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 December 31, 2011

 

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.                                                                                                                                            x 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).                                                                                           x 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 x

 

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

 

As of February 7, 2012 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

 

 

 

 

 

Condensed Consolidated Balance Sheets -
December 31, 2011 and September 30, 2011 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations -
three months ended December 31, 2011 and 2010 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income -
three months ended December 31, 2011 and 2010 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows -
three months ended December 31, 2011 and 2010 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Equity -
three months ended December 31, 2011 and 2010 (Unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

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

19

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II.

OTHER INFORMATION:

 

 

 

 

Item 6.

Exhibits

29

 

 

 

 

Signature

30

 

 

 

 

Index to Exhibits

31

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.                                      FINANCIAL STATEMENTS

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

December 31,

 

September 30,

 

 

2011

 

2011

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

9,319,000

 

 

 

$

9,834,000

 

Accounts receivable, net of allowance for doubtful accounts of:

 

 

 

 

 

 

 

 

$71,000 at December 31, 2011; $70,000 at September 30, 2011

 

 

4,293,000

 

 

 

5,760,000

 

Income taxes receivable

 

 

43,000

 

 

 

43,000

 

Prepaid expenses

 

 

502,000

 

 

 

298,000

 

Real estate held for sale

 

 

12,640,000

 

 

 

12,640,000

 

Other current assets

 

 

866,000

 

 

 

955,000

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

27,663,000

 

 

 

29,530,000

 

 

 

 

 

 

 

 

 

 

Investments

 

 

4,623,000

 

 

 

4,623,000

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

245,536,000

 

 

 

239,036,000

 

Accumulated depletion, depreciation, and amortization

 

 

(190,853,000

)

 

 

(184,417,000

)

Property and equipment, net

 

 

54,683,000

 

 

 

54,619,000

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

$

86,969,000

 

 

 

$

88,772,000

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

$

2,859,000

 

 

 

$

2,750,000

 

Accrued capital expenditures

 

 

2,216,000

 

 

 

2,492,000

 

Accrued compensation

 

 

1,474,000

 

 

 

2,397,000

 

Payable to joint interest owners

 

 

556,000

 

 

 

1,012,000

 

Income taxes payable

 

 

534,000

 

 

 

199,000

 

Current portion of long-term debt

 

 

12,647,000

 

 

 

12,314,000

 

Other current liabilities

 

 

2,490,000

 

 

 

2,925,000

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

22,776,000

 

 

 

24,089,000

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

10,800,000

 

 

 

11,400,000

 

 

 

 

 

 

 

 

 

 

Liability for retirement benefits

 

 

4,612,000

 

 

 

5,167,000

 

 

 

 

 

 

 

 

 

 

Asset retirement obligation

 

 

5,032,000

 

 

 

4,921,000

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

4,409,000

 

 

 

4,481,000

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

47,629,000

 

 

 

50,058,000

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Barnwell Industries, Inc. stockholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

8,445,060 issued at December 31, 2011 and September 30, 2011

 

 

4,223,000

 

 

 

4,223,000

 

Additional paid-in capital

 

 

1,289,000

 

 

 

1,289,000

 

Retained earnings

 

 

33,949,000

 

 

 

34,231,000

 

Accumulated other comprehensive income, net

 

 

1,136,000

 

 

 

290,000

 

Treasury stock, at cost:

 

 

 

 

 

 

 

 

167,900 shares at December 31, 2011 and September 30, 2011

 

 

(2,286,000

)

 

 

(2,286,000

)

 

 

 

 

 

 

 

 

 

Total Barnwell Industries, Inc. stockholders’ equity

 

 

38,311,000

 

 

 

37,747,000

 

Non-controlling interests

 

 

1,029,000

 

 

 

967,000

 

 

 

 

 

 

 

 

 

 

Total equity

 

 

39,340,000

 

 

 

38,714,000

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

 

$

86,969,000

 

 

 

$

88,772,000

 

 

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

 

 

 

 

December 31,

 

 

 

 

2011

 

 

 

2010

 

Revenues:

 

 

 

 

 

 

 

 

Oil and natural gas

 

 

$

7,789,000

 

 

 

$

6,598,000

 

Contract drilling

 

 

425,000

 

 

 

1,569,000

 

Sale of interest in leasehold land, net

 

 

-

 

 

 

564,000

 

Sale of development rights, net

 

 

-

 

 

 

2,497,000

 

Gas processing and other

 

 

288,000

 

 

 

91,000

 

 

 

 

 

 

 

 

 

 

 

 

 

8,502,000

 

 

 

11,319,000

 

Costs and expenses:

 

 

 

 

 

 

 

 

Oil and natural gas operating

 

 

2,741,000

 

 

 

2,719,000

 

Contract drilling operating

 

 

637,000

 

 

 

1,367,000

 

General and administrative

 

 

1,846,000

 

 

 

2,314,000

 

Depletion, depreciation, and amortization

 

 

2,909,000

 

 

 

2,430,000

 

Interest expense

 

 

219,000

 

 

 

308,000

 

 

 

 

 

 

 

 

 

 

 

 

 

8,352,000

 

 

 

9,138,000

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

150,000

 

 

 

2,181,000

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

 

490,000

 

 

 

486,000

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

 

(340,000

)

 

 

1,695,000

 

 

 

 

 

 

 

 

 

 

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

 

 

(58,000

)

 

 

610,000

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings attributable to Barnwell Industries, Inc.

 

 

$

(282,000

)

 

 

$

1,085,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

$

(0.03

)

 

 

$

0.13

 

 

 

 

 

 

 

 

 

 

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

 

 

$

(0.03

)

 

 

$

0.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

8,277,160

 

 

 

8,277,160

 

Diluted

 

 

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 INCOME

(Unaudited)

 

 

 

 

Three months ended

 

 

 

 

December 31,

 

 

 

 

2011

 

 

 

2010

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

 

$

(340,000

)

 

 

$

1,695,000

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of taxes of $0

 

 

781,000

 

 

 

1,301,000

 

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

 

 

65,000

 

 

 

63,000

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

846,000

 

 

 

1,364,000

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

506,000

 

 

 

3,059,000

 

 

 

 

 

 

 

 

 

 

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

 

 

(58,000

)

 

 

610,000

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Barnwell Industries, Inc.

 

 

$

564,000

 

 

 

$

2,449,000

 

 

See Notes to Condensed Consolidated Financial Statements

 

5



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

Three months ended

 

 

 

 

December 31,

 

 

 

 

2011

 

 

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) earnings

 

 

$

(340,000

)

 

 

$

1,695,000

 

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depletion, depreciation, and amortization

 

 

2,909,000

 

 

 

2,430,000

 

Retirement benefits expense

 

 

182,000

 

 

 

188,000

 

Accretion of asset retirement obligation

 

 

86,000

 

 

 

81,000

 

Gain on sale of drilling equipment

 

 

(40,000

)

 

 

-

 

Deferred income tax (benefit) expense

 

 

(68,000

)

 

 

131,000

 

Asset retirement obligation payments

 

 

(109,000

)

 

 

(10,000

)

Share-based compensation (benefit) expense

 

 

(295,000

)

 

 

240,000

 

Retirement plan contributions

 

 

(672,000

)

 

 

(252,000

)

Sale of interest in leasehold land, net

 

 

-

 

 

 

(564,000

)

Sale of development rights, net

 

 

-

 

 

 

(2,497,000

)

Increase from changes in current assets and liabilities

 

 

150,000

 

 

 

1,885,000

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

1,803,000

 

 

 

3,327,000

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of development rights

 

 

-

 

 

 

2,656,000

 

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

 

 

-

 

 

 

564,000

 

Proceeds from sale of drilling equipment

 

 

59,000

 

 

 

-

 

Proceeds from gas over bitumen royalty adjustments

 

 

15,000

 

 

 

17,000

 

Capital expenditures - oil and natural gas

 

 

(2,249,000

)

 

 

(3,016,000

)

Capital expenditures - all other

 

 

(6,000

)

 

 

(1,860,000

)

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(2,181,000

)

 

 

(1,639,000

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

(267,000

)

 

 

(500,000

)

Contributions from non-controlling interests

 

 

120,000

 

 

 

240,000

 

Distributions to non-controlling interests

 

 

-

 

 

 

(100,000

)

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(147,000

)

 

 

(360,000

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

10,000

 

 

 

69,000

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(515,000

)

 

 

1,397,000

 

Cash and cash equivalents at beginning of period

 

 

9,834,000

 

 

 

10,674,000

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

 

$

9,319,000

 

 

 

$

12,071,000

 

 

See Notes to Condensed Consolidated Financial Statements

 

6



Table of Contents

 

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Three months ended December 31, 2011 and 2010

(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, 2010

 

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

34,340,000

 

 

 

$

49,000

 

 

 

$

(2,286,000

)

 

 

$

993,000

 

 

 

$

38,608,000

 

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

240,000

 

 

 

240,000

 

Distributions to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(100,000

)

 

 

(100,000

)

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,085,000

 

 

 

 

 

 

 

 

 

 

 

610,000

 

 

 

1,695,000

 

Foreign currency translation adjustments, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,301,000

 

 

 

 

 

 

 

 

 

 

 

1,301,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63,000

 

 

 

 

 

 

 

 

 

 

 

63,000

 

Balance at December 31, 2010

 

 

 

8,277,160

 

 

 

$

4,223,000

 

 

 

$

1,289,000

 

 

 

$

35,425,000

 

 

 

$

1,413,000

 

 

 

$

(2,286,000

)

 

 

$

1,743,000

 

 

 

$

41,807,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

120,000

 

 

 

120,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(282,000

)

 

 

 

 

 

 

 

 

 

 

(58,000

)

 

 

(340,000

)

Foreign currency translation adjustments, net of taxes of $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

781,000

 

 

 

 

 

 

 

 

 

 

 

781,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,000

 

 

 

 

 

 

 

 

 

 

 

65,000

 

Balance at 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

7



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, including an indirect 77.6%-owned land investment general partnership and two 80%-owned joint ventures (collectively referred to herein as “Barnwell,” “we,” “our,” “us,” or the “Company”).  All significant intercompany accounts and transactions have been eliminated.  Investments in companies over which Barnwell has the ability to exercise significant influence, but not control, are accounted for using the equity method.

 

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, 2011 Annual Report on Form 10-K.  The Condensed Consolidated Balance Sheet as of September 30, 2011 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 December 31, 2011, results of operations, comprehensive income, cash flows and equity for the three months ended December 31, 2011 and 2010, have been made.  The results of operations for the period ended December 31, 2011 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.

 

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2.                                    (LOSS) EARNINGS PER COMMON SHARE

 

Basic (loss) earnings per share excludes dilution and is computed by dividing net (loss) earnings attributable to Barnwell stockholders by the weighted-average number of common shares outstanding for the period.  Diluted (loss) earnings per share includes the potentially dilutive effect of outstanding common stock options.

 

Reconciliations between net (loss) earnings attributable to Barnwell stockholders and common shares outstanding of the basic and diluted net (loss) earnings per share computations for the three months ended December 31, 2011 and 2010 are as follows:

 

 

 

 

Three months ended December 31, 2011

 

 

 

Net Loss

 

Shares

 

Per-Share

 

 

(Numerator)

 

(Denominator)

 

Amount

Basic net loss per share

 

 

$

(282,000

)

 

 

8,277,160

 

 

 

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities - common stock options

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per share

 

 

$

(282,000

)

 

 

8,277,160

 

 

 

$

(0.03

)

 

 

 

 

Three months ended December 31, 2010

 

 

 

Net Earnings

 

Shares

 

Per-Share

 

 

(Numerator)

 

(Denominator)

 

Amount

Basic net earnings per share

 

 

$

1,085,000

 

 

 

8,277,160

 

 

 

$

0.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities - common stock options

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share

 

 

$

1,085,000

 

 

 

8,277,160

 

 

 

$

0.13

 

 

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.  Potentially dilutive shares are excluded from the computation of (loss) earnings per share if their effect is antidilutive.  Options to purchase 815,375 and 858,500 shares of common stock were excluded from the computation of diluted shares for the three months ended December 31, 2011 and 2010, respectively, as their inclusion would have been antidilutive.

 

 

3.                                    SHARE-BASED PAYMENTS

 

The Company’s share-based compensation (benefit) expense and related income tax effects for the three months ended December 31, 2011 and 2010 are as follows:

 

 

 

 

Three months ended

 

 

 

 

December 31,

 

 

 

 

2011

 

 

 

2010

 

 

 

 

 

 

 

 

 

 

Share-based compensation (benefit) expense

 

 

$

(295,000

)

 

 

$

240,000

 

 

 

 

 

 

 

 

 

 

Income tax effect

 

 

$

-

 

 

 

$

-

 

 

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Share-based compensation (benefit) expense recognized in (loss) earnings for the three months ended December 31, 2011 and 2010 are reflected in “General and administrative” expenses in the Condensed Consolidated Statements of Operations.  There was no impact on income taxes for the three months ended December 31, 2011 and 2010 due to a full valuation allowance on the related deferred tax asset.

 

Equity-classified Awards

 

A summary of the activity in Barnwell’s equity-classified share options as of the beginning and end of the three months ended December 31, 2011 is presented below:

 

 

 

 

Three months ended December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

 

 

 

 

 

 

 

Average

 

Contractual

 

Aggregate

 

 

 

 

Exercise

 

Term

 

Intrinsic

Options

 

Shares

 

 

Price

 

 

(in years)

 

 

Value

 

Outstanding at October 1, 2011

 

 

60,000

 

 

 

$

8.62

 

 

 

 

 

 

 

 

 

Granted

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2011

 

 

60,000

 

 

 

$

8.62

 

 

 

2.9

 

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2011

 

 

60,000

 

 

 

$

8.62

 

 

 

2.9

 

 

 

$

-

 

 

There was no share-based compensation expense for equity-classified awards in the three months ended December 31, 2011 and 2010.

 

Liability-classified Awards

 

As of December 31, 2011, there was $94,000 of total unrecognized compensation cost related to nonvested liability-classified share options.  That cost is expected to be recognized over 1.8 years.

 

The following assumptions were used in estimating fair value for all liability-classified share options outstanding during the three months ended December 31, 2011 and 2010:

 

 

Three months ended December 31,

 

2011

 

2010

 

 

 

 

Expected volatility range

57.8% to 64.1%

 

49.5% to 65.4%

Weighted-average volatility

60.9%

 

54.7%

Expected dividends

0.0%

 

0.0%

Expected term (in years)

2.9 to 8.0

 

3.9 to 9.0

Risk-free interest rate

0.4% to 1.4%

 

1.5% to 3.0%

Expected forfeitures

None

 

None

 

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The application of alternative assumptions could produce significantly different estimates of the fair value of share-based compensation, and consequently, the related costs reported in the Condensed Consolidated Statements of Operations.

 

A summary of the activity in Barnwell’s liability-classified share options as of the beginning and end of the three months ended December 31, 2011 is presented below:

 

 

 

 

Three months ended December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

 

 

 

 

 

 

 

Average

 

Contractual

 

Aggregate

 

 

 

 

Exercise

 

Term

 

Intrinsic

Options

 

Shares

 

 

Price

 

 

(in years)

 

 

Value

 

Outstanding at October 1, 2011

 

 

755,375

 

 

 

$

8.40

 

 

 

 

 

 

 

 

 

Granted

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2011

 

 

755,375

 

 

 

$

8.40

 

 

 

6.2

 

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2011

 

 

537,875

 

 

 

$

9.34

 

 

 

5.6

 

 

 

$

-

 

 

Total share-based compensation for liability-classified awards for the three months ended December 31, 2011 and 2010 was a $295,000 benefit and a $240,000 expense, respectively.  Included in share-based compensation for liability-classified awards for the three months ended December 31, 2011 and 2010 were $31,000 and $91,000, respectively, of compensation expense related to shares that vested during each respective period and a $326,000 benefit and a $149,000 expense, respectively, primarily due to the impact of fluctuations in Barnwell’s stock price on previously vested shares in each respective period.

 

 

4.                                    REAL ESTATE HELD FOR SALE

 

Kaupulehu 2007, LLLP (“Kaupulehu 2007”) is a Hawaii limited liability limited partnership 80%-owned by Barnwell.  At December 31, 2011, Kaupulehu 2007 owns two luxury residences that are available for sale in the Lot 4A Increment I area located approximately six miles north of the Kona International Airport 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.

 

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5.                                    INVESTMENTS

 

A summary of Barnwell’s investments as of December 31, 2011 and September 30, 2011 is as follows:

 

Investment in two residential parcels

 

$

2,331,000

Investment in joint ventures

 

1,754,000

Investment in land interests:

 

 

Leasehold land zoned conservation – Lot 4C

 

50,000

Lot acquisition rights – Mauka Lands

 

488,000

 

 

 

Total investments

 

$

4,623,000

 

Investment in two residential parcels

 

Kaupulehu 2007 owns two residential parcels in the Lot 4A Increment I area located approximately six miles north of the Kona International Airport 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.

 

Investment in joint ventures

 

Kaupulehu Investors, LLC, a limited liability company 80%-owned by Barnwell, owns 1.5% passive minority interests in Hualalai Investors JV, LLC and Hualalai Investors II, LLC (hereinafter collectively referred to as “Hualalai Investors”), owners of Hualalai Resort, and a 1.5% passive minority interest in Kona Village Investors, LLC, owner of Kona Village Resort.  Kaupulehu Investors, LLC accounts for its 1.5% passive investments under the cost method.

 

Lot 4C

 

Barnwell owns a 77.6% controlling interest in Kaupulehu Developments, a Hawaii general partnership that owns interests in leasehold land for property located approximately six miles north of the Kona International Airport in the North Kona District of the island of Hawaii.

 

Lot 4C is an area of approximately 1,000 acres of vacant leasehold land zoned conservation and is 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 2015.  However, this right to negotiate will terminate in June 2013 if WB and/or WBKD have not completed all environmental assessments and surveys reasonably required to support a petition to the Hawaii State Land Use Commission for reclassification of Lot 4C.

 

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.

 

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Table of Contents

 

Lot acquisition rights

 

Barnwell, through wholly-owned Kaupulehu Mauka Investors, LLC, owns acquisition rights as to 14 lots within agricultural-zoned leasehold land in the upland area of Kaupulehu (“Mauka Lands”) situated between the Queen Kaahumanu Highway and the Mamalahoa Highway at Kaupulehu, on the island of Hawaii.  The acquisition rights give Barnwell the right to acquire 14 residential lots, currently estimated to be two to five acres in size, which may be developed on the Mauka Lands.  These lands are currently classified as agricultural by the state of Hawaii and, accordingly, the developer of these lands (Hualalai Investors) will need to pursue both state and county of Hawaii approvals for reclassification and rezoning to permit the development of residential lots and negotiate development terms.

 

There is no assurance that the developer of the Mauka Lands will obtain the necessary land use reclassification, rezoning, permits, approvals, and development terms and agreements needed to develop the Mauka Lands.  If the developer of the Mauka Lands is unable to obtain such required land use changes, development terms and agreements with respect to the Mauka Lands and Barnwell is therefore unable to fully recover its investment in the Mauka Lands, we will incur an expense resulting from a write-off of the lot acquisition rights.

 

6.                                    LONG-TERM DEBT

 

A summary of Barnwell’s long-term debt as of December 31, 2011 and September 30, 2011 is as follows:

 

 

 

December 31,

 

September 30,

 

 

2011

 

2011

Canadian revolving credit facility

 

 

$

12,000,000

 

 

 

$

12,000,000

 

Real estate loan

 

 

11,447,000

 

 

 

11,714,000

 

 

 

 

 

 

 

 

 

 

 

 

 

23,447,000

 

 

 

23,714,000

 

Less: current portion

 

 

(12,647,000

)

 

 

(12,314,000

)

 

 

 

 

 

 

 

 

 

Total long-term debt

 

 

$

10,800,000

 

 

 

$

11,400,000

 

 

Canadian revolving credit facility

 

Barnwell has a credit facility at Royal Bank of Canada, a Canadian bank, for $20,000,000 Canadian dollars, or US$19,665,000 at the December 31, 2011 exchange rate.  Borrowings under this facility were US$12,000,000 and unused credit available under this facility was US$7,665,000 at December 31, 2011.  The interest rate on the facility at December 31, 2011 was 3.0%.

 

Under the financing agreement with Royal Bank of Canada, the facility is reviewed annually, with the next review planned for April 2012.  Subject to that review, the facility may be extended one year with no required debt repayments for one year 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 2012, Barnwell would be obligated to make quarterly principal and interest repayments beginning in July 2012.  As such, two quarterly repayments of 5% each would be due within one year of December 31, 2011 and accordingly, we have included $1,200,000, representing 10% of the outstanding loan balance at December 31, 2011, in the current portion of long-term debt.

 

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Table of Contents

 

Real estate loan

 

Barnwell, together with its 80%-owned real estate joint venture, Kaupulehu 2007, has a non-revolving real estate loan with a Hawaii financial institution.  The loan is a seven year term loan with interest rates that adjust annually.  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 a change in the interest rate, the sale of a house or the sale of a residential parcel.  The monthly payment for the first year, based on a seven-year amortization schedule, is approximately $169,000 and the interest rate for the first year is 3.67%.  After the first year, the interest rate will adjust for each of the remaining six 1-year periods of the loan term.  The interest rate will be the lender’s then prevailing interest rate for similarly priced commercial mortgage loans or a floating rate equal to the lender’s base rate.  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 four 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 of not less than 1.20 to 1, a consolidated total liabilities to tangible net worth ratio not to exceed 1.85 to 1, and a maximum loan to value (“LTV”) ratio.  The lender may request updated appraisals no more frequently than annually.  If the appraised value results in an LTV of greater than 70% of the appraised value of the homes and 65% of the appraised value of the residential parcels, a further principal payment would be required.  As of December 31, 2011, we were in compliance with the loan covenants.

 

Kaupulehu 2007 made scheduled monthly principal payments during the three months ended December 31, 2011, reducing the loan amount to $11,447,000 at December 31, 2011.  Both houses collateralizing the loan are currently available for sale, therefore, the entire $11,447,000 outstanding at December 31, 2011 under the term loan has been classified as a current liability.

 

7.                                    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 defined benefit pension plan, and a postretirement medical insurance benefits plan (“Postretirement Medical”) covering eligible U.S. employees.

 

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Table of Contents

 

The following table details the components of net periodic benefit cost for Barnwell’s retirement plans for the three months ended December 31, 2011 and 2010:

 

 

 

Pension Plan

 

SERP

 

Postretirement Medical

 

 

Three months ended December 31,

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

Service cost

 

 

$

75,000

 

 

 

$

75,000

 

 

 

$

13,000

 

 

 

$

11,000

 

 

 

$

3,000

 

 

 

$

4,000

 

Interest cost

 

 

81,000

 

 

 

78,000

 

 

 

15,000

 

 

 

14,000

 

 

 

12,000

 

 

 

17,000

 

Expected return on plan assets

 

 

(82,000

)

 

 

(74,000

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Amortization of prior service cost

 

 

1,000

 

 

 

1,000

 

 

 

-

 

 

 

1,000

 

 

 

34,000

 

 

 

34,000

 

Amortization of net actuarial loss (gain)

 

 

29,000

 

 

 

21,000

 

 

 

4,000

 

 

 

4,000

 

 

 

(3,000

)

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

 

$

104,000

 

 

 

$

101,000

 

 

 

$

32,000

 

 

 

$

30,000

 

 

 

$

46,000

 

 

 

$

57,000

 

 

Barnwell contributed $670,000 to the Pension Plan during the three months ended December 31, 2011 and does not expect to make any further contributions during the remainder of fiscal 2012.  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 2012 and expected payments under the SERP for fiscal 2012 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.

 

8.                                    INCOME TAXES

 

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

 

 

Three months ended

 

December 31,

 

2011

 

2010

Earnings (loss) before income taxes in:

 

 

 

 

 

 

 

Canada

 

$

1,538,000

 

 

 

$

645,000

 

United States

 

(1,330,000

)

 

 

926,000

 

 

 

 

 

 

 

 

 

 

 

 

 

$

208,000

 

 

 

$

1,571,000

 

 

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Table of Contents

 

The components of the income tax provision for the three months ended December 31, 2011 and 2010 are as follows:

 

 

Three months ended

 

December 31,

 

2011

 

2010

 

 

 

 

 

 

 

 

Current

 

$

558,000

 

 

 

$

355,000

 

Deferred

 

(68,000

)

 

 

131,000

 

 

 

 

 

 

 

 

 

 

 

$

490,000

 

 

 

$

486,000

 

 

Barnwell’s effective consolidated income tax rate for the three months ended December 31, 2011 and 2010, after adjusting earnings before income taxes for non-controlling interests, was 236% and 31%, respectively.

 

The high effective tax rate for the three months ended December 31, 2011 reflects the fact that Canadian income taxes are not sheltered by current period U.S. source losses, and Canadian income taxes are not estimated to have a current or future benefit as foreign tax credits or deductions for U.S. tax purposes.

 

Included in the income tax provision for the three months ended December 31, 2010 is a $130,000 benefit primarily from the lapsing of the statute of limitations for an uncertain tax position related to Canadian income taxes.  There were no lapses of the statute of limitations for uncertain tax positions in the same period of the current year.

 

Uncertain tax positions consist primarily of Canadian federal and provincial audit issues that involve transfer pricing adjustments.  Because of a lack of clarity and uniformity regarding allowable transfer pricing valuations by differing jurisdictions, it is reasonably possible that the total amount of uncertain tax positions may significantly increase or decrease during the next 12 months, and the estimated range of any such variance is not currently estimable based upon facts and circumstances as of December 31, 2011.

 

Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities at December 31, 2011:

 

Jurisdiction

 

Fiscal Years Open

U.S. federal

 

2006, 2008 – 2010

Various U.S. states

 

2008 – 2010

Canada federal

 

2004 – 2010

Various Canadian provinces

 

2004 – 2010

 

9.                                    SEGMENT INFORMATION

 

Barnwell operates four 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).

 

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Table of Contents

 

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

 

December 31,

 

2011

 

2010

Revenues:

 

 

 

 

 

 

 

Oil and natural gas

 

$

7,789,000

 

 

 

$

6,598,000

 

Land investment

 

-

 

 

 

3,061,000

 

Contract drilling

 

425,000

 

 

 

1,569,000

 

Other

 

276,000

 

 

 

83,000

 

Total before interest income

 

8,490,000

 

 

 

11,311,000

 

Interest income

 

12,000

 

 

 

8,000

 

Total revenues

 

$

8,502,000

 

 

 

$

11,319,000

 

 

 

 

 

 

 

 

 

Depletion, depreciation, and amortization:

 

 

 

 

 

 

 

Oil and natural gas

 

$

2,753,000

 

 

 

$

2,263,000

 

Contract drilling

 

129,000

 

 

 

145,000

 

Other

 

27,000

 

 

 

22,000

 

Total depletion, depreciation, and amortization

 

$

2,909,000

 

 

 

$

2,430,000

 

 

 

 

 

 

 

 

 

Operating profit (before general and administrative expenses):

 

 

 

 

 

 

 

Oil and natural gas

 

$

2,295,000

 

 

 

$

1,616,000

 

Land investment

 

-

 

 

 

3,061,000

 

Contract drilling

 

(341,000

)

 

 

57,000

 

Other

 

249,000

 

 

 

61,000

 

Total operating profit

 

2,203,000

 

 

 

4,795,000

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

(1,846,000

)

 

 

(2,314,000

)

Interest expense

 

(219,000

)

 

 

(308,000

)

Interest income

 

12,000

 

 

 

8,000

 

Earnings before income taxes

 

$

150,000

 

 

 

$

2,181,000

 

 

10.                            ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The components of accumulated other comprehensive income, net of taxes, at December 31, 2011 and September 30, 2011 are as follows:

 

 

December 31,

 

September 30,

 

2011

 

2011

Foreign currency translation

 

$

3,874,000

 

 

 

$

3,093,000

 

Retirement plans liability

 

(2,738,000

)

 

 

(2,803,000

)

 

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

$

1,136,000

 

 

 

$

290,000

 

 

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11.                            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.

 

12.                            FAIR VALUE MEASUREMENTS

 

Barnwell does not have any assets and liabilities that are required to be remeasured on a recurring 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.  There were no nonrecurring fair value measurements recorded for such assets and liabilities during the three months ended December 31, 2011 or 2010.

 

13.                            INFORMATION RELATING TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Three months ended

 

December 31,

 

2011

 

2010

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

176,000

 

 

 

$

229,000

 

Income taxes

 

$

230,000

 

 

 

$

835,000

 

 

Capital expenditure accruals related to oil and natural gas exploration and development decreased $327,000 and $659,000 during the three months ended December 31, 2011 and 2010, respectively.  Additionally, during the three months ended December 31, 2011 and 2010, capital expenditure accruals related to oil and natural gas asset retirement obligations increased $28,000 and nil, respectively.

 

14.       SUBSEQUENT EVENTS

 

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

 

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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, 2011.  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, 2011.  There have been no significant changes to these critical accounting policies and estimates during the three months ended December 31, 2011.  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

 

Fair Value Measurements and Related Disclosures

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards.  The amendments clarify or change the application of existing fair value measurements, including: (1) that the highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets; (2) that a reporting entity should measure the fair value of its own equity instrument from the perspective of a market participant that holds that instrument as an asset; (3) for

 

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Level 3 fair value measurements, quantitative information about the unobservable inputs used in a fair value measurement, a description of the valuation processes used by the entity, and a discussion about the sensitivity of the fair value measurements to changes in the unobservable inputs should be disclosed; (4) to permit an entity to measure the fair value of certain financial instruments on a net basis rather than based on its gross exposure when the reporting entity manages its financial instruments on the basis of such net exposure; (5) that in the absence of a Level 1 input, a reporting entity should apply premiums or discounts when market participants would do so when pricing the asset or liability consistent with the unit of account; (6) that premiums and discounts related to size as a characteristic of the reporting entity’s holding are not permitted in a fair value measurement; (7) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; and (8) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined.  The standard is effective during interim or annual periods beginning after December 15, 2011.  We are currently evaluating its impact on our consolidated financial statements and disclosures.

 

Presentation of Comprehensive Income

 

In June 2011, the FASB issued an accounting standards update that eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other updates to the presentation of comprehensive income.  Under this guidance, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In addition, an entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  In January 2012, the FASB issued an accounting standards update that defers the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income.  The deferral is temporary until the FASB reconsiders the operational concerns and needs of financial statement users.  The requirement to present comprehensive income in either a single continuous statement or two consecutive condensed statements is effective for fiscal years beginning after December 15, 2011, with early adoption permitted.  Adoption of this standard will impact the presentation of the Company’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.

 

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Land Investment Segment

 

The land investment segment is comprised of the following three components:

 

1)  Barnwell owns a 77.6% controlling interest in Kaupulehu Developments, a Hawaii general partnership which owns interests in leasehold land for property 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.  Increment II is not yet developed and is currently planned for approximately 350-400 residential units; and

 

·           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 2015 or in June 2013 if WB and/or WBKD have not completed all environmental assessments and surveys reasonably required to support a petition to the Hawaii State Land Use Commission for reclassification of the 1,000 acres.

 

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.

 

3)  Barnwell, through wholly-owned Kaupulehu Mauka Investors, LLC, owns acquisition rights as to 14 lots within agricultural-zoned leasehold land in the upland area of Kaupulehu (“Mauka Lands”) situated between the Queen Kaahumanu Highway and the Mamalahoa Highway at Kaupulehu, on the island of Hawaii.  The acquisition rights give Barnwell the right to acquire 14 residential lots, currently estimated to be two to five acres in size, which may be developed on the Mauka Lands.  These lands are currently classified as agricultural by the state of Hawaii and, accordingly, the developer of these lands will need to pursue both state and county of Hawaii approvals for reclassification and rezoning to permit the development of residential lots and negotiate development terms.

 

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 two luxury residences in the Kaupulehu area that are available for sale.  Kaupulehu 2007 does not currently have any homes under construction.

 

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Table of Contents

 

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.

 

 

Results of Operations

 

Summary

 

Barnwell incurred a net loss of $282,000 for the three months ended December 31, 2011, a $1,367,000 decrease from net earnings of $1,085,000 for the three months ended December 31, 2010.  This decrease was largely attributable to the following items:

 

·           A $3,061,000 decrease in land investment segment operating profit, before income taxes, as there were no development rights option receipts or percentage of sales receipts in the current year period; and

 

·           A $398,000 decrease in contract drilling operating results, before income taxes, due to decreased well drilling activity as contract drilling revenues for the current year period were generated by pump installation and repair work only and there was no water well drilling work performed in the current year period.

 

The decrease was partially offset by a $679,000 increase in oil and natural gas segment operating profit, before income taxes, due primarily to higher oil production and higher oil prices and a $468,000 decrease in general and administrative expenses due primarily to a $535,000 decrease in stock appreciation rights expense due to fluctuations in Barnwell’s stock price.

 

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.

 

The average exchange rate of the Canadian dollar to the U.S. dollar decreased 1% in the three months ended December 31, 2011 as compared to the same period in the prior year, and the exchange rate of the Canadian dollar to the U.S. dollar increased 2% at December 31, 2011 as compared to September 30, 2011.  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) earnings.  The other comprehensive income due to foreign currency translation adjustments, net of taxes, for the three months ended December 31, 2011 was $781,000, a $520,000 decrease from the $1,301,000 other comprehensive income due to foreign currency translation adjustments, net of taxes, for the same period in the prior year.  There were no taxes on other comprehensive income due to foreign currency translation adjustments in the three months ended December 31, 2011 and 2010 due to a full valuation allowance on the related deferred tax asset.

 

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Oil and natural gas revenues

 

The following tables set forth Barnwell’s average prices per unit of production and net production volumes for the three months ended December 31, 2011 as compared to the same period of the prior year.  Production amounts reported are net of royalties.

 

 

 

Average Price Per Unit

 

 

Three months ended

 

Increase

 

 

December 31,

 

(Decrease)

 

 

2011

 

2010

 

$

 

%

Natural Gas (Mcf)*

 

 

$

2.88

 

 

 

$

3.18

 

 

 

$

(0.30

)

 

 

(9

%)

Oil (Bbls)**

 

 

$

88.68

 

 

 

$

72.86

 

 

 

$

15.82

 

 

 

22

%

Liquids (Bbls)**

 

 

$

52.04

 

 

 

$

42.01

 

 

 

$

10.03

 

 

 

24

%

 

 

 

Net Production

 

 

Three months ended

 

Increase

 

 

December 31,

 

(Decrease)

 

 

2011

 

2010

 

Units

 

%

Natural Gas (Mcf)*

 

 

765,000

 

 

 

800,000

 

 

 

(35,000

)

 

 

(4

%)

Oil (Bbls)**

 

 

48,000

 

 

 

37,000

 

 

 

11,000

 

 

 

30

%

Liquids (Bbls)**

 

 

23,000

 

 

 

27,000

 

 

 

(4,000

)

 

 

(15

%)

 


*      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 increased $1,191,000 (18%) for the three months ended December 31, 2011, as compared to the same period in the prior year, primarily due to increases in net oil production and oil prices, which increased 30% and 22%, respectively, as compared to the same period in the prior year.  The increase was partially offset by decreases in natural gas prices and net natural gas production, which decreased 9% and 4%, respectively, as compared to the same period in the prior year.  The increase in net oil production was due partly to increased activity and production from newer properties partially offset by natural declines in production from older properties.  Also contributing to the increase in net oil production was lower royalty rates on certain high production rate properties resulting from the Government of Alberta’s modification to the royalty framework effective January 1, 2011, which reduced the maximum royalty rate for oil and natural gas production from 50% for each to 40% and 36%, respectively.  The decrease in royalty rates due to the modified royalty framework was partially offset by increased royalty rates due to higher oil prices.  Gross oil production for the three months ended December 31, 2011 increased 22%, as compared to the same period in the prior year.

 

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Table of Contents

 

Sale of development rights and Sale of interest in leasehold land

 

Kaupulehu Developments received its final development rights option payment in December 2010. Revenues related to sales of development rights under option for the three months ended December 31, 2011 and 2010 are summarized as follows:

 

 

Three months ended

 

December 31,

 

2011

 

2010

Sale of development rights under option:

 

 

 

 

 

 

 

Proceeds

 

$

-

 

 

 

$

2,656,000

 

Fees

 

-

 

 

 

(159,000

)

 

 

 

 

 

 

 

 

Revenues - sale of development rights, net

 

$

-

 

 

 

$

2,497,000

 

 

The following table summarizes the percentage of sales payment revenues received from WB for the three months ended December 31, 2011 and 2010:

 

 

Three months ended

 

December 31,

 

2011

 

2010

Sale of interest in leasehold land:

 

 

 

 

 

 

 

Proceeds

 

$

-

 

 

 

$

600,000

 

Fees

 

-

 

 

 

(36,000

)

 

 

 

 

 </