Barnwell Industries, Inc. — Q1 FY2019 Form 10-Q
Business context and reporting period. The quarter ended December 31, 2018 covers Barnwell’s first fiscal quarter of 2019. The company operates oil and natural gas properties in Canada, invests in land interests in Hawaii, and provides water-well drilling and pump services in Hawaii. The financial statements are unaudited.
Financial performance and position
- Revenue: $2.595 million, up 40% from $1.856 million a year earlier. Oil and gas revenue was $1.232 million; contract drilling, $1.163 million; and land-interest sale revenue, $165,000.
- Profitability: Net loss attributable to Barnwell was $4.600 million, or $0.56 per diluted share, compared with a $1.017 million loss, or $0.12 per share. The company recorded a $2.170 million oil and gas ceiling-test impairment. Total expenses were $7.194 million.
- Segment results: Oil and gas had a $3.024 million operating loss before corporate general and administrative expenses, versus $96,000 operating income a year earlier. Contract drilling had a $210,000 operating loss, versus a $40,000 loss. Land investment contributed $165,000 of segment operating profit before fees and non-controlling interests.
- Cash flow: Operating activities used $998,000, compared with $1.787 million used in the prior-year quarter. Investing activities provided $1.291 million, including $633,000 in oil and gas asset-sale proceeds (a refund of taxes withheld on prior-year sales) and $352,000 in distributions from equity investees in excess of earnings. Financing activities used $107,000, principally non-controlling-interest distributions. Cash increased $133,000 to $6.098 million.
- Liquidity and liabilities: Working capital was $6.613 million; current assets were $10.831 million and current liabilities $4.218 million. Total liabilities were $15.495 million, including $6.446 million in asset retirement obligations and $4.463 million in retirement-benefit liabilities. The filing reports only $4,000 of interest expense and does not identify conventional borrowings on the balance sheet.
- Equity and comprehensive loss: Total equity was $11.183 million, down from $16.239 million at September 30, 2018, primarily reflecting the quarterly loss. Foreign-currency translation produced a $413,000 other comprehensive loss.
Material changes versus the prior-year quarter
- Oil and gas revenue rose 29%, mainly from higher production following the Twining acquisition, but oil and gas operating costs increased 103% and depletion increased substantially. Average oil price received fell 45% to $25.60 per barrel; the December average was approximately $9.52 per barrel. Production volumes increased for natural gas, oil, and liquids.
- The oil and gas segment’s results deteriorated by $3.120 million, primarily due to weaker oil prices and the impairment charge. Management cited western Canadian pipeline and refinery constraints as a factor depressing realized prices.
- Contract drilling revenue rose 38%, but operating costs rose 60%. Two jobs encountered unusually hard geological formations, slowing progress and reducing results.
- The quarter included $165,000 of land-related sale proceeds, versus none in the prior-year quarter. General and administrative expense increased $67,000, mainly from professional fees.
- The prior-year quarter included a $460,000 income-tax benefit from the Tax Cuts and Jobs Act’s AMT-credit refund provision; there was no comparable benefit this quarter. The current-quarter income-tax benefit was $105,000, versus $503,000 previously.
Outlook, risks, and notable items
- Management estimated fiscal 2019 oil and gas property investment of $600,000–$800,000. It also reported approximately $14 million of future capital spending to develop Twining proved undeveloped reserves over five years; management said reserve cash flows are estimated to fund this, but acknowledged that financing could be needed if cash inflows are insufficient, particularly after general and administrative costs.
- Management believes cash balances, working capital, and expected operating inflows should cover estimated cash outflows for the next 12 months from the report date. It also warned that if longer-term inflows or financing fall short, asset sales or other alternatives may be necessary, and the company might not continue as a going concern beyond February 2020.
- A further ceiling-test impairment in the quarter ending March 31, 2019 was described as reasonably possible; the company could not estimate its amount. Commodity prices, production, reserves, and development-cost assumptions affect the test.
- Cash generation depends on volatile oil and gas prices and on land-sale proceeds and partnership distributions whose timing is uncertain and outside Barnwell’s control. The company also faces uncertain drilling demand, contract cost-estimation risk, foreign-exchange exposure, and asset-retirement obligations; it reported no foreign-currency hedging.
- Barnwell adopted revenue-recognition Topic 606 on October 1, 2018, recording a $20,000 increase to opening retained earnings. The standard changed contract-drilling revenue timing, largely for uninstalled materials; the reported net-loss impact this quarter was a $1,000 decrease in income. The company was evaluating the forthcoming lease-accounting standard.
- Disclosure controls were assessed as effective at December 31, 2018, and no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether realized Canadian oil prices recover from the sharply lower December level, and the effect on operating cash flow and any subsequent ceiling-test impairment.
- Whether Twining production and cash flows support the planned development spending, and whether external financing will be required.
- Progress and profitability of drilling contracts, including the troubled jobs, backlog of approximately $5.738 million, and competitive conditions in Hawaii.
- Timing and amount of future Hawaii land-sale payments and Kukio partnership distributions; the filing provides no assurance of future proceeds.
- Liquidity, asset-sale options, and the going-concern warning, including management’s stated risk that the company may not continue beyond February 2020 if assumptions do not hold.