Barnwell Industries, Inc. — Q3 FY2013 Form 10-Q
Reporting period: Three and nine months ended June 30, 2013; comparative periods ended June 30, 2012. Barnwell operates Canadian oil and gas production and Hawaii land investment, contract drilling, and residential real estate businesses. Financial statements are unaudited.
Financial performance
| Metric | Three months 2013 | Three months 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $5.182 million | $12.358 million | $18.502 million | $28.026 million |
| Net loss attributable to Barnwell | $1.225 million | $1.366 million | $6.915 million | $4.629 million |
| Loss per share | $0.15 | $0.17 | $0.84 | $0.56 |
- Third-quarter revenue fell 58%, primarily because the prior-year quarter included a $5.975 million home sale; nine-month revenue declined 34%.
- Third-quarter loss narrowed by $141,000, helped by higher oil and natural gas segment operating profit before taxes, partly offset by weaker contract drilling and higher G&A.
- Nine-month loss widened by $2.286 million. A $4.506 million non-cash oil and gas property write-down was recorded in 2013; the comparable 2012 period included a $1.854 million real estate write-down.
- Oil and gas revenue was down 3% in Q3 and 16% year to date. Year-to-date net production declined for natural gas (29%), oil (10%), and liquids (13%). Q3 gas and oil prices improved, but lower volumes offset the benefit; year-to-date oil and liquids prices also fell.
- Contract drilling generated a $210,000 operating loss before G&A in Q3, versus $28,000 profit a year earlier. Its nine-month operating loss improved to $274,000 from $620,000.
- Consolidated margins are not separately stated in the filing.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $3.864 million, down from $10.630 million, largely because the prior period included real estate sale proceeds and current-period oil and gas operating results were lower. Investing cash outflow was $3.230 million; financing cash outflow was $232,000.
- Cash at June 30 was $9.115 million. Working capital was $3.751 million; unused credit under the Canadian facility was $7.026 million.
- Total debt was $16.772 million: $12.000 million drawn on the Canadian revolving facility and $4.772 million on the real estate loan. The real estate loan is classified as current because the collateralized home is for sale.
- The Canadian facility was renewed through April 2014, with a $20 million Canadian-dollar limit and a 2.70% rate at June 30. The bank will review it in April 2014 and may renew it or convert it to a term loan.
- Total equity was $21.661 million, down from $30.125 million at September 30, 2012, principally reflecting the year-to-date loss and foreign currency translation losses.
Outlook, risks, and unusual items
- Management expected fiscal 2013 oil and gas capital expenditures of $6.0–$6.5 million, subject to cash flows and its assessment of prospects. Nine-month expenditures, including accruals, were $4.856 million.
- In July 2013, Barnwell received a $6.0 million water-well drilling contract; work began in late July and management estimated it would continue through fiscal 2014.
- Management said current cash, operating cash flow, land-sale proceeds, and available credit were expected to fund operations, planned capital spending, debt service, and interest. It cautioned that weaker oil and gas prices or production, lower property-sale proceeds, reduced credit availability, or covenant issues could materially impair liquidity and financial condition. Management said, absent higher oil and/or gas prices, operating cash flow was unlikely to fund capital spending needed to maintain production and reserves.
- A $706,000 environmental remediation accrual was recorded for soil contamination at the Dunvegan and Wood River properties; additional costs may arise and are uncertain.
- Further oil and gas ceiling-test write-downs may be required, depending on prices, reserves, production, and development costs. The Canada Revenue Agency was examining fiscal 2010 and 2011 Canadian returns.
- The real estate loan covenants were met at June 30. No material subsequent events were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Canadian facility terms or availability change at the April 2014 review, and the repayment implications of a term-loan conversion.
- Oil and gas prices, production declines, reserve assumptions, and the possibility of further ceiling-test impairments.
- Progress and eventual cost of environmental remediation, including whether the $706,000 accrual proves sufficient.
- Timing and cash contribution of the $6.0 million drilling contract and future Kaupulehu lot or home sales.
- Liquidity and covenant headroom, particularly given the current classification of the $4.772 million real estate loan and dependence on asset-sale proceeds and available credit.