Business Context and Reporting Period
Company: Barnwell Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Barnwell operates four segments: oil and natural gas exploration/production in Canada; land investment in Hawaii; residential real estate development in Hawaii; and contract drilling in Hawaii. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2009 | Six Months Ended Mar 31, 2009 |
|---|---|---|
| Total Revenues | $7,171,000 | $17,093,000 |
| Net (Loss) Earnings | $(16,997,000) | $(16,573,000) |
| Net (Loss) Per Share (Basic) | $(2.06) | $(2.01) |
| Cash and Cash Equivalents | $7,188,000 | $7,188,000 (Ending Balance) |
| Working Capital | $3,929,000 | $3,929,000 |
| Total Long-Term Debt | $30,028,000 | $30,028,000 |
| Operating Cash Flow | N/A | $(4,327,000) Used |
Material Changes vs. Prior Period
- Net Loss vs. Net Income: The company reported a net loss of $16.997 million for the three months ended March 31, 2009, compared to net earnings of $1.685 million in the same period of 2008. For the six-month period, the loss was $16.573 million versus earnings of $5.004 million in the prior year.
- Asset Write-Down: The primary driver of the loss was a non-cash reduction of the carrying value of oil and natural gas properties totaling $22,088,000. This was required under the full cost method of accounting due to a significant decline in natural gas prices.
- Revenue Decline: Oil and natural gas revenues decreased 52% ($5.954 million) for the quarter and 39% ($8.333 million) for the six months, driven by price drops of 47% for natural gas and 61% for oil.
- Bad Debt Expense: A new bad debt expense of $594,000 was recorded for the current period due to collectability concerns regarding a customer affected by the economic crisis. No such expense was recorded in the prior year.
- Contract Drilling: Revenues in this segment decreased 54% for the quarter due to reduced well drilling activity.
Guidance, Outlook, and Risks
- Capital Expenditure Reduction: In response to declining commodity prices, the company scaled back oil and natural gas exploration and development activity in January 2009. Projected capital expenditures for fiscal 2009 are reduced to a range of $7.0 million to $8.0 million.
- Real Estate Outlook: The company anticipates completing two turnkey homes within two months of the filing date. However, the ability to sell these properties is contingent on the strength of the luxury real estate market, which has softened due to the recession.
- Liquidity and Credit Facilities:
- Canadian Facility: Renewed in April 2009 for $20 million CAD (approx. $15.87 million USD). Borrowings were $15.397 million with $473,000 unused. A decline in the CAD/USD exchange rate could force debt repayments.
- Hawaii Facility: $16 million revolving line for real estate development. Borrowings were $14.631 million with $1.369 million unused. The facility expires in December 2010.
- Risks: Continued declines in oil and natural gas prices could trigger further asset write-downs. Disruptions in credit markets may limit access to financing. There is no assurance that future development rights options or percentage-of-sales payments from land investments will be received.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current oil and natural gas prices against the March 31, 2009 ceiling test prices ($2.94/MCF for gas, $46.36/bbl for oil) to assess the risk of future write-downs.
- Real Estate Sales Progress: Monitor the status of the two turnkey homes under construction and their listing prices ($9.4 million for the first home) to gauge liquidity from the residential segment.
- Currency Exposure: Track the Canadian dollar to U.S. dollar exchange rate, as a further decline could reduce available credit under the Canadian facility and impact asset valuations.
- Debt Covenants: Review the terms of the Hawaii real estate credit facility regarding loan advance limitations based on appraised values, which could be reduced if property values decline.
- Bad Debt Resolution: Investigate the status of the receivable that triggered the $594,000 bad debt provision to determine if further provisions are necessary.