10-K: Barnwell Industries Reports Fiscal 2024 Results, Navigates Market Volatility

Barnwell Industries experienced a widened net loss in fiscal year 2024, primarily due to decreased oil and gas prices and a non-cash ceiling test impairment, despite increased production in some areas.

Summary

• Barnwell Industries reported a net loss of $5.565 million for fiscal year 2024, a significant increase from the $961,000 loss in the previous year.
• The oil and natural gas segment saw a $4.958 million decrease in operating results, impacted by a $2.885 million non-cash ceiling test impairment and lower commodity prices.
• Contract drilling segment operating results decreased by $599,000 due to reduced activity and increased costs.
• The company's land investment segment saw revenue from the sale of leasehold land decrease to $500,000 from $265,000 in the prior year.
• General and administrative expenses decreased by $1.358 million, primarily due to lower stockholder costs and professional fees.
• Total net proved reserves increased by 80,000 Boe (3%), with oil and natural gas liquids increasing and natural gas decreasing.
• The company invested $4.805 million in oil and natural gas properties during fiscal 2024, primarily in the Twining area.
• One gross (1.0 net) operated development oil well was drilled in the Twining area, producing an average of 107 Boe per day in its first two months.
• The company sold certain oil and gas properties in Canada for $441,000 and $292,000, and conveyed other properties retaining a 4% overriding royalty.
• The contract drilling segment has a backlog of $1.1 million as of December 1, 2024, expected to be recognized in fiscal 2025.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with significant challenges in profitability and operational performance, offset by some positive developments in reserves and cost management. The overall tone is cautious, reflecting the company's need to navigate market volatility and strategic decisions.

Positives

• Total net proved reserves increased by 3%, indicating potential for future production.
• The new well in the Twining area is showing promising initial production rates.
• General and administrative expenses decreased by 20%, improving cost management.
• The company has identified a number of additional optimization projects for fiscal 2025 that should further improve well performance and reduce operating costs.
• Additional oil export pipeline capacity was made available in Canada which greatly reduced the differential between Canadian oil prices and WTI.

Negatives

• The company experienced a significant increase in net loss compared to the previous year.
• The oil and gas segment was negatively impacted by a substantial non-cash ceiling test impairment.
• Oil and natural gas revenues decreased due to lower commodity prices.
• Contract drilling revenues decreased significantly, and the segment reported an operating loss.
• The company terminated a stock purchase agreement for the sale of Water Resources.
• The company is considering winding down the contract drilling segment if a sale cannot be secured.

Risks

• The company's future performance is highly dependent on volatile oil and natural gas prices.
• The company faces risks related to drilling, including the possibility of unproductive wells.
• The company is subject to environmental regulations and may incur material costs for compliance.
• The company's land investment segment is dependent on the uncertain development plans of KD II.
• The company's contract drilling segment is subject to volatile demand and intense competition.
• The company is subject to the provisions of the Alberta Energy Regulators (AER) Licensee Life-Cycle Management Program via a Licensee Capability Assessment (LCA).
• The company is not fully insured against certain environmental risks.
• The company may fail to fully identify potential problems related to acquired reserves or to properly estimate those reserves.
• The company may be required to take write-downs of the carrying values of our oil and natural gas properties if oil and natural gas prices decline and remain low.
• The company is not the operator and has limited influence over the operations of certain of our oil and natural gas properties.
• The company may experience challenges from the impacts of international and domestic legislation, regulation, or other government actions relating to GHG emissions (e.g., carbon dioxide and methane) and climate change.

Future Outlook

The company plans to continue developing the Twining pool with more horizontal wells if commodity prices support their profitability. The company is also investigating strategies regarding Water Resources' future, including a potential sale or wind down. The company has identified a number of additional optimization projects for fiscal 2025 that should further improve well performance and reduce operating costs.

Management Comments

• The oil wells operated by the Company largely have less than 15% per year decline rates, and due to these lower decline rates, require less capital investment to replace decline.
• Barnwell plans to continue to develop the pool with more horizontal wells if commodity prices continue to support their profitability.
• Barnwell will continue to opportunistically divest our remaining legacy Canadian assets and minimal capital is expected to be invested in these properties.
• The Company continues to investigate strategies regarding Water Resources' future including, but not limited to, other potential opportunities for a sale of its stock or assets.
• If no sale of its stock or assets along with contract backlog can be secured, Water Resources will likely be wound down after all contracts in backlog are completed and any remaining drilling rigs and equipment will be liquidated.

Industry Context

The report reflects the challenges faced by oil and gas companies due to fluctuating commodity prices and the need for strategic asset management. The company's focus on the Twining area and potential divestment of legacy assets aligns with industry trends of optimizing portfolios and focusing on core assets. The company's contract drilling segment is facing challenges due to decreased activity and increased costs, which is a common issue in the cyclical nature of the drilling industry.

Comparison to Industry Standards

• Barnwell's production decline rates of less than 15% per year in the Twining field are favorable compared to industry averages, which can range from 20% to 40% for conventional wells.
• The company's focus on horizontal drilling and multi-stage sand fracs is consistent with modern industry practices for maximizing production from unconventional reservoirs.
• The company's weighted-average royalty rate paid on all of Barnwell's Canadian natural gas was 6%, and the weighted-average royalty rate paid on oil was 21%. These rates are within the typical range for Alberta.
• The company's weighted-average royalty rate paid on all of Oklahomas and Texass production was 23% and 26%, respectively. These rates are within the typical range for Oklahoma and Texas.
• The company's LCA assessment under the Alberta Energy Regulator program is currently favorable with Tier 1 or Tier 2 overall rankings in the six factor groups. This is a positive result compared to other operators who may be assessed at Tier 3.
• The company's mandatory annual minimum expenditures towards outstanding decommissioning and reclamation obligations in accordance with AER targets which are adjusted by the AER on an annual basis. The target for calendar 2025 is 6.2% of an individual company's inactive liability. This amount for Barnwell is approximately $244,000. This is a typical requirement for oil and gas operators in Alberta.

Related Party Transactions

• Kaupulehu Developments is entitled to receive payments from the sales of lots and/or residential units by KD I and KD II, which are part of the Kukio Resort Land Development Partnerships in which Barnwell holds indirect non-controlling ownership interests.
• In May 2023, the Company issued a total of 34,091 shares of Barnwell common stock to certain independent directors for their services on behalf of the Company and the Board of Directors pertaining to the negotiations of the Cooperation Agreement and the settlement of the potential proxy contest.

Stakeholder Impact

• Shareholders may be concerned about the increased net loss and the potential for further impairments.
• Employees in the contract drilling segment may face uncertainty due to the potential wind down of the business.
• Customers of the contract drilling segment may be affected by the potential wind down of the business.
• Suppliers may be affected by the potential wind down of the contract drilling segment.
• Creditors may be concerned about the company's increased net loss and the potential for further impairments.

Next Steps

• The company plans to continue developing the Twining pool with more horizontal wells if commodity prices support their profitability.
• The company will continue to opportunistically divest remaining legacy Canadian assets.
• The company will continue to investigate strategies regarding Water Resources' future, including a potential sale or wind down.
• The company has identified a number of additional optimization projects for fiscal 2025 that should further improve well performance and reduce operating costs.

Key Dates

Keywords

oil and gas, reserves, production, drilling, contract drilling, land investment, financial results, impairment, commodity prices, Alberta, Hawaii