Barnwell Industries, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015; comparisons are with fiscal 2014. This is an annual report, not a quarterly filing. Barnwell operates oil and natural gas businesses in Canada and land investment, contract drilling, and residential real estate businesses in Hawaii.
Financial results and key metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $17.533 million | $31.445 million |
| Net earnings attributable to Barnwell shareholders | $1.263 million; $0.15 per diluted share | $0.672 million; $0.08 per diluted share |
| Net cash from (used in) operations | $(7.132) million | $5.569 million |
| Cash and cash equivalents at year-end | $8.471 million | $16.104 million |
| Working capital | $15.675 million | Not stated in the supplied filing text |
| Total debt | $3.440 million | $11.099 million |
FY2015 net margin attributable to Barnwell shareholders was approximately 7.2%, versus approximately 2.1% in FY2014. The improvement in earnings occurred despite sharply lower revenue and operating cash flow, and included material gains from asset sales and stronger land-related results.
- Oil and gas: Revenue fell 56% to $9.008 million. The segment recorded a $366,000 operating loss before general and administrative expenses, compared with $5.416 million of operating profit in FY2014. Average realized oil and natural gas prices each declined 42%; natural gas liquids prices declined 61%. Total production fell 16% to 434,000 Boe.
- Land investment: Net percentage-of-sales revenue rose to $3.244 million from $636,000, reflecting more lot sales. Equity income from affiliates was $1.580 million, compared with a $482,000 loss.
- Contract drilling: Revenue decreased 22% to $4.886 million; operating profit before general and administrative expenses was $922,000, slightly below the prior year.
- Liquidity and cash flows: Investing activities provided $9.077 million, largely reflecting asset-sale proceeds and land-related receipts. Financing activities used $8.709 million, principally for debt repayments and restricted-cash deposits. Year-end restricted cash was $7.577 million, including $7.135 million held in Canadian tax escrow.
- Debt: Barnwell repaid its Canadian revolving facility using sale proceeds. Remaining debt was a $3.440 million real estate loan, classified as current because the home and lot securing it were for sale. The loan bears 3.59% interest at year-end and matures April 1, 2018, with principal due from net sale proceeds or at maturity.
Material changes and unusual items
- In September 2015, Barnwell sold its principal Dunvegan and Belloy oil and gas properties. Net proceeds after fees were $14.162 million, of which $7.135 million was placed in escrow pending Canadian tax determination. The sale generated a $6.217 million gain and materially reduced the company’s producing asset base.
- The sale reduced proved natural gas reserves by 60% and proved oil and natural gas liquids reserves by 34%. At September 30, 2015, proved reserves were 469,000 barrels of oil and liquids and 3.124 million Mcf of gas; there were no proved undeveloped reserves.
- Reported net earnings included the $6.217 million property-sale gain and a $272,000 gain on sale of drilling equipment. FY2014 included a $3.399 million gain on sale of investments. These items complicate year-over-year earnings comparisons.
- Barnwell recorded a $316,000 impairment of its home held for sale and a $1.028 million deferred-tax valuation allowance related to Canadian tax assets.
- Other comprehensive loss was $1.864 million, primarily reflecting foreign currency translation and retirement-plan actuarial losses; comprehensive loss attributable to Barnwell shareholders was $601,000.
Outlook, risks, and contingencies
- Management expects oil and gas operations to have negative operating cash flow at current prices and production levels. It intends to seek replacement acreage and producing assets, but reinvestment depends on release of the tax escrow and available liquidity.
- FY2016 oil and gas investment was estimated at $2.5 million to $7.5 million, subject to cash flows and management’s assessment. Management expected Hawaii well-drilling activity to decrease from FY2015 based on backlog.
- Management stated that Barnwell relies on the uncertain release of escrow funds and on land-sale receipts and potential partnership distributions to fund operations, capital expenditures, asset-retirement obligations, and overhead. It warned that persistent liquidity issues could raise longer-term going-concern concerns and force reduced investment or asset sales.
- The Canadian credit facility’s capacity was reduced to C$1.0 million (approximately US$747,000 at year-end), with only about $713,000 available after letters of credit. The facility was subject to review in April 2016 and could be reduced further or not renewed.
- Future land proceeds depend on development and lot sales by partnerships Barnwell does not control. The company reported 28 Kaupulehu Increment I lots remaining; two oceanfront lots in Increment II were being developed. The home held for sale is also a source of potential liquidity.
- Alberta was reviewing its royalty framework and climate levies, with possible changes expected to be implemented by January 2017. A future Alberta liability-management ratio below 1.0 could require a security deposit or management plan; the amount, if any, was not estimable.
- A January 2015 Alberta pipeline oil and salt-water release had estimated gross remediation costs of $2.3 million. After partner and insurance recoveries, Barnwell estimated a net impact of $223,000, of which $75,000 remained accrued at year-end. The company also had joint and several exposure under approximately $4.144 million of partnership performance bonds; management considered a material call remote.
- KPMG issued an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting as of year-end.
Important facts for investors to verify
- Timing and amount of any release of the $7.135 million Canadian tax escrow, and final purchase-price adjustments for the Dunvegan sale.
- Cash burn, required funding, and the company’s ability to sustain operations if land receipts or partnership distributions are delayed or insufficient.
- Renewal and borrowing capacity of the Canadian credit facility at its April 2016 review, plus any Alberta security deposit requirement.
- Actual FY2016 oil and gas capital spending, production and commodity-price assumptions, and progress toward replacing reserves after the major property sale.
- Timing and proceeds from remaining Kaupulehu lot sales, Increment II development, partnership distributions, and sale of the luxury home.
- Final environmental remediation costs and any changes to the performance-bond exposure, retirement obligations, or tax assessments.