Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017. Comparisons are with the periods ended June 30, 2016. The company operates in Canadian oil and gas, Hawaii land investments, and Hawaii contract drilling.
Financial results and liquidity
- Revenue: Third-quarter revenue was $1.34 million, down from $8.49 million; nine-month revenue was $8.66 million, down from $11.93 million. Prior-year comparisons included $5.7 million of residential property revenue in the quarter and larger land-sale-related proceeds.
- Earnings: Third-quarter net loss attributable to Barnwell was $512,000 ($0.06 per share), versus net income of $775,000 ($0.09 per share). Nine-month attributable net income was $514,000 ($0.06 per share), compared with a $2.24 million loss ($0.27 per share).
- Drivers: Nine-month oil and gas revenue rose to $3.49 million from $2.24 million, while contract drilling revenue increased to $3.35 million from $1.50 million. Equity-method income from land development affiliates declined to $2.13 million from $2.62 million for nine months; the third quarter recorded a $31,000 affiliate loss versus $2.20 million of income.
- Cash flow: Nine-month operating cash flow was negative $1.83 million, versus positive $3.04 million. Investing activities provided $2.57 million and financing activities used $239,000. Cash increased $574,000 to $16.12 million; the company also held $2.48 million in certificates of deposit.
- Liquidity and debt: Working capital was $19.04 million at June 30. Total current liabilities were $4.42 million. No long-term debt was reported; the Canadian revolving facility was canceled in April 2017.
- Balance sheet: Total assets were $30.98 million, total liabilities $16.52 million, and total equity $14.46 million. The current portion of asset retirement obligations was $1.04 million; total asset retirement obligations were $6.36 million.
- Margins: The filing does not provide consolidated gross or operating margin percentages. It reports nine-month operating profit before general and administrative expenses of $552,000 for oil and gas and $534,000 for contract drilling; contract drilling had a $302,000 operating loss on that basis in the quarter.
Material changes and unusual items
- Oil and gas prices improved year over year for the nine-month period: average oil price rose 31% to $40.86 per barrel and natural gas rose 81% to $2.14 per Mcf. Production was mixed, including a 20% decline in natural gas volume.
- The company sold its New York office in May for approximately $2.36 million net of costs and recorded a $527,000 gain. It also sold Canadian oil and gas properties; proceeds included $1.08 million from a June sale and $162,000 from other dispositions. No gain or loss was recognized on the oil and gas sales under full-cost accounting.
- A $369,000 income tax benefit from the lapse of the statute of limitations on a previously accrued uncertain tax position contributed to current-period results. The filing states there were no remaining uncertain tax positions at June 30.
- No oil and gas property impairment was recorded in the 2017 periods; a $1.15 million impairment was recorded in the prior-year quarter and nine-month period.
Outlook, risks, and contingencies
- Management warns that existing oil and gas assets are projected to generate negative operating cash flow, citing lower production following property sales and natural decline, oil and gas price pressures, and rising costs. Cash may not be sufficient to fund reinvestment, asset retirement obligations, retirement plan funding, and ongoing expenses.
- Barnwell says it will likely depend increasingly on uncertain, uncontrollable timing of land percentage-of-sales payments and distributions from Kukio Resort partnerships. Management warns that without sufficient successful investment of liquid assets or other favorable developments, the company may have to wind down through liquidation, bankruptcy, or further asset sales, and may not continue as a going concern beyond one year.
- Land receipts are particularly uncertain: no affiliate lots were sold in the third quarter, and the timing of further Increment II development and distributions is not assured. Twenty-five Increment I lots remained unsold.
- Contract drilling is volatile; quarterly losses included unforeseen geological and well-wall difficulties. Management also cites reduced demand, competition, and lower margins in water-well work.
- Asset retirement obligations and Canadian inactive-well compliance requirements could require significant future spending. The environmental remediation accrual for a gas-migration site was reduced to approximately $2,000, but future remediation costs remain uncertain.
- Barnwell is jointly and severally liable under a surety indemnification agreement for approximately $325,000 of partnership performance bonds; management considers a material call remote. The company has no foreign-currency hedges.
- No formal earnings or revenue guidance is provided. Management estimated only nominal additional oil and gas investment in fiscal fourth quarter 2017, subject to change.
Key investor verification points
- Assess the adequacy and timing of liquidity against management’s stated negative oil and gas operating cash flow and going-concern warning.
- Track actual cash distributions and percentage-of-sales receipts from Kukio partnerships, including lot sales and Increment II development.
- Review oil and gas production, realized prices, reserve changes, and capital needs after property sales.
- Monitor asset retirement obligation spending and pension contributions; management estimated a further approximately $350,000 pension contribution for the remainder of fiscal 2017.
- Evaluate whether contract drilling can sustain positive results after completion of the geothermal well-abandonment contract and amid reported water-well losses.
- Confirm final purchase-price adjustments and Canadian tax treatment for the oil and gas property sales; $552,000 from the principal sale was withheld for potential Canadian taxes.