Barnwell Industries Inc 10-Q for FY2023 Q1
Barnwell Industries Inc (BRN)
10-Q
2023-02-13
For: 2022-12-31
View Original
Added on
April 09, 2026
About this 10-Q
Barnwell Industries Inc filed this 10-Q on February 13, 2023, covering the quarter ended December 31, 2022 (FY2023 Q1).
Headline figures
Quarter ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.51M
- up 37.7% from $5.45M a year earlier
- Net income
- $1.09M
- up 1.5% from net income of $1.07M a year earlier
- Diluted EPS
- $0.11
- unchanged from $0.11 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended December 31, 2022
or
Commission File Number 1-5103
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip code) | |||||||
( | ||||||||
| (Registrant’s telephone number, including area code) | ||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| | ||||||||
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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||||||||
| ☒ | Smaller reporting company | ||||||||||||||||
| Emerging growth company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of February 3, 2022 there were 9,956,687 shares of common stock, par value $0.50, outstanding.
BARNWELL INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| December 31, 2022 | September 30, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts and other receivables, net of allowance for doubtful accounts of: $ | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Asset for retirement benefits | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Property and equipment: | |||||||||||
| Oil and natural gas properties, full cost method of accounting: | |||||||||||
| Proved properties | |||||||||||
| Advances to operators for capital expenditures | |||||||||||
| Unproved properties | |||||||||||
| Drilling rigs and other property and equipment | |||||||||||
| Total property and equipment | |||||||||||
| Accumulated depletion, depreciation, and amortization | ( | ( | |||||||||
| Total property and equipment, net | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued capital expenditures | |||||||||||
| Accrued compensation | |||||||||||
| Accrued operating and other expenses | |||||||||||
| Current portion of asset retirement obligation | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Operating lease liabilities | |||||||||||
| Liability for retirement benefits | |||||||||||
| Asset retirement obligation | |||||||||||
| Deferred income tax liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Equity: | |||||||||||
Common stock, par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income, net | |||||||||||
Treasury stock, at cost: | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Non-controlling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements
3
BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenues: | |||||||||||
| Oil and natural gas | $ | $ | |||||||||
| Contract drilling | |||||||||||
| Sale of interest in leasehold land | |||||||||||
| Gas processing and other | |||||||||||
| Costs and expenses: | |||||||||||
| Oil and natural gas operating | |||||||||||
| Contract drilling operating | |||||||||||
| General and administrative | |||||||||||
| Depletion, depreciation, and amortization | |||||||||||
| Foreign currency gain | ( | ||||||||||
| Gain on sale of assets | ( | ||||||||||
| Earnings before equity in income of affiliates and income taxes | |||||||||||
| Equity in income of affiliates | |||||||||||
| Earnings before income taxes | |||||||||||
| Income tax provision | |||||||||||
| Net earnings | |||||||||||
| Less: Net earnings attributable to non-controlling interests | |||||||||||
| Net earnings attributable to Barnwell Industries, Inc. | $ | $ | |||||||||
| Basic and diluted net earnings per common share attributable to Barnwell Industries, Inc. stockholders | $ | $ | |||||||||
| Weighted-average number of common shares outstanding: | |||||||||||
| Basic and diluted | |||||||||||
See Notes to Condensed Consolidated Financial Statements
4
BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three months ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net earnings | $ | $ | |||||||||
| Other comprehensive (loss) income: | |||||||||||
Foreign currency translation adjustments, net of taxes of $ | ( | ||||||||||
| Retirement plans: | |||||||||||
Amortization of accumulated other comprehensive gain into net periodic benefit cost, net of taxes of $ | ( | ||||||||||
| Total other comprehensive loss | ( | ( | |||||||||
| Total comprehensive income | |||||||||||
| Less: Comprehensive income attributable to non-controlling interests | ( | ( | |||||||||
| Comprehensive income attributable to Barnwell Industries, Inc. | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements
5
BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Three months ended December 31, 2022 and 2021
(Unaudited)
| Shares Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock | Non-controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of taxes of $ | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of taxes of $ | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Dividends declared, $ | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Retirement plans: | |||||||||||||||||||||||||||||||||||||||||||||||
Amortization of accumulated other comprehensive gain into net periodic benefit cost, net of taxes of $ | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
6
BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to net cash | |||||||||||
| provided by operating activities: | |||||||||||
| Equity in income of affiliates | ( | ( | |||||||||
| Depletion, depreciation, and amortization | |||||||||||
| Gain on sale of assets | ( | ||||||||||
| Sale of interest in leasehold land, net of fees paid | ( | ( | |||||||||
| Distributions of income from equity investees | |||||||||||
| Retirement benefits income | ( | ( | |||||||||
| Accretion of asset retirement obligation | |||||||||||
| Non-cash rent income | ( | ( | |||||||||
| Deferred income tax (benefit) expense | ( | ||||||||||
| Asset retirement obligation payments | ( | ( | |||||||||
| Share-based compensation expense | |||||||||||
| Common stock issued for services | |||||||||||
| Retirement plan contributions and payments | ( | ||||||||||
| Bad debt expense | |||||||||||
| Foreign currency gain | ( | ||||||||||
| Decrease from changes in current assets and liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Distribution from equity investees in excess of earnings | |||||||||||
| Proceeds from sale of interest in leasehold land, net of fees paid | |||||||||||
| Proceeds from the sale of contract drilling assets | |||||||||||
| Payments to acquire oil and natural gas properties | ( | ||||||||||
| Capital expenditures - oil and natural gas | ( | ( | |||||||||
| Capital expenditures - all other | ( | ( | |||||||||
| Advances to operators for capital expenditures | ( | ||||||||||
| Net cash (used in) provided by investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Distributions to non-controlling interests | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | |||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements
7
BARNWELL INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Barnwell Industries, Inc. and all majority-owned subsidiaries (collectively referred to herein as “Barnwell,” “we,” “our,” “us,” or the “Company”), including a 77.6 %-owned land investment general partnership (Kaupulehu Developments), a 75 %-owned land investment partnership (KD Kona 2013 LLLP), and a variable interest entity (Teton Barnwell Fund I, LLC) for which the Company is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated.
Undivided interests in oil and natural gas exploration and production joint ventures are consolidated on a proportionate basis. Barnwell’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in variable interest entities in which the Company is not deemed to be the primary beneficiary are accounted for by 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, 2022 Annual Report on Form 10-K, as amended by our Form 10-K/A Amendment No. 1 (our “2022 Annual Report”). The Condensed Consolidated Balance Sheet as of September 30, 2022 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, 2022, results of operations, comprehensive income, equity and cash flows for the three months ended December 31, 2022 and 2021, have been made. The results of operations for the period ended December 31, 2022 are not necessarily indicative of the operating results for the full year.
Use of Estimates in the Preparation of Condensed Consolidated Financial Statements
The preparation of the condensed consolidated 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 assumptions are required in the
8
Significant Accounting Policies
Other than as set forth below, there have been no changes to Barnwell's significant accounting policies as described in the Notes to Consolidated Financial Statements included in Item 8 of the Company's 2022 Annual Report.
Advances to Operators for Capital Expenditures
The Company participates in the drilling of crude oil and natural gas wells with other working interest partners. Due to the capital intensive nature of crude oil and natural gas drilling activities, the working interest partner responsible for conducting the drilling operations may request advance payments from other working interest partners for their share of the costs. The Company expects such advances to be applied by working interest partners against joint interest billings for its share of drilling operations within 90 days from when the advance is paid.
2. EARNINGS PER COMMON SHARE
Basic earnings per share is computed using the weighted-average number of common shares outstanding for the period. Diluted earnings per share is calculated using the treasury stock method to reflect the assumed issuance of common shares for all potentially dilutive securities, which consist of outstanding stock options. Potentially dilutive shares are excluded from the computation of diluted earnings per share if their effect is anti-dilutive.
Options to purchase 615,000
Reconciliations between net earnings attributable to Barnwell stockholders and common shares outstanding of the basic and diluted net earnings per share computations are detailed in the following tables:
| Three months ended December 31, 2022 | |||||||||||||||||
| Net Earnings (Numerator) | Shares (Denominator) | Per-Share Amount | |||||||||||||||
| Basic net earnings per share | $ | $ | |||||||||||||||
| Effect of dilutive securities - | |||||||||||||||||
| common stock options | |||||||||||||||||
| Diluted net earnings per share | $ | $ | |||||||||||||||
9
| Three months ended December 31, 2021 | |||||||||||||||||
| Net Earnings (Numerator) | Shares (Denominator) | Per-Share Amount | |||||||||||||||
| Basic net earnings per share | $ | $ | |||||||||||||||
| Effect of dilutive securities - | |||||||||||||||||
| common stock options | |||||||||||||||||
| Diluted net earnings per share | $ | $ | |||||||||||||||
3. INVESTMENTS
Investment in Kukio Resort Land Development Partnerships
On November 27, 2013, Barnwell, through a wholly-owned subsidiary, entered into two limited liability limited partnerships, KD Kona 2013 LLLP (“KD Kona”) and KKM Makai, LLLP (“KKM”), and indirectly acquired a 19.6 5,140,000 . These entities, collectively referred to hereinafter as the “Kukio Resort Land Development Partnerships,” 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 holds interests in KD Acquisition, LLLP (“KD I”) and KD Acquisition II, LP, formerly KD Acquisition II, LLLP (“KD II”). KD I is the developer of Kaupulehu Lot 4A Increment I (“Increment I”), and KD II is the developer of Kaupulehu Lot 4A Increment II (“Increment II”). Barnwell's ownership interests in the Kukio Resort Land Development Partnerships is accounted for using the equity method of accounting.
In March 2019, KD II admitted a new development partner, Replay Kaupulehu Development, LLC (“Replay”), a party unrelated to Barnwell, in an effort to move forward with development of the remainder of Increment II at Kaupulehu. KDK and Replay hold ownership interests of 55 % and 45 %, respectively, of KD II and Barnwell has a 10.8 % indirect non-controlling ownership interest in KD II through KDK, which is accounted for using the equity method of accounting. Barnwell continues to have an indirect 19.6 % non-controlling ownership interest in KD Kukio Resorts, LLLP, KD Maniniowali, LLLP, and KD I.
The partnerships derive income from the sale of residential parcels in Increment I, of which only one lot remains to be sold as of December 31, 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.
Increment II is not yet under development, and there is no assurance that development of such acreage will occur. No definitive development plans have been made by KD II, the developer of Increment II, as of the date of this report.
Barnwell has the right to receive distributions from the Kukio Resort Land Development Partnerships via its non-controlling interests in KD Kona and KKM, based on its respective partnership sharing ratios of 75 % and 34.45 %, respectively. During the three months ended December 31, 2022, Barnwell received cash distributions of $538,000 from the Kukio Resort Land Development Partnerships resulting in a net amount of $478,000 , after distributing $60,000 to non-controlling interests. During the three months ended December 31, 2021, Barnwell received cash distributions $1,207,000 from the Kukio
10
Resort Land Development Partnerships resulting in a net amount of $1,075,000 , after distributing $132,000 to non-controlling interests.
Equity in income of affiliates was $538,000 for the three months ended December 31, 2022, as compared to equity in income of affiliates of $1,207,000 for the three months ended December 31, 2021.
Summarized financial information for the Kukio Resort Land Development Partnerships is as follows:
| Three months ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | $ | $ | |||||||||
| Gross profit | $ | $ | |||||||||
| Net earnings | $ | $ | |||||||||
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 three months ended December 31, 2022 was equivalent to the $538,000 of distributions received in that period.
Cumulative distributions received from the Kukio Resort Land Development Partnerships in excess of our investment balance was $1,198,000 at December 31, 2022 and $958,000 at September 30, 2022.
Sale of Interest in Leasehold Land
Kaupulehu Developments has the right to receive payments from KD I and KD II resulting from the sale of lots and/or residential units within Increment I and Increment II by KD I and KD II (see Note 17).
With respect to Increment I, Kaupulehu Developments is entitled to receive payments from KD I based on 10 % of the gross receipts from KD I’s sales of single-family residential lots in Increment I. One single-family lot was sold during the three months ended December 31, 2022 and one single-family lot, of the 79 lots developed within Increment I, remained to be sold as of December 31, 2022.
11
The following table summarizes the Increment I revenues from KD I and the amount of fees directly related to such revenues:
| Three months ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Sale of interest in leasehold land: | |||||||||||
| Revenues - sale of interest in leasehold land | $ | $ | |||||||||
| Fees - included in general and administrative expenses | ( | ( | |||||||||
| Sale of interest in leasehold land, net of fees paid | $ | $ | |||||||||
There is no assurance with regards to the amounts of future payments from Increment I or Increment II to be received, or that the remaining acreage within Increment II will be developed. No definitive development plans have been made by KD II, the developer of Increment II, as of the date of this report.
Investment in Leasehold Land Interest - Lot 4C
4. CONSOLIDATED VARIABLE INTEREST ENTITY
In February 2021, Barnwell Industries, Inc. established a new wholly-owned subsidiary named BOK Drilling, LLC (“BOK”) for the purpose of indirectly investing in oil and natural gas exploration and development in Oklahoma. BOK and Gros Ventre Partners, LLC (“Gros Ventre”) entered into the Limited Liability Agreement (the “Teton Operating Agreement”) of Teton Barnwell Fund I, LLC (“Teton Barnwell”), an entity formed for the purpose of directly entering into such oil and natural gas investments. Under the terms of the Teton Operating Agreement, the profits of Teton Barnwell are split between BOK and Gros Ventre at 98 % and 2 %, respectively, and as the manager of Teton Barnwell, Gros Ventre is paid an annual asset management fee equal to 1 % of the cumulative capital contributions made to Teton Barnwell as compensation for its management services. BOK is responsible for 100 % of the capital contributions made to Teton Barnwell.
The Company has determined that Teton Barnwell is a variable interest entity (“VIE”) as the entity is structured with non-substantive voting rights and that the Company is the primary beneficiary. This is due to the fact that even though Teton Barnwell has a unanimous consent voting structure, BOK is responsible for 100 % of the capital contributions required to fund Teton Barnwell’s future oil exploration and development investments pursuant to the Teton Operating Agreement and thus, BOK has the power to steer the decisions that most significantly impact Teton Barnwell’s economic performance and has the obligation to absorb any potential losses that could be significant to Teton Barnwell. As BOK is the primary beneficiary of the VIE, Teton Barnwell’s operating results, assets and liabilities are consolidated by the Company.
12
The following table summarizes the carrying value of the assets and liabilities of Teton Barnwell that are consolidated by the Company. Intercompany balances are eliminated in consolidation and thus, are not reflected in the table below.
| December 31, 2022 | September 30, 2022 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts and other receivables | |||||||||||
| Oil and natural gas properties, full cost method of accounting: | |||||||||||
| Proved properties, net | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued operating and other expenses | |||||||||||
| Total liabilities | $ | $ | |||||||||
5. ASSET HELD FOR SALE
6. OIL AND NATURAL GAS PROPERTIES
Oil and Natural Gas Investments
In December 2022, Barnwell Texas, LLC (“Barnwell Texas”), a new wholly-owned subsidiary of the Company, entered into a purchase and sale agreement with an independent third party whereby Barnwell Texas acquired a 22.3 % non-operated working interest in oil and natural gas leasehold acreage in the Permian Basin in Texas for cash consideration of $806,000 . In connection with the purchase of such leasehold interests, Barnwell Texas acquired a 15.4 % non-operated working interest in the planned drilling of two oil wells in the Wolfcamp Formation in Loving and Ward Counties, Texas and made a pre-payment of $4,293,000 to pay its share of the estimated costs to drill, complete and equip the wells. As of December 31, 2022, the total costs incurred for these two oil wells was $829,000 and thus, the remaining prepaid balance of $3,464,000 was recorded as “Advances to operators for capital expenditures” on the Company's Condensed Consolidated Balance sheet.
Additionally, in connection with the agreement, the Company is obligated to pay a broker’s fee of 5.0 % of the capital invested under this arrangement to Four Pines Exploration LLC - Exploration - Series 1 (“Four Pines”). Four Pines is controlled by Mr. Colin O’Farrell who is an affiliate of Teton Barnwell
13
(see Note 17 for additional details). During the three months ended December 31, 2022, the Company paid $255,000 in broker fees to Four Pines related to this arrangement.
Oil and Natural Gas Acquisitions
7. RETIREMENT PLANS
Barnwell sponsors a noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all of its U.S. employees and a noncontributory Supplemental Executive Retirement Plan (“SERP”), which covers certain current and former employees of Barnwell for amounts exceeding the limits allowed under the Pension Plan.
The following table details the components of net periodic benefit (income) cost for Barnwell’s retirement plans:
| Pension Plan | SERP | ||||||||||||||||||||||
| Three months ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Interest cost | $ | $ | $ | $ | |||||||||||||||||||
| Expected return on plan assets | ( | ( | |||||||||||||||||||||
| Amortization of net actuarial gain | ( | ||||||||||||||||||||||
| Net periodic benefit (income) cost | $ | ( | $ | ( | $ | $ | |||||||||||||||||
The net periodic benefit (income) cost is included in “General and administrative” expenses in the Company's Condensed Consolidated Statements of Operations.
Currently, no contributions are expected to be made to the Pension Plan during fiscal 2023. The SERP plan is unfunded and Barnwell funds benefits when payments are made. Expected payments under the SERP for fiscal 2023 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 the earnings for non-controlling interests, are as follows:
| Three months ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| United States | $ | $ | ||||||||||||
| Canada | ||||||||||||||
| $ | $ | |||||||||||||
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The components of the income tax provision are as follows:
| Three months ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Current | $ | $ | |||||||||
| Deferred | ( | ||||||||||
| $ | $ | ||||||||||
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. 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.
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9. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
| Three months ended December 31, 2022 | ||||||||||||||||||||||||||||||||
| Oil and natural gas | Contract drilling | Land investment | Other | Total | ||||||||||||||||||||||||||||
| Revenue streams: | ||||||||||||||||||||||||||||||||
| Oil | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Natural gas | ||||||||||||||||||||||||||||||||
| Natural gas liquids | ||||||||||||||||||||||||||||||||
| Drilling and pump | ||||||||||||||||||||||||||||||||
| Contingent residual payments | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Total revenues before interest income | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Geographical regions: | ||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Canada | ||||||||||||||||||||||||||||||||
| Total revenues before interest income | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Timing of revenue recognition: | ||||||||||||||||||||||||||||||||
| Goods transferred at a point in time | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Services transferred over time | ||||||||||||||||||||||||||||||||
| Total revenues before interest income | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Three months ended December 31, 2021 | ||||||||||||||||||||||||||||||||
| Oil and natural gas | Contract drilling | Land investment | Other | Total | ||||||||||||||||||||||||||||
| Revenue streams: | ||||||||||||||||||||||||||||||||
| Oil | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Natural gas | ||||||||||||||||||||||||||||||||
| Natural gas liquids | ||||||||||||||||||||||||||||||||
| Drilling and pump | ||||||||||||||||||||||||||||||||
| Contingent residual payments | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Total revenues before interest income | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Geographical regions: | ||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Canada | ||||||||||||||||||||||||||||||||
| Total revenues before interest income | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Timing of revenue recognition: | ||||||||||||||||||||||||||||||||
| Goods transferred at a point in time | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Services transferred over time | ||||||||||||||||||||||||||||||||
| Total revenues before interest income | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
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Contract Balances
| December 31, 2022 | September 30, 2022 | ||||||||||
| Accounts receivables from contracts with customers | $ | $ | |||||||||
| Contract assets | |||||||||||
| Contract liabilities | |||||||||||
Accounts receivables from contracts with customers are included in "Accounts and other receivables, net of allowance for doubtful accounts," and contract assets, which includes costs and estimated earnings in excess of billings and retainage, are included in “Other current assets.” Contract liabilities, which includes billings in excess of costs and estimated earnings are included in “Other current liabilities” in the accompanying Condensed Consolidated Balance Sheets.
Retainage, included in contract assets, represents amounts due from customers, but where payments are withheld contractually until certain construction milestones are met. Amounts retained typically range from 5 % to 10 % of the total invoice, up to contractually-specified maximums. The Company classifies as a current asset those retainages that are expected to be collected in the next twelve months.
Contract assets represent the Company’s rights to consideration in exchange for services transferred to a customer that have not been billed as of the reporting date. The Company’s rights are generally unconditional at the time its performance obligations are satisfied.
When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. Such deferred revenue typically results from billings in excess of costs and estimated earnings on uncompleted contracts. As of December 31, 2022 and September 30, 2022, the Company had $746,000 and $1,087,000 , respectively, included in “Other current liabilities” on the balance sheets for those performance obligations expected to be completed in the next twelve months.
During the three months ended December 31, 2022 and 2021, the amount of revenue recognized that was previously included in contract liabilities as of the beginning of the respective period was $523,000 and $186,000 , respectively.
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.
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Performance Obligations
The Company’s remaining performance obligations for drilling and pump installation contracts (hereafter referred to as “backlog”) represent the unrecognized revenue value of the Company’s contract commitments. The Company’s backlog may vary significantly each reporting period based on the timing of major new contract commitments. In addition, our customers have the right, under some infrequent circumstances, to terminate contracts or defer the timing of the Company’s services and their payments to us. Nearly all of the Company's contract drilling segment contracts have original expected durations of one year or less. At December 31, 2022, the Company had six contract drilling jobs with original expected durations of greater than one year. For these contracts, approximately 70 % of the remaining performance obligation of $4,764,000 is expected to be recognized as revenue in the next twelve months and the remaining, thereafter.
Contract Fulfillment Costs
Preconstruction costs, which include costs such as set-up and mobilization, are capitalized and allocated across all performance obligations and deferred and amortized over the contract term on a progress towards completion basis. As of December 31, 2022 and September 30, 2022, the Company had $717,000 and $689,000 , respectively, in unamortized preconstruction costs related to contracts that were not completed. During the three months ended December 31, 2022 and 2021, the amortization of preconstruction costs related to contracts were not material and were included in the accompanying Condensed Consolidated Statements of Operations. Additionally, no impairment charges in connection with the Company’s preconstruction costs were recorded during the three months ended December 31, 2022 and 2021.
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10. SEGMENT INFORMATION
Barnwell operates the following segments: 1) acquiring, developing, producing and selling oil and natural gas in Canada and the U.S. (oil and natural gas); 2) investing in land interests in Hawaii (land investment); and 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling).
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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenues: | |||||||||||
| Oil and natural gas | $ | $ | |||||||||
| Contract drilling | |||||||||||
| Land investment | |||||||||||
| Other | |||||||||||
| Total before interest income | |||||||||||
| Interest income | |||||||||||
| Total revenues | $ | $ | |||||||||
| Depletion, depreciation, and amortization: | |||||||||||
| Oil and natural gas | $ | $ | |||||||||
| Contract drilling | |||||||||||
| Other | |||||||||||
| Total depletion, depreciation, and amortization | $ | $ | |||||||||
| Operating profit (loss) (before general and administrative expenses): | |||||||||||
| Oil and natural gas | $ | $ | |||||||||
| Contract drilling | ( | ||||||||||
| Land investment | |||||||||||
| Other | |||||||||||
| Gain on sale of assets | |||||||||||
| Total operating profit | |||||||||||
| Equity in income of affiliates: | |||||||||||
| Land investment | |||||||||||
| General and administrative expenses | ( | ( | |||||||||
| Foreign currency gain | |||||||||||
| Interest income | |||||||||||
| Earnings before income taxes | $ | $ | |||||||||
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11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in each component of accumulated other comprehensive income were as follows:
| Three months ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Foreign currency translation: | |||||||||||
| Beginning accumulated foreign currency translation | $ | $ | |||||||||
| Change in cumulative translation adjustment before reclassifications | ( | ||||||||||
| Income taxes | |||||||||||
| Net current period other comprehensive income (loss) | ( | ||||||||||
| Ending accumulated foreign currency translation | |||||||||||
| Retirement plans: | |||||||||||
| Beginning accumulated retirement plans benefit income (cost) | ( | ||||||||||
| Amortization of net actuarial gain | ( | ||||||||||
| Income taxes | |||||||||||
| Net current period other comprehensive loss | ( | ||||||||||
| Ending accumulated retirement plans benefit income (cost) | ( | ||||||||||
| Accumulated other comprehensive income, net of taxes | $ | $ | |||||||||
The amortization of net actuarial gain for the retirement plans are included in the computation of net periodic benefit (income) cost which is a component of “General and administrative” expenses on the accompanying Condensed Consolidated Statements of Operations (see Note 7 for additional details).
12. FAIR VALUE MEASUREMENTS
The carrying values of cash and cash equivalents, accounts and other receivables, accounts payable and accrued current liabilities approximate their fair values due to the short-term nature of the instruments.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The estimated fair values of oil and natural gas properties and the asset retirement obligation incurred in the drilling of oil and natural gas wells or assumed in the acquisitions of additional oil and natural gas working interests are based on an estimated discounted cash flow model and market assumptions. The significant Level 3 assumptions used in the calculation of estimated discounted cash flows included future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development, operating and asset retirement costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates.
Barnwell estimates the fair value of asset retirement obligations based on the projected discounted future cash outflows required to settle abandonment and restoration liabilities. Such an estimate requires assumptions and judgments regarding the existence of liabilities, the amount and timing of cash outflows required to settle the liability, what constitutes adequate restoration, inflation factors, credit adjusted discount rates, and consideration of changes in legal, regulatory, environmental and political environments. Abandonment and restoration cost estimates are determined in conjunction with Barnwell’s reserve engineers based on historical information regarding costs incurred to abandon and restore similar well sites, information regarding current market conditions and costs, and knowledge of subject well sites
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13. DEBT
14. STOCKHOLDERS' EQUITY
Cash Dividend
In December 2022, the Company's Board of Directors declared a cash dividend of $0.015 per share that was paid on January 11, 2023 to stockholders of record on December 27, 2022. No dividends were declared or paid during the three months ended December 31, 2021.
The Tax Benefits Preservation Plan
On October 17, 2022, the Board of Directors of the Company adopted a Tax Benefits Preservation Plan (the “Tax Plan”) designed to protect the availability of the Company’s existing net operating loss carryforwards and certain other tax attributes (collectively, the “Tax Benefits”).
The Company has generated substantial Tax Benefits, which could potentially be used in certain circumstances to reduce its future income tax obligations. Utilization of these NOLs and other Tax Benefits depends on many factors, including the Company’s future taxable income. Additionally, the Company’s ability to use its Tax Benefits would be substantially limited if it were to experience an “ownership change,” as defined under Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). In general, a corporation would experience an ownership change if the percentage of the corporation’s stock owned by one or more “5% stockholders,” as defined under Section 382, were to increase by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period (or, if a shorter period, since the Company’s last ownership change). The purpose of the Tax Plan is to reduce the likelihood that the Company will experience an ownership change under Section 382, which would limit the Company’s future use of its Tax Benefits and, in turn, significantly impair the value of such Tax Benefits.
Absent the adoption of the Tax Plan, the Company would be at a greater risk of experiencing an ownership change under Section 382 in the future as a result of certain changes in its investor base and subsequent shifts in its stock ownership that cannot be predicted or controlled. If the Company were to
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undergo an ownership change, limitations would be placed on the Company’s ability to utilize the Tax Benefits in future years in which it has taxable income, and the Company would pay more taxes than if it were able to utilize the Tax Benefits fully. This could result in a negative impact on the Company’s financial position, results of operations, and cash flows. The Tax Plan is designed to preserve the Tax Benefits by reducing the risk of an ownership change under Section 382.
The Tax Plan adopted by the Board of Directors is similar to plans adopted by other publicly held companies with substantial Tax Benefits and has a limited duration of three years. The Tax Plan is not designed to prevent any action that the Board of Directors determines to be in the best interest of the Company and its stockholders.
To implement the Tax Plan, the Board of Directors declared a dividend of one right (a “Right”) for each outstanding share of the Company's common stock. The Rights were issued to stockholders of record at the close of business on October 27, 2022 pursuant to the Tax Plan. The Rights are exercisable if a person or group of persons acquires 4.95% or more of the Company’s common stock. The Rights are also exercisable if a person or group of persons that already owns 4.95% or more of the Company’s common stock acquires an additional share other than as a result of a dividend or a stock split. Existing stockholders that beneficially own in excess of 4.95% of the Company’s common stock are “grandfathered in” at their current ownership level. If the Rights become exercisable, all holders of Rights, other than the person or group of persons triggering the Rights, will be entitled to purchase shares of the Company’s common stock at a 50% discount. Rights held by the person or group of persons triggering the Rights will become void and will not be exercisable.
The Tax Plan also includes an exchange option. At any time after any person or group of persons acquires 4.95% or more of the Company’s common stock, but less than 50% or more of the outstanding shares of the Company’s common stock, the Board of Directors, at its option, may exchange the Rights (other than Rights owned by such person or group of persons which will have become void), in whole or in part, at an exchange ratio of three shares of the Company’s common stock per outstanding Right (subject to adjustment).
The Rights will trade with the Company’s common stock and will expire at the close of business on October 17, 2025. The Rights will expire under other circumstances as described in the Tax Plan, including on the date set by the Board of Directors following a determination that the Tax Plan is no longer necessary or desirable for the preservation of the Tax Benefits or no significant Tax Benefits are available to be carried forward or are otherwise available. The Board of Directors may terminate the Tax Plan prior to the time the Rights are triggered or may redeem the Rights prior to the Distribution Date, as defined in the Tax Plan.
In January 2023, the Company terminated the Tax Plan (see Note 18 for additional details).
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 an at-the-market offering program (“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
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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.
In August 2022, the Company’s Board of Directors suspended the sales of our common stock under the ATM until further notice.
15. CONTINGENCIES
Legal and Regulatory Matters
Barnwell is routinely involved in disputes with third parties that occasionally require litigation. In addition, Barnwell is required to maintain compliance with all current governmental controls and regulations in the ordinary course of business. Barnwell’s management is not aware of any claims or litigation involving Barnwell that are likely to have a material adverse effect on its results of operations, financial position or liquidity.
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 December 31, 2022 for any further costs related to this contract as there is no related probable or estimable contingent liability.
16. INFORMATION RELATING TO THE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
17. 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. KD I and KD II are part of the Kukio Resort Land Development Partnerships in which Barnwell holds indirect 19.6 % and 10.8 % non-controlling ownership interests, respectively, accounted for under the equity method of investment. The percentage of sales payments are part of transactions which took place in 2004 and 2006 where Kaupulehu Developments sold its leasehold interests in Increment I and Increment II to KD I's and KD II's predecessors in interest, respectively, which was prior to Barnwell’s affiliation with KD I and KD II which commenced on November 27, 2013, the acquisition date of our ownership interest in the Kukio Resort Land Development Partnerships. Changes to the arrangement above, effective March 7, 2019, are discussed in Note 3.
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During the three months ended December 31, 2022, Kaupulehu Developments received $265,000 in percentage of sales payments from KD I from the sale of one single-family lot within Phase II of Increment I. During the three months ended December 31, 2021, Kaupulehu Developments received $600,000 in percentage of sales payments from KD I from the sale of three single-family lots within Phase II of Increment I.
Mr. Colin R. O'Farrell, formerly a member of the Board of Directors of the Company through March 7, 2022, is the sole member of Four Pines Operating LLC which owns a 25 % interest in Gros Ventre. In February 2021, Gros Ventre and BOK, a wholly-owned subsidiary of Barnwell, entered into the Teton Operating Agreement of Teton Barnwell, an entity formed for the purpose of directly investing in oil and natural gas exploration and development in Oklahoma. Under the terms of the Teton Operating Agreement, Gros Ventre makes no capital contributions and receives 2 % of the profits of Teton Barnwell. Additionally, as the manager of Teton Barnwell, Gros Ventre is paid an annual asset management fee equal to 1 % of the cumulative capital contributions made to Teton Barnwell as compensation for its management services.
18. SUBSEQUENT EVENTS
Cooperation and Support Agreement
In January 2023, the Company entered into a cooperation and support agreement (the “Agreement”) with Alexander C. Kinzler, the Company’s CEO and President in his capacity as a stockholder, MRMP-Managers LLC, the Ned L. Sherwood Revocable Trust, NLS Advisory Group, Inc. and Ned L. Sherwood (collectively, the “MRMP Stockholders”), with respect to the potential proxy contest pertaining to the election of directors to our Board of Directors (the “Board”). The Agreement extends for two years the standstill terms of the previous agreement entered into with the MRMP Stockholders in 2021, ending the potential of a proxy contest at the 2023 annual meeting of stockholders (the “2023 Annual Meeting”).
Pursuant to the terms of the Agreement, among other things, the Company has agreed to promptly appoint Joshua S. Horowitz and Laurance Narbut to serve on the Board, subject to certain customary board procedures (effective February 9, 2023, Mr. Horowitz and Mr. Narbut became members of the Board). In addition, the Company has agreed to nominate a five-person board comprised of Mr. Kinzler, Kenneth Grossman, Douglas Woodrum, and Messrs. Horowitz and Narbut as candidates for election to the Board at the 2023 Annual Meeting and the 2024 annual meeting of stockholders (the “2024 Annual Meeting”) and Mr. Kinzler and the MRMP Stockholders have agreed to vote their respective shares of common stock of the Company in favor of the election of the Company’s slate at the 2023 Annual Meeting and 2024 Annual Meeting. Additionally, pursuant to the terms of the Agreement, the Company has terminated the previously enacted Tax Benefits Preservation Plan, although the MRMP Stockholders have agreed to limit their beneficial and economic ownership of the Company to 28 % of the outstanding common stock of the Company for the next 12 months and 30 % for the subsequent 12-month period. In exchange for this arrangement, the Company has agreed to reimburse the MRMP Stockholders and Mr. Kinzler for their reasonable, documented out-of-pocket fees and expenses (including legal expenses) in connection with the negotiation and execution of the Agreement and the transactions contemplated hereby and the proposed nomination of directors by the MRMP Stockholders in connection with the 2023 Annual Meeting.
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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 ("PSLRA"). 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. All such statements we make are forward-looking statements made under the safe harbor of the PSLRA, except to the extent such statements relate to the operations of a partnership or limited liability company. 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 2022 Annual Report. 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 full-cost ceiling calculation and depletion of our oil and natural gas properties, the estimation of our contract drilling segment's revenues and expenses, and the calculation of our income taxes, all of which are discussed in our 2022 Annual Report. There have been no significant changes to these critical accounting policies and estimates during the three months ended December 31, 2022. We continue to monitor our accounting policies to ensure proper application of current rules and regulations.
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.
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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 through fiscal 2022 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.
Impact of Recently Issued Accounting Standards on Future Filings
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.
Overview
Barnwell is engaged in the following lines of business: 1) acquiring, developing, producing and selling oil and natural gas in Canada and the U.S. (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 in 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 exploratory and developmental operations elsewhere. Additionally, through its wholly-owned subsidiaries, Barnwell is involved in several non-operated oil and natural gas investments in Oklahoma and Texas.
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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 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 79 single-family lots, of which one remained to be sold at December 31, 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 occur. No definitive development plans have been made by KDII, 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 as well as from commission 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. The lease terminates in December 2025.
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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.
Results of Operations
Summary
The net earnings attributable to Barnwell for the three months ended December 31, 2022 totaled $1,089,000, a $16,000 increase in operating results from net earnings of $1,073,000 for the three months ended December 31, 2021. The following factors affected the results of operations for the three months ended December 31, 2022 as compared to the same period in the prior year:
•A $551,000 gain recognized in the current year period from the sale of a contract drilling segment drilling rig;
•A $418,000 improvement in oil and natural gas segment operating results, before income taxes, due to an increase in oil prices and an increase in the net production of oil and natural gas in the current period as compared to the same period in the prior year. The increase in production was primarily due to the additional working interests acquired and wells drilled in the Twining area in fiscal 2022 and was partially offset by a decrease in production from wells in Oklahoma;
•A $199,000 improvement in contract drilling segment operating results, before income taxes, due to work performed on higher value water well drilling contracts in the current year period as compared to the prior year period;
•Equity in income from affiliates decreased $669,000 and land investment segment operating results, before non-controlling interests’ share of such profits, decreased $335,000 due to the Kukio Resort Development Partnerships' sale of one lot in the current year period, whereas there were three lot sales in the prior year period; and
•General and administrative expenses increased $419,000 primarily due to an increase in professional fees in the current year period as compared to the same period in the prior year, partially offset by a $138,000 decrease in share-based compensation expense in the current year period as compared to the prior year period.
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.
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The average exchange rate of the Canadian dollar to the U.S. dollar decreased 7% in the three months ended December 31, 2022 as compared to the same period in the prior year, and the exchange rate of the Canadian dollar to the U.S. dollar increased 1% at December 31, 2022 as compared to September 30, 2022. 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 income due to foreign currency translation adjustments, net of taxes, for the three months ended December 31, 2022 was $2,000, a $27,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of $25,000 for the same period in the prior year. There were no taxes on other comprehensive income (loss) due to foreign currency translation adjustments in the three months ended December 31, 2022 and 2021 due to a full valuation allowance on the related deferred tax assets.
Oil and natural gas
The following tables set forth Barnwell’s average prices per unit of production and net production volumes. Production amounts reported are net of royalties.
| Average Price Per Unit | |||||||||||||||||||||||
| Three months ended | Increase | ||||||||||||||||||||||
| December 31, | (Decrease) | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Natural Gas (Mcf)* | $ | 4.25 | $ | 4.08 | $ | 0.17 | 4 | % | |||||||||||||||
| Oil (Bbls)** | $ | 72.32 | $ | 68.50 | $ | 3.82 | 6 | % | |||||||||||||||
| Natural gas liquids (Bbls)** | $ | 44.01 | $ | 31.04 | $ | 12.97 | 42 | % | |||||||||||||||
| Net Production | |||||||||||||||||||||||
| Three months ended | Increase | ||||||||||||||||||||||
| December 31, | (Decrease) | ||||||||||||||||||||||
| 2022 | 2021 | Units | % | ||||||||||||||||||||
| Natural Gas (Mcf)* | 300,000 | 205,000 | 95,000 | 46 | % | ||||||||||||||||||
| Oil (Bbls)** | 48,000 | 39,000 | 9,000 | 23 | % | ||||||||||||||||||
| Natural gas liquids (Bbls)** | 10,000 | 13,000 | (3,000) | (23 | %) | ||||||||||||||||||
_______________________________________
* 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
The oil and natural gas segment generated $1,986,000 of operating profit before general and administrative expenses in the three months ended December 31, 2022, an increase in operating results of $418,000 as compared to a $1,568,000 operating profit during the same period of the prior year.
Oil and natural gas segment revenues and operating expenses increased $1,306,000 (33%) and $528,000 (28%) for the three months ended December 31, 2022, respectively, as compared to the same period in the prior year, primarily due to 6% and 42% increases in oil and natural gas liquid prices, respectively, and 46% and 23% increases in natural gas and oil net production, respectively. The increase in production was primarily due to the additional working interests acquired and wells drilled in the Twining area in fiscal 2022 and was partially offset by a decrease in production from wells in Oklahoma in the current year period as compared to the prior year period.
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Our Oklahoma operations generated $517,000 (10%) of our oil and natural gas segment revenues for the three months ended December 31, 2022 as compared to $964,000 (25%) of our oil and natural gas segment revenues for the three months ended December 31, 2021.
Oil and natural gas segment depletion increased $360,000 (83%) for the three months ended December 31, 2022, as compared to the prior year period, 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 in oil and natural gas depletion was partially offset by a decrease in depletion for Oklahoma properties due to the decrease in production from wells in Oklahoma in the current year period as compared to the prior year period.
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:
| Three months ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Sale of interest in leasehold land: | ||||||||||||||
| Revenues – sale of interest in leasehold land | $ | 265,000 | $ | 600,000 | ||||||||||
| Fees - included in general and administrative expenses | (32,000) | (73,000) | ||||||||||||
| Sale of interest in leasehold land, net of fees paid | $ | 233,000 | $ | 527,000 | ||||||||||
During the three months ended December 31, 2022, Barnwell received $265,000 in percentage of sales payments from KD I from the sale of one single-family lot within Increment I. During the three months ended December 31, 2021, Barnwell received $600,000 in percentage of sales payments from KD I from the sale of three single-family lots within Increment I.
As of December 31, 2022, only one single-family lot of the 79 lots developed within Increment I remained to be sold and it is not expected to be sold in the Company's fiscal 2023. 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 KD II, the developer of Increment II, as of the date of this report.
Contract drilling
Contract drilling revenues and contract drilling costs increased $1,072,000 (122%) and $877,000 (89%), respectively, for the three months ended December 31, 2022, as compared to the same period in the prior year. The contract drilling segment generated a $48,000 operating profit before general and
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administrative expenses in the three months ended December 31, 2022, an increase in operating results of $199,000 as compared to a $151,000 operating loss during the same period of the prior year. The increase in contract drilling revenues and contract drilling costs for the three months ended December 31, 2022 as compared to the same period in the prior year is due to work performed on higher value water well drilling contracts in the current year period as compared to the prior year period and due to a higher amount of revenues and expenses recognized from previously uninstalled materials during the current year period.
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 December 31, 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 $419,000 (23%) for the three months ended December 31, 2022, as compared to the same period in the prior year. The increase was primarily due to an increase in professional fees in the current year period as compared to the same period in the prior year, partially offset by a $138,000 decrease in share-based compensation expense in the current year period as compared to the prior year period.
Depletion, depreciation, and amortization
Depletion, depreciation, and amortization increased $357,000 (74%) for the three months ended December 31, 2022, as compared to the same period in the prior year, primarily due to increases in the depletion rate for Canadian properties and also new production from those properties, partially offset by a decrease in depletion for Oklahoma properties as discussed in the “Oil and natural gas” section above.
Foreign currency gain
Foreign currency gain was $78,000 during the three months ended December 31, 2022, as compared to none during the three months ended December 31, 2021, due to the effects of foreign exchange rate changes on intercompany loans and advances as a result of the weakening of the U.S. dollar against the Canadian dollar. The foreign currency gain from intercompany balances was included in our condensed consolidated net earnings as the intercompany balances were not considered long-term in
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nature because management estimates that these intercompany balances will be settled in the future.
Gain on sale of assets
In October 2022, the Company completed the sale of a contract drilling segment drilling rig to an independent third part for proceeds of $551,000, net of related costs. The drilling rig was fully depreciated and had a net book value of zero and as a result of the sale, the Company recognized a $551,000 gain during the three months ended December 31, 2022.
Equity in income of affiliates
Barnwell recognized equity in income of affiliates of $538,000 during the three months ended December 31, 2022, as compared to $1,207,000 during the three months ended December 31, 2021. The decrease was primarily due to the Kukio Resort Land Development Partnerships' sale of one lot during the current year period as compared to three lot sales in the prior year period. The Kukio Resort Land Development Partnerships' have only one lot to sell in Increment I and we are not anticipating any more lot sales in fiscal 2023.
During the three months ended December 31, 2022, Barnwell received cash distributions of $538,000 from the Kukio Resort Land Development Partnerships resulting in a net amount of $478,000, after distributing $60,000 to non-controlling interests. During the three months ended December 31, 2021, Barnwell received cash distributions $1,207,000 from from the Kukio Resort Land Development Partnerships resulting in a net amount of $1,075,000, after distributing $132,000 to non-controlling interests.
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 three months ended December 31, 2022 was equivalent to the $538,000 of distributions received in that period.
Cumulative distributions received from the Kukio Resort Land Development Partnerships in excess of our investment balance was $1,198,000 at December 31, 2022 and $958,000 at September 30, 2022.
Income taxes
Barnwell’s effective consolidated income tax rate for the three months ended December 31, 2022, after adjusting earnings before income taxes for non-controlling interests, was 7%, as compared to an effective income tax rate of 9% for the three months ended December 31, 2021.
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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. 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.
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 for the three months ended December 31, 2022 totaled $120,000, as compared to net earnings attributable to non-controlling interests of $267,000 for the same period in the prior year. The decrease of $147,000 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.
Liquidity and Capital Resources
Barnwell’s primary sources of liquidity are cash on hand, cash flow generated by operations and land investment segment proceeds. At December 31, 2022, Barnwell had $6,747,000 in working capital.
Cash Flows
Cash flows provided by operating activities totaled $897,000 for the three months ended December 31, 2022, as compared to cash flows provided by operating activities of $909,000 for the same period in the prior year. This $12,000 change in operating cash flows was primarily due to a decrease in distributions from the Kukio Resort Land Development Partnerships, which was partially offset by higher operating results for the oil and natural gas segment in the current year period as compared to the prior year period, and fluctuations in working capital.
Cash flows used in investing activities totaled $6,891,000 during the three months ended December 31, 2022, as compared to cash flows provided by investing activities of $194,000 during the same period of the prior year. This $7,085,000 change in investing cash flows was primarily due to an increase of $3,168,000 in cash paid for oil and natural gas capital expenditures, an increase of $3,464,000 in advances to operators for capital expenditures, and a decrease of $687,000 in proceeds from the sale of assets in the current year period as compared to same period in the prior year.
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Cash flows used in financing activities totaled $108,000 during the three months ended December 31, 2022, as compared to cash flows used in financing activities of $251,000 for the same period in the prior year. The $143,000 change in financing cash flows was due to a decrease in distributions to non-controlling interests in the current year period as compared to the same period in the prior year.
Cash Dividend
In December 2022, the Company's Board of Directors declared a cash dividend of $0.015 per share that was paid on January 11, 2023 to stockholders of record on December 27, 2022. No dividends were declared or paid during the three months ended December 31, 2021.
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. The current loan balance of $44,000 is included in “Other current liabilities” in the Company's Condensed Consolidated Balance sheet at December 31, 2022.
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 an at-the-market offering program (“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.
In August 2022, the Company’s Board of Directors suspended the sales of our common stock under the ATM until further notice.
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Oil and Natural Gas Capital Expenditures
Barnwell’s oil and natural gas capital expenditures, including accrued capital expenditures, advances to operators, and excluding additions and revisions to estimated asset retirement obligations, totaled $5,928,000 for the three months ended December 31, 2022 of which $5,354,000 was for a new Texas investment and $574,000 was primarily for the completion and equipping of Canadian wells and facilities at Twining, as compared to $2,870,000, essentially all in Canada, for the same period in the prior year.
In December 2022, Barnwell Texas, LLC (“Barnwell Texas”), a new wholly-owned subsidiary of the Company, entered into a purchase and sale agreement with an independent third party whereby Barnwell Texas acquired a 22.3% non-operated working interest in oil and natural gas leasehold acreage in the Permian Basin in Texas for cash consideration of $806,000. In connection with the purchase of such leasehold interests, Barnwell Texas acquired a 15.4% non-operated working interest in the planned drilling of two oil wells in the Wolfcamp Formation in Loving and Ward Counties, Texas and made a pre-payment of $4,293,000 to pay its share of the estimated costs to drill, complete and equip the wells. As of December 31, 2022, the total costs incurred for these two oil wells was $829,000 and thus, the remaining prepaid balance of $3,464,000 was recorded as “Advances to operators for capital expenditures” on the Company's Condensed Consolidated Balance sheet.
In fiscal 2022, the Company participated in the drilling of one operated and two non-operated for a total of three gross (1.6 net) wells in the Twining area of Alberta, Canada and the capital expenditures incurred for the drilling these wells in the three months ended December 31, 2021 totaled approximately $2,350,000.
Barnwell estimates that investments in oil and natural gas properties for fiscal 2023 will range from $9,000,000 to $10,00,000. This estimated amount may increase or decrease as dictated by cash flows and management's assessment of the oil and natural gas environment and prospects.
Oil and Natural Gas Properties Acquisitions
There were no oil and gas working interest acquisitions during the three months ended December 31, 2022. 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.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to Barnwell, including its consolidated subsidiaries, is made known to the officers who certify Barnwell’s financial reports and to other members of executive management and the Board of Directors.
As of December 31, 2022, an evaluation was carried out by Barnwell’s Chief Executive Officer and Chief Financial Officer of the effectiveness of Barnwell’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that Barnwell’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of December 31, 2022 to ensure that information required to be disclosed by Barnwell in the reports that it files or submits under the Securities Exchange
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Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Act of 1934 and the rules thereunder.
Changes in Internal Control Over Financial Reporting
There was no change in Barnwell’s internal control over financial reporting during the quarter ended December 31, 2022 that materially affected, or is reasonably likely to materially affect, Barnwell’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
| Exhibit Number | Description | |||||||
| 10.1 | Purchase and Sale Agreement, dated as of December 12, 2022, between Barnwell Texas, LLC and Alchemist Energy LeaseCo, LP | |||||||
| 31.1 | Certification of Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||
| 31.2 | Certification of Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||
| 32 | Certification Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||
| 101.INS | Inline XBRL Instance Document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BARNWELL INDUSTRIES, INC. | ||||||||
| (Registrant) | ||||||||
| Date: | February 13, 2023 | /s/ Russell M. Gifford | ||||||
| Russell M. Gifford | ||||||||
| Executive Vice President, | ||||||||
| Chief Financial Officer, | ||||||||
| Treasurer and Secretary | ||||||||
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INDEX TO EXHIBITS
| Exhibit Number | Description | |||||||
| 10.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101.INS | Inline XBRL Instance Document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||
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Exhibit No. 10.1
STRICTLY CONFIDENTIAL
December 12, 2022
Alchemist Energy, LLC
Attn: Billy Hannes
511 E. John Carpenter Fwy, Suite 300
Irving, Texas 75062
Re: Assignment of Leasehold Interests
Loving and Ward Counties, Texas – Atlanta Unit Wells
Mr. Hannes:
Per the terms of this letter agreement (this “Agreement”), Alchemist Energy LeaseCo, LP (“Seller”) agrees to sell, and Barnwell Texas, LLC (“Buyer”), agrees to buy, the following (such assets, less and except the Excluded Assets, collectively the “Assets”):
1.THE ASSETS.
a.22.31618% (the “Assigned Interest”) of Seller’s interest in the oil and gas leases set forth on Exhibit A-1 (the “Leases”) acquired pursuant to that certain term assignment dated effective October 4, 2022 between Seller and Callon (Permian) LLC, a memorandum of which is recorded at Instrument No. 2022-2317 in Loving County, Texas and at Instrument No. 2022-4087 in Ward County, Texas (the “Term Assignment”);
b.All contracts capable of being assigned, including, without limitation, those set forth on Exhibit A-2 to the extent of the Assigned Interest in the Leases conveyed herein, including, but not limited to, any applicable agreements pooling agreements applicable to the Assigned Interest in the Leases;
c.Seller’s unitization, pooling and communization agreements, declarations, orders, and the units created, properties, warranties or interests relating to, or necessary in connection with, the ownership and operation of the Leases, including, without limitation, to the extent of the Assigned Interest, any easements, rights-of-way or other similar rights; and
d.Copies of the files, records, and data related to the Leases, whether physically or electronically stored, including, but not limited to, copies of all land, lease, well and production files and other related agreements, and title records (including abstracts of title, title opinions, ownership reports, and title curative documents) that Seller has in its possession (the “Records”).
2.EXCLUDED ASSETS. Seller hereby excepts from this Agreement (i) any right, title and interest that Seller may have in and to the Leases that was acquired other than through the Term Assignment, including, without limitation, any non-consent interest acquired by virtue of that certain joint operating agreement dated June 9, 2011 covering the Leases (the “JOA”); (ii) all right, title and interest in the wellbore for the Atlanta #2H Well API # 42475358270000, and (iii) any right, title and interest that Seller may have in the existing wells drilled upon and presently producing from the Assets (“Existing Wells”) as of December 1, 2022, along with the equipment and appurtenances and all present and future production from said wells, together with the right to sell such production under existing gas purchase contracts applicable thereto shall be specifically excluded from this Agreement (and corresponding Assignment) and shall belong to Seller (the
4886-0503-6611.1
“Excluded Assets”). The Parties agree that as of the date of this Agreement, Seller or its affiliate has acquired a non-consent interest in the Atlanta 73 Unit #72H well and that such interest is expressly excluded from this Agreement and the Assignment (defined below).
3.PURCHASE PRICE. The purchase price (the “Purchase Price”) for the Assets shall be $805,651.15, which Buyer shall pay to Seller by wire transfer of immediately available funds upon execution of this Agreement.
4.EFFECTIVE DATE. The effective date of the transaction contemplated by this Agreement shall be December 1, 2022 (the “Effective Date”); provided that Buyer shall be responsible for its share of the costs incurred prior to the Effective Date so long as such costs are directly related to the Wells (defined below) and set forth in the AFEs (defined below).
5.FORM OF ASSIGNMENT. The Assets will be conveyed from Seller to Buyer by an assignment in substantially the same form as that Assignment and Bill of Sale attached hereto as Exhibit B (the “Assignment”).
6.CLOSING. Buyer and Seller shall consummate the transaction contemplated by this Agreement simultaneously with the execution of this Agreement (the “Closing”). At Closing, Buyer shall deliver the Purchase Price to Seller and the Pre-Payment (as defined below) to Alchemist Energy, LLC, and Seller shall deliver to Buyer an executed Assignment.
7.PRE-PAYMENT. From and after Closing, Buyer’s ownership of the Assets shall be subject to the terms of the JOA. Pursuant to this Agreement and Article VI.B.1 the JOA, Buyer elects to participate in the Atlanta 73-72H well API # 42-301-36133 and Atlanta 73-73H well API # 42-301-36134 (each, a “Well” and collectively, the “Wells”). The authorization for expenditure (“AFE”) for each Well is set forth on Exhibit C. Pursuant to Section 6, but subject to the JOA, Buyer shall pay its share of the estimated costs to drill, complete and equip the Wells (as set forth in each AFE) at Closing, such amount being $4,293,162.03 (the “Pre-Payment”). From and after Closing, Buyer will own a 15.38677% working interest in the Wells.
8.SELLER REPRESENTATIONS AND WARRANTIES. Seller makes the following representations and warranties to Buyer, as of the date of execution of this Agreement and as of Closing:
a.Seller is duly organized, validly existing and in good standing under the laws of its state of formation and is fully qualified to do business in said state and the party executing this Agreement and subsequent Assignment has the requisite authority to bind the organization;
b.Seller has all requisite power and authority to carry on its business as presently conducted;
c.Seller has not incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which Buyer shall have any responsibility whatsoever;
d.There are no bankruptcy proceedings pending, being contemplated by or threatened against Seller;
e.There is no active, pending, or, to Seller’s knowledge, threatened legal proceeding against Seller, its affiliates, or any of the Assets that (i) relate to or may affect any of the Assets or Seller’s ownership or operation thereof, or (ii) seek to prohibit the transactions contemplated by this Agreement;
f.To Seller’s knowledge, Exhibit C sets forth a complete list of all AFE’s and/or well elections relating to the Assets which have been received, or proposed, by Seller;
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g.To Seller’s knowledge, the Assets are not subject to any agreements containing a minimum volume commitment or similar obligation;
h.The Assets are free and clear of all liens, encumbrances, and tax liabilities created by, through or under Seller;
i.Seller has made, or prior to Closing will make, all contracts and Records affecting the Assets in its possession available to Buyer;
j.To Seller’s knowledge, Seller has complied in all material respects with the provisions and requirements of applicable laws in connection with its ownership and operation of the Assets;
k.Seller warrants and agrees to defend title to the Assets free and clear of all liens and encumbrances created by, through or under Seller, but not otherwise
l.To Seller’s knowledge, Seller has properly and timely elected under all well elections, and Seller has not elected, or been deemed to have elected, to go consent on any wells located on the Assets;
m.To Seller’s knowledge, there are no preferential rights to purchase or consents to assignment to which the Assets are subject;
n.To Seller’s knowledge, (i) all taxes relating or applicable to Seller’s acquisition, ownership or operation of the Assets that are or have become due have been timely paid in full, and Seller is not delinquent in the payment of any such taxes and (ii) none of the Assets is subject to any tax partnership agreement or is otherwise treated, or required to be treated, as held in an arrangement requiring a partnership income tax return to be filed under Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code if 1986, as amended from time to time; and
o.Except as provided in the Term Assignment, to Seller’s knowledge, no Assets are subject to any area of mutual interest agreement, most favored nation provision, back-in after payout, back-in working interest, obligation to carry drilling completion or other costs on behalf of Seller or a third party, or any farmout agreement, farmin agreement or similar agreement under which any party thereto is entitled to receive assignments not yet made, or could earn additional assignments after the Effective Date.
9.BUYER REPRESENTATIONS AND WARRANTIES. Buyer makes the following representations and warranties to Seller, as of the date of execution of this Agreement and as of Closing:
a.Buyer is duly organized, validly existing and in good standing under the laws of its state of formation and is fully qualified to do business in said state and the party executing this Agreement and subsequent Assignment has the requisite authority to bind the organization;
b.Buyer has all requisite power and authority to carry on its business as presently conducted;
c.Buyer has not incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which Seller shall have any responsibility whatsoever; and
d.There are no bankruptcy proceedings pending, being contemplated by or threatened against Buyer.
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10.INDEMNIFICATION.
a.Buyer’s Assumption of Liabilities and Obligations. FROM AND AFTER CLOSING, BUYER SHALL RELEASE, INDEMNIFY, DEFEND AND HOLD SELLER, ITS DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS HARMLESS FROM AND AGAINST ANY AND ALL LIABILITY, LIENS, DEMANDS, JUDGMENTS, SUITS AND CLAIMS OF ANY KIND OR CHARACTER RELATED TO THE ASSETS (“CLAIMS”) (TO THE EXTENT ASSIGNED TO BUYER AT CLOSING) THAT ACCRUE ON OR AFTER THE EFFECTIVE DATE (THE “ASSUMED OBLIGATIONS”). FOR THE SAKE OF CLARITY AND NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IN NO EVENT WILL THE ASSUMED OBLIGATIONS INCLUDE ANY COSTS OR EXPENSES PAID OR INCURRED BY SELLER IN THE ORDINARY COURSE FOR LEASING OR ACQUIRING THE ASSETS, OR OTHER SIMILAR ACTIVITIES OR EXPENSES. THE INDEMNITY OBLIGATIONS OF THIS SECTION SHALL BE WITHOUT REGARD TO THE NEGLIGENCE, IN ANY DEGREE, OF THE INDEMNIFIED PARTY. IN NO EVENT, HOWEVER, WILL THE ASSUMED OBLIGATIONS INCLUDE ANY MATTER FOR WHICH SELLER IS OBLIGATED TO INDEMNIFY BUYER PURSUANT TO THIS AGREEMENT.
b.Seller’s Retained Liabilities and Obligations. FROM AND AFTER CLOSING, SELLER SHALL RELEASE, INDEMNIFY, DEFEND AND HOLD BUYER, ITS DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS OF ANY KIND OR CHARACTER RELATED TO THE (I) THE ASSETS (TO THE EXTENT ASSIGNED TO BUYER AT CLOSING) PRIOR TO THE EFFECTIVE DATE; (II) THE EXCLUDED ASSETS; AND (III) ANY TAXES RELATED TO THE ASSETS TO THE EXTENT ACCURED PRIOR TO THE CLOSING. THE INDEMNITY OBLIGATIONS OF THIS SECTION SHALL BE WITHOUT REGARD TO THE NEGLIGENCE, IN ANY DEGREE, OF THE INDEMNIFIED PARTY.
c.Indemnities of Each Party. Each Party assumes all risk, liability, obligation and losses in connection with, and shall defend, indemnify, and save and hold harmless, the other Party, as well as, its officers, directors, agents, representatives, employees and affiliated companies that arise directly or indirectly from or in connection with (i) any breach by a Party of any of its covenants or agreements under this Agreement, and (ii) any breach by a Party of any of its representatives or warranties under this Agreement.
11.MISCELLANEOUS.
a.Party. Buyer and Seller may be referred to herein each as a “Party” and collectively, the “Parties”.
b.Assignability. Buyer’s rights and obligations under this Agreement may not be assigned, subleased, farmed out or encumbered in whole or in part without obtaining Seller’s consent; provided that, after completion of the Wells consent shall not be required. Subject to the foregoing, this Agreement will extend to, inure to the benefit of and be binding upon the Parties and each of their successors and permitted assigns.
c.Exhibits and Schedules. All of the Exhibits and Schedules referred to in this Agreement are hereby incorporated into this Agreement by reference and constitute a part of this Agreement. Each Party to this Agreement and its counsel has received a complete set of Exhibits and Schedules prior to and as of the execution of this Agreement.
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d.Preparation of Agreement. Seller and Buyer and their respective counsel participated in the preparation of this Agreement. In the event of any ambiguity in this Agreement, no presumption shall arise based on the identity of the draftsman of this Agreement.
e.Further Cooperation. After Closing, Buyer and Seller shall execute and deliver, or shall cause to be executed and delivered, from time to time such further instruments of conveyance and transfer, and shall take such other actions as any Party may reasonably request, to convey and deliver the Assets to Buyer, to perfect Buyer’s title thereto, and to accomplish the orderly transfer of the Assets to Buyer in the manner contemplated by this Agreement.
f.Amendment. This Agreement may be amended only by an instrument in writing executed by the Parties against whom enforcement is sought.
g.Waiver; Rights Cumulative. Any of the terms, covenants, representations, warranties or conditions hereof may be waived only by a written instrument executed by or on behalf of the Party waiving compliance. No course of dealing on the part of Seller or Buyer or their respective officers, employees, agents or representatives and no failure by Seller or Buyer to exercise any of its rights under this Agreement shall, in each case, operate as a waiver thereof or affect in any way the right of such Party at a later time to enforce the performance of such provision. No waiver by any Party of any condition, or any breach of any term, covenant, representation or warranty contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of any breach of any other term, covenant, representation or warranty. The rights of Seller and Buyer under this Agreement shall be cumulative, and the exercise or partial exercise of any such right shall not preclude the exercise of any other right.
h.Governing Law. This Agreement and any claim, controversy or dispute arising under or related to this Agreement or the transactions contemplated hereby or the rights, duties and relationship of the parties hereto and thereto, shall be governed by and construed and enforced in accordance with the laws of the State of Texas, excluding any conflicts of law, rule or principle that might refer construction of provisions to the laws of another jurisdiction.
i.Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any adverse manner to any Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.
j.Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all of such counterparts shall constitute for all purposes one agreement. Any signature hereto delivered by a Party by facsimile or other electronic transmission shall be deemed an original signature hereto.
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Please sign this letter, the Settlement Statement, and the Assignment (two copies).
Regards,
Barnwell Texas, LLC
By Alexander C. Kinzler
CEO and President, Managing Member
Agreed to and accepted this ______ day of December, 2022.
Alchemist Energy LeaseCo, LP
By: ___________________________
Name: ___________________________
Title: ___________________________
Date: ___________________________
Email: ___________________________
Phone: ___________________________
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EXHIBIT A-1
THE LEASES
Agreement: Paid-Up Oil and Gas Lease
Date: May 21, 2019
Original Lessor: Carrizo (Permian) Minerals LLC
Original Lessee: Carrizo (Permian) LLC
Recording Information: Ward County, Texas - Document # 2019-4482; Loving County, Texas – Instrument Number 2019-2510
Lands and Depths Covered: Insofar and only insofar as the lease covers the following lands and depths:
| County | Unit/Name | Legal Description of Lands | Depths Covered | ||||||||
| Loving | Atlanta 73 | H&TC RR CO BLK 33 SEC 73 | Limited to rights from the subsurface interval of 7,860 feet (top of the Bone Spring Lime Formation) down to 11,550 feet (600 feet below the top of the Wolfcamp Formation) appearing on the Schlumberger Density/Neutron log for the Vermejo 58-1 Well (API 42-301-31248) logged on February 7, 2006, Loving County, Texas | ||||||||
| Ward | Atlanta 73 | H&TC RR CO BLK 33 SEC 73 | Limited to rights from the subsurface interval of 7,860 feet (top of the Bone Spring Lime Formation) down to 11,550 feet (600 feet below the top of the Wolfcamp Formation) appearing on the Schlumberger Density/Neutron log for the Vermejo 58-1 Well (API 42-301-31248) logged on February 7, 2006, Loving County, Texas | ||||||||
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EXHIBIT A-2
CONTRACTS
1.Joint Operating Agreement dated June 9, 2011 between Devon Energy Production Company, L.P., as Operator, and Energen Resources Corporation, as Non-Operator.
2.That certain Transfer of ORRI Leases and Certain Obligations Under Side Letter Agreement dated July 20, 2021 by and between Callon (Permian) LLC, Callon (Eagle Ford) LLC, and Callon Petroleum Operating Company, (collectively, “Callon”) and Chambers Minerals, LLC (“Kimmeridge”).
3.Enterprise Connection Agreement dated December 1, 2011 by and between Devon Energy Production Company, LP and Enterprise Crude Pipeline, LLC.
4.Enterprise Trucking Agreement dated March 6, 2018, by and between Devon Energy Production Company, LP and Enterprise Crude Oil LLC.
5.Water Gathering and Disposal Agreement dated November 1, 2022, by and between Riptide Midstream, LLC and Alchemist Energy, LLC.
6.Gas Purchase Contract, as amended, dated June 1, 2012 by and between ETC Texas Pipeline, Ltd.(“ETC”) as successor in interest by merger to ETC Field Services LLC formerly Regency Field Services LLC, successor-in-interest to Southern Union Gas Services, Ltd., Callon (Permian) LLC, (“Callon”) as successor in interest to Devon Energy Production Company, L.P.
7. Atlanta 73 Unit – Pooling Agreement – State of Texas, Ammonite Oil & Gas Corporation, and Devon Energy Production Company, L.P., dated January 1, 2012 (M-114771 – GLO Unit No. 5477).
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EXHIBIT B
FORM OF ASSIGNMENT AND BILL OF SALE
[Begins on following page]
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ASSIGNMENT AND BILL OF SALE
STATE OF TEXAS §
§
COUNTIES OF LOVING AND WARD §
THIS ASSIGNMENT AND BILL OF SALE (this “Assignment”) dated December 1, 2022, but to be effective as of the Effective Time (defined below), is made and executed by and between Alchemist Energy LeaseCo, LP (“Assignor”), and Barnwell Texas, LLC (“Assignee”).
Article 1
ASSIGNMENT AND CONVEYANCE
ASSIGNMENT AND CONVEYANCE
Section 1.aAssignment. Assignor, for and in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, does hereby, as of the Effective Time, GRANT, BARGAIN, SELL, CONVEY, ASSIGN, TRANSFER, SET OVER AND DELIVER, subject to the terms hereof and any and all exceptions and reservations by Assignor herein, unto Assignee, its successors and assigns the following (and excluding the Excluded Assets) (the “Assets”):
22.31618% (the “Assigned Interest”) of Assignor’s interest in the oil and gas leases set forth on Exhibit A-1 (the “Leases”) acquired pursuant to that certain term assignment dated effective October 4, 2022 between Assignor and Callon (Permian) LLC, a memorandum of which is recorded in Instrument No. 2022-2317 in Loving County, Texas and Instrument No. 2022-4087 in Ward County, Texas (the “Term Assignment”);
All contracts capable of being assigned, including, without limitation, those set forth on Exhibit A-2 to the extent of the Assigned Interest in the Leases conveyed herein, including, but not limited to, any applicable agreements pooling agreements applicable to the Assigned Interest in the Leases;
Assignor’s unitization, pooling and communization agreements, declarations, orders, and the units created, properties, warranties or interests relating to, or necessary in connection with, the ownership and operation of the Leases, including, without limitation, to the extent of the Assigned Interest, any easements, rights-of-way or other similar rights; and
Copies of the files, records, and data related to the Leases, whether physically or electronically stored, including, but not limited to, copies of all land, lease, well and production files and other related agreements, and title records (including abstracts of title, title opinions, ownership reports, and title curative documents) that Assignor has in its possession (the “Records”).
TO HAVE AND TO HOLD said rights, privileges and Assets unto Assignee and its successors and assigns.
WARRANTY
Section 2.1 SPECIAL WARRANTY. Assignor agrees to warrant and defend title to the Leases and Wells (subject to any reservations, limitations or depth restrictions described on Exhibit A-1, if any) unto Assignee against every person whomsoever claims the same or any part thereof by, through or under Assignor, but not otherwise.
RESERVATION
Excluded Assets. Notwithstanding anything herein to the contrary, the Assets shall not include, and Assignor does not intend to assign, any interest in the Excluded Assets (as hereinafter defined). Assignor reserve unto itself, its successors and assigns, all Excluded Assets. As used herein, “Excluded Assets” means (i) any right, title and interest that Assignor may have in and to the Leases that was acquired other than through the Term Assignment, including, without limitation, any non-consent interest acquired by virtue of that certain joint operating agreement dated June 9, 2011 covering the Leases (the “JOA”); (ii) all right, title and interest in the wellbore for the Atlanta #2H Well API # 42475358270000, and (iii) any right, title and interest that Assignor may have in the existing wells drilled upon and presently producing from the Assets (“Existing Wells”) as of December 1, 2022, along with the equipment and appurtenances and all present and future production from said wells, together with the right to sell such production under existing gas
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purchase contracts applicable thereto shall be specifically excluded from this Assignment and shall belong to Assignor.
Article 2
MISCELLANEOUS PROVISIONS
MISCELLANEOUS PROVISIONS
Section 1.aFurther Assurances. Assignor agrees to execute and deliver to Assignee, from time to time, all such other and additional documents, and to do all such other and further acts and things as may be necessary to more fully and effectively grant, convey and assign to Assignee the rights and interests conveyed to Assignee hereby or intended so to be.
Section 1.bOther Forms. Separate governmental form assignments of the assigned Assets may be executed on officially approved forms by Assignor and Assignee, in sufficient counterparts to satisfy statutory and regulatory requirements. Those assignments shall be deemed to contain all of the terms hereof. The interests conveyed by such separate assignments are the same, and not in addition to, the assigned Assets conveyed herein.
Section 1.cExhibits. All Exhibits that are referred to herein are hereby made part of this Assignment and incorporated herein by such reference. References in such Exhibits to instruments on file in the public records are notice of such instruments for all purposes. Unless provided otherwise, all recording references in such exhibits are to the appropriate records of the counties in which the assigned Assets are located.
Section 1.dGoverning Law. This Assignment shall be governed by and construed in accordance with the laws of the State of Texas, excluding any conflicts of law rule or principle that might refer construction of such provisions to the laws of another jurisdiction.
Section 1.eCounterparts. This Assignment may be executed in several counterparts, all of which are identical except that, to facilitate recordation, certain counterparts hereof may include only that portion of the exhibits which contain descriptions of the properties located in (or otherwise subject to the recording or filing requirements and/or protections of the recording or filing acts or regulations of) the recording jurisdiction in which the particular counterpart is to be recorded, and other portions of the exhibits shall be included in such counterparts by reference only. All of such counterparts together shall constitute one and the same instrument. Complete copies of this Assignment containing the entire exhibits have been retained by Assignor and Assignee.
Section 1.fSuccessors and Assigns. This Assignment shall be a covenant that runs with the land and all provisions hereof shall be binding on and inure to the benefit of Assignor and Assignee and their respective successors and assigns.
Section 1.gCaptions. The headings in this Assignment are for the convenience of reference only and shall not be deemed to alter or affect any provision hereof. References in this Assignment to articles, sections and exhibits are to articles, sections and exhibits of this Assignment unless otherwise specified.
Section 1.hSeverability. If any provision of this Assignment is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof such provision shall be fully severable; this Assignment shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised apart hereof, and the remaining provisions of this Assignment shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Assignment.
Section 1.iPurchase and Sale Agreement. This Assignment is being executed pursuant to and is made subject to the terms of that certain Letter Agreement re: Assignment of Leasehold Interests dated effective December 1, 2022, by and between Assignor and Assignee (the “Letter Agreement”). If there is any conflict between the terms of this Assignment and the terms of the Letter Agreement, the Letter Agreement shall control in all respects and shall not merge into the terms of this Assignment. Any capitalized terms used herein but not otherwise defined herein shall have the meaning ascribed to them in the Letter Agreement.
Section 1.jEffective Time. This Assignment is effective as of December 1, 2022 at 7:00 AM, (Central Time) (the “Effective Time”).
[SIGNATURE PAGE FOLLOWS]
Page 2
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IN WITNESS WHEREOF, this Assignment has been executed and delivered by each party hereto on the date of its acknowledgement, but for all purposes hereunder effective as of the Effective Time.
ASSIGNOR
ALCHEMIST ENERGY LEASECO, LP
BY: ALCHEMIST ENERGY LEASECO GP, LLC,
ITS GENERAL PARTNER
By:
Name:
Title:
Name:
Title:
ACKNOWLEDGEMENT
STATE OF TEXAS §
§
COUNTY OF DALLAS _________________________ §
§
COUNTY OF DALLAS _________________________ §
This instrument was acknowledged before me on , 2022, by , of ALCHEMIST ENERGY LEASECO, LP on behalf of said entity.
_______________________________________ Notary Public, State of Texas
My commission expires: __________________
My commission expires: __________________
[Signature Page(s) to Assignment and Bill of Sale]
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IN WITNESS WHEREOF, this Assignment has been executed and delivered by each party hereto on the date of its acknowledgement, but for all purposes hereunder effective as of the Effective Time.
ASSIGNEE
BARNWELL TEXAS, LLC
By:
Name:
Title:
Name:
Title:
ACKNOWLEDGEMENT
STATE OF HAWAII §
§
COUNTY OF _________________________ §
§
COUNTY OF _________________________ §
On , 2022, before me appeared _______________, to me personally known, who, being by me duly sworn (or affirmed), did say that the person is the _______________________ of BARNWELL TEXAS, LLC, and that the instrument was signed on behalf of the limited liability company, and said person acknowledged the instrument to be the free act and deed of the limited liability company.
_______________________________________ Notary Public, State of Texas
My commission expires: __________________
My commission expires: __________________
[Signature Page(s) to Assignment and Bill of Sale]
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EXHIBIT A-1
THE LEASES
THE LEASES
Agreement: Paid-Up Oil and Gas Lease
Date: May 21, 2019
Original Lessor: Carrizo (Permian) Minerals LLC
Original Lessee: Carrizo (Permian) LLC
Recording Information: Ward County, Texas - Document # 2019-4482; Loving County, Texas – Instrument Number 2019-2510
Lands and Depths Covered: Insofar and only insofar as the lease covers the following lands and depths:
| County | Unit/Name | Legal Description of Lands | Depths Covered | ||||||||
| Loving | Atlanta 73 | H&TC RR CO BLK 33 SEC 73 | Limited to rights from the subsurface interval of 7,860 feet (top of the Bone Spring Lime Formation) down to 11,550 feet (600 feet below the top of the Wolfcamp Formation) appearing on the Schlumberger Density/Neutron log for the Vermejo 58-1 Well (API 42-301-31248) logged on February 7, 2006, Loving County, Texas | ||||||||
| Ward | Atlanta 73 | H&TC RR CO BLK 33 SEC 73 | Limited to rights from the subsurface interval of 7,860 feet (top of the Bone Spring Lime Formation) down to 11,550 feet (600 feet below the top of the Wolfcamp Formation) appearing on the Schlumberger Density/Neutron log for the Vermejo 58-1 Well (API 42-301-31248) logged on February 7, 2006, Loving County, Texas | ||||||||
[Exhibit A to Assignment and Bill of Sale]
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EXHIBIT A-2
THE CONTRACTS
THE CONTRACTS
1.Joint Operating Agreement dated June 9, 2011 between Devon Energy Production Company, L.P., as Operator, and Energen Resources Corporation, as Non-Operator.
2.That certain Transfer of ORRI Leases and Certain Obligations Under Side Letter Agreement dated July 20, 2021 by and between Callon (Permian) LLC, Callon (Eagle Ford) LLC, and Callon Petroleum Operating Company, (collectively, “Callon”) and Chambers Minerals, LLC (“Kimmeridge”).
3.Enterprise Connection Agreement dated December 1, 2011 by and between Devon Energy Production Company, LP and Enterprise Crude Pipeline, LLC.
4.Enterprise Trucking Agreement dated March 6, 2018, by and between Devon Energy Production Company, LP and Enterprise Crude Oil LLC.
5.Water Gathering and Disposal Agreement dated November 1, 2022, by and between Riptide Midstream, LLC and Alchemist Energy, LLC.
6.Gas Purchase Contract, as amended, dated June 1, 2012 by and between ETC Texas Pipeline, Ltd.(“ETC”) as successor in interest by merger to ETC Field Services LLC formerly Regency Field Services LLC, successor-in-interest to Southern Union Gas Services, Ltd., Callon (Permian) LLC, (“Callon”) as successor in interest to Devon Energy Production Company, L.P.
7. Atlanta 73 Unit – Pooling Agreement – State of Texas, Ammonite Oil & Gas Corporation, and Devon Energy Production Company, L.P., dated January 1, 2012 (M-114771 – GLO Unit No. 5477).
WEST\240729640.2
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EXHIBIT C
OUTSTANDING AFE’S
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[Exhibit A to Assignment and Bill of Sale]
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Exhibit No. 31.1
Certifications
I, Alexander C. Kinzler, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Barnwell Industries, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | February 13, 2023 | /s/ Alexander C. Kinzler | ||||||
Alexander C. Kinzler | ||||||||
President, Chief Executive Officer, Chief Operating Officer, General Counsel | ||||||||
Exhibit No. 31.2
Certifications
I, Russell M. Gifford, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Barnwell Industries, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | February 13, 2023 | /s/ Russell M. Gifford | ||||||
Russell M. Gifford | ||||||||
Executive Vice President, Chief Financial Officer, Treasurer and Secretary | ||||||||
Exhibit No. 32
Barnwell Industries, Inc.
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Barnwell Industries, Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2022 as filed with the Securities and Exchange Commission (the “Report”), each of the undersigned officers of the Company does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | February 13, 2023 | /s/ Alexander C. Kinzler | ||||||
| Name: Alexander C. Kinzler | ||||||||
| Title: President, Chief Executive Officer, Chief Operating Officer, General Counsel | ||||||||
| Dated: | February 13, 2023 | /s/ Russell M. Gifford | ||||||
| Name: Russell M. Gifford | ||||||||
| Title: Executive Vice President, Chief Financial Officer, Treasurer and Secretary | ||||||||
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.
A signed original of the written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.