Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2021; unaudited results compared with the three months ended December 31, 2020. Barnwell operates oil and natural gas, Hawaii land investment, and Hawaii contract drilling businesses.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $5.454 million | $4.387 million |
| Net earnings | $1.340 million | $743,000 |
| Net earnings attributable to Barnwell | $1.073 million; $0.11 per share | $584,000; $0.07 per share |
| Operating cash flow | $909,000 | $80,000 |
| Cash and cash equivalents, period-end | $12.142 million | $11.279 million at September 30, 2021 |
| Working capital, period-end | $10.676 million | Not stated for the comparison date |
| Long-term debt, period-end | $47,000 | $47,000 at September 30, 2021 |
Revenue rose 24%. Oil and natural gas revenue increased to $3.920 million from $1.887 million, while contract drilling revenue declined to $876,000 from $1.942 million. Land-sale-related revenue was $600,000 versus $485,000. Net earnings attributable to Barnwell rose 84%. The company reported a 9% effective tax rate, compared with 10%.
Oil and natural gas segment operating profit before general and administrative expenses was $1.568 million, versus a $373,000 loss. Contract drilling reported a $151,000 operating loss before general and administrative expenses, versus $758,000 profit. Total general and administrative expense increased 54% to $1.830 million. The filing does not provide a consolidated operating-margin measure.
Cash, balance sheet, and financing
Investing cash flow was $194,000, including $687,000 of proceeds from selling drilling assets, offset in part by $702,000 of oil and gas capital expenditures and $317,000 of property acquisitions. Financing cash use was $251,000, consisting of distributions to non-controlling interests. Cash increased by $863,000 during the quarter. Total liabilities were $16.848 million and total equity was $10.827 million at December 31, 2021.
Current assets were $18.543 million against current liabilities of $7.867 million. Current liabilities included $2.754 million of accrued capital expenditures and $1.216 million of current asset-retirement obligations. The company had no interest expense in the quarter. Its $47,000 CEBA loan is interest-free through December 31, 2023 under an announced repayment-deadline extension; partial repayment by that date may qualify for forgiveness.
Material changes and notable items
- Oil and gas prices increased sharply year over year: average oil price rose 93%, natural gas 92%, and natural gas liquids 41%. Natural gas production rose 20%, liquids production 117%, and oil production was flat. Higher prices and Oklahoma production helped drive segment improvement; operating costs also rose 34%.
- The prior-year period included a $630,000 oil and gas ceiling-test impairment; there was none this quarter. The current-period increase in earnings therefore reflects both stronger commodity results and the absence of that prior charge.
- Contract drilling results weakened after a large, essentially completed well-drilling contract boosted the prior-year quarter. The segment also faces competition and uncertain demand.
- Equity in income of affiliates was $1.207 million, equal to cash distributions received from the Kukio land partnerships. Barnwell had suspended normal equity-method earnings recognition after distributions exceeded its investment balance; during the suspension, distributions are recorded as affiliate income. The prior-year amount included a $459,000 preferred return that did not recur.
- Share-based compensation expense was $254,000. No shares were sold under the ATM offering in the quarter. In October 2021, Barnwell sold a drilling rig and related equipment for $687,000, equal to carrying value.
Outlook, risks, and contingencies
Management estimated fiscal 2022 oil and gas property investments of $7.0 million to $9.5 million, subject to cash flows and management’s assessment of market conditions. Three gross (1.6 net) wells were drilled in Alberta during the quarter, with completion and expected production in the latter part of the quarter ending March 31, 2022. After quarter-end, the company acquired additional Alberta working interests for approximately $1.25 million.
Management cautioned that oil and gas prices are volatile; Oklahoma shale production is expected to decline significantly; and COVID-19, including new variants, could disrupt operations or drilling contracts. Oil-and-gas ceiling-test values depend on commodity prices, reserves, production, and cost estimates. Management disclosed a contract well that failed the contract’s gyroscopic plumbness test; centralizer and cabling costs were accrued, but no warranty accrual was recorded because a liability was not considered probable or estimable. The filing reports no known litigation expected to materially affect the company. Increment II land development has no definitive plans, and future land proceeds are uncertain. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether commodity prices, production, and Alberta well completion support the planned $7.0–$9.5 million fiscal 2022 investment program.
- How much future affiliate income represents recurring partnership earnings versus distributions recognized under the suspended equity-method treatment.
- Whether contract drilling demand, margins, and the unresolved well warranty arrangement change materially.
- Actual Oklahoma production and cost data as operator reports arrive; the company notes its estimates have limited operating history.
- Prospects and timing for remaining Increment I lot sales and any development of Increment II.
The company cautions that quarterly results are not necessarily indicative of full-year results.