Barnwell Industries, Inc. — Form 10-Q Summary
Business context and reporting period
For the first quarter of fiscal 2020, the three months ended December 31, 2019. Barnwell operates oil and natural gas properties in Canada, contract drilling and water-well services in Hawaii, and land investments in Hawaii. Results are unaudited and compared with the three months ended December 31, 2018.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2019 | Prior-year quarter |
|---|---|---|
| Total revenue, including interest | $4.850 million | $2.595 million |
| Loss before income taxes | $421,000 | $4.678 million |
| Net loss attributable to Barnwell | $414,000; $0.05 per share | $4.600 million; $0.56 per share |
| Cash used in operating activities | $1.366 million | $998,000 |
| Cash and cash equivalents, quarter-end | $2.399 million | $6.098 million |
Revenue before interest increased about 88%, from $2.574 million to $4.843 million. Oil and natural gas revenue was $2.141 million, and contract drilling revenue was $2.646 million. Operating profit before general and administrative expenses was $322,000 for oil and gas and $747,000 for contract drilling. Consolidated gross margin is not presented as a clear value.
At December 31, 2019, working capital was $1.232 million, total assets were $23.322 million, total liabilities were $19.768 million, and total equity was $3.554 million. The filing does not provide a clear total-debt figure; interest expense was zero for the quarter. Cash fell $2.214 million during the quarter. Investing activities used $863,000, including $1.444 million of cash oil-and-gas capital expenditures. Oil-and-gas capital expenditures including accruals were $3.105 million.
Changes versus the prior comparable period
- Attributable net loss narrowed by $4.186 million. The prior-year quarter included a $2.170 million oil-and-gas ceiling-test impairment; there was no impairment in the current quarter.
- Oil-and-gas revenue rose $909,000, principally reflecting higher prices: average oil price increased 90% to $48.76 per barrel and natural gas price rose 60% to $1.84 per Mcf. Oil production was flat; gas production increased 20%.
- Contract drilling revenue rose 128% to $2.646 million, primarily from a significant multi-well contract; segment operating results before general and administrative expenses improved by $957,000.
- No land-sale payment revenue was recorded, compared with $165,000 in the prior-year quarter. No lots were sold in the current quarter.
- Operating cash use increased $368,000, mainly due to working-capital timing. Oil-and-gas capital expenditures including accruals rose from $397,000 to $3.105 million.
Outlook, risks, contingencies and unusual items
- Management believes cash and estimated future operating cash flows can fund expected outflows for the next 12 months, contingent on assumptions including no decline in oil and gas prices and no unforeseen drilling-contract delays or difficulties. If results fall short and financing or asset sales are insufficient, the company warns it may be unable to continue as a going concern beyond February 2021.
- Fiscal 2020 oil-and-gas investment is estimated at $3.4 million to $5.7 million. Approximately $12 million of future capital expenditures over five years is estimated to be needed to develop proved undeveloped reserves, largely at Twining. A Twining well was still being evaluated; a second well was conditional on adequate funding, market conditions and first-well results.
- The company sold Progress-area Canadian properties for $594,000 in October 2019, with customary final purchase-price adjustments pending and no gain or loss recognized. It engaged a broker in January 2020 to market non-core oil-and-gas properties. It also began discussions with a potential buyer for its Honolulu drilling-yard leasehold interest.
- A failed hole opener may require abandoning and redrilling a well, with estimated exposure of $1.4 million to $1.6 million; no liability was accrued because the loss was not considered probable. Two wells that may not meet contract plumbness specifications could expose the company to $2 million to $3 million; negotiations with the customer were ongoing, and no liability was accrued.
- The board froze future Pension Plan and SERP benefit accruals effective December 31, 2019. The remeasurement and freeze generated $2.579 million of retirement-plan other comprehensive income, including a $1.699 million curtailment gain and an $880,000 actuarial gain; these items improved comprehensive income, not operating net income.
- NYSE American notified the company that it failed stockholders’ equity listing standards. Barnwell submitted a compliance plan; the exchange was to review it, with a stated deadline of July 13, 2021 to regain compliance. Delisting is a risk if compliance is not restored or progress is inadequate.
Important facts for investors to verify
- Progress of the Twining well, expected production, funding needs and whether planned capital spending can be supported.
- Cash burn, working-capital requirements and management’s assumptions underlying its 12-month liquidity assessment.
- Outcome of the drilling-related contingencies and customer negotiations, and whether any loss becomes probable or estimable.
- Status and expected proceeds of proposed non-core property and leasehold-interest sales, and the NYSE American’s response to the compliance plan.
- Potential timing and value of future Kukio land distributions: they are uncertain, outside Barnwell’s control, and no lots were sold in the quarter.