Barnwell Industries, Inc. — Form 10-Q Summary
Business context and period: Barnwell operates Canadian oil and natural gas properties and Hawaii land investment, contract drilling, and residential real estate businesses. This unaudited report covers the first quarter of fiscal 2013, the three months ended December 31, 2012; comparisons are with the three months ended December 31, 2011 unless noted.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $6.551 million | $8.502 million |
| Loss before income taxes | $3.350 million | Income of $0.150 million |
| Net loss attributable to Barnwell | $2.746 million; $0.33 per share | $0.282 million; $0.03 per share |
| Cash provided by operations | $1.743 million | $1.803 million |
| Cash used in investing | $0.967 million | $2.181 million |
- Oil and natural gas revenue was $5.640 million, down 28%. Contract drilling revenue rose 69% to $0.717 million.
- A $2.327 million non-cash reduction in oil and gas property carrying value was recorded after capitalized costs exceeded the quarterly ceiling-test limit. This charge was included in expenses.
- At December 31, 2012, cash was $10.027 million, working capital was $3.771 million, and total assets were $67.516 million. Current assets were $20.141 million and current liabilities were $16.370 million.
- Total debt was $17.537 million: $12.502 million under the Canadian revolving facility and $5.035 million under the real estate loan. The current portion was $6.285 million. The filing reports $7.600 million of unused revolving credit at 2.71%; the facility was due for annual review in April 2013.
- Operating cash flow was nearly flat year over year. Cash increased $1.182 million during the quarter, to $10.027 million, with financing cash flow including $0.502 million in new borrowings.
- The company reported a $0.564 million income tax benefit, including a $1.122 million deferred tax benefit partly offset by $0.558 million current tax expense. Management cautions that taxes do not track pretax results conventionally because of the geographic mix and limits on expected tax benefits.
Material changes and operating drivers
- Total revenue fell 23%, and Barnwell’s attributable net loss widened from $0.282 million to $2.746 million. Management attributed the deterioration principally to the asset write-down, weaker oil and gas segment performance, and higher general and administrative expense.
- Oil and gas revenue fell by $2.149 million. Average prices declined 12% for natural gas, 15% for oil, and 23% for liquids. Net natural gas and oil production fell 14% and 21%, respectively; net liquids production increased 4%.
- Oil and gas segment operating results before general and administrative expense and the asset reduction shifted to a $1.215 million loss from $2.295 million of profit. Lower prices and production were key factors; operating expense also benefited from lower production and a $0.220 million operator equalization credit.
- General and administrative expense increased 16% to $2.142 million, mainly because the prior-year quarter included a larger reduction in stock appreciation rights expense.
- Contract drilling improved by $0.335 million, primarily on greater water-well drilling activity, but still recorded a $0.006 million operating loss before general and administrative expense.
Outlook, risks, and unusual items
- Management expects fiscal 2013 oil and gas capital expenditures of $5 million to $6 million, subject to cash flows and its assessment of industry conditions. The company participated in four gross (1.1 net) Canadian wells in the quarter, all of which appeared successful.
- Management warned a further oil and gas property carrying-value reduction may be required in the quarter ending March 31, 2013; it could not estimate the amount. The ceiling test depends on prices, reserves, production, and costs.
- The Canadian credit facility could be renewed or converted to a two-year term loan at the April 2013 review. Conversion could trigger quarterly repayments beginning July 2013. Management’s liquidity outlook is sensitive to facility terms, commodity prices and production, land proceeds, home sales, and compliance with debt covenants.
- Management said current cash, expected operating cash flow, land proceeds, and available credit should fund operations and planned spending, but cautioned that weaker-than-expected prices, production, or property-sale proceeds, reduced credit availability, or covenant problems could materially harm liquidity and financial condition. It also stated that, absent higher oil and/or natural gas prices, operating cash flow may not support capital spending needed to maintain production and reserves.
- Low natural gas prices had prompted well shut-ins; management said no further shut-ins had occurred since August 2012 but future shut-ins remain possible. Contract drilling demand has been weak, with continued weakness potentially requiring cost cuts, a temporary shutdown, or equipment sales.
- The Canada Revenue Agency was examining Canadian federal income tax returns for fiscal 2010 and 2011. In February 2013, the land investment partnership received a $0.300 million percentage-of-sales payment; it will be reflected in the quarter ending March 31, 2013.
- Disclosure controls were deemed effective as of December 31, 2012, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether the April 2013 review renewed or converted the Canadian credit facility, and the resulting repayment requirements and available borrowing capacity.
- Whether subsequent commodity prices, reserve estimates, and capital spending triggered another ceiling-test write-down.
- Actual fiscal 2013 capital expenditures and whether they can sustain production and reserves given operating cash flow.
- Subsequent oil and gas production, realized prices, and any additional well shut-ins.
- Progress on Kaupulehu land and home sales, the Lot 4C negotiations and approvals, and related proceeds or debt repayments.
- Outcome of the Canadian tax examination and any effect on cash taxes or reported tax benefits.