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Escalara Builds Natural Gas War Chest with Atlantic Rim Purchase from Warren

Denver-based Escalara Resources Co., whose strategy is to explore and develop natural gas, is building its arsenal after buying producing wells and interests in the Atlantic Rim of Wyoming's Washakie Basin from Warren Resources Inc.

Warren, working to right its balance sheet, is selling several assets to Escalara for a total of $47 million. The assets to be sold include a 74% working stake in the Spyglass Hill Unit, a coalbed methane (CBM) gas production area in which Escalera already owns 22%. Warren also is selling its 11% stake in the Catalina Unit, which Escalara controls with an 86% interest. Also being sold are midstream gathering assets and pipeline assets that are part of the Spyglass unit.

"This acquisition will consolidate the major operating and economic interests in the Atlantic Rim, and is expected to be immediately accretive to cash flows, allowing for a more cost efficient capital allocation and decision-making framework for operations in the area moving forward," said Escalara CEO Charles F. Chambers.

Current production from Spyglass is 14 MMcf/d with proved developed reserves as of April 1 of 83 Bcf. Spyglass covers 97,000 gross acres. Warren now operates 367 producing and injection wells in the unit, with production feeding into the Wyoming Interstate Co. (WIC) system. The unit long has been one of Warren's major holdings (see Shale DailyMay 27, 2013).

Escalara in the deal also would receive a 30% stake in some deep rights associated with its former leases in the Atlantic Rim area. Warren would retain 70% of its operated deep rights across 68,700 gross acres.

Warren's operating activities now primarily are focused on developing oil in the Wilmington field in the Los Angeles Basin and on natural gas in the Marcellus Shale.

"This strategic divestiture is another important step forward in our continuing strategy to give Warren the ability to transact on future high growth opportunities as we further reduce debt and increase our liquidity," Warren interim CEO Lance Peterson said.

In May, Warren completed a strategic refinancing with funds sponsored by Franklin Square Capital Partners and sub-advised by GSO Capital Partners LP, the credit division of Blackstone, providing Warren with liquidity and a platform to continue its growth initiatives.

As of May 26, Warren has $14.7 million of cash on hand. Once its transaction with Escalara closes, the New York City-based producer would have available liquidity of around $61 million. The Atlantic Rim CBM assets represented less than 10% of 2014 net earnings with interest, taxes, depreciation, and amortization added back to it, Peterson noted.

"Divesting our Wyoming assets fits into Warren's corporate mission to shift our focus toward pursuit of the high-growth, strategic acquisition opportunities for the company," he said. In the past six months, he said management had worked methodically to right-size capital expenditures, capture savings, align with a strong financial partner, retire debt and sell noncore assets. "Together, all these measures boost the company's liquidity and position us for growth."

During 1Q2015, Warren had a net loss of $102.3 million (minus $1.26/share), including a $91.4 million write-down of its oil and gas properties. In 1Q2014, Warren earned $8.2 million net (11 cents/share).

The Escalara transaction is expected to close in August; it has an effective date of April 1, 2015.

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