Barnwell Industries, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; filed August 13, 2020. Barnwell operates Canadian oil and natural gas properties, Hawaii contract drilling, and Hawaii land investments.
Financial performance
| Metric | Three months ended June 30, 2020 | Nine months ended June 30, 2020 |
|---|---|---|
| Revenue | $3.984 million, versus $3.409 million | $13.416 million, versus $8.967 million |
| Net loss attributable to Barnwell | $3.456 million; $0.42 per share, versus $1.365 million; $0.16 per share | $5.384 million; $0.65 per share, versus $8.090 million; $0.98 per share |
| Operating cash flow | $472,000 for the nine months, versus cash used of $1.631 million | |
| Cash and cash equivalents | $4.106 million at June 30, 2020 |
- Quarter revenue rose 17%; nine-month revenue rose 50%. Contract drilling drove the increase: revenue was $3.040 million for the quarter and $8.279 million for nine months, compared with $1.689 million and $3.839 million, respectively.
- Oil and natural gas revenue was $830,000 for the quarter, down 51%, as average oil price fell 67% to $17.24 per barrel. Nine-month oil and natural gas revenue was nearly unchanged at $4.881 million.
- Quarterly loss widened, chiefly reflecting a $2.689 million oil and gas ceiling-test impairment. Nine-month loss narrowed, helped by a $1.336 million gain on sale of a Honolulu maintenance and storage yard and stronger drilling results; this was partly offset by a $4.326 million impairment.
- Contract drilling operating profit before general and administrative expenses was $977,000 for the quarter and $2.455 million for nine months. These equate to approximately 32% and 30% of segment revenue, respectively; these are segment measures, not consolidated operating margins.
- Current assets were $8.140 million and current liabilities $6.449 million, yielding reported working capital of $1.691 million. Total liabilities were $17.417 million against assets of $15.985 million; total equity was a deficit of $1.432 million.
- Cash declined $507,000 during the nine months. Investing activities used $1.116 million, including $2.824 million of cash capital expenditures; financing provided $147,000, primarily the PPP loan. Long-term debt was $83,000, with another $64,000 of the $147,000 PPP loan classified in other current liabilities.
Changes, outlook, and risks
- COVID-19 and going concern: Management states that pandemic-related uncertainty, low oil prices, and uncertain drilling demand create substantial doubt about the Company’s ability to continue as a going concern for one year from filing. Potential funding sources, including non-core property sales and a possible office sale, were not probable or secured. Oil and gas investment was suspended indefinitely.
- Impairments and reserves: The Company excluded proved undeveloped reserves from ceiling-test calculations because it was no longer reasonably certain it could fund approximately $12 million of development spending over five years. Further impairment is considered more likely if oil prices remain low or decline.
- Drilling outlook and unusual costs: A major well-drilling contract boosted results but was nearing completion after June 30, and management anticipated drilling revenue to decline from recent quarters. A failed hole opener led to abandonment and redrilling, reversal of $733,000 of previously recognized revenue, and an estimated $670,000 reduction in contract margin.
- Contingencies: Hawaii regulators proposed fines that would amount to approximately $1.2 million for Barnwell related to wells drilled beyond permitted depth. The Company recorded a $250,000 contingent liability while evaluating an alternative settlement requiring two monitoring wells; final terms and cost allocation were uncertain. A separate well-plumbness matter had no accrual because management did not consider a liability probable and estimable.
- Listing risk: NYSE American accepted a compliance plan through July 13, 2021, but Barnwell reported stockholders’ deficit of $1.512 million at June 30 and told the Exchange it likely would not reach $4 million equity by the deadline. Delisting could reduce liquidity and impair access to financing.
- Other items: The Company received approximately $67,000 under Canada’s wage subsidy program. It expected the PPP loan to qualify for forgiveness, but forgiveness had not yet been obtained. Two land-sale payments totaling $325,000 were received in early August and will be reflected in the following quarter.
- No specific numerical earnings or revenue guidance was provided. Management emphasized unpredictable oil prices, uncertain customer demand, and the timing of land-partnership proceeds, which Barnwell does not control.
Most important facts for investors to verify
- Whether Barnwell can secure funding or generate sufficient operating cash to address the disclosed going-concern doubt and required obligations.
- Whether the NYSE American compliance plan remains viable and whether the Company can avoid delisting.
- Actual resolution and total cost of the Hawaii regulatory matter, including whether monitoring wells replace the proposed fines.
- Post-quarter drilling-contract activity and customer backlog as the major contract winds down.
- Oil prices, production trends, future ceiling-test impairments, and the feasibility or financing of reserve development.
- Whether the PPP loan is forgiven and whether land-partnership payments or distributions recur.