Barnwell Industries, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014; comparisons are with the year ended September 30, 2013. This is an annual filing, not a standalone fourth-quarter report. Barnwell operates oil and gas, land investment, contract drilling, and residential real estate businesses, principally in Canada and Hawaii.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $31.445 million | $24.608 million |
| Income (loss) before income taxes | $1.942 million | ($10.169 million) |
| Net earnings (loss) attributable to Barnwell shareholders | $672,000 | ($8.563 million) |
| Basic and diluted EPS | $0.08 | ($1.03) |
| Cash provided by operating activities | $5.569 million | $3.191 million |
| Cash and cash equivalents at year-end | $16.104 million | $7.828 million |
| Working capital at year-end | $11.997 million | Not stated here |
| Total debt at year-end | $11.099 million | $16.640 million |
- Revenue rose about 28%, but included a $3.399 million gain on sale of investments. Revenue excluding that gain and interest income was $28.017 million, versus $24.563 million.
- Oil and gas revenue declined 5% to $20.298 million as lower production outweighed higher realized prices. Net production fell 11% to 516,000 Boe; natural gas prices rose 43% to $3.84/Mcf, while oil prices were broadly flat at $80.40/Bbl.
- Contract drilling revenue increased 169% to $6.287 million, producing $952,000 of segment operating profit before corporate general and administrative expenses, compared with a $295,000 loss in FY2013. Management attributed the improvement mainly to an unusually large multi-well contract.
- Oil and gas segment operating profit before general and administrative expenses was $5.416 million, versus a $1.156 million loss in FY2013. The prior year included a $4.506 million oil and gas property carrying-value reduction; FY2014 had none.
- Net earnings also benefited from the $3.399 million investment-sale gain and a $271,000 foreign-currency transaction gain. Total comprehensive loss attributable to Barnwell was $2.577 million, including $2.009 million of currency translation loss and retirement-plan actuarial losses.
Cash, debt, and reserves
- Operating cash flow increased to $5.569 million. Investing activities provided $9.078 million, mainly from $13.846 million of oil and gas property sales and $3.297 million received from investment sales, partly offset by $5.140 million to acquire land-development partnership interests. Financing activities used $6.031 million, including debt repayments and distributions to non-controlling interests.
- Debt declined by $5.541 million year over year. The Canadian revolving facility had $7.0 million outstanding, $3.273 million of unused availability after letters of credit, and a 2.66% rate at year-end. The $4.099 million real estate loan carried a 3.41% rate and matures April 1, 2018; its balance was classified as current because the collateralized home was for sale.
- Proved reserves were 2.356 million Boe, all developed, down from 2.689 million Boe. Sales of reserves and production were partly offset by reserve revisions and additions. The standardized measure of discounted future net cash flows fell to $24.147 million from $31.934 million; the company cautions this measure is not fair value.
- Oil and gas property investment was $2.282 million excluding asset-retirement-obligation additions and revisions. The segment disclosure reports $4.824 million of capital expenditures including those ARO amounts.
Outlook, risks, and unusual items
- Management estimated FY2015 oil and gas property investment of $5 million to $12 million, subject to cash flows and its assessment of prospects. It expected Hawaii well-drilling activity to decrease slightly from FY2014 based on backlog.
- Management said current cash, working capital, available credit, operating cash flows, and land proceeds were expected to fund operations and planned needs. It warned that lower commodity prices or production, weaker property-sale proceeds, reduced credit availability, or covenant noncompliance could materially impair liquidity. Without a sustained improvement in oil and gas prices, operating cash flow may not fund investment sufficient to maintain production and reserves.
- Oil and gas sales were highly exposed to spot prices; over 90% of segment revenue came from spot-priced products. Risks include production declines, reserve-estimate uncertainty, foreign-exchange movements, regulatory and environmental costs, and dependence on third-party operators.
- The Alberta regulator’s inactive-well program may accelerate suspension and abandonment spending. Barnwell recorded $978,000 of current ARO at year-end; total ARO was $9.163 million. Environmental remediation accruals for contamination at Dunvegan and Wood River were $501,000.
- Barnwell had joint and several exposure under $5.4 million of performance bonds for land-development partnerships; it estimated maximum loss exposure from the investment and indemnity at approximately $10.058 million and considered a material bond call remote. No litigation was identified as likely to materially affect results, financial position, or liquidity.
- After year-end, the company received $1.2 million in percentage-of-sales payments from Hawaii lot sales, sold a residential parcel for $1.25 million (with proceeds required to reduce real-estate debt), and acquired additional Alberta property interests for approximately $526,000.
- The board amended bylaws in December 2014 to establish Delaware as the exclusive forum for specified shareholder claims and to provide for certain litigation-cost reimbursement. Investors may wish to review the full provisions.
Most important facts to verify
- Whether FY2015 operating cash flow and oil and gas investment can sustain production and reserves as management plans.
- The April 2015 bank review outcome, borrowing-base availability, and compliance with real-estate loan covenants.
- Whether Hawaii lot and home sales generate the expected proceeds and timely debt paydowns.
- Actual abandonment, inactive-well compliance, and environmental remediation costs versus recorded accruals.
- Reserve revisions, commodity-price sensitivity, and the effect of the FY2014 divestitures on future production and cash flows.
- Final purchase-price adjustments on FY2014 property sales and the post-year-end Progress-area acquisition.