Barnwell Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2022. The filing is unaudited. Barnwell operates oil and gas businesses in Canada and Oklahoma, land investments in Hawaii, and a Hawaii contract-drilling business.
Financial performance
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $8.03 million | $5.11 million | $20.16 million | $13.50 million |
| Net earnings attributable to Barnwell | $2.53 million | $4.98 million | $5.66 million | $4.71 million |
| Diluted earnings per share | $0.25 | $0.59 | $0.59 | $0.57 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $5.67 million | $2.11 million |
- Quarterly revenue growth reflected higher oil and gas prices and production. Quarterly attributable earnings fell chiefly because affiliate income was lower and the prior-year quarter included a $2.34 million non-cash gain from terminating the post-retirement medical plan.
- Nine-month earnings improved despite lower affiliate income and weaker contract-drilling results. The 2021 comparison included the medical-plan gain and a $149,000 gain from forgiveness of a PPP loan; 2021 also had a $630,000 oil-and-gas impairment charge.
- Oil and gas revenue rose 153% for the quarter and 123% for nine months. For the nine-month period, average realized prices increased 82% for oil, 99% for natural gas, and 59% for natural gas liquids; production also increased across these products.
- Oil and gas segment operating profit before general and administrative expenses was $4.12 million for the quarter and $8.12 million for nine months. Contract drilling recorded losses of $177,000 and $469,000, respectively; the nine-month result was down from a $392,000 profit in 2021.
- General and administrative expense decreased 23% in the quarter, to $1.71 million, but increased 8% for nine months, to $5.78 million. Depletion, depreciation, and amortization rose to $1.92 million for nine months from $738,000.
Cash, liquidity, debt, and capital
- At June 30, 2022, cash and cash equivalents were $12.57 million, working capital was $12.34 million, and current assets and liabilities were $20.54 million and $8.20 million, respectively.
- Total liabilities were $18.36 million. Long-term debt was $47,000, consisting of the Canadian CEBA loan; it is interest-free with repayment deferred until December 31, 2023. The filing reports no material conventional borrowing beyond this balance.
- Nine-month operating cash flow of $5.67 million was more than offset by $6.06 million of investing cash outflow, primarily oil-and-gas acquisitions and capital expenditures. Financing provided $1.73 million, including $2.36 million in net ATM stock proceeds. Cash increased $1.30 million from September 30, 2021.
- Oil-and-gas capital expenditures, including accrued amounts and excluding acquisitions and asset-retirement revisions, were $7.35 million for nine months. Management estimated fiscal 2022 oil-and-gas property investment of $11 million to $12 million, subject to cash flows and management’s assessment of conditions.
- Shares outstanding increased during the period through ATM sales and other issuances. In August 2022, the Board suspended ATM sales until further notice and declared a $0.015-per-share dividend payable September 6, 2022.
Outlook, risks, and unusual items
- Management did not provide broad earnings or revenue guidance. The stated fiscal 2022 investment estimate is $11 million to $12 million for oil-and-gas properties.
- Oil and gas results remain exposed to volatile commodity prices, reserve estimates, production declines, operating costs, and full-cost ceiling-test impairment risk. Oklahoma shale production is expected to decline significantly; production and costs from Oklahoma properties are initially estimated because operator data arrive later.
- Contract drilling faces uncertain demand, competition, and pressure on margins. A completed well did not meet the contract’s gyroscopic plumbness specification; Barnwell accrued for agreed corrective work, but recorded no further liability because additional costs were not considered probable or estimable.
- Land-related income is dependent on property sales and development. Two lots remained unsold in Increment I, and no definitive development plans existed for the remaining Increment II acreage. Affiliate income recognized in 2022 reflected $3.40 million of distributions from the Kukio partnerships while equity-method earnings recognition remained suspended.
- A $2.00 million subscription-receipt investment agreement was in escrow and had not been funded as of the filing date; release depended on the issuer raising additional proceeds and meeting other conditions.
- The company reported a $61,000 income-tax penalty and interest expense related to missing IRS Form 8858 filings for fiscal 2019–2021. It planned to amend those returns and request abatement.
- COVID-19 disruption and foreign-exchange movements were identified as risks. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher commodity prices and new production can sustain oil-and-gas cash generation, and how steep Oklahoma declines affect output.
- Progress against the $11 million–$12 million fiscal 2022 investment estimate, related funding needs, and the impact of asset-retirement obligations.
- Future Kukio partnership distributions and land-sale proceeds, including the remaining Increment I lots and uncertain Increment II development.
- Contract-drilling backlog, margins, and any additional cost or liability from the well-specification issue.
- Potential dilution from past equity issuance, the ATM suspension, the status of the escrowed $2 million subscription investment, and the sustainability of the dividend.
- Resolution of the tax filing penalties and the assumptions supporting oil-and-gas reserves, depletion, and ceiling-test valuations.