Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended June 30, 2018 (fiscal third quarter). Barnwell operates Canadian oil and gas, Hawaii land investment, and Hawaii contract drilling businesses. Financial statements are unaudited.
Financial performance and liquidity
- Revenue: Third-quarter revenue was $3.168 million, up from $1.340 million; nine-month revenue was $6.999 million, down from $8.659 million. Quarterly growth reflected $1.310 million of land-related revenue and higher contract drilling revenue.
- Profitability: Net loss attributable to Barnwell shareholders was $374,000, or $0.05 per share, versus a $512,000 loss, or $0.06 per share, in the prior-year quarter. For nine months, Barnwell reported a $712,000 attributable loss, or $0.09 per share, versus $514,000 of earnings, or $0.06 per share.
- Cash flow: Nine-month operating cash use was $4.321 million, compared with $1.830 million. Investing activities provided $2.482 million; financing activities used $594,000. Cash declined $2.742 million to $13.539 million.
- Liquidity and debt: Working capital was $19.639 million. Cash and certificates of deposit totaled $16.999 million. The balance sheet lists no borrowings; a separate debt balance is not provided. Total liabilities were $11.586 million, including $4.219 million of asset retirement obligations and $4.064 million of retirement-benefit liabilities.
- Balance sheet: Total assets were $28.541 million, down from $33.020 million at September 30, 2017; total equity was $16.955 million, down from $18.183 million.
Changes versus the prior comparable period
- Oil and gas revenue fell 34% for the quarter and 30% for nine months, primarily due to lower production after property sales, downtime and shut-ins, and lower natural gas prices. Higher oil prices partly offset the decline. Net production of natural gas and oil fell 26% and 47%, respectively, in the quarter.
- Contract drilling returned to a quarterly operating profit before G&A of $64,000, versus a $302,000 loss; nine-month segment operating profit fell to $104,000 from $534,000.
- Nine-month earnings declined in part because equity income from affiliates fell to a $97,000 loss from $2.125 million of income, reflecting the prior-year sale of a large development parcel. The current period included a $2.135 million gain on sale of Red Earth oil properties and a $115,000 gain on other Canadian assets.
- Cash from operations weakened, including because the prior-year period included a $2.164 million distribution of income from equity investees that did not recur.
Outlook, risks and unusual items
- Management said existing oil and gas assets are projected to generate negative operating cash flow after related G&A, citing production declines, prior divestitures, natural well decline, commodity-price pressure and rising costs. It warned cash may not be sufficient for reinvestment, asset retirement obligations, retirement-plan funding and ongoing expenses; absent adequate investments or funding, Barnwell may have to sell assets or wind down operations and may not continue as a going concern beyond one year.
- In July 2018, Barnwell agreed to buy Twining-area Alberta oil and gas interests for approximately $10.5 million and paid a non-refundable $525,000 deposit. Closing was expected in late August, subject to customary adjustments and third-party rights of first refusal. Management said the purchase could increase reserves, production and cash flow, but would use a significant portion of cash and likely require substantial debt or equity financing. Closing was not assured, and management could not assess the likelihood or timing of financing.
- A Kilauea eruption covered Barnwell’s approximately 16 acres in Puna; the company wrote off their $165,000 carrying value. A separate $37,000 impairment related to a residential lot held for sale, which closed in August for net proceeds of $1.0 million.
- Land-related receipts and future distributions are uncertain and outside Barnwell’s control. At June 30, 22 lots remained for sale in Increment I; remaining Increment II acreage was not under development. Barnwell had received $3.5 million of a possible $8.0 million in future KD II distributions.
- The company reported a $460,000 tax benefit/receivable related to refundable alternative minimum tax credits under the Tax Cuts and Jobs Act. It planned to adopt the new revenue-recognition standard on October 1, 2018 using the modified retrospective method; quantified impact was not yet finalized.
Important facts for investors to verify
- Whether the Twining acquisition closed, the final purchase price and assets conveyed after rights-of-first-refusal elections, and the source and terms of financing.
- Actual cash needs and operating performance after the acquisition, including the ability to fund capital expenditures, retirement-plan contributions and asset retirement obligations.
- Oil and gas production, natural gas economics, and whether remaining Canadian properties can avoid the negative cash flow management projected.
- Timing and amount of Kukio/KD II land proceeds and distributions, including development and lot-sale activity.
- Whether the $460,000 tax receivable is collected and the eventual effect of adopting the revenue-recognition standard.