Warren Resources, Inc. (Nasdaq:WRES) reported its second quarter 2012 financial and operating results.

Warren's oil and gas revenues increased 12% to $30.2 million for the second quarter of 2012, compared to $26.9 million in the second quarter of 2011. This increase primarily resulted from increased oil production in the second quarter of 2012 compared to the second quarter of 2011.

Warren's oil production for the quarter ended June 30, 2012 increased 31% to 293,000 barrels of oil, compared to 224,000 barrels of oil produced in the second quarter of 2011. Warren produced 1.24 billion cubic feet ("Bcf") of natural gas for both the second quarters of 2012 and 2011.

The average realized price per barrel of oil was $95 for the second quarter of 2012 compared to $97 for the second quarter of 2011. Additionally, the average realized price per thousand cubic feet ("Mcf") of natural gas was $1.84 for the second quarter of 2012 compared to $4.13 for the second quarter of 2011. These realized commodity prices exclude the cash effect of derivative activities. The net gain on derivative financial instruments was $0.5 million during the three months ended June 30, 2012, which was comprised of a $0.5 million realized loss on oil and gas commodity price derivatives and a $1.0 million unrealized mark-to-market, non-cash gain on oil and gas commodity price derivatives.

Total operating expenses increased 29% to $24.6 million during the second quarter of 2012, compared to $19.2 million during the second quarter of 2011. Lease operating expenses and taxes ("LOE") decreased 18% to $7.2 million, or $14.38 per barrel of oil equivalent ("BOE"), in the second quarter of 2012, compared to $8.7 million or $20.24 per BOE during the same period in 2011. This decrease was primarily attributed to the timing of plugging and abandonments and other well work in California.

Depreciation, depletion and amortization expenses were $11.2 million for the three months ended June 30, 2012, or $22.50 per BOE, which represents a 64% increase over the same period in 2011. This increase resulted from an increase in oil and gas production as well as an increase in estimated future development costs.

General and administrative ("G&A") expenses increased $2.6 million to $6.2 million for the second quarter of 2012, compared to $3.6 million for the second quarter of 2011. This increase was primarily due to $2 million of expense associated with the severance payments to the Company's former chairman and chief executive officer and $0.2 million of additional consulting expense incurred during the second quarter of 2012.

Total cash flow from operating activities increased 61% to $32.2 million in the first six months of 2012, compared to $20.0 million in the first six months of 2011. This increase primarily resulted from increased oil production.

Interest expense increased 7% to $0.83 million for the second quarter of 2012, compared to $0.77 million for the second quarter of 2011. Interest expense primarily increased due to increased borrowings under our senior credit facility.

Recent Operational Developments

The Company's updated capital expenditure budget for 2012 has been reduced to $62 million, consisting of $57 million for California operations and $5 million for Wyoming operations. This amount represents a 20% decrease from 2011. The amount and allocation of actual capital expenditures will depend on a number of factors, including oil and gas prices, regulatory and environmental approvals, agreements among various working interest owners, drilling and service costs, timing of drilling wells, variances in forecasted production and acquisition opportunities. The Company intends to fund 2012 capital expenditures with cash flow from operations.

Wilmington Oil Field in the Los Angeles Basin in California

During the second quarter of 2012 the Company drilled and completed 6 producing wells in the Wilmington Townlot Unit ("WTU") in California, consisting of four wells in the Tar formation, one sinusoidal producer in the Ranger formation and one sinusoidal producer in the Upper Terminal formation. One additional Upper Terminal well was drilled to casing point and the productive interval will be completed in August. Thirty day initial production rates for each of the new Tar wells averaged 141 BOPD. These new Tar wells typically experience a 50% to 60% reduction in producing rates after a few months, which is a normal decline. Thirty day initial production rate for the new Ranger well averaged 60 BOPD, and thirty day initial production for the new Upper Terminal well averaged 114 BOPD. Capital expenditures for the second quarter of 2012 in California were $13.7 million. The capital expenditures consisted of $11.0 million for drilling and development operations in the Wilmington Field oil properties and $2.7 million for facilities improvements and infrastructure costs in the WTU and North Wilmington Unit ("NWU").

Warren's original 2012 drilling plan included 17 producers and 6 injectors at WTU and 3 producers and 3 injectors at NWU. However, due to injection well permitting delays, the Company will complete the 2012 drilling program at WTU in early September after having drilled the 17 producers and one injection well. Warren then plans to commence drilling in the NWU during the fourth quarter of 2012. The drilling schedule at NWU is contingent upon timely approval by the DOGGR of our proposed water injection wells.

As part of the development plan for the WTU and NWU, the Company is in constant communication with the California Division of Oil, Gas and Geothermal Resources ("DOGGR") as it works to secure the injection wells needed for its development plans. Each of the Company's reservoirs has different injection needs and each reservoir faces differing DOGGR constraints. Injection well approvals for the WTU Tar and Upper Terminal, and NWU Ranger reservoirs are proceeding, while the WTU Ranger and Ford reservoirs have unique challenges. Warren continues to work with DOGGR on practical solutions that will allow timely approvals for its development plans.

During the second quarter, the Company has actively worked with Southern California Gas Company ("SoCal Gas") to get the documentation and permitting necessary for the installation of a natural gas sales line connection at the WTU to SoCal Gas's system. As earlier reported, on July 19, 2011, the South Coast Air Quality Management District ("AQMD") certified the Company's California Environmental Quality Act ("CEQA") documents and issued all of the related permits for its proposed gas handling and other equipment. Although the gas sales line was included in the CEQA analysis, it will require additional review and approval by the AQMD. The Company is also currently seeking approval from the AQMD to increase its current limit on the high efficiency burner installed at the WTU in 2011. It is anticipated that the gas sales line will be fully installed and operational in late 2013.

Spyglass Hill Unit:

The Spyglass Hill Unit covers approximately 113,000 acres, including the areas previously committed to the Doty Mountain, Sun Dog, Jack Sparrow and Brown Cow Units, as well as all additional leases in the southern portion of the project area. Under the Spyglass Hill Unit agreement, the working interest owners are required to drill 25 gross (10.3 net) coalbed methane ("CBM") natural gas wells per year. Warren's working interest partner, Anadarko Petroleum Corporation, has solicited and received bids to sell its assets in the Atlantic Rim, including all of their operated CBM assets, 50% interest in the mid-stream gathering, compression and pipeline assets (Warren owns the other 50%), and mineral rights in the deeper formations prospective for Niobrara oil. Once Warren is notified by Anadarko of the results of the bids, the Company will make a decision regarding exercising its preferential rights to purchase an interest in Anadarko's CBM assets, their share of the midstream assets and deep mineral rights.