Barnwell Industries, Inc. — Q1 FY2017 10-Q
Reporting period: Three months ended December 31, 2016; comparisons are with the three months ended December 31, 2015. Barnwell operates in Canadian oil and gas, Hawaii land investments, and Hawaii contract drilling and water systems.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $4.290 million | $1.874 million |
| Loss before affiliate income and taxes | $(71,000) | $(1.672) million |
| Equity in income of affiliates | $2.326 million | $163,000 |
| Net earnings (loss) attributable to Barnwell | $1.641 million | $(1.409) million |
| Diluted EPS | $0.20 | $(0.17) |
| Operating cash flow | $(966,000) | $(2.420) million |
- Revenue rose approximately 129%. The increase reflected higher land-sale percentage payments, oil and gas prices, and contract drilling activity.
- Land investment operating profit before general and administrative expenses was $1.678 million, versus $150,000. Oil and gas segment operating profit was $60,000, improving from a $165,000 loss. Contract drilling operating profit was $176,000, down from $221,000.
- Overall earnings depended heavily on the Kukio Resort partnerships: Barnwell recorded $2.326 million of equity-method income, up from $163,000. The partnerships’ sale of a $20.975 million oceanfront parcel drove much of the increase.
- Consolidated gross margin is not separately reported. General and administrative expense was $2.023 million, up 9%; interest expense was $4,000, down from $33,000.
Liquidity, balance sheet, and cash flow
- At December 31, cash and cash equivalents were $15.360 million, restricted cash was $372,000, and working capital was $16.738 million. Cash declined $190,000 during the quarter.
- Operating activities used $966,000; investing activities provided $971,000, primarily reflecting $1.418 million of net leasehold-land sale proceeds; financing activities used $54,000.
- Total assets were $34.324 million, total liabilities $18.403 million, and total equity $15.921 million. Current liabilities were $5.452 million.
- No facility borrowings were outstanding. A Canadian-dollar revolving demand facility had a reported U.S.-dollar equivalent of $372,000, secured by restricted cash; letters of credit outstanding were $33,000.
- Asset retirement obligations were $6.957 million, including $1.119 million current; retirement-benefit liabilities were $6.784 million.
Outlook, risks, and unusual items
- Management estimated fiscal 2017 oil and gas property investment of $2.0 million to $4.5 million, subject to cash flows and management’s assessment of the market. Estimated fiscal 2017 pension contributions were approximately $500,000.
- Management warned that existing oil and gas assets are projected to generate minimal operating cash flow and that current cash may not fund reinvestment, asset retirement obligations, retirement-plan funding, and ongoing costs. Barnwell may increasingly rely on uncertain land-sale payments and Kukio partnership distributions, which are outside its control. If funding is inadequate, it may need to wind down, liquidate, enter bankruptcy, or sell additional assets; management stated it might not be able to continue as a going concern beyond one year.
- Oil and gas prices improved year over year, but production was mixed: natural gas volume fell 21%, oil volume rose 17%, and liquids volume fell 50%. Management cautioned that low prices could adversely affect results, asset values, reserves, and financing capacity.
- Contract drilling results vary with contract awards and timing. Management cited weaker demand, increased competition, and pressure on margins.
- A gas migration issue at a previously abandoned Alberta well has estimated total remediation costs of $400,000–$800,000. Barnwell’s 50% share was accrued at approximately $200,000; actual cost and timing remain uncertain.
- Barnwell was jointly and severally liable under an indemnity related to approximately $325,000 of partnership performance bonds. Management considered a material call remote. Its stated maximum exposure from the investment and indemnity was approximately $5.656 million.
- After quarter-end, Barnwell received a $2.066 million distribution from the Kukio partnerships in January 2017, after $253,000 distributed to non-controlling interests.
- The company’s New York office, carried at $1.829 million, was listed for sale. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether recurring operating cash flow and future land-sale proceeds or partnership distributions can support planned reinvestment and obligations, given management’s going-concern warning.
- How much of reported earnings came from the parcel sale and related equity-method income, and whether comparable future transactions or distributions are likely.
- Actual timing and costs of oil and gas capital spending, asset retirement work, pension funding, and environmental remediation.
- Future contract drilling demand and margins, oil and gas prices and production, and the development and sale schedule for remaining Kukio-area lots.
- Whether the January partnership distribution improves liquidity as expected and whether further distributions are available and timely.