Barnwell Industries, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; comparisons are with the three months ended December 31, 2016 unless stated otherwise. Barnwell operates Canadian oil and gas, Hawaii land investment, and Hawaii contract drilling businesses. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Revenue | $1.856 million | $4.290 million |
| Operating costs and expenses | $3.240 million | $4.361 million |
| Loss before taxes | $1.537 million | Earnings of $2.255 million |
| Net income (loss) attributable to Barnwell | $(1.017) million; $(0.12) per share | $1.641 million; $0.20 per share |
| Operating cash flow | $(1.787) million | $(0.966) million |
| Cash and cash equivalents | $12.764 million at Dec. 31, 2017 | $16.281 million at Sept. 30, 2017 |
| Certificates of deposit | $5.157 million | $4.413 million at Sept. 30, 2017 |
| Working capital | $18.590 million | Not stated for the comparable period |
| Total liabilities | $14.569 million | $14.837 million at Sept. 30, 2017 |
Revenue fell about 57%. The filing presents no borrowings or debt line on the balance sheet; debt terms or borrowing availability are not provided. Cash and cash equivalents decreased $3.517 million during the quarter. Investing activities used $1.217 million, including a net $744,000 investment in certificates of deposit; financing activities used $506,000, primarily distributions to non-controlling interests. No interest was paid during the quarter.
Material changes and segment results
- The earnings swing chiefly reflects the absence of prior-year land-sale-related revenue and affiliate income. In Q1 FY2017, a Kukio partnership sold an oceanfront parcel for $20.975 million, generating Barnwell a $1.678 million percentage-of-sales payment and $2.326 million equity-method income. There were no lot sales in the current quarter; Barnwell recorded a $153,000 equity-method loss.
- Oil and gas revenue declined 16% to $953,000 as production fell; lower natural gas prices partly offset higher oil and liquids prices. Segment operating profit before general and administrative expense was $96,000 versus $60,000.
- Contract drilling revenue declined 40% to $842,000. The segment had a $40,000 operating loss before general and administrative expense, versus $176,000 profit, partly because the prior-year quarter included a high-value geothermal well abandonment contract.
- General and administrative expense declined 27% to $1.481 million, primarily due to lower compensation and professional fees.
- A $460,000 income tax benefit was recorded following the Tax Cuts and Jobs Act’s provision for refunds of unused alternative minimum tax credits. The company said the federal tax-rate reduction had no quarter-end financial statement impact because of a full valuation allowance on its U.S. federal deferred tax assets.
Outlook, risks, and significant items
- Management projects that existing oil and gas assets will have negative operating cash flow, citing commodity-price pressure, declining production, and rising costs. It warns current cash may not fund reinvestment, asset retirement obligations, pension contributions, and ongoing expenses.
- Barnwell expects increasing reliance on uncertain, uncontrollable future land proceeds and Kukio partnership distributions. Management says the company may need alternative strategies and could be forced to wind down through liquidation, bankruptcy, or further asset sales; it may not be able to continue as a going concern beyond one year if it cannot make sufficient successful investments or other adverse circumstances arise.
- Fiscal 2018 oil and gas property investment is estimated at $750,000–$1.250 million, subject to cash flows and management’s assessment of the business environment.
- In October 2017, the company sold its Pouce Coupe, Alberta properties for an adjusted $72,000; final customary purchase-price adjustments were pending and not expected to be material. In February 2018, it sold Red Earth properties for an adjusted $1.360 million. The gain, if any, was not yet estimable and was expected to be recorded in the quarter ending March 31, 2018.
- The current portion of the asset retirement obligation was $1.092 million. Alberta regulatory requirements accelerate remediation of inactive wells. Barnwell estimates approximately $500,000 of fiscal 2018 pension plan contributions.
- Future land proceeds are uncertain: 23 of 80 developed Increment I lots remained for sale, while remaining Increment II acreage was not under development. Contract drilling demand and awarded work can fluctuate significantly, with recent weak demand contributing to competition and lower margins.
Important facts for investors to verify
- Whether operating cash burn, asset retirement spending, pension funding, and planned capital expenditures can be funded without further asset sales or land partnership distributions.
- The timing and amount of Kukio-related lot sales and distributions, and the status of development in Increment II.
- The final accounting and realized gain or loss on the February 2018 Red Earth sale, including final sale adjustments.
- Oil and gas production, prices, and costs following the Alberta property sales, and whether remaining operations achieve management’s investment and cash-flow objectives.
- The filing’s stated liquidity and going-concern risks, including the possibility of a wind-down or inability to continue beyond one year.