Barnwell Industries, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Unaudited quarter and six months ended March 31, 2024; fiscal year ends September 30. Barnwell operates oil and natural gas, Hawaii land investment, and Hawaii contract drilling businesses.
Financial performance
| Metric | Three months ended March 31, 2024 | Six months ended March 31, 2024 | Prior comparable period |
|---|---|---|---|
| Total revenue | $5.774 million | $11.929 million | $5.239 million and $12.750 million, respectively |
| Net loss attributable to Barnwell | $1.772 million; $0.18 per share | $2.436 million; $0.24 per share | $1.237 million and $0.12 per share; $0.148 million and $0.01 per share, respectively |
| Cash from operations | Not presented quarterly | $2.262 million | $0.734 million for six months |
| Capital expenditures for oil and gas properties | $0.560 million | $1.055 million | $1.752 million and $7.680 million, respectively |
| Cash and cash equivalents | $3.685 million at March 31, 2024 | $2.830 million at September 30, 2023 |
- Quarterly revenue rose about 10% year over year; six-month revenue fell about 6%. Oil and gas revenue increased, while contract drilling revenue declined.
- Six-month oil and gas production increased year over year: natural gas 35%, oil 19%, and natural gas liquids 89%. Average realized prices declined: 47%, 7%, and 26%, respectively.
- Quarterly oil and gas operating loss before general and administrative expense was $1.205 million, versus $0.701 million of operating profit a year earlier. Six-month results were a $0.324 million loss versus $2.687 million profit.
- Contract drilling recorded operating losses before general and administrative expense of $0.367 million for the quarter and $0.595 million for six months, compared with profits of $0.057 million and $0.105 million, respectively.
- Working capital was $3.332 million. Total assets were $32.782 million and total liabilities $16.384 million. The balance sheet lists no conventional borrowings; interest expense was $2,000 for the six-month period.
Changes, unusual items, and management commentary
- A $1.677 million non-cash ceiling-test impairment of Canadian oil and gas properties contributed to losses. Management says further impairments are more likely if benchmark commodity prices decline sufficiently, absent offsetting factors.
- Oil and gas revenue benefited from higher production at Twining and Texas properties, partly offset by lower commodity prices. Higher Canadian depletion expense also weighed on results.
- Contract drilling results were hurt by drilling difficulties, higher estimated job-completion costs, and labor cost increases. A significant contract with an estimated $2.4 million backlog was canceled by mutual agreement in January 2024.
- Management is exploring a sale of Water Resources’ business or assets. A proposed $2.0 million stock sale was terminated by the buyer before closing. If a sale cannot be secured, management expects to wind down the business after completing backlog, estimated for December 2024 or soon thereafter. Some drilling equipment was classified as held for sale.
- Land investment generated $1.071 million of equity income from Kukio partnerships and $0.500 million of leasehold-land sale revenue from the final two Increment I lots. Increment I is fully sold; Increment II has no definitive development plan, so future land-related cash inflows are uncertain.
- Cash from operations improved year over year mainly due to larger Kukio distributions and lower general and administrative costs. Those distributions are recorded as affiliate income under the company’s suspended equity-method earnings recognition; they are not necessarily recurring operating cash flows.
Liquidity, outlook, and risks
- Management identifies cash, oil and gas operating cash flow, and potential contract drilling asset-sale proceeds as key liquidity sources. It believes these sources are more likely than not sufficient to continue as a going concern for the 12 months from filing, but says liquidity beyond that period depends on commodity prices, production, and other factors.
- Management estimates fiscal 2024 oil and gas property investment of $4 million to $6 million, subject to cash flows and its assessment of the industry and prospects. Funding future capital needs may require external debt or equity that is not currently in place.
- Canadian gas sales covering about 34% of Canadian gross gas production for the March quarter were fixed at C$2.55 per Mcf from April through October 2024; oil sales covering about 37% of Canadian gross oil production were fixed at $69.46 per net barrel through June 2024. Remaining volumes continue at spot prices.
- After quarter-end, Barnwell sold certain Kaybob, Alberta oil and gas properties for an adjusted purchase price of $448,000; final customary adjustments were pending and not expected to be material. Results will be reflected in the quarter ending June 30, 2024.
- No dividends were declared or paid in the six months ended March 31, 2024. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
- Other disclosed uncertainties include foreign-exchange fluctuations, reserve and ceiling-test assumptions, contract cost estimates, and the undeveloped status of Increment II. Management reported no known litigation likely to have a material adverse effect.
Important facts for investors to verify
- Whether oil and gas prices, production, and reserve estimates support the carrying value of Canadian properties and avoid further ceiling-test impairment.
- Whether operating cash flow and available cash can fund planned $4 million to $6 million FY2024 oil and gas investment, particularly given no external financing currently in place.
- Whether Water Resources is sold or wound down, and the timing and proceeds from any asset disposition after the terminated $2 million sale agreement.
- Whether Kukio distributions and Increment II development generate future cash; Increment I’s final lots have been sold and Increment II has no definitive development plan.
- The final proceeds and any gain or loss from the post-quarter Kaybob disposition, and performance against contract drilling backlog and completion-cost estimates.