Barnwell Industries, Inc. — Form 10-Q Summary
Business context and reporting period
For the three months ended December 31, 2011, Barnwell reported operations in Canadian oil and natural gas, Hawaii land investment, Hawaii contract drilling, and residential real estate development. This is the first quarter of its fiscal 2012; the filing cautions that interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2011 | Prior-year quarter |
|---|---|---|
| Revenue | $8.502 million | $11.319 million |
| Earnings before taxes | $150,000 | $2.181 million |
| Net income (loss) attributable to Barnwell | $(282,000); $(0.03) per share | $1.085 million; $0.13 per share |
| Operating cash flow | $1.803 million | $3.327 million |
| Cash and cash equivalents, Dec. 31 | $9.319 million | $12.071 million |
- Revenue declined 25%. The filing attributes the earnings decline chiefly to no land development-rights or percentage-of-sales receipts in the current quarter, compared with $3.061 million in prior-year land investment segment operating profit.
- Oil and natural gas revenue rose 18% to $7.789 million. Oil production increased 30% and average oil price rose 22%; gas price and production fell 9% and 4%, respectively. The segment’s operating profit before G&A increased to $2.295 million from $1.616 million.
- Contract drilling generated a $341,000 operating loss before G&A, versus $57,000 profit, as current-quarter revenue came only from pump installation and repair, with no water-well drilling.
- General and administrative expense declined 20% to $1.846 million, mainly because of lower stock appreciation rights expense. Depletion, depreciation and amortization increased 20% to $2.909 million. The effective tax rate was 236%, reflecting Canadian taxes not offset by U.S.-source losses.
- Operating cash flow decreased by $1.524 million, primarily due to working-capital changes. Investing activities used $2.181 million; financing activities used $147,000. Cash declined $515,000 during the quarter.
- At Dec. 31, total assets were $86.969 million, total liabilities $47.629 million, and equity $39.340 million. Working capital was $4.887 million. Debt totaled $23.447 million: $12.647 million current and $10.800 million long-term.
Material changes versus the prior comparable period
- Total revenue fell $2.817 million, largely because the prior period included $2.497 million net development-rights revenue and $564,000 net leasehold-land sale revenue; neither recurred.
- Oil and gas performance improved, but did not offset the absence of land proceeds and weaker contract drilling activity. Consolidated results moved from $1.695 million net earnings to a $340,000 consolidated net loss; Barnwell-attributable results moved from $1.085 million profit to a $282,000 loss.
- Cash was down from $12.071 million at the prior-year quarter end. The comparison of balance-sheet amounts in the filing is also against Sept. 30, 2011: cash fell from $9.834 million, while total debt declined from $23.714 million.
Outlook, risks, contingencies, and unusual items
- Management expects fiscal 2012 oil and gas capital expenditures of $5 million to $7 million, subject to cash flows and its assessment of prospects. Barnwell participated in 2 gross (0.5 net) Canadian wells in the quarter; both appeared successful.
- The company expected to begin a water-well drilling job in fiscal Q2 from its Dec. 31 backlog. Management warned that continued weak demand and competitive pricing could require further cost reductions, temporary shutdown of drilling operations, or sale or liquidation of equipment.
- The Canadian revolving facility had $12 million drawn and $7.665 million available at Dec. 31, with a 3.0% interest rate. Its annual bank review was planned for April 2012; the bank could extend the facility or convert it to a term loan, affecting repayment timing.
- The $11.447 million real estate loan was classified entirely as current because both collateralizing homes were for sale. The company reported compliance with loan covenants at Dec. 31. The loan requires principal payments from net sale proceeds and includes loan-to-value requirements.
- Management believed available cash, operating cash flow, credit, and potential land and home-sale proceeds would fund operations and planned spending. It warned that weaker commodity prices or production, reduced credit, lower property-sale proceeds, or covenant-related repayments could materially harm liquidity and financial condition.
- Land-related values depend on regulatory approvals and development agreements; the filing gives no assurance these will be obtained. Uncertain tax positions, primarily Canadian transfer-pricing matters, could increase or decrease, but the potential range was not estimable.
- Other comprehensive income was $846,000, including $781,000 of foreign-currency translation gains, despite the reported net loss. No material subsequent events were reported.
Most important facts for investors to verify
- April 2012 bank review outcome, facility availability, and any resulting debt repayment schedule.
- Sales timing and proceeds for the two homes securing the real estate loan, and continued covenant compliance.
- Oil and gas production, realized prices, and whether planned capital spending converts into sustained cash generation.
- Water-well drilling contract awards, backlog execution, and the viability of the contract drilling segment.
- Progress on Hawaii land approvals and development, and any material change in recoverability of land investments or tax exposures.