The following discussion is intended to assist in the understanding of the
Consolidated Balance Sheets of Barnwell Industries, Inc. and subsidiaries
(collectively referred to herein as "Barnwell," "we," "our," "us" or the
"Company") as of September 30, 2022 and 2021, and the related Consolidated
Statements of Operations, Comprehensive Income, Equity, and Cash Flows for the
years ended September 30, 2022 and 2021. This discussion should be read in
conjunction with the consolidated financial statements and related Notes to
Consolidated Financial Statements included in this report.
Current Outlook
Impact of COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a
global pandemic and the U.S. and Canadian governments declared the virus a
national emergency shortly thereafter. The ongoing global health crisis
(including resurgences) resulting from the pandemic have, and continue to,
disrupt the normal operations of many businesses, including the temporary
closure or scale-back of business operations and/or the imposition of either
quarantine or remote work or meeting requirements for employees, either by
government order or on a voluntary basis. While the outbreak recently appeared
to be trending downward, particularly as vaccination rates increased, new
variants of COVID-19 continue emerging, including the Omicron variants,
spreading throughout the U.S. and globally and causing significant disruptions.
The global economy, our markets and our business have been, and may continue to
be, materially and adversely affected by COVID-19.
The COVID-19 outbreak materially and adversely affected our business operations
and financial condition as a result of the deteriorating market outlook, the
global economic recession and weakened liquidity. Although demand for oil and
oil prices has increased significantly from the lows of March through May of
2020, uncertainty regarding future oil prices continues to exist. While the
Company's contract drilling segment remained operational throughout fiscal 2020
and 2021 and continues to work, the continuing potential impact of COVID-19 on
the health of our contract drilling segment's crews is uncertain, and any work
stoppage or discontinuation of contracts currently in backlog could result in a
material adverse impact to the Company's financial condition and outlook. Though
availability of vaccines and reopening of state and local economies has improved
the outlook for recovery from COVID-19's impacts, the impact of new, more
contagious or lethal variants that may emerge, and the effectiveness of COVID-19
vaccines against variants and the related responses by governments, including
reinstated government-imposed lockdowns or other measures, cannot be predicted
at this time. Both the health and economic aspects of the COVID-19 pandemic
remain highly fluid and the future course of each is uncertain. We cannot
foresee whether the outbreak of COVID-19 will be effectively contained on a
sustained basis, nor can we predict the severity and duration of its impact. If
the impact of COVID-19 is not effectively and timely controlled on a sustained
basis going forward, our business operations and financial condition may be
materially and adversely affected by factors that we cannot foresee. Any of
these factors and other factors beyond our control could have an adverse effect
on the overall business environment, cause uncertainties in the regions where we
conduct business, cause our business to suffer in ways that we cannot predict
and materially and adversely impact our business, financial condition and
results of operations.
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Critical Accounting Policies and Estimates
The Company considers an accounting estimate to be critical if the accounting
estimate requires the Company to make assumptions that are difficult or
subjective about matters that were highly uncertain at the time that the
accounting estimate was made, and changes in the estimate that are reasonably
likely to occur in periods subsequent to the period in which the estimate was
made, or use of different estimates that the Company could have used in the
current period, would have a material impact on the Company's financial
condition or results of operations. The most critical accounting policies
inherent in the preparation of the Company's consolidated financial statements
are described below. We continue to monitor our accounting policies to ensure
proper application of current rules and regulations.
Oil and Natural Gas Properties - full cost ceiling calculation and depletion
Policy Description
We use the full cost method of accounting for our oil and natural gas properties
under which we are required to conduct quarterly calculations of a "ceiling," or
limitation, on the carrying value of oil and natural gas properties . The
ceiling limitation is the sum of 1) the discounted present value (at 10%), using
average first-day-of-the-month prices during the 12-month period ending as of
the balance sheet date held constant over the life of the reserves, of
Barnwell's estimated future net cash flows from estimated production of proved
oil and natural gas reserves, less estimated future expenditures to be incurred
in developing and producing the proved reserves but excluding future cash
outflows associated with settling asset retirement obligations with the
exception of those associated with proved undeveloped reserves from wells that
are to be drilled in the future; plus 2) the cost of major development projects
and unproven properties not subject to depletion, if any; plus 3) the lower of
cost or estimated fair value of unproven properties included in costs subject to
depletion; less 4) related income tax effects. If net capitalized costs exceed
this limit, the excess is expensed.
All items classified as unevaluated and unproved properties are assessed on a
quarterly basis for possible impairment or reduction in value. Properties are
assessed on an individual basis or as a group if properties are individually
insignificant. The assessment includes consideration of various factors,
including, but not limited to, the following: intent to drill; remaining lease
term; geological and geophysical evaluations; drilling results and activity;
assignment of proved reserves; and economic viability of development if proved
reserves are assigned. During any period in which these factors indicate an
impairment, the cumulative drilling costs incurred to date for such property and
all or a portion of the associated leasehold costs are transferred to the full
cost pool and become subject to amortization.
Judgments and Assumptions
The estimate of our oil and natural gas reserves is a major component of the
ceiling calculation and represents the component that requires the most
subjective judgments. Estimates of reserves are forecasts based on engineering
data, historical data, projected future rates of production and the timing of
future expenditures. The process of estimating oil and natural gas reserves
requires substantial judgment, resulting in imprecise determinations,
particularly for new discoveries. Our reserve estimates are prepared at least
annually by independent petroleum reserve engineers. The passage of time
provides more quantitative and qualitative information regarding estimates of
reserves, and revisions are made to prior estimates to reflect updated
information. A portion of the revisions are attributable to changes in the
rolling 12-month average first-day-of-the-month prices, which impact the
economics of producible reserves. In the last three fiscal years, annual
revisions to our reserve volume estimates have averaged
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44% of the previous year's estimate, due in large part to the impacts of
volatile oil and natural gas prices which change the economic viability of
producing such reserves and changes in estimated proved undeveloped reserves
which can fluctuate from year to year depending upon the Company's plans and
ability to fund the capital expenditures necessary to develop such reserves.
There can be no assurance that more significant revisions will not be necessary
in the future. If future significant revisions are necessary that reduce
previously estimated reserve quantities, such revisions could result in a
write-down of oil and natural gas properties.
If reported reserve volumes were revised downward by 5% at the end of fiscal
2022, the ceiling limitation would have decreased approximately $1,664,000
before income taxes, which would not have resulted in an increase in the ceiling
impairment before income taxes due to sufficient room between the ceiling and
the carrying value of oil and natural gas properties at the end of fiscal 2022
of approximately $20,064,000. The significant amount of room between the ceiling
and the carrying value of oil and natural gas properties at the end of fiscal
2022 was due primarily to the fact that the carrying value was significantly
reduced in prior years by impairment write-downs due to the extremely low
average historical prices that were used in the ceiling test for those prior
periods, whereas the prices used in the ceiling test at the end of fiscal 2022
reflects the significantly higher average historical prices used in that ceiling
test.
In addition to the impact of the estimates of proved reserves on the calculation
of the ceiling, estimated proved reserves are also a significant component of
the quarterly calculation of depletion expense. The lower the estimated
reserves, the higher the depletion rate per unit of production. Conversely, the
higher the estimated reserves, the lower the depletion rate per unit of
production. If reported reserve volumes were revised downward by 5% as of the
beginning of fiscal 2022, depletion for fiscal 2022 would have increased by
approximately $129,000.
While the quantities of proved reserves require substantial judgment, the
associated prices of oil, natural gas and natural gas liquids reserves are the
average first-day-of-the-month prices during the 12-month period ending in the
reporting period on a constant basis as prescribed by SEC regulations.
Additionally, the applicable discount rate that is used to calculate the
discounted present value of the reserves is mandated at 10%. Costs included in
future net revenues are determined in a similar manner. As such, the future net
revenues associated with the estimated proved reserves are not based on an
assessment of future prices or costs.
Contract Drilling Revenues and Operating Expenses
Policy Description
Through contracts which are normally less than twelve months in duration,
Barnwell drills water and water monitoring wells and installs and repairs water
pumping systems in Hawaii. Barnwell recognizes revenue from well drilling or the
installation of pumps over time based on total costs incurred on the projects
relative to the total expected costs to satisfy the performance obligation as
management believes this is an accurate representation of the percentage of
completion as control is continuously transferred to the customer. Uninstalled
materials, which typically consists of well casing or pumps, are excluded in the
costs-to-costs calculation for the duration of the contract as including these
costs would result in a distortion of progress towards satisfaction of the
performance obligation due to the resulting cumulative catch-up in margin in a
single period. An equal amount of cost and revenue is recorded when uninstalled
materials are controlled by the customer, which is typically when Barnwell has
the right to payment for the materials and when the materials are delivered to
the customer's site or location and such
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materials have been accepted by the customer. Uninstalled materials are held in
inventory and included in "Other current assets" on the Company's Consolidated
Balance Sheets until control is transferred to the customer. When the estimate
on a contract indicates a loss, Barnwell records the entire estimated loss in
the period the loss becomes known.
Unexpected significant inefficiencies that were not considered a risk at the
time of entering into the contract, such as design or construction execution
errors that result in significant wasted resources, are excluded from the
measure of progress toward completion and the costs are expensed as incurred.
To the extent a contract is deemed to have multiple performance obligations, the
Company allocates the transaction price of the contract to each performance
obligation using its best estimate of the standalone selling price of each
distinct good or service in the contract. The contract price may include
variable consideration, which includes such items as increases to the
transaction price for unapproved change orders and claims for which price has
not yet been agreed by the customer. The Company estimates variable
consideration using either the most likely amount or expected value method,
whichever is a more appropriate reflection of the amount to which it expects to
be entitled based on the characteristics and circumstances of the contract.
Variable consideration is included in the estimated transaction price to the
extent it is probable that a significant reversal of cumulative recognized
revenue will not occur.
Contracts are sometimes modified for a change in scope or other requirements.
The Company considers contract modifications to exist when the modification
either creates new or changes the existing enforceable rights and obligations.
Most of the Company's contract modifications are for goods and services that are
not distinct from the existing performance obligations. The effect of a contract
modification on the transaction price, and the measure of progress for the
performance obligation to which it relates, is recognized as an adjustment to
revenue (either as an increase or decrease) on a cumulative catchup basis.
Judgments and Assumptions
Management evaluates the performance of contracts on an individual basis. In the
ordinary course of business, but at least quarterly, we prepare updated
estimates that may impact the cost and profit or loss for each contract based on
actual results to date plus management's best estimate of costs to be incurred
to complete each performance obligation. Increases or decreases in the estimated
costs to complete a performance obligation without a change to the contract
price has the impact to decrease or increase, respectively, the contract
completion percentage applied to the contract price to calculate the cumulative
contract revenue to be recognized to date. Changes in the cost estimates can
have a material impact on our contract revenue and are reflected in the results
of operations when they become known. The nature of accounting for these
contracts is such that refinements of the estimated costs to complete may occur
and are characteristic of the estimation process due to changing conditions and
new developments. Many factors and assumptions can and do change during a
contract performance obligation period which can result in a change to contract
profitability including unforeseen underground geological conditions (to the
extent that contract remedies are unavailable), the availability and costs of
skilled contract labor, the performance of major material suppliers, the
performance of major subcontractors, unusual weather conditions and unexpected
changes in material costs, changes in the scope and nature of work to be
performed, and unexpected construction execution errors, among others. Any
revisions to estimated costs to complete the performance obligation from period
to period as a result of changes in these factors can materially affect revenue
and operating results in the period such revisions are necessary. In addition,
many contracts give the customer a unilateral right to cancel for convenience or
other than for cause. In accordance with FASB ASC 606-10-32-4, our estimates are
based on the assumption that the existing
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contract will not be cancelled. Any unforeseen cancellation of a contract may
result in a material revision to our estimates.
We have a long history of working with multiple types of projects and preparing
cost estimates, and we rely on the expertise of key personnel to prepare what we
believe are reasonable best estimates given available facts and circumstances.
Due to the nature of the work involved, however, judgment is involved to
estimate the costs to complete and the amounts estimated could have a material
impact on the revenue we recognize in each accounting period. We can not
estimate unforeseen events and circumstances which may result in actual results
being materially different from previous estimates.
Income Taxes
Policy Description
Income taxes are determined using the asset and liability method. Deferred tax
assets and liabilities are recognized for the estimated future tax impacts of
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Deferred income tax assets are routinely assessed for realizability. A valuation
allowance is provided when it is more likely than not that some portion or all
of the deferred tax asset will not be realized.
Barnwell recognizes the financial statement effects of tax positions when it is
more likely than not that the position will be sustained by a taxing authority.
Judgments and Assumptions
We make estimates and judgments in determining our income tax expense for each
reporting period. Significant changes to these estimates could result in an
increase or decrease in our tax provision in future periods. We are also
required to make judgments about the recoverability of deferred tax assets and
when it is more likely than not that all or a portion of deferred tax assets
will not be realized, a valuation allowance is provided. We consider available
positive and negative evidence and available tax planning strategies when
assessing the realizability of deferred tax assets. Accordingly, changes in our
business performance and unforeseen events could require a further increase in
the valuation allowance or a reversal in the valuation allowance in future
periods. This could result in a charge to, or an increase in, income in the
period such determination is made, and the impact of these changes could be
material.
In addition, Barnwell operates within the U.S. and Canada and is subject to
audit by taxing authorities in these jurisdictions. Barnwell records accruals
for the estimated outcomes of these audits, and the accruals may change in the
future due to new developments in each matter. Tax benefits are recognized when
we determine that it is more likely than not that such benefits will be
realized. Management evaluates its potential exposures from tax positions taken
that have or could be challenged by taxing authorities. These potential
exposures result because taxing authorities may take positions that differ from
those taken by management in the interpretation and application of statutes,
regulations and rules. Management considers the possibility of alternative
outcomes based upon past experience, previous actions by taxing authorities
(e.g., actions taken in other jurisdictions) and advice from tax experts. Where
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uncertainty exists due to the complexity of income tax statutes and where the
potential tax amounts are significant, we generally seek independent tax
opinions to support our positions. If our evaluation of the likelihood of the
realization of benefits is inaccurate, we could incur additional income tax and
interest expense that would adversely impact earnings, or we could receive tax
benefits greater than anticipated which would positively impact earnings, either
of which could be material.
Overview
Barnwell is engaged in the following lines of business: 1) acquiring,
developing, producing and selling oil and natural gas in Canada and Oklahoma
(oil and natural gas segment), 2) investing in land interests in Hawaii (land
investment segment), and 3) drilling wells and installing and repairing water
pumping systems in Hawaii (contract drilling segment).
Oil and Natural Gas Segment
Barnwell is involved in the acquisition and development of oil and natural gas
properties primarily in the Twining area of Alberta, Canada, where we initiate
and participate in acquisition 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. Additionally, through its wholly-owned subsidiary BOK,
Barnwell is indirectly involved in non-operated oil and natural gas investments
in Oklahoma.
Barnwell sells all of its Canadian oil and natural gas under short-term
contracts with marketers based on prices indexed to market prices. The price of
natural gas, oil and natural gas liquids is freely negotiated between the buyers
and sellers. Oil and natural gas prices are determined by many factors that are
outside of our control. Market prices for oil and natural gas products are
dependent upon factors such as, but not limited to, changes in market supply and
demand, which are impacted by overall economic activity, changes in weather,
pipeline capacity constraints, inventory storage levels, and output. Oil and
natural gas prices are very difficult to predict and fluctuate significantly.
Natural gas prices tend to be higher in the winter than in the summer due to
increased demand, although this trend has become less pronounced due to the
increased use of natural gas to generate electricity for air conditioning in the
summer and increased natural gas storage capacity in North America.
Oil and natural gas exploration, development and operating costs generally
follow trends in product market prices, thus in times of higher product prices
the cost of exploring, developing and operating the oil and natural gas
properties will tend to escalate as well. Capital expenditures are required to
fund the exploration, development, and production of oil and natural gas. Cash
outlays for capital expenditures are largely discretionary, however, a minimum
level of capital expenditures is required to replace depleting reserves. Due to
the nature of oil and natural gas exploration and development, significant
uncertainty exists as to the ultimate success of any drilling effort.
Land Investment Segment
Through Barnwell's 77.6% interest in Kaupulehu Developments, 75% interest in KD
Kona, and 34.45% non-controlling interest in KKM Makai, the Company's land
investment interests include the following:
•The right to receive percentage of sales payments from KD I resulting from the
sale of single-family residential lots by KD I, within Increment I of the
Kaupulehu Lot 4A area
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located in the North Kona District of the island of Hawaii. Kaupulehu
Developments is entitled to receive payments from KD I based on 10% of the gross
receipts from KD I's sales at Increment I. Increment I is an area zoned for
approximately 80 single-family lots, of which two remained to be sold at
September 30, 2022.
•The right to receive 15% of the distributions of KD II, the cost of which is to
be solely borne by KDK out of its 55% ownership interest in KD II, plus a
priority payout of 10% of KDK's cumulative net profits derived from Increment II
sales subsequent to Phase 2A, up to a maximum of $3,000,000. Such interests are
limited to distributions or net profits interests and Barnwell does not have any
partnership interest in KD II or KDK through its interest in Kaupulehu
Developments. Barnwell also has rights to three single-family residential lots
in Phase 2A of Increment II, and four single-family residential lots in phases
subsequent to Phase 2A when such lots are developed by KD II, all at no cost to
Barnwell. Barnwell is committed to commence construction of improvements within
90 days of the transfer of the four lots in the phases subsequent to Phase 2A as
a condition of the transfer of such lots. Also, in addition to Barnwell's
existing obligations to pay professional fees to certain parties based on
percentages of its gross receipts, Kaupulehu Developments is also obligated to
pay an amount equal to 0.72% and 0.20% of the cumulative net profits of KD II to
KD Development, LLC and a pool of various individuals, respectively, all of whom
are partners of KKM and are unrelated to Barnwell. The remaining acreage within
Increment II is not yet under development, and there is no assurance that
development of such acreage will in fact occur. No definitive development plans
have been made by the developer of Increment II as of the date of this report.
•An indirect 19.6% non-controlling ownership interest in KD Kukio Resorts, LLLP,
KD Maniniowali, LLLP and KD I and an indirect 10.8% non-controlling ownership
interest in KD II through KDK. These entities own certain real estate and
development rights interests in the Kukio, Maniniowali and Kaupulehu portions of
Kukio Resort, a private residential community on the Kona coast of the island of
Hawaii, as well as Kukio Resort's real estate sales office operations. KDK was
the developer of Kaupulehu Lot 4A Increments I and II. The partnerships derive
income from the sale of residential parcels, of which two remained to be sold at
September 30, 2022, as well as from commissions on real estate sales by the real
estate sales office and revenues resulting from the sale of private club
memberships.
•Approximately 1,000 acres of vacant leasehold land zoned conservation in the
Kaupulehu Lot 4C area, which currently has no development potential without both
a development agreement with the lessor and zoning reclassification.
Contract Drilling Segment
Barnwell drills water and water monitoring 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.
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Business Environment
Our operations are located in Canada and in the states of Hawaii and Oklahoma.
Accordingly, our business performance is directly affected by macroeconomic
conditions in those areas, as well as general economic conditions of the U.S.
domestic and world economies.
Oil and Natural Gas Segment
Barnwell realized an average price for oil of $86.73 per barrel during the year
ended September 30, 2022, an increase of 68% from $51.74 per barrel realized
during the prior year. Oil prices continue to be volatile over time and thus,
the Company is unable to reasonably predict future oil prices and the impacts
future oil prices will have on the Company.
Barnwell realized an average price for natural gas of $4.63 per Mcf during the
year ended September 30, 2022, an increase of 77% from $2.62 per Mcf realized
during the prior year.
Land Investment Segment
Future land investment payments and any future cash distributions from our
investment in the Kukio Resort Land Development Partnerships are dependent upon
the sale of the remaining two residential lots within Increment I by KD I and
potential future development or sale of the remaining portion of Increment II by
KD II of Kaupulehu Lot 4A. The amount and timing of future land investment
segment proceeds from percentage of sales payments and cash distributions from
the Kukio Resort Land Development Partnerships are highly uncertain and out of
our control, and there is no assurance with regards to the amounts of future
sales of residential lots within Increments I and II. No definitive development
plans have been made by the developer of Increment II as of the date of this
report.
Contract Drilling Segment
Demand for water well drilling and/or pump installation and repair services is
volatile and dependent upon land development activities within the state of
Hawaii. Management currently estimates that well drilling activity for fiscal
2023 is expected to be higher than fiscal 2022 based upon the number and value
of contracts in backlog and anticipated job starts and durations.
Results of Operations
Summary
Net earnings attributable to Barnwell for fiscal 2022 totaled $5,513,000, a
$740,000 decrease in operating results from net earnings of $6,253,000 in fiscal
2021. The following factors affected the results of operations for the current
fiscal year as compared to the prior fiscal year:
•In the prior year period, the Company recognized $4,472,000 in gains that did
not occur in fiscal 2022, which included a $2,341,000 gain from the termination
of the Company's Post-retirement Medical plan, $1,982,000 in gains from the
sales of assets, and a $149,000 gain on debt extinguishment;
•An $8,113,000 improvement in oil and natural gas segment operating results,
before income taxes, due primarily to a significant increase in oil and natural
gas prices in the current period
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as compared to the same period in the prior year and new production from wells
drilled in Oklahoma. Also contributing to the increase was a ceiling test
impairment of $630,000 in the prior year period, whereas there was no such
ceiling test impairment in the current year period;
•Equity in income from affiliates decreased $2,393,000 and land investment
segment operating results, before non-controlling interests' share of such
profits, decreased $532,000 due to the Kukio Resort Development Partnerships'
sale of six lots in the current year period, whereas there were eight lot sales
in the prior year period;
•General and administrative expenses increased $956,000 primarily due to
increases in professional fees in the current year period as compared to the
same period in the prior year, partially offset by a decrease in stockholder
costs in the prior year period as compared to the current year period; and
•A $484,000 foreign currency loss recorded in the current year period due to the
effects of foreign exchange rate changes on intercompany loans and advances as a
result of the strengthening of the U.S. dollar against the Canadian dollar.
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. Barnwell cannot accurately predict future fluctuations of the exchange
rates and the impact of such fluctuations may be material from period to period.
To date, we have not entered into foreign currency hedging transactions. Foreign
currency gains or losses on intercompany loans and advances that are not
considered long-term investments in nature because management intends to settle
these intercompany balances in the future are included in our statements of
operations.
The average exchange rate of the Canadian dollar to the U.S. dollar decreased 1%
in fiscal 2022, as compared to fiscal 2021, and the exchange rate of the
Canadian dollar to the U.S. dollar decreased 7% at September 30, 2022, as
compared to September 30, 2021. 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. Other comprehensive income and losses are not included in net earnings
and net loss. Other comprehensive loss due to foreign currency translation
adjustments, net of taxes, for fiscal 2022 was $40,000, a $243,000 change from
other comprehensive loss due to foreign currency translation adjustments, net of
taxes, of $283,000 in fiscal 2021. There were no taxes on other comprehensive
loss due to foreign currency translation adjustments in fiscal 2022 and 2021 due
to a full valuation allowance on the related deferred tax assets.
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Oil and natural gas
Selected Operating Statistics
The following tables set forth Barnwell's annual average prices per unit of
production and annual net production volumes for fiscal 2022 as compared to
fiscal 2021. Production amounts reported are net of royalties.
Annual Average Price Per Unit
Increase (Decrease)
2022 2021 $ %
Natural gas (Mcf)* $ 4.63 $ 2.62 $ 2.01 77%
Oil (Bbls) $ 86.73 $ 51.74 $ 34.99 68%
Natural gas liquids (Bbls) $ 48.06 $ 31.92 $ 16.14 51%
Annual Net Production
Increase (Decrease)
2022 2021 Units %
Natural gas (Mcf) 964,000 694,000 270,000 39%
Oil (Bbls) 182,000 147,000 35,000 24%
Natural gas liquids (Bbls) 48,000 24,000 24,000 100%
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* Natural gas price per unit is net of pipeline charges.
The oil and natural gas segment generated a $10,536,000 operating profit in
fiscal 2022 before general and administrative expenses, an increase in operating
results of $8,113,000 as compared to $2,423,000 of operating profit in fiscal
2021. There was no ceiling test impairment during the year ended September 30,
2022 and a $630,000 ceiling test impairment during the year ended September 30,
2021.
Our Oklahoma operations generated $2,667,000 (25%) of our oil and natural gas
segment operating profits for the year ended September 30, 2022 as compared to
$80,000 (3%) of our oil and natural gas segment operating profits for the year
ended September 30, 2021.
Oil and natural gas revenues increased $12,327,000 (120%) from $10,254,000 in
fiscal 2021 to $22,581,000 in fiscal 2022, primarily due to significant
increases in oil, natural gas and natural gas liquids prices as compared to the
same period in the prior year. Additionally, production increased due to new
wells drilled in the Twining area and Oklahoma, as well as due to additional
working interests acquired in the Twining area. The increase in net production
from Canadian areas was partially offset by an increase in royalty rates
attributed to the increase in commodity prices.
Oil and natural gas operating expenses increased $2,883,000 (44%) from
$6,556,000 in fiscal 2021 to $9,439,000 in fiscal 2022, primarily due to
production from the new wells drilled in the Twining area and Oklahoma, as well
as due to additional working interests acquired in the Twining area. The
increase was also partially attributable to workovers, repairs, higher utilities
and hauling costs, and restart costs for certain acquired wells, as well as to
the remediation of a minor pipeline leak.
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Oil and natural gas segment depletion increased $1,961,000 (304%) from
$645,000 in fiscal 2021 to $2,606,000 in fiscal 2022, primarily due to increases
in the depletion rate for Canadian properties and also new production from those
properties, both of which were the result of the drilling of new wells,
acquisition of additional working interests, and facilities expansion and
upgrade costs, all in the Twining area. The increase also was due to increased
depletion from production in Oklahoma, whereas there was only a minor amount of
such depletion in the prior year period.
All seven non-operated wells in Oklahoma were producing during the year ended
September 30, 2022. The Company's share of net production from these wells plus
another well with a minor overriding royalty interest totaled 42,000 barrels of
oil and natural gas liquids and 192,000 Mcf of natural gas for total revenues of
$3,496,000 during the year ended September 30, 2022. Our Oklahoma production is
from shale oil wells that typically have steep production declines and
accordingly, we estimate that their production will continue to decline
significantly.
Oil prices continue to be volatile over time and thus, the Company is unable to
reasonably predict future oil, natural gas and natural gas liquids prices and
the impacts future prices will have on the Company.
Sale of interest in leasehold land
Kaupulehu Developments is entitled to receive a percentage of the gross receipts
from the sales of lots and/or residential units in Increment I by KD I.
The following table summarizes the revenues received from KD I and the amount of
fees directly related to such revenues:
Year ended September 30,
2022 2021
Sale of interest in leasehold land:
Revenues - sale of interest in leasehold land $ 1,295,000 $ 1,738,000Fees - included in general and administrative expenses (158,000) (212,000)
Sale of interest in leasehold land, net of fees paid $ 1,137,000 $ 1,526,000
During the year ended September 30, 2022, Barnwell received $1,295,000 in
percentage of sales payments from KD I from the sale of six single-family lots
within Increment I. During the year ended September 30, 2021, Barnwell received
$1,738,000 in percentage of sales payments from KD I from the sale of eight
single-family lots within Increment I.
In November 2022, Kaupulehu Developments received a percentage of sales payment
of $265,000 from the sale of one lot within Increment I. Financial results from
the receipt of this payment will be reflected in Barnwell's first quarter of
fiscal 2023 ending December 31, 2022. Accordingly, with the inclusion of the lot
sale subsequent to September 30, 2022, one single-family lot of the 80 lots
developed within Increment I remained to be sold as of the date of this report.
The Company does not have a controlling interest in Increments I and II, and
there is no assurance with regards to the amounts of future sales from
Increments I and II, or that the remaining acreage within Increment II will be
developed. No definitive development plans have been made by the developer of
Increment II as of the date of this report.
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Contract drilling
Contract drilling revenues and costs are associated with well drilling and water
pump installation, replacement and repair in Hawaii.
Contract drilling revenues decreased $1,269,000 (22%) to $4,540,000 in fiscal
2022, as compared to $5,809,000 in fiscal 2021, and contract drilling costs
decreased $964,000 (17%) to $4,591,000 in fiscal 2022, as compared to $5,555,000
in fiscal 2021. The contract drilling segment generated a $222,000 operating
loss before general and administrative expenses during fiscal 2022, a decrease
in operating results of $133,000 as compared to an operating loss before general
and administrative expenses of $89,000 in fiscal 2021. The decrease in contract
drilling revenues, costs, and operating results for the year ended September 30,
2022 is due to decreased water well drilling activity in the current year period
as compared to the same period in the prior year, primarily due to a significant
well drilling contract in a portion of the prior year period, which was
essentially completed as of December 31, 2020 and thus, did not contribute to
operating results from that point forward.
At September 30, 2022, there was a backlog of seven well drilling and 14 pump
installation and repair contracts, of which four well drilling and 10 pump
installation and repair contracts were in progress as of September 30, 2022. The
backlog of contract drilling revenues as of December 1, 2022 was approximately
$11,200,000, of which $8,600,000 is expected to be realized in fiscal 2023 with
the remainder to be recognized in the following fiscal year. Based on these
contracts in backlog, contract drilling segment operating results are estimated
to be higher in fiscal 2023 as compared to fiscal 2022.
In the quarter ended December 31, 2021, it was determined that a contract
drilling segment well completed in the period did not meet the contract
specifications for plumbness under a gyroscopic plumbness test which the
contract required. While the well did pass the cage plumbness test, the contract
uses the gyroscopic test as the measure of plumbness. Barnwell and the customer
currently have an arrangement where Barnwell will provide for centralizers,
armored cabling and a pump installation and removal test to confirm that
plumbness is satisfactory. Barnwell's management believes the plumbness
deviation is not impactful to the performance of the submersible pumps that will
be installed in the well. Accordingly, while costs for the centralizers, armored
cabling and the pump installation and removal test have been accrued, no accrual
has been recorded as of September 30, 2022 for any further costs related to this
contract as there is no related probable or estimable contingent liability.
There has been a significant decrease in demand for water well drilling
contracts in recent years that has generally led to increased competition for
available contracts and lower margins on awarded contracts. The Company is
unable to predict the near-term and long-term availability of water well
drilling and pump installation and repair contracts as a result of this
volatility in demand. The continuing potential impact of COVID-19 on the health
of our contract drilling segment's crew is uncertain, and any work stoppage or
discontinuation of contracts currently in backlog due to COVID-19 impacts could
result in a material adverse impact to the Company's financial condition and
outlook.
General and administrative expenses
General and administrative expenses increased $956,000 (13%) to $8,044,000 in
fiscal 2022, as compared to $7,088,000 in fiscal 2021. The increase was
primarily due to increases of $1,245,000 in professional fees primarily related
to legal and consulting services and $65,000 in director fees in the current
year period as compared to the same period in the prior year, partially offset
by a reduction of $191,000 in pension and post-retirement medical plan costs and
$296,000 in stockholder costs related to
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the cooperation and support agreement executed with the MRMP Stockholders in the
prior year period as compared to the current year period.
Depletion, depreciation, and amortization
Depletion, depreciation, and amortization increased $1,815,000 (188%) from
$963,000 in fiscal 2021 to $2,778,000 in fiscal 2022, primarily due to increases
in the depletion rate for Canadian properties and also new production from those
properties, both of which were the result of the drilling of new wells,
acquisition of additional working interests, and facilities expansion and
upgrade costs, all in the Twining area. The increase was also due to increased
depletion from production in Oklahoma, whereas there was only a minor amount of
such depletion in the prior year period.
Impairment of assets
Under the full cost method of accounting, the Company performs quarterly oil and
natural gas ceiling test calculations. There was no ceiling test impairment
during the year ended September 30, 2022 and a $630,000 ceiling test impairment
during the year ended September 30, 2021.
Changes in the mandated 12-month historical 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 estimated market value of
unproved properties, impact the determination of the maximum carrying value of
oil and natural gas properties.
In September 2022, the Company determined that the right-of-use asset related to
the operating lease for the Lot 4C leasehold land zoned conservation held by
Kaupulehu Developments was fully impaired as of September 30, 2022. As a result,
the Company recognized an $89,000 right-of-use asset impairment expense during
the year ended September 30, 2022. The operating lease terminates in December
2025.
In September 2021, the Company designated a contract drilling segment drilling
rig and related ancillary equipment, with an aggregate net carrying value of
$725,000, as assets held for sale and recorded an impairment of $38,000 to
reduce the value of these assets to its fair value, less estimated selling
costs. The impairment expense was included in the "Impairment of assets" line
item in the accompanying Consolidated Statements of Operations for the year
ended September 30, 2021.
Foreign currency loss
Foreign currency loss was $484,000 during the year ended September 30, 2022, as
compared to none during the year ended September 30, 2021 due to the effects of
foreign exchange rate changes on intercompany loans and advances as a result of
the strengthening of the U.S. dollar against the Canadian dollar. The foreign
currency loss from intercompany balances was included in our consolidated net
earnings as the intercompany balances were not considered long-term in nature
because management estimates that these intercompany balances will be settled in
the future.
Gain on termination of Post-Retirement Medical plan
In June 2021, the Company terminated its Post-retirement Medical plan, which
covered officers of the Company who had attained at least 20 years of service of
which at least 10 years were at the position
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of Vice President or higher, their spouses and qualifying dependents, effective
June 4, 2021. The Post-retirement Medical plan was an unfunded plan and the
Company funded benefits when payments were made. As result of the plan
termination, the Company recognized a non-cash gain of $2,341,000 during the
year ended September 30, 2021.
Gain on sale of assets
In July 2021, Barnwell completed a purchase and sale agreement with an
independent third party and sold its interests in certain natural gas and oil
properties located in the Spirit River area of Alberta, Canada. The sales price
per the agreement was adjusted for customary purchase price adjustments to
$1,047,000 in order to, among other things, reflect an economic effective
closing date of sale of July 8, 2021. Income taxes were withheld by the buyers
from Barnwell's net proceeds for potential amounts due to the Canada Revenue
Agency related to the sale, and the amount was subsequently refunded to Barnwell
in fiscal 2022.
The difference in the relationship between capitalized costs and proved reserves
of the Spirit River properties sold, as compared to the properties retained by
Barnwell, was significant as there was a 93% difference in capitalized costs
divided by proved reserves if the gain was recorded versus the gain being
credited against the full-cost pool. Accordingly, Barnwell recorded a gain on
the sale of Spirit River of $818,000 in the year ended September 30, 2021 in
accordance with the guidance in Rule 4-10(c)(6)(i) of Regulation S-X of the
rules and regulations of the SEC, which requires an allocation of capitalized
costs to the reserves sold and reserves retained on the basis of the relative
fair values of the properties as there was a substantial economic difference
between the properties sold and those retained. Also included in the gain
calculation were asset retirement obligations of $77,000 assumed by the
purchaser.
In September 2021, the Company's Honolulu corporate office was sold for
approximately $1,864,000, net of related costs, resulting in a gain of
$1,164,000, which was recognized in the year ended September 30, 2021.
Equity in income of affiliates
Barnwell's investment in the Kukio Resort Land Development Partnerships is
accounted for using the equity method of accounting. Barnwell recognized equity
in income of affiliates of $3,400,000 for the year ended September 30, 2022, as
compared to equity in income of affiliates of $5,793,000 for the year ended
September 30, 2021. The decrease in partnership income is primarily due to the
Kukio Resort Land Development Partnerships' sale of eight lots during the prior
year period, as compared to six lot sales in the current year period, and
$459,000 in preferred return payments received from KKM in the prior year period
as compared to none in the current year period.
During the year ended September 30, 2022, Barnwell received cash distributions
of $3,400,000 from the Kukio Resort Land Development Partnership resulting in a
net amount of $3,028,000, after distributing $372,000 to non-controlling
interests. During the year ended September 30, 2021, Barnwell received net cash
distributions in the amount of $6,011,000 from the Kukio Resort Land Development
Partnerships after distributing $683,000 to non-controlling interests. Of the
$6,011,000 net cash distribution received from the Kukio Resort Land Development
Partnerships, $459,000 represented a payment of the preferred return from KKM,
as discussed in Note 3 of the Notes to Consolidated Financial Statements.
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In the quarter ended June 30, 2021, the Company received cumulative
distributions from the Kukio Resort Land Development Partnerships in excess of
our investment balance and in accordance with applicable accounting guidance,
the Company suspended its equity method earnings recognition and the Kukio
Resort Land Development Partnership investment balance was reduced to zero with
the distributions received in excess of our investment balance recorded as
equity in income of affiliates because the distributions are not refundable by
agreement or by law and the Company is not liable for the obligations of or
otherwise committed to provide financial support to the Kukio Resort Land
Development Partnerships. The Company will record future equity method earnings
only after our share of the Kukio Resort Land Development Partnership's
cumulative earnings in excess of distributions during the suspended period
exceeds our share of the Kukio Resort Land Development Partnership's income
recognized for the excess distributions, and during this suspended period any
distributions received will be recorded as equity in income of affiliates.
Accordingly, the amount of equity in income of affiliates recognized in the year
ended September 30, 2022 was equivalent to the $3,400,000 of distributions
received in that period.
Cumulative distributions received from the Kukio Resort Land Development
Partnerships in excess of our investment balance was $958,000 at September 30,
2022 and $654,000 at September 30, 2021.
In November 2022, Barnwell received a net cash distribution in the amount of
$478,000 from the Kukio Resort Land Development Partnerships. Financial results
from this distribution will be reflected in Barnwell's first quarter of fiscal
2023 ending December 31, 2022.
Additionally, in November 2022, Kaupulehu Developments received a percentage of
sales payment of $265,000 from the sale of one lot within Increment I. Financial
results from the receipt of this payment will be reflected in Barnwell's first
quarter of fiscal 2023 ending December 31, 2022. Accordingly, with the inclusion
of the lot sale subsequent to September 30, 2022, one single-family lot of the
80 lots developed within Increment I remained to be sold as of the date of this
report. The Company does not have a controlling interest in Increments I and II,
and there is no assurance with regards to the amounts of future sales from
Increments I and II, or that the remaining acreage within Increment II will be
developed. No definitive development plans have been made by the developer of
Increment II as of the date of this report.
Income taxes
The components of earnings before income taxes, after adjusting the earnings for
non-controlling interests, are as follows:
Year ended September 30,
2022 2021
United States $ 739,000 $ 5,436,000
Canada 5,121,000 1,149,000
$ 5,860,000 $ 6,585,000Barnwell's effective consolidated income tax rate for fiscal 2022, after
adjusting earnings before income taxes for non-controlling interests, was 6% as
compared to 5% for fiscal 2021.
Consolidated taxes do not bear a customary relationship to pretax results due
primarily to the fact that the Company is taxed separately in Canada based on
Canadian source operations and in the U.S.
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based on consolidated operations, and essentially all deferred tax assets, net
of relevant offsetting deferred tax liabilities, are not estimated to have a
future benefit as tax credits or deductions. Income from our non-controlling
interest in the Kukio Resort Land Development Partnerships is treated as
non-unitary for state of Hawaii unitary filing purposes, thus unitary Hawaii
losses provide limited sheltering of such non-unitary income. Income from our
investment in the Oklahoma oil venture is 100% allocable to Oklahoma, and
therefore, receives no benefit from consolidated or unitary losses and,
therefore, is subject to Oklahoma state taxes.
In addition, net operating loss carryforwards, all of which had a full valuation
allowance at the end of the previous fiscal year, are being partially utilized
in the current year to offset taxable income in the U.S. federal and Canadian
jurisdictions. The net operating loss carryforwards beyond the current year's
utilization continue to have a full valuation allowance as realization of their
benefit is not more likely than not.
Included in the current income tax provision for the year ended September 30,
2022 is a $62,000 expense for income tax penalties and interest thereon for the
non-filing of IRS Form 8858 in each of our U.S. federal income tax returns for
fiscal years 2019, 2020 and 2021. The Company is in the process of amending its
U.S. federal tax returns to include Form 8858 and plans to request abatement of
the potential penalties and interest. There was no such expense included in the
current income tax provision for the year ended September 30, 2021.
On June 28, 2019, the Government of Alberta reduced its corporate income tax
rate from 12% to 11%, effective July 1, 2019, with further reductions in the
rate by 1% on January 1 of every year until it reaches 8% on January 1, 2022. On
June 29, 2020, the Government of Alberta introduced Alberta's Recovery Plan
which will, among other things, reduce Alberta's general corporate income tax
rate to 8% (from 10%) effective July 1, 2020. This reduction was enacted in the
quarter ended December 31, 2020. Canadian deferred tax assets and liabilities
have been measured using the enacted tax rates in effect for the year in which
the differences are expected to reverse. Alberta rate changes had no significant
impact to earnings/loss as a result of a full valuation allowance being applied
to Canadian deferred tax assets.
Net earnings 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 controlling interests and
consolidates.
Net earnings attributable to non-controlling interests totaled $659,000 in
fiscal 2022, as compared to net earnings attributable to non-controlling
interests of $950,000 in fiscal 2021. The $291,000 (31%) decrease is primarily
due to decreases in the amount of equity in income of affiliates and percentage
of sales revenue received in the current year period as compared to the same
period in the prior year.
Inflation
The effect of inflation on Barnwell has generally been to increase its cost of
operations, general and administrative costs and direct costs associated with
oil and natural gas production and contract drilling operations. Oil and natural
gas prices realized by Barnwell are essentially determined by world prices for
oil and western Canadian/Midwestern U.S. prices for natural gas.
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Impact of Recently Issued Accounting Standards on Future Filings
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No.
2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments," which replaces the incurred loss model
with an expected loss model referred to as the current expected credit loss
("CECL") model. The CECL model is applicable to the measurement of credit losses
on financial assets measured at amortized cost, including but not limited to
trade receivables. This ASU is effective for annual reporting periods beginning
after December 15, 2022, and interim periods within those annual periods. The
FASB has subsequently issued other related ASUs which amend ASU 2016-13 to
provide clarification and additional guidance. The Company is currently
evaluating the impact of these standards.
Liquidity and Capital Resources
Barnwell's primary sources of liquidity are cash on hand, cash flow generated by
operations, and land investment segment proceeds. Prior to the suspension of the
at-the-market offering program ("ATM") in August 2022, the Company received
$2,356,000 in net proceeds from the shares of common stock sold under the ATM in
fiscal 2022. At September 30, 2022, Barnwell had $11,170,000 in working capital.
Cash Flows
Cash flows provided by operating activities totaled $7,291,000 for fiscal 2022,
as compared to cash flows provided by operating activities of $831,000 for the
same period in fiscal 2021. This $6,460,000 change in operating cash flows was
primarily due to significantly higher operating results for the oil and natural
gas segment, which was partially offset by lower operating results for the
contract drilling segment and a decrease in distributions from the Kukio Resort
Land Development Partnerships in the current year period as compared to the
prior year period. The change was also due to fluctuations in working capital.
Cash flows used in investing activities totaled $7,112,000 for fiscal 2022, as
compared to cash flows provided by investing activities of $3,686,000 for fiscal
2021. This $10,798,000 change in investing cash flows was primarily due to an
increase of $1,215,000 in payments to acquire oil and natural gas properties, an
increase of $7,084,000 in cash paid for oil and natural gas capital
expenditures, a decrease of $1,419,000 received in distributions from equity
investees in excess of earnings, and a net decrease of $1,177,000 in proceeds
from the sale of assets in the current year period as compared to same period in
the prior year.
Cash flows provided by financing activities totaled $1,560,000 for fiscal 2022,
as compared to cash flows provided by financing activities of $2,192,000 for
fiscal 2021. The $632,000 change in financing cash flows was primarily
attributed to a decrease of $823,000 in proceeds from issuance of stock, net of
costs, related to the Company's ATM offering, a $149,000 increase in dividend
payments, and a decrease of $387,000 in distributions to non-controlling
interests in the current year period as compared to the same period in the prior
year.
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Cash Dividend
In August 2022, the Company's Board of Directors declared a cash dividend of
$0.015 per share that was paid on September 6, 2022 to stockholders of record on
August 23, 2022.
Canada Emergency Business Account Loan
In the quarter ended December 31, 2020, the Company's Canadian subsidiary,
Barnwell of Canada, received a loan of CAD$40,000 (in Canadian dollars) under
the Canada Emergency Business Account ("CEBA") loan program for small
businesses. In the quarter ended March 31, 2021, the Company applied for an
increase to our CEBA loan and received an additional CAD$20,000 for a total loan
amount received of CAD$60,000 ($44,000) under the program. In January 2022, the
Canadian government announced the extension of the CEBA loan repayment deadline
and interest-free period from December 31, 2022 to December 31, 2023.
Accordingly, the CEBA loan is interest-free with no principal payments required
until December 31, 2023, after which the remaining loan balance is converted to
a two year term loan at 5% annual interest paid monthly. If the Company repays
66.7% of the principal amount prior to December 31, 2023, there will be loan
forgiveness of 33.3% up to a maximum of CAD$20,000.
Paycheck Protection Program Loan
In April 2020, the Company, as obligor, entered into a promissory note
evidencing an unsecured loan in the approximate amount of $147,000 under the
Paycheck Protection Program ("PPP") pursuant to the Coronavirus Aid, Relief, and
Economic Security Act. The note was to mature two years after the date of the
loan disbursement with interest at a fixed annual rate of 1.00% and with the
principal and interest payments deferred until ten months after the last day of
the covered period. In April 2021, the Company was notified by the lender of our
PPP loan that the entire PPP loan amount and related accrued interest was
forgiven by the Small Business Administration. As a result of the loan
forgiveness, the Company recognized a gain on debt extinguishment of $149,000
during the year ended September 30, 2021.
At The Market Offering
On March 16, 2021, the Company entered into a Sales Agreement (the "Sales
Agreement") with A.G.P./Alliance Global Partners ("A.G.P,"), with respect to the
ATM pursuant to which the Company may offer and sell, from time to time, shares
of its common stock, par value $0.50 per share, having an aggregate sales price
of up to $25 million (subject to certain limitations set forth in the Sales
Agreement and applicable securities laws, rules and regulations), through or to
A.G.P as the Company's sales agent or as principal. Sales of our common stock
under the ATM, if any, will be made by any methods deemed to be "at the market
offerings" as defined in Rule 415(a)(4) under the Securities Act, including
sales made directly on the NYSE American, on any other existing trading market
for our Common Stock, or to or through a market maker. Shares of common stock
sold under the ATM are offered pursuant to the Company's Registration Statement
on Form S-3 (File No. 333-254365), filed with the Securities and Exchange
Commission on March 16, 2021, and declared effective on March 26, 2021 (the
"Registration Statement"), and the prospectus dated March 26, 2021, included in
the Registration Statement.
During the year ended September 30, 2022, the Company sold 509,467 shares of
common stock resulting in net proceeds of $2,356,000 after commissions and fees
of $75,000 and ATM-related professional services of $22,000. During the year
ended September 30, 2021, the Company sold 1,167,987 shares of common stock
resulting in net proceeds of $3,179,000 after commissions and fees of $123,000
and ATM-related professional services of $605,000.
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As of September 30, 2022, the Company has received $5,535,000 in cumulative net
proceeds from the shares sold under the ATM program. In August 2022, the
Company's Board of Directors suspended the sales of our common stock under the
ATM until further notice.
Oil and Natural Gas Capital Expenditures
Barnwell's oil and natural gas capital expenditures, including accrued capital
expenditures and acquisitions of oil and natural gas properties and excluding
additions and revisions to estimated asset retirement obligations, increased
$8,835,000 from $2,217,000 in fiscal 2021 to $11,052,000 in fiscal 2022.
The Company participated in the drilling of six gross (1.7 net) non-operated
wells in the Twining area during the year ended September 30, 2022. Capital
expenditures incurred by the Company for these non-operated wells totaled
$4,366,000 for the year ended September 30, 2022. Five gross (1.4 net) wells
were producing at September 30, 2022 and the remaining one gross (0.3 net) well
is awaiting tie in and is expected to produce in fiscal 2023. The Company
drilled one gross (1.0 net) operated well in the Twining area which was
producing at September 30, 2022. Capital expenditures incurred by the Company
for this operated well was $2,852,000. The Company did not drill or participate
in the drilling of wells in Canada during the year ended September 30, 2021.
The Company did not drill or participate in the drilling of wells in Oklahoma
during the year ended September 30, 2022. In fiscal 2021, the Company
participated in the drilling of seven gross (0.2 net) non-operated wells in
Oklahoma. Capital expenditures incurred by the Company for these Oklahoma wells
totaled $1,178,000 for the year ended September 30, 2021.
Oil and Natural Gas Property Acquisitions and Dispositions
Acquisitions
In the quarter ended December 31, 2021, Barnwell acquired working interests in
oil and natural gas properties located in the Twining area of Alberta, Canada,
for cash consideration of $317,000.
In January 2022, Barnwell acquired additional working interests in oil and
natural gas properties located in the Twining area of Alberta, Canada for
consideration of $1,246,000. The purchase price per the agreement was adjusted
for customary purchase price adjustments to reflect the economic activity from
the effective date to the closing date. The final determination of the customary
adjustments to the purchase price has not yet been made, however, it is not
expected to result in a material adjustment. Barnwell also assumed $1,500,000 in
asset retirement obligations associated with the acquisition.
In April 2021, Barnwell acquired additional working interests in oil and natural
gas properties located in the Twining area of Alberta, Canada for cash
consideration of $348,000. The purchase price per the agreement was adjusted for
customary purchase price adjustments to reflect the economic activity from the
effective date to the closing date.
Dispositions
There were no significant oil and natural gas property dispositions during the
year ended September 30, 2022. The $503,000 of proceeds from sale of oil and
natural gas properties included in the Consolidated Statement of Cash Flows for
the year ended September 30, 2022 primarily represents the
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refund of income taxes previously withheld from what otherwise would have been
proceeds on prior year's oil and natural gas property sales.
In April 2021, Barnwell entered into a purchase and sale agreement with an
independent third party and sold its interests in properties located in the
Hillsdown area of Alberta, Canada. The sales price per the agreement was
adjusted for customary purchase price adjustments to $132,000 in order to, among
other things, reflect an economic effective date of October 1, 2020. $72,000 of
the sales proceeds was withheld by the buyers for potential amounts due for
Barnwell's Canadian income taxes related to the sale. The proceeds were credited
to the full cost pool, with no gain or loss recognized, as the sale did not
result in a significant alteration of the relationship between capitalized costs
and proved reserves.
In July 2021, Barnwell completed a purchase and sale agreement with an
independent third party and sold its interests in certain natural gas and oil
properties located in the Spirit River area of Alberta, Canada. The sales price
per the agreement was adjusted for customary purchase price adjustments to
$1,047,000 in order to, among other things, reflect an economic effective
closing date of sale of July 8, 2021. Income taxes were withheld by the buyers
from Barnwell's net proceeds for potential amounts due to the Canada Revenue
Agency related to the sale, and the amount was subsequently refunded to Barnwell
in fiscal 2022.
The difference in the relationship between capitalized costs and proved reserves
of the Spirit River properties sold, as compared to the properties retained by
Barnwell, was significant as there was a 93% difference in capitalized costs
divided by proved reserves if the gain was recorded versus the gain being
credited against the full-cost pool. Accordingly, Barnwell recorded a gain on
the sale of Spirit River of $818,000 in the year ended September 30, 2021 in
accordance with the guidance in Rule 4-10(c)(6)(i) of Regulation S-X of the
rules and regulations of the SEC, which requires an allocation of capitalized
costs to the reserves sold and reserves retained on the basis of the relative
fair values of the properties as there was a substantial economic difference
between the properties sold and those retained. Also included in the gain
calculation were asset retirement obligations of $77,000 assumed by the
purchaser.
Asset Retirement Obligation
In September 2019, the AER issued an abandonment/closure order for all wells and
facilities in the Manyberries area which had been largely operated by LGX, an
operating company that went into receivership in 2016. The estimated asset
retirement obligation for the Company's interest in the wells and facilities in
the Manyberries area is included in "Asset retirement obligation" in the
Consolidated Balance Sheets.
Recently, the OWA created a WIP program for specific areas where there are a
significant number of orphaned wells to abandon. The OWA has the ability and
expertise to abandon wells using its internal resources and network of service
providers resulting in efficiencies that companies such as Barnwell, would not
be able to obtain on its own. Under the WIP program, the Company would be
required to provide payment for only Barnwell's working interest share, however,
all WIP's would have to participate in the program for the OWA to begin its
work. In March 2021, the Company was notified by the OWA that Barnwell's
Manyberries wells were confirmed to be in the WIP program.
Under the new agreement with the OWA, the Company is required to pay the
abandonment and reclamation costs in advance through a cash deposit. The total
cash deposit amount was calculated to be approximately $1,525,000 and the
Company paid $888,000 of the total deposit in July and August 2021 and will need
to pay the remaining balance of $637,000 by August 2023. The Company revised its
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Manyberries ARO liability based on the OWA's revised abandonment and reclamation
estimates, which resulted in an increase of approximately $213,000 in the year
ended September 30, 2021. The increase in the ARO liability was a result of
higher reclamation and remediation costs than anticipated, partially offset by
lower abandonment estimates. Based on a review of the details of the cash
deposit calculation provided by the OWA, which includes amounts added for
possible contingencies, the Company believes the required cash deposit amount by
the OWA is higher than the actual costs of the asset retirement obligation for
the Manyberries wells and that any excess of the deposit over actual asset
retirement costs for the first phase of the work would be credited toward the
second phase of the work. A remaining excess deposit, if any, would ultimately
be refunded to the Company upon completion of all of the work. As of September
30, 2022, the Company recognized a cumulative reduction in the deposit balance
of $113,000 for work performed under this program.
Contractual Obligations
Disclosure is not required as Barnwell qualifies as a smaller reporting company.
Contingencies
For a detailed discussion of contingencies, see Note 17 in the "Notes to
Consolidated Financial Statements" in Item 8 of this report.
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BARNWELL INDUSTRIES, INC. 
