Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2012. The interim financial statements are unaudited. Barnwell operates in Canadian oil and natural gas and in Hawaiian land investment, contract drilling, and residential real estate.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | $7.17 million, versus $9.28 million in 2011 | $15.67 million, versus $20.60 million in 2011 |
| Net loss attributable to Barnwell | $2.98 million, versus $1.46 million in 2011; loss per share $0.36 versus $0.18 | $3.26 million, versus $0.38 million in 2011; loss per share $0.39 versus $0.05 |
| Cash flow from operations | Not separately presented for the quarter | $3.03 million, versus $7.16 million in 2011 |
| Cash and cash equivalents | $8.60 million at March 31, 2012, down from $9.83 million at September 30, 2011 | |
| Debt | $23.04 million total: $12.00 million revolving facility and $11.04 million real estate loan. The real estate loan was classified as current because the homes securing it were for sale. | |
| Liquidity | Current assets $24.47 million; current liabilities $19.08 million; working capital $5.39 million. Undrawn revolving credit was $8.02 million. |
For the six months, the company reported an operating loss before general and administrative expenses of $0.75 million, compared with operating profit of $2.92 million in 2011. A comparable consolidated operating margin is not stated in the filing. Capital spending totaled $4.33 million, and cash decreased by $1.24 million.
Material changes and drivers
- Quarterly revenue fell about 23%; six-month revenue fell about 24%. Oil and gas revenue declined 9% for the quarter but increased 4% for the six months.
- Natural gas prices were down 48% in the quarter and 29% for the six months year over year; gas production declined 5% in both periods. Higher oil prices and production partly offset this. Six-month oil production rose 23% and the average oil price rose 14%.
- Contract drilling activity weakened: six-month revenue fell 70%, and the segment’s operating loss before general and administrative expenses widened to $648,000 from $115,000.
- Land investment results weakened substantially: six-month land investment revenue was $353,000 versus $3.06 million, with no development-rights option receipts in 2012. One land lot sale generated a $353,000 net payment in the current period.
- A $1.85 million write-down of two luxury homes held for sale was recorded after a below-carrying-value sale contract was reached for one home. General and administrative expense fell 31% for the six months, largely because stock-appreciation-rights expense decreased $1.99 million. Depletion, depreciation, and amortization increased 17%.
Outlook, risks, and unusual items
- Management expects fiscal 2012 oil and gas capital expenditures of $5 million to $7 million, subject to cash flows and management’s assessment of prospects and market conditions.
- Management believes cash, operating cash flow, land proceeds, home sales, and available credit should fund operations and planned spending. It cautions that weaker commodity prices or production, lower land proceeds or home sales, a reduction in the revolving facility, or covenant issues could materially impair liquidity. Without higher oil or gas prices, operating cash flow may not cover capital spending needed to maintain production and reserves.
- The Canadian revolving facility was renewed through April 2013; it carried a 3.0% rate and had $8.02 million available. The bank’s next annual review is planned for April 2013; a conversion to a term loan could require repayments beginning July 2013. The company reported compliance with real estate loan covenants at March 31, 2012.
- The home sale was in escrow and expected to close in the quarter ending June 30, 2012, but completion was not assured. Natural-gas wells representing about 8% of 2011 gas production had been shut in by Barnwell or independent operators for economic or logistical reasons; future production effects are uncertain.
- Continued weak demand for Hawaiian water-well drilling could lead to further cost reductions, temporary shutdown, or sale or liquidation of drilling equipment. Development of certain Hawaiian land interests depends on regulatory approvals and negotiated terms, which are not assured.
- The prior-year comparison benefited from a $1.33 million gain on purchased drilling royalty credits under a program that has ended. The 2011 six-month period also included $2.50 million of net development-rights revenue. These items are not recurring in the current period.
Investor verification priorities
- Track cash generation, working capital, and access to the Canadian credit facility ahead of its April 2013 review.
- Verify the luxury-home escrow closing, actual proceeds applied to the real estate loan, and the effect on the loan’s current classification and liquidity.
- Monitor natural-gas prices, production and shut-in wells, along with whether planned capital spending can sustain reserves and output.
- Assess the recovery of Hawaiian contract drilling demand and the timing and value of future land-sale proceeds, which are uncertain and approval-dependent.
- Separate recurring operating performance from the home write-down, prior-year royalty-credit gains and land-sale receipts, and volatility in stock-appreciation-rights expense.