Barnwell Industries, Inc. — FY2016 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended September 30, 2016, not a standalone fourth-quarter report. Barnwell operates Canadian oil and natural gas properties and Hawaii land investment, water-well drilling, and residential real estate businesses.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $13.287 million | $17.533 million |
| Loss before equity in affiliates and taxes | $6.210 million loss | $1.397 million income |
| Net income (loss) attributable to Barnwell shareholders | $3.615 million loss; $(0.44) per share | $1.263 million income; $0.15 per share |
| Cash from (used in) operating activities | $1.770 million | $(7.132) million |
| Cash and cash equivalents at year-end | $15.550 million | $8.471 million |
| Working capital at year-end | $16.378 million | Not stated here |
| Total debt at year-end | $0 | $3.440 million |
- Revenue declined 24%. Management stated that excluding the $5.7 million home sale in FY2016, revenue declined 57% from FY2015.
- Operating cash flow improved primarily from a $3.714 million distribution of income from land-development affiliates and $5.132 million net proceeds from the home sale. Investing activities provided $9.378 million; financing activities used $4.252 million, including $3.440 million of debt repayment.
- The former real-estate loan was repaid after the home sale. Barnwell ended the year with no borrowings and a new $500,000 Canadian-dollar revolving demand facility, secured by a $500,000 Canadian-dollar guaranteed investment certificate; $34,000 of letters of credit were outstanding.
- At year-end, current and long-term asset-retirement obligations totaled $7.194 million; retirement-benefit liabilities were $6.707 million.
Material changes versus FY2015
- Oil and natural gas revenue fell 65% to $3.177 million, reflecting the sale of the Dunvegan and Belloy properties, lower production and weaker realized prices. Net gas production declined 72%; oil prices averaged $32.42 per barrel, down 30%, and gas averaged $1.27 per Mcf, down 43%.
- Oil and gas operations recorded a $2.355 million loss before general and administrative expenses, impairment and income taxes as presented by segment; the company also recorded a $1.154 million oil-and-gas ceiling-test impairment.
- Contract drilling revenue fell 54% to $2.233 million and the segment reported a $116,000 operating loss before general and administrative expenses, versus $922,000 of profit in FY2015.
- Net land-sale percentage payments fell to $1.915 million from $3.244 million. Equity income from land-development affiliates increased to $2.624 million from $1.580 million, aided by an affiliate’s sale of a $20 million oceanfront parcel.
- FY2016 included $5.7 million of residential real estate revenue from a home sale, generating $190,000 of operating profit before general and administrative expenses. FY2015 included a $6.217 million gain on the Dunvegan sale and a $272,000 gain on drilling equipment; FY2016 included a further $472,000 gain from final purchase-price adjustments on Dunvegan.
- General and administrative expense declined 26% to $6.361 million, reflecting cost reductions and the absence of FY2015’s $752,000 foreign-currency transaction loss.
Outlook, risks and unusual items
- Going-concern risk: Management warned that current cash may not cover both the reinvestment needed to sustain oil and gas operations and ongoing costs, retirement funding and asset-retirement obligations. It expects increasing dependence on uncertain land-sale payments and affiliate distributions and cautioned that Barnwell may be unable to continue as a going concern beyond one year if circumstances or reinvestment results are unfavorable.
- Management estimated FY2017 oil-and-gas investment of $2.0 million to $4.5 million, subject to cash flows and its assessment of opportunities. Existing oil-and-gas assets were expected to generate minimal operating cash flow at then-current prices and production.
- Water Resources’ contract backlog was approximately $3.8 million at December 1, 2016, of which $3.4 million was expected to be recognized in FY2017. Management expected drilling activity to increase versus FY2016 based on backlog, while noting demand and contract awards are volatile.
- Proved developed reserves fell 31% to 698,000 Boe; Barnwell reported no proved undeveloped reserves. The standardized measure of discounted future net cash flows was $2.910 million, down from $4.035 million; the filing cautions this is not fair value.
- Alberta’s revised liability-management rules may limit asset-sale buyers and acquisitions. Barnwell had no required security deposit at year-end, but weaker production or netbacks could worsen its ratio and trigger future cash deposits.
- A gas migration at a previously abandoned non-operated Alberta well led to an estimated remediation range of $400,000–$800,000; Barnwell accrued approximately $200,000 for its 50% interest. The 2015 pipeline spill had no remaining liability at year-end after insurance recovery.
- Other risks include commodity-price and Canadian-dollar exposure, uncertain Hawaii land sales and affiliate distributions, retirement-plan funding, potential reserve write-downs, and contingent liability under approximately $325,000 of affiliate performance bonds.
Important facts for investors to verify
- Whether operating cash flow and liquidity can support corporate costs, retirement funding, asset retirement obligations and planned oil-and-gas investment without relying on uncertain land proceeds or further asset sales.
- Progress, timing and economics of oil-and-gas reinvestment, and subsequent reserve, production and ceiling-test changes.
- Actual FY2017 conversion of the $3.8 million drilling backlog to revenue and cash, including any cancellations or change orders.
- Timing and proceeds from remaining Kaupulehu lots and the remaining oceanfront parcel, plus future distributions from the non-controlled development partnerships.
- Final remediation costs for the gas-migration event and any change in Alberta security-deposit requirements or Barnwell’s liability-management position.
- Whether retirement-plan assumptions, contributions and obligations change materially; the filing reports $2.053 million of FY2016 actuarial losses in other comprehensive income.