Barnwell Industries, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012; comparable period is FY2011. This is an annual filing, not a standalone fourth-quarter report.
Business context and results
Barnwell operates oil and natural gas businesses in Canada and land investment, contract drilling, and residential real estate businesses in Hawaii. Canada generated $25.1 million, or approximately 74%, of FY2012 revenue.
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $34.1 million | $38.5 million |
| Loss attributable to Barnwell | $10.1 million | $0.1 million |
| Loss per share | $1.22 | $0.01 |
| Cash from operations | $11.5 million | $13.3 million |
| Capital expenditures | $5.0 million | $15.4 million |
FY2012 attributable net margin was approximately negative 29.7%. The filing reports no consolidated operating-margin percentage.
Financial position and operating metrics
- Cash and cash equivalents were $8.8 million at year-end, down from $9.8 million. Working capital was $4.6 million; current assets were $18.9 million and current liabilities $14.3 million.
- Total debt was $17.2 million, including $12.0 million drawn on the Canadian revolving facility and $5.2 million on the real estate loan. The facility had $8.3 million available and a 2.73% stated rate; it was scheduled for review in April 2013. The real estate loan rate was 3.57%, with a stated April 2018 maturity. The company reported compliance with its real estate loan covenants.
- Oil and natural gas revenue declined 15% to $24.6 million. Average natural gas price fell 41% to $2.03/Mcf; net gas production decreased 7%, while oil production rose 7%. Total production fell 3% to 734,000 Boe.
- Contract drilling revenue fell 39% to $2.3 million; the segment recorded a $1.16 million operating loss before general and administrative expenses.
- Land investment revenue was $0.5 million, versus $3.7 million, including no development-rights option revenue in FY2012. Residential real estate revenue was $6.0 million from a home sale; the sale resulted in a nominal loss.
- Proved reserves were 2.993 million Boe, all developed, down from 3.760 million Boe. The standardized measure of discounted future net cash flows fell to $35.3 million from $48.6 million.
Material changes and unusual items
- The attributable net loss widened by approximately $10.0 million. Management cited weaker oil and gas segment results, lower Hawaii land receipts, and a $5.4 million year-over-year increase in asset write-downs.
- FY2012 included $6.647 million of carrying-value reductions: $2.551 million for oil and gas properties, $1.854 million for real estate held for sale, $1.754 million for passive joint-venture investments, and $0.488 million for Mauka Lands lot acquisition rights.
- Oil and gas capital spending declined 63% to $4.915 million. Reserve replacement was 22% for oil and liquids and 1% for natural gas.
- Operating cash flow remained positive despite the net loss, helped by noncash charges and real estate-related working-capital effects. Cash used in investing was $6.3 million and cash used in financing was $6.2 million; debt repayments included a $5.277 million payment following the home sale.
- Foreign-currency translation generated $1.927 million of other comprehensive income. No dividends were declared or paid in FY2012 or FY2011.
Outlook, risks, and contingencies
- Management estimated FY2013 oil and gas capital expenditures of $5 million to $7 million, subject to cash flows and its assessment of commodity conditions. It said low gas prices may leave spending insufficient to maintain production and reserves.
- Management expected Hawaii well-drilling activity in FY2013 to be similar to FY2012, based on backlog and anticipated work. December 1, 2012 contract backlog was $1.32 million, expected to be completed in FY2013.
- The company warned that it might record another oil and gas property write-down in FY2013’s first quarter; it could not estimate the amount. Commodity prices, production, reserve revisions, and the April 2013 bank-facility review could affect liquidity and financing needs.
- Other key risks include natural gas price weakness and possible well shut-ins; reserve depletion and limited control over non-operated properties; customer concentration in oil and gas sales; Hawaii real estate and drilling market weakness; reliance on third-party developers for land-sale receipts; loan covenants and variable rates; and environmental, reclamation, and retirement-plan obligations.
- Management considered routine litigation unlikely to materially affect financial position, results, or liquidity. The filing reports no material subsequent events. KPMG issued an unqualified audit opinion; management concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Whether the Canadian credit facility was renewed or reduced at its April 2013 review, and the company’s covenant compliance and borrowing availability thereafter.
- Subsequent oil and gas ceiling-test results, reserve revisions, production trends, and whether further impairments were recorded.
- Realized commodity prices, well shut-ins, and the ability of operating cash flow to support capital spending and debt service.
- Progress and cash receipts from Kaupulehu lot development, sale of the remaining luxury home, and the status of the Mauka Lands and Lot 4C approvals or negotiations.
- Whether contract drilling backlog converted to revenue at acceptable margins, given the FY2012 segment loss and competitive conditions.
- Resolution of Canadian tax examinations and uncertain tax positions; the filing reports $722,000 of unrecognized tax benefits at September 30, 2012.