Barnwell Industries, Inc. — Q2 FY2018 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended March 31, 2018; the comparable periods ended March 31, 2017. Barnwell operates Canadian oil and gas properties, Hawaii land investments, and Hawaii contract drilling and water-pumping services.
Financial performance and liquidity
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Revenue | $1.975 million, down from $3.029 million | $3.831 million, down from $7.319 million |
| Net earnings (loss) attributable to Barnwell | $679,000 ($0.08 per share), versus loss of $615,000 ($0.07 per share) | Loss of $338,000 ($0.04 per share), versus earnings of $1.026 million ($0.12 per share) |
| Operating cash flow | Not presented separately for the quarter | Cash used of $3.461 million, versus $316,000 provided |
- Quarterly profitability included a $2.250 million gain on asset sales, primarily the Red Earth oil-property sale. Without this unusual gain, the reported result would have been materially weaker.
- Six-month investing cash use was $715,000 and financing cash use was $506,000. Cash and cash equivalents fell $4.888 million to $11.393 million. Certificates of deposit were $5.195 million.
- At March 31, working capital was $18.646 million; total assets were $29.284 million and total liabilities $12.101 million. The balance sheet presents no borrowings or debt line item.
- Six-month segment operating profit before general and administrative expenses was $223,000 for oil and gas, $40,000 for contract drilling, and a $37,000 loss for land investment. These figures exclude corporate G&A.
Material changes versus prior period
- Revenue fell in both reported periods. Six-month oil and gas revenue declined 29%, as lower production from property sales and downtime outweighed higher oil prices; production volumes were lower across natural gas and oil.
- Contract drilling results weakened: operating profit before G&A was $40,000 for six months versus $836,000 a year earlier, primarily because the prior-year period included a high-value geothermal-well plugging and abandonment contract.
- Land-related results were sharply lower year over year. The prior-year six-month period included a $1.678 million percentage-of-sale receipt and $2.156 million of equity-method income; the current period had no lot-sale receipt and recorded a $233,000 equity-method loss.
- General and administrative expenses declined $737,000, or 19%, for six months, partly offsetting weaker segment results.
Outlook, risks and unusual items
- Management projects existing oil and gas assets will generate negative operating cash flow after related G&A, citing divestitures and natural production declines, commodity-price pressure, and rising costs. Management warns current cash may not fund reinvestment, asset-retirement obligations, pension funding, and ongoing expenses.
- Barnwell expects to rely increasingly on uncertain land proceeds and Kukio Resort partnership distributions, neither of which it controls. Management says failure to make sufficient successful investments or unforeseen events could force an operational wind-down, liquidation, bankruptcy, further asset sales, or mean the Company may not continue as a going concern beyond one year.
- Oil and gas investment for the remainder of fiscal 2018 was estimated at $500,000–$1 million, absent significant acquisitions; management says the estimate may change. No broader earnings or revenue guidance is provided.
- The Red Earth sale generated a $2.135 million gain and transferred $1.666 million of asset-retirement obligations to the buyer; a separate facilities sale generated a $115,000 gain. $752,000 of sale proceeds was withheld for potential Canadian taxes. Final purchase-price adjustments remained pending but were not expected to be material.
- A residential lot was under contract for $1 million net, with a $37,000 impairment recorded. After quarter-end, Barnwell received a $310,000 land-sale payment and a $373,000 partnership distribution. The May 2018 Kilauea eruption may affect the carrying value of about 16 acres of company land recorded at $165,000; the impact was not yet determined.
- Other risks include uncertain future land sales and development, volatile contract-drilling demand and margins, Canadian-dollar exchange movements (Barnwell reported no currency hedging), and asset-retirement obligations. The filing reports $1.223 million of current asset-retirement obligations.
Key facts for investors to verify
- Whether recurring operations can cover cash needs, given negative operating cash flow and management’s explicit going-concern warning.
- The cash impact, timing, and reliability of future land-sale proceeds and Kukio partnership distributions.
- The final proceeds and tax treatment of asset sales, and whether remaining asset-retirement obligations and pension contributions are adequately funded.
- Whether oil and gas production declines and contract-drilling demand continue, and the effect on segment profitability.
- The eventual valuation effect, if any, of the Kilauea eruption on Barnwell’s Hawaii land.