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CORRESP
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filename1.htm

August 1, 2005

Mr. H. Roger Schwall

Assistant Director

Division of Corporation Finance

Securities and Exchange Commission

450 5th Street, N.W. - Judiciary Plaza

Washington,
D.C. 20549-0405

Attn:       Mr. Gary Newberry; Mr.
Jason Wynn

                Re:          Warren Resources, Inc.
                                Registration
Statement on Form S-3

                                Filed
on June 15, 2005

                                File
No. 333-125835

                                Form
10-K for Fiscal Year Ended December 31, 2004

                                SEC
File No. 0-33275

Dear Mr. Schwall:

                This letter
responds to comments made by the Staff of the Commission in its letter dated
July 12, 2005, regarding the above Registration Statement on Form S-3 filed on
June 15, 2005 and the Annual Report on Form 10-K for
Fiscal Year Ended December 31, 2004.  The
numbered responses below correspond to the comment number in the Staff’s letter
and the page references are to the pages in the proposed Amendment No. 1 to the
Form 10-K.  This letter is being filed
via EDGAR simultaneously.  Upon your
review of our responses and written indication that you have no further
comments, we will file an Amendment No. 1 to the Form 10-K via EDGAR. We are
providing the proposed revisions to Amendment No. 1 marked by underlining to
show changes against the original filings for the Staff’s convenience.  Enclosed in the courtesy copy package are three
copies of these materials for the use of the Staff in reviewing the proposed
amendments to our Form 10-K.

Form S-3

General

1.                     Our revisions and amendments in response
to your comments issued on the Form 10-K for the year ended December 31, 2004
shall be incorporated by reference into the Form S-3. Upon resolution of the
Staff’s comments on the Form 10-K and our filing of Amendment No. 1 to the Form
10-K, we anticipate requesting acceleration of the effectiveness of the Form
S-3.

Form 10-K for the Fiscal
Year Ended December 31, 2004

Business and Properties, page 4

Natural Gas and
Oil Reserves, page 13

2.                     In response to the Staff’s request, the
disclosure has been modified as described in (a), (b) and (c) below:

(a)  The table on page 13 has been amended to
include a line for “less: future income taxes, discounted at 10%” as shown
below.

  Estimated
  Present Value of Net Proved Reserves:

  2004

  2003

  2002

  PV-10 Value (in thousands)(3) Proved developed

  $

  26,901

  $

  20,461

  $

  10,041

  Proved undeveloped

  215,392

  162,524

  103,913

  Total

  242,293

  182,985

  113,954

  less: future income taxes, discounted at 10%

  49,648

  36,859

  42,536

  Standardized measure of discounted future net cash
  flows (in thousands)(4)

  $

  192,645

  $

  146,126

  $

  71,418

(b)  Add New Footnote No. 3 to PV-10 on Page 13

“(3) The PV-10 Value
represents the discounted future net cash flows attributable to our proved oil
and gas reserves before income tax, discounted at 10% per annum. Although it is
a non-GAAP measure, we believe that the presentation of the PV-10 Value is
relevant and useful to our investors because it presents the discounted future
net cash flows attributable to our proved reserves prior to taking into account
corporate future income taxes and our current tax structure. We use this
measure when assessing the potential return on investment related to our oil
and gas properties. Our reconciliation of this non-GAAP financial measure is
shown in the table as the PV-10, less future income taxes, discounted at 10%
per annum, resulting in the standardized measure of discounted future net cash
flows. The standardized measure of discounted future net cash flows represents
the present value of future cash flows attributable to our proved oil and natural
gas reserves after income tax, discounted at 10%. In accordance with SEC
requirements, our reserves and the future net revenues were determined using
realized prices for natural gas and oil at each of December 31, 2002,
2003, and 2004, which were $3.36 per Mcf of natural gas and $27.15 per barrel
of oil at December 31, 2002, $4.50 per Mcf of natural gas and $28.45 per
barrel of oil at December 31, 2003, and $5.30 per Mcf of natural gas and
$37.59 per barrel of oil at December 31, 2004. These prices reflect adjustment
by lease for quality, transportation fees and regional price differences.”

Please note that former
footnote No. 3 becomes footnote No. 4.

(c)  Add following the table on Page 13

“The data in the above
table represents estimates only. Oil and natural gas reserve engineering is
inherently a subjective process of estimating underground accumulations of oil
and natural gas that cannot be measured exactly. The accuracy of any reserve
estimate is a function of the quality of available data and engineering and
geological interpretation and judgment. Accordingly, reserve estimates may vary
from the quantities of oil and natural gas that are ultimately recovered. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Risk
Factors”.

2

PV-10 is equal to the
future net cash flows from our proved reserves at December 31, 2004, excluding
any future income taxes, discounted at 10% per annum (“PV-10”). Proved developed
reserves are reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. Proved undeveloped
reserves are proved reserves that are expected to be recovered from new wells
drilled to known reservoirs on undrilled acreage for which the existence and
recoverability of such reserves can be estimated with reasonable certainty, or
from existing wells on which a relatively major expenditure is required to
establish production.

PV-10 may be considered a
non-GAAP financial measure as defined by Item 10(e) of Regulation S-K and is
derived from the standardized measure of discounted future net cash flows which
is the most directly comparable GAAP financial measure. PV-10 is a computation
of the standardized measure of discounted future net cash flows on a pre-tax
basis. We believe that the presentation of the PV-10 is relevant and useful to
investors because it presents the discounted future net cash flows attributable
to our proved reserves prior to taking into account corporate future income
taxes and it is a useful measure for evaluating the relative monetary
significance of our oil and natural gas properties. Further, investors may
utilize the measure as a basis for comparison of the relative size and value of
our reserves to other companies. We use this measure when assessing the
potential return on investment related to our oil and natural gas properties.
However, PV-10 is not a substitute for the standardized measure of discounted
future net cash flows.

Due to the volatility of
commodity prices, the oil and gas prices on the last day of the period
significantly impact the calculation of the PV-10 and the standardized measure
of discounted future net cash flows. The present value of future net cash flows
does not purport to be an estimate of the fair market value of the Company’s
proved reserves. An estimate of fair value would also take into account, among
other things, anticipated changes in future prices and costs, the expected
recovery of reserves in excess of proved reserves and a discount factor more
representative of the time value of money and the risks inherent in producing
oil and gas. Future prices received for production and costs may vary, perhaps
significantly, from the prices and costs assumed for purposes of these
estimates. The 10% discount factor used to calculate present value, which is
required by Financial Accounting Standard Board pronouncements, may not
necessarily be the most appropriate discount rate. The present value, no matter
what discount rate is used, is materially affected by assumptions as to timing
of future production, which may prove to be inaccurate.”

Management’s Discussion and Analysis of Financial
Condition and Results of Operation, page 31

Overview, page 32

3.                     In response to the Staff’s
comments, the
disclosure of gross profit measures has been modified in the tables of revenue
and expense from oil and gas sales and to present depreciation, depletion,
amortization and impairment expenses relating to our oil and gas properties and
our property, plant and equipment as follows (changes underlined):

  2004

  2003

  Oil and gas sales

  $

  6,454,334

  $

  5,717,814

  Production and exploration expense

  3,935,137

  3,811,595

  Depreciation, depletion, amortization and impairment

  3,840,781

  3,102,354

  Gross margin

  $

  (1,321,584

  )

  $

  (1,196,135

  )

  Turnkey contract revenue with affiliated
  partnerships

  $

  10,529,883

  $

  11,300,646

  Turnkey contract expense

  12,932,124

  7,284,653

  Depreciation, depletion, amortization and impairment

  103,216

  102,534

  Gross margin

  $

  (2,505,457

  )

  $

  3,913,459

3

Liquidity and Capital
Resources, page 38

4.                     The disclosure has been modified to
include the following paragraph describing generally our stock based incentive
programs and the potential impact of the exercise of these options on our
liquidity as follows:

Insert
at end of Liquidity and Capital Resources section, at page 42 immediately
before Capital Expenditures

“Stock
based Equity Compensation Plan Information

At December 31, 2004, we
had approximately 2.3 million vested outstanding stock options issued under our
stock based equity compensation plans. Of the total 2.3 million outstanding
vested options, approximately 1.9 million options had exercise prices below the
closing market price ($9.10) of our common stock on December 31, 2004. If such
options are exercised by the holders, we will receive the exercise price in
cash. The following table provides information with respect to shares of our
common stock that may be issued under vested stock options whose exercise price
was less than our closing stock price on December 31, 2004.

  Number of Securities

  to be Issued Upon

  Proceeds to be Received

  Exercise Price of

  Exercise of Vested

  Upon Exercise of Vested

  Outstanding Vested Options

  Outstanding Options

  Outstanding Options

  $

  4.00

  1,545,007

  $

  6,180,028

  $

  7.00

  330,125

  2,310,875

  1,875,132

  $

  8,490,903

For
additional detail about our stock based equity compensation plans, see “Executive
Compensation — Employee Benefit Plans” under Item 11 and as incorporated by
reference from our Proxy Statement on Form 14A.”

Preferred Stock, page 40

5.                     As requested, we have
added further disclosure regarding the preferred stock, as follows:

Insert at end of Preferred Stock
section on page 40

“All of our outstanding
preferred stock has a dividend equal to 8% per annum, payable to the
extent legally available quarterly in arrears, and a liquidation preference of
$12.00 per share. Any accrued but unpaid dividends shall be cumulative and
paid upon liquidation, optional redemption or conditional repurchase. No

4

dividends may be paid on the common stock as long
as there are any accrued and unpaid dividends on the preferred stock.

The following describes
the conversion rate applicable to 5,512,473 of these preferred shares
outstanding at December 31, 2004:

  •

  At the election of the
  holder of our convertible preferred stock, until June 30, 2005, each
  share of preferred stock is convertible into one share of our common stock.
  Commencing July 1, 2005 and until June 30, 2006, each share of
  preferred stock is convertible into 0.75 shares of common stock, and
  commencing July 1, 2006 and thereafter, each share of preferred stock is
  convertible into 0.50 shares of common stock.

With respect to the other
1,048,336 shares of preferred stock outstanding at December 31, 2004, the
following conversion rate applies:

  •

  At the election of the
  holder, until December 16, 2005, each share of preferred stock is convertible
  into one share of our common stock. Thereafter, until June 30, 2006,
  each share of preferred stock is convertible into 0.75 shares of common
  stock, and commencing July 1, 2006 and thereafter, each share of
  preferred stock is convertible into 0.50 shares of common stock.

The conversion rate for
our convertible preferred stock is subject to adjustment in the event of:

  •

  the issuance of common
  stock as a dividend or distribution on any class of our capital stock;

  •

  the combination,
  subdivision or reclassification of the common stock; or

  •

  the distribution to all holders of common
  stock of evidences of indebtedness or assets, including securities issued by
  third parties, but excluding cash dividends or distributions paid out of
  surplus.

Commencing
seven years after their respective date of issuance, the preferred stock may be
redeemed by the holders at a redemption price equal to the liquidation value of
$12.00 per share, plus accrued but unpaid dividends, if any. At December
31, 2004, there were 1,784,197 preferred shares outstanding that the Company
may be required to redeem during the year ended December 31, 2009, and thereafter,
4,776,612 preferred shares outstanding that the Company may be required to be
redeemed during the year ended December 31, 2010 and thereafter.

Upon receipt of a
redemption election, we, at our option, shall either:

  •

  pay the holder cash in
  an amount equal to $12.00 per convertible preferred share, subject to
  adjustment for stock splits, stock dividends or stock exchanges, plus accrued
  and unpaid dividends, to the extent that we have funds legally available for
  redemption, or

  •

  Issue, to the holder,
  shares of common stock in an amount equal to 125% of the cash redemption
  price and any accrued and unpaid dividends, based on the average of the
  closing sale prices of our common stock for the 30 trading days immediately
  preceding the date of the receipt of the written redemption election by the
  holder, as reported by the Nasdaq Stock Market, or by any exchange or
  electronic OTC listing service on which the shares of common stock are then
  traded. In the event that we elect to pay the

5

  Redemption Price in
  kind with our common stock,  for each
  2.1 million shares of preferred stock representing $25.2 million of
  Redemption Price value, notwithstanding the market price of our common stock,
  we shall not issue to the redeeming preferred stockholders less than their
  proportionate share of 2.1 million of our shares of common stock, nor be
  obligated to issue more than 3.15 million shares of our common stock in full
  satisfaction of the redemption, subject to adjustment for stock splits, stock
  dividends and stock exchanges.

If we are not listed on
an exchange or our common stock has no trading volume, upon redemption the
Board shall determine the fair market value of the common stock.

If the closing sale price
of our publicly traded common stock as reported by the Nasdaq Stock Market, or
any exchange or electronic OTC listing service on which the shares of common
stock are then traded, exceeds 133% of the conversion price then in effect for
the preferred stock for at least 10 trading days during any 30-day period,
we, at our option, may either:

  •

  redeem the preferred
  stock in whole or in part, at a redemption price of $12.00 per share
  plus accrued and unpaid dividends, or

  •

  convert the preferred stock, plus any accrued
  and unpaid dividends, into common stock at the then applicable conversion
  rate, based on the average closing sale prices of our common stock for the
  30 trading days immediately preceding the date fixed for redemption.

In addition, the preferred
stock, plus accrued and unpaid dividends, shall be converted into c