Business Overview and History
Barnwell Industries, Inc. (BRN) is a diversified company with operations spanning the oil and gas, land investment, and contract drilling sectors. Founded in 1956 and headquartered in Honolulu, Hawaii, Barnwell has weathered numerous industry cycles and challenges over its six-decade history. As the company navigates the evolving landscape, it must carefully balance its legacy assets with new opportunities to drive long-term shareholder value.
Barnwell Industries was established in 1956 as an independent oil and natural gas company, primarily focused on the acquisition, development, production, and sale of oil and natural gas in Canada and the United States. Over the years, the company has expanded its portfolio to include land investment and contract drilling activities, providing a degree of diversification.
In the oil and gas segment, Barnwell acquires, develops, and produces crude oil and natural gas. The company's Canadian operations account for the majority of its oil and gas production, with additional non-operated investments in Oklahoma and Texas. Barnwell has a long history of leveraging advanced drilling and production techniques to extract resources from its properties.
The land investment segment encompasses Barnwell's interests in various real estate developments in Hawaii. Through its subsidiaries, the company holds rights to receive payments from the sale of residential lots and units within the Kaupulehu development on the Big Island. Additionally, Barnwell maintains non-controlling ownership stakes in various land investment partnerships in Hawaii.
Barnwell's contract drilling segment, operated through its subsidiary Water Resources International, Inc., provides water well drilling and water pump installation and repair services in Hawaii. This business unit serves a diverse customer base, including residential, commercial, and government clients.
In the early 2020s, Barnwell faced significant challenges due to low oil and natural gas prices and declining production from aging wells, which impacted its financial performance. However, the company has worked to optimize its operations and reduce costs, leading to improved results in fiscal year 2022. Despite these challenges, Barnwell has maintained a strong balance sheet, remaining debt-free with $12.80 million in cash and cash equivalents as of September 30, 2023.
Financial Performance and Ratios
Over the past three fiscal years, Barnwell has reported mixed financial results. In the fiscal year ended September 30, 2022, the company generated revenue of $28.55 million and a net income of $5.51 million, or $0.57 per diluted share. This represented a significant improvement from the prior year, when the company reported revenue of $25.27 million and a net loss of $961,000, or $0.10 per diluted share.
However, the company's most recent fiscal year, ended September 30, 2024, saw a decline in performance, with revenue of $21.72 million and a net loss of $5.57 million, or $0.56 per diluted share. This loss was primarily driven by a non-cash ceiling test impairment of $2.88 million in the company's oil and gas properties, as well as a decline in oil, natural gas, and natural gas liquids prices and production.
Financials
Barnwell's balance sheet remains relatively strong, with a current ratio of 1.14 and a debt-to-equity ratio of 0.01 as of September 30, 2024. The company's cash and cash equivalents position stood at $4.50 million at the end of the fiscal year, providing a buffer for near-term operations.
For the most recent quarter (Q1 2025), Barnwell reported revenue of $4.48 million, representing a 27.3% decrease compared to the same quarter in the prior year. The company posted a net loss of $1.92 million for the quarter. The decreases in revenue, net income, and production were primarily due to declines in oil, natural gas, and natural gas liquids prices and production compared to the prior year period.
Barnwell's annual operating cash flow for fiscal year 2024 was $4.71 million, with annual free cash flow of $1.18 million. This provides some financial flexibility for the company, despite the challenging market conditions.
Liquidity
As of the end of the most recent quarter, Barnwell had $1.96 million in cash and cash equivalents, with no available credit lines. The company's current ratio and quick ratio both stood at 1.12, indicating a reasonable ability to meet short-term obligations. Barnwell's debt-to-equity ratio remains low at 0.01, reflecting its conservative approach to leverage.
Operational Highlights and Challenges
Barnwell's oil and gas segment has faced headwinds in recent years, with declining production and volatile commodity prices. The company's latest well drilled in Canada, which came online in mid-September 2024, contributed approximately 10,000 net barrels of equivalent production during the first quarter of fiscal 2025. However, this was not enough to offset the natural declines in the company's aging well portfolio.
During the three months ended December 31, 2024, the oil and natural gas segment generated $3.90 million in revenue, a decrease of 24% compared to the same period in the prior year. Production decreased 17% for oil, 21% for natural gas, and 17% for natural gas liquids compared to the prior year period. The segment reported an operating loss of $116,000 before general and administrative expenses, a decrease of $997,000 compared to the prior year period. This was largely attributable to a $613,000 non-cash ceiling test impairment recorded on the company's U.S. oil and gas properties during the current period.
In the land investment segment, Barnwell's interests in the Kaupulehu development have provided a steady stream of income over the years. However, the last two single-family residential lots in the Increment I phase were sold in the quarter ended March 31, 2024, limiting future revenue from this source. The company's ongoing stake in the Kukio Resort Land Development Partnerships provides exposure to the Hawaiian real estate market, but the timing and profitability of future development plans remain uncertain. These partnerships have remaining obligations to complete project amenities and infrastructure, and therefore have yet to fully recognize deferred profit from the Increment I project.
The contract drilling segment has experienced a decline in activity, with the company working on only one water well drilling job in the first quarter of fiscal 2025, compared to three water well drilling jobs and one pump installation job in the same period of the prior year. During the three months ended December 31, 2024, the contract drilling segment generated $543,000 in revenue, a 45% decrease from the prior year period, due to less drilling activity. The segment reported an operating loss of $201,000 before general and administrative expenses, a $27,000 improvement compared to the same quarter last year.
In December 2024, Barnwell entered into an agreement to sell a drilling rig and related equipment from the contract drilling segment, which are fully depreciated. The sale is expected to close in the next quarter, at which point the company will recognize a gain. Barnwell is actively exploring strategic options for this business unit, including a potential sale of its Water Resources International subsidiary or its assets.
Geographic Performance
Barnwell operates in both the United States and Canada, with the majority of its revenue (79%) coming from its Canadian operations. This geographic diversification provides some balance to the company's portfolio, although it also exposes Barnwell to currency fluctuations and different regulatory environments.
Shareholder Activism and Governance Challenges
Barnwell's leadership has faced ongoing challenges from shareholder activist Ned Sherwood and his affiliates. In January 2025, the company adopted a limited-duration shareholder rights plan, or "poison pill," in response to Sherwood's significant ownership position and his attempts to gain control of the board of directors without paying a premium to other shareholders.
Sherwood's nomination of a slate of directors for Barnwell's 2025 annual meeting was recently rejected by the company's board, citing deficiencies in the nomination notice. Barnwell has also set a record date for shareholders to act by written consent, as it investigates the circumstances that may have triggered the shareholder rights plan.
These governance battles have added an additional layer of complexity to Barnwell's operations, diverting management's attention and resources away from the company's core business initiatives. Navigating these shareholder activist challenges will be a critical priority for Barnwell's leadership in the coming year.
Outlook and Conclusion
Barnwell Industries faces a multitude of operational and strategic challenges as it looks to the future. The company's oil and gas business will need to find ways to replace declining production and manage volatile commodity prices. The land investment segment must adapt to the changing dynamics of the Hawaiian real estate market, while the contract drilling unit explores options for its future.
Against this backdrop, Barnwell must also contend with the ongoing shareholder activism and governance issues that have disrupted the company's operations in recent years. The successful resolution of these challenges will be key to Barnwell's ability to execute its long-term strategic plan and drive sustainable shareholder value.
Despite the headwinds, Barnwell's diversified business model, low debt levels, and experienced management team provide a foundation for the company to navigate the current landscape. As Barnwell continues to chart its course through these choppy waters, investors will closely monitor the company's ability to adapt, innovate, and capitalize on new opportunities that emerge. The company's future cash flows will rely primarily on its oil and gas operations, as well as potential asset sales, to fund ongoing business and capital expenditures.