Barnwell Industries, Inc. — Q2 FY2017 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended March 31, 2017. Barnwell operates Canadian oil and natural gas properties, invests in Hawaii land interests, and provides Hawaii contract drilling and water-system services. Unless otherwise noted, amounts are U.S. dollars.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | 2017: $3.029 million; 2016: $1.568 million | 2017: $7.319 million; 2016: $3.442 million |
| Net earnings (loss) attributable to Barnwell | 2017: $(615,000); 2016: $(1.608) million | 2017: $1.026 million; 2016: $(3.017) million |
| Diluted earnings (loss) per share | 2017: $(0.07); 2016: $(0.19) | 2017: $0.12; 2016: $(0.36) |
| Operating cash flow | Six months 2017: $316,000; 2016: cash used of $4.607 million |
- Quarterly drivers: Oil and natural gas revenue rose to $1.409 million from $621,000, and contract drilling revenue to $1.580 million from $550,000. Segment operating profit before general and administrative expenses was $317,000 for oil and gas and $660,000 for contract drilling. No land-sale payment revenue was recorded in the quarter.
- Six-month drivers: Oil and gas revenue was $2.550 million and contract drilling revenue was $2.986 million. Land-sale payment revenue was $1.678 million, related to an 8% payment on a $20.975 million parcel sale by an investee partnership. Equity income from affiliates was $2.156 million, versus $416,000 in the prior-year period.
- Cash flow detail: Investing activities provided $1.503 million, including $652,000 of distributions from equity investees in excess of earnings and $1.418 million of net land-sale proceeds. Financing activities used $616,000, primarily distributions to non-controlling interests.
- Liquidity and debt at March 31: Cash and cash equivalents were $16.655 million, restricted cash $375,000, and working capital $18.074 million. Current liabilities were $4.968 million and total liabilities $17.539 million. No borrowings were outstanding under the Canadian facility; it was canceled in April 2017, when its pledged deposit matured and was reclassified to cash.
- Total assets were $32.375 million. Asset retirement obligations totaled $6.756 million, including $1.007 million current. The company reported no consolidated margin figure.
Changes versus prior period
- Six-month results improved to attributable net earnings of $1.026 million from a $3.017 million loss. Higher oil and gas prices, increased drilling activity, the $1.678 million land-sale payment, and increased affiliate income were key contributors.
- Quarterly attributable loss narrowed by $993,000. Management cited improved oil and gas results and drilling activity, partly offset by no current-quarter lot-sale receipts, a $423,000 decline in affiliate income, and higher general and administrative costs.
- Average six-month realized prices increased year over year: oil to $41.63 per barrel from $26.46, and natural gas to $2.27 per Mcf from $1.33. Six-month natural gas production declined 19% to 203,000 Mcf, while oil production rose 15% to 45,000 barrels.
Outlook, risks, and unusual items
- Management estimated fiscal 2017 oil and gas property investment of $2.0 million to $4.5 million; the estimate may change with cash flows and management’s view of the sector.
- Management warned that existing oil and gas assets are projected to generate minimal operating cash flow and that current cash may not cover necessary reinvestment, asset retirement obligations, pension funding, and ongoing expenses. Barnwell expects increasing reliance on uncertain, non-controlled land-sale payments and investee distributions; it cautioned that inability to fund operations could lead to asset sales, winding down, bankruptcy, or inability to continue as a going concern in the longer term beyond one year.
- Commodity prices and declining production pose risks to cash flow and asset values. Contract drilling results depend on contract awards and timing; management noted weak water-well demand, competition, and pressure on margins. The geothermal well plugging and abandonment contract that boosted drilling activity was completed by March 31.
- Barnwell expects approximately $650,000 of additional pension-plan contributions in the remainder of fiscal 2017. Future pension costs and contributions may vary with investment returns and interest rates.
- The New York office was sold on May 2, 2017 for approximately $2.370 million net of related costs. An estimated $540,000 gain is expected to be recognized in the quarter ending June 30, 2017.
- A remediation accrual for gas migration at a non-operated Alberta well was reduced from approximately $200,000 to $19,000 based on updated operator information. Further environmental costs remain uncertain. Barnwell also had joint and several exposure under approximately $325,000 of partnership performance bonds; management considered a material call remote.
- The six-month improvement includes significant, potentially uneven land-development activity: the investee partnership reported $10.062 million of six-month net earnings, while reporting a $598,000 loss for the three months ended March 31. Future lot development and sales are uncertain.
Important facts for investors to verify
- Whether future Kukio partnership distributions and percentage-of-sales payments occur, and when; these are important to the company’s stated funding outlook.
- Whether oil and gas prices, production, and planned reinvestment support sustainable operating cash flow, given management’s warning about funding needs.
- Actual fiscal 2017 capital spending and pension contributions, along with the cost and timing of asset retirement and environmental obligations.
- Recognition of the estimated $540,000 office-sale gain in the June 2017 quarter and the final net proceeds.
- Progress on Increment I lot sales and any development of Increment II; 25 Increment I lots remained for sale at March 31, 2017, while further Increment II development was uncertain.