Barnwell Industries, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022; comparisons are to FY2021. This is an annual report, not a standalone fourth-quarter filing. Barnwell operates oil and natural gas businesses in Canada and Oklahoma, Hawaii land investments, and Hawaii water-well drilling and pump services.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $28.545 million | $18.113 million |
| Net earnings attributable to Barnwell stockholders | $5.513 million; $0.57 per diluted share | $6.253 million; $0.73 per diluted share |
| Net cash provided by operating activities | $7.291 million | $0.831 million |
| Cash and cash equivalents at year-end | $12.804 million | $11.279 million |
| Working capital at year-end | $11.170 million | Not stated in the cited discussion |
| Long-term debt at year-end | $44,000 | $47,000 |
- Revenue rose 58%, led by oil and gas revenue, which more than doubled to $22.581 million as commodity prices and production increased. Average realized oil, natural gas, and NGL prices rose 68%, 77%, and 51%, respectively; total net production increased from 291,000 to 396,000 Boe.
- Oil and gas segment operating profit before corporate general and administrative expenses increased to $10.536 million from $2.423 million. Contract drilling revenue fell 22% to $4.540 million, and the segment recorded a $222,000 operating loss before general and administrative expenses. Land-investment revenue from leasehold sales declined to $1.295 million from $1.738 million.
- Equity in income of land-development affiliates decreased to $3.400 million from $5.793 million. FY2022 earnings also reflect a $484,000 foreign-currency loss and higher general and administrative expense, up $956,000 to $8.044 million.
- Investing activities used $7.112 million, including substantial oil and gas development spending; financing activities provided $1.560 million, including $2.356 million of net ATM share-sale proceeds and $149,000 of dividends. Oil and gas capital expenditures and acquisitions were reported as $11.052 million in the MD&A; the segment note reports $13.755 million including asset-retirement-obligation additions and revisions.
- Total liabilities were $18.054 million. Asset-retirement obligations were $8.456 million, including $1.327 million current. The company reported $19.161 million of total equity.
Material changes and notable items
- Despite higher revenue and much stronger oil and gas results, attributable net earnings declined 12%, mainly because FY2021 included $4.472 million of gains absent in FY2022: a $2.341 million post-retirement medical plan termination gain, $1.982 million of asset-sale gains, and a $149,000 debt-forgiveness gain. Lower affiliate income and higher corporate costs also weighed on the comparison.
- Operating cash flow improved markedly, while oil and gas investment increased. Barnwell drilled or participated in seven Twining-area wells in FY2022; six gross non-operated wells and one operated well were producing or expected to be tied in.
- Proved reserves were 1.939 million Boe at year-end, up from 1.142 million Boe in FY2021. The standardized measure of discounted future net cash flows rose to $27.878 million from $2.645 million, largely reflecting higher SEC-prescribed prices and reserve additions. The filing cautions that this standardized measure is not fair value.
- Shares issued increased through the ATM program: 509,467 shares were sold for $2.356 million net proceeds in FY2022. The board suspended ATM sales in August 2022. A $0.015-per-share dividend was paid in September 2022.
Outlook, risks, and contingencies
- Management expected FY2023 contract-drilling activity and results to be higher than FY2022, based on backlog. Backlog was approximately $11.2 million at December 1, 2022, of which $8.6 million was expected to be recognized in FY2023. Management does not provide formal consolidated earnings or revenue guidance.
- Future land proceeds depend on remaining Increment I lot sales and uncertain development of Increment II, over which Barnwell lacks control. One Increment I lot remained after a November 2022 sale; the company also received a $478,000 net partnership distribution that month.
- Oil and gas results remain exposed to commodity-price volatility, operating and development costs, reserve-estimate uncertainty, pipeline and market access, foreign exchange, and regulatory and environmental obligations. Barnwell does not hedge commodity or currency risks. The AER’s liability-spending targets are forecast to rise approximately 9% annually; a $637,000 Manyberries abandonment deposit remained payable by August 2023.
- In December 2022, after year-end, Barnwell paid $5.099 million for non-operated Permian Basin interests: a 22.3% leasehold working interest and a 15.4% interest in two planned wells. It also agreed to a 5% broker fee to an entity controlled by a person affiliated with Teton Barnwell. The transaction is subsequent to FY2022 and is not included in the year-end results.
- Other subsequent events include a $551,000 gain expected in FY2023 from a fully depreciated drilling rig sold in October 2022, and a Tax Benefits Preservation Plan adopted in October 2022. The plan may be triggered by specified ownership thresholds, including 4.95%, and can constrain share accumulation and affect takeover opportunities.
- The company reported no known litigation likely to have a material adverse effect and no significant environmental contingent liabilities requiring accrual or disclosure. A drilling contract well failed its specified gyroscopic plumbness test; remedial costs were accrued, but no further liability was considered probable and estimable.
Most important facts for investors to verify
- Whether FY2022’s oil and gas cash generation and reserve growth can be sustained if commodity prices weaken, and how much production from Oklahoma wells declines.
- Funding needs and returns for the Permian investment, including the related-party broker fee, and the effect of the post-year-end expenditure on liquidity and planned capital spending.
- Timing and collectability of Hawaii land proceeds and partnership distributions, given the limited remaining Increment I lots and no definitive Increment II development plan.
- Actual abandonment and reclamation spending, the remaining Manyberries deposit, and compliance with Alberta’s escalating liability-spending requirements.
- Potential dilution and governance effects from future equity issuance and the Tax Benefits Preservation Plan. The company is a smaller reporting company; its auditor did not attest to internal-control effectiveness, although management concluded controls were effective and the auditor issued an unmodified opinion on the financial statements.