Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; comparisons are with the three months ended December 31, 2012. Barnwell operates in Canadian oil and gas, Hawaiian land investment, Hawaiian contract drilling, and residential real estate.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $7.201 million | $6.551 million | Up 10% |
| Operating loss before affiliate loss, interest and taxes | $0.915 million loss | $3.350 million loss | Improved |
| Net loss attributable to Barnwell | $0.989 million | $2.746 million | Improved by $1.757 million |
| Basic and diluted loss per share | $0.12 | $0.33 | Improved |
| Cash from operations | $0.999 million | $1.743 million | Down $0.744 million |
| Capital expenditures, oil and gas cash basis | $1.617 million | $0.973 million | Up $0.644 million |
Revenue rose mainly on higher contract drilling activity; oil and gas revenue declined 6% to $5.327 million as lower production outweighed higher natural gas prices. Contract drilling revenue increased 124% to $1.609 million. Oil and gas operating costs rose 32% to $2.621 million, primarily due to repairs and workovers, including work at a major oil battery. Consolidated gross margin is not presented as a clear value in the filing.
Assets were $65.929 million at December 31, versus $62.714 million at September 30, 2013. Cash and cash equivalents were $5.269 million; an additional $2.000 million was restricted. Total debt was $20.692 million, versus $16.640 million at September 30; $7.106 million was classified current. Stockholders’ equity was $19.990 million. Cash declined by $2.559 million during the quarter.
Material changes and notable items
- The prior-year quarter included a $2.327 million oil and gas asset carrying-value reduction; no such reduction was recorded in the current quarter. This was a major reason the reported net loss improved.
- Oil and gas operating profit before general and administrative expenses fell to $0.647 million from $1.112 million before the prior-year impairment, reflecting lower production and higher operating costs. Natural gas production fell 16%; oil volumes fell 3% and liquids volumes fell 21%.
- Contract drilling moved from a $0.006 million operating loss to $0.219 million operating profit before general and administrative expenses, reflecting increased water-well activity and improved margins, partly offset by costs on pump installation and repair work.
- In November 2013, Barnwell acquired interests in Hawaiian land-development partnerships for $5.140 million, funded partly with a new land investment loan. The investment is accounted for under the equity method; Barnwell recorded $0.147 million of allocated losses through December 31. It paid the remaining $1.000 million in January 2014 and borrowed another $0.814 million, bringing the loan to its $5.000 million limit.
- Foreign-currency translation produced a $0.780 million other comprehensive loss; total comprehensive loss attributable to Barnwell was $1.761 million.
Liquidity, outlook and risks
Management said cash, operating cash flows, land proceeds and available credit were expected to fund operations, planned capital spending and scheduled debt service. At quarter-end, $6.804 million remained available on Barnwell’s Canadian revolving facility, which carried a 2.66% rate and was subject to an annual review planned for April 2014. The $12.000 million balance could be renewed or converted by the bank to a two-year term loan, which would trigger scheduled repayments.
Management expected fiscal 2014 oil and gas capital expenditures of $4.0–$4.5 million, subject to cash flows and its assessment of operating prospects. Two gross (1.2 net) Canadian development wells were drilled during the quarter and both appeared successful. Management cautioned that, absent higher oil or natural gas prices, oil and gas operating cash flow might not support capital spending needed to maintain current production and reserves.
- Liquidity is exposed to commodity prices and production, land and home sale proceeds, the Canadian credit facility review, and compliance with debt covenants. A covenant breach could require early repayment; the loans include debt-service coverage and liabilities-to-tangible-net-worth tests.
- The land partnerships are illiquid and non-controlled; additional contributions may be required, and investment value depends on future development costs and lot sales. Barnwell’s stated maximum exposure from the investment and joint surety indemnity was $9.693 million. Management considered a material call on the approximately $4.7 million of performance bonds remote.
- Environmental remediation liabilities were accrued at $0.781 million; actual costs could differ. Canadian tax returns for fiscal 2010 and 2011 were under examination.
- The filing identifies refinancing and balloon-payment risks, possible future oil and gas property impairments, and significant foreign-exchange exposure. It provides no quantitative earnings guidance.
Management reported disclosure controls and procedures were effective as of December 31, 2013, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- April 2014 outcome of the Canadian revolving-credit-facility review, available borrowing capacity and repayment terms.
- Compliance with loan covenants and the timing and sources for servicing the increased debt balance.
- Actual oil and gas production, repair costs, commodity prices and capital spending relative to the $4.0–$4.5 million fiscal 2014 estimate.
- Land-development partnership sales, cash distributions, future funding needs, carrying value and potential obligations under the surety indemnification.
- Resolution of the Canadian tax examination and eventual environmental remediation costs.