Barnwell Industries, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020 (not a standalone fourth-quarter report). Barnwell operates in Canadian oil and gas, Hawaii land investments, and Hawaii water-well drilling and pump services. Amounts are U.S. dollars.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $18.347 million | $12.075 million |
| Net loss attributable to Barnwell shareholders | $4.756 million | $12.414 million |
| Basic and diluted loss per share | $0.57 | $1.50 |
| Operating cash flow | $0.750 million provided | $2.133 million used |
| Investing cash flow | $0.833 million used | $0.905 million provided |
- Revenue rose 52%, principally because contract drilling revenue more than doubled to $10.994 million, from $5.349 million. Contract drilling operating profit before general and administrative expense was $3.125 million, versus $0.089 million.
- Oil and gas revenue increased 4% to $6.693 million, but the segment recorded a $4.230 million operating loss before general and administrative expense, including a $4.326 million ceiling-test impairment. Oil and gas impairment was $5.710 million in FY2019.
- Overall loss narrowed by $7.658 million. Other favorable contributors included a $1.336 million gain on sale of a Hawaii storage-yard leasehold interest and $0.352 million of equity income from affiliates, versus a $0.276 million loss the prior year.
- Oil and gas production totaled 286,000 Boe, up from 250,000 Boe. Average oil price fell 19% to $33.85 per barrel; natural gas price rose 43% to $1.64 per Mcf. Production cost averaged $16.79 per Boe, compared with $20.64.
- Cash and cash equivalents were $4.584 million; working capital was $3.123 million. Total assets were $15.182 million and total liabilities $17.135 million. Shareholders’ equity was a deficit of $2.045 million, versus positive equity of $1.229 million.
- Debt was limited to an approximately $147,000 unsecured PPP loan at 1% interest; $89,000 was current and $58,000 long-term at year-end. Forgiveness had not yet been legally obtained. Lease liabilities totaled $254,000.
- No dividends were declared or paid in FY2020 or FY2019.
Material changes and business developments
- COVID-19, the oil-demand shock and the Saudi Arabia–Russia price conflict drove lower oil prices. Barnwell suspended development of proved undeveloped reserves because funding and economics were uncertain.
- Proved reserves fell to 933,000 Boe from 2.198 million Boe. The filing reports 5,000 Boe of proved undeveloped reserves at year-end; management had no definitive development plan. The standardized measure of discounted future net cash flows was negative $1.685 million, compared with positive $2.310 million in FY2019.
- Oil and gas capital expenditures were $3.151 million, primarily for a Twining horizontal well and a Spirit River well. The company sold its Progress-area interests for approximately $594,000 and had no significant oil and gas acquisitions.
- Hawaii drilling performance benefited from a large, nearing-completion contract. Backlog was $7.2 million as of December 1, 2020, with $4.4 million expected in FY2021. Management expects FY2021 drilling activity and contract-drilling operating profit to be significantly lower than FY2020.
- Two Increment I land lots sold in FY2020. Barnwell received $325,000 in land-sale payments and $360,000 in net distributions from the land partnerships. A further $1.034 million distribution, including $459,000 of preferred return, was received after year-end.
Outlook, risks and unusual items
- Going concern: Management concluded substantial doubt exists about Barnwell’s ability to continue as a going concern for one year from the filing date. The auditor’s report also highlights substantial doubt. Potential funding sources, including non-core asset sales, were not secured; the Honolulu corporate office, carried at $699,000, was listed for sale, but a sale was not considered probable.
- NYSE American listing: The company had received a compliance extension through July 13, 2021. Its equity deficit and uncertain ability to meet the plan’s targets create delisting risk, which could reduce liquidity and constrain financing.
- Abandonment obligations: Asset retirement obligations were $6.194 million, including $0.647 million current. Barnwell is coordinating closure of Manyberries-area wells and facilities; proposed plans imply approximately $55,000 annual net cost over ten years, or approximately $150,000 annually under an alternative plan involving the Orphan Well Association. Timing, reimbursements and final costs remain uncertain.
- Contingency: Barnwell recorded an approximately $300,000 liability for proposed Hawaii water-well permit penalties. The parties were considering an alternative aquifer-monitoring settlement; acceptance and cost allocation were unresolved. A separate customer dispute over well plumbness had no accrual because management said a loss was not probable or estimable.
- Drilling contract loss: Equipment failures and rework on a Hawaii water-well job led to $390,000 of revenue reversals and an approximately $1.440 million reduction in contract margin during FY2020.
- Additional risks include commodity-price volatility, uncertain land-sale timing, contract cancellations or cost overruns, environmental and regulatory exposure, Canadian currency movements, and reliance on third-party operators and partners. The company does not hedge oil, gas or foreign-exchange exposure.
- The pension and supplemental executive retirement plans were frozen effective December 31, 2019. A $1.726 million curtailment gain was recorded in other comprehensive income, not net income.
- The financial statements received an unmodified audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Whether Barnwell can obtain sufficient funding or asset-sale proceeds to address the disclosed going-concern uncertainty and meet near-term obligations.
- Progress toward NYSE American continued-listing compliance before the July 2021 plan deadline.
- FY2021 contract-drilling revenue, profitability and backlog conversion as the unusually large contract winds down.
- Oil and gas prices, reserve revisions, future impairment risk, and the funding and economics required to develop reserves.
- Final outcome and financial impact of the Hawaii penalty matter, water-well warranty discussions, and Manyberries abandonment plans and reimbursements.
- Whether the PPP loan is forgiven and whether anticipated land-partnership sales and distributions occur as expected.