Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended June 30, 2019, compared with the periods ended June 30, 2018. The filing is unaudited. Barnwell operates oil and natural gas properties in Canada, land investments in Hawaii, and a Hawaii contract-drilling business.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $3.409 million in 2019; $3.168 million in 2018 | $8.967 million in 2019; $6.999 million in 2018 |
| Net loss attributable to Barnwell | $1.365 million; $0.16 per share, versus $0.374 million; $0.05 per share | $8.090 million; $0.98 per share, versus $0.712 million; $0.09 per share |
| Net cash used in operating activities | Not provided as a quarterly figure | $1.631 million, compared with $4.321 million |
| Cash and cash equivalents | $5.035 million at June 30, 2019 | Down from $5.965 million at September 30, 2018 |
At June 30, 2019, working capital was $4.335 million, total assets were $24.568 million, total liabilities were $16.693 million, and total equity was $7.875 million. The filing does not show a borrowings balance; nine-month interest expense was $4,000. It reports substantial asset-retirement and retirement-benefit obligations. No operating margin measure is stated.
Nine-month investing cash flow provided $802,000, including $1.519 million of proceeds primarily from refunds of Canadian income taxes previously withheld on property sales. Financing cash flow used $110,000, principally distributions to non-controlling interests. Cash declined by $930,000 over the nine months.
Material changes versus the prior comparable periods
- Nine-month revenue rose about 28%, primarily as oil and gas production increased following the Twining-area acquisition and contract-drilling revenue grew. The quarter’s revenue increase was about 8%.
- Nine-month loss attributable to Barnwell widened to $8.090 million from $712,000. A $2.413 million oil-and-gas ceiling-test impairment, lower oil prices and higher depletion contributed; the prior-year period included a $2.250 million gain on asset sales.
- Oil and gas revenue increased, but the segment reported a $3.541 million operating loss before general and administrative expenses for the nine months, compared with $174,000 of operating profit. Contract drilling reported a $145,000 nine-month operating loss before general and administrative expenses, versus $104,000 of profit.
- Land-investment proceeds were $165,000 for the nine months, versus $1.310 million in the prior-year period. Barnwell’s equity-method affiliates generated a $545,000 loss, compared with a $97,000 loss.
- General and administrative expense declined 6% for the nine months. Depletion, depreciation and amortization rose to $2.308 million from $694,000.
Outlook, risks and unusual items
- Management said existing cash and estimated future revenues should fund estimated cash outflows for the next 12 months. However, it warned that without sufficient oil-and-gas and land-investment inflows or timely financing, it may need asset sales or other strategies and may be unable to continue as a going concern beyond August 2020.
- Management is seeking financing for drilling, including planned Twining development. Estimated oil-and-gas development spending is approximately $1.3 million for the remainder of fiscal 2019 and $1.4 million for completion and pipeline work in fiscal Q1 2020, contingent on financing. A further approximately $600,000 Spirit River well was planned for fiscal Q1 2020. The company estimates approximately $14 million of capital expenditures over five years to develop proved undeveloped reserves.
- The company recorded $2.413 million of ceiling-test impairment in the first nine months and said a further impairment in fiscal Q4 was reasonably possible; it could not estimate the amount. Its ability to fund planned reserve development also affects the ceiling-test calculation.
- Production from certain Wood River wells was shut in after operator Trident Exploration ceased operations on April 30, 2019; restart timing was unknown. A new contract-drilling job was put on hold in July pending regulatory approvals. Difficult geological, casing, cementing and equipment issues also affected drilling results.
- Alberta’s regulator was preparing an abandonment order for certain non-producing Manyberries wells. Timing and cash costs for Barnwell’s share were unknown; the related estimated obligation is included in the balance sheet.
- In March 2019, a new partner entered the Increment II development. Barnwell’s indirect interest in KD II fell to 10.8%, and the land-payment arrangement changed, including rights to distributions and specified residential lots. Future proceeds depend on development and sales outside Barnwell’s control.
- A $300,000 unsecured loan made in March to an affiliate of the company was due July 31, 2019 and was repaid with accrued interest after June 30. The filing also reports a $1.042 million customer advance used toward a drilling rig and equipment, recorded within contract liabilities.
- Topic 606 adoption increased opening retained earnings by $20,000. For the nine months, it increased reported contract-drilling revenue by $638,000 and costs by $606,000, with a $32,000 improvement in net loss.
Important facts for investors to verify
- Whether Barnwell obtains financing for planned drilling and can fund the approximately $14 million of reserve-development spending.
- Whether commodity prices, reserve estimates or funding assumptions trigger additional ceiling-test impairment.
- When shut-in Wood River production and the paused drilling contract may resume, and their impact on cash flow.
- The timing, scope and potential cost of any Alberta abandonment order.
- Future Kukio partnership sales and distributions, including the practical value and obligations attached to the revised Increment II arrangement.
- That liquidity and going-concern disclosures remain current; management’s stated assessment was that the company could face inability to continue beyond August 2020 absent sufficient inflows or financing.