Business Context and Reporting Period
Company: Barnwell Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Barnwell operates four primary segments: oil and natural gas exploration/production in Canada; land investment in Hawaii; contract drilling in Hawaii; and residential real estate development in Hawaii. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2011 | Six Months Ended Mar 31, 2011 |
|---|---|---|
| Total Revenues | $9,281,000 | $20,600,000 |
| Net (Loss) Earnings | $(1,602,000) | $93,000 |
| Net (Loss) Attributable to Barnwell | $(1,463,000) | $(378,000) |
| EPS (Basic & Diluted) | $(0.18) | $(0.05) |
| Operating Cash Flow (6 months) | $7,158,000 | |
| Cash and Cash Equivalents | $13,982,000 (as of Mar 31, 2011) | |
| Total Debt | $25,500,000 ($12.5M current, $13.0M long-term) | |
| Working Capital | $9,491,000 |
Material Changes vs. Prior Period
- Profitability Decline: The company reported a net loss of $1.46 million for the quarter ended March 31, 2011, compared to net earnings of $1.49 million in the same period of 2010. For the six-month period, the company reported a net loss of $378,000 compared to earnings of $3.44 million in the prior year.
- Revenue Drivers:
- Oil & Gas: Revenues decreased 7% year-over-year due to a 24% drop in natural gas prices and a 6% decline in production, partially offset by a 14% increase in oil prices.
- Land Investment: Revenues dropped significantly as no percentage-of-sales payments were received in the current quarter, compared to $1.13 million in the prior year.
- Contract Drilling: Revenues decreased 18% due to fewer well drilling contracts and lower margins.
- Expense Increases: General and administrative expenses surged 89% ($1.8 million increase) primarily due to a $1.63 million increase in stock appreciation rights expense driven by an increase in the company's stock price.
- Asset Impairments: The company recorded $311,000 in reductions of the carrying value of assets, including a $190,000 writedown of residential parcels and a $121,000 write-off of its investment in Kona Village Investors, LLC due to tsunami damage.
- One-Time Gain: A $1.33 million gain from the purchase of third-party drilling royalty credits in Canada offset some losses; this program ended March 31, 2011.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Management expects fiscal 2011 oil and natural gas capital expenditures to range between $8 million and $10 million. Expenditures are being held at reduced levels due to poor natural gas price outlooks and diminished demand for luxury real estate.
- Real Estate Market: The luxury real estate market in Hawaii remains sluggish. Two luxury homes are available for sale at $7.95 million and $7.65 million, but sales are contingent on market recovery. The company faces continuing cash outflows for debt service and holding costs until sales occur.
- Joint Venture Risks: Kona Village Resort closed indefinitely following the March 2011 Japan earthquake and tsunami, resulting in a full write-off of Barnwell's investment. Hualalai Resort also sustained damage and shut down for repairs.
- Liquidity: The company maintains $13.98 million in cash and approximately $7.58 million in available credit under its Canadian facility. Management believes current resources are sufficient to fund operations and debt obligations, though reduced cash flows from operations could impact liquidity.
- Tax Position: The effective tax rate was anomalous (negative 37% for the quarter) due to full valuation allowances on U.S. deferred tax assets generated by stock-based compensation and foreign tax credit carryforwards.
Investor Verification Checklist
- Stock-Based Compensation Volatility: Verify the sensitivity of future earnings to Barnwell's stock price, as liability-classified share options caused a $1.63 million expense increase in the quarter.
- Real Estate Liquidity: Assess the timeline and probability of selling the two luxury homes in Hawaii, as these assets are encumbered by a $12.5 million loan classified as current.
- Oil & Gas Reserve Decline: Monitor natural gas production volumes and pricing trends, as reduced capital expenditures may lead to accelerated reserve declines.
- Joint Venture Exposure: Review the status of Hualalai Resort and Kona Village Resort to determine if further impairment charges are necessary.
- Debt Covenants: Confirm compliance with debt covenants, specifically the minimum debt service coverage ratio of 1.20 to 1 and the total liabilities to tangible net worth ratio of 1.85 to 1.