10-Q 1 a13-9364_110q.htm 10-Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X]         Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2013

 

or

 

[   ]         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 1-5103

 

 

BARNWELL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

72-0496921

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

1100 Alakea Street, Suite 2900, Honolulu, Hawaii

96813

 

 

(Address of principal executive offices)

(Zip code)

 

 

(808) 531-8400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                                                                                           S Yes     o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                                                           S Yes     o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer

o

Accelerated filer o

 Non-accelerated filer

o (Do not check if a smaller reporting company)

Smaller reporting company S

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                                                 o Yes     S No

 

As of May 10, 2013 there were 8,277,160 shares of common stock, par value $0.50, outstanding.

 



Table of Contents

 

BARNWELL INDUSTRIES, INC.

AND SUBSIDIARIES

 

INDEX

 

 

 

PART I.

FINANCIAL INFORMATION:

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets -
March 31, 2013 and September 30, 2012

3

 

 

 

 

Condensed Consolidated Statements of Operations -
three and six months ended March 31, 2013 and 2012

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss -
three and six months ended March 31, 2013 and 2012

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows -
six months ended March 31, 2013 and 2012

6

 

 

 

 

Condensed Consolidated Statements of Equity -
three months ended March 31, 2013 and 2012

7

 

 

 

 

Condensed Consolidated Statements of Equity -
six months ended March 31, 2013 and 2012

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

PART II.

OTHER INFORMATION:

 

 

 

 

Item 5.

Other Information

31

 

 

 

Item 6.

Exhibits

32

 

 

 

 

Signature

33

 

 

 

 

Index to Exhibits

34

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.                                     FINANCIAL STATEMENTS

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

March 31,

 

September 30,

 

2013

 

2012

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,316,000

 

 

 

$

8,845,000

 

Accounts receivable, net of allowance for doubtful accounts of:

 

 

 

 

 

 

 

$44,000 at March 31, 2013; $45,000 at September 30, 2012

 

4,363,000

 

 

 

3,600,000

 

Prepaid expenses

 

496,000

 

 

 

361,000

 

Real estate held for sale

 

5,448,000

 

 

 

5,309,000

 

Other current assets

 

649,000

 

 

 

770,000

 

 

 

 

 

 

 

 

 

Total current assets

 

19,272,000

 

 

 

18,885,000

 

 

 

 

 

 

 

 

 

Investments

 

2,381,000

 

 

 

2,381,000

 

 

 

 

 

 

 

 

 

Property and equipment

 

252,009,000

 

 

 

256,153,000

 

Accumulated depletion, depreciation, and amortization

 

(210,580,000

)

 

 

(207,529,000

)

Property and equipment, net

 

41,429,000

 

 

 

48,624,000

 

 

 

 

 

 

 

 

 

Total assets

 

$

63,082,000

 

 

 

$

69,890,000

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,965,000

 

 

 

$

2,680,000

 

Accrued capital expenditures

 

1,757,000

 

 

 

341,000

 

Accrued incentive and other compensation

 

1,469,000

 

 

 

1,593,000

 

Payable to joint interest owners

 

682,000

 

 

 

854,000

 

Income taxes payable

 

78,000

 

 

 

-

 

Current portion of long-term debt

 

4,903,000

 

 

 

5,764,000

 

Other current liabilities

 

3,381,000

 

 

 

3,083,000

 

 

 

 

 

 

 

 

 

Total current liabilities

 

15,235,000

 

 

 

14,315,000

 

 

 

 

 

 

 

 

 

Long-term debt

 

12,000,000

 

 

 

11,400,000

 

 

 

 

 

 

 

 

 

Liability for retirement benefits

 

5,039,000

 

 

 

5,114,000

 

 

 

 

 

 

 

 

 

Asset retirement obligation

 

5,554,000

 

 

 

5,629,000

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

1,563,000

 

 

 

3,307,000

 

 

 

 

 

 

 

 

 

Total liabilities

 

39,391,000

 

 

 

39,765,000

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Common stock, par value $0.50 per share; authorized, 20,000,000 shares:

 

 

 

 

 

 

 

8,445,060 issued at March 31, 2013 and September 30, 2012

 

4,223,000

 

 

 

4,223,000

 

Additional paid-in capital

 

1,289,000

 

 

 

1,289,000

 

Retained earnings

 

18,405,000

 

 

 

24,095,000

 

Accumulated other comprehensive income, net

 

1,482,000

 

 

 

2,322,000

 

Treasury stock, at cost:

 

 

 

 

 

 

 

167,900 shares at March 31, 2013 and September 30, 2012

 

(2,286,000

)

 

 

(2,286,000

)

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

23,113,000

 

 

 

29,643,000

 

Non-controlling interests

 

578,000

 

 

 

482,000

 

 

 

 

 

 

 

 

 

Total equity

 

23,691,000

 

 

 

30,125,000

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

63,082,000

 

 

 

$

69,890,000

 

 

See Notes to Condensed Consolidated Financial Statements

 

3



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three months ended

 

Six months ended

 

March 31,

 

March 31,

 

2013

 

2012

 

2013

 

2012

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas

 

$

5,605,000

 

 

 

$

6,408,000

 

 

 

$

11,245,000

 

 

 

$

14,197,000

 

Contract drilling

 

703,000

 

 

 

281,000

 

 

 

1,420,000

 

 

 

706,000

 

Sale of interest in leasehold land, net

 

282,000

 

 

 

353,000

 

 

 

282,000

 

 

 

353,000

 

Gas processing and other

 

179,000

 

 

 

124,000

 

 

 

373,000

 

 

 

412,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,769,000

 

 

 

7,166,000

 

 

 

13,320,000

 

 

 

15,668,000

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas operating

 

3,049,000

 

 

 

2,792,000

 

 

 

5,042,000

 

 

 

5,533,000

 

Contract drilling operating

 

653,000

 

 

 

460,000

 

 

 

1,261,000

 

 

 

1,097,000

 

General and administrative

 

2,107,000

 

 

 

2,367,000

 

 

 

4,249,000

 

 

 

4,213,000

 

Depletion, depreciation, and amortization

 

2,332,000

 

 

 

2,806,000

 

 

 

5,011,000

 

 

 

5,715,000

 

Reduction of carrying value of assets

 

2,179,000

 

 

 

1,854,000

 

 

 

4,506,000

 

 

 

1,854,000

 

Interest expense

 

144,000

 

 

 

219,000

 

 

 

296,000

 

 

 

438,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,464,000

 

 

 

10,498,000

 

 

 

20,365,000

 

 

 

18,850,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(3,695,000

)

 

 

(3,332,000

)

 

 

(7,045,000

)

 

 

(3,182,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) provision

 

(772,000

)

 

 

(3,000

)

 

 

(1,336,000

)

 

 

487,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(2,923,000

)

 

 

(3,329,000

)

 

 

(5,709,000

)

 

 

(3,669,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net earnings (loss) attributable to non-controlling interests

 

21,000

 

 

 

(348,000

)

 

 

(19,000

)

 

 

(406,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Barnwell Industries, Inc.

 

$

(2,944,000

)

 

 

$

(2,981,000

)

 

 

$

(5,690,000

)

 

 

$

(3,263,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per common share attributable to Barnwell Industries, Inc. stockholders

 

$

(0.36

)

 

 

$

(0.36

)

 

 

$

(0.69

)

 

 

$

(0.39

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per common share attributable to Barnwell Industries, Inc. stockholders

 

$

(0.36

)

 

 

$

(0.36

)

 

 

$

(0.69

)

 

 

$

(0.39

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

8,277,160

 

 

 

8,277,160

 

 

 

8,277,160

 

 

 

8,277,160

 

Diluted

 

8,277,160

 

 

 

8,277,160

 

 

 

8,277,160

 

 

 

8,277,160

 

 

See Notes to Condensed Consolidated Financial Statements

 

4



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

 

Three months ended

 

Six months ended

 

March 31,

 

March 31,

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,923,000

)

 

 

$

(3,329,000

)

 

 

$

(5,709,000

)

 

 

$

(3,669,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of taxes of $0

 

(600,000

)

 

 

662,000

 

 

 

(970,000

)

 

 

1,443,000

 

Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0

 

65,000

 

 

 

65,000

 

 

 

130,000

 

 

 

130,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

(535,000

)

 

 

727,000

 

 

 

(840,000

)

 

 

1,573,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss

 

(3,458,000

)

 

 

(2,602,000

)

 

 

(6,549,000

)

 

 

(2,096,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to non-controlling interests

 

21,000

 

 

 

(348,000

)

 

 

(19,000

)

 

 

(406,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to Barnwell Industries, Inc.

 

$

(3,479,000

)

 

 

$

(2,254,000

)

 

 

$

(6,530,000

)

 

 

$

(1,690,000

)

 

See Notes to Condensed Consolidated Financial Statements

 

5



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Six months ended

 

March 31,

 

2013

 

2012

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(5,709,000

)

 

 

$

(3,669,000

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depletion, depreciation, and amortization

 

5,011,000

 

 

 

5,715,000

 

Reduction of carrying value of assets

 

4,506,000

 

 

 

1,854,000

 

Retirement benefits expense

 

308,000

 

 

 

364,000

 

Accretion of asset retirement obligation

 

190,000

 

 

 

174,000

 

Gain on sale of drilling equipment

 

-

 

 

 

(40,000

)

Deferred income tax benefit

 

(1,680,000

)

 

 

(176,000

)

Asset retirement obligation payments

 

(133,000

)

 

 

(281,000

)

Share-based compensation benefit

 

(41,000

)

 

 

(68,000

)

Retirement plan contributions

 

(253,000

)

 

 

(673,000

)

Sale of interest in leasehold land, net

 

(282,000

)

 

 

(353,000

)

Real estate held for sale

 

(139,000

)

 

 

-

 

(Decrease) increase from changes in current assets and liabilities

 

(270,000

)

 

 

180,000

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

1,508,000

 

 

 

3,027,000

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Proceeds from sale of interest in leasehold land, net of fees paid

 

282,000

 

 

 

375,000

 

Proceeds from gas over bitumen royalty adjustments

 

24,000

 

 

 

40,000

 

Proceeds from sale of drilling equipment, net

 

-

 

 

 

59,000

 

Capital expenditures - oil and natural gas

 

(2,127,000

)

 

 

(4,304,000

)

Capital expenditures - all other

 

(2,000

)

 

 

(27,000

)

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(1,823,000

)

 

 

(3,857,000

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from long-term debt borrowings

 

503,000

 

 

 

-

 

Repayments of long-term debt

 

(757,000

)

 

 

(670,000

)

Contributions from non-controlling interests

 

115,000

 

 

 

240,000

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(139,000

)

 

 

(430,000

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(75,000

)

 

 

25,000

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(529,000

)

 

 

(1,235,000

)

Cash and cash equivalents at beginning of period

 

8,845,000

 

 

 

9,834,000

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

8,316,000

 

 

 

$

8,599,000

 

 

See Notes to Condensed Consolidated Financial Statements

 

6



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Three months ended March 31, 2013 and 2012

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

Shares

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Non-controlling

 

Total

 

Outstanding

 

Stock

 

Capital

 

Earnings

 

Income

 

Stock

 

Interests

 

Equity

Balance at December 31, 2011

 

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

33,949,000

 

 

 

$

1,136,000

 

 

 

$

(2,286,000

)

 

 

$

1,029,000

 

 

 

$

39,340,000

 

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

120,000

 

 

 

120,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,981,000

)

 

 

 

 

 

 

 

 

 

 

(348,000

)

 

 

(3,329,000

)

Foreign currency translation adjustments, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

662,000

 

 

 

 

 

 

 

 

 

 

 

662,000

 

Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,000

 

 

 

 

 

 

 

 

 

 

 

65,000

 

Balance at March 31, 2012

 

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

30,968,000

 

 

 

$

1,863,000

 

 

 

$

(2,286,000

)

 

 

$

801,000

 

 

 

$

36,858,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

21,349,000

 

 

 

$

2,017,000

 

 

 

$

(2,286,000

)

 

 

$

497,000

 

 

 

$

27,089,000

 

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60,000

 

 

 

60,000

 

Net (loss) earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,944,000

)

 

 

 

 

 

 

 

 

 

 

21,000

 

 

 

(2,923,000

)

Foreign currency translation adjustments, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(600,000

)

 

 

 

 

 

 

 

 

 

 

(600,000

)

Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,000

 

 

 

 

 

 

 

 

 

 

 

65,000

 

Balance at March 31, 2013

 

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

18,405,000

 

 

 

$

1,482,000

 

 

 

$

(2,286,000

)

 

 

$

578,000

 

 

 

$

23,691,000

 

 

See Notes to Condensed Consolidated Financial Statements

 

7



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Six months ended March 31, 2013 and 2012

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

 

Shares

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Non-controlling

 

Total

 

Outstanding

 

Stock

 

Capital

 

Earnings

 

Income

 

Stock

 

Interests

 

Equity

Balance at September 30, 2011

 

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

34,231,000

 

 

 

$

290,000

 

 

 

$

(2,286,000

)

 

 

$

967,000

 

 

 

$

38,714,000

 

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

240,000

 

 

 

240,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,263,000

)

 

 

 

 

 

 

 

 

 

 

(406,000

)

 

 

(3,669,000

)

Foreign currency translation adjustments, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,443,000

 

 

 

 

 

 

 

 

 

 

 

1,443,000

 

Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

130,000

 

 

 

 

 

 

 

 

 

 

 

130,000

 

Balance at March 31, 2012

 

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

30,968,000

 

 

 

$

1,863,000

 

 

 

$

(2,286,000

)

 

 

$

801,000

 

 

 

$

36,858,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2012

 

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

24,095,000

 

 

 

$

2,322,000

 

 

 

$

(2,286,000

)

 

 

$

482,000

 

 

 

$

30,125,000

 

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

115,000

 

 

 

115,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,690,000

)

 

 

 

 

 

 

 

 

 

 

(19,000

)

 

 

(5,709,000

)

Foreign currency translation adjustments, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(970,000

)

 

 

 

 

 

 

 

 

 

 

(970,000

)

Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

130,000

 

 

 

 

 

 

 

 

 

 

 

130,000

 

Balance at March 31, 2013

 

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

18,405,000

 

 

 

$

1,482,000

 

 

 

$

(2,286,000

)

 

 

$

578,000

 

 

 

$

23,691,000

 

 

See Notes to Condensed Consolidated Financial Statements

 

8



Table of Contents

 

BARNWELL INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.                                    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of Barnwell Industries, Inc. and all majority-owned subsidiaries (collectively referred to herein as “Barnwell,” “we,” “our,” “us,” or the “Company”), including a 77.6%-owned land investment general partnership (Kaupulehu Developments) and two 80%-owned joint ventures (Kaupulehu 2007, LLLP and Kaupulehu Investors, LLC). All significant intercompany accounts and transactions have been eliminated.

 

Unless otherwise indicated, all references to “dollars” in this Form 10-Q are to U.S. dollars.

 

Unaudited Interim Financial Information

 

The accompanying unaudited condensed consolidated financial statements and notes have been prepared by Barnwell in accordance with the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Barnwell’s September 30, 2012 Annual Report on Form 10-K. The Condensed Consolidated Balance Sheet as of September 30, 2012 has been derived from audited consolidated financial statements.

 

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at March 31, 2013, results of operations, comprehensive loss, and equity for the three and six months ended March 31, 2013 and 2012, and cash flows for the six months ended March 31, 2013 and 2012, have been made. The results of operations for the period ended March 31, 2013 are not necessarily indicative of the operating results for the full year.

 

Use of Estimates

 

The preparation of the financial statements in conformity with U.S. GAAP requires management of Barnwell to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates.

 

Significant Accounting Policies

 

Barnwell’s significant accounting policies are described in the Notes to Consolidated Financial Statements included in Item 8 of the Company’s most recently filed Annual Report on Form 10-K.

 

9



Table of Contents

 

2.                                    LOSS PER COMMON SHARE

 

Basic earnings (loss) per share excludes dilution and is computed by dividing net earnings (loss) attributable to Barnwell stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share includes the potentially dilutive effect of outstanding common stock options, to the extent their inclusion would be dilutive. Potentially dilutive shares are excluded from the computation of diluted earnings (loss) per share if their effect is anti-dilutive.

 

Reconciliations between net loss attributable to Barnwell stockholders and common shares outstanding of the basic and diluted net loss per share computations are detailed in the following tables:

 

 

Three months ended March 31, 2013

 

Net Loss

 

Shares

 

Per-Share

 

(Numerator)

 

(Denominator)

 

Amount

Basic net loss per share

 

$

(2,944,000

)

 

 

8,277,160

 

 

 

$

(0.36

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities - common stock options

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per share

 

$

(2,944,000

)

 

 

8,277,160

 

 

 

$

(0.36

)

 

 

 

Six months ended March 31, 2013

 

Net Loss

 

Shares

 

Per-Share

 

(Numerator)

 

(Denominator)

 

Amount

Basic net loss per share

 

$

(5,690,000

)

 

 

8,277,160

 

 

 

$

(0.69

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities - common stock options

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per share

 

$

(5,690,000

)

 

 

8,277,160

 

 

 

$

(0.69

)

 

 

 

Three months ended March 31, 2012

 

Net Loss

 

Shares

 

Per-Share

 

(Numerator)

 

(Denominator)

 

Amount

Basic net loss per share

 

$

(2,981,000

)

 

 

8,277,160

 

 

 

$

(0.36

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities - common stock options

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per share

 

$

(2,981,000

)

 

 

8,277,160

 

 

 

$

(0.36

)

 

10



Table of Contents

 

 

Six months ended March 31, 2012

 

Net Loss

 

Shares

 

Per-Share

 

(Numerator)

 

(Denominator)

 

Amount

Basic net loss per share

 

$

(3,263,000

)

 

 

8,277,160

 

 

 

$

(0.39

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities - common stock options

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per share

 

$

(3,263,000

)

 

 

8,277,160

 

 

 

$

(0.39

)

 

Potentially dilutive shares consist of the common shares issuable upon the exercise of outstanding stock options (both vested and non-vested) using the treasury stock method. Options to purchase 777,250 and 815,375 shares of common stock were excluded from the computation of diluted shares for the three and six months ended March 31, 2013 and 2012, respectively, as their inclusion would have been antidilutive due to the net loss attributable to Barnwell stockholders.

 

 

3.                                    REAL ESTATE HELD FOR SALE

 

Kaupulehu 2007 constructs and sells single-family homes. Kaupulehu 2007 currently owns one luxury residence that is available for sale in the Lot 4A Increment I area located in the North Kona District of the island of Hawaii, north of Hualalai Resort at Historic Ka’upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean.

 

In April 2012, Kaupulehu 2007 entered into a contract to sell one of the luxury residences at a price below carrying value. Accordingly, during the three and six months ended March 31, 2012, Barnwell recorded a $1,854,000 reduction in the carrying value of real estate held for sale to reflect this decline in the estimated market value. No reduction was necessary during the three and six months ended March 31, 2013.

 

 

4.                                    INVESTMENTS

 

A summary of Barnwell’s investments as of March 31, 2013 and September 30, 2012 is as follows:

 

Investment in two residential parcels

 

$

2,331,000

 

Investment in land interest – Lot 4C

 

50,000

 

 

 

 

 

Total investments

 

$

2,381,000

 

 

Investment in two residential parcels

 

Kaupulehu 2007 owns two residential parcels in the Lot 4A Increment I area located in the North Kona District of the island of Hawaii, north of Hualalai Resort at Historic Ka’upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean.

 

11



Table of Contents

 

Lot 4C

 

Kaupulehu Developments holds an interest in Lot 4C, an area of approximately 1,000 acres of vacant leasehold land zoned conservation located adjacent to Lot 4A. WB KD Acquisition, LLC (“WB”) and/or WB KD Acquisition II, LLC (“WBKD”), entities not affiliated with Barnwell and its subsidiaries, have the exclusive right to negotiate with Kaupulehu Developments with respect to Lot 4C until June 2013 unless extended by Barnwell.

 

There is no assurance that the required land use reclassification and rezoning from regulatory agencies will be obtained, that the necessary development terms and agreements will be successfully negotiated for Lot 4C, or that WB and/or WBKD will enter into an agreement with Kaupulehu Developments regarding Lot 4C.

 

 

5.                                    LONG-TERM DEBT

 

A summary of Barnwell’s long-term debt is as follows:

 

 

March 31,

 

September 30,

 

2013

 

2012

 

 

 

 

 

 

 

 

Canadian revolving credit facility

 

$

12,000,000

 

 

 

$

12,000,000

 

Real estate loan

 

4,903,000

 

 

 

5,164,000

 

 

 

 

 

 

 

 

 

 

 

16,903,000

 

 

 

17,164,000

 

Less: current portion

 

(4,903,000

)

 

 

(5,764,000

)

 

 

 

 

 

 

 

 

Total long-term debt

 

$

12,000,000

 

 

 

$

11,400,000

 

 

Canadian revolving credit facility

 

In March 2013, Barnwell’s credit facility at Royal Bank of Canada was renewed through April 2014 for $20,000,000 Canadian dollars, unchanged from the prior year amount, or US$19,692,000 at the March 31, 2013 exchange rate. Unused credit available under this facility was US$7,692,000 and the interest rate on the facility was 2.70% at March 31, 2013.

 

The renewed facility is available in U.S. dollars at the London Interbank Offer Rate plus 2.50%, at the Royal Bank of Canada’s U.S. base rate plus 1.50%, or in Canadian dollars at the Royal Bank of Canada’s prime rate plus 1.50%. A standby fee of 0.625% per annum is charged on the unused facility balance. Under the financing agreement with Royal Bank of Canada, the facility is reviewed annually, with the next review planned for April 2014. Subject to that review, the facility may be renewed for one year with no required debt repayments or converted to a two-year term loan by the bank. If the facility is converted to a two-year term loan, Barnwell has agreed to the following repayment schedule of the then outstanding loan balance: first year of the term period – 20% (5% per quarter), and in the second year of the term period – 80% (5% per quarter for the first three quarters and 65% in the final quarter). Based on the terms of this agreement, if Royal Bank of Canada were to convert the facility to a two-year term loan upon its next review in April 2014, Barnwell would be obligated to make quarterly principal and interest repayments beginning in July 2014. As no debt repayments will be required on or before March 31, 2014, the entire outstanding loan balance at March 31, 2013 is classified as long-term debt.

 

12



Table of Contents

 

Real estate loan

 

Barnwell, together with its real estate joint venture, Kaupulehu 2007, has a non-revolving real estate loan with a Hawaii bank. Principal and interest are paid monthly and are determined based on a loan amortization schedule. The monthly payment will change as a result of an annual change in the interest rate, the sale of a house or the sale of a residential parcel. The interest rate adjusts each April for the remaining term of the loan to the lender’s then prevailing interest rate for similarly priced commercial mortgage loans or a floating rate equal to the lender’s base rate. The interest rate at March 31, 2013 was 3.57%, and was adjusted to 3.53% effective April 1, 2013. Any unpaid principal balance and accrued interest will be due and payable on April 1, 2018.

 

The loan is collateralized by, among other things, a first mortgage on Kaupulehu 2007’s lots together with all improvements thereon. Kaupulehu 2007 will be required to make a principal payment upon the sale of a house or a residential parcel in the amount of the net sales proceeds of the house or residential parcel; the loan agreement defines net sales proceeds as the gross sales proceeds for the house or residential parcel, less reasonable commissions and normal closing costs.

 

The loan agreement contains provisions requiring us to maintain compliance with certain covenants including a consolidated debt service coverage ratio and a consolidated total liabilities to tangible net worth ratio. As of March 31, 2013, we were in compliance with the loan covenants.

 

The home collateralizing the loan is currently available for sale; therefore, the entire balance outstanding at March 31, 2013 under the term loan has been classified as a current liability.

 

13



Table of Contents

 

6.                                    RETIREMENT PLANS

 

Barnwell sponsors a noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all of its U.S. employees. Additionally, Barnwell sponsors a Supplemental Employee Retirement Plan (“SERP”), a noncontributory supplemental retirement benefit plan which covers certain current and former employees of Barnwell for amounts exceeding the limits allowed under the Pension Plan, and a postretirement medical insurance benefits plan (“Postretirement Medical”) covering eligible U.S. employees.

 

The following tables detail the components of net periodic benefit cost for Barnwell’s retirement plans:

 

 

Pension Plan

 

SERP

 

Postretirement Medical

 

Three months ended March 31,

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

Service cost

 

$

68,000

 

 

 

$

76,000

 

 

 

$

13,000

 

 

 

$

12,000

 

 

 

$

3,000

 

 

 

$

3,000

 

Interest cost

 

74,000

 

 

 

81,000

 

 

 

15,000

 

 

 

15,000

 

 

 

13,000

 

 

 

12,000

 

Expected return on plan assets

 

(97,000

)

 

 

(82,000

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Amortization of prior service cost (credit)

 

2,000

 

 

 

2,000

 

 

 

(2,000

)

 

 

-

 

 

 

34,000

 

 

 

34,000

 

Amortization of net actuarial loss (gain)

 

26,000

 

 

 

27,000

 

 

 

5,000

 

 

 

4,000

 

 

 

-

 

 

 

(2,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

73,000

 

 

 

$

104,000

 

 

 

$

31,000

 

 

 

$

31,000

 

 

 

$

50,000

 

 

 

$

47,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Plan

 

SERP

 

Postretirement Medical

 

Six months ended March 31,

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

Service cost

 

$

136,000

 

 

 

$

151,000

 

 

 

$

26,000

 

 

 

$

25,000

 

 

 

$

7,000

 

 

 

$

6,000

 

Interest cost

 

149,000

 

 

 

162,000

 

 

 

29,000

 

 

 

30,000

 

 

 

25,000

 

 

 

24,000

 

Expected return on plan assets

 

(194,000

)

 

 

(164,000

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Amortization of prior service cost (credit)

 

3,000

 

 

 

3,000

 

 

 

(3,000

)

 

 

-

 

 

 

68,000

 

 

 

68,000

 

Amortization of net actuarial loss (gain)

 

52,000

 

 

 

56,000

 

 

 

10,000

 

 

 

8,000

 

 

 

-

 

 

 

(5,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

146,000

 

 

 

$

208,000

 

 

 

$

62,000

 

 

 

$

63,000

 

 

 

$

100,000

 

 

 

$

93,000

 

 

Barnwell contributed $250,000 to the Pension Plan during the six months ended March 31, 2013 and does not expect to make any further contributions during the remainder of fiscal 2013. The SERP and Postretirement Medical plans are unfunded, and Barnwell will fund benefits when payments are made. Barnwell does not expect to make any benefit payments under the Postretirement Medical plan during fiscal 2013 and expected payments under the SERP for fiscal 2013 are not material. Fluctuations in actual equity market returns as well as changes in general interest rates will result in changes in the market value of plan assets and may result in increased or decreased retirement benefits costs and contributions in future periods.

 

14



Table of Contents

 

7.                                    INCOME TAXES

 

The components of loss before income taxes, after adjusting the loss for non-controlling interests, are as follows:

 

 

Three months ended

 

Six months ended

 

March 31,

 

March 31,

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

(1,014,000

)

 

 

$

(2,972,000

)

 

 

$

(2,302,000

)

 

 

$

(4,302,000

)

Canada

 

(2,702,000

)

 

 

(12,000

)

 

 

(4,724,000

)

 

 

1,526,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(3,716,000

)

 

 

$

(2,984,000

)

 

 

$

(7,026,000

)

 

 

$

(2,776,000

)

 

The components of the income tax (benefit) provision are as follows:

 

 

Three months ended

 

Six months ended

 

March 31,

 

March 31,

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

(214,000

)

 

 

$

105,000

 

 

 

$

344,000

 

 

 

$

663,000

 

Deferred

 

(558,000

)

 

 

(108,000

)

 

 

(1,680,000

)

 

 

(176,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(772,000

)

 

 

$

(3,000

)

 

 

$

(1,336,000

)

 

 

$

487,000

 

 

Barnwell’s effective consolidated income tax rate for the three and six months ended March 31, 2013, after adjusting loss before income taxes for non-controlling interests, was 21% and 19%, respectively, as compared to 0% and (18%) for the three and six months ended March 31, 2012, respectively.

 

Consolidated taxes do not bear a customary relationship to pretax (losses) earnings due primarily to the fact that Canadian income taxes are not sheltered by current period U.S. source losses, Canadian income taxes are not estimated to have a current or future benefit as foreign tax credits or deductions for U.S. tax purposes, and U.S. consolidated net operating losses are not estimated to have any future U.S. tax benefit prior to expiration.

 

The Canada Revenue Agency is currently examining the Company’s Canadian federal income tax returns for fiscal 2010 and 2011.

 

15



Table of Contents

 

8.                                    SEGMENT INFORMATION

 

Barnwell operates the following segments: 1) exploring for, developing, producing and selling oil and natural gas in Canada (oil and natural gas); 2) investing in land interests in Hawaii (land investment); 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling); and 4) developing homes for sale in Hawaii (residential real estate).

 

The following table presents certain financial information related to Barnwell’s reporting segments. All revenues reported are from external customers with no intersegment sales or transfers.

 

 

Three months ended

 

Six months ended

 

March 31,

 

March 31,

 

2013

 

2012

 

2013

 

2012

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas

 

$

5,605,000

 

 

 

$

6,408,000

 

 

 

$

11,245,000

 

 

 

$

14,197,000

 

Land investment

 

282,000

 

 

 

353,000

 

 

 

282,000

 

 

 

353,000

 

Contract drilling

 

703,000

 

 

 

281,000

 

 

 

1,420,000

 

 

 

706,000

 

Other

 

178,000

 

 

 

121,000

 

 

 

344,000

 

 

 

397,000

 

Total before interest income

 

6,768,000

 

 

 

7,163,000

 

 

 

13,291,000

 

 

 

15,653,000

 

Interest income

 

1,000

 

 

 

3,000

 

 

 

29,000

 

 

 

15,000

 

Total revenues

 

$

6,769,000

 

 

 

$

7,166,000

 

 

 

$

13,320,000

 

 

 

$

15,668,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depletion, depreciation, and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas

 

$

2,195,000

 

 

 

$

2,649,000

 

 

 

$

4,730,000

 

 

 

$

5,402,000

 

Contract drilling

 

108,000

 

 

 

128,000

 

 

 

223,000

 

 

 

257,000

 

Other

 

29,000

 

 

 

29,000

 

 

 

58,000

 

 

 

56,000

 

Total depletion, depreciation, and amortization

 

$

2,332,000

 

 

 

$

2,806,000

 

 

 

$

5,011,000

 

 

 

$

5,715,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reduction of carrying value of assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas

 

$

2,179,000

 

 

 

$

-

 

 

 

$

4,506,000

 

 

 

$

-

 

Residential real estate

 

-

 

 

 

1,854,000

 

 

 

-

 

 

 

1,854,000

 

Total reduction of carrying value of assets

 

$

2,179,000

 

 

 

$

1,854,000

 

 

 

$

4,506,000

 

 

 

$

1,854,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) profit (before general and administrative expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas

 

$

(1,818,000

)

 

 

$

967,000

 

 

 

$

(3,033,000

)

 

 

$

3,262,000

 

Land investment

 

282,000

 

 

 

353,000

 

 

 

282,000

 

 

 

353,000

 

Contract drilling

 

(58,000

)

 

 

(307,000

)

 

 

(64,000

)

 

 

(648,000

)

Residential real estate

 

-

 

 

 

(1,854,000

)

 

 

-

 

 

 

(1,854,000

)

Other

 

149,000

 

 

 

92,000

 

 

 

286,000

 

 

 

341,000

 

Total operating (loss) profit

 

(1,445,000

)

 

 

(749,000

)

 

 

(2,529,000

)

 

 

1,454,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

(2,107,000

)

 

 

(2,367,000

)

 

 

(4,249,000

)

 

 

(4,213,000

)

Interest expense

 

(144,000

)

 

 

(219,000

)

 

 

(296,000

)

 

 

(438,000

)

Interest income

 

1,000

 

 

 

3,000

 

 

 

29,000

 

 

 

15,000

 

Loss before income taxes

 

$

(3,695,000

)

 

 

$

(3,332,000

)

 

 

$

(7,045,000

)

 

 

$

(3,182,000

)

 

16



Table of Contents

 

9.                                    ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The components of accumulated other comprehensive income, net of taxes, are as follows:

 

 

 

March 31,

 

 

 

September 30,

 

 

 

2013

 

 

 

2012

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

$

4,050,000

 

 

 

$

5,020,000

 

Retirement plans liability

 

(2,568,000

)

 

 

(2,698,000

)

 

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

$

1,482,000

 

 

 

$

2,322,000

 

 

 

10.                            FAIR VALUE MEASUREMENTS

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

Certain of our assets and liabilities are reported at fair value in the accompanying balance sheets on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. The following table provides carrying value and fair value measurement information for nonrecurring fair value measurements recorded during the three and six months ended March 31, 2012:

 

 

 

 

 

Fair Value Measurements Using:

 

 

 

 

 

Carrying

 

Quoted

 

Significant

 

 

 

Total Reduction of

 

 

 

Amount

 

Prices in

 

Other

 

Significant

 

Carrying Value

 

 

 

as of

 

Active

 

Observable

 

Unobservable

 

for the three and

 

 

 

March 31,

 

Markets

 

Inputs

 

Inputs

 

six months ended

 

 

 

2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

March 31, 2012

 

Real estate held for sale*

 

$ 10,786,000

 

$    -

 

$ 10,786,000

 

$     -

 

$ 1,854,000

 

_________________

 

*            The fair value included in the table above represents only those assets whose carrying values were adjusted to fair value in each respective period.

 

The fair value of our real estate held for sale was based on a contract to sell one of the luxury residences at a price below carrying value entered into in April 2012. The fair values of both homes held for sale at March 31, 2012 were revised downward as a result of the information provided by those negotiations. Such fair value measurements have been classified as Level 2 valuations.

 

Fair Value of Financial Instruments

 

The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued current liabilities and payables to joint interest owners approximate their fair values due to the short-term nature of the instruments. The carrying value of long-term debt approximates fair value as the terms approximate current market terms for similar debt instruments of comparable risk and maturities.

 

17



Table of Contents

 

11.       COMMITMENTS AND CONTINGENCIES

 

Environmental Matters

 

At March 31, 2013, a liability was established for recently discovered soil contamination from infrastructure issues at the Dunvegan and Wood River properties. The estimated amount accrued for probable environmental remediation costs was $696,000, which has not been discounted, and is accrued in “Other current liabilities” on the Condensed Consolidated Balance Sheets. Because of the inherent uncertainties associated with environmental assessment and remediation activities, future expenses to remediate the currently identified sites, and sites identified in the future, if any, could be incurred. No accrual for environmental remediation costs was necessary at September 30, 2012.

 

 

12.                            INFORMATION RELATING TO THE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six months ended March 31,

 

 

2013

 

2012

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

Interest

 

 

$

285,000

 

 

 

$

388,000

 

Income taxes

 

 

$

215,000

 

 

 

$

455,000

 

 

Capital expenditure accruals related to oil and natural gas exploration and development increased $1,450,000 and decreased $2,153,000 during the six months ended March 31, 2013 and 2012, respectively. Additionally, during the six months ended March 31, 2013 and 2012, capital expenditure accruals related to oil and natural gas asset retirement obligations increased $48,000 and $28,000, respectively.

 

13.       OIL AND NATURAL GAS PROPERTIES

 

Under the full cost method of accounting, the Company performs quarterly ceiling test calculations. Barnwell’s net capitalized costs exceeded the ceiling limitation at March 31, 2013. As such, Barnwell reduced the carrying value of its oil and natural gas properties by $2,179,000 during the three months ended March 31, 2013. The current quarter’s reduction of the carrying value of oil and natural gas properties combined with the first quarter’s reduction of $2,327,000 resulted in a reduction of $4,506,000 for the six months ended March 31, 2013. No such reduction was necessary during the three and six months ended March 31, 2012. The reduction is included in the Condensed Consolidated Statements of Operations under the caption “Reduction of carrying value of assets.”

 

14.       SUBSEQUENT EVENTS

 

There were no material subsequent events that would require recognition or disclosure in the accompanying condensed consolidated financial statements.

 

18



Table of Contents

 

ITEM 2.                                     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Relevant to Forward-Looking Information

For the Purpose Of “Safe Harbor” Provisions Of The

Private Securities Litigation Reform Act of 1995

 

This Form 10-Q, and the documents incorporated herein by reference, contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement is one which is based on current expectations of future events or conditions and does not relate to historical or current facts. These statements include various estimates, forecasts, projections of Barnwell’s future performance, statements of Barnwell’s plans and objectives, and other similar statements. Forward-looking statements include phrases such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates,” “assumes,” “projects,” “may,” “will,” “will be,” “should,” or similar expressions. Although Barnwell believes that its current expectations are based on reasonable assumptions, it cannot assure that the expectations contained in such forward-looking statements will be achieved. Forward-looking statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from those contained in such statements. The risks, uncertainties and other factors that might cause actual results to differ materially from Barnwell’s expectations are set forth in the “Forward-Looking Statements” and “Risk Factors” sections of Barnwell’s Annual Report on Form 10-K for the year ended September 30, 2012. Investors should not place undue reliance on these forward-looking statements, as they speak only as of the date of filing of this Form 10-Q, and Barnwell expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein.

 

 

Critical Accounting Policies and Estimates

 

Management has determined that our most critical accounting policies and estimates are those related to the evaluation of recoverability of assets, depletion of our oil and natural gas properties, income taxes and asset retirement obligation which are discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. There have been no significant changes to these critical accounting policies and estimates during the three and six months ended March 31, 2013. We continue to monitor our accounting policies to ensure proper application of current rules and regulations.

 

 

Impact of Recently Issued Accounting Standards on Future Filings

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments are effective on a prospective basis for fiscal years, and interim reporting periods within those years, beginning after December 15, 2012. Adoption of this standard will impact the presentation of Barnwell’s consolidated financial statements.

 

19



Table of Contents

 

In February 2013, the FASB issued ASU No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” This update provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. Examples of obligations within this guidance are debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The amendments are effective retrospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The adoption of this update is not expected to have a material impact on Barnwell’s consolidated financial statements.

 

In March 2013, the FASB issued ASU No. 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This update provides guidance on releasing cumulative translation adjustments when a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, these amendments provide guidance on the release of cumulative translation adjustments in partial sales of equity method investments and in step acquisitions. The amendments are effective on a prospective basis for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The adoption of this update is not expected to have a material impact on Barnwell’s consolidated financial statements.

 

In April 2013, the FASB issued ASU No. 2013-07, “Liquidation Basis of Accounting,” which provides guidance on when and how to apply the liquidation basis of accounting and on what to disclose. The update requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent, as defined in the update. The amendments are effective on a prospective basis for an entity that determines liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The adoption of this update is not expected to have a material impact on Barnwell’s consolidated financial statements.

 

 

Overview

 

Barnwell is engaged in the following lines of business: 1) exploring for, developing, producing and selling oil and natural gas in Canada (oil and natural gas segment), 2) investing in land interests in Hawaii (land investment segment), 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling segment), and 4) developing homes for sale in Hawaii (residential real estate segment).

 

Oil and Natural Gas Segment

 

Barnwell is involved in the acquisition, exploration and development of oil and natural gas properties in Canada where we initiate and participate in exploratory and developmental operations for oil and natural gas on properties in which we have an interest, and evaluate proposals by third parties with regard to participation in such exploratory and developmental operations elsewhere.

 

20



Table of Contents

 

Land Investment Segment

 

The land investment segment is comprised of the following components:

 

1)  Barnwell owns a 77.6% controlling interest in Kaupulehu Developments, a Hawaii general partnership which owns interests in leasehold land at Kaupulehu located approximately six miles north of the Kona International Airport in the North Kona District of the island of Hawaii, adjacent to Hualalai Resort at Historic Ka’upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean. Kaupulehu Developments’ interests include the following:

 

·            The right to receive payments from WB KD Acquisition, LLC (“WB”) and WB KD Acquisition II, LLC (“WBKD”), entities not affiliated with Barnwell and its subsidiaries, resulting from the sale of lots and/or residential units within approximately 870 acres of the Kaupulehu Lot 4A area by WB and WBKD in two increments (“Increment I” and “Increment II”). Increment I is an area planned for approximately 80 single-family lots and a beach club on the portion of the property bordering the Pacific Ocean. The purchasers of the 80 single-family lots will have the right to apply for membership in the Kuki’o Golf and Beach Club, which is located adjacent to and south of the Four Seasons Resort Hualalai at Historic Ka’upulehu. Increment II is the remaining portion of the approximately 870-acre property and is zoned for single-family and multi-family residential units and a golf course and clubhouse.

 

·            Approximately 1,000 acres of vacant leasehold land zoned conservation in the Kaupulehu Lot 4C area located adjacent to the 870-acre Lot 4A described above. Kaupulehu Developments has an agreement which provides WB and/or WBKD the exclusive right to negotiate with Kaupulehu Developments with respect to these 1,000 acres. This right expires in June 2013 unless extended by Barnwell.

 

2)  Barnwell owns an 80% controlling interest in Kaupulehu 2007, LLLP (“Kaupulehu 2007”), a Hawaii limited liability limited partnership. Kaupulehu 2007 owns two residential parcels in the Kaupulehu area that are held for investment.

 

Contract Drilling Segment

 

Barnwell drills water, water monitoring and geothermal wells and installs and repairs water pumping systems in Hawaii. Contract drilling results are highly dependent upon the quantity, dollar value and timing of contracts awarded by governmental and private entities and can fluctuate significantly.

 

Residential Real Estate Segment

 

Barnwell, through its 80%-owned real estate joint venture, Kaupulehu 2007, constructs and sells luxury single-family homes. Kaupulehu 2007, in addition to the two parcels described above, owns a luxury residence in the Kaupulehu area that is available for sale. Kaupulehu 2007 does not currently have any homes under construction.

 

21



Table of Contents

 

Results of Operations

 

Summary

 

Barnwell incurred a net loss of $2,944,000 for the three months ended March 31, 2013, a $37,000 increase in operating results from a net loss of $2,981,000 for the three months ended March 31, 2012.  The following factors affected the results of operations for the three months ended March 31, 2013 as compared to the prior year period:

 

·            A non-cash reduction of the carrying value of oil and natural gas properties of $2,179,000 recorded in the current year period as compared to a $1,854,000 reduction of the carrying value of residential real estate, before impact of non-controlling interests, recorded in the prior year period;

 

·            A $606,000 decrease in oil and natural gas segment operating profit, before reduction in carrying value of assets and taxes, primarily resulting from lower prices received for oil, lower net natural gas production and increased operating expenses due to estimated costs incurred to remediate soil contamination issues;

 

·            A $260,000 decrease in general and administrative expenses due primarily to decreased stock appreciation rights expense; and

 

·            A $249,000 increase in contract drilling operating results, before taxes, primarily due to increased water well drilling activity.

 

Barnwell incurred a net loss of $5,690,000 for the six months ended March 31, 2013, a $2,427,000 decrease in operating results from a net loss of $3,263,000 for the six months ended March 31, 2012. The following factors affected the results of operations for the six months ended March 31, 2013 as compared to the prior year period:

 

·            A non-cash reduction of the carrying value of oil and natural gas properties of $4,506,000 recorded in the current year period as compared to a $1,854,000 reduction of the carrying value of residential real estate, before impact of non-controlling interests, recorded in the prior year period;

 

·            A $1,789,000 decrease in oil and natural gas segment operating profit, before reduction in carrying value of assets and taxes, primarily resulting from lower prices received for oil and natural gas liquids, lower net oil and net natural gas production and increased operating expenses due to estimated costs incurred to remediate soil contamination issues; and

 

·           A $584,000 increase in contract drilling operating results, before taxes, primarily due to increased water well drilling activity.

 

General

 

Barnwell conducts operations in the U.S. and Canada.  Consequently, Barnwell is subject to foreign currency translation and transaction gains and losses due to fluctuations of the exchange rates between the Canadian dollar and the U.S. dollar. The impact of fluctuations of the exchange rates between the Canadian dollar and the U.S. dollar may be material from period to period. Barnwell cannot accurately predict future fluctuations between the Canadian and U.S. dollar.

 

22



Table of Contents

 

The average exchange rate of the Canadian dollar to the U.S. dollar decreased 1% and increased 1% in the three and six months ended March 31, 2013, respectively, as compared to the same periods in the prior year, and the exchange rate of the Canadian dollar to the U.S. dollar decreased 3% at March 31, 2013, as compared to September 30, 2012. Accordingly, the assets, liabilities, stockholders’ equity and revenues and expenses of Barnwell’s subsidiaries operating in Canada have been adjusted to reflect the change in the exchange rates. Barnwell’s Canadian dollar assets are greater than its Canadian dollar liabilities; therefore, increases or decreases in the value of the Canadian dollar to the U.S. dollar generate other comprehensive income or loss, respectively. Other comprehensive income and losses are not included in net loss. Other comprehensive loss due to foreign currency translation adjustments, net of taxes, for the three months ended March 31, 2013 was $600,000, a $1,262,000 change from other comprehensive income due to foreign currency translation adjustments, net of taxes, of $662,000 for the same period in the prior year. Other comprehensive loss due to foreign currency translation adjustments, net of taxes, for the six months ended March 31, 2013 was $970,000, a $2,413,000 change from other comprehensive income due to foreign currency translation adjustments, net of taxes, of $1,443,000 for the same period in the prior year. There were no taxes on other comprehensive (loss) income due to foreign currency translation adjustments in the three and six months ended March 31, 2013 and 2012 due to a full valuation allowance on the related deferred tax asset.

 

Oil and natural gas revenues

 

The following tables set forth Barnwell’s average prices per unit of production and net production volumes. Production amounts reported are net of royalties.

 

 

 

Average Price Per Unit

 

 

 

Three months ended

 

Increase

 

 

 

March 31,

 

(Decrease)

 

 

 

 

2013

 

 

 

2012

 

 

 

$

 

 

 

%

 

Natural Gas (Mcf)*

 

 

$

2.75

 

 

 

$

1.85

 

 

 

$

0.90

 

 

 

49%

 

Oil (Bbls)**

 

 

$

70.33

 

 

 

$

88.44

 

 

 

$

(18.11)

 

 

 

(20%)

 

Liquids (Bbls)**

 

 

$

45.52

 

 

 

$

46.39

 

 

 

$

(0.87)

 

 

 

(2%)

 

 

 

 

Average Price Per Unit

 

 

 

Six months ended

 

Increase

 

 

 

March 31,

 

(Decrease)

 

 

 

 

2013

 

 

 

2012

 

 

 

$

 

 

 

%

 

Natural Gas (Mcf)*

 

 

$

2.63

 

 

 

$

2.38

 

 

 

$

0.25

 

 

 

11%

 

Oil (Bbls)**

 

 

$

72.55

 

 

 

$

88.57

 

 

 

$

(16.02)

 

 

 

(18%)

 

Liquids (Bbls)**

 

 

$

42.73

 

 

 

$

49.21

 

 

 

$

(6.48)

 

 

 

(13%)

 

 

23



Table of Contents

 

 

 

Net Production

 

 

 

Three months ended

 

Increase

 

 

 

March 31,

 

(Decrease)

 

 

 

 

2013

 

 

 

2012

 

 

 

Units

 

 

 

%

 

Natural Gas (Mcf)*

 

 

568,000

 

 

 

719,000

 

 

 

(151,000)

 

 

 

(21%)

 

Oil (Bbls)**

 

 

42,000

 

 

 

43,000

 

 

 

(1,000)

 

 

 

(2%)

 

Liquids (Bbls)**

 

 

21,000

 

 

 

23,000

 

 

 

(2,000)

 

 

 

(9%)

 

 

 

 

Net Production

 

 

 

Six months ended

 

Increase

 

 

 

March 31,

 

(Decrease)

 

 

 

 

2013

 

 

 

2012

 

 

 

Units

 

 

 

%

 

Natural Gas (Mcf)*

 

 

1,228,000

 

 

 

1,484,000

 

 

 

(256,000)

 

 

 

(17%)

 

Oil (Bbls)**

 

 

80,000

 

 

 

91,000

 

 

 

(11,000)

 

 

 

(12%)

 

Liquids (Bbls)**

 

 

45,000

 

 

 

46,000

 

 

 

(1,000)

 

 

 

(2%)

 

 


*                 Mcf = 1,000 cubic feet.  Natural gas price per unit is net of pipeline charges.

**   Bbl = stock tank barrel equivalent to 42 U.S. gallons

 

Oil and natural gas revenues decreased $803,000 (13%) for the three months ended March 31, 2013, as compared to the same period in the prior year, primarily due to a decline in oil prices, which decreased 20% as compared to the same period in the prior year, and a decrease in net natural gas production, which decreased 21% as compared to the same period in the prior year due to natural declines in production from older properties and natural gas well shut ins. The decrease was partially offset by an increase in natural gas prices, which increased 49% as compared to the same period in the prior year. Net oil production was relatively unchanged as a decline in oil production from older areas was offset by new oil production from recent drilling activity.

 

Oil and natural gas revenues decreased $2,952,000 (21%) for the six months ended March 31, 2013, as compared to the same period in the prior year, primarily due to declines in oil and natural gas liquids prices of 18% and 13%, respectively, and declines in net oil and net natural gas production of 12% and 17%, respectively, as compared to the same period in the prior year. The impact of these declines was partially offset by an increase in natural gas prices, which increased 11% as compared to the same period in the prior year. The decline in natural gas production was due to natural declines in production from older properties and natural gas well shut ins.  The decline in oil production was due to natural declines in production from older properties, partially offset by new oil production from recent drilling activity.

 

Due to low natural gas prices, certain natural gas wells have been shut in by the Company and independent operators of such properties due to economic or operational issues where necessary repairs have been deferred. Net natural gas production from these wells in the three and six month periods of the prior year accounted for approximately 4% and 5%, respectively, of the net natural gas production for those periods. As natural gas prices have increased from the lows encountered during much of fiscal 2012, no natural gas well shut ins have occurred since August 2012 and in December 2012 production was restored at three of the natural gas wells shut in during fiscal 2012. The level of future natural gas prices remains uncertain and a decline in prices could result in additional shut ins of natural gas wells. Future additional shut ins may result in the Company receiving materially less than anticipated production or no production and associated revenues from affected properties until the Company or independent operator elects to return such wells to production. The impact of any future natural gas well shut ins is unknown as such events are dependent upon the level of future natural gas prices, which the Company is unable to predict.

 

24



Table of Contents

 

Oil and natural gas operating expenses

 

Oil and natural gas operating expenses increased $257,000 (9%) for the three months ended March 31, 2013, as compared to the same period in the prior year. The increase was due to $696,000 of estimated costs incurred to remediate recently discovered soil contamination from infrastructure issues at the Dunvegan and Wood River properties. The increase was partially offset by lower production and lower repair and workover costs in the current year period.

 

Oil and natural gas operating expenses decreased $491,000 (9%) for the six months ended March 31, 2013, as compared to the same period in the prior year. The decrease was due to lower production and a $220,000 equalization credit for previously allocated operating expenses received from an operator of a property, partially offset by $696,000 of estimated costs incurred to remediate recently discovered soil contamination from infrastructure issues at the Dunvegan and Wood River properties.

 

Sale of interest in leasehold land

 

The following table summarizes the percentage of sales payment revenues received from WB:

 

 

 

Three months ended

 

Six months ended

 

 

March 31,

 

March 31,

 

 

 

2013

 

 

 

2012

 

 

 

2013

 

 

 

2012

 

Sale of interest in leasehold land:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds

 

 

$

300,000

 

 

 

$

375,000

 

 

 

$

300,000

 

 

 

$

375,000

 

Fees

 

 

(18,000

)

 

 

(22,000

)

 

 

(18,000

)

 

 

(22,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues - sale of interest in leasehold land, net

 

 

$

282,000

 

 

 

$

353,000

 

 

 

$

282,000

 

 

 

$

353,000

 

 

WB sold one single-family lot in Increment I during the three and six months ended March 31, 2013 and one single-family lot in Increment I during the three and six months ended March 31, 2012.

 

As of March 31, 2013, 31 of the 38 single-family lots in Phase I of Increment I have been sold by WB. Forty-two single-family lots are planned for Phase II of Increment I, for a total of 80 single-family lots planned for Increment I. The developer released and began marketing a portion of the 42 single-family lots in Phase II of Increment I, and as of March 31, 2013, one of the lots has been sold. The Company cannot predict when or if WB will complete the remaining single-family lots in Phase II of Increment I and there is no assurance with regards to the amounts of future sales from Increment I.

 

Contract drilling

 

Contract drilling revenues and contract drilling costs increased $422,000 (150%) and $193,000 (42%), respectively, for the three months ended March 31, 2013, as compared to the same period in the prior year. The contract drilling segment generated a $58,000 operating loss before general and administrative expenses in the three months ended March 31, 2013, an increase in operating results of $249,000 as compared to the $307,000 operating loss generated during the same period of the prior year. Contract drilling revenues and contract drilling costs increased $714,000 (101%) and $164,000 (15%), respectively, for the six months ended March 31, 2013, as compared to the same period in the prior year. The contract drilling segment generated a $64,000 operating loss before general and administrative expenses in the six months ended March 31, 2013, an increase in operating results of $584,000 as compared to the $648,000 operating loss generated during the same period of the prior year. The increases in operating results were primarily due to increased water well drilling activity.

 

25



Table of Contents

 

Contract drilling revenues and costs are not seasonal in nature, but can fluctuate significantly based on the awarding and timing of contracts, which are determined by contract drilling customer demand. In general, there has been a significant decrease in demand for water well drilling contracts in the last three years due largely to the impact of the recession and continuing weak economic conditions on both private real estate development and governmental capital improvement budgets. Lack of availability of contracts has also resulted in increased competition for available contracts, which generally has resulted in lower estimated margins on awarded contracts. Continued lack of water well drilling contracts may necessitate future cost reduction measures, temporary shutdown of water well drilling operations, or sale or liquidation of a portion of our contract drilling equipment. The Company is unable to predict the near-term and long-term availability of water well drilling and pump installation and repair contracts as the duration of the slowdown in construction activity is unknown.

 

General and administrative expenses

 

General and administrative expenses decreased $260,000 (11%) for the three months ended March 31, 2013 as compared to the same period in the prior year. The decrease was primarily due to the fact that general and administrative expenses in the prior year quarter included a $227,000 increase in stock appreciation rights expense resulting from an increase in the market price of the Company’s stock, as compared to a $9,000 reduction in stock appreciation rights expense in the current quarter.

 

General and administrative expenses for the six months ended March 31, 2013 were comparable to the prior year period.

 

Depletion, depreciation, and amortization

 

Depletion, depreciation, and amortization decreased $474,000 (17%) for the three months ended March 31, 2013 as compared to the same period in the prior year. The decrease was primarily due to a 15% decrease in net production, a 1% decrease in the depletion rate and a 1% decrease in the average exchange rate of the Canadian dollar to the U.S. dollar. The decrease in the depletion rate for the three months ended March 31, 2013 was due to the impact of the reductions in the carrying value of oil and natural gas properties at September 30, 2012 and December 31, 2012, partially offset by increases in Barnwell’s costs of finding and developing proven reserves and the drilling of unsuccessful wells.

 

Depletion, depreciation, and amortization decreased $704,000 (12%) for the six months ended March 31, 2013 as compared to the same period in the prior year. The decrease was primarily due to a 14% decrease in net production, offset by a 1% increase in the depletion rate and a 1% increase in the average exchange rate of the Canadian dollar to the U.S. dollar. The increase in the depletion rate for the six months ended March 31, 2013 was due to increases in Barnwell’s costs of finding and developing proven reserves and the drilling of unsuccessful wells, partially offset by the impact of the reductions in the carrying value of oil and natural gas properties at September 30, 2012 and December 31, 2012.

 

26



Table of Contents

 

Reduction of carrying value of assets

 

The reduction of carrying value of assets increased $325,000 (18%) and $2,652,000 (143%) for the three and six months ended March 31, 2013, respectively, as compared to the same periods in the prior year.

 

Under the full cost method of accounting, the Company performs quarterly oil and natural gas ceiling test calculations. Barnwell’s net capitalized costs exceeded the ceiling limitation at March 31, 2013. As such, Barnwell reduced the carrying value of its oil and natural gas properties by $2,179,000 during the three months ended March 31, 2013. The current quarter’s reduction of the carrying value of oil and natural gas properties combined with the first quarter’s reduction of $2,327,000 resulted in a reduction of $4,506,000 for the six months ended March 31, 2013. No such reduction was necessary during the three and six months ended March 31, 2012.

 

Changes in the 12-month rolling average first-day-of-the-month prices for oil, natural gas and natural gas liquids prices, the value of reserve additions as compared to the amount of capital expenditures to obtain them, and changes in production rates and estimated levels of reserves, future development costs and the market value of unproved properties, impact the determination of the maximum carrying value of oil and natural gas properties. If oil, natural gas and natural gas liquids prices do not increase sufficiently or if the Company is not sufficiently successful in its exploration activities, the Company may be required to record additional reductions in the carrying value of its oil and natural gas properties. The Company is unable to estimate a range of the amount of any potential future reduction in carrying value as variables that impact the ceiling limitation are dependent upon future prices and actual results of activity.

 

During the three and six months ended March 31, 2012, Barnwell recorded a $1,854,000 reduction in the carrying value of its real estate held for sale to reflect a decline in the estimated market value of the two luxury residences. No such reduction was necessary during the three and six months ended March 31, 2013.

 

Income taxes

 

Barnwell’s effective consolidated income tax rate for the three and six months ended March 31, 2013, after adjusting loss before income taxes for non-controlling interests, was 21% and 19%, respectively, as compared to 0% and (18%) for the three and six months ended March 31, 2012, respectively.

 

Consolidated taxes do not bear a customary relationship to pretax (losses) earnings due primarily to the fact that Canadian income taxes are not sheltered by current period U.S. source losses, Canadian income taxes are not estimated to have a current or future benefit as foreign tax credits or deductions for U.S. tax purposes, and U.S. consolidated net operating losses are not estimated to have any future U.S. tax benefit prior to expiration.

 

The Canada Revenue Agency is currently examining the Company’s Canadian federal income tax returns for fiscal 2010 and 2011.

 

27



Table of Contents

 

Net earnings (loss) attributable to non-controlling interests

 

Earnings and losses attributable to non-controlling interests represent the non-controlling interests’ share of revenues and expenses related to the various partnerships and joint ventures in which Barnwell has interests.

 

Net earnings attributable to non-controlling interests for the three months ended March 31, 2013 totaled $21,000, as compared to net loss attributable to non-controlling interests of $348,000 for the three months ended March 31, 2012. The $369,000 (106%) change is due primarily to impacts to non-controlling interests of prior year write-downs of Barnwell’s assets, as compared to the same period in the current year.

 

Net loss attributable to non-controlling interests for the six months ended March 31, 2013 totaled $19,000, as compared to net loss attributable to non-controlling interests of $406,000 for the same period in the prior year. The $387,000 (95%) change is due primarily to impacts to non-controlling interests of prior year write-downs of Barnwell’s assets, as compared to the same period in the current year.

 

 

Liquidity and Capital Resources

 

Barnwell’s primary sources of liquidity are cash on hand, cash flows from operations, land investment segment proceeds and available credit. At March 31, 2013, Barnwell had $8,316,000 in cash and cash equivalents, $4,037,000 in working capital, and $7,692,000 of available credit under its credit facility with its Canadian bank.

 

Cash Flows

 

Cash flows provided by operations totaled $1,508,000 for the six months ended March 31, 2013, as compared to $3,027,000 for the same period in the prior year. The $1,519,000 change was primarily due to lower oil and natural gas segment operating results.

 

Net cash used in investing activities totaled $1,823,000 during the six months ended March 31, 2013, as compared to $3,857,000 during the same period of the prior year. The decrease was primarily due to a $2,177,000 decrease in cash outflows for oil and natural gas capital expenditures due to differences in the timing of disbursements for capital projects.

 

Cash flows used in financing activities totaled $139,000 for the six months ended March 31, 2013, as compared to $430,000 during the same period of the prior year. The $291,000 decrease in cash outflows was primarily due to decreased net debt repayments.

 

Credit Arrangements

 

In March 2013, Barnwell’s credit facility at Royal Bank of Canada was renewed through April 2014 for $20,000,000 Canadian dollars, unchanged from the prior year amount, or US$19,692,000 at the March 31, 2013 exchange rate of 0.9846. Borrowings under this facility were US$12,000,000 and unused credit available under this facility was US$7,692,000 at March 31, 2013. The interest rate on the facility at March 31, 2013 was 2.70%. The renewed facility is available in U.S. dollars at the London Interbank Offer Rate plus 2.50%, at the Royal Bank of Canada’s U.S. base rate plus 1.50%, or in Canadian dollars at the Royal Bank of Canada’s prime rate plus 1.50%. A standby fee of 0.625% per annum is charged on the unused facility balance.

 

28



Table of Contents

 

Barnwell, together with its 80%-owned real estate joint venture, Kaupulehu 2007, has a non-revolving real estate loan with a Hawaii bank that terminates on April 1, 2018. Principal and interest are paid monthly and are determined based on a loan amortization schedule.  Monthly payments of principal and interest are due on the first day of each month and will change as a result of an annual change in the interest rate, the sale of a house or the sale of a residential parcel. The interest rate adjusts each April for the remaining term of the loan to the lender’s then prevailing interest rate for similarly priced commercial mortgage loans or a floating rate equal to the lender’s base rate. The interest rate at March 31, 2013 was 3.57%, and was adjusted to 3.53% effective April 1, 2013. Any unpaid principal balance and accrued interest will be due and payable on April 1, 2018. The loan is collateralized by, among other things, a first mortgage on Kaupulehu 2007’s lots together with all improvements thereon. Kaupulehu 2007 will be required to make a principal payment upon the sale of a house or a residential parcel in the amount of the net sales proceeds of the house or residential parcel; the loan agreement defines net sales proceeds as the gross sales proceeds for the house or residential parcel, less reasonable commissions and normal closing costs.

 

The non-revolving real estate loan agreement contains provisions requiring us to maintain compliance with certain covenants including a consolidated debt service coverage ratio of not less than 1.20 to 1 and a consolidated total liabilities to tangible net worth ratio not to exceed 1.85 to 1. As of March 31, 2013, we were in compliance with the loan covenants.

 

Oil and Natural Gas and Other Capital Expenditures

 

Barnwell’s oil and natural gas capital expenditures, including accrued capital expenditures, totaled $1,760,000 and $3,625,000 for the three and six months ended March 31, 2013, respectively, as compared to $229,000 and $2,179,000 for the same periods in the prior year. Management expects that oil and natural gas capital expenditures in fiscal 2013 will range from $5,000,000 to $6,000,000. This estimated amount may increase or decrease as dictated by cash flows and management’s assessment of the oil and natural gas environment and prospects.

 

During the three months ended March 31, 2013, Barnwell drilled 1 gross (1.0 net) exploratory well in Canada, which was not successful. During the six months ended March 31, 2013, Barnwell participated in the drilling of 4 gross (1.1 net) development wells in Canada, all of which were successful, and 1 gross (1.0 net) exploratory well in Canada, which was not successful. The term “gross” refers to the total number of wells in which Barnwell owns an interest, and “net” refers to Barnwell’s aggregate interest therein. For example, a 50% interest in a well represents 1 gross well, but 0.5 net well. The gross figure includes interests owned of record by Barnwell and, in addition, the portion owned by others.

 

Other Considerations

 

We believe our sources of funds such as current cash balances, future operating cash flows, land investment segment proceeds, and available credit will provide sufficient liquidity to fund our operations, planned future capital expenditures, scheduled debt repayments and related interest. However, in the event oil and natural gas prices and production, land investment segment proceeds, and residential real estate home sale proceeds are less than current expectations, Barnwell’s Canadian revolving credit facility is reduced below the current level of borrowings under the facility upon the

 

29



Table of Contents

 

April 2014 review, and/or we fall short of our key financial debt covenants for our real estate loan and are required to repay a portion of our loan borrowings earlier than anticipated, we will be faced with reduced cash inflows and/or higher cash outflows than expected, which in turn could have a material adverse effect on our operations, liquidity, cash flows and financial condition. Absent a sufficient increase in natural gas and/or oil prices, it is unlikely that future oil and natural gas operating cash flows will be sufficient to fund the capital expenditure levels necessary to maintain current production and reserve levels. As such, the near-term and longer-term outlook for sources and uses of funds and oil and natural gas capital resources remains highly dependent on the factors noted above.

 

In the event our liquidity and capital resources are not sufficient to fund our future cash needs, the Company will need to obtain alternative terms or sources of financing or liquidate investments and/or operating assets to make any required cash outflows. Events and circumstances that lead to results that significantly differ from management’s expectations could have a material adverse effect on our operations, liquidity, cash flows, and financial condition.

 

 

ITEM 4.                                     CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We have established disclosure controls and procedures to ensure that material information relating to Barnwell, including its consolidated subsidiaries, is made known to the officers who certify Barnwell’s financial reports and to other members of executive management and the Board of Directors.

 

As of March 31, 2013, an evaluation was carried out by Barnwell’s Chief Executive Officer and Chief Financial Officer of the effectiveness of Barnwell’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that Barnwell’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of March 31, 2013 to ensure that information required to be disclosed by Barnwell in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Act of 1934 and the rules thereunder.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in Barnwell’s internal control over financial reporting during the quarter ended March 31, 2013 that materially affected, or is reasonably likely to materially affect, Barnwell’s internal control over financial reporting.

 

30


 


Table of Contents

 

PART II - OTHER INFORMATION

 

ITEM 5.                                     OTHER INFORMATION

 

On May 9, 2013, the Board of Directors of Barnwell amended the Company’s Amended and Restated By-laws (the “By-laws”), effective on such date.  A copy of the By-laws, as so amended and restated, is filed as Exhibit 3.2 to this Quarterly Report on Form 10-Q and incorporated by reference herein.

 

The following is a summary of the material amendments to the By-laws:

 

Section 1.02 – Annual Meetings.  This By-law was amended to remove the requirement that the annual meeting of stockholders must be held in March and to add a provision that, at the sole discretion of the Board, the annual meeting of stockholders could be held by remote communication.

 

Section 1.02 – Special Meetings. This By-law provides, among other things, that the Secretary of the Company shall call a special meeting of stockholders upon the request of stockholders of record holding at least 25% in amount of the entire issued and outstanding capital stock of the Company.  Prior to the amendment, that threshold was 10%.  This By-law also clarifies that any business transacted at a special meeting of stockholders shall be limited to the purpose or purposes stated in the notice of such meeting.  Additionally this By-law was amended to provide that, at the sole discretion of the Board, a special meeting of stockholders could be held by remote communication.

 

Section 1.12 – Notice of Stockholder Business and Nominations. This new By-law was added to the By-laws to provide that if a stockholder wishes to nominate a person or persons for election to the Board of Directors or bring other business before a stockholders meeting, such stockholder may only do so by delivering prior written notice to the Company’s Secretary, within the time period specified in the By-law, and by complying with certain other requirements specified therein.  The stockholder’s notice must include, among other things, certain information as to each person whom the stockholder proposes to nominate for election as a director or as to each matter of business that the stockholder proposes to bring before a meeting of stockholders.  The stockholder’s notice also must include certain information as to the stockholder giving the notice, the beneficial owner, if any, on whose behalf the nomination or proposal is made or other proponent persons, if any.

 

31



Table of Contents

 

ITEM 6.         EXHIBITS

 

Exhibit
Number

 

Description

 

 

 

3

.2

 

Amended and Restated By-laws

 

 

 

 

31

.1

 

Certification of Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

31

.2

 

Certification of Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32

 

 

Certification Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

101

.INS

 

XBRL Instance Document

 

 

 

 

101

.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

101

.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

101

.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

101

.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

101

.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

32



Table of Contents

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

BARNWELL INDUSTRIES, INC.

 

 

 

(Registrant)

 

 

 

 

 

 

 

Date:  May 14, 2013

/s/ Russell M. Gifford

 

 

Russell M. Gifford

 

Chief Financial Officer,

 

Executive Vice President,

 

Treasurer and Secretary

 

33



Table of Contents

 

INDEX TO EXHIBITS

 

Exhibit
Number

 

Description

 

 

 

 

3

.2

 

Amended and Restated By-laws

 

 

 

 

31

.1

 

Certification of Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

31

.2

 

Certification of Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32

 

 

Certification Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

101

.INS

 

XBRL Instance Document

 

 

 

 

101

.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

101

.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

101

.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

101

.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

101

.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

34