Barnwell Industries, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011, compared with FY2010. This is an annual report, not a standalone fourth-quarter filing.
Business context
Barnwell operates oil and natural gas properties in Canada and land investment, contract drilling, and residential real estate businesses in Hawaii. Oil and gas was the largest segment, representing 79% of FY2011 revenue. The company reported that sluggish economic conditions affected its businesses in both regions.
Financial performance and position
| Metric | FY2011 / September 30, 2011 | FY2010 / September 30, 2010 |
|---|---|---|
| Total revenue | $38.46 million | $41.87 million |
| Pre-tax earnings | $1.71 million | $5.06 million |
| Net earnings, consolidated | $205,000 | $4.30 million |
| Net earnings (loss) attributable to Barnwell | $(109,000); $(0.01) per share | $3.84 million; $0.46 per share |
| Cash provided by operations | $13.26 million | $7.47 million |
| Cash and cash equivalents | $9.83 million | $10.67 million |
| Working capital | $5.44 million | Not stated in the provided filing text |
| Total debt | $23.71 million | $26.00 million |
Revenue declined 8%; pre-tax earnings fell 66%. The effective consolidated tax rate was 108%, reflecting, among other items, Canadian taxes without an estimated U.S. tax benefit and valuation allowances. FY2010 included a $1.465 million U.S. tax benefit that did not recur. No dividends were declared or paid in either year.
- Oil and gas: Revenue increased 5% to $28.80 million, while segment operating profit before general and administrative expenses declined to $9.36 million from $9.94 million. Net production fell to 759,000 Boe from 802,000 Boe; oil and NGL prices rose, while natural gas prices and production declined. Production costs rose 12% to $11.40 million.
- Hawaii contract drilling: Revenue fell 41% to $3.86 million; the segment recorded a $587,000 operating loss before general and administrative expenses, versus a $437,000 profit. December 1, 2011 backlog was $570,000, all expected to be completed in FY2012.
- Land investment: Segment revenue was $3.74 million versus $5.84 million. Percentage-of-sales revenue from Increment I fell to $1.25 million from $3.35 million as the developer sold fewer lots.
- Cash investment: Oil and gas capital expenditures increased to $13.30 million from $5.49 million; total capital expenditures were $15.40 million. Investing activities used $11.47 million, and cash declined by $840,000 during the year.
- Asset write-downs: The company recorded $1.23 million of total carrying-value reductions, including $689,000 on residential parcels, $418,000 on homes held for sale, and a $121,000 write-off of its remaining Kona Village joint-venture investment.
Liquidity, debt, outlook, and risks
At year-end, Barnwell had $7.25 million available under its Canadian revolving facility, with $12.0 million drawn and a 3.0% stated interest rate. The facility was renewed through April 2012 and was subject to annual review. A separate real estate term loan had $11.71 million outstanding, a first-year rate of 3.67%, and a seven-year term; because the homes securing it were for sale, the full balance was classified as current. The company reported compliance with the real estate loan covenants at September 30, 2011.
Management estimated FY2012 oil and gas capital expenditures of $5 million to $7 million and expected Hawaii well-drilling activity to be lower than FY2011. Management believed available cash, operating cash flow, land proceeds, home sales, and credit would fund FY2012 needs, but cautioned that weaker commodity prices or production, lower or delayed property proceeds, a reduced credit facility, or covenant shortfalls could materially impair liquidity and require alternative financing or asset sales.
Principal risks include volatile oil and gas prices and declining reserves or production; limited control over many non-operated properties; Canadian royalty, tax, regulatory, and environmental exposure; concentrated customer and geographic risks; weak Hawaii real estate and construction markets; uncertain timing of luxury home and lot sales; and debt refinancing, interest-rate, and covenant risks. The company had no proved undeveloped reserves at year-end; proved reserves and production declined. Its reserve-based standardized discounted future net cash flow measure was $48.56 million, which the filing cautions is not fair value.
Management reported effective disclosure controls and internal control over financial reporting as of year-end. KPMG issued an unqualified opinion on the financial statements. Routine litigation was not expected by management to have a material adverse effect; no material subsequent events were reported.
Important facts for investors to verify
- Whether the April 2012 review renewed or changed the Canadian credit facility, and the resulting borrowing availability and repayment terms.
- Whether the company can meet debt service and real estate loan covenants, particularly if the homes remain unsold or appraised values fall.
- Actual FY2012 oil and gas capital spending, production, reserve replacement, and realized commodity prices versus management’s estimates.
- Progress and cash receipts from Kaupulehu lot development, and whether the two completed homes are sold; future land proceeds depend on unaffiliated developers.
- Whether the unusually high FY2011 tax burden, uncertain Canadian transfer-pricing positions, and valuation allowances change materially.