Barnwell Industries, Inc. — FY2018 Form 10-K
Business context and period: Fiscal year ended September 30, 2018; this is an annual report, not a standalone fourth-quarter report. Barnwell operates Canadian oil and natural gas properties and Hawaii land investment and water-well drilling businesses.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $9.368 million | $13.030 million |
| Operating loss before affiliate income and taxes | $2.242 million | $1.042 million |
| Net income (loss) attributable to Barnwell shareholders | $(1.770) million; $(0.21) per share | $1.171 million; $0.14 per share |
| Cash from operating activities | $(5.091) million | $(2.119) million |
| Cash and cash equivalents at year-end | $5.965 million | $16.281 million |
| Working capital at year-end | $8.453 million | — |
Revenue fell 28%, while the company moved from a profit to a loss. The filing reports no borrowings on the balance sheet; interest expense was $7,000. Current assets were $12.082 million and current liabilities $3.629 million. Cash used in investing activities was $3.884 million, including the Twining acquisition; financing activities used $1.070 million. No dividends were paid in either year.
Oil and natural gas segment revenue decreased 15% to $3.706 million. Average oil prices rose 27% to $51.53 per barrel, but natural gas prices fell 43% to $1.12 per Mcf; production was down for oil, gas, and total equivalent volumes. The segment generated $247,000 of operating profit before general and administrative expenses, versus $507,000.
Contract drilling revenue declined 4% to $3.769 million, while operating costs rose 13% to $3.650 million. The segment moved to a $104,000 operating loss before general and administrative expenses, from $437,000 of profit. Land investment revenue declined to $1.645 million from $4.503 million; equity-method income from land partnerships fell to $223,000 from $2.276 million.
Material changes and unusual items
- Barnwell acquired operated conventional oil assets in Alberta’s Twining area in August 2018 for $10.362 million and assumed $3.076 million of asset retirement obligations (ARO). It also sold its Red Earth property, recognizing a $2.140 million gain; total gains on asset sales were $2.255 million.
- Twining contributed to reported proved reserves of 2.462 million Boe at year-end, including 1.355 million Boe of proved undeveloped reserves. Development is estimated to require about $14 million for 12 gross (8.75 net) wells over five years. The company reported no proved undeveloped reserves a year earlier.
- The land partnerships’ lower earnings reflected the absence of a large oceanfront parcel sale recorded in the prior year. Barnwell received $735,000 of net partnership distributions in FY2018, versus $3.223 million in FY2017.
- A $601,000 income tax benefit contributed to FY2018 results, including a $429,000 benefit related to refundable alternative minimum tax credits under the Tax Cuts and Jobs Act. Barnwell also wrote off $165,000 for land covered by lava during the Kilauea eruption and recorded a $37,000 impairment on a residential parcel.
Outlook, risks and contingencies
Management expects FY2019 oil and natural gas property investment of approximately $2.7 million. It estimates current cash, working capital, and expected operating inflows will cover estimated outflows for the next 12 months. However, management warns that additional financing may be needed for the longer-term plan and says the company may be unable to continue as a going concern in 2020 and beyond if operating cash flows, land proceeds, or financing are insufficient. Reserve-engineer estimates of Twining cash flows exclude ongoing general and administrative costs.
Management expects FY2019 Hawaii drilling activity to be similar to or higher than FY2018, based on backlog and contracts considered likely to be awarded. The December 1, 2018 backlog was $5.8 million, of which $2.9 million was expected to be recognized in FY2019; backlog is subject to changes and cancellation.
- Commodity prices, production, pipeline capacity, Canadian-dollar movements, and access to capital could materially affect oil and gas cash flow. More than 80% of FY2018 oil and gas revenue was sold at spot prices; Barnwell did not use commodity or currency hedges.
- ARO totaled $7.122 million, including $444,000 current. The company had no Alberta regulator security deposit due at year-end, but a decline in production or netbacks could affect its liability-management ratio and create a deposit requirement.
- Management said a ceiling-test impairment was reasonably possible in the first quarter of FY2019 based on prices through December 2018; it could not estimate the amount.
- Future land proceeds depend on sales and development decisions by partnerships Barnwell does not control. A requested 20-year extension for development zoning had not yet been granted; a project status report was due April 20, 2019.
- The company identifies environmental, abandonment, drilling, partner-performance, Hawaiian real estate and tourism, and municipal contract-spending risks. Management reported no known material environmental contingencies or litigation likely to materially harm financial position, results, or liquidity.
Important facts for investors to verify
- Whether Twining delivers expected production and cash generation, and how the estimated $14 million development program will be funded alongside corporate costs and ARO.
- Actual cash burn, liquidity, and any financing or asset-sale plans, given negative operating cash flow and management’s longer-term going-concern warning.
- Whether FY2019 commodity prices and reserve revisions trigger the disclosed ceiling-test impairment, and whether reserve estimates remain supportable.
- Progress on Kaupulehu development approvals, remaining lot sales, and the timing and amount of future land-related proceeds and distributions.
- Whether drilling backlog converts to revenue and margin as expected, particularly the large job whose substantial work was deferred to late FY2019 or early FY2020.
Audit and controls: KPMG issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness because Barnwell qualified as a smaller reporting company.