Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014. The company operates in Canadian oil and gas, Hawaiian land investment, contract drilling, and residential real estate. Amounts below are U.S. dollars.
Financial results and position
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 |
|---|---|---|
| Revenue | $6.81 million, up 31% year over year | $21.89 million, up 18% |
| Net loss | $198,000; attributable to Barnwell, $216,000, or $0.03 per share | $1.52 million; attributable to Barnwell, $1.49 million, or $0.18 per share |
| Operating cash flow | Not separately reported for the quarter | $4.49 million, versus $3.86 million |
- Third-quarter segment operating profit before general and administrative expense was $2.13 million, compared with $1.03 million. This measure precedes corporate G&A, interest, and taxes.
- At June 30, cash and cash equivalents were $10.26 million; restricted cash was $1.89 million. Working capital was $11.17 million.
- Total assets were $56.36 million, down from $62.71 million at September 30, 2013. Total liabilities were $36.72 million; equity was $19.64 million.
- Total debt was $16.03 million, including $5.64 million classified as current, compared with $16.64 million at September 30, 2013. The Canadian revolving facility had $7.0 million drawn and $3.92 million available after letters of credit.
- Oil and gas capital expenditures, including accrued amounts, were $2.11 million for the nine months. Fiscal 2014 guidance for oil and gas capital expenditures, excluding proved-property acquisitions, was $2.7–$3.0 million; acquisitions could be up to $10 million.
Changes versus the prior period
- Quarterly net loss narrowed from $1.23 million. Higher contract drilling activity, improved oil and gas segment operating profit, a land-sale-related payment, and a $223,000 foreign-currency transaction gain supported the improvement.
- Nine-month net loss narrowed from $6.97 million. The prior-year period included a $4.51 million oil and gas asset carrying-value reduction; none was recorded in 2014. Higher oil and gas and drilling operating results also contributed.
- Oil and gas revenue rose 2% for the nine months, mainly on higher realized prices, while production of oil and natural gas liquids declined. Quarterly oil and gas revenue fell 3%, as lower oil production partly offset stronger prices and natural gas volumes.
- Contract drilling revenue increased to $4.48 million for the nine months from $1.67 million, and the segment moved from an operating loss to profit before G&A, primarily due to increased water-well drilling activity.
- The company sold several Canadian oil and gas property interests, receiving $8.45 million in sale proceeds during the nine months. Buyers withheld $5.73 million for potential Canadian tax obligations, recorded in receivables. No sale gain or loss was recognized under the full-cost accounting method.
Outlook, risks, and unusual items
- Management said cash, working capital, available credit, operating cash flows, and land-investment proceeds were expected to fund operations, planned capital spending, debt repayments, and interest. It cautioned that weaker commodity prices or production, lower land or home sale proceeds, reduced credit availability, or covenant breaches could materially impair liquidity and financial condition.
- The Canadian credit facility was renewed in April 2014 with a lower maximum commitment. It is subject to annual review in April 2015; the bank may renew it or convert it to a term loan with scheduled repayments.
- Land-investment partnership information used for equity-method accounting was unaudited and subject to change after the general partner’s acquisition-date audit. Barnwell recorded $376,000 of its share of partnership losses for the nine months. Management noted that changes could materially affect reported results.
- Barnwell was jointly and severally liable under indemnities for approximately $5.4 million of performance bonds associated with partnership construction contracts. The company’s stated maximum exposure related to the investment and indemnity was $10.16 million; management considered a material bond call remote.
- Accrued environmental remediation costs were $555,000 for contamination at Canadian properties; further costs could arise. The company also identified risks from illiquid, non-controlling land-development investments, potential impairment, and debt balloon payments or refinancing.
- A subsequent event: on July 25, 2014, Barnwell received $2.64 million for its 80% share of a sale of passive minority interests, with a further $80,000 contingent on a related utility interest sale.
- No specific earnings guidance was provided. Management said future oil and gas cash flows might not fund spending needed to maintain production and reserves absent a sustained increase in oil or gas prices. Results may also be affected by Canadian/U.S. dollar fluctuations and volatile contract drilling demand.
- Management concluded disclosure controls were effective as of June 30, 2014; no material change in internal control over financial reporting was reported during the quarter.
Most important facts for investors to verify
- Whether withheld Canadian tax proceeds and final sale-price adjustments will be released to Barnwell, and the final net cash proceeds from the Canadian asset sales.
- The outcome of the land-development partnership audit, future lot sales and distributions, potential further capital needs, and any change in investment valuation.
- Compliance with loan covenants and the Canadian facility’s April 2015 review, including possible refinancing, conversion, or repayment requirements.
- Oil and gas prices, production declines after divestitures, future ceiling-test impairment exposure, and whether planned capital spending can sustain reserves and output.
- Contract drilling activity and margins, which management described as dependent on the timing and availability of customer contracts.