Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2019 (fiscal 2019 second quarter). Barnwell operates oil and gas properties in Canada, Hawaii land investments, and Hawaii contract drilling and water-pump services.
Financial results and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $2.963 million, versus $1.975 million in 2018 | $5.558 million, versus $3.831 million in 2018 |
| Net income (loss) attributable to Barnwell | $(2.125) million, versus $0.679 million | $(6.725) million, versus $(0.338) million |
| Basic and diluted EPS | $(0.26), versus $0.08 | $(0.81), versus $(0.04) |
| Cash from (used in) operating activities | Not presented quarterly | $(0.821) million, versus $(3.461) million |
- Second-quarter revenue rose about 50%; six-month revenue rose about 45%. Higher oil and gas production drove the increase, partly offset by lower realized oil and liquids prices.
- At March 31, cash and cash equivalents were $6.427 million; working capital was $5.193 million. Current assets were $10.793 million and current liabilities $5.600 million.
- Total assets were $26.145 million and total liabilities $16.970 million. The filing reports no material borrowing balance; interest expense was $4,000 for the six-month period.
- Six-month investing cash flow was positive $1.425 million, including $1.519 million in proceeds primarily from Canadian tax refunds related to prior property sales and $352,000 of distributions from equity investees in excess of earnings. Financing cash outflow was $110,000, consisting of distributions to non-controlling interests.
- No consolidated profit margin is provided. Oil and gas segment operating loss before general and administrative expense was $3.276 million for six months; contract drilling segment operating loss on the same basis was $514,000.
Material changes and unusual items
- Six-month oil and gas results included a $2.413 million ceiling-test impairment, compared with none in the 2018 period. The second-quarter impairment was $243,000. Lower trailing average commodity prices contributed; further impairment may result if prices or the company’s ability to fund development change.
- The prior-year periods included a $2.250 million gain on asset sales, primarily the Red Earth oil-property sale. No comparable gain was recorded in 2019.
- Contract drilling results deteriorated after unexpected geological, weather, cementing, and casing difficulties on two jobs. Six-month drilling revenue increased 16%, but operating costs increased 49%.
- Oil and gas production increased substantially following Twining-area activity and acquisitions, but realized prices were mixed. Six-month average oil price fell 27% to $34.90 per barrel and liquids price fell 24% to $31.62; natural gas price rose 5% to $1.55 per Mcf.
- Adoption of revenue-recognition Topic 606 increased opening retained earnings by $20,000. It materially changed the timing and gross presentation of some drilling revenue and costs, primarily for uninstalled materials, but had little effect on reported earnings.
- In March, a drilling customer advanced $1.25 million for a three-well contract not yet started at quarter-end. Barnwell planned to use the advance toward a new rig and ancillary equipment, which will remain company-owned and available for other work after the contract.
Outlook, risks, and contingencies
- Management said cash balances and estimated future revenue should cover estimated cash outflows for the next 12 months. However, it stated that, without adequate oil and gas and land-investment cash inflows or timely, sufficient financing, the company might need asset sales or other alternatives and might not continue as a going concern beyond May 2020.
- Management is seeking financing for oil and gas development. Approximately $14 million of capital spending over five years is estimated to be needed to develop proved undeveloped reserves, largely in Twining; development drilling needs to begin within 12 months to help offset declining production from existing properties.
- Fiscal 2019 total capital expenditures were estimated at $1.7 million to $2.0 million, including approximately $1.3 million for a new contract-drilling rig and equipment. This estimate excludes oil and gas property acquisitions and asset-retirement-obligation additions or revisions.
- On April 30, 2019, the operator of certain Wood River wells ceased operations; restart timing was unknown. Those wells generated about $55,000 of operating margin in the March quarter.
- The Alberta Energy Regulator notified Barnwell in April that it was preparing an abandonment order for certain non-producing Manyberries wells. Timing and cash cost are unknown; the company has interests in approximately 9.4 net wells involved. Related estimated obligations are included in its asset-retirement-obligation balance.
- Hawaii land proceeds and distributions from Kukio partnerships are uncertain and outside Barnwell’s control. A development partner joined Increment II in March, changing Barnwell’s indirect interest in that entity to 10.8% and revising its distribution and profit rights. Increment I had 19 lots remaining at quarter-end.
- Barnwell made an unsecured $300,000 loan to an affiliate of a land-partnership partner on March 27, bearing 8% interest and due July 31, 2019. The filing also identifies commodity-price, Canadian-dollar, contract-award, reserve-estimate, retirement-benefit, and asset-valuation risks. Barnwell reported no foreign-currency hedging.
Important facts for investors to verify
- Whether Barnwell obtains financing and can fund planned reserve development and the rig purchase while maintaining liquidity.
- Whether oil and gas prices, production, and reserve estimates support the carrying value of its properties and avoid additional ceiling-test impairments.
- When Wood River wells resume operation and what costs or obligations result from any Manyberries abandonment order.
- Whether drilling jobs achieve acceptable margins, including the new three-well contract, and how the $1.25 million customer advance is applied.
- Repayment of the $300,000 related-party note and timing and amounts of future Kukio land proceeds and distributions.
- Management’s conditional liquidity outlook, including its statement that the company may not continue as a going concern beyond May 2020 if cash inflows or financing prove inadequate.