Barnwell Industries, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparisons are with the three months ended December 31, 2019. Barnwell operates in Canadian oil and natural gas, Hawaiian contract drilling, and Hawaiian land investments.
Financial performance and position
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $4.387 million | $4.850 million |
| Net earnings (loss) attributable to Barnwell | $584,000 | $(414,000) |
| Basic and diluted EPS | $0.07 | $(0.05) |
| Operating cash flow | $80,000 | $(1.366) million |
| Cash at period end | $5.334 million | $2.399 million |
- Revenue fell about 10% year over year. Oil and natural gas revenue declined 12% to $1.887 million, and contract drilling revenue declined 27% to $1.942 million. Land-investment revenue was $485,000, versus none in the prior-year quarter.
- The company reported $743,000 consolidated net earnings, including $159,000 attributable to non-controlling interests. Earnings improved principally because equity-method income from the Kukio partnerships rose to $1.054 million from a $43,000 loss, and land-sale-related proceeds contributed $485,000.
- Oil and natural gas operations recorded a $373,000 operating loss before corporate general and administrative expenses, compared with $322,000 operating profit. The current quarter included a $630,000 ceiling-test impairment. Contract drilling operating profit before general and administrative expenses was $758,000, compared with $747,000.
- Operating cash flow improved from a $1.366 million use to $80,000 provided. Investing activities provided $875,000, including $813,000 of distributions from equity investees in excess of earnings and $426,000 net proceeds from land-interest payments. Financing activities used $217,000, including $248,000 distributed to non-controlling interests.
- At December 31, 2020, current assets were $9.979 million and current liabilities $4.609 million, for working capital of $5.370 million. Total assets were $14.041 million, total liabilities $15.700 million, and stockholders’ deficit $1.662 million. Long-term debt was $98,000; the balance sheet also included the $81,000 current portion of the PPP loan within other current liabilities.
Changes, outlook, and risks
- The earnings turnaround was driven by Kukio partnership activity, including two lot sales and increased real-estate resale commissions. The $459,000 preferred return received in the quarter exhausted Barnwell’s entitlement to that preferred return; no further amount was outstanding at December 31, 2020.
- Oil prices remained a material pressure: the average oil price fell 27% to $35.48 per barrel, partly offset by higher production. The company says oil prices and COVID-19 effects remain difficult to predict. It suspended oil and gas property investment pending suitable opportunities and sufficient funding; capital expenditures were $139,000, compared with $3.105 million.
- Management disclosed substantial doubt about Barnwell’s ability to continue as a going concern for one year from the filing date. Cash inflows depend on volatile commodity prices, drilling demand, and uncertain timing of land proceeds and partnership distributions. No probable additional funding source had been secured; the Honolulu office was listed for sale, but a timely or sufficient sale was not considered probable.
- Management expected contract drilling revenue and costs in the remaining FY2021 quarters to be lower than in the comparable prior-year periods because a large drilling contract was essentially complete. Demand and backlog remain uncertain, including potential COVID-19-related interruptions.
- NYSE American had extended the company’s compliance plan through July 13, 2021. Barnwell reported a stockholders’ deficit and warned that failure to regain compliance could result in delisting. It said there was no assurance its proposed initiatives would be achieved.
- A $300,000 contingent liability was recorded for a proposed alternative resolution of a Hawaii water-well regulatory matter; the final terms and allocation of costs remained uncertain. A separate well-rework project had resumed in January 2021 after retrieval of a lodged drill string. The filing reports no material-adverse-effect litigation known to management.
- The company was applying for forgiveness of its approximately $147,000 PPP loan. It also received an approximately $31,000 Canadian emergency business loan during the quarter. January 2021 events included a director-election agreement with expense reimbursement capped at $300,000 and a further $199,000 Kukio distribution; these were not reflected in quarter-end results.
Important facts for investors to verify
- Whether the company can sustain cash flows and address the disclosed going-concern uncertainty, including progress on funding sources or the office sale.
- NYSE American’s response to the company’s compliance-plan updates and its ability to meet listing standards by July 13, 2021.
- Future oil prices, reserve development funding, and potential additional ceiling-test impairments.
- The sustainability and timing of Kukio lot sales, partnership distributions, and related land proceeds after the preferred-return entitlement was exhausted.
- Final cost and liability exposure for the Hawaii regulatory matter and any customer well-rework or warranty claims.