |       | 7                                                                                   |        | 7                            |       |
| Additional paid-in-capital                                                                                                                                                                                                                                                            |       | 463,740                                                                             |        | 463,326                      |       |
| Accumulated deficit                                                                                                                                                                                                                                                                   |       | (312,794                                                                            | )           | (312,217                     | )          |
| Accumulated other comprehensive income, net of   applicable income taxes of $98 in 2011 and $103 in 2010                                                                                                                                                                              |       | 150                                                                                 |        | 158                          |       |
|                                                                                                                                                                                                                                                                                  |       | 151,231                                                                             |        | 151,402                      |       |
|                                                                                                                                                                                                                                                                                  |       |                                                                                |        |                         |       |
| Less common stock in Treasury—at cost; 632,250   shares in 2011 and 2010                                                                                                                                                                                                         |       | 728                                                                                 |        | 728                          |       |
| Total stockholders’ equity                                                                                                                                                                                                                                                       |       | 150,503                                                                             |        | 150,674                      |       |
|                                                                                                                                                                                                                                                                                  | ** ** | **$**                                                                               | **272,246** | ** **                   | **$**      | **272,596** | ** ** |

 

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

 

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**Warren Resources, Inc. and Subsidiaries**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

** **
| ** **                                                  | ** ** | **Three Months Ended   March 31, (Unaudited)**                  | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(in thousands, except share   and per share data)** | ** ** |
| ** **                                                  | ** ** | **2011**                                                                            | ** ** | **2010** | ** ** |
| Operating revenues                                          |       |                                                                                |       |   |   |
| Oil and gas sales                                           |       | $                                                                                   | 23,180     |   | $ | 21,589 |   |
|                                                        |       |                                                                                |       |   |   |
| Operating expenses                                          |       |                                                                                |       |   |   |
| Lease operating expense and taxes                           |       | 7,735                                                                               |       | 7,231 |   |
| Depreciation, depletion and amortization                    |       | 6,129                                                                               |       | 4,783 |   |
| General and administrative                                  |       | 3,563                                                                               |       | 3,452 |   |
|                                                        |       |                                                                                |       |   |   |
| Total operating expenses                                    |       | 17,427                                                                              |       | 15,466 |   |
|                                                        |       |                                                                                |       |   |   |
| Income from operations                                      |       | 5,753                                                                               |       | 6,123 |   |
|                                                        |       |                                                                                |       |   |   |
| Other income (expense)                                      |       |                                                                                |       |   |   |
| Interest and other income                                   |       | 19                                                                                  |       | 38 |   |
| Interest expense                                            |       | (571                                                                                | )          | (872 | ) |
| Gain (loss) on derivative financial instruments             |       | (5,772                                                                              | )          | 1,894 |   |
|                                                        |       |                                                                                |       |   |   |
| Total other income (expense)                                |       | (6,324                                                                              | )          | 1,060 |   |
|                                                        |       |                                                                                |       |   |   |
| Income (loss) before taxes                                  |       | (571                                                                                | )          | 7,183 |   |
|                                                        |       |                                                                                |       |   |   |
| Deferred income tax expense (benefit)                       |       | 5                                                                                   |       | (3 | ) |
|                                                        |       |                                                                                |       |   |   |
| Net income (loss)                                           |       | (576                                                                                | )          | 7,186 |   |
|                                                        |       |                                                                                |       |   |   |
| Less dividends and accretion on preferred shares            |       | 3                                                                                   |       | 11 |   |
|                                                        |       |                                                                                |       |   |   |
| Net income (loss) applicable to common   stockholders       |       | $                                                                                   | (579       | ) | $ | 7,175 |   |
|                                                        |       |                                                                                |       |   |   |
| Earnings (loss) per share — Basic                      |       | $                                                                                   | (0.01      | ) | $ | 0.10 |   |
| Earnings (loss) per share — Diluted                    |       | $                                                                                   | (0.01      | ) | $ | 0.10 |   |
|                                                        |       |                                                                                |       |   |   |
| Weighted average common shares outstanding — Basic     |       | 70,741,785                                                                          |       | 70,083,641 |   |
| Weighted average common shares outstanding —   Diluted |       | 70,741,785                                                                          |       | 71,204,846 |   |

 

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

 

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**Warren Resources, Inc. and Subsidiaries**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                            | ** ** | **For the three months ended   March 31, (Unaudited)** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **(in thousands)**                                                              | ** ** |
| ** **                                                                                            | ** ** | **2011**                                                                             | ** ** | **2010** | ** ** |
| Cash flows from operating activities:                                                                 |       |                                                                                 |       |   |   |
| Net income (loss)                                                                                     |       | $                                                                                    | (576       | ) | $ | 7,186 |   |
| Adjustments to reconcile net income to net cash   provided by operating activities:                   |       |                                                                                 |       |   |   |
| Accretion of discount on available-for-sale debt   securities                                         |       | (13                                                                                  | )          | (12 | ) |
| Amortization of deferred offering costs                                                               |       | 52                                                                                   |       | 43 |   |
| Depreciation, depletion and amortization                                                              |       | 6,129                                                                                |       | 4,783 |   |
| Change in fair value of derivative financial   instruments                                            |       | 3,643                                                                                |       | (2,452 | ) |
| Stock option expense                                                                                  |       | 358                                                                                  |       | 732 |   |
| Deferred tax expense (benefit)                                                                        |       | 5                                                                                    |       | (3 | ) |
| Change in assets and liabilities:                                                                     |       |                                                                                 |       |   |   |
| Decrease in accounts receivable—trade                                                            |       | (623                                                                                 | )          | (815 | ) |
| Decrease in other assets                                                                              |       | (879                                                                                 | )          | (485 | ) |
| Decrease in accounts payable and accruals                                                             |       | (337                                                                                 | )          | (989 | ) |
| Decrease in other long-term liabilities                                                               |       | (92                                                                                  | )          | — |   |
|                                                                                                  |       |                                                                                 |       |   |   |
| Net cash provided by operating activities                                                             |       | 7,667                                                                                |       | 7,988 |   |
|                                                                                                  |       |                                                                                 |       |   |   |
| Cash flows from investing activities:                                                                 |       |                                                                                 |       |   |   |
| Purchase, exploration and development of oil and   gas properties                                     |       | (5,742                                                                               | )          | (1,882 | ) |
| Purchase of property and equipment                                                                    |       | (3,150                                                                               | )          | (6 | ) |
|                                                                                                  |       |                                                                                 |       |   |   |
| Net cash used in investing activities                                                                 |       | (8,892                                                                               | )          | (1,888 | ) |
|                                                                                                  |       |                                                                                 |       |   |   |
| Cash flows from financing activities:                                                                 |       |                                                                                 |       |   |   |
| Payments on long-term debt                                                                            |       | (734                                                                                 | )          | (4,931 | ) |
| Issuance of common stock, net                                                                         |       | 58                                                                                   |       | 12 |   |
| Repurchase of preferred stock, net                                                                    |       | —                                                                               |       | (642 | ) |
|                                                                                                  |       |                                                                                 |       |   |   |
| Net cash used in financing activities                                                                 |       | (676                                                                                 | )          | (5,561 | ) |
|                                                                                                  |       |                                                                                 |       |   |   |
| Net increase (decrease) in cash and cash   equivalents                                                |       | (1,901                                                                               | )          | 539 |   |
|                                                                                                  |       |                                                                                 |       |   |   |
| Cash and cash equivalents at beginning of period                                                      |       | 11,092                                                                               |       | 17,238 |   |
|                                                                                                  |       |                                                                                 |       |   |   |
| Cash and cash equivalents at end of period                                                            |       | $                                                                                    | 9,191      |   | $ | 17,777 |   |
|                                                                                                  |       |                                                                                 |       |   |   |
| Supplemental disclosure of cash flow information Cash   paid for interest, net of amounts capitalized |       | $                                                                                    | 517        |   | $ | 849 |   |
| Noncash investing and financing activities Accrued   preferred stock dividend                         |       | 3                                                                                    |       | 11 |   |

 

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

 

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**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 Wyoming, California and New Mexico.

 

The accompanying unaudited financial statements and related notes present the Company’s consolidated financial position as of March 31, 2011 and December 31, 2010, the consolidated results of operations for the three months ended March 31, 2011 and 2010 and consolidated cash flows for the three months ended March 31, 2011 and 2010. 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 three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. 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, 2010. These interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements presented in the Company’s 2010 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 $0.4 and $0.7 million for the three months ended March 31, 2011 and March 31, 2010, respectively.

 

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

 
| ** **              | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| Dividend yield          |       | 0                                                    | %          | 0 | % |
| Expected volatility     |       | 74.7                                                 | %          | 77.8 | % |
| Risk-free interest rate |       | 1.4                                                  | %          | 1.6 | % |
| 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 December 31, 2010 |       | 3,541,703           |       | $            | 4.80       |                          |       |                     |       |   |
| Granted                               |       | 106,000             |       | 4.26         |       |                          |       |                     |       |
| Exercised                             |       | (62,169             | )          | 0.94         |       |                          |       |                     |       |
| Forfeited or expired                  |       | (318,917            | )          | 13.80        |       |                          |       |                     |       |
| Outstanding at March 31, 2011    |       | 3,266,617           |       | $            | 3.97       |                          | 2.93       |                     | $          | 8,725 |   |
|                                  |       |                |       |         |       |                          |       |                     |       |
| Exercisable at March 31, 2011    |       | 1,890,372           |       | $            | 5.47       |                          | 2.83       |                     | $          | 4,290 |   |

 

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The total intrinsic value of options exercised during the three months ended March 31, 2011 and 2010 were approximately $240,000 and $45,000 respectively.

 

As of March 31, 2011 total unrecognized stock-based compensation expense related to non-vested stock options was approximately $1.3 million, which we expect to recognize over a weighted average period of 2.0 years.

 

*Restricted Shares*

 

Restricted share activity as of March 31, 2011 was as follows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted   Average   Fair Value** | ** ** |
|---------------------------------------|------------|------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** **                               | ** ** |
| Outstanding at December 31, 2010 |       | 28,373     |       | $                                        | 11.15      |   |
| Granted                               |       | 630,437    |       | 4.22                                     |       |
| Vested                                |       | (28,373    | )          | 11.15                                    |       |
| Forfeited                             |       | —     |       | —                                   |       |
| Outstanding at March 31, 2011    |       | 630,437    |       | $                                        | 4.22       |   |

 

Restricted stock awards for executive officers and employees vest ratably over three years, excluding shares granted in March 2010 which vest ratably over nine months. Fair value of our restricted shares is based on our closing stock price on the date of grant.  As of March 31, 2011, total unrecognized stock-based compensation expense related to non-vested restricted shares was $2.6 million, which is expected to be recognized over a weighted average period of approximately 2.9 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, commencing October 1, 2009, 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.

 

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**NOTE D—EARNINGS (LOSS) PER SHARE**

 

Basic earnings (loss) per share is computed by dividing net earnings (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) 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 three months ended March 31, 2011 and March 31, 2010 of 52,522 and 69,462 respectively, relating to convertible bonds and preferred stock, were excluded from the computation of diluted earnings (loss) per share because they are anti-dilutive. Potential common shares of 3,897,054 and 2,725,465 respectively, relating to stock options and restricted stock were excluded from the computation of diluted earnings (loss) per share for the three months ended March 31, 2011 and 2010, respectively, because they are anti-dilutive. Stock options have a weighted average exercise price of $3.97 and $4.57 at March 31, 2011 and March 31, 2010, respectively. At March 31, 2011, 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 price of $35 to $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 (loss) per share are computed based on the following information:

 
| ** **                                             | ** ** | **Three Months   Ended   March 31, 2011**                 | ** ** | **Three Months   Ended   March 31, 2010** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                             | ** ** | **(in thousands, except for per   share data)** | ** ** |
| Net earnings (loss) available to common   shareholders |       | $                                                                        | (579       | )                                                        | $          | 7,175 |   |
|                                                   |       |                                                                     |       |                                                     |       |
| Weighted average shares outstanding - basic            |       | 70,741,785                                                               |       | 70,083,641                                               |       |
| Effect of dilutive securities — stock options     |       | —                                                                   |       | 1,121,205                                                |       |
| Effect of dilutive securities — preferred stock   |       | —                                                                   |       | —                                                   |       |
|                                                   |       |                                                                     |       |                                                     |       |
| Weighted average shares outstanding - diluted          |       | 70,741,785                                                               |       | 71,204,846                                               |       |
|                                                   |       |                                                                     |       |                                                     |       |
| Basic net earnings (loss) per share                    |       | $                                                                        | (0.01      | )                                                        | $          | 0.10 |   |
| Diluted net earnings (loss) per share                  |       | $                                                                        | (0.01      | )                                                        | $          | 0.10 |   |

 

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**NOTE E—LONG-TERM LIABILITIES**

 

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

 
| ** **                            | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2011**                | ** ** | **2010**              | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** |
|                                  |       |                    |       |                  |       |
| Line of Credit                        |       | $                       | 69,500     |                  | $          | 69,500 |   |
| Convertible debentures                |       | 1,651                   |       | 1,651                 |       |
| Debt collateralized by treasury stock |       | 210                     |       | 245                   |       |
| Asset retirement obligations          |       | 10,332                  |       | 10,217                |       |
| Litigation allowance                  |       | 3,100                   |       | 3,100                 |       |
| Drilling rig note payable             |       | 1,867                   |       | 2,567                 |       |
|                                  |       | 86,660                  |       | 87,280                |       |
| Less current portion                  |       | 2,860                   |       | 3,631                 |       |
| Long-term portion                     |       | $                       | 83,800     |                  | $          | 83,649 |   |

 

On November 19, 2007, the Company entered into a five year, $250 million credit agreement with Merrill Lynch Capital (now owned by GE Business Financial Services, Inc.). The Credit Facility provides for a revolving credit line up to the lesser of (i) the borrowing base, (ii) $250 million or (iii) the draw limit requested by the Company. The Credit Facility matures on November 19, 2012. It is secured by substantially all of our assets. The borrowing base will be determined by the lenders at least semi-annually on each April 1 and October 1 and is based in part on the proved reserves of the Company. The current borrowing base is $120 million. Interest payments are made in arrears. Credit line interest of approximately $0.1 million was accrued as of March 31, 2011. As of March 31, 2011, the Company has $69.5 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 March 31, 2011.

 

Depending on the current level of borrowing base usage, the annual interest rate on each base rate borrowing under the Credit Facility will be at our option either: (a) 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” plus the applicable “Base Rate Margin”, 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 3.0% per annum, plus an applicable margin that ranges from 1.5% to 2.25%, or (b) 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 2.75% to 3.50%. As of March 31, 2011, the weighted average interest rate on the credit line was 3.5%.

 

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 prices ranging from $35 to $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 three months ended March 31, 2011, there were no bond redemptions.

 

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**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:

 
| ** **                             | ** ** | **March 31,**      | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **2011**                | ** ** |
| ** **                             | ** ** | **(in thousands)** | ** ** |
| Balance at beginning of period         |       | $                       | 10,217     |   |
| Liabilities incurred in current period |       | —                  |       |
| Liabilities settled in current period  |       | (128                    | )          |
| Accretion expense                      |       | 243                     |       |
| Balance at end of period               |       | $                       | 10,332     |   |

 

**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.  Based on extensions given by the El Paso Court of Appeals, the Frio County District Court Clerk certified and filed the Record on Appeal on October 26, 2010.  On March 14, 2011, Warren filed its appellate brief with the El Paso Court of Appeals. Gotham requested an extension of time until May 16, 2011 to file its response to Warren’s brief, which extension was granted by the Court. Although Warren believes that it has meritorious grounds for the appeal, if its appeal is unsuccessful, it will pay the amount of restitution to Gotham, as ordered by the trial court.

 

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.

 

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**NOTE H—COMPREHENSIVE INCOME**

 

Other comprehensive income consists primarily of net unrealized investment gains and losses, net of income tax effect.

 

Total comprehensive income for the periods is as follow:

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **March 31,**               | ** ** |
| ** **                                                 | ** ** | **2011**                         | ** ** | **2010** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**          | ** ** |
|                                                       |       |                             |       |   |   |
| Net income (loss)                                          |       | $                                | (576       | ) | $ | 7,186 |   |
| Financial assets                                           |       |                             |       |   |   |
| Holding gains (losses) on available for sale   investments |       | (8                               | )          | 4 |   |
|                                                       |       |                             |       |   |   |
| Comprehensive income (loss)                                |       | $                                | (584       | ) | $ | 7,190 |   |

 

**NOTE I - 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 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 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.

 
| ** **                  | ** ** | **March 31, 2011** | ** ** | **December 31, 2010** | ** ** |
|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **Fair**                     | ** ** | **Carrying**                    | ** ** | **Fair** | ** ** | **Carrying** | ** ** |
| ** **                  | ** ** | **value**                    | ** ** | **amount**                      | ** ** | **value** | ** ** | **amount** | ** ** |
| ** **                  | ** ** | **(in thousands)**      | ** ** |
|                        |       |                         |       |                            |       |   |   |   |   |
| Financial assets            |       |                         |       |                            |       |   |   |   |   |
| Collateral security account |       | $                            | 3,161      |                            | $          | 3,161 |   | $ | 3,160 |   | $ | 3,160 |   |
|                        |       |                         |       |                            |       |   |   |   |   |
| Financial liabilities       |       |                         |       |                            |       |   |   |   |   |
| Fixed rate debentures       |       | $                            | 1,888      |                            | $          | 1,651 |   | $ | 1,901 |   | $ | 1,651 |   |
| Other long-term liabilities |       | 210                          |       | 210                             |       | 245 |   | 245 |   |
|                        |       |                         |       |                            |       |   |   |   |   |
| Line of credit              |       | 69,500                       |       | 69,500                          |       | 69,500 |   | 69,500 |   |
| Drilling rig obligation     |       | 1,867                        |       | 1,867                           |       | 2,567 |   | 2,567 |   |

 

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**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, 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.

 

**March 31, 2011**

 
| ** **                                  | ** ** | **Level 1**        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| ** **                                  |       |                    |       |             |       |             |       |      |       |
| **Assets**                                  |       |                    |       |             |       |             |       |      |       |
| ** **                                  |       |                    |       |             |       |             |       |      |       |
| Restricted investments in US Treasury Bonds |       |                    |       |             |       |             |       |      |       |
| — available for sale, at fair value    |       | $                       | 1,098      |             | $          | —           |       | $         | —     |   | $ | 1,098 |   |
| Commodity derivatives                       |       | $                       | —     |             | $          | 335              |       | $         | —     |   | $ | 335 |   |
|                                        |       |                    |       |             |       |             |       |      |       |
| ** **                                  | ** ** | **Level 1**        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| ** **                                  |       |                    |       |             |       |             |       |      |       |
| **Liabilities**                             |       |                    |       |             |       |             |       |      |       |
| ** **                                  |       |                    |       |             |       |             |       |      |       |
| Commodity derivatives                       |       | $                       | —     |             | $          | 13,814           |       | $         | —     |   | $ | 13,814 |   |
|                                        |       |                    |       |             |       |             |       |      |       |
| **December 31, 2010**                  |       |                    |       |             |       |             |       |      |       |
| ** **                                  | ** ** | **Level 1**        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| ** **                                  |       |                    |       |             |       |             |       |      |       |
| **Assets**                                  |       |                    |       |             |       |             |       |      |       |
| ** **                                  |       |                    |       |             |       |             |       |      |       |
| Restricted investments in US Treasury Bonds |       |                    |       |             |       |             |       |      |       |
| — available for sale, at fair value    |       | $                       | 1,097      |             | $          | —           |       | $         | —     |   | $ | 1,097 |   |
| Commodity derivatives                       |       | $                       | —     |             | $          | 392              |       | $         | —     |   | $ | 392 |   |
|                                        |       |                    |       |             |       |             |       |      |       |
| ** **                                  | ** ** | **Level 1**             | ** ** | **Level 2**      | ** ** | **Level 3**      | ** ** | **Total** | ** ** |
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| **Liabilities**                             |       |                    |       |             |       |             |       |      |       |
| Commodity derivatives                       |       | $                       | —     |             | $          | 10,228           |       | $         | —     |   | $ | 10,228 |   |

 

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**NOTE J — 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 swaps, calls and costless collars.  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 March 31, 2011, 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           |       | Swap         |       | 04/01/11 - 12/31/11 |       | 840 Bbl/d   |       | $61.80                                    |
| Oil           |       | Collar       |       | 04/01/11 - 12/31/11 |       | 700 Bbl/d   |       | $70 - $101.00                   |
| Oil           |       | Long   Call  |       | 10/01/11 - 01/31/12 |       | 50,000 Bbl  |       | $80.00                                    |
| Oil           |       | Short   Call |       | 07/01/11 - 10/31/11 |       | 50,000 Bbl  |       | $100.00                                   |
| Oil           |       | Call         |       | 01/01/12 - 01/31/12 |       | 100,000 Bbl |       | $120.00 **                                |
| Oil           |       | Collar       |       | 01/01/12 - 12/31/12 |       | 500 Bbl/d   |       | $70 - $106.50                   |
| Oil           |       | Call         |       | 01/01/12 - 01/31/12 |       | 50,000 Bbl  |       | $125.00 **                                |
| Oil           |       | Put          |       | 01/01/12 - 12/31/12 |       | 219,000 Bbl |       | $70.00 **                                 |
| Natural   Gas |       | Swap         |       | 09/01/11 - 09/30/11 |       | 4,000 Mcf/d |       | $4.56                                     |
| Natural   Gas |       | Swap         |       | 04/01/11 - 05/31/11 |       | 4,000 Mcf/d |       | $4.38                                     |
| Natural   Gas |       | Collar       |       | 11/01/11 - 12/31/11 |       | 4,000 Mcf/d |       | $4.00 - $6.28                   |
| Natural   Gas |       | Collar       |       | 07/01/11 - 08/31/11 |       | 4,000 Mcf/d |       | $4.00 - $5.10                   |
| Natural   Gas |       | Collar       |       | 05/01/11 - 12/31/11 |       | 3,000 Mcf/d |       | $4.25 - $5.03                   |
| Natural   Gas |       | Swap         |       | 04/01/11 - 11/30/11 |       | 2,500 Mcf/d |       | —$0.71*                              |
| Natural   Gas |       | Swap         |       | 01/01/11 - 12/31/11 |       | 6,500 Mcf/d |       | —$0.44*                              |
| Natural   Gas |       | Swap         |       | 01/01/12 - 12/31/12 |       | 3,000 Mcf/d |       | —$0.51*                              |

 

----

*                                         This represents a differential spread between NYMEX and CIG pricing.

 

**                                  The Company paid approximately $1,385,000 in net premiums for these contracts.

 

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**                     | ** ** | **Amount of Gain (Loss)   Recognized in Income for   Derivatives not designated as   Hedging Instruments under   authoritative guidance** | ** ** | **Amount of Gain (Loss)   Recognized in Income for   Derivatives not designated as   Hedging Instruments under   authoritative guidance** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Hedging Instrument under   authoritative guidance** | ** ** | **Three months ended March 31, 2011   (in thousands)**                                                                                                                  | ** ** | **Three months ended March 31, 2010   (in thousands)**                                                                                                                  | ** ** |
|                                                                 |       |                                                                                                                                                                                                  |       |                                                                                                                                                                                                  |       |
| Realized cash settlements on hedges                                  |       | $                                                                                                                                                                                                     | (1,838     | )                                                                                                                                                                                                     | $          | 816 |   |
| Unrealized gain (loss) on hedges                                     |       | (3,934                                                                                                                                                                                                | )          | 1,078                                                                                                                                                                                                 |       |
| Total                                                                |       | $                                                                                                                                                                                                     | (5,772     | )                                                                                                                                                                                                     | $          | 1,894 |   |

 

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

 

**March 31, 2011**

 
| ** **                                                | ** ** | **Derivative Assets**        | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**                                   | ** ** | **Balance Sheet   Location** | ** ** | **Fair Value** | ** ** |
| Commodity—Natural Gas                                |       | Non-current                       |       | $ | (58 | ) |
| Commodity—Oil                                        |       | Non-current                       |       | 393 |   |
| Total derivatives not designated as hedging   instruments |       |                              |       | $ | 335 |   |
| ** **                                                | ** ** | ** **                        | ** ** | ** ** | ** ** |
| **March 31, 2011**                                   | ** ** | ** **                        | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** **                        | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Derivative Liabilities**   | ** ** |
| **(in thousands)**                                   | ** ** | **Balance Sheet   Location** | ** ** | **Fair Value** | ** ** |
| Commodity—Natural Gas                                |       | current                           |       | (322 | ) |
| Commodity—Oil                                        |       | current                           |       | (12,048 | ) |
| Commodity—Oil                                        |       | Non-current                       |       | (1,444 | ) |
| Total derivatives not designated as hedging   instruments |       |                              |       | $ | (13,814 | ) |
| ** **                                                | ** ** | ** **                        | ** ** | ** ** | ** ** |
| **December 31, 2010**                                | ** ** | ** **                        | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** **                        | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Derivative Assets**        | ** ** |
| **(in thousands)**                                   | ** ** | **Balance Sheet   Location** | ** ** | **Fair Value** | ** ** |
| Commodity—Natural Gas                                |       | Non-current                       |       | (92 | ) |
| Commodity—Oil                                        |       | Non-current                       |       | 484 |   |
| Total derivatives not designated as hedging   instruments |       |                              |       | $ | 392 |   |
|                                                      |       |                              |       |   |   |
| **December 31, 2010**                                |       |                              |       |   |   |
|                                                      |       |                              |       |   |   |
| ** **                                                | ** ** | **Derivative Liabilities**   | ** ** |
| **(in thousands)**                                   | ** ** | **Balance Sheet   Location** | ** ** | **Fair Value** | ** ** |
| Commodity—Natural Gas                                |       | current                           |       | 72 |   |
| Commodity—Oil                                        |       | current                           |       | (9,697 | ) |
| Commodity—Oil                                        |       | Non-current                       |       | (603 | ) |
| Total derivatives not designated as hedging   instruments |       |                              |       | $ | (10,228 | ) |

 

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**NOTE K — 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.

 

**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 2010 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 March 31, 2011, we owned oil and natural gas leasehold interests in approximately 135,870 gross, 73,190 net acres, approximately 80% 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 $1.9 million to $9.2 million during the three months ended March 31, 2011.  This resulted from cash provided from operating activities of $7.7 million offset by cash used in investing activities of $8.9 million and cash used in financing activities of $0.7 million.

 

Cash provided by operating activities was primarily generated by oil and gas operations.  Cash used in financing activities primarily represents paying down our outstanding debt on our recently acquired drilling rig.  Cash used in investing activities was primarily spent on oil and gas properties and equipment.

 

On August 26, 2010, Warren purchased an oil drilling rig for $7 million. The Company paid $3.5 million at closing and the balance will be payable in fifteen equal monthly installments, commencing September 30, 2010. This rig will be used to

 

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drill future oil wells on our California properties.  As of March 31, 2011, the Company has paid an additional $6 million to assemble and equip the drilling rig.  The rig is currently operational.

 

On November 19, 2007, Warren entered into a five year, $250 million credit agreement with Merrill Lynch Capital (subsequently sold to GE Business Financial Services, Inc.) on behalf of itself and a syndicate of five participating banks (the “Credit Facility”).   The Credit Facility provides for a revolving loan up to the lesser of (i) the borrowing base (ii) $250 million or (iii) the draw limit requested by the Company.  The Credit Facility matures on November 19, 2012.  It is secured by substantially all of our assets.  The borrowing base will be determined by the lenders at least semi-annually on or about April 1 and October 1 of each year, and is based in part on the proved reserves of the Company. The current borrowing base is $120 million, representing an immediate availability of $50.5 million as of March 31, 2011.  The Company has not repaid any amounts under the Credit Facility during the first three months of 2011.  The Company is subject to certain covenants required by the Credit Facility which include, but are not limited to the maintenance of the following financial ratios (1) a minimum current ratio (including the unused borrowing base and excluding unrealized gains and losses on derivative financial instruments) of not less than 1.0 to 1.0 and (2) a minimum annualized consolidated EBITDAX (as defined by the Credit Facility) to net interest expense of not less than to of 2.5 to 1.0.  As of March 31, 2011, the Company had borrowed $69.5 million under the Credit Facility and was in compliance with all covenants.  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.

 

Depending on the current level of borrowing base usage, the annual interest rate on each base rate borrowing under the Credit Facility will be at our option either: (a) 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” plus the applicable “Base Rate Margin”, 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 3.0% per annum, plus an applicable margin that ranges from 1.5% to 2.25%, or (b) 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 2.75% to 3.50%. During the first quarter of 2011, the Company incurred $0.5 million of interest expense, net of amounts capitalized, under the Credit Facility of which approximately $0.1 million was accrued for as of March 31, 2011. The weighted average interest rate as of March 31, 2011, was 3.5%.

 

If oil and gas commodity prices go lower, the Company may not generate sufficient cash flows to cover capital expenditures. In such case, the availability of funds under our Credit Facility is critical to our Company. The borrowing base is scheduled to be redetermined in May 2011. If the Credit Facility’s borrowing base is reduced to a level below current borrowings, the Company would be obligated to begin reducing the deficiency by 25% within 90 days after the deficiency occurs and the remaining 75% within 180 days after the deficiency occurs.

 

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 for more than 24 months, due in part to the financial stresses affecting the liquidity of the banking system, the real estate mortgage industry and the 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 a 2011 capital expenditure budget which is expected to be funded by primarily with discretionary cash flow, entered into price swap agreements, collars, puts, futures contracts and differential swap agreements for a portion of its 2011 and 2012 production to reduce price volatility and reductions in discretionary expenditures. As of March 31, 2011, approximately 50% of the Company’s oil and natural gas production are covered by price swaps, puts and collars. It is not anticipated that these percentages will not change significantly during the remainder of 2011. 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.

 

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During the first quarter of 2011, the Company had a net loss of $0.6 million (which included $3.9 million of unrealized losses on derivative financial instruments). This compares to the first quarter of 2010 when the Company had net income of $7.2 million (which included a $1.1 million unrealized gain on derivative financial instruments). At March 31, 2011, current assets were $12.7 million less than current liabilities. Currently, the Company has a borrowing base of $120 million and $69.5 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 quarter of 2011, our oil lease operating expenses were $21.77 per net barrel of oil produced. Our natural gas operations include reinjecting the produced water into deep formations and compressing and transporting the gas with significant fixed costs. During the first quarter of 2011, our natural gas lease operating expenses were $2.70 per net mcf of gas produced.

 

At March 31, 2011, we had approximately 1.9 million vested outstanding stock options issued under our stock based equity compensation plans. Of the total 1.9 million outstanding vested options, 0.8 million had exercise prices above the closing market price $5.11 of our common stock on March 31, 2011.

 

*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 $1.1 million at March 31, 2011.  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 March 31, 2011** | ** ** | **Total**                                        | ** ** | **Less Than   1 Year** | ** ** | **1-3   Years** | ** ** | **3-5   Years** | ** ** | **More Than   5 Years** | ** ** |
| ** **                                                                  | ** ** | **(in thousands)**                          | ** ** |
| Line of credit                                                              |       | $                                                | 69,500     |   | $ | — |   | $ | 69,500 |   | $ | — |   | $ | — |   |
| Bonds                                                                       |       | 1,651                                            |       | 165 |   | 282 |   | 229 |   | 975 |   |
| Drilling rig note payable                                                   |       | 1,867                                            |       | 1,867 |   | — |   | — |   | — |   |
| Other Accounts Payable                                                      |       | 226                                              |       | 160 |   | 66 |   | — |   | — |   |
| Leases                                                                      |       | 1,682                                            |       | 648 |   | 808 |   | 226 |   | — |   |
| Total                                                                       |       | $                                                | 74,926     |   | $ | 2,840 |   | $ | 70,656 |   | $ | 455 |   | $ | 975 |   |

 

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*                 Does not include estimated interest of $2.9 million less than one year, $2.1 million 1-3 years, $0.4 million 3-5 years and $1.1 million thereafter.

 

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**RESULTS OF OPERATIONS:**

 

**Three months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010**

 

*Oil and gas sales.* Revenue from oil and gas sales increased $1.6 million in the first quarter of 2011 to $23.2 million, a 7% increase compared to the same quarter in 2010.  This increase resulted from an increase in realized oil prices and production of natural gas.  The average realized price per barrel of oil for the three months ended March 31, 2011 and 2010 was $87.33 and $70.52, respectively.  Additionally, the average realized price per Mcf of gas for the three months ended March 31, 2011 and 2010 was $4.15 and $5.50, respectively.  Net oil production for the three months ended March 31, 2011 and 2010 was 210 Mbbls and 223 Mbbls, respectively.  Net gas production for the three months ended March 31, 2011 and 2010 was 1.2 Bcf and 1.1 Bcf, respectively.

 

*Lease operating expense.* Lease operating expense increased 7% to $7.7 million ($19.07 per boe) for the first quarter of 2011 compared to $7.2 million ($18.02 per boe) in the comparable period of 2010. Primarily, this increase resulted from higher California property taxes.

 

*Depreciation, depletion and amortization.*Depreciation, depletion and amortization expense increased $1.3 million for the first quarter of 2011 to $6.1 million, a 28% increase compared to the corresponding quarter last year.  The increase in depletion expense resulted from an increase in the 2011 depletion rate.  The 2011 depletion rate increased to $15.11 per boe compared to $11.92 per boe in 2010.  The increase in the 2011 depletion rate compared to the 2010 depletion rate on a boe basis reflects an increase in estimated future development costs.

 

*General and administrative expenses.* General and administrative expenses increased $0.1 million in the first quarter of 2011 to $3.6 million, a 3% increase compared to the corresponding quarter last year.  This increase resulted from a $0.6 million incentive compensation accrual.  The Company anticipates paying year end incentive compensation amounts in March 2012 based upon reaching certain operational goals in our incentive compensation plan.  This increase was offset by a decrease in stock option expense.

 

*Interest expense.* Interest expense decreased 35% to $0.6 million in the first quarter of 2011 compared to the same quarter last year.  The decrease results from a decrease in borrowings under our Credit Facility and interest capitalized of $0.2 million relating to our drilling rig.

 

*Interest and other income.* Interest and other income decreased $19 thousand in the first quarter of 2011 to $19 thousand, compared to the same quarter in 2010.

 

*Gain (loss) on derivative financial instruments.*  Derivative losses of $5.8 million were recorded during the first quarter of 2011. This amount reflects $1.8 million of realized losses and $3.9 million of unrealized losses resulting from mark to market accounting of our oil and gas swaps, puts, futures contracts and costless collar 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 2010 Form 10-K includes a discussion of our critical accounting policies.

 

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**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. Below is a sensitivity analysis of the Company’s commodity price related derivative instruments.

 

***Commodity Risk***

 

Our primary market risk exposure is in the price we receive for our natural gas and oil 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 natural gas and oil 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.

 

We have entered into several financial derivative swap contracts, calls and costless collars 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 following table summarizes our open financial derivative positions as of May 3, 2011 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           |       | Swap         |       | 04/01/11 - 12/31/11 |       | 840 Bbl/d   |       | $61.80                                    |
| Oil           |       | Collar       |       | 04/01/11 - 12/31/11 |       | 700 Bbl/d   |       | $70 - $101.00                   |
| Oil           |       | Long   Call  |       | 10/01/11 - 01/31/12 |       | 50,000 Bbl  |       | $80.00                                    |
| Oil           |       | Short   Call |       | 07/01/11 - 10/31/11 |       | 50,000 Bbl  |       | $100.00                                   |
| Oil           |       | Call         |       | 01/01/12 - 01/31/12 |       | 100,000 Bbl |       | $120.00 **                                |
| Oil           |       | Collar       |       | 01/01/12 - 12/31/12 |       | 500 Bbl/d   |       | $70 - $106.50                   |
| Oil           |       | Call         |       | 01/01/12 - 01/31/12 |       | 50,000 Bbl  |       | $125.00 **                                |
| Oil           |       | Put          |       | 01/01/12 - 12/31/12 |       | 219,000 Bbl |       | $70.00 **                                 |
| Natural   Gas |       | Swap         |       | 09/01/11 - 09/30/11 |       | 4,000 Mcf/d |       | $4.56                                     |
| Natural   Gas |       | Swap         |       | 04/01/11 - 05/31/11 |       | 4,000 Mcf/d |       | $4.38                                     |
| Natural   Gas |       | Collar       |       | 11/01/11 - 12/31/11 |       | 4,000 Mcf/d |       | $4.00 - $6.28                   |
| Natural   Gas |       | Collar       |       | 07/01/11 - 08/31/11 |       | 4,000 Mcf/d |       | $4.00 - $5.10                   |
| Natural   Gas |       | Collar       |       | 05/01/11 - 12/31/11 |       | 3,000 Mcf/d |       | $4.25 - $5.03                   |
| Natural   Gas |       | Swap         |       | 04/01/11 - 11/30/11 |       | 2,500 Mcf/d |       | —$0.71*                              |
| Natural   Gas |       | Swap         |       | 01/01/11 - 12/31/11 |       | 6,500 Mcf/d |       | —$0.44*                              |
| Natural   Gas |       | Swap         |       | 01/01/12 - 12/31/12 |       | 3,000 Mcf/d |       | —$0.51*                              |

 

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*                                         This represents a differential spread between NYMEX and CIG pricing.

 

**                                  The Company paid approximately $1,385,000 in net premiums for these contracts.

 

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***Interest Rate Risk***

 

At March 31, 2011, we had debt outstanding under our Credit Facility of $69.5 million.  Depending on the current level of borrowing base usage, the annual interest rate on each base rate borrowing under the Credit Facility will be at our option either: (a) 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” plus the applicable “Base Rate Margin”, 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 3.0% per annum, plus an applicable margin that ranges from 1.5% to 2.25%, or (b) 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 2.75% to 3.50%.

 

***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 natural gas and oil, 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 2010 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.

 

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**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.

 

***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 March 31, 2011, 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 G 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, 2010, and in our Registration Statement on Form S-3, and the prospectus supplement thereto, in connection with our public offering on October 23, 2009, 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. *Removed and Reserved***

 

**Item 5. *Other Information***

 

Not applicable.

 

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**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 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 |

 

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| * |   | Filed   herewith. |
|---|--------|-------------------|

 

**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:   May 4, 2011 |                                    |   |
|                |                                    | /s/   Timothy A. Larkin |
|                | By:                                     | Timothy   A. Larkin |
|                |                                    | *Executive   Vice President,   Chief Financial Officer and   Principal Accounting Officer* |

 

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