Barnwell Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the third quarter and nine months ended June 30, 2015, in Barnwell’s fiscal year. The company operates in Canadian oil and gas and in Hawaii land investment, contract drilling, and residential real estate. Its residential real estate segment had no homes under construction.
Financial performance and position
- Revenue: $5.203 million for the quarter, down 24% from $6.810 million; $14.727 million for nine months, down 33% from $21.892 million.
- Profit: Quarterly net income attributable to Barnwell was $971,000 ($0.12 per share), versus a $216,000 loss ($0.03 per share). Nine-month attributable net loss was $1.513 million ($0.18 per share), compared with a $1.490 million loss. Nine-month consolidated net loss was $943,000; the difference reflects income attributable to non-controlling interests.
- Cash flow: Operations used $5.366 million in the nine months, versus $4.487 million provided a year earlier. Investing provided $2.148 million and financing used $3.409 million. Cash declined $7.409 million to $8.695 million.
- Liquidity: Working capital was $8.858 million at June 30. Current assets were $19.318 million and current liabilities $10.460 million.
- Debt: Total debt was $8.454 million: $4.800 million under the Canadian revolving facility and a $3.654 million real estate loan classified as current. The Canadian facility’s reduced capacity was about $5.211 million at the period-end exchange rate, leaving minimal availability; the real estate loan’s covenants were suspended subject to a $275,000 interest reserve.
- Operating results: Segment operating profit before general and administrative expenses was $2.033 million for the quarter. Oil and gas recorded a $46,000 operating loss, while land investment earned $1.266 million and contract drilling $534,000. The filing does not provide a clear consolidated operating-margin measure.
Material changes versus the prior comparable period
- Oil and gas revenue fell 52% for the quarter and 56% for nine months. Nine-month realized prices declined 39% for oil and 41% for natural gas; oil production fell 39% and natural gas production fell 13%, chiefly reflecting prior property sales and natural declines.
- Quarterly results improved primarily because land-sale percentage payments increased and equity-method income from Kukio Resort partnerships rose to $988,000 from a $113,000 loss. These gains offset a $1.367 million deterioration in oil and gas segment results.
- Nine-month land-sale revenue increased to $3.115 million from $378,000, and affiliate income was $1.444 million versus a $376,000 loss. These gains largely offset weaker oil and gas results; the nine-month attributable net loss was little changed.
- Cash from operations swung to an outflow, reflecting weaker oil and gas performance and working-capital changes. Debt repayments reduced the Canadian facility balance by $2.2 million during the nine months.
Outlook, risks, contingencies, and unusual items
- In August 2015, Barnwell agreed to sell its principal Dunvegan and Belloy oil and gas interests for approximately $15 million, subject to adjustments and customary closing conditions. Closing was expected in fiscal Q4 2015, but was not assured. The buyer would hold 50% of proceeds in trust for potential Canadian taxes; Barnwell expected to use part of the remainder for taxes and to repay most or all of the $4.8 million Canadian facility balance. The company expected to record a gain, but the amount is not stated.
- Management said liquidity is a primary focus and that Barnwell will rely heavily on land-investment proceeds and possible partnership distributions. It warned that insufficient proceeds, a failed property sale, or further credit reduction could materially harm operations and liquidity and could require asset sales, reduced or delayed capital spending, or alternative financing.
- Management expected fiscal 2015 oil and gas capital expenditures of $1.0–$1.5 million, subject to cash flow and conditions. No broader earnings or revenue guidance was provided.
- A January 2015 Alberta oil and salt-water spill had estimated remediation costs of $2.3 million. After partner recoveries and insurance, the estimated net impact to Barnwell was approximately $221,000, recorded in results; a further $410,000 insurance recovery was receivable at June 30. Other accrued environmental remediation liabilities were $390,000.
- Barnwell was jointly and severally liable under a surety indemnification agreement for approximately $4.144 million of partnership performance bonds. The company assessed a material call as remote; its stated maximum exposure for the Kukio investment and indemnity was approximately $10.246 million.
- Unusual results included an $863,000 Canadian deferred-tax valuation allowance for the nine months, a $92,000 charge from Alberta’s tax-rate increase, and a $272,000 gain on sale of drilling equipment. Contract drilling results also benefited from reversal of a prior contract-loss accrual.
Most important facts for investors to verify
- Whether the Dunvegan and Belloy sale closed, final proceeds and adjustments, tax escrow release timing, and resulting debt repayment and gain.
- Whether land-sale proceeds and partnership distributions can sustain liquidity as oil and gas production and revenues decline.
- The availability and terms of Canadian borrowing after the facility review planned for April 2016, and the status of the real estate loan and interest reserve.
- Actual spill remediation costs and insurance recoveries, and whether environmental or performance-bond exposures change.
- Future oil and gas prices, production, capital spending, and any further deferred-tax valuation allowances or asset impairments.