Barnwell Industries, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019; comparisons are to FY2018. Barnwell operates oil and natural gas properties in Alberta, Hawaii land investments, and Hawaii contract drilling and water-pump services. The filing was signed December 20, 2019.
Financial performance and position
| Metric | FY2019 / September 30, 2019 | FY2018 / September 30, 2018 |
|---|---|---|
| Total revenue | $12.075 million | $9.368 million |
| Net loss attributable to Barnwell | $12.414 million; $1.50 per share | $1.770 million; $0.21 per share |
| Operating cash flow | $(2.133) million | $(5.091) million |
| Cash and cash equivalents | $4.613 million | $5.965 million |
| Working capital | $3.936 million | Not clearly stated as a comparable figure |
| Total assets | $18.302 million | $31.378 million |
| Total liabilities | $16.973 million | $15.139 million |
| Total equity | $1.329 million | $16.239 million |
FY2019 revenue rose 29%, largely because the Twining acquisition increased oil and gas production and contract drilling revenue grew. The net loss widened substantially, primarily because of a $5.710 million oil-and-gas ceiling-test impairment, lower oil prices and higher depletion; FY2018 also included a $2.255 million gain on asset sales. Total comprehensive loss was $14.820 million, including a $2.224 million pension actuarial loss and foreign-currency translation loss.
Oil and gas revenue increased 73% to $6.406 million, while the segment recorded a $7.197 million operating loss before general and administrative expenses, versus $247,000 profit in FY2018. Contract drilling revenue rose 42% to $5.349 million; segment operating profit before general and administrative expenses was $89,000, compared with a $104,000 loss. Land-sale revenue fell to $165,000 from $1.645 million, and equity-method affiliates moved to a $276,000 loss from $223,000 income.
Net production increased to 250,000 Boe from 123,000 Boe, primarily reflecting the Twining acquisition. Average realized oil price fell 19% to $41.84 per barrel; natural gas price edged up 3% to $1.15 per Mcf. The standardized measure of discounted future net cash flows from proved reserves fell to $2.310 million from $13.836 million; this measure is not fair value. Barnwell reported no material borrowing balance in the presented balance sheet; interest expense was $5,000. Current assets were $8.704 million versus current liabilities of $4.768 million.
Liquidity, outlook and material developments
- Management said cash and estimated future operating cash flows should cover estimated outflows for the next 12 months, subject to assumptions including no decline in oil and gas prices and no significant drilling-contract delays or difficulties. If actual results fall short and financing is unavailable or inadequate, the company may sell assets, pursue alternatives, or wind down; it warned it might not continue as a going concern beyond December 2020.
- Management estimated FY2020 oil and gas investment of about $3.8 million. Developing proved undeveloped reserves is estimated to require about $13 million over five years for 12 gross (8.82 net) wells; funding and drilling results are key uncertainties.
- Contract drilling backlog was approximately $10.0 million at December 1, 2019, with $6.8 million expected to be recognized in FY2020. Management expected FY2020 contract-drilling operating profit to be substantially higher than FY2019, based on backlog and contract assumptions. Demand remains sensitive to Hawaii development and public-sector spending.
- On March 7, 2019, a new partner acquired a 45% interest in KD II. Barnwell’s indirect interest in KD II fell to 10.8%, and its Increment II economics changed to specified distribution/net-profit rights and rights to residential lots. Future land proceeds remain uncertain and outside Barnwell’s control.
- On October 10, 2019, Barnwell agreed to sell its Progress-area properties for an adjusted stated price of $588,000; the buyer assumed related retirement obligations. These properties represented about 6% of FY2019 production and 5% of year-end proved reserves. On December 12, 2019, the board approved freezing the defined-benefit pension plan and SERP effective December 31, 2019.
Risks, contingencies and unusual items
- Asset impairment and reserves: The $5.710 million ceiling-test charge reflected lower reserve pricing assumptions. Further impairment is possible if prices, reserve estimates or the company’s ability to fund development weaken. Proved undeveloped reserves depend on substantial future capital spending.
- Abandonment obligations: Asset retirement obligations were $6.389 million at year-end. For Manyberries wells and facilities, Barnwell proposed a ten-year abandonment plan; estimated annual gross costs are about $500,000, or approximately $55,000 net to Barnwell, but Barnwell may need to pay costs upfront and seek reimbursement from others and the Orphan Well Association.
- Drilling-contract exposure: Two wells for one customer did not meet contract plumbness specifications. No liability was recorded because management considered an adverse outcome not probable; potential combined exposure was estimated at $2–$3 million. Separately, a hole-opener failure in October 2019 could require abandoning and redrilling a well, with estimated exposure of $1.4–$1.6 million; efforts to recover equipment were ongoing.
- Commodity and funding risk: More than 80% of FY2019 oil and gas revenue came from spot-priced sales, and Barnwell does not hedge commodity prices. Pipeline constraints, Canadian price differentials, currency movements, partner performance and access to financing can affect cash flow and development.
- Land and concentration risks: Future land payments and affiliate distributions depend on non-controlled development and lot sales. Hawaii real estate conditions, contract awards, and natural disasters could affect both land and drilling activities.
- The auditor issued an unqualified opinion on the consolidated financial statements. The auditor did not attest to internal controls; management reported controls effective as of September 30, 2019.
Key facts for investors to verify
- Whether operating cash flow and available liquidity can support FY2020 needs, planned capital spending, and retirement and abandonment obligations without new financing or asset sales.
- Progress, cost and production performance of the Spirit River and Twining wells, and whether the estimated $13 million development program can be funded.
- Whether oil prices, reserve assumptions or funding constraints trigger additional ceiling-test impairment; review the independent reserve report and standardized-measure assumptions.
- Resolution and ultimate cost of the two disputed well-specification matters and the October 2019 hole-opener incident.
- Actual timing and economics of the Progress sale, Manyberries abandonment reimbursements, contract backlog conversion, and future Kaupulehu lot sales and distributions.
- Effects of the pension-plan freeze and the company’s reduced equity cushion on future cash requirements and financial flexibility.