Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2022, compared with the three months ended December 31, 2021. The filing was submitted February 13, 2023.
Business context and results
Barnwell operates oil and natural gas businesses in Canada and the United States, a Hawaii land-investment business, and a Hawaii contract-drilling and water-pumping business.
- Revenue: $7.511 million, up 38% from $5.454 million. Oil and gas revenue rose to $5.226 million from $3.920 million; contract-drilling revenue rose to $1.948 million from $876,000. Land-investment sale revenue declined to $265,000 from $600,000.
- Earnings: Net earnings were $1.209 million versus $1.340 million. Earnings attributable to Barnwell were $1.089 million versus $1.073 million; diluted earnings per share were $0.11 in both periods. Pretax earnings declined to $1.288 million from $1.452 million.
- Cash flow: Operating cash flow was $897,000, slightly below $909,000. Investing activities used $6.891 million, primarily reflecting oil and gas capital spending and operator advances. Cash fell by $6.068 million to $6.736 million.
- Liquidity and debt: Working capital was $6.747 million. Total current assets were $14.298 million and current liabilities were $7.551 million. Long-term debt was zero; the $44,000 CEBA loan was included in other current liabilities.
- Other balance-sheet items: Total assets were $36.861 million and total equity was $20.210 million at December 31, 2022. Oil and gas properties, net, were $18.998 million.
Changes versus prior year
- Oil and gas segment operating profit before general and administrative expenses increased to $1.986 million from $1.568 million. Management cited higher oil and natural-gas-liquids prices and increased net production, partly offset by lower Oklahoma production. Natural gas and oil production rose 46% and 23%, respectively; natural gas liquids production fell 23%.
- Contract drilling moved to a $48,000 operating profit before general and administrative expenses from a $151,000 loss, reflecting higher-value water-well work and recognition of previously uninstalled materials.
- Equity income from affiliates declined to $538,000 from $1.207 million, and land-investment sale revenue declined as one lot sold versus three a year earlier. The company said it does not anticipate further Increment I lot sales in fiscal 2023.
- General and administrative expense increased 23% to $2.249 million, primarily due to higher professional fees, partly offset by lower share-based compensation.
Outlook, risks and notable items
- Management estimated fiscal 2023 oil and gas property investment of $9 million to an upper figure shown in the filing as “$10,00,000”; the upper amount is unclear in the filing text and should be verified. The estimate may change with cash flow and management’s assessment of the market and prospects.
- In December, Barnwell acquired a 22.3% non-operated interest in Permian Basin acreage for $806,000 and funded a $4.293 million advance for its share of two planned wells. At quarter-end, $3.464 million remained as an advance to operators. The filing also reports a $255,000 broker fee paid to an entity controlled by an affiliate of the Oklahoma venture’s manager, whose relationship to Barnwell is disclosed as a related-party transaction.
- A $551,000 gain on sale of a fully depreciated drilling rig increased current-period results. It is a nonrecurring item.
- Oil and gas prices are volatile, and Barnwell says it cannot reasonably predict future prices. Contract-drilling demand and margins have been volatile; customer contract termination or delay, crew disruption, and the unresolved well-plumbness matter could affect performance. Management recorded no additional probable or estimable liability for the plumbness matter at quarter-end.
- Kukio partnership distributions were recognized as equity income while equity-method earnings recognition remains suspended; only one Increment I lot remained to sell, and Increment II has no definitive development plan.
- In January 2023, Barnwell entered a cooperation agreement resolving the potential 2023 proxy contest, agreed to appoint two directors and nominate a five-person slate, and terminated its Tax Benefits Preservation Plan. The agreement also includes limits on certain stockholders’ ownership and reimbursement of specified expenses.
- The Board declared a $0.015-per-share dividend in December, paid January 11, 2023, and declared another $0.015-per-share dividend in February, payable March 13, 2023. The ATM offering remained suspended. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Key facts for investors to verify
- Confirm the intended upper limit of the fiscal 2023 oil and gas investment estimate, which appears malformed in the filing.
- Track spending, well completion and production from the Texas investment, including application of the $3.464 million operator advance.
- Assess whether operating cash generation can support planned capital investment while cash balances have declined.
- Monitor oil and gas prices, production trends, contract-drilling backlog and margins, and the remaining Kukio lot-sale and development outlook.
- Review the effects of the cooperation agreement, director changes, ownership limits and termination of the tax-benefit rights plan.