Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. The report was filed June 29, 2020, after the company invoked SEC filing relief, citing COVID-19 disruption and additional time needed to assess going concern and oil and gas asset values. Barnwell operates Canadian oil and gas properties and Hawaii contract drilling and land investment businesses.
Financial performance and position
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 | Prior-year comparison |
|---|---|---|---|
| Total revenue | $4.582 million | $9.432 million | $2.963 million and $5.558 million, respectively |
| Net loss attributable to Barnwell | $1.514 million; $0.18 per share | $1.928 million; $0.23 per share | Losses of $2.125 million and $6.725 million, respectively |
| Operating cash flow | Not stated for the quarter | $(0.252) million | $(0.821) million for six months |
| Cash and cash equivalents | $3.386 million at March 31, 2020 | $4.613 million at September 30, 2019 | |
| Working capital | $2.041 million at March 31, 2020 | — | |
| Total liabilities / total equity | $16.625 million / $2.140 million at March 31, 2020 | $16.973 million / $1.329 million at September 30, 2019 |
Six-month investing cash outflow was $0.957 million, including $2.448 million of oil and gas capital expenditures, partly offset by $1.100 million from the sale of a Hawaii maintenance-yard leasehold interest. No financing cash flows were reported for the period. The balance sheet reports operating lease liabilities of $0.298 million, retirement-benefit liabilities of $4.643 million and asset retirement obligations of $6.191 million in total. No separate borrowing balance is presented.
Changes versus the prior comparable period
- Revenue rose 55% in the quarter and 70% for the six months. Contract drilling revenue increased substantially, primarily due to a significant multi-well job; segment operating profit before general and administrative expenses was $0.731 million for the quarter and $1.478 million for the six months, versus losses in the prior periods.
- Oil and gas revenue was nearly flat in the quarter, while six-month revenue increased 28%, reflecting higher oil prices and production. Quarter oil prices were lower than a year earlier, and the segment recorded a $1.637 million ceiling-test impairment.
- Net losses narrowed year over year, helped by stronger drilling results and a $1.336 million gain on the sale of the Honolulu leasehold interest. The six-month comparison also benefited from lower impairment charges than in 2019.
- General and administrative expense rose $0.570 million in the quarter and $0.518 million for six months, mainly from legal, proxy-solicitation, proxy-advisory and public-relations costs.
Outlook, risks and unusual items
- Going concern: Management concluded substantial doubt exists about Barnwell’s ability to continue as a going concern for one year from the filing date. The company cites a history of losses and negative operating cash flow, COVID-related uncertainty, volatile commodity prices, drilling demand and uncertain land-development distributions. Potential funding sources, including non-core property sales, were not secured; a corporate-office sale was described as possible but not probable.
- COVID-19 and oil prices: The company suspended oil and gas development spending indefinitely and excluded proved undeveloped reserves from its ceiling test after determining it could not reasonably assure funding of approximately $12 million of development costs. Management warned of possible further impairments if oil prices remain low or decline.
- Operational exposure: A failed hole opener led Barnwell to abandon a Hawaii water well and drill a replacement at no incremental cost to the customer. The company reversed $0.979 million of quarterly revenue and estimated a roughly $0.750 million reduction in contract margin. It also disclosed a five-year warranty arrangement for one other well and ongoing customer discussions regarding another; no contingent-liability accrual was recorded.
- Land investment: No developer lot sales or cash distributions from the Kukio partnerships occurred in the six-month period. Future proceeds depend on development and sales outside Barnwell’s control.
- Listing and financing risk: NYSE American accepted Barnwell’s compliance plan and extended its continued listing through July 13, 2021, subject to periodic review. Failure to make progress or regain compliance could lead to delisting.
- After-period support: Barnwell obtained an approximately $147,000 PPP loan on April 28, 2020, which it believed would qualify for forgiveness if used as required. Its Canadian subsidiaries subsequently received approximately $60,000 in wage subsidies.
- No formal earnings guidance: The filing provides no quantified revenue or earnings forecast. The company states that pandemic duration, oil prices, drilling contract demand and timing of land proceeds make its outlook uncertain.
Key investor verification points
- Track cash burn, liquidity and whether management secures funding or completes asset sales sufficient to address the disclosed going-concern uncertainty.
- Review subsequent oil prices, production, capital-spending plans and ceiling-test calculations for additional impairment risk.
- Assess whether drilling backlog converts to revenue and whether the well replacement and warranty matters result in further costs or claims.
- Monitor progress against NYSE American’s compliance plan and the July 13, 2021 deadline.
- Confirm PPP loan forgiveness, subsidy receipts, and whether Kukio lot sales or distributions resume.