Barnwell Industries, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 31, 2016. The company operates Canadian oil and gas businesses and Hawaii land investment, contract drilling, and residential real estate businesses. The filing is unaudited.
Financial performance and position
| Metric | Three months ended March 31, 2016 | Six months ended March 31, 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $1.522 million | $3.375 million | $3.492 million and $9.524 million, respectively |
| Net loss attributable to Barnwell | $1.608 million; $0.19 per share | $3.017 million; $0.36 per share | $2.017 million and $2.484 million; $0.24 and $0.30 per share, respectively |
| Operating cash flow | Used $4.607 million in the six-month period | Used $4.443 million |
- For the quarter, the attributable net loss narrowed by $409,000 year over year, although revenue fell by 56%. For the six months, the attributable net loss widened by $533,000 as revenue declined by 65%.
- Oil and gas segment operating loss before general and administrative expenses was $698,000 for the quarter and $863,000 for six months. Land investment operating profit was $284,000 and $413,000, respectively. Contract drilling recorded a $130,000 quarterly operating loss and $91,000 six-month operating profit.
- Oil and gas revenue declined 70% for the quarter and 71% for six months, reflecting the Dunvegan property sale in September 2015, lower production, and lower realized prices. Six-month average oil and natural gas prices fell 45% and 46%, respectively, year over year.
- General and administrative expense fell 27% for the quarter and 23% for six months, mainly due to cost reductions. Equity income from affiliates was $253,000 for the quarter and $416,000 for six months, down from $368,000 and $456,000.
- At March 31, cash and cash equivalents were $8.949 million; working capital was $12.376 million; total assets were $37.075 million; and total equity was $16.513 million. Cash increased $478,000 from September 30, 2015.
- Six-month investing cash flow provided $4.733 million, substantially reflecting release of restricted Dunvegan sale proceeds; financing cash flow provided $80,000. Operating cash burn exceeded reported net loss.
- Debt at quarter-end was $3.440 million, all related to the real estate loan; there were no revolving-credit borrowings. The real estate loan was repaid in April after the collateralized residence sale. The Canadian revolving facility was terminated in April.
Changes, outlook, and principal risks
- The sale of Dunvegan reduced production and revenue, while the sharp decline in commodity prices pressured oil and gas results. Management said the segment is projected to generate negative operating cash flow at current prices and production levels.
- Management expected fiscal 2016 oil and gas capital expenditures and potential acquisitions to total $1.5 million to $4.5 million, subject to cash flows and its assessment of industry conditions. Contract drilling revenue and operating results were expected to decline significantly in the rest of fiscal 2016 absent additional contract awards.
- Management estimated that Alberta regulator security deposits could total as much as $3.0 million over the next 12 months, with the ultimate amount uncertain. A shortfall under the regulator’s liability-rating program could lead to operating restrictions, penalties, or a closure order.
- The company says it depends on future land-sale percentage payments and potentially uncertain Kukio partnership distributions to fund operations and longer-term reinvestment. These proceeds may instead be needed for security deposits, asset retirement obligations, pension funding, and operating costs.
- In April, Barnwell received a $5.320 million cash distribution from Kukio partnerships and a $1.600 million percentage-of-sales payment on a $20.0 million oceanfront parcel sale. The $5.7 million residence sale repaid the $3.440 million real estate loan; the company reported approximately $1.5 million net cash proceeds after repayment and minority distributions. These transactions are expected to affect the quarter ending June 30, 2016.
- Management warned that a potentially material oil and gas ceiling-test write-down could be required in the quarter ending June 30, 2016; it could not estimate the amount. Other risks include environmental remediation: approximately $200,000 was accrued for a gas leak at a previously abandoned non-operated well, and $77,000 remained accrued for an earlier pipeline release.
- Barnwell is jointly and severally liable under performance-bond indemnities totaling approximately $4.144 million; stated maximum exposure from its Kukio investment and the indemnity was approximately $10.798 million. Management considered a material bond call remote.
Key investor verification points
- Track oil and gas prices, production, cash burn, and whether a ceiling-test impairment is recorded.
- Verify the timing and amount of Alberta security deposits and any resulting operating or asset-transfer restrictions.
- Confirm the company’s liquidity after April receipts, the real estate loan payoff, pension contributions, and environmental and asset-retirement spending.
- Monitor future Kukio lot sales, distributions, and percentage-of-sales payments, whose timing management says is uncertain.
- Review the remaining contract drilling backlog and awards, given management’s expectation of weaker results without new contracts.