Barnwell Industries, Inc. — Form 10-Q
Amounts: U.S. dollars; millions unless otherwise stated. The filing covers the three and nine months ended June 30, 2021 (the company’s fiscal third quarter), compared with the corresponding 2020 periods.
Business context and reporting period
Barnwell operates in oil and natural gas production in Canada and Oklahoma, land investment in Hawaii, and contract drilling and water-pump services in Hawaii. Results are unaudited interim results and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2021 (2020) | $5.114 ($3.984) | $13.499 ($13.416) |
| Net earnings (loss) attributable to Barnwell, 2021 (2020) | $4.978 ($(3.456)) | $4.706 ($(5.384)) |
| EPS, basic and diluted, 2021 (2020) | $0.59 ($(0.42)) | $0.57 ($(0.65)) |
| Cash provided by operating activities, 2021 (2020) | Nine months: $2.105 ($0.472) |
- At June 30, cash and equivalents were $9.500, versus $4.584 at September 30, 2020. Working capital was $8.335; current assets were $14.845 and current liabilities $6.510.
- Cash increased $4.916 over the nine months. Investing activities provided $1.955 and financing activities provided $0.832. Operating cash flow included $4.278 of distributions of income from equity investees.
- Reported long-term debt was $0.048; the balance sheet also included $6.931 of asset-retirement obligations, of which $0.965 was current. The company reported total liabilities of $15.017 and total equity of $4.805.
- The filing does not report a conventional consolidated gross margin. Segment operating results before general and administrative expenses were $1.015 million for oil and gas, a loss of $0.213 million for contract drilling, and $1.253 million for land investment in the quarter.
Material changes versus prior comparable periods
- Quarterly revenue rose 28%, while nine-month revenue was nearly flat. Higher oil and gas revenue and new land-sale proceeds were partly offset by materially lower contract-drilling revenue.
- Oil and gas revenue increased 248% in the quarter and 50% for nine months, largely reflecting higher commodity prices versus pandemic-affected 2020 prices. Quarterly average realized prices rose 256% for oil and 90% for natural gas; nine-month prices rose 44% and 52%, respectively.
- Contract-drilling revenue fell 71% in the quarter and 49% for nine months as a large well-drilling contract was substantially completed in December 2020.
- Equity income from Kukio Resort Land Development Partnerships was $3.348 million for the quarter and $5.026 million for nine months, versus losses in the prior-year periods. The current-year amounts included a $0.748 million excess-distribution gain and, for nine months, a $0.459 million preferred return. The investment balance was reduced to zero at June 30 after distributions exceeded the carrying value.
- Results also included a $2.341 million noncash gain from termination of the post-retirement medical plan and a $0.149 million gain from forgiveness of the PPP loan. Nine-month oil and gas impairment was $0.630 million, compared with $4.326 million in 2020.
- General and administrative expense increased 78% in the quarter and 12% for nine months. The filing cites compensation and bonuses, share-based compensation, professional fees, and costs related to a stockholder cooperation agreement.
Outlook, risks, contingencies, and unusual items
- Liquidity and going concern: Management said substantial doubt about the company’s ability to continue as a going concern for one year had been overcome, citing $3.784 million of ATM proceeds raised through the report date and $3.965 million of second-quarter net cash inflows from land-sale proceeds and Kukio distributions. Cash generation nevertheless depends on volatile oil and gas prices, drilling demand, and uncertain partnership distributions and land-sale timing.
- Funding actions: The company’s ATM program allows up to $25 million of share sales, subject to limitations. It sold 586,546 shares through June 30 and another 581,441 shares after quarter-end through the report date. It also listed its Honolulu office for sale; a contracted sale was expected to close before September 30, 2021, but completion was not assured.
- Subsequent events: After June 30, Barnwell sold certain Spirit River-area Canadian oil and gas properties for adjusted proceeds of $1.047 million; $0.524 million was withheld for possible Canadian taxes. The company expected to recognize a gain in the September quarter. It also received $0.683 million in subsequent Kukio distributions.
- Asset-retirement funding: Under an agreement for Manyberries-area well abandonment and reclamation, Barnwell must deposit approximately $1.568 million with the Orphan Well Association: $0.913 million by August 2021 and $0.655 million by August 2022. The company said any excess deposit may be credited to later work or refunded after completion.
- Other risks and contingencies: Management highlighted COVID-19 and variant uncertainty, commodity-price volatility, contract-drilling demand and backlog risk, foreign-exchange exposure (no hedging), and uncertainty around future Kukio lot development and distributions. A $0.300 million liability remained accrued for a Hawaii water-well regulatory matter. A separate customer well-plumbness dispute had no accrual because management said a probable and estimable liability was not established.
- Guidance: No formal numeric earnings or revenue guidance was provided. Management expected contract-drilling revenue and costs in the remaining fiscal 2021 quarter to be lower than in the prior-year comparable quarter.
- The company reported that it regained compliance with NYSE American continued-listing equity standards in July 2021. Management concluded disclosure controls were effective as of June 30 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company sustains positive operating cash flow without relying on Kukio distributions, land-sale proceeds, or further equity issuance.
- ATM share issuance, net proceeds, remaining capacity and resulting dilution; reconcile the various offering-proceeds figures across the filing’s cash-flow, equity and offering disclosures.
- Timing and cash impact of the Manyberries abandonment deposits, total asset-retirement obligations, and any further regulatory requirements.
- Completion and net proceeds of the Honolulu office sale, and any additional non-core oil and gas asset sales.
- Durability of oil and gas operating results under changing prices and costs, and contract-drilling backlog, demand and margins after completion of the large contract.
- How much future earnings and liquidity depend on Kukio lot sales and distributions, particularly after the investment carrying value reached zero and equity-method earnings recognition was suspended.