Barnwell Industries, Inc. — Form 10-Q Summary
Business context and period: Unaudited fiscal third quarter ended June 30, 2012, with comparative results for the three- and nine-month periods ended June 30, 2011. Barnwell operates in Canadian oil and gas, Hawaii land investments, contract drilling, and residential real estate. The report was signed August 10, 2012.
Financial performance and position
- Revenue: Third-quarter revenue was $12.36 million, up from $8.99 million, mainly due to a $5.98 million home sale. Nine-month revenue was $28.03 million, down from $29.59 million. Oil and gas revenue declined 35% in the quarter and 10% year to date.
- Earnings: The quarter resulted in a $1.40 million net loss ($0.17 per share), versus net income of $0.89 million ($0.10 per share) a year earlier. Nine-month net loss was $5.07 million ($0.56 per share), compared with net income of $0.98 million ($0.05 per share).
- Profitability: Pretax loss was $1.66 million for the quarter and $4.85 million for nine months. Nine-month general and administrative expense was $6.09 million; depletion, depreciation and amortization was $8.17 million. No consolidated operating-margin figure is presented.
- Cash flow: Nine-month operating cash flow was $10.63 million, down from $13.85 million. Investing used $4.68 million and financing used $6.06 million, including $6.35 million of debt repayments. Cash decreased $0.12 million to $9.72 million.
- Liquidity and debt: Working capital was $5.88 million; cash was $9.72 million and unused Canadian credit availability was $7.63 million. Debt totaled $17.36 million: $12.00 million under the Canadian revolving facility and $5.36 million of real-estate debt classified as current. The revolving facility was renewed through April 2013; its June 30 rate was 2.7%. The real-estate loan rate was 3.57%. Barnwell reported compliance with its real-estate loan covenants.
- Balance sheet: Total assets were $74.96 million, down from $88.77 million at September 30, 2011; equity was $34.86 million, down from $38.71 million.
Material changes versus comparable periods
- Lower natural gas, oil and liquids prices, reduced net gas production, and higher depletion costs weakened oil-and-gas results. In the quarter, average realized prices fell 64% for gas, 20% for oil and 25% for liquids year over year; net gas production fell 11%.
- Nine-month land-investment results fell because there were no development-rights option receipts and percentage-of-sales receipts were lower. The final development-rights option payment had been received in December 2010.
- A $1.85 million write-down of two homes held for sale was recorded during the first six months of fiscal 2012. One home subsequently sold in June for $5.98 million, at a nominal loss, and $5.28 million of real-estate debt was repaid from the sale.
- Prior-year nine-month results included $1.42 million of gains from purchased drilling royalty credits; the Alberta program ended and no comparable gain occurred in 2012.
- Contract drilling improved in the quarter but remained loss-making for the nine-month period. The quarter benefited from higher activity and the absence of prior-year job difficulties; year-to-date activity was lower.
- Foreign-currency translation contributed $0.73 million of other comprehensive income for nine months, versus $2.35 million a year earlier; the quarter recorded a $0.71 million translation loss.
Outlook, commentary and risks
- Management expected fiscal 2012 oil-and-gas capital expenditures of $5 million to $7 million; actual spending and plans could change with cash flows and its assessment of industry conditions.
- Management believed cash, operating cash flow, land proceeds, home sales and available credit would fund operations and planned spending. It cautioned that lower commodity prices or production, weaker land or home-sale proceeds, reduced credit availability at the April 2013 review, or covenant problems could materially impair liquidity and financial condition. Without higher oil or gas prices, operating cash flow may not cover capital spending needed to maintain production and reserves.
- Some gas wells had been shut in for economic or operational reasons; further shut-ins could reduce production and revenue. Management said future shut-ins were difficult to predict.
- Hawaii development opportunities depend on regulatory reclassification, rezoning, approvals and negotiated terms. The filing states there is no assurance these will be obtained, including for Lot 4C and Mauka Lands; failure could lead to investment write-offs.
- Water-well drilling faces weak demand, competition and lower expected margins; prolonged weakness could require cost reductions, a temporary shutdown, or equipment sales.
- No material subsequent events were reported. Management concluded disclosure controls were effective as of June 30, 2012, with no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether commodity prices, production and any gas-well shut-ins support the capital-spending plan and reserve levels.
- The April 2013 revolving-credit review outcome, available borrowing capacity and any resulting repayment requirements.
- Cash generation and liquidity after home-sale proceeds, scheduled debt service and planned capital expenditures.
- Remaining home-sale prospects and valuation, and the status of land-use approvals, development negotiations and related proceeds.
- Contract-drilling demand and margins, and whether the segment can reduce its year-to-date operating loss.