Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2014. The company operates in Canadian oil and gas, Hawaii land investment, contract drilling, and residential real estate. Interim financial statements are unaudited.
Key financial results
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 |
|---|---|---|
| Revenue | $7.833 million, up 16% from $6.769 million | $15.034 million, up 13% from $13.320 million |
| Income (loss) before income taxes | $189,000 | $(873,000) |
| Net loss attributable to Barnwell | $(285,000); $(0.03) per share | $(1.274) million; $(0.15) per share |
| Operating cash flow | Not separately stated by quarter; $3.010 million for six months, versus $1.508 million in 2013 |
- Oil and gas revenue was $6.397 million for the quarter and $11.724 million for six months. Higher realized prices more than offset lower production; quarter prices rose 77% for natural gas, 13% for oil, and 11% for liquids, while production volumes declined across all three products.
- Contract drilling revenue increased 87% to $1.318 million for the quarter and 106% to $2.927 million for six months. Segment operating profit before general and administrative expenses was $151,000 for the quarter and $370,000 for six months, reversing prior-year losses.
- Consolidated operating margins are not presented as a single metric. Oil and gas operating expenses fell, partly reflecting the absence of prior-year environmental remediation costs and the weaker Canadian dollar. General and administrative expense rose 9% in the quarter.
- At March 31, cash and cash equivalents were $7.163 million, plus $1.947 million of restricted cash. Working capital was $2.571 million. Total assets were $61.384 million and total equity was $19.401 million.
- Total debt was $19.870 million, compared with $16.640 million at September 30, 2013; $5.770 million was classified as current. The increase primarily reflects a new $5.0 million land investment loan. The revolving facility had $10.5 million drawn and only $175,000 of availability under its amended terms.
- Six-month investing cash outflow was $4.922 million, including $5.140 million for land-development partnership interests and $2.700 million in oil and gas capital expenditures, partly offset by $2.828 million of asset-sale proceeds. Cash declined $665,000 over the period.
Material changes and unusual items
- Net loss improved from $2.944 million to $285,000 for the quarter and from $5.690 million to $1.274 million for six months. A principal factor was that no oil-and-gas carrying-value reduction was required in 2014, versus impairments of $2.179 million for the 2013 quarter and $4.506 million for the 2013 half-year. Oil and gas segment operating results also improved, while production declined.
- In November 2013, Barnwell invested $5.140 million for interests in Hawaii land-development partnerships, financed in part by the new $5.0 million loan. Its equity-method share of partnership losses was $263,000 for six months. The acquisition accounting remained incomplete at quarter-end.
- Foreign-currency translation losses were $1.701 million for six months and reduced accumulated other comprehensive income. The six-month effective tax rate was negative 55%; management cites the different U.S. and Canadian tax positions and limited expected benefit from U.S. tax losses. Canadian federal tax returns for fiscal 2010 and 2011 are under examination.
- Environmental remediation accruals for identified contamination sites were $582,000 at March 31. Barnwell also shares joint and several indemnification exposure on approximately $5.4 million of surety bonds; the company estimated maximum exposure tied to the partnership investment at $10.277 million and said a material bond call was remote.
Guidance, outlook, and risks
- Management estimated fiscal 2014 oil and gas capital expenditures of $4.0 million to $4.5 million, subject to cash flows and its assessment of the operating environment. The company did not participate in drilling during the quarter.
- Management believed cash, operating cash flows, and land-investment proceeds would fund operations and planned spending, but warned liquidity could be materially affected by lower oil and gas prices or production, weaker land or home-sale proceeds, reduced credit availability, or covenant breaches. It said sustained increases in oil and gas prices may be needed to fund investment sufficient to maintain production and reserves.
- After quarter-end, Barnwell sold Alberta properties for preliminary adjusted proceeds of approximately $4.511 million in April and Boundary Lake properties for approximately $6.049 million in May. Cash received was about $2.256 million and $2.956 million, respectively, with amounts withheld for potential Canadian taxes and final purchase-price adjustments pending. Proceeds were intended for investment, debt reduction, and other opportunities. These sales were expected to reduce the full-cost pool without recognized gain or loss.
- On April 29, 2014, the Canadian revolving facility was renewed with its maximum reduced to C$11.8 million (approximately US$10.675 million at the stated exchange rate). The bank reviews the facility annually and may renew it or convert it to a term loan; covenant compliance and refinancing remain risks. Other disclosed risks include illiquid, non-controlling land investments, possible additional capital contributions, potential impairment, and loan balloon payments.
Investor verification priorities
- Track oil and gas prices, declining production, and whether planned capital spending can sustain reserves and output.
- Confirm final proceeds, tax withholdings, and debt reduction following the April and May property sales, and monitor the reduced revolving-credit availability.
- Review covenant headroom, loan maturities, required payments upon property sales, and the status of the residential home held for sale.
- Assess the land-development partnerships’ lot sales, cash generation, acquisition accounting, potential capital needs, and surety indemnification exposure.
- Monitor environmental remediation costs and the outcome of the Canadian tax examination.