** **

**UNITEDSTATESSECURITIES 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 theQuarterly Period Ended March 31, 2009**

 

# **OR**

** **

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For thetransition period from            to            **

 

# **Commission File No. 000-33275**

# ** **

**WARRENRESOURCES, INC.**

(Exact Name ofRegistrant as Specified in its Charter.)

 

| **Maryland**  (State or other jurisdiction of  incorporation or organization)                 | ** ** | **11-3024080**  (I.R.S. Employer  Identification Number) |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|
| ** **                                                                                    | ** ** | ** **                                               |
| **1114  Avenue of the Americas,**

**New  York, NY**(Address of  Principal Executive Offices) | ** ** | **10036**  (Zip Code)                                    |

 

Registrant’stelephone number, including area code:

**(212)697-9660**

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13and 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months and (2) has been subject to such filing requirements for the past90 days.  Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

| Large accelerated filer  x |   | Accelerated filer o          |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated filer o    |   | Smaller  reporting company o |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yeso No x

 

Theaggregate number of Registrant’s outstanding shares on May 5, 2009 was58,876,160 shares of Common Stock, $0.0001 par value.

 

 

 

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** **

**WARRENRESOURCES, INC.**

 

**TABLE OFCONTENTS**

 
| PART I—        | FINANCIAL INFORMATION                                                                                |   |
|--------------------------|------------------------------------------------------------------------------------------------------|--------|
|                     |                                                                                                 |   |
|                     | Item 1. Financial  Statements (Unaudited)                                                            |   |
|                     |                                                                                                 |   |
|                     | Consolidated Balance  Sheets as of March 31, 2009 and December 31, 2008                    |   |
|                     |                                                                                                 |   |
|                     | Consolidated Statements  of Operations for the three months ended March 31, 2009 and 2008       |   |
|                     |                                                                                                 |   |
|                     | Consolidated Statements  of Cash Flows for three months ended March 31, 2009 and 2008           |   |
|                     |                                                                                                 |   |
|                     | 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. Submission of  Matters to a Vote of Security Holders                                         |   |
|                     |                                                                                                 |   |
|                     | Item 5. Other  Information                                                                           |   |
|                     |                                                                                                 |   |
|                     | Item 6. Exhibits                                                                                     |   |
|                     |                                                                                                 |   |
|                     | Signatures                                                                                           |   |

 

2

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**PART I—FINANCIALINFORMATION**

 

###### **ITEM 1. FINANCIAL STATEMENTS**

 

**Warren Resources, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                          | ** ** | **March 31,  2009**                             | ** **        | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                          | ** ** | **(Unaudited)**                                      | ** **        | ** **                  | ** ** |
| ** **                                                                                                                                                                                                                                                                          | ** ** | **(in thousands, except share  and per share data)** | ** **        |
| **ASSETS**                                                                                                                                                                                                                                                                          | ** ** | ** **                                           | ** **        | ** **                  | ** ** |
| Current Assets                                                                                                                                                                                                                                                                      | ** ** | ** **                                           | ** **        | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                                                                                                                                                                                          |       | $                                                    | 19,424            |                        | $          | 29,688 |   |
| Accounts  receivable – trade                                                                                                                                                                                                                                                   |       | 6,335                                                |              | 9,680                       |       |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value                                                                                                                                                                                               |       | 106                                                  |              | 109                         |       |
| Inventory                                                                                                                                                                                                                                                                           |       | 2,875                                                |              | —                      |       |
| Other current  assets                                                                                                                                                                                                                                                               |       | 1,888                                                |              | 734                         |       |
|                                                                                                                                                                                                                                                                                |       |                                                 |              |                        |       |
| Total current  assets                                                                                                                                                                                                                                                               |       | 30,628                                               |              | 40,211                      |       |
|                                                                                                                                                                                                                                                                                |       |                                                 |              |                        |       |
| 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 $25,747 and $27,116 as of  March 31, 2009 and December 31, 2008) |       | 231,702                                              |              | 239,438                     |       |
| Property and  equipment—at cost, net                                                                                                                                                                                                                                           |       | 1,841                                                |              | 2,011                       |       |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value                                                                                                                                                                                               |       | 956                                                  |              | 985                         |       |
| Other assets                                                                                                                                                                                                                                                                        |       | 3,952                                                |              | 3,988                       |       |
|                                                                                                                                                                                                                                                                                |       |                                                 |              |                        |       |
| Total other  assets                                                                                                                                                                                                                                                                 |       | 238,451                                              |              | 246,422                     |       |
| ** **                                                                                                                                                                                                                                                                          | ** ** | **$**                                                | **269,079**       | ** **                  | **$**      | **286,633** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                      |       |                                                 |              |                        |       |
| Current  Liabilities                                                                                                                                                                                                                                                                |       |                                                 |              |                        |       |
| Current  maturities of debentures and other long-term liabilities                                                                                                                                                                                                                   |       | $                                                    | 318               |                        | $          | 315 |   |
| Accounts payable  and accruals                                                                                                                                                                                                                                                      |       | 31,258                                               |              | 49,616                      |       |
|                                                                                                                                                                                                                                                                                |       |                                                 |              |                        |       |
| Total current  liabilities                                                                                                                                                                                                                                                          |       | 31,576                                               |              | 49,931                      |       |
|                                                                                                                                                                                                                                                                                |       |                                                 |              |                        |       |
| Long-Term  Liabilities                                                                                                                                                                                                                                                              |       |                                                 |              |                        |       |
| Debentures, less  current portion                                                                                                                                                                                                                                                   |       | 1,508                                                |              | 1,508                       |       |
| Other long-term  liabilities, less current portion                                                                                                                                                                                                                                  |       | 10,280                                               |              | 10,769                      |       |
| Line of credit                                                                                                                                                                                                                                                                      |       | 119,750                                              |              | 112,400                     |       |
|                                                                                                                                                                                                                                                                                |       |                                                 |              |                        |       |
|                                                                                                                                                                                                                                                                                |       | 131,538                                              |              | 124,677                     |       |
|                                                                                                                                                                                                                                                                                |       |                                                 |              |                        |       |
| Commitments and  Contingencies                                                                                                                                                                                                                                                      |       |                                                 |              |                        |       |
|                                                                                                                                                                                                                                                                                |       |                                                 |              |                        |       |
| Stockholders’  Equity                                                                                                                                                                                                                                                          |       |                                                 |              |                        |       |
| 8% convertible preferred stock, par value $.0001; authorized 10,000,000  shares,  issued and outstanding, 98,112 shares in 2009  and 2008, respectively  (aggregate  liquidation preference $1,178 in 2009 and $1,177 in 2008)                                                      |       | 1,178                                                |              | 1,177                       |       |
| Common stock -  $.0001 par value; authorized, 100,000,000 shares; issued 58,876,160 in 2009  and 58,825,881 shares in 2008                                                                                                                                                          |       | 6                                                    |              | 6                           |       |
| Additional  paid-in-capital                                                                                                                                                                                                                                                         |       | 430,762                                              |              | 430,243                     |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                |       | (325,436                                             | )                 | (318,881                    | )          |
| Accumulated  other comprehensive income, net of applicable income taxes of $119 in 2009  and $137 in 2008                                                                                                                                                                           |       | 183                                                  |              | 208                         |       |
|                                                                                                                                                                                                                                                                                |       | 106,693                                              |              | 112,753                     |       |
| Less common  stock in Treasury—at cost; 632,250 shares in 2009 and 2008                                                                                                                                                                                                        |       | 728                                                  |              | 728                         |       |
| Total  stockholders’ equity                                                                                                                                                                                                                                                    |       | 105,965                                              |              | 112,025                     |       |
| ** **                                                                                                                                                                                                                                                                          | ** ** | **$**                                                | ** 269,079** | ** **                  | **$**      | **286,633** | ** ** |

 

The accompanyingnotes are an integral part of these financial statements.

 

3

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** **

**Warren Resources, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF OPERATIONS**

** **
| ** **                                                 | ** ** | **Three Months Ended**          | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **March 31, (Unaudited)**  | ** ** |
| ** **                                                 |       | **(in thousands, except share** |       |
| ** **                                                 |       | **and per share data)**         |       |
| ** **                                                 | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| Revenues                                                   |       |                            |       |   |   |
| Oil and gas  sales                                         |       | $                               | 11,547     |   | $ | 23,484 |   |
| Interest and  other income                                 |       | 97                              |       | 345 |   |
| Net gain on oil  and gas derivative financial instruments  |       | 734                             |       | — |   |
| Net gain on  investments                                   |       | —                          |       | 93 |   |
|                                                       |       | 12,378                          |       | 23,922 |   |
|                                                       |       |                            |       |   |   |
| Expenses                                                   |       |                            |       |   |   |
| Lease operating  expense and taxes                         |       | 8,799                           |       | 5,864 |   |
| Depreciation, depletion  and amortization                  |       | 5,316                           |       | 3,914 |   |
| General and  administrative                                |       | 3,255                           |       | 3,312 |   |
| Interest                                                   |       | 1,544                           |       | 1,342 |   |
|                                                       |       | 18,914                          |       | 14,432 |   |
|                                                       |       |                            |       |   |   |
| Income (loss)  before provision for income taxes           |       | (6,536                          | )          | 9,490 |   |
|                                                       |       |                            |       |   |   |
| Deferred income  tax expense                               |       | 18                              |       | 27 |   |
|                                                       |       |                            |       |   |   |
| Net income  (loss)                                         |       | (6,554                          | )          | 9,463 |   |
|                                                       |       |                            |       |   |   |
| Less dividends  and accretion on preferred shares          |       | 24                              |       | 33 |   |
|                                                       |       |                            |       |   |   |
| Net income  (loss) applicable to common stockholders       |       | $                               | (6,578     | ) | $ | 9,430 |   |
|                                                       |       |                            |       |   |   |
| Earnings (loss)  per share – Basic                    |       | $                               | (0.11      | ) | $ | 0.16 |   |
| Earnings (loss)  per share – Diluted                  |       | (0.11                           | )          | 0.16 |   |
|                                                       |       |                            |       |   |   |
| Weighted average  common shares outstanding – Basic   |       | 58,243,910                      |       | 57,582,536 |   |
| Weighted average  common shares outstanding – Diluted |       | 58,243,910                      |       | 58,644,616 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

4

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** **

**Warren Resources, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **For the three months ended  March 31, (Unaudited)** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **(in thousands)**                                         | ** ** |
| ** **                                                                         | ** ** | **2009**                                                   | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                             |       |                                                       |       |   |   |
| Net income  (loss)                                                                 |       | $                                                          | (6,554     | ) | $ | 9,463 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                       |       |   |   |
| Accretion of  discount on available-for-sale debt securities                       |       | (12                                                        | )          | (17 | ) |
| Amortization and  write-off of deferred bond offering costs                        |       | 37                                                         |       | 48 |   |
| Gain on sale of  US treasury bonds — available for sale                       |       | —                                                     |       | (93 | ) |
| Depreciation,  depletion and amortization                                          |       | 5,316                                                      |       | 3,913 |   |
| Gain on  derivative financial instruments                                          |       | (87                                                        | )          | — |   |
| Stock option  expense                                                              |       | 543                                                        |       | 507 |   |
| Deferred tax  expense                                                              |       | 18                                                         |       | 27 |   |
| Change in assets  and liabilities:                                                 |       |                                                       |       |   |   |
| Decrease  (Increase) in accounts receivable—trade                             |       | 3,345                                                      |       | (2,682 | ) |
| Decrease  (Increase) in other assets                                               |       | (1,068                                                     | )          | 466 |   |
| (Increase)  Decrease in accounts payable and accruals                              |       | (1,291                                                     | )          | (1,746 | ) |
|                                                                               |       |                                                       |       |   |   |
| Net cash  provided by operating activities                                         |       | 247                                                        |       | 9,886 |   |
|                                                                               |       |                                                       |       |   |   |
| Cash flows from  investing activities:                                             |       |                                                       |       |   |   |
| Purchase,  exploration and development of oil and gas properties                   |       | (17,833                                                    | )          | (29,609 | ) |
| Purchase of  property and equipment                                                |       | —                                                     |       | (96 | ) |
| Proceeds from  U.S. Treasury Bonds—available-for-sale                         |       | —                                                     |       | 426 |   |
|                                                                               |       |                                                       |       |   |   |
| Net cash used in  investing activities                                             |       | (17,833                                                    | )          | (29,279 | ) |
|                                                                               |       |                                                       |       |   |   |
| Cash flows from  financing activities:                                             |       |                                                       |       |   |   |
| Proceeds from  line of credit                                                      |       | 7,350                                                      |       | 36,247 |   |
| Payments on debt  and debentures                                                   |       | (28                                                        | )          | (800 | ) |
| Issuance of  common stock, net                                                     |       | —                                                     |       | 122 |   |
| Repurchase of  preferred stock, net                                                |       | —                                                     |       | (1,664 | ) |
|                                                                               |       |                                                       |       |   |   |
| Net cash  provided by financing activities                                         |       | 7,322                                                      |       | 33,905 |   |
|                                                                               |       |                                                       |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | (10,264                                                    | )          | 14,512 |   |
|                                                                               |       |                                                       |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 29,688                                                     |       | 12,815 |   |
|                                                                               |       |                                                       |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                          | 19,424     |   | $ | 27,327 |   |
|                                                                               |       |                                                       |       |   |   |
| Supplemental  disclosure of cash flow information                                  |       |                                                       |       |   |   |
| Cash paid for  interest                                                            |       | $                                                          | 1,500      |   | $ | 791 |   |
| Noncash investing  and financing activities                                        |       |                                                       |       |   |   |
| Accrued  preferred stock dividend                                                  |       | 24                                                         |       | 32 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

5

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** **

**WARRENRESOURCES, 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 forthe purpose of acquiring and developing oil and gas properties. The Company isincorporated under the laws of the state of Maryland. The Company’s propertiesare primarily located in Wyoming, California and New Mexico. In addition, theCompany previously served as the managing general partner (the “MGP”) andturnkey drilling contractor to affiliated partnerships and joint ventures.

 

Theaccompanying unaudited financial statements and related notes present theCompany’s consolidated financial position as of March 31, 2009 and December 31,2008, the consolidated results of operations for the three months ended March 31,2009 and 2008 and consolidated cash flows for the three months ended March 31,2009 and 2008. The unaudited financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions of Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included. Operatingresults for the three months ended March 31, 2009, are not necessarilyindicative of the results that may be expected for the fiscal year ending December 31,2009. The accounting policies followed by the Company are set forth in Note Ato the Company’s financial statements included in Form 10-K for the yearended December 31, 2008. These interim financial statements and notesthereto should be read in conjunction with the consolidated financialstatements presented in the Company’s 2008 Annual Report on Form 10-K.

 

**NOTE B — LIQUIDITY AND MANAGEMENT’SPLANS**

 

At March 31, 2009,the Company had cash and cash equivalents of $19.4 million, a working capitaldeficit of $0.9 million and incurred a loss of $6.6 million for the threemonths ended March 31, 2009.  TheCompany depends on its Credit Facility, as described in Note F, for a portionof its operating and capital needs.  Asof March 31, 2009, the Company had $119.8 million outstanding under theCredit Facility which matures in November 2012 and currently has  a borrowing base of $120 million, plus a $15million over-advance availability through May 19, 2009. In April 2009,the Company repaid $4.75 million of the borrowings leaving an outstandingbalance of $115 million. The borrowing base is currently in the process ofre-determination.  If the borrowing baseis reduced to a level below the current outstanding balance, the Company wouldbe obligated to reduce the deficiency by 25% within 90 days and has anadditional 90 days to cure the remaining deficiency.

 

Management has takenseveral actions to ensure that the Company will have sufficient liquidity tomeet its obligations through December 31, 2009, including a reduction inits 2009 capital expenditure budget to $11 million, entered into price swapagreements for a portion of its 2009 production to reduce price volatility,temporarily shut-in three pilot areas in the Atlantic Rim that are uneconomicat current prices to reduce lease operating expenses, headcount reductions andreductions in discretionary expenditures, including elimination of year-endbonuses and implementation of a salary freeze. The Company is also evaluatingother measures to further improve its liquidity, including, volumetricproduction payments, additional commodity price hedging and other monetizationof assets strategies. Management believes that these actions will enable theCompany to meet its liquidity requirements through December 31, 2009.

 

6

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##### **NOTE C**—STOCK BASEDCOMPENSATION

##### ** **

*Stock Options*

 

Compensation expense related to stock options andrestricted stock awards recognized in operating results (general andadministrative expenses) under Statement of Financial Accounting Standards (“SFAS”)No. 123R was approximately $0.5 million and $0.5 million for the threemonths ended March 31, 2009 and 2008, respectively.

 

Thefollowing assumptions were used to value stock options calculated using theBlack-Scholes options pricing model:

 
| ** **               | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------|------------|---------------------------------------|------------|
| ** **               | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Dividend yield           |       | 0                                     | %          | 0 | % |
| Expected  volatility     |       | 69.3                                  | %          | 48.2 | % |
| Risk-free  interest rate |       | 1.54                                  | %          | 1.97 | % |
| Fair value of  options   |       | $                                     | 0.25       |   | $ | 4.15 |   |
| 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, 2008 |       | 2,477,715      |       | $            | 10.15      |                |       |                |       |   |
| Granted                                |       | 1,571,496      |       | 0.51         |       |                |       |                |       |
| Exercised                              |       | —         |       | —       |       |                |       |                |       |
| Forfeited or  expired                  |       | (524,799       | )          | 7.18         |       |                |       |                |       |
| Outstanding at  March 31, 2009    |       | 3,524,412      |       | $            | 6.29       |                | 3.47       |                | $          | 862 |   |
|                                   |       |           |       |         |       |                |       |                |       |
| Exercisable at  March 31, 2009    |       | 1,536,080      |       | $            | 10.86      |                | 1.94       |                | —     |   |
|                                        |            |                |            |              |            |                     |            |                     |            |  |  |

 

Thetotal intrinsic value of options exercised during the three months ended March 31,2008 was $2.1 million. There were no options exercised in the three monthsended March 31, 2009.

 

As of March 31,2009, total unrecognized stock-based compensation expense related to non-vestedstock options was $2.1 million, which we expect to recognize over a weightedaverage period of 1.8 years.

 

*RestrictedShares*

 

Restricted share activityas of March 31, 2009 was as follows:

 
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | ** **                             | ** ** |
| Outstanding at  December 31, 2008 |       | 131,392    |       | $                                      | 10.96      |   |
| Granted                           |       | —     |       | —                                 |       |
| Vested                            |       | (50,279    | )          | 10.90                                  |       |
| Forfeited                         |       | —     |       | —                                 |       |
| Outstanding at  March 31, 2009    |       | 81,113     |       | $                                      | 11.00      |   |

 

Restricted stock awardsfor executive officers and employees vest ratably over three years. Fair valueof our restricted shares is based on our closing stock price on the date ofgrant.  As of March 31, 2009, total unrecognized stock-basedcompensation expense related to non-vested restricted shares was $1.0 million,which is expected to be recognized over a weighted average period ofapproximately 1.7 years.

 

7

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#### **NOTE D**—CHANGES IN STOCKHOLDERS’ EQUITY

#### ** **

The preferred stock paysan 8% cumulative dividend which is treated as a deduction of additional paid incapital. The holders of the preferred stock are not entitled to vote except asdefined by the agreement or as provided by applicable law.  The preferred stock may be voluntarilyconverted, at the election of the holder into common stock of the Company basedon a conversion rate of one share of preferred stock for 0.50 shares of commonstock.

 

Additionally, commencing October 1,2009, holders of the preferred stock may elect to require the Company to redeemtheir 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 theamount equal to the Redemption Price or (2) issue to the holder shares ofcommon stock in an amount equal to 125% of the redemption price and any accruedand unpaid dividends, based on the weighted average closing “bid” price of theCompany’s common stock for the thirty trading days immediately preceding thedate of the written redemption election by the holder up to a maximum of 1.5shares of common stock for each one share of preferred stock redeemed. TheCompany is accreting the carrying value of its preferred stock to itsredemption price using the effective interest method with changes recorded toadditional paid in capital. The accretion of preferred stock results in areduction of earnings per share applicable to common stockholders.

 

Notwithstanding theforgoing, if the closing “bid” price of the Company’s publicly traded commonstock as reported by the NASDAQ stock market, or any exchange on which theshares of common stock are traded, exceeds 133% of the conversion price then ineffect for the convertible preferred shares for at least 10 days during any30-day trading period, the Company has the right to redeem in whole or in partthe convertible preferred stock at a redemption price of $12 per share (plusany accrued unpaid dividends) or convert the convertible preferred shares (plusany accrued unpaid dividends) into common stock at the then applicableconversion rate.

 

**NOTE E—EARNINGS (LOSS) PER SHARE**

 

Basic earnings (loss) pershare is computed by dividing net earnings (loss) applicable to commonstockholders by the weighted average number of shares of common stockoutstanding during the period. Diluted earnings (loss) per share is based onthe assumption that stock options and warrants are converted into common sharesusing the treasury stock method and convertible bonds and preferred stock areconverted using the if-converted method. Conversion is not assumed if theresults are anti-dilutive.  Potentialcommon shares for the three months ended March 31, 2009 and March 31,2008 of 96,941 and 180,319 respectively, relating to convertible bonds andpreferred stock, were excluded from the computation of diluted earnings (loss)per share because they are anti-dilutive. Potential common shares of  5,261,133 and 1,601,576 respectively,relating to stock options, warrants and restricted stock were excluded from thecomputation of diluted earnings (loss) per share for the three months ended March 31,2009 and 2008, respectively, because they are anti-dilutive. Stock options havea weighted average exercise price of $6.29 and $9.21 at March 31, 2009 andMarch 31, 2008, respectively. At March 31, 2009, the convertiblebonds may be converted from the date of issuance until maturity at 100% ofprincipal amount into common stock of the Company at a price of $35 to$50.  The preferred stock may beconverted at the discretion of the holder or upon meeting certain conditions atthe discretion of the Company (see Note D).

 

Basic and diluted netearnings (loss) per share are computed based on the following information:

 
| ** **                                            | ** ** | **Three Months Ended  March 31, 2009**     | ** ** | **Three Months Ended  March 31, 2008** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|
|                                                  |       | **(in thousands,  except for per share  data)** |       |
| Net earnings  (loss) available to common shareholders |       | $                                               | (6,578     | )                                           | $          | 9,430 |   |
|                                                  |       |                                            |       |                                        |       |
| Weighted average  shares outstanding - basic          |       | 58,243,910                                      |       | 57,582,536                                  |       |
| Effect of  dilutive securities — stock options   |       | —                                          |       | 762,014                                     |       |
| Effect of  dilutive securities — preferred stock |       | —                                          |       | —                                      |       |
| Effect of  dilutive securities — warrants        |       | —                                          |       | 300,066                                     |       |
|                                                  |       |                                            |       |                                        |       |
| Weighted average  shares outstanding - diluted        |       | 58,243,910                                      |       | 58,644,616                                  |       |
|                                                  |       |                                            |       |                                        |       |
| Basic net  earnings (loss) per share                  |       | $                                               | (0.11      | )                                           | $          | 0.16 |   |
| Diluted net  earnings (loss) per share                |       | $                                               | (0.11      | )                                           | $          | 0.16 |   |

 

8

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**NOTE F—LONG-TERM LIABILITIES**

 

Long-termliabilities consisted of the following for the balance sheets dated:

 
| ** **                             | ** ** | **March 31,**       | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2009**            | ** ** | **2008**              | ** ** |
|                                   |       | **(in  thousands)** | ** ** |
|                                   |       |                |       |                  |       |
| Line of Credit                         |       | $                   | 119,750    |                  | $          | 112,400 |   |
| Convertible debentures                 |       | 1,676               |       | 1,676                 |       |
| Debt  collateralized by treasury stock |       | 461                 |       | 489                   |       |
| Asset retirement  obligations          |       | 8,145               |       | 8,604                 |       |
| Litigation  allowance                  |       | 1,823               |       | 1,823                 |       |
|                                   |       | 131,856             |       | 124,992               |       |
| Less current  portion                  |       | 318                 |       | 315                   |       |
| Long-term  portion                     |       | $                   | 131,538    |                  | $          | 124,677 |   |

 

 

On November 19,2007, the Company entered into a five year, $250 million credit agreement withMerrill Lynch Capital (now owned by GE Capital Corporation). The CreditFacility provides for a revolving credit line up to the lesser of (i) theborrowing base, (ii) $250 million or (iii) the draw limit requestedby the Company. The Credit Facility matures on November 19, 2012. It issecured by substantially all of our assets. The borrowing base will bedetermined by the lenders at least semi-annually on each April 1 and October 1and is based in part on the proved reserves of the Company. The currentborrowing base is $120 million with an over-advance of $15 million,representing an availability of $135 million. Interest payments are madequarterly in arrears. During the first quarter of 2009 the Company drew downapproximately $7.35 million under this facility. During April 2009, theCompany repaid $4.75 million of the borrowings, leaving $20 million ofcurrently available credit. Credit line interest of approximately $0.6 millionwas accrued for as of March 31, 2009.

 

The Company is subject tocertain covenants under the terms of the Credit Facility which include, but arenot limited to the maintenance of the following financial ratios (1) minimumcurrent ratio of current assets (including unused borrowing base in currentassets) to current liabilities of 1.0 to 1.0 and (2) a minimum annualizedconsolidated EBITDAX (as defined by the Credit Facility) to net interestexpense to of 2.5 to 1.0.  As of March 31,2009, the Company has borrowed $119.75 million under the Credit Facility andwas in compliance with all covenants.

 

Depending on the currentlevel of borrowing base usage, the annual interest rate on each base rateborrowing under the Credit Facility will be at our option either: (a) thehigher of (i) the Agent’s prime rate of interest announced from time totime, or (ii) the Federal Funds rate most recently determined by theAgent, plus 0.5% per annum, plus an applicable margin that ranges from 0.25% to1.0%, or (b) Eurodollar Loan rate plus an applicable margin that rangesfrom 1.25% to 2.0%.

 

Theconvertible bonds may be converted from the date of issuance until maturity at100% of principal amount into common stock of the Company at prices rangingfrom $35 to $50. Each year the holders of the convertible bonds may tender tothe Company up to 10% of the aggregate bonds issued and outstanding. During thethree months ended March 31, 2009, there were no Bond Redemptions

 

9

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#### **NOTE G—CONTINGENCIES**

#### ** **

*Stateof California v. Warren E&P, Inc., et al.*    On January 30,2008, the Los Angeles city attorney filed a complaint against Warren E&P, Inc.,a subsidiary of the Company, and six of its individual employees and independentcontractors in the Superior Court of California, County of Los Angeles. Thecomplaint alleges eight misdemeanor violations concerning four alleged eventsin Wilmington, California during 2007. The complaint asserts one count offailing to report the discharge or threatened discharge of oil into marinewaters for an event occurring on or about March 7, 2007; one count offailing to prepare and implement an oil spill contingency plan; four counts ofviolating the California Fish and Game Code by placing petroleum or itsby-products in or at a place where they can pass into waters of the state; andtwo similar violations of the California Clean Water Act. The complaint allegesall eight counts against Warren E&P, Inc. and one to four countsagainst each of the individuals. An amended complaint was served on October 30,2008, which added one additional misdemeanor count for alleged failure toreport a release or threatened release to the certain state agencies.  Warren E&P and the various separatedefendants filed Demurrers on November 3, 2008, seeking to dismiss thecomplaints for failure to state a claim on which relief can be granted and/orfor a more definite statement. No arraignment before the Superior Court hasoccurred.

 

Warren believes theactions by the city attorney are unwarranted. Contrary to the claims made inthe complaint, Warren follows an existing regulatory-approved contingency plan,which is maintained on site at the Wilmington Townlot Unit (“WTU”) and NorthWilmington Unit (“NWU”). With respect to the alleged event on March 7,2007 at the NWU, substantially all of the oil was captured within a surroundingconcrete retainer wall and pumped to a nearby NWU oil storage tank and sold inthe ordinary course of business. None of the alleged events occurred at the WTUcentral facility.

 

Our Company policy is tofollow the law of the jurisdiction in which we operate and to comply withenvironmental protection principles. In connection with these alleged events,we believe we have followed and complied with applicable laws and regulations.We believe once we are given an opportunity to present the facts regardingthese alleged events, the outcome will be favorable to our Company, ouremployees and our independent contractors. Conversely, we do not believe anunfavorable outcome will have a material adverse effect on our business,financial condition or results of operation.

 

In 2005, Warren recordeda provision for $1.8 million relating to a contingent liability that we mayface as a result of a lawsuit originally filed in 1998 by Gotham InsuranceCompany in the 81st Judicial District Court of Frio County, Texas seekinga refund of approximately $1.8 million paid by Gotham and other insurersunder 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 SupremeCourt, the case has been remanded to the trial court for further proceedings.Both parties have filed Motions for Summary Judgment before the trial courtthat are expected to be heard in the second quarter of 2009.

 

Except for the foregoing,we are not a party to any material pending legal or governmental proceedings,other than ordinary routine litigation incidental to our business. While theultimate outcome and impact of any proceeding cannot be predicted withcertainty, our management believes that the resolution of any proceeding willnot have a material adverse effect on our financial condition or results ofoperations.

 

**NOTE H—COMPREHENSIVE INCOME**

 

Other comprehensiveincome consists primarily of net unrealized investment gains and losses, net ofincome tax effect. Total comprehensive income for the periods is as follow:

 
| ** **                          | ** ** | **2009**           | ** ** | **2008** | ** ** |
|-------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                          | ** ** | **(in thousands)** | ** ** |
| Three Months  ending March 31, |       | $                  | (6,580     | )        | $          | 9,423 |   |
|                                     |            |                    |            |          |            |  |  |

 

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#### **NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

On September 15,2006, the FASB issued SFAS No. 157, “Fair Value Measurement”. Weadopted SFAS No. 157 effective January 1, 2008. SFAS No. 157defines fair value as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsat the measurement date and establishes a three level hierarchy for measuringfair value. The statement requires fair value measurements be classified anddisclosed in one of the following categories:

 

*Level 1**:*   Quoted prices (unadjusted) in activemarkets for identical assets and liabilities that we have the ability to accessat the measurement date.

 

*Level 2**:*  Inputs other than quoted prices includedwithin Level 1 that are either directly or indirectly observable for the assetor liability, including quoted prices for similar assets or liabilities inactive markets, quoted prices for identical or similar assets or liabilities ininactive markets, inputs other than quoted prices that are observable for theasset or liability, and inputs that are derived from observable market data bycorrelation or other means. Instruments categorized in Level 2 includenon-exchange traded derivatives such as over-the-counter forwards and swaps.

 

*Level 3**:*  Unobservable inputs for the asset orliability, including situations where there is little, if any, market activityfor the asset or liability.

 

Thevaluation assumptions utilized to measure the fair value of the Company’scommodity derivatives were observable inputs based on market data obtained fromindependent sources and are considered Level 2 inputs (quoted prices forsimilar assets, liabilities (adjusted) and market-corroborated inputs).

 

Thefollowing tables present for each hierarchy level our assets and liabilities,including both current and non-current portions, measured at fair value on arecurring basis.

 
| **March 31, 2009**                                                               | ** ** | ** **         | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------|------------|-------------|------------|-------------|------------|------------|------------|
| **Assets**                                                                            | ** ** | **Level 1**        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** |
| ** **                                                                            | ** ** | **(in thousands)** | ** ** |
|                                                                                  |       |               |       |        |       |        |       |       |       |
| Restricted  investments in US Treasury Bonds — available for sale, at fair value |       | $                  | 1,062      |        | $          | —      |       | $          | —     |   | $ | 1,062 |   |
| Commodity  derivative asset - (included in other current assets)                      |       | —             |       | $           | 87         |        | $          | —     |       | $ | 87 |   |
|                                                                                       |            |                    |            |             |            |             |            |            |            |  |  |  |  |

 
| **December 31,  2008**                                                           |       |                |       |        |       |        |       |      |   |
|---------------------------------------------------------------------------------------|------------|---------------------|------------|-------------|------------|-------------|------------|-----------|--------|
| **Assets**                                                                            | ** ** | **Level 1**         | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** |   |
| ** **                                                                            |       | **(in  thousands)** |       |
|                                                                                  |       |                |       |        |       |        |       |      |   |
| Restricted  investments in US Treasury Bonds — available for sale, at fair value |       | $                   | 1,094      |        | $          | —      |       | $         | — |   | $ | 1,094 |   |
|                                                                                       |            |                     |            |             |            |             |            |           |        |  |  |  |  |

 

11

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**NOTE J —DERIVATIVE FINANCIAL INSTRUMENTS**

 

To minimize the effect ofa downturn in oil and gas prices and protect our profitability and theeconomics of our development plans, we enter into crude oil and natural gashedge contracts. The terms of contracts depend on various factors, includingmanagement’s view of future crude oil and natural gas prices. This pricehedging program is designed to moderate the effects of a crude oil and naturalgas price downturn while allowing us to participate in some commodity priceincreases. Management regularly monitors the crude oil and natural gas marketsand our financial commitments to determine if, when, and at what level someform of crude oil and/or natural gas hedging and/or basis adjustments or otherprice protection is appropriate. Currently, our hedges are in the form ofswaps.  However, we may use a variety of hedge instruments in thefuture to hedge. The Company has not designated these derivatives as hedgesunder SFAS No. 133.

 

The following tablesummarizes the open financial derivative positions as of March 31, 2009related to oil and gas production. The Company will receive prices as noted inthe table below and will pay a counterparty market price based on the NYMEX(for natural gas production) or WTI (for oil production) index price, settledmonthly.

 
| ** **  | ** ** | ** ** | ** ** | ** **          | ** ** | ** **  | ** ** | **Price per**  | ** ** |
|-------------|------------|------------|------------|---------------------|------------|-------------|------------|----------------|------------|
| **Product** | ** ** | **Type**   | ** ** | **Contract Period** | ** ** | **Volume**  | ** ** | **Mcf or Bbl** | ** ** |
| Gas         |       | Swap       |       | 02/01/09-12/31/10   |       | 3,000 Mcf/d |       | $              | 6.88       |   |
| Gas         |       | Swap       |       | 03/01/09-02/28/11   |       | 3,000 Mcf/d |       | $              | 6.02       |   |
| Gas         |       | Swap       |       | 02/01/09-04/30/09   |       | 3,000 Mcf/d |       | *              |       |
| Oil         |       | Swap       |       | 04/01/09-12/31/09   |       | 1,325 Bbld  |       | $              | 49.70      |   |
| Oil         |       | Swap       |       | 01/01/11-12/31/11   |       | 1,225 Bbld  |       | $              | 61.80      |   |

 

----

* This represents a$1.985 differential spread between NYMEX and CIG pricing.

 

The tables belowsummarize the amount of gain (loss) recognized in income from derivativeinstruments.

 
| **Derivatives not designated as  Hedging  Instruments under Statement 133** | ** ** | **Location of Gain (Loss) Recognized in  Income**         | ** ** | **Amount of Gain (Loss)  Recognized in Income for  Derivatives not designated as  Hedging Instruments under  Statement 133** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | ** **                                                | ** ** | **Three months ended March  31, 2009 (in thousands)**                                                                        | ** ** |
| Realized cash  settlements on hedges                                        |       | Net gain on oil and gas  derivative financial instruments |       | $                                                                                                                            | 647        |   |
| Unrealized gain  on hedges                                                  |       | Net gain on oil and gas  derivative financial instruments |       | 87                                                                                                                           |       |
| Total                                                                       |       | Net gain on oil and gas  derivative financial instruments |       | $                                                                                                                            | 734        |   |

 

We present our derivativeassets and liabilities in our Condensed Balance Sheets on a net basis. Thetable below reflects the line item in our Condensed Balance Sheet where thefair value of our net derivatives, are included.

 
| ** **                                                                   | ** ** | **Derivative Assets**      | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Balance Sheet Location** | ** ** | **Fair Value** | ** ** |
| Commodity –  Natural Gas                                                |       | Other current assets       |       | $ | 4,433 |   |
|                                                                         |       |                       |       |   |   |
| Commodity – Oil                                                         |       | Other current assets       |       | (4,520 | ) |
|                                                                         |       |                       |       |   |   |
| Total  derivatives not designated as hedging instruments under Statement 133 |       |                       |       | $ | 87 |   |

 

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**NOTE K —RECENTLY ISSUED ACCOUNTING STANDARDS**

 

Effective January 1,2008, we implemented Financial Accounting Standards Board(FASB) SFAS No. 157, “Fair Value Measurements,” which definesfair value, establishes a framework for its measurement and expands disclosuresabout fair value measurements. We elected to implement this Statement with theone-year deferral permitted by FASB Staff Position (FSP) 157-2 fornonfinancial assets and nonfinancial liabilities measured at fair value, exceptthose that are recognized or disclosed on a recurring basis (at leastannually). Effective January 1, 2009, we implemented SFAS No. 157 fornonfinancial assets and liabilities. The adoption did not have a materialeffect on our consolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities—Including an amendment of FASB Statement No. 115.”This Statement permits the election to carry financial instruments and certainother items similar to financial instruments at fair value on the balancesheet, with all changes in fair value reported in earnings. By electing thefair value option in conjunction with a derivative, an entity can achieve anaccounting result similar to a fair value hedge without having to comply withcomplex hedge accounting rules. We adopted this Statement effective January 1,2008. During the first quarter of 2008, we did not make the fair value electionfor any financial instruments not already carried at fair value in accordancewith other accounting standards, so the adoption of SFAS No. 159 did nothave a material effect on our consolidated financial statements.

 

The FASB revised SFAS No. 141(Revised 2007) “Business Combinations” (SFAS 141R) in 2007. The revision broadensthe application of SFAS 141 to cover all transactions and events in which anentity obtains control over one or more other businesses. This Statementapplies prospectively to business combinations for which the acquisition dateis on or after the beginning of the first annual reporting period beginning onor after December 15, 2008. We may experience a financial statement impactdepending on the nature and extent of any new business combinations enteredinto after the effective date of SFAS No. 141(R).

 

In December 2007,the FASB issued SFAS No. 160 “Noncontrolling Interest in ConsolidatedFinancial Statements — an Amendment of ARB 51” (SFAS 160). SFAS 160 clarifiesthat a noncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. It also requires consolidated net income to be reportedat amounts that include the amounts attributable to both the parent and thenoncontrolling interest, and requires disclosure, on the face of theconsolidated statement of income, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest. SFAS 160 iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. The adoption of SFAS 160 did nothave a material effect on our consolidated financial statements.

 

In March 2008,the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments andHedging Activities — An Amendment of FASB Statement No. 133” (SFAS 161),that requires new and expanded disclosures regarding hedging activities. Thesedisclosures include, but are not limited to, a proscribed tabular presentationof derivative data; financial statement presentation of fair values on a grossbasis, including those that currently qualify for netting under FASBInterpretation No. 39; and specific footnote narrative regarding how andwhy derivatives are used. The disclosures are required in all interim andannual reports. SFAS 161 is effective for fiscal and interim periods beginningafter November 15, 2008. The adoption of SFAS 161 did not have a materialeffect on our consolidated financial statements.

 

On December 31,2008, the SEC published a final rule to revise its oil and gas reservesestimation and disclosure requirements. The primary objectives of the revisionsare to increase the transparency and information value of reserve disclosuresand improve comparability among oil and gas companies. The rule is effectivefor annual reports on Form 10-K for fiscal years ending on or after December 31,2009. The Company anticipates that the implementation of the new rule willprovide a more meaningful and comprehensive understanding of oil and gasreserves. The new disclosure requirements include: consideration of newtechnologies in evaluating oil and natural gas reserves; disclosure of probable and possible oil and natural gasreserves; use of an average price based on the prior twelve month period ratherthan year-end prices, and revisions of the oil and natural gas disclosurerequirements for operations. The Company anticipates that the implementation ofthe new rule will provide a more meaningful and comprehensiveunderstanding of oil and gas reserves. The Company is currently evaluating theeffect that the new reporting requirements will have on the financialstatements.

 

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**Item 2. *Management’s Discussion and Analysis of Financial Conditions andResults of Operations***

 

**FORWARD-LOOKINGINFORMATION**

 

*TheCompany has made in this report, and may from time to time otherwise make inother public filings, press releases and discussions with Company management,forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934 concerning the Company’s operations, economic performance and financialcondition. These forward-looking statements include information concerningfuture 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-lookingstatements contained in the Private Securities Litigation Reform Act of 1995.Although the Company believes that the expectations reflected in suchforward-looking statements are reasonable, it can give no assurance that suchexpectations will prove to have been correct. Important factors that couldcause actual results to differ materially from the Company’s expectationsinclude, but are not limited to, the Company’s assumptions about energymarkets, production levels, reserve levels, operating results, competitiveconditions, technology, the availability of capital resources, capitalexpenditures and other contractual obligations, the supply and demand for andthe price of oil, natural gas and other products or services, the weather,inflation, the availability of goods and services, drilling risks, futureprocessing volumes and pipeline throughput, general economic conditions, eitherinternationally or nationally or in the jurisdictions in which the Company orits subsidiaries are doing business, legislative or regulatory changes,including changes in environmental regulation, environmental risks andliability under federal, state and foreign environmental laws and regulations,potential environmental obligations, the securities or capital markets, ourability to repay debt and other factors discussed in “Risk Factors” and in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in the Company’s 2007 Annual Report on Form 10-K, this Form 10-Qand in the Company’s other public filings, press releases and discussions withCompany management. Warren undertakes no obligation to publicly update orrevise any forward-looking statements.*

 

**Overview**

 

We are an independentenergy company engaged in the exploration and development of domestic onshoreoil and natural gas reserves. We focus our efforts primarily on our waterfloodoil recovery programs and horizontal drilling in the Wilmington field withinthe Los Angeles Basin of California and on the exploration and development ofcoalbed methane (“CBM”) properties located in the Rocky Mountain region. As of March 31,2009, we owned natural gas and oil leasehold interests in approximately 166,013gross, 89,136 acres, approximately 83% of which are undeveloped. Substantiallyall our undeveloped acreage is located in the Rocky Mountains.

 

**Liquidity and CapitalResources**

** **

Our cashand cash equivalents decreased $10.3 million during the first quarter of 2009to $19.4 million at March 31, 2009. This resulted from cash used ininvesting activities of $17.8 million. This was partially offset by cash provided by operating activities of$0.2 million and cash provided by financing activities of $7.3 million.

 

Cash used in investingactivities was primarily spent on oil and gas properties and equipment.  Cash provided by operating activities wasprimarily generated by oil and gas operations. Cash provided by financing activities primarily represents proceedsreceived under our Credit Facility as discussed in more detail below.

 

The Company recorded animpairment expense of $272.3 million at December 31, 2008 relating to itsceiling test on the carrying costs of its oil and gas properties and goodwillimpairments.  This resulted primarilyfrom realized oil prices decreasing 62% from $86.21 at December 31, 2007to $32.92 at December 31, 2008.  Asa result, many of our proved undeveloped reserves became uneconomic at this oilprice.  Additionally, the Company wroteoff approximately $3.4 million of goodwill at December 31, 2008.  The Company had no impairment charges duringthe three months ended March 31, 2009.

 

14

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On November 19,2007, Warren entered into a five year, $250 million credit agreement withMerrill Lynch Capital on behalf of itself and a syndicate of five participatingbanks (the “Credit Facility”).   TheCredit Facility provides for a revolving loan up to the lesser of (i) theborrowing base (ii) $250 million or (iii) the draw limit requested bythe Company.  The Credit Facility matureson November 19, 2012.  It is securedby substantially all of our assets.  Theborrowing base will be determined by the lenders at least semi-annually on April 1and October 1 of each year, and is based in part on the proved reserves ofthe Company. Interest payments are made quarterly in arrears.  The current borrowing base is $120 millionand the overadvance option is $15 million, representing an immediateavailability of $135 million. The overadvance option under the Credit Facilityexpires on May 19, 2009.  TheCompany is subject to certain covenants required by the Credit Facility whichinclude, but are not limited to the maintenance of the following financialratios (1) a minimum current ratio (including the unused borrowing baseand overadvance option in current assets) of not less than 1.0 to 1.0 and (2) aminimum annualized consolidated EBITDAX (as defined by the Credit Facility) tonet interest expense of not less than to of 2.5 to 1.0.  As of March 31, 2009, the Company hadborrowed $119.8 million under the Credit Facility and was in compliance withall covenants.   If oil and gas commodityprices remain at low levels, the Company could be in violation of CreditFacility covenants during 2009.  If theCompany fails to satisfy its Credit Facility covenants, it would be an event ofdefault.  Under such event of default andupon notice, all borrowings would become immediately due and payable to thelending banks.

 

Dependingon the current level of borrowing base usage, the annual interest rate on eachbase rate borrowing under the Credit Facility will be at our option either: (a) thehigher of (i) the Agent’s prime rate of interest announced from time totime, or (ii) the Federal Funds rate most recently determined by theAgent, plus 0.5% per annum, plus an applicable margin that ranges from 0.25% to1.0%, or (b) a Eurodollar Loan rate plus an applicable margin that rangesfrom 1.25% to 2.0%. During the first quarter of 2009, the Company incurred $1.4million of interest expense under the Credit Facility of which approximately$0.6 million was accrued for as of March 31, 2009. The weighted averageinterest rate as of March 31, 2009, was 4.74%.

 

Our operations areaffected by local, national and worldwide economic conditions. We have reliedon the capital markets, particularly for equity securities, as well as the bankingand debt markets, to meet financial commitments and liquidity needs ifinternally generated cash flow from operations is not adequate to fund ourcapital requirements. Capital markets in the United States and elsewhere havebeen experiencing extreme adverse volatility and disruption, due in part to thefinancial stresses affecting the liquidity of the banking system, the realestate mortgage industry and the financial markets generally. In recent months,this volatility and disruption has reached unprecedented levels. As a result,our access to capital has become limited.

 

If oil and gas commodityprices remain at recent low levels or go lower, the Company may not generatesufficient cash flows to cover capital expenditures. In such case, theavailability of funds under our Credit Facility is critical to ourCompany.  The borrowing base is currentlyin the process of re-determination.  Ifthe Credit Facility’s borrowing base is reduced to a level below currentborrowings, the Company would be obligated to begin reducing the deficiency by25% within 90 days after the deficiency occurs and the remaining 75% within 180days after the deficiency occurs. Additionally, the overadvance option underthe Credit Facility expires on May 19, 2009.

 

The continuing crisis inthe U.S. and world financial and securities markets could have a materialadverse effect on our business and operations. Additionally, low commodity prices may restrict our ability to meet ourcurrent obligations.  As a result,Management has taken several actions to ensure that the Company will havesufficient liquidity to meet its obligations through December 31, 2009,including a reduction in its 2009 capital expenditure budget to $11 million,entered into price swap agreements for a portion of its 2009 production toreduce price volatility, temporarily shut-in three pilot areas in the AtlanticRim that are uneconomic at current prices to reduce lease operating expenses,headcount reductions and reductions in discretionary expenditures, including eliminationof year-end bonuses. The Company is also evaluating other measures to furtherimprove its liquidity, including, additional borrowings from 2nd Lien Lenders,the sale of equity or debt securities, the sale of certain assets, enteringinto joint ventures with third parties, volumetric production payments,additional commodity price hedging and other monetization of assets strategies.Management believes that these actions will enable the Company to meet itsliquidity requirements through December 31, 2009. The Company has hiredoutside consultants to assist us in these endeavors.  There is no assurance that the Company willbe successful in these capital raising efforts that may be necessary to fundoperations during 2009.

 

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In addition to exploringways to raise capital, as mentioned above, the Company has reduced and willcontinue to reduce its general and administrative expenses by reducingemployees and consultants, where necessary. In addition, the Company has waived the March 2009 annual bonusesand currently has a salary freeze in effect.

 

During the first quarterof 2009, operating results declined significantly compared to 2008.  Primarily, this resulted from the significantdecline in oil and gas commodity prices. Additionally during the first quarter of 2009, the Company incurred anet loss of $6.6 million as compared to net income of $9.4 million for thecomparable period of 2008.  At March 31,2009, current assets were approximately $1.1 million less than currentliabilities.   As mentioned previously,the unused availability under the Credit Facility is added to current assetswhen calculating the current ratio covenant.

 

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

 

The Company’s provedreserves declined significantly compared to prior years and may decline infuture years.  Due to current commodityprices, compared to the cost of developing our undeveloped oil reserves and ourestimated lease operating expenses, a significant portion of our futureprojects are or may be uneconomic at this time. As a result, a significant portion of our proved undeveloped reservesare no longer in the proved category. The Company’s projects have material lease operating expenses.  Our oil operations include a secondaryrecovery waterflood with significant fixed costs.  During the first quarter of 2009, our oillease operating expenses were $18.98 per barrel of oil produced. Our naturalgas operations include reinjecting the produced water into deep formations andcompressing and transporting the gas with significant fixed costs. During thefirst quarter of 2009, our natural gas lease operating expenses were $4.35 permcf of gas produced. The Company’s proved reserves are based on assumptionsthat may prove to be inaccurate.

 

At March 31, 2009,we had approximately 1.5 million vested outstanding stock options issued underour stock based equity compensation plans. Of the total 1.5 million outstandingvested options, all had exercise prices above the closing market price $0.95 ofour common stock on March 31, 2009.

 

*Contractual Obligations*

 

The contractualobligations table below assumes the maximum amount is tendered each year. Thetable does not give effect to the conversion of any bonds to common stock whichwould reduce payments due. All bonds are secured at maturity by zero couponU.S. treasury bonds deposited into an escrow account equaling the parvalue 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 31,2009.  The table below does not reflectthe release of escrowed U.S. treasury bonds to us upon redemption.

 
| ** **                     | ** ** | **Payments  due by period** | ** ** |
|--------------------------------|------------|-----------------------------|------------|
| **Contractual  Obligations**   | ** ** | ** **                  | ** ** | **Less  Than** | ** ** | **1-3** | ** ** | **3-5** | ** ** | **More  Than** | ** ** |
| **As of  March 31, 2009** | ** ** | **Total**                   | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| ** **                     | ** ** | ** **                  | ** ** | ** ** | ** ** | **(in  thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Line of credit                 |       | $                           | 119,750    |   | $ | — |   | $ | — |   | $ | 119,750 |   | $ | — |   |
| Bonds                          |       | 1,676                       |       | 167 |   | 287 |   | 232 |   | 990 |   |
| Leases                         |       | 2,943                       |       | 486 |   | 1,277 |   | 902 |   | 278 |   |
| Total                          |       | $                           | 124,369    |   | $ | 653 |   | $ | 1,564 |   | $ | 120,884 |   | $ | 1,268 |   |

 

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**RESULTS OF OPERATIONS:**

 

**Three months Ended March 31, 2009 Compared toThree Months Ended March 31, 2008**

** **

*Oil and gas sales.* Revenue from oil and gas sales decreased$11.9 million in the first quarter of 2009 to $11.5 million, a 51% decreasecompared to the same quarter in 2008. This decrease resulted from a decrease in realized energy prices.  The average realized price per barrel of oilfor the three months ended March 31, 2009 and 2008 was $35.14 and $85.17,respectively.  Additionally, the averagerealized price per Mcf of gas for the three months ended March 31, 2009and 2008 was $2.89 and $6.80, respectively. Net oil production for the three months ended March 31, 2009 and2008 was 253 Mbbls and 243 Mbbls, respectively. Net gas production for the three months ended March 31, 2009 and2008 was 920 Mmcf and 405 Mmcf, respectively.

 

*Lease operating expense.* Lease operating expense for the firstquarter of 2009 increased 50% to $8.8 million ($3.61 per Mcfe) compared to $5.9million ($3.14 per Mcfe) in the comparable period of 2008. Primarily, thisincrease resulted from an increase in production.  Total production increased to 2.4 Bcfe forthe first quarter of 2009 compared to 1.9 Bcfe for the first quarter of 2008,an increase of 31%.

 

*Interest and other income.* Interest and other income decreased $0.2million in the first quarter of 2009 to $0.1 million, a 72% decrease comparedto the same quarter in 2008. This represents a decrease in interest earned dueto lower cash and cash equivalents balances and lower interest rates during thequarter as compared to the corresponding quarter last year.

 

*Depreciation, depletion andamortization .*Depreciation,depletion and amortization expense increased $1.4 million for the first quarterof 2009 to $5.3 million, a 36% increase compared to the corresponding quarterlast year. This increase reflects an increase in the depletion rate resultingfrom increased production and a decrease in proved reserves compared to thesame quarter in 2008. Production increased 31% during this period.

 

*General and administrativeexpenses.* Generaland administrative expenses decreased $0.1 million in the first quarter of 2009to $3.3 million, a 2% decrease compared to the corresponding quarter lastyear.  This reflects a decrease inpersonnel as a result of cost cutting activities.

 

*Interest expense.* Interest expense increased $0.2 millionin the first quarter of 2009 to $1.5 million compared to the same quarter lastyear.  The increase results from interestexpense relating to the drawdown under our Credit Facility.

 

**CRITICAL ACCOUNTING POLICIES**

 

Our discussion andanalysis of our financial condition and results of operations are based onconsolidated financial statements that have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Webelieve that certain accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements.Our 2008 Form 10-K includes a discussion of our critical accountingpolicies.

 

**Item 3. ****Quantitative and QualitativeDisclosures About Market Risk**

 

***Energy PriceRisk***

 

The Company’s mostsignificant market risk is the pricing for natural gas and crude oil.Management expects energy prices to remain volatile and unpredictable. Ifenergy prices decline significantly, revenues and cash flow would significantlydecline. Below is a sensitivity analysis of the Company’s commodity pricerelated derivative instruments.

 

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***CommodityRisk***

 

Our primary market riskexposure is in the price we receive for our natural gas and oil production.Realized pricing is primarily driven by the prevailing worldwide price forcrude oil and spot regional market prices applicable to our U.S. natural gasproduction. Pricing for natural gas and oil production has been volatile andunpredictable for several years, and we expect this volatility to continue inthe future. The prices we receive for production depend on many factors outsideof our control, including volatility in the differences between product pricesat sales points and the applicable index price.

 

In 2009 we entered intoseveral financial derivative swap contracts to hedge our exposure to commodityprice risk associated with anticipated future oil and gas production. Through aprice swap, we have fixed the price we will receive on a portion of our naturalgas and oil production. In a swap transaction, the counterparty is required tomake a payment to us for the difference between the fixed price and thesettlement price if the settlement price is below the fixed price. We arerequired to make a payment to the counterparty for the difference between thefixed price and the settlement price if the fixed price is below the settlementprice. We believe we will have more predictability of our crude oil and gasrevenues as a result of these financial derivative contracts.

 

The following tablesummarizes our open financial derivative positions as of April 27, 2009related to oil and gas production. The Company will receive prices asnoted in the table below and will pay a counterparty market price based on theNYMEX (for natural gas production) or WTI (for oil production) index price,settled monthly.

 
| ** **  | ** ** | ** ** | ** ** | ** **          | ** ** | ** **  | ** ** | **Price per**  | ** ** |
|-------------|------------|------------|------------|---------------------|------------|-------------|------------|----------------|------------|
| **Product** | ** ** | **Type**   | ** ** | **Contract Period** | ** ** | **Volume**  | ** ** | **Mcf or Bbl** | ** ** |
| Gas         |       | Swap       |       | 02/01/09-12/31/10   |       | 3,000 Mcf/d |       | $              | 6.88       |   |
| Gas         |       | Swap       |       | 03/01/09-02/28/11   |       | 3,000 Mcf/d |       | $              | 6.02       |   |
| Gas         |       | Swap       |       | 02/01/09-04/30/09   |       | 3,000 Mcf/d |       | *              |       |
| Oil         |       | Swap       |       | 04/01/09-12/31/09   |       | 1,325 Bbld  |       | $              | 49.70      |   |
| Oil         |       | Swap       |       | 01/01/11-12/31/11   |       | 1,225 Bbld  |       | $              | 61.80      |   |

 

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* This represents a$1.985 differential spread between NYMEX and CIG pricing.

 

***InterestRate Risk***

 

We hold investments inU.S. treasury bonds available for sale, which represents securities heldin escrow accounts on behalf of certain debentures. Additionally, we holdU.S. treasury bonds trading securities, which predominantly representU.S. treasury bonds released from escrow accounts. The fair market valueof these securities will generally increase if the federal discount ratedecreases and decrease if the federal discount rate increases. All of ourconvertible debt has fixed interest rates, so consequently we are not exposedto cash flow or fair value risk from market interest rate changes on this debt.

 

At March 31, 2009,we had debt outstanding under our Credit Facility of $119.8 million.  Depending on the current level of borrowingbase usage, the annual interest rate on each base rate borrowing under theCredit Facility will be at our option either: (a) the higher of (i) theAgent’s prime rate of interest announced from time to time, or (ii) theFederal Funds rate most recently determined by the Agent, plus 0.5% per annum,plus an applicable margin that ranges from 0.25% to 1.0%, or (b) aEurodollar Loan rate plus an applicable margin that ranges from 1.25% to2.0%.  A 1% increase in this rate wouldresult in annual additional interest of $1.2 million.

 

***Financial Instruments***

 

Our financial instrumentsconsist of cash and cash equivalents, U.S. treasury bonds and other long-termliabilities. The carrying amounts of cash and cash equivalents, U.S. treasurybonds and other long-term liabilities, approximate fair market value due to thehighly liquid nature of these short-term instruments or they are reported atfair value.

 

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***Inflation and Changes in Prices***

 

The general level ofinflation affects our costs. Salaries and other general and administrativeexpenses are impacted by inflationary trends and the supply and demand ofqualified professionals and professional services. Inflation and pricefluctuations affect the costs associated with exploring for and producingnatural gas and oil, which have a material impact on our financial performance.

 

***Forward-LookingStatements and Risk***

 

Certain statements inthis report, including statements of the future plans, objectives, and expectedperformance of the company, are forward-looking statements that are dependentupon certain events, risks and uncertainties that may be outside the company’scontrol, and which could cause actual results to differ materially from thoseanticipated. Some of these include, but are not limited to, the market pricesof oil and gas, economic and competitive conditions, exploration risks such asdrilling unsuccessful wells, higher-than-expected costs, potential liabilityfor remedial actions under existing or future environmental regulations andlitigation, potential liability resulting from pending or futurelitigation,  environmental and regulatoryuncertainties that could delay or prevent drilling, and not successfullycompleting, or any material delay of, any development of new or existingfields, expansion, or capital expenditure, legislative and regulatory changes,financial market conditions, political and economic uncertainties of foreigngovernments, future business decisions, and other uncertainties, all of whichare difficult to predict. Forward-looking statements are generally accompaniedby words such as “estimate”, “project”, “predict”, “will”, “anticipate”, “plan”,“intend”, “believe”, “expect” or similar expressions that convey theuncertainty of future events or outcomes. You should not place undue relianceon these forward-looking statements, which speak only as of the date of thisreport. Unless legally required, Warren does not undertake any obligation toupdate any forward-looking statements, as a result of new information, futureevents or otherwise. Certain risks that may affect Warren’s results ofoperations and financial position appear in Part 1, Item 1A “Risk Factors”of Warren’s 2008 Annual Report on Form 10-K.

 

There are numerousuncertainties inherent in estimating quantities of proved oil and gas reservesand in projecting future rates of production and the timing of developmentexpenditures. The total amount or timing of actual future production may varysignificantly from reserves and production estimates. The drilling ofexploratory wells can involve significant risks, including those related totiming, success rates and cost overruns. Lease and rig availability, complexgeology and other factors can affect these risks. Fluctuations in oil andnatural gas prices or a prolonged continuation of low prices may adverselyaffect the company’s financial position, results of operations and cash flows.

 

#### **Item 4. **Controls andProcedures

#### ** **

***Evaluation ofDisclosure 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 ofour disclosure controls and procedures as defined in Securities and ExchangeCommission (“SEC”) Rule 13a-15(e) and 15d-15(e) as of the end ofthe period covered by this report.  Basedupon that evaluation, management  hasconcluded that our  disclosure  controls and  procedures  are effective to ensure  thatinformation  we are required to disclosein reports that we file or submit under the Securities Exchange Act iscommunicated to management, including the CEO and CFO, as appropriate to allowtimely decisions  regarding requireddisclosure and is  recorded,  processed, summarized  and  reported within the time periods specified in the SEC’s rules and forms.

 

***Changes inInternal Control over Financial Reporting***

 

There have been nochanges in our internal controls over financial reporting or in other factorsduring the quarter ended March 31, 2009, that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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## **PART II—OTHERINFORMATION**

## ** **

**Item 1. *Legal Proceedings***

 

See Note G —Contingencies of the Notes to Financial Statements (Part I, Item 1)for information regarding the legal proceedings in which we are involved.

 

**Item 1A. *Risk Factors***

 

Our business has manyrisks. Factors that could materially adversely affect our business, financialcondition, operating results or liquidity and the trading price of our commonstock are described under “Risk Factors” in Item 1A of our annual reporton Form 10-K for the year ended December 31, 2008 and also disclosurein our “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” in Item 2 above. This information should be consideredcarefully, together with other information in this report, our press releasesand other reports and materials we file with the Securities and ExchangeCommission. Additional risks and uncertainties not currently known to us orthat we currently deem to be immaterial also may materially adversely affectour 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***

 

Notapplicable.

 

**Item 4. *Submission of Matters to a Vote of Security Holders***

 

Not applicable.

 

**Item 5. *Other Information***

 

Not applicable.

 

**Item 6. *Exhibits***

*** ***
| **a)**     | **Exhibits**                                                                                                                                                                                                     |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                       |
|       | Exhibits not incorporated by reference to a prior  filing are designated by an (*) and are filed herewith; all exhibits not so  designated are incorporated herein by reference to a prior filing as  indicated. |

 
| **Exhibit** | ** ** | ** **                                                                                                                                           |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                      |
|        |       |                                                                                                                                                 |
| 31.1*       |       | Certification of Chief  Executive Officer pursuant to Rule 13a-15(e)/15d-15(e)                                                                  |
| 31.2*       |       | Certification of Chief  Financial Officer pursuant to Rule 13a-15(e)/15d-15(e)                                                                  |
| 32.1*       |       | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted 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.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                   | WARREN RESOURCES, INC.  (Registrant) |
|------------------------|--------------------------------------|
|                   |                                 |
| Date: May 6, 2009 |                                 | /s/ Timothy A. Larkin |
|                   | By:                                  | Timothy A. Larkin |
|                   |                                 | *Executive Vice President,  Chief Financial Officer and Principal Accounting Officer* |

 

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