Barnwell Industries, Inc. — FY2017 Form 10-K
Business context and reporting period. Fiscal year ended September 30, 2017; comparative figures are for FY2016. Barnwell operates Canadian oil and gas, Hawaii land investments, and Hawaii contract drilling and water-pump services. The filing is an annual report, not a standalone fourth-quarter report.
Financial performance and position
| Metric | FY2017 / September 30, 2017 | FY2016 / September 30, 2016 |
|---|---|---|
| Revenue | $13.030 million | $13.627 million |
| Net earnings (loss) | $2.314 million | $(2.864) million |
| Net earnings (loss) attributable to Barnwell shareholders | $1.171 million; $0.14 per share | $(3.615) million; $(0.44) per share |
| Cash from operating activities | $(2.119) million | $1.770 million |
| Cash from investing activities | $2.911 million | $9.378 million |
| Cash and cash equivalents | $16.281 million | $15.550 million |
| Certificates of deposit | $4.413 million | — |
| Working capital | $20.344 million | — |
| Total debt | None outstanding | Real estate loan repaid in FY2016 |
Margins and segments. Oil and gas revenue rose 38% to $4.383 million, while operating costs were $3.028 million; segment operating profit before corporate general and administrative expense was $0.507 million. Contract drilling revenue rose 76% to $3.938 million, producing $0.437 million of segment operating profit before general and administrative expense. Land investment revenue was $4.503 million, with segment operating profit of $4.348 million before general and administrative expense. Consolidated costs and expenses were $14.072 million; loss before equity in affiliate income and taxes was $1.042 million. No consolidated gross or operating margin is presented on a directly comparable basis in the filing.
Oil and gas production totaled 151,000 Boe, down from 166,000 Boe; average realized oil and gas prices increased. Proved reserves were 931,000 Boe, up 33%, all developed, with no proved undeveloped reserves. The standardized measure of discounted future net cash flows was $4.317 million; the filing cautions this is not fair value.
Material changes versus FY2016
- Revenue decreased 4%, partly because FY2016 included $5.700 million from a home sale; FY2017 had no residential real estate revenue.
- Shareholder-attributable earnings improved by $4.786 million. Key contributors included a $2.500 million payment tied to distributions by KD II, improved oil and gas results, better contract drilling results, and no repeat of FY2016’s $1.154 million oil and gas impairment.
- Operating cash flow swung from positive $1.770 million to negative $2.119 million, reflecting the prior-year home-sale proceeds and lower affiliate distributions, partly offset by improved segment results.
- Cash increased to $16.281 million, with an additional $4.413 million in certificates of deposit. Property and equipment fell to $5.369 million from $6.902 million. Total liabilities declined to $14.837 million from $17.824 million, and the company had no debt at year-end.
Outlook, risks, contingencies and unusual items
- Going concern and liquidity: Management says existing oil and gas assets are projected to generate negative operating cash flow, and cash may not cover reinvestment, asset-retirement obligations, retirement-plan funding, and ongoing expenses. Barnwell expects increasing reliance on uncertain land proceeds and partnership distributions and warns it may be unable to continue as a going concern beyond one year absent successful investment or other strategies.
- FY2018 expectations: Estimated oil and gas capital investment is $1.5–$2.0 million, subject to cash flows and management’s assessment. Management expects well-drilling activity to be comparable to FY2017 based on backlog. At December 1, 2017, drilling and pump-services backlog was $6.2 million, of which $3.8 million was expected to be recognized in FY2018. These are estimates, not earnings guidance.
- Land proceeds: FY2017 land revenue included $2.003 million in percentage-of-sales receipts and a $2.500 million KD II distribution-related payment. Further receipts depend on sales and development decisions outside Barnwell’s control. Twenty-three Increment I lots remained unsold; Increment II’s remaining acreage was not under development.
- Oil and gas obligations: Asset-retirement obligations totaled $6.863 million, including $1.231 million current. No Alberta security deposit was due at year-end, but Barnwell’s liability-management ratio was below 1.2 and could be pressured by weaker production or netbacks. Its ability to sell or acquire licensed properties may be constrained by regulator requirements.
- Other exposures: Commodity-price and Canadian-dollar currency volatility, environmental and abandonment costs, retirement-plan funding, uncertain contract drilling margins, Hawaii real estate conditions, and partnership illiquidity are key risks. A gas-migration remediation accrual was reduced from about $200,000 to approximately $2,000 at year-end. A $155,000 impairment was recorded on a Hawaii residential lot.
- Subsequent events: In December 2017 Barnwell agreed to sell Red Earth oil properties for $1.560 million, expected to close in January 2018, subject to customary adjustments. A Pouce Coupe property sale for adjusted proceeds of $73,000 was agreed in October 2017.
- The company reported an unqualified KPMG audit opinion. Management concluded internal controls were effective; the auditor did not attest to internal controls because Barnwell was not an accelerated filer.
Most important facts for investors to verify
- Cash runway and funding needs against negative projected oil and gas operating cash flow, retirement-plan contributions, and asset-retirement requirements.
- Actual proceeds and closing terms from the Red Earth sale, and the effect of continuing oil and gas dispositions on production and reserves.
- Timing, amount, and sustainability of Kaupulehu/KD I and KD II sales receipts and distributions; distinguish one-time FY2017 proceeds from recurring operations.
- FY2018 contract backlog conversion, project profitability, and exposure to fixed-price contract overruns.
- Current Alberta liability-management ratio, potential security requirements, and updated abandonment and remediation estimates.
- Reserve assumptions and sensitivity to commodity prices, costs, production, and future revisions; the standardized measure is not a valuation of the company.