Business Overview and Chronology: Barnwell Industries, Inc. (BRN) is a diversified company with operations spanning the oil and natural gas, land investment, and contract drilling sectors. With a rich history dating back to 1956, Barnwell has weathered numerous industry challenges and emerged as a resilient player in the energy and real estate arenas.
Barnwell Industries was incorporated in 1956, initially focusing on acquiring, developing, producing, and selling oil and natural gas in Canada and the United States. The company’s oil and natural gas segment began its operations in Canada during the 1950s, steadily expanding its presence through acquisitions and development projects over the following decades. In the early 2000s, Barnwell diversified its upstream energy portfolio by investing in several non-operated oil and gas ventures in Oklahoma and Texas.
The company’s land investment segment originated in 2004 and 2006 when Barnwell sold its leasehold interests in certain land parcels in Hawaii to entities that later became part of the Kukio Resort Land Development Partnerships. These transactions granted Barnwell the right to receive percentage of sales payments from the development and sale of residential lots and units within those land parcels. This strategic move into land investments has since become a crucial component of Barnwell’s business model.
Barnwell’s contract drilling segment, operated through its wholly-owned subsidiary Water Resources International, Inc., has been providing water well drilling and pump installation and repair services in Hawaii since the 1980s. The activity levels of this segment have varied over the years, depending on the timing and quantity of drilling and repair contracts awarded by governmental and private entities in Hawaii.
Throughout its more than 65-year history, Barnwell has faced various challenges, including commodity price volatility affecting its oil and gas operations, uncertainties surrounding the development plans for its Hawaiian land investments, and fluctuations in demand for its contract drilling services. The company has navigated these challenges through strategic planning, cost management, and diversification of its business activities.
This three-pronged business approach has allowed Barnwell to navigate the volatile dynamics of the energy sector while leveraging opportunities in the Hawaiian real estate market.
Financials Barnwell’s financial performance has been mixed in recent years, reflecting the challenges faced by the oil and gas industry and the company’s efforts to diversify its revenue streams. For the fiscal year 2023, Barnwell reported annual revenue of $25.27 million, a net loss of $961,000, operating cash flow of $1.94 million, and free cash flow of -$9.69 million.
In the most recent quarter (Q3 2024), the company reported revenue of $5,527,000, a net loss of $1,246,000, operating cash flow of $1,276,000, and free cash flow of $465,000. The decrease in revenue, net income, operating cash flow, and free cash flow for the most recent quarter compared to the prior year quarter was mainly due to a $599,000 non-cash ceiling test impairment to the company’s oil and natural gas properties and a $104,000 decrease in contract drilling segment operating results, partially offset by a $772,000 decrease in oil and natural gas operating expenses.
The company’s return on assets (ROA) and return on equity (ROE) stood at -12.03% and -22.14%, respectively, as of the most recent reporting period.
In terms of geographic performance, Barnwell operates in the United States and Canada. In the most recent quarter, 12% of revenue came from the United States and 88% came from Canada.
Liquidity The company’s liquidity position remains stable, with a current ratio of 1.51 and a quick ratio of 1.51 as of June 30, 2024. Barnwell’s debt-to-equity ratio is 0.00, indicating a conservative capital structure and a strong balance sheet. As of June 30, 2024, the company had $4.39 million in cash and cash equivalents. Notably, Barnwell has no outstanding credit facilities or credit lines.
Segmental Performance and Outlook Barnwell’s oil and natural gas segment has faced headwinds in recent years, with the company recording a non-cash ceiling test impairment of $2.28 million during the nine months ended June 30, 2024. This impairment was primarily attributable to a decline in historical 12-month rolling average first-day-of-the-month prices and capital expenditures for which there was insufficient operating history to assign a determinable increase in future cash flows from reserves.
For the three months ended June 30, 2024, the oil and natural gas segment generated a $326,000 operating profit after depletion and impairment of $1.29 million and $599,000, respectively, and before general and administrative expenses. This represented an increase in operating results of $39,000 compared to the $287,000 operating profit before general and administrative expenses generated during the same period of the prior year. The increase was primarily due to decreases in oil and natural gas operating expenses, partially offset by the non-cash ceiling test impairment recorded in the current year period.
For the nine months ended June 30, 2024, the oil and natural gas segment generated a $2,000 operating profit after depletion and impairment of $4.09 million and $2.28 million, respectively, and before general and administrative expenses. This represented a decrease in operating results of $2.97 million compared to the $2.97 million operating profit before general and administrative expenses generated during the same period of the prior year. The decrease was primarily attributable to the non-cash ceiling test impairment in the current year period and an increase in oil and natural gas depletion.
Oil and natural gas revenues decreased $51,000 (1%) for the three months ended June 30, 2024 compared to the same period in the prior year. For the nine months ended June 30, 2024, oil and natural gas revenues increased $311,000 (2%) compared to the same period in the prior year, primarily due to increases in natural gas, oil, and natural gas liquid production, partially offset by decreases in the prices of those commodities.
Oil and natural gas operating expenses decreased $772,000 (26%) and $362,000 (5%) for the three and nine months ended June 30, 2024, respectively, compared to the same periods in the prior year, primarily due to decreases in repairs, electricity and chemical costs, as well as optimization from capital expenditures made earlier in the year.
Depletion expense for the oil and natural gas segment increased $83,000 (7%) and $1.37 million (50%) for the three and nine months ended June 30, 2024, respectively, compared to the same periods in the prior year. The increases were primarily due to increases in the depletion rate for Canadian properties and increased production from those properties, as a result of wells drilled and facilities expansion and upgrades in 2023.
In contrast, the company’s land investment segment has been a bright spot, with Barnwell receiving $500,000 in percentage of sales payments from KD I during the nine months ended June 30, 2024, from the sale of the last two single-family lots within Increment I of the Kaupulehu Lot 4A area. This represents an increase compared to the $265,000 in percentage of sales payments received from KD I during the nine months ended June 30, 2023 from the sale of one single-family lot. However, the future cash inflows from this segment are uncertain, as no definitive development plans have been made for Increment II by the developer, KD II.
Through Barnwell’s 77.6% interest in Kaupulehu Developments, 75% interest in KD Kona, and 34.45% non-controlling interest in KKM Makai, the Company’s land investment interests include the right to receive percentage of sales payments from KD I resulting from the sale of single-family residential lots within Increment I of the Kaupulehu Lot 4A area. In the quarter ended March 31, 2024, the last two remaining single-family lots in Increment I were sold.
Barnwell also has the right to receive 15% of the distributions of KD II, the developer of Increment II, as well as a priority payout of 10% of KD Kona’s cumulative net profits derived from Increment II sales subsequent to Phase 2A, up to a maximum of $3 million. However, the remaining acreage within Increment II is not yet under development, and there is no assurance that development of such acreage will occur.
Additionally, Barnwell has an indirect 19.6% non-controlling ownership interest in KD Kukio Resorts, LLLP, KD Maniniowali, LLLP and KD I, and an indirect 10.8% non-controlling ownership interest in KD II through KD Kona. These entities, collectively referred to as the Kukio Resort Land Development Partnerships, own certain real estate and development rights interests in the Kukio, Maniniowali and Kaupulehu portions of Kukio Resort, as well as the resort’s real estate sales office operations.
The contract drilling segment, represented by Water Resources International, Inc., has faced challenges, with revenues and operating results declining by 33% and 804%, respectively, during the nine months ended June 30, 2024, compared to the same period in the prior year. For the three months ended June 30, 2024, the contract drilling segment generated a $99,000 operating loss before general and administrative expenses, a decrease in operating results of $104,000 compared to the $5,000 operating profit generated during the same period of the prior year. This was primarily due to a $113,000 (10%) decrease in contract drilling revenues and a $10,000 (1%) increase in contract drilling costs.
For the nine months ended June 30, 2024, the contract drilling segment generated a $694,000 operating loss before general and administrative expenses, a decrease in operating results of $804,000 compared to the $110,000 operating profit generated during the same period of the prior year. The decreases in contract drilling revenues of $1.50 million (33%) and contract drilling costs of $692,000 (16%) were primarily due to decreased activity and a decrease in revenues and costs recognized from materials deliveries and installations.
In January 2024, a significant well drilling contract, which previously had an estimated contract drilling revenue backlog of $2.40 million and which had not yet started, was cancelled by mutual agreement. The company has been exploring strategic options for this segment, including a potential sale or winding down of operations once the remaining contracts in backlog are completed.
Risks and Challenges Barnwell’s operations are subject to various risks, including volatility in commodity prices, regulatory changes, and competition in its core business lines. The company’s reliance on a limited number of large customers in the contract drilling segment poses a risk, as the loss of any of these key clients could have a significant impact on the segment’s performance.
Additionally, Barnwell’s ability to generate future cash flows from its land investment segment is heavily dependent on the development plans and activities of its joint venture partners, which are outside the company’s direct control. Unforeseen delays or changes in these plans could adversely affect Barnwell’s anticipated cash inflows.
Outlook and Conclusion Barnwell’s management has acknowledged the challenges facing the company’s oil and natural gas and contract drilling segments, and has indicated that the company will be primarily reliant on cash flows from its oil and natural gas operations and potential asset sales to provide liquidity in the near term. The company’s success in navigating the dynamic market landscape will depend on its ability to optimize operations, explore strategic alternatives for underperforming segments, and capitalize on opportunities in the land investment business.
Despite the headwinds, Barnwell’s diversified business model, strong balance sheet, and experience in weathering industry cycles position the company to potentially navigate the current environment. Investors should closely monitor the company’s progress in executing its strategic initiatives and managing the risks inherent in its various business lines.
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