Barnwell Industries, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013; comparisons are with FY2012. This is an annual report, not a standalone fourth-quarter filing. Barnwell operates Canadian oil and gas businesses and Hawaii land investment, contract drilling, and residential real estate businesses.
Financial performance and condition
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $24.608 million | $34.062 million |
| Loss before income taxes | $10.169 million | $12.059 million |
| Net loss attributable to Barnwell shareholders | $8.563 million; $1.03 per share | $10.136 million; $1.22 per share |
| Cash flow from operations | $3.191 million | $11.466 million |
| Cash and cash equivalents at year-end | $7.828 million | $8.845 million |
| Working capital | $2.580 million | Not stated here |
| Total debt | $16.640 million | $17.164 million |
| Available Canadian credit facility | $7.446 million | Not stated here |
FY2013 revenue fell 28%, reflecting lower oil and gas sales and the absence of the prior-year $5.975 million home sale. Oil and gas revenue declined 13% to $21.376 million. Net production fell 21% to 577,000 Boe; natural gas production decreased 27%, oil 10%, and natural gas liquids 14%. Average natural gas prices rose 32%, partly offsetting lower oil and liquids prices. The contract drilling segment had $2.338 million revenue and a $295,000 operating loss before general and administrative expenses, an $865,000 improvement year over year. No home sale revenue was recorded in FY2013.
Operating cash flow declined by $8.275 million, mainly because FY2012 included proceeds associated with a real estate sale and FY2013 oil and gas operating results were weaker. Investing activities used $3.778 million; financing activities used $319,000. The filing does not present a consolidated operating margin as a headline metric. The oil and gas segment reported a $1.156 million operating loss before corporate general and administrative expenses, interest, and taxes.
Material changes and unusual items
- Asset carrying-value reductions totaled $4.506 million in FY2013, all from oil and gas properties, versus $6.647 million in FY2012, which also included real estate and investment write-downs.
- Oil and gas property reductions followed quarterly full-cost ceiling tests. The company cites commodity prices, reserves, production, and costs as factors that could cause further write-downs.
- Environmental remediation expense and accrual arose from soil contamination at Dunvegan and Wood River. The year-end accrued liability was $783,000; the company says additional costs may arise.
- General and administrative expense increased 8% to $8.911 million, including severance and executive-search/legal costs following a change in leadership at the Canadian oil and gas subsidiary.
- Asset retirement obligations increased to $7.520 million from $5.629 million, including a $1.783 million upward revision to estimated abandonment and reclamation costs.
- Foreign currency translation produced a $1.319 million other comprehensive loss, compared with $1.927 million of income in FY2012.
- After year-end, Barnwell acquired indirect 19.6% interests in three Hawaii real estate and development entities for $5.140 million. About $4.140 million was funded with new borrowing, and approximately $1.000 million was expected to be funded subsequently. Barnwell guarantees the loan. This transaction was not reflected in FY2013 results.
Liquidity, debt, and outlook
The Canadian revolving facility had $12.000 million outstanding, a 2.68% stated rate at September 30, 2013, and was due for review in April 2014. It could be renewed, converted to a term loan, or otherwise adjusted by the lender; a reduction below borrowings could require repayment or additional collateral. The Hawaii real estate loan carried a 3.53% rate and matures April 1, 2018, with monthly payments and principal payments tied to property sales. Its covenants require a debt-service coverage ratio of at least 1.20 and liabilities-to-tangible-net-worth ratio no greater than 1.85.
Management expected FY2014 oil and gas capital expenditures of $4.0–$4.5 million, subject to cash flows and its assessment of prices and prospects. It cautioned that this level could be insufficient to maintain production and reserves absent higher commodity prices or additional cash inflows. Management estimated FY2014 well-drilling activity would increase based on contract backlog; $4.9 million of the $6.8 million December 1, 2013 contract backlog was expected to be recognized in FY2014. These are expectations, not guarantees. The filing states management believed available cash, operating cash flows, land proceeds, and credit would cover planned needs, while warning that lower prices, production or property-sale proceeds, a credit-facility reduction, or covenant noncompliance could materially strain liquidity.
Key risks and contingencies
- Commodity-price volatility, natural production declines, limited reserve replacement, and the risk of future oil and gas ceiling-test impairments. Proved reserves were 2.689 million Boe at year-end, all developed; no proved undeveloped reserves were reported.
- Dependence on non-operated properties and limited control over drilling, development, and operating decisions. Dunvegan supplied 55% of FY2013 net production on a Boe basis.
- Debt refinancing and covenant risks, variable interest rates, and potential cash demands from abandonment, reclamation, and environmental remediation.
- Hawaii real estate and drilling businesses depend on local development, buyer demand, permitting, and government spending. The company had one luxury home available for sale and no homes under construction.
- Future Kaupulehu percentage-of-sales receipts depend on an unaffiliated developer’s continued development and lot sales. Kaupulehu demand remained slow, and Barnwell does not control project timing.
- Canadian tax authorities were examining fiscal 2010 and 2011 federal returns; the filing also describes uncertain transfer-pricing tax positions. Routine litigation was not expected by management to have a material effect.
Most important facts for investors to verify
- Whether operating cash flow and available borrowing capacity can support debt service and necessary capital spending, particularly after the April 2014 credit review.
- Whether FY2014 oil and gas spending and drilling results can stabilize production and reserves despite declining output and weak gas-price expectations.
- The final remediation costs at Dunvegan and Wood River compared with the $783,000 accrued liability.
- The financing, cash requirements, and returns associated with the post-year-end $5.140 million real estate interests acquisition and guaranteed loan.
- Future sales and cash receipts from Kaupulehu properties, the remaining home, and the contract-drilling backlog.
The financial statements received an unmodified audit opinion from KPMG. Management reported effective disclosure controls and internal control over financial reporting as of September 30, 2013.