Barnwell Industries, Inc. — Form 10-Q Summary
Business context and reporting period: The unaudited quarter ended March 31, 2015, was the second quarter of Barnwell’s fiscal 2015; the filing also reports the six months then ended. Operations include Canadian oil and natural gas, Hawaii land investments, Hawaii contract drilling, and residential real estate development. The real estate segment had no homes under construction.
Financial performance and position
- Quarter revenue: $3.492 million, down from $7.833 million in the prior-year quarter. Parent-attributable net loss was $2.017 million, versus a $285,000 loss; basic and diluted loss per share was $0.24, versus $0.03.
- Six-month revenue: $9.524 million, versus $15.034 million. Parent-attributable net loss was $2.484 million, compared with $1.274 million; loss per share was $0.30, versus $0.15.
- Revenue drivers: Oil and natural gas revenue fell 67% for the quarter and 57% for the six months. Land investment revenue from leasehold sales was $817,000 for the quarter and $1.849 million for the six months. Contract drilling revenue declined 63% and 17%, respectively.
- Cash flow: Operating activities used $4.443 million in the six months, compared with $3.010 million provided in the prior-year period. Investing activities provided $950,000; financing activities used $2.689 million. Cash fell $7.007 million to $9.097 million.
- Liquidity: Working capital was $8.207 million at March 31, 2015. Total assets were $47.919 million and total liabilities $31.489 million.
- Debt: Total debt was $8.654 million: $5.0 million outstanding under the Canadian revolving facility and $3.654 million under the real estate loan, classified as current. The real estate loan was amended to interest-only payments beginning February 2015; its remaining principal is due April 1, 2018.
- Margins and profitability: The filing reports segment operating results before general and administrative expenses, but does not provide a clear consolidated operating margin. Oil and gas generated a $498,000 quarterly operating loss before corporate G&A; contract drilling had a $51,000 loss.
Material changes versus the prior comparable period
- Lower commodity prices and reduced production drove the oil and gas decline. Quarter average realized oil price fell 55% to $35.70 per barrel and natural gas fell 58% to $2.03 per Mcf. Six-month oil and gas production also declined, including oil production down 51%.
- Land investment performance improved with greater lot-sale proceeds; equity in affiliate income was $368,000 for the quarter, versus a $116,000 loss, and $456,000 for six months, versus a $263,000 loss.
- Contract drilling results weakened, principally from lower water-well drilling activity. General and administrative expense fell 9% for the quarter but rose 5% for six months.
- Other comprehensive loss included $1.179 million of foreign-currency translation loss for six months. A $785,000 valuation allowance on Canadian deferred tax assets increased tax expense.
Outlook, risks, contingencies and unusual items
- Liquidity outlook: Management identified cash management and potential asset sales as priorities and said oil and gas property sales are expected to be needed to sustain operations. Barnwell expects to rely heavily on land investment proceeds, but cautions that future proceeds are uncertain.
- Credit facility: After quarter-end, on April 10, 2015, the Canadian facility was renewed with capacity reduced from C$11.8 million to C$6.5 million, approximately US$5.125 million at the March 31 exchange rate. The company said this leaves minimal available credit; its risk-factor discussion says no available credit at the then-current exchange rate. The next annual review is planned for April 2016.
- Covenant breach: Barnwell exceeded the maximum liabilities-to-tangible-net-worth ratio under its real estate loan at March 31, triggering a default. The lender waived the breach, but the company said it could not assure compliance by June 30, 2015. The filing states a home securing the loan was available for sale.
- Spill: A January 2015 oil and salt-water spill in Alberta had estimated gross cleanup costs of approximately $2.3 million. The company recorded recovery receivables from co-owners and insurance and estimated its net cost at approximately $160,000. A shortfall in recoveries could materially affect financial condition and liquidity.
- Capital spending: Management expected fiscal 2015 oil and gas capital expenditures and potential acquisitions of $1 million to $2 million, subject to cash flows and its assessment of industry conditions.
- Key risks: Sustained low commodity prices could reduce cash flow, reserves, borrowing capacity, and the economic production of wells; constrain reserve replacement; and lead to asset impairments. Barnwell warned it may need to curtail operations, reduce or delay capital expenditures, obtain alternative financing, or sell assets, potentially on unfavorable terms.
- Other exposure: Barnwell and other partners were jointly and severally liable under indemnities for approximately $4.830 million of land-development performance bonds; the company considered a material call remote. Other environmental remediation liabilities were also accrued.
Most important facts for investors to verify
- Whether oil and gas prices and production stabilize, and the resulting impact on operating cash flow, reserves, and asset values.
- Actual available borrowing capacity under the renewed Canadian facility, including currency effects and the outcome of the April 2016 review.
- Whether Barnwell satisfies the real estate loan covenants after the waiver and whether any repayment is accelerated.
- Whether insurance and joint-venture reimbursements for the Alberta spill are received as estimated.
- Whether land-sale proceeds and proposed oil and gas asset sales provide enough liquidity to fund operations and planned investment.
- Whether the expected $1 million to $2 million fiscal-year capital expenditure range changes in response to liquidity and commodity conditions.