Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011; filed August 12, 2011. The interim financial statements are unaudited. Barnwell operates in Canadian oil and gas, Hawaiian land investment and contract drilling, and residential real estate.
Financial performance and liquidity
| Metric | Three months ended June 30, 2011 | Nine months ended June 30, 2011 |
|---|---|---|
| Total revenue | $8.989 million, versus $8.779 million | $29.589 million, versus $31.704 million |
| Net earnings attributable to Barnwell | $802,000, versus $314,000 | $424,000, versus $3.756 million |
| Diluted EPS | $0.10, versus $0.04 | $0.05, versus $0.45 |
| Operating cash flow | Not separately provided for the quarter | $13.854 million, versus $6.899 million |
- For the quarter, oil and gas revenue rose 27% to $7.559 million, led by higher oil and liquids prices and increased oil production. Contract drilling revenue fell 69% to $490,000; land-sale receipts also declined.
- For the nine-month period, lower land-investment and contract-drilling results, higher stock appreciation rights expense, and the absence of a prior-year tax benefit outweighed oil and gas gains. Current-period results included $1.424 million from purchased drilling royalty credits; the Alberta program has ended.
- Operating cash flow increased largely because of changes in working capital. Investing activities used $5.638 million, including $9.452 million in cash capital expenditures; financing activities used $2.281 million, primarily for debt repayments and distributions.
- At June 30, cash was $16.769 million, working capital was $7.295 million, and total debt was $24.242 million. Current liabilities were $28.472 million; the $12.242 million real estate loan was classified as current because the collateralized homes were for sale. Cash less reported debt was approximately $7.473 million.
- The Canadian revolving facility had $12.0 million drawn and approximately $8.740 million available; its stated rate was 2.9%. It was renewed through April 2012, subject to annual review. Total assets were $97.871 million.
Changes, outlook, and risks
- Quarterly attributable earnings improved year over year; nine-month earnings declined substantially. Nine-month oil and gas revenue rose 3%, but land-investment revenue fell and contract drilling shifted from operating profit to loss.
- Management expected fiscal 2011 oil and gas capital expenditures of $10–12 million, subject to cash flows and its assessment of prospects. Through June, 12 gross (3.9 net) wells had been drilled and all appeared successful.
- Management expected lower contract-drilling activity for the remainder of fiscal 2011; there were no water-well jobs in backlog other than work in progress at June 30. Management said available cash, operating flows, land proceeds, home sales, and credit should fund planned needs, but weaker prices, production, land proceeds, or home sales could impair liquidity and debt-covenant compliance.
- Key exposures include volatile oil and gas prices and production, declining natural gas output, aging-field repairs, uncertain Hawaiian luxury-property demand, contract-drilling variability, foreign-exchange movements, and possible changes in uncertain Canadian tax positions. Land development and rezoning approvals are not assured.
- The Japan tsunami damaged Hualalai Resort, which reopened May 1, 2011, and led to Kona Village Resort’s indefinite closure. Barnwell wrote off its $121,000 remaining investment in Kona Village Investors.
- The real estate loan has annual rate adjustments, financial covenants, and a requirement to apply net sale proceeds to principal. The Canadian credit facility’s next review was planned for April 2012. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor verification priorities
- Reconcile the nine-month earnings decline, including the prior-year $1.465 million tax benefit, current drilling-credit gains, and stock appreciation rights expense.
- Track cash conversion and working-capital movements against higher oil and gas capital spending and planned full-year spending of $10–12 million.
- Confirm the real estate loan’s current classification, covenant compliance, payment obligations, and effect of any home or parcel sales.
- Monitor renewal and availability of the Canadian credit facility, oil and gas prices and volumes, and remaining contract-drilling backlog.
- Assess sales progress and carrying values for Hawaiian homes and land, including regulatory approvals and the potential for additional impairments; review developments in uncertain tax positions.