Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023, compared with the same periods in 2022. Financial statements are unaudited.
Business context
Barnwell operates oil and natural gas businesses in Canada and the U.S., a Hawaii land-investment business, and a Hawaii contract-drilling and water-pump business. The results include equity-method income from Hawaii land-development partnerships.
Financial results and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $5.24 million in 2023; $6.68 million in 2022 | $12.75 million in 2023; $12.13 million in 2022 |
| Net income (loss) attributable to Barnwell | $(1.24) million; $2.05 million | $(148,000); $3.13 million |
| Basic and diluted EPS | $(0.12); $0.21 | $(0.01); $0.33 |
| Operating cash flow | $734,000 for the six months, versus $1.70 million in 2022 | |
| Investing cash flow | $(7.37) million for the six months, primarily reflecting oil and gas capital spending | |
| Financing cash flow | $(423,000) for the six months |
Quarterly revenue fell about 22%, while six-month revenue increased about 5%. At March 31, cash was $5.78 million, down from $12.80 million at September 30, 2022; working capital was $4.25 million. Total assets were $35.50 million and total liabilities $16.64 million. Long-term debt was zero; a $44,000 Canadian CEBA loan was included in other current liabilities. The filing does not provide a consolidated gross or operating margin measure.
- Oil and gas: Segment operating profit before general and administrative expenses was $701,000 for the quarter and $2.69 million for six months, versus $2.43 million and $4.00 million in 2022. Six-month revenue was $8.91 million, slightly below 2022. For the quarter, realized natural gas, oil, and NGL prices fell 34%, 26%, and 43%, respectively; six-month production of natural gas and oil rose, partly offsetting lower prices.
- Contract drilling: Revenue rose 83% for the quarter and 104% for six months. Segment operating profit before general and administrative expenses was $57,000 and $105,000, respectively, reversing prior-year losses, reflecting higher activity and higher-value water-well contracts.
- Land investment and affiliates: No Increment I lots were sold in the quarter, compared with three in the prior-year quarter. One lot was sold in the six-month period versus six in 2022. Equity in affiliate income was nil for the quarter and $538,000 for six months, compared with $1.76 million and $2.97 million.
Oil and gas investing cash outflow included $7.31 million of capital expenditures and $481,000 in advances to operators. Free cash flow was not reported; operating cash flow less capital expenditures was negative. Barnwell paid two dividends of $0.015 per share during the six-month period.
Outlook, risks, and unusual items
- Management estimated fiscal 2023 oil and gas property investment of $9.5 million to $10.0 million, subject to cash flows and management’s assessment of market conditions. Three Twining-area wells were expected to be completed and begin production in the latter part of the quarter ending June 30, 2023; Texas wells began initial flowback in late April.
- Management did not provide broader earnings or revenue guidance. It cautioned that commodity prices are volatile and future prices cannot be reasonably predicted. Contract-drilling demand and margins can fluctuate; backlog contracts may be deferred or terminated in some circumstances.
- Only one lot remained for sale in Increment I, and no definitive development plans existed for Increment II. Future land-sale payments and development are uncertain. The approximately 1,000-acre Lot 4C leasehold has no current development potential absent a development agreement and zoning reclassification, and the lease ends in December 2025.
- Investing outflows included a Permian Basin interest acquisition and drilling prepayment. A $551,000 gain was recognized on the October 2022 sale of a fully depreciated drilling rig.
- The company recorded a $147,000 out-of-period adjustment in the six-month results, reducing oil and gas revenue and increasing general and administrative expense. Management considered it immaterial to the current and prior periods.
- A January 2023 cooperation agreement resolved a potential proxy contest, added two directors, and included reimbursement of stockholder and CEO expenses. The filing reports approximately $351,000 of agreement-related expenses and a $150,000 special director-fee accrual; the related expense-period detail is not clear in the filing text.
- A contract-drilling well had a plumbness-specification issue. The company accrued costs for proposed remedial work and said no further probable and estimable liability was identified. Management reported no other known legal claims likely to have a material adverse effect.
- The filing identifies foreign-exchange exposure without hedging, significant estimation risks for reserves and asset-retirement obligations, and ongoing evaluation of the expected-credit-loss accounting standard. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether the planned fiscal 2023 oil and gas capital spending and well tie-ins were completed as expected, and their effect on production and cash.
- Whether commodity prices, production, and operating costs support a recovery in oil and gas segment profitability.
- The pace of contract-drilling awards, backlog conversion, margins, and any remaining costs related to the well-specification issue.
- Future Kukio partnership distributions and land-sale receipts, given the limited remaining Increment I inventory and uncertain Increment II development.
- Cash needs and liquidity following the $7.03 million six-month cash decline, including the timing of capital commitments and the CEBA loan terms.
- The exact timing and accounting of cooperation-agreement reimbursements and special director fees, and any subsequent share issuance.