Barnwell Industries, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021; comparisons are with fiscal 2020. This is an annual report, not a stand-alone fourth-quarter report. Barnwell operates oil and natural gas businesses in Canada and Oklahoma, Hawaii land investments, and Hawaii water-well drilling and pump services.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $18.113 million | $18.347 million |
| Net earnings (loss) attributable to Barnwell shareholders | $6.253 million; $0.73 per share | $(4.756) million; $(0.57) per share |
| Net cash from operating activities | $0.831 million | $0.750 million |
| Cash and cash equivalents at year-end | $11.279 million | $4.584 million |
| Working capital at year-end | $12.134 million | Not stated in the cited discussion |
| Long-term debt at year-end | $0.047 million | $0.058 million |
- Total assets were $24.435 million and total liabilities were $14.928 million at September 30, 2021; total equity was $9.507 million, versus a $1.953 million deficit a year earlier.
- Cash from investing activities was $3.686 million, mainly reflecting asset-sale proceeds, land-related receipts, and distributions from investees. Cash from financing activities was $2.192 million, including $3.179 million of net ATM share proceeds.
- Oil and natural gas revenue rose 53% to $10.254 million as average realized oil and gas prices increased. Oil averaged $51.74 per barrel and gas $2.62 per Mcf. Production costs rose to $22.40 per Boe from $16.79.
- Canadian proved reserves at year-end totaled 1.142 million Boe, up from 0.933 million Boe. The standardized measure of discounted future net cash flows was $2.645 million; the measure is not an estimate of fair value and incorporates substantial abandonment costs.
Material changes and drivers
- Despite broadly flat revenue, Barnwell swung to profit, aided by higher oil and gas prices, a smaller oil-and-gas ceiling-test impairment ($0.630 million versus $4.326 million), and a $5.441 million increase in equity income from land-development affiliates.
- Eight Hawaii residential lots were sold through the Kukio partnerships, compared with two in FY2020. Barnwell recorded $5.793 million of equity income from affiliates and received $6.011 million in net cash distributions from the partnerships. Its investment carrying value was reduced to zero after distributions exceeded the balance.
- Contract drilling revenue fell 47% to $5.809 million and the segment recorded an $89,000 operating loss before general and administrative expenses, primarily because a large well-drilling contract was substantially completed by December 2020.
- General and administrative expense increased 22% to $7.088 million. Oil and gas capital expenditures, including acquisitions and accrued items as described in the filing, were $2.217 million in management’s discussion.
Outlook, risks, and unusual items
- Management said substantial doubt about the company’s ability to continue as a going concern for one year from the filing date had been overcome, citing ATM proceeds, asset sales, and land-related cash inflows. Future liquidity nevertheless depends on volatile commodity prices, contract-drilling demand, and uncertain land distributions not controlled by Barnwell.
- Management expected Hawaii well-drilling activity in FY2022 to be significantly lower based on backlog, but estimated contract-drilling operating profit could be higher than FY2021. Backlog was approximately $9.5 million as of December 1, 2021, with $5.9 million expected to be recognized in FY2022; a $2.436 million government contract expires in 2022 and may not be extended.
- Barnwell planned an operated horizontal well in Twining in the first half of FY2022 and expected to participate in two non-operated horizontal wells. Results will inform future development plans; future spending and returns remain sensitive to commodity prices and financing.
- Significant nonrecurring items included a $2.341 million non-cash gain from terminating the post-retirement medical plan, $1.982 million in asset-sale gains, and a $149,000 gain from forgiveness of the PPP loan. These items contributed to reported profitability.
- Asset retirement obligations were $7.053 million. For Manyberries abandonment and reclamation, Barnwell was required to deposit approximately $1.525 million with the Orphan Well Association; $888,000 had been paid and the remaining $637,000 was due by August 2022. The ARO estimate increased approximately $213,000 in FY2021.
- COVID-19 and new variants, oil and gas price and reserve-estimation volatility, environmental and abandonment obligations, limited control over non-operated properties and land partnerships, Hawaii contract demand, and possible dilution from future equity issuance remain key risks. The company regained compliance with NYSE American equity listing standards in July 2021.
- A $300,000 contingent liability was recorded for a Hawaii water-well permitting matter. A separate well-plumbness dispute had no accrual at year-end because management did not consider a liability probable or estimable. Management reported no known litigation likely to materially harm results, financial position, or liquidity.
Investor facts to verify
- Whether FY2021’s earnings are repeatable without the land-partnership income and the plan-termination and asset-sale gains.
- Current cash requirements and timing for Manyberries deposits, abandonment work, and other asset-retirement obligations.
- FY2022 oil and gas drilling outcomes, production and reserve revisions, and the economics of planned Twining and Oklahoma activity.
- Conversion and cancellation risk in the $9.5 million contract backlog, including the government contract that may not be extended.
- Timing and amount of future Increment I lot sales and whether Increment II development proceeds; these cash flows are outside Barnwell’s control.
- Potential future share issuance under the ATM and resulting dilution. The company sold 1,167,987 shares in FY2021 for $3.784 million net proceeds.
- The independent auditor issued an unqualified opinion on the financial statements and identified reserve estimation, percentage-of-completion contract revenue, and the oil-property-sale gain calculation as critical audit matters. The auditor did not attest to internal-control effectiveness.