Barnwell Industries, Inc. — Q3 FY2016 Form 10-Q
Business context and reporting period. The quarter and nine months ended June 30, 2016 (fiscal Q3 and year to date; fiscal year ends September 30). Barnwell operates Canadian oil and gas, Hawaiian land investment, contract drilling, and residential real estate businesses. The statements are unaudited.
Financial performance and position
| Metric | Three months ended June 30, 2016 | Nine months ended June 30, 2016 |
|---|---|---|
| Revenue | $8.216 million, versus $4.931 million | $11.591 million, versus $14.455 million |
| Net earnings (loss), consolidated | $1.373 million, versus $1.213 million | $(1.488) million, versus $(0.943) million |
| Net earnings (loss) attributable to Barnwell | $0.775 million; $0.09 per share, versus $0.971 million; $0.12 per share | $(2.242) million; $(0.27) per share, versus $(1.513) million; $(0.18) per share |
| Operating cash flow | Not presented for the quarter | $3.044 million provided, versus $5.366 million used |
Quarterly revenue rose about 67% year over year, primarily reflecting a $5.7 million home sale and stronger land-related income; nine-month revenue fell about 20%. The nine-month loss attributable to Barnwell widened. Quarterly profit was supported by $2.2 million of equity-method income from Kukio Resort land development partnerships.
At June 30, cash and cash equivalents were $17.433 million, working capital was $17.107 million, and total assets were $33.588 million, compared with $41.553 million at September 30, 2015. Total equity was $17.156 million. The company had no borrowings under its new revolving demand facility; the $384,000 U.S.-dollar equivalent facility was secured by restricted cash of the same amount. The $3.440 million real estate loan was repaid in April, and the prior Canadian revolving facility was terminated. The filing does not provide a consolidated operating margin measure.
Nine-month investing cash flow was $9.932 million, including a $7.089 million decrease in restricted cash and $1.646 million of partnership distributions in excess of earnings. Financing used $4.252 million, including $3.440 million of debt repayment and $0.866 million of distributions to non-controlling interests. Cash increased by $8.962 million from the fiscal-year start. Cash generation included significant asset-sale and partnership-related items and should not be read as recurring operating performance.
Material changes versus the prior comparable period
- Oil and gas revenue fell 65% in the quarter and 69% year to date. The September 2015 sale of principal Alberta properties reduced production, while lower commodity prices also weighed on results. Year-to-date realized oil and gas prices declined 36% and 48%, respectively.
- Contract drilling moved to operating losses before general and administrative expenses: $207,000 in the quarter and $116,000 year to date, mainly because of reduced water-well drilling activity.
- Land investment income included an $1.6 million percentage-of-sale payment after an investee sold an oceanfront parcel for $20 million. Barnwell’s equity in affiliate income increased to $2.616 million year to date from $1.444 million.
- General and administrative expense declined 24% in the quarter and 23% year to date, reflecting cost reductions. A $1.154 million oil-and-gas ceiling-test impairment was recorded; no comparable impairment was recorded in 2015.
Outlook, risks, and unusual items
- Management expects minimal cash flow from existing oil and gas assets at current prices and production levels. Cash may be needed for asset-retirement obligations, pension funding, and operating costs; Barnwell expects to rely on land-sale percentage payments and potential Kukio partnership distributions, whose timing is uncertain.
- Fiscal 2016 oil-and-gas capital expenditures, including potential property acquisitions, were estimated at $0.8 million to $1.2 million, subject to cash flows and management’s assessment. Management expected contract-drilling revenue and operating results for the remainder of fiscal 2016 to be below the prior-year period.
- The oil-and-gas credit facility was terminated after reserve reductions and tighter lending conditions; the replacement facility is small and demand-based. Alberta’s revised license-transfer requirement may constrain asset sales and acquisitions. A future security deposit under the regulator’s liability-management program could divert cash; noncompliance could lead to operating restrictions.
- Environmental matters include a $77,000 remaining accrued liability for a 2015 pipeline release (after $1.103 million of insurance proceeds collected) and approximately $200,000 accrued for a 2016 gas-migration matter. Further remediation costs may arise.
- Barnwell and other parties are jointly and severally liable under a surety indemnification agreement for approximately $4.144 million of performance bonds. Barnwell estimated maximum loss exposure related to the investment and guarantee at approximately $7.638 million and said a material bond call was considered remote.
- A $1.154 million impairment and a $472,000 additional estimated gain on the 2015 Alberta property sale were recorded in the period; final purchase-price adjustments remain subject to change. A $233,000 royalty assessment was accrued. No material subsequent events were reported.
Important facts for investors to verify
- Whether future Kukio land sales and distributions can support cash needs, given the company’s projected minimal oil-and-gas cash flow and uncertainty over timing.
- Current Alberta production, commodity-price sensitivity, reserve and ceiling-test assumptions, and any resulting impairment or regulatory security-deposit requirements.
- The final purchase-price adjustments for the Alberta property sale and the realization and timing of future land-related proceeds.
- Actual contract-drilling demand, the remaining fiscal-year outlook, and the sufficiency of cash for retirement-plan and asset-retirement obligations.
- Potential costs beyond recorded accruals for environmental matters, royalty claims, and the performance-bond indemnity.