NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2022 AND 2021
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Barnwell is engaged in the following lines of business: 1) acquiring, developing, producing and selling oil and natural gas in Canada and Oklahoma, 2) investing in land interests in Hawaii, and 3) drilling wells and installing and repairing water pumping systems in Hawaii.
Principles of Consolidation
The 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), 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 VIEs in which the Company is not deemed to be the primary beneficiary are accounted for by the equity method.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of the 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 valuation of deferred tax assets, asset retirement obligations, share-based payment arrangements, obligations for retirement plans, contract drilling estimated costs to complete, proved oil and natural gas reserves, and the carrying value of other assets, and such assumptions may impact the amount at which such items are recorded.
Reclassifications
Certain reclassifications of prior period amounts have been made in the Notes to Consolidated Financial Statements to conform to the current period presentations.
Revenue Recognition
Barnwell operates in and derives revenue from the following three principal business segments:
•Oil and Natural Gas Segment - Barnwell engages in oil and natural gas development, production, acquisitions and sales in Canada and Oklahoma.
•Land Investment Segment - Barnwell invests in land interests in Hawaii.
•Contract Drilling Segment - Barnwell provides well drilling services and water pumping system installation and repairs in Hawaii.
Oil and Natural Gas - Barnwell’s investments in oil and natural gas properties are located in Alberta, Canada and Oklahoma. These property interests are principally held under governmental leases or licenses. Barnwell sells the large majority of its oil, natural gas and natural gas liquids production under short-term contracts between itself and marketers based on prices indexed to market prices and recognizes revenue at a point in time when the oil, natural gas and natural gas liquids are delivered, as this is where Barnwell’s performance obligation is satisfied and title has passed to the customer.
Land Investment - Barnwell is entitled to receive contingent residual payments from the entities that previously purchased Barnwell’s land investment interests under contracts entered into in prior years. The residual payments under those contracts become due when the entities sell lots and/or residential units in the areas that were previously sold under the aforementioned contracts or when a preferred payment threshold is achieved. The residual payments received by Barnwell are recognized as revenue when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
Contract Drilling - Through contracts which are normally less than twelve months in duration, Barnwell drills water and water monitoring wells and installs and repairs water pumping systems in Hawaii. Barnwell recognizes revenue from well drilling or the installation of pumps over time based on total costs incurred on the projects relative to the total expected costs to satisfy the performance obligation as management believes this is an accurate representation of the percentage of completion as control is continuously transferred to the customer. Uninstalled materials, which typically consists of well casing or pumps, are excluded in the costs-to-costs calculation for the duration of the contract as including these costs would result in a distortion of progress towards satisfaction of the performance obligation due to the resulting cumulative catch-up in margin in a single period. An equal amount of cost and revenue is recorded when uninstalled materials are controlled by the customer, which is typically when Barnwell has the right to payment for the materials and when the materials are delivered to the customer’s site or location and such materials have been accepted by the customer. Uninstalled materials are held in inventory and included in “Other current assets” on the Company’s Consolidated Balance Sheets until control is transferred to the customer. When the estimate on a contract indicates a loss, Barnwell records the entire estimated loss in the period the loss becomes known.
The contract price may include variable consideration, which includes such items as increases to the transaction price for unapproved change orders and claims for which price has not yet been agreed by the customer. The Company estimates variable consideration using either the most likely amount or expected value method, whichever is a more appropriate reflection of the amount to which it expects to be entitled based on the characteristics and circumstances of the contract. Variable consideration is included
in the estimated transaction price to the extent it is probable that a significant reversal of cumulative recognized revenue will not occur.
Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the costs incurred to date to total estimated costs at completion are reflected in contract revenues in the reporting period when such estimates are revised. The nature of accounting for these contracts is such that refinements of the estimated costs to complete may occur and are characteristic of the estimation process due to changing conditions and new developments. Many factors and assumptions can and do change during a contract performance obligation period which can result in a change to contract profitability including unforeseen underground geological conditions (to the extent that contract remedies are unavailable), the availability and costs of skilled contract labor, the performance of major material suppliers, the performance of major subcontractors, unusual weather conditions and unexpected changes in material costs, changes in the scope and nature of the work to be performed, and unexpected construction execution errors, among others. These factors may result in revisions to costs and income and are recognized in the period in which the revisions become known. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.
Management evaluates the performance of contracts on an individual basis. In the ordinary course of business, but at least quarterly, we prepare updated estimates that may impact the cost and profit or loss for each contract based on actual results to date plus management's best estimate of costs to be incurred to complete each performance obligation. The cumulative effect of revisions in estimates of the total forecasted revenue and costs, including any unapproved change orders and claims, during the course of the contract is reflected in the accounting period in which the facts that caused the revision become known. Changes in the cost estimates can have a material impact on our consolidated financial statements and are reflected in the results of operations when they become known.
Unexpected significant inefficiencies that were not considered a risk at the time of entering into the contract, such as design or construction execution errors that result in significant wasted resources, are excluded from the measure of progress toward completion and the costs are expensed as incurred.
To the extent a contract is deemed to have multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract.
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. Contract liabilities are included in “Other current liabilities” on the Company’s Consolidated Balance Sheets. Costs and estimated earnings in excess of billings represent certain amounts under customer contracts that were earned and billable, but yet not invoiced, and are included in contract assets and reported in “Other current assets” on the Company’s Consolidated Balance Sheets.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments with original maturities of three months or less.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. We maintain bank account balances with high quality financial institutions which often exceed insured limits. We have not experienced any losses with these accounts and believe that we are not exposed to any significant credit risk on cash.
Accounts and Other Receivables
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is Barnwell’s best estimate of the amount of probable credit losses in Barnwell’s existing accounts receivable and is based on historical write-off experience and the application of the specific identification method. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Barnwell does not have any off-balance sheet credit exposure related to its customers.
Investments in Real Estate
Barnwell accounts for sales of Increment I and Increment II leasehold land interests under the full accrual method. Gains from such sales were recognized when the buyer’s investments were adequate to demonstrate a commitment to pay for the property, risks and rewards of ownership transferred to the buyer, and Barnwell did not have a substantial continuing involvement with the property sold. With regard to payments Kaupulehu Developments is entitled to receive from KD I and KD II, the percentage of sales payments from KD I and KD II and percentage of distributions from KD II are contingent future profits which will be recognized when they are realized. All costs of the sales of Increment I and Increment II leasehold land interests were recognized at the time of sale and were not deferred to future periods when any contingent profits will be recognized.
Variable Interest Entities
The consolidation of VIEs is required when an enterprise has a controlling financial interest and is therefore the VIE’s primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The determination of whether an entity is a VIE and, if so, whether the Company is the primary beneficiary, may require significant judgment.
Barnwell analyzes its entities in which it has a variable interest to determine whether the entities are VIEs and, if so, whether the Company is the primary beneficiary. This analysis includes a qualitative review based on an evaluation of the design of the entity, its organizational structure, including decision making ability and financial agreements, as well as a quantitative review. Entities that have been determined to be VIEs and for which we have a controlling financial interest and are therefore the VIE’s primary beneficiary are consolidated (see Note 4). Entities that have been determined to be VIEs and for which we do not have a controlling financial interest and are therefore not the VIE’s primary beneficiary are not consolidated. These unconsolidated entities are accounted for under the equity method (see Note 3).
Equity Method Investments
Affiliated companies, which are limited partnerships or similar entities, in which Barnwell holds more than a 3% to 5% ownership interest and does not control, are accounted for as equity method investments. Equity method investment adjustments include Barnwell’s proportionate share of investee income or loss, adjustments to recognize certain differences between Barnwell’s carrying value and Barnwell’s equity in net assets of the investee at the date of investment, impairments and other adjustments required by the equity method. Gains or losses are realized when such investments are sold. Barnwell classifies distributions received from equity method investments using the cumulative earnings approach in the Consolidated Statements of Cash Flows. Under the cumulative earnings approach, distributions received up to the amount of cumulative equity in earnings recognized are treated as returns on investment and are classified within operating cash flows and those in excess of that amount are treated as returns of investment and are classified within investing cash flows.
Investments in equity method investees are evaluated for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to measure the amounts of the impairment losses, if any. When an impairment test demonstrates that the fair value of an investment is less than its carrying value, management will determine whether the impairment is either temporary or other-than-temporary. Examples of factors which may be indicative of an other-than-temporary impairment include (a) the length of time and extent to which fair value has been less than carrying value, (b) the financial condition and near-term prospects of the investee, and (c) the intent and ability to retain the investment in the investee for a period of time sufficient to allow for any anticipated recovery in fair value. If the decline in fair value is determined by management to be other-than-temporary, the carrying value of the investment is written down to its estimated fair value as of the balance sheet date of the reporting period in which the assessment is made.
Oil and Natural Gas Properties
Barnwell uses the full cost method of accounting under which all costs incurred in the acquisition, exploration and development of oil and natural gas reserves, including costs related to unsuccessful wells and estimated future site restoration and abandonment, are capitalized. We capitalize internal costs that can be directly identified with our acquisition, exploration and development activities and do not include any costs related to production, general corporate overhead or similar activities.
The capitalized costs of oil and gas properties, excluding unevaluated and unproved properties, are amortized as depreciation, depletion and amortization expense using the units-of-production method based on estimated proved recoverable oil and gas reserves.
Costs associated with unevaluated and unproved properties, initially excluded from the amortization base, relate to unproved leasehold acreage, wells and production facilities in progress and wells pending determination of the existence of proved reserves. Unproved leasehold costs are transferred to the amortization base with the costs of drilling the related well once a determination of the existence of proved reserves has been made or upon impairment of a lease. Costs associated with wells in progress and completed wells that have yet to be evaluated are transferred to the amortization base once a determination is made whether or not proved reserves can be assigned to the property. Costs of dry wells are transferred to the amortization base immediately upon determination that the well is unsuccessful.
All items classified as unevaluated and unproved properties are assessed on a quarterly basis for possible impairment or reduction in value. Properties are assessed on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of various factors, including, but not limited to, the following: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; assignment of proved reserves; and economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and become subject to amortization.
Under the full cost method of accounting, we review the carrying value of our oil and natural gas properties, on a country-by-country basis, each quarter in what is commonly referred to as the ceiling test. Under the ceiling test, capitalized costs, net of accumulated depletion and oil and natural gas related deferred income taxes, may not exceed an amount equal to the sum of 1) the discounted present value (at 10%), using average first-day-of-the-month prices during the 12-month period ending as of the balance sheet date held constant over the life of the reserves, of Barnwell’s estimated future net cash flows from estimated production of proved oil and natural gas reserves as determined by independent petroleum reserve engineers, less estimated future expenditures to be incurred in developing and producing the proved reserves but excluding future cash outflows associated with settling asset retirement obligations with the exception of those associated with proved undeveloped reserves from wells that are to be drilled in the future; plus 2) the cost of major development projects and unproven properties not subject to depletion, if any; plus 3) the lower of cost or estimated fair value of unproven properties included in costs subject to depletion; less 4) related income tax effects. If net capitalized costs exceed this limit, the excess is expensed. Depletion is computed using the units-of-production method whereby capitalized costs, net of estimated salvage values, plus estimated future costs to develop proved reserves and satisfy asset retirement obligations, are amortized over the total estimated proved reserves on a country-by-country basis. Investments in major development projects are not depleted until either proved reserves are associated with the projects or impairment has been determined. Proceeds from the disposition of oil and natural gas properties are credited to the full cost pool, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves in a particular country.
Given the volatility of oil and gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline in the future, even if only for a short period of time, it is possible that impairments of oil and gas properties could occur. In addition, it is reasonably possible that impairments could occur if costs are incurred in excess of any increases in the present value of future net cash flows from proved oil and gas reserves, or if properties are sold for proceeds less than the discounted present value of the related proved oil and gas reserves.
Barnwell’s sales reflect its working interest share after royalties. Barnwell’s production is generally delivered and sold at the plant gate. Barnwell does not have transportation volume commitments with pipelines and does not have natural gas imbalances related to natural gas balancing arrangements with its partners.
Acquisitions
In accordance with the guidance for business combinations, Barnwell determines whether an acquisition is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method
of accounting. If the assets acquired are not a business, the Company accounts for the transaction as an asset acquisition. Under both methods purchase prices are allocated to acquired assets and assumed liabilities based on their estimated fair value at the time of the acquisition. For transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase. The Company capitalizes acquisition-related costs and fees associated with asset acquisitions and immediately expenses acquisition-related costs and fees associated with business combinations.
Long-lived Assets
Long-lived assets to be held and used, other than oil and natural gas properties, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Recoverability is measured by comparing the carrying amount of the asset to the future net cash flows expected to result from use of the asset (undiscounted and without interest charges). If it is determined that the asset may not be recoverable, impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of the asset carrying value or fair value, less cost to sell.
Water well drilling rigs, office and other property and equipment are depreciated using the straight-line method based on estimated useful lives.
Share-based Compensation
Share-based compensation cost is measured at fair value. Barnwell utilizes a closed-form valuation model to determine the fair value of each option award. Expected volatilities are based on the historical volatility of Barnwell’s stock over a period consistent with that of the expected terms of the options. The expected terms of the options represent expectations of future employee exercise and are estimated based on factors such as vesting periods, contractual expiration dates, historical trends in Barnwell’s stock price, and historical exercise behavior. If the Company does not have sufficient historical data regarding employee exercise behavior, the “simplified method” as permitted by the SEC’s Staff Accounting Bulletin No. 110, Share-Based Payment is utilized to estimate the expected terms of the options. The risk-free rates for periods within the contractual life of the options are based on the yields of U.S. Treasury instruments with terms comparable to the estimated option terms. Expected dividends are based on historical dividend payments. The Company's policy is to recognize forfeitures as they occur.
Retirement Plans
Barnwell accounts for its defined benefit pension plan, Supplemental Executive Retirement Plan, and post-retirement medical insurance benefits plan, which was terminated in June 2021, by recognizing the over-funded or under-funded status as an asset or liability in its Consolidated Balance Sheets and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. See further discussion at Note 8.
The estimation of Barnwell’s retirement plan obligations, costs and liabilities requires management to estimate the amount and timing of cash outflows for projected future payments and cash inflows for maturities and expected returns on plan assets. These assumptions may have an effect on the amount and timing of future contributions.
At the end of each year, Barnwell determines the discount rate to be used to calculate the present value of plan liabilities and the net periodic benefit cost. The discount rate is an estimate of the current
interest rate at which the retirement plan liabilities could be effectively settled at the end of the year. In estimating this rate, Barnwell performs a cash-flow matching discount rate analysis developed using high-quality corporate bonds yield. The discount rate used to value the future benefit obligation as of each year-end is the rate used to determine the periodic benefit cost in the following year.
The expected long-term return on assets assumption for the pension plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. The actual fair value of plan assets and estimated rate of return is used to determine the expected investment return during the year. The estimated rate of return on plan assets is based on an estimate of future experience for plan asset returns, the mix of plan assets, current market conditions, and expectations for future market conditions. A decrease (increase) of 50 basis points in the expected return on assets assumption would increase (decrease) pension expense by approximately $56,000 based on the assets of the plan at September 30, 2022.
The effects of changing assumptions are included in unamortized net gains and losses, which directly affect accumulated other comprehensive income. These unamortized gains and losses in excess of certain thresholds are amortized and reclassified to (loss) income over the average remaining service life of active employees.
Asset Retirement Obligation
Barnwell accounts for asset retirement obligations by recognizing the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. 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 and properties. These assumptions represent Level 3 inputs.
Barnwell’s estimated site restoration and abandonment costs of its oil and natural gas properties are capitalized as part of the carrying amount of oil and natural gas properties and depleted over the life of the related reserves. When the assumptions used to estimate a recorded asset retirement obligation change, a revision is recorded to both the asset retirement obligation and the capitalized cost of asset retirements. The liability is accreted at the end of each period through charges to oil and natural gas operating expense.
Income Taxes
Income taxes are determined using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax impacts of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Management evaluates its potential exposures from tax positions taken that have been or could be challenged by taxing authorities. These potential exposures result because taxing authorities may take positions that differ from those taken by management in the interpretation and application of statutes, regulations and rules. Management considers the possibility of alternative outcomes based upon past experience, previous actions by taxing authorities (e.g., actions taken in other jurisdictions) and advice from tax experts. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority on a jurisdiction-by-jurisdiction basis. Liabilities for unrecognized tax benefits related to such tax positions are included in long-term liabilities unless the tax position is expected to be settled within the upcoming year, in which case the liabilities are included in current liabilities. Interest and penalties related to uncertain tax positions are included in income tax expense.
Environmental
Barnwell is subject to extensive environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and maintenance of surface conditions and may require Barnwell to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated.
Barnwell recognizes an insurance receivable related to environmental expenditures when collection of the receivable is deemed probable. Any recognition of an insurance receivable is recorded by crediting and offsetting the original charge. Any differential arising between insurance recoveries and insurance receivables is expensed or capitalized, consistent with the original treatment.
Foreign Currency Translations and Transactions
Assets and liabilities of foreign subsidiaries are translated at the year-end exchange rate. Operating results of foreign subsidiaries are translated at average exchange rates during the period. Translation adjustments have no effect on net income and are included in “Accumulated other comprehensive income, net” in stockholders’ equity.
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.
Fair Value Measurements
Fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:
•Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities in active markets and have the highest priority.
•Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
•Level 3: Unobservable inputs for the financial asset or liability and have the lowest priority.
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which enhances and simplifies various aspects of the income tax accounting guidance in ASC 740. The Company adopted the provisions of this ASU effective October 1, 2021. The adoption of this update did not have an impact on Barnwell's consolidated financial statements.
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 shares were excluded from the computation of diluted shares for the years ended September 30, 2022 and 2021, as their inclusion would have been anti-dilutive.
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:
| | | | | | | | | | | | | | | | | |
| | Year ended September 30, 2022 |
| | Net Earnings | | Shares | | Per-Share |
| | (Numerator) | | (Denominator) | | Amount |
| Basic net earnings per share | $ | 5,513,000 | | | 9,732,936 | | | $ | 0.57 | |
| Effect of dilutive securities - common stock options | — | | | — | | | |
| Diluted net earnings per share | $ | 5,513,000 | | | 9,732,936 | | | $ | 0.57 | |
| | | | | |
| | Year ended September 30, 2021 |
| | Net Earnings | | Shares | | Per-Share |
| | (Numerator) | | (Denominator) | | Amount |
| Basic net earnings per share | $ | 6,253,000 | | | 8,592,154 | | | $ | 0.73 | |
| Effect of dilutive securities - common stock options | — | | | — | | | |
| Diluted net earnings per share | $ | 6,253,000 | | | 8,592,154 | | | $ | 0.73 | |
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 and KKM, and indirectly acquired a 19.6% non-controlling ownership interest in each of KD Kukio Resorts, KD Maniniowali, and KDK for $5,140,000. 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 I and KD II. KD I is the developer of Increment I and KD II is the developer of Increment II. Barnwell's ownership interests in the Kukio Resort Land Development Partnerships is accounted for using the equity method of accounting.
The partnerships derive income from the sale of residential parcels, of which two lots, one being a large lot that is now a consolidation of two previous separate lots and one being an original size lot, remain to be sold at Increment I as of September 30, 2022, as well as from commissions on real estate sales by the real estate sales office and revenues resulting from the sale of private club memberships. Two ocean front parcels approximately two to three acres in size fronting the ocean were developed within Increment II by KD II, of which one was sold in fiscal 2017 and one was sold in fiscal 2016. The remaining acreage within Increment II is not yet under development, and there is no assurance that development of such acreage will in fact occur. No definitive development plans have been made by the developer of Increment II as of the date of this report.
In March 2019, KD II admitted a new development partner, 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, KD Maniniowali, and KD I.
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. Additionally, Barnwell was entitled to a preferred return from KKM on any allocated equity in income of the Kukio Resort Land Development Partnerships in excess of its partnership sharing ratio for cumulative distributions to all of its partners in excess of $45,000,000 from those partnerships. Cumulative distributions from the Kukio Resort Land Development Partnerships reached the $45,000,000 threshold, and accordingly, Barnwell received a total of $459,000 in preferred return payments in the year ended September 30, 2021. The payments were reflected as an additional equity pickup in the "Equity in income of affiliates" line item on the accompanying Consolidated Statement of Operations for the year ended September 30, 2021. Those preferred return payments brought the cumulative preferred return total to $656,000, which was the total amount to which Barnwell was entitled.
During the year ended September 30, 2022, Barnwell received cash distributions of $3,400,000 from the Kukio Resort Land Development Partnership resulting in a net amount of $3,028,000, after distributing $372,000 to non-controlling interests. During the year ended September 30, 2021, Barnwell received net cash distributions in the amount of $6,011,000 from the Kukio Resort Land Development Partnerships after distributing $683,000 to non-controlling interests. Of the $6,011,000 net cash distribution received from the Kukio Resort Land Development Partnerships, $459,000 represented a payment of the preferred return from KKM, as discussed above.
Equity in income of affiliates was $3,400,000 for the year ended September 30, 2022, as compared to equity in income of affiliates of $5,793,000 for the year ended September 30, 2021, which includes the $459,000 payment of the preferred return from KKM discussed above.
Summarized financial information for the Kukio Resort Land Development Partnerships is as follows:
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2022 | | 2021 |
| Revenue | $ | 24,577,000 | | | $ | 43,013,000 | |
| Gross profit | $ | 16,934,000 | | | $ | 24,759,000 | |
| Net earnings | $ | 13,763,000 | | | $ | 20,612,000 | |
In the quarter ended June 30, 2021, the Company received cumulative distributions from the Kukio Resort Land Development Partnerships in excess of our investment balance and in accordance with applicable accounting guidance, the Company suspended its equity method earnings recognition and the Kukio Resort Land Development Partnership investment balance was reduced to zero with the distributions received in excess of our investment balance recorded as equity in income of affiliates because the distributions are not refundable by agreement or by law and the Company is not liable for the obligations of or otherwise committed to provide financial support to the Kukio Resort Land Development Partnerships. The Company will record future equity method earnings only after our share of the Kukio Resort Land Development Partnership’s cumulative earnings in excess of distributions during the suspended period exceeds our share of the Kukio Resort Land Development Partnership’s income recognized for the excess distributions, and during this suspended period any distributions received will be recorded as equity in income of affiliates. Accordingly, the amount of equity in income of affiliates recognized in the year ended September 30, 2022 was equivalent to the $3,400,000 of distributions received in that period.
Cumulative distributions received from the Kukio Resort Land Development Partnerships in excess of our investment balance was $958,000 at September 30, 2022 and $654,000 at September 30, 2021.
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 19).
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. Six single-family lots were sold during the year ended September 30, 2022 and two single-family lots, of the 80 lots developed within Increment I, remained to be sold as of September 30, 2022.
Under the terms of the Increment II agreement with KD II, Kaupulehu Developments is entitled to 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 as to the priority payout. Such interests are limited to distributions or net profits interests and Barnwell does not have any partnership interests in KD II or KDK through its interest in Kaupulehu Developments. The arrangement also gives Barnwell 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 and a pool of various individuals, respectively, all of whom are partners of KKM and are unrelated to Barnwell, in compensation for the agreement of these parties to admit the new development partner for Increment II. Such compensation will be reflected as the obligation becomes probable and the amount of the obligation can be reasonably estimated.
The following table summarizes the Increment I revenues from KD I and the amount of fees directly related to such revenues (see Note 17 “Commitments and Contingencies - Other Matters”):
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2022 | | 2021 |
| Sale of interest in leasehold land: | | | |
| Revenues - sale of interest in leasehold land | $ | 1,295,000 | | | $ | 1,738,000 | |
| Fees - included in general and administrative expenses | (158,000) | | | (212,000) | |
| Sale of interest in leasehold land, net of fees paid | $ | 1,137,000 | | | $ | 1,526,000 | |
In November 2022, one lot within Increment I was sold and Kaupulehu Developments received a percentage of sales payment of $265,000 from the sale, leaving one lot remaining to be sold in Increment I. Financial results from the receipt of this payment will be reflected in Barnwell's first quarter of fiscal 2023 ending December 31, 2022.
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 the developer of Increment II as of the date of this report.
Investment in Leasehold Land Interest – Lot 4C
Kaupulehu Developments holds an interest in an area of approximately 1,000 acres of vacant leasehold land zoned conservation located adjacent to Lot 4A, which currently has no development potential without both a development agreement with the lessor and zoning reclassification. The lease terminates in December 2025.
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”), an entity previously affiliated with the Company (see Note 19 for additional details), 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 and as of September 30, 2022, the Company has made a total of $1,250,000 in cumulative capital contributions to Teton Barnwell to fund its initial oil and natural gas investment in Oklahoma and has received a total of $2,058,000 in distributions, net of non-controlling interests, from Teton Barnwell out of Teton Barnwell's operating cash flows. In October 2022, an additional $711,000 distribution, net of non-controlling interests, was received from Teton Barnwell. These contributions and distributions between Teton Barnwell and the Company do not affect our reported consolidated cash flows as Teton Barnwell is a consolidated entity, as discussed further below.
The Company has determined that Teton Barnwell is a 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.
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.
| | | | | | | | | | | |
| September 30,
2022 | | September 30,
2021 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 623,000 | | | $ | 136,000 | |
| Accounts and other receivables | 606,000 | | | 118,000 | |
| Oil and natural gas properties, full cost method of accounting: | | | |
| Proved properties, net | 655,000 | | | 203,000 | |
| Unproved properties | — | | | 962,000 | |
| Total assets | $ | 1,884,000 | | | $ | 1,419,000 | |
| | | |
| LIABILITIES | | | |
| Accounts payable | $ | 15,000 | | | $ | 3,000 | |
| Accrued capital expenditures | — | | | 581,000 | |
| Accrued operating and other expenses | 26,000 | | | 20,000 | |
| Total liabilities | $ | 41,000 | | | $ | 604,000 | |
5. ASSET HELD FOR SALE
Contract Segment Drilling Rigs and Equipment
In September 2021, the Company designated a contract drilling segment drilling rig and related ancillary equipment, with an aggregate net carrying value of $725,000, as assets held for sale and recorded an impairment of $38,000 to reduce the value of these assets to its fair value, less estimated selling costs. The fair value of these assets in the aggregate amount of $687,000 was recorded as “Assets held for sale” on the Company's Consolidated Balance Sheet at September 30, 2021. In October 2021, the Company sold the drilling rig and related ancillary equipment for proceeds of $687,000, net of related costs, which was equivalent to its net carrying value.
In September 2022, the Company entered into a purchase and sale agreement with an independent third party for the sale of a contract drilling segment drilling rig and received a payment of $551,000, net of related costs. At September 30, 2022, the legal title for the drilling rig had not yet transferred to the buyer and therefore, the Company did not record a sale during the year ended September 30, 2022. The proceeds received from the buyer was recognized as a deposit and recorded in “Other Current Liabilities” on the Company's Consolidated Balance Sheet at September 30, 2022. No amount was recorded as assets held for sale at September 30, 2022 as the drilling rig was fully depreciated and therefore had a net book value of zero. In October 2022, the legal title for the drilling rig was transferred to the buyer and as a result, the Company will recognize a $551,000 gain on the sale of the drilling rig in the first quarter of fiscal 2023 ending December 31, 2022.
6. OIL AND NATURAL GAS PROPERTIES
Acquisitions
In the quarter ended December 31, 2021, Barnwell acquired working interests in oil and natural gas properties located in the Twining area of Alberta, Canada, for cash consideration of $317,000.
In January 2022, Barnwell acquired additional working interests in oil and natural gas properties located in the Twining area of Alberta, Canada for consideration of $1,246,000. The purchase price per the agreement was adjusted for customary purchase price adjustments to reflect the economic activity from the effective date to the closing date. The final determination of the customary adjustments to the purchase price has not yet been made, however, it is not expected to result in a material adjustment. Barnwell also assumed $1,500,000 in asset retirement obligations associated with the acquisition.
In April 2021, Barnwell acquired additional working interests in oil and natural gas properties located in the Twining area of Alberta, Canada for cash consideration of $348,000. The purchase price per the agreement was adjusted for customary purchase price adjustments to reflect the economic activity from the effective date to the closing date.
Dispositions
There were no significant oil and natural gas property dispositions during the year ended September 30, 2022. The $503,000 of proceeds from sale of oil and natural gas properties included in the Consolidated Statement of Cash Flows for the year ended September 30, 2022 primarily represents the refund of income taxes previously withheld from what otherwise would have been proceeds on prior year's oil and natural gas property sales.
In April 2021, Barnwell entered into a purchase and sale agreement with an independent third party and sold its interests in properties located in the Hillsdown area of Alberta, Canada. The sales price per the agreement was adjusted for customary purchase price adjustments to $132,000 in order to, among other things, reflect an economic effective date of October 1, 2020. $72,000 of the sales proceeds was withheld by the buyers for potential amounts due for Barnwell’s Canadian income taxes related to the sale. The proceeds were credited to the full cost pool, with no gain or loss recognized, as the sale did not result in a significant alteration of the relationship between capitalized costs and proved reserves.
In July 2021, Barnwell completed a purchase and sale agreement with an independent third party and sold its interests in certain natural gas and oil properties located in the Spirit River area of Alberta, Canada. The sales price per the agreement was adjusted for customary purchase price adjustments to $1,047,000 in order to, among other things, reflect an economic effective closing date of sale of July 8, 2021. Income taxes were withheld by the buyers from Barnwell's net proceeds for potential amounts due to the Canada Revenue Agency related to the sale, and the amount was subsequently refunded to Barnwell in fiscal 2022.
The difference in the relationship between capitalized costs and proved reserves of the Spirit River properties sold, as compared to the properties retained by Barnwell, was significant as there was a 93% difference in capitalized costs divided by proved reserves if the gain was recorded versus the gain being credited against the full-cost pool. Accordingly, Barnwell recorded a gain on the sale of Spirit River of $818,000 in the year ended September 30, 2021 in accordance with the guidance in Rule 4-10(c)(6)(i) of Regulation S-X of the rules and regulations of the SEC, which requires an allocation of capitalized costs to
the reserves sold and reserves retained on the basis of the relative fair values of the properties as there was a substantial economic difference between the properties sold and those retained. Also included in the gain calculation were asset retirement obligations of $77,000 assumed by the purchaser.
Impairment of Oil and Natural Gas Properties
Under the full cost method of accounting, the Company performs quarterly oil and natural gas ceiling test calculations. There was no ceiling test impairment during the year ended September 30, 2022 and a $630,000 ceiling test impairment during the year ended September 30, 2021.
Changes in the mandated 12-month historical rolling average first-day-of-the-month prices for oil, natural gas and natural gas liquids prices, the value of reserve additions as compared to the amount of capital expenditures to obtain them, and changes in production rates and estimated levels of reserves, future development costs and the estimated market value of unproved properties, impact the determination of the maximum carrying value of oil and natural gas properties.
7. PROPERTY AND EQUIPMENT AND ASSET RETIREMENT OBLIGATION
Barnwell’s property and equipment is detailed as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Estimated
Useful
Lives | | Gross
Property and
Equipment | | Accumulated
Depletion,
Depreciation,
Amortization, and Impairment | | Net
Property and
Equipment |
| At September 30, 2022: | | | | | | | |
| | | | | | | |
Oil and natural gas properties:
(full cost accounting) | | | | | | | |
| Proved properties | | | $ | 67,883,000 | | | $ | (54,651,000) | | | $ | 13,232,000 | |
| Unproved properties | | | — | | | — | | | — | |
| Total oil and natural gas properties | | | 67,883,000 | | | (54,651,000) | | | 13,232,000 | |
| Drilling rigs and equipment | 3 – 10 years | | 6,304,000 | | | (5,943,000) | | | 361,000 | |
| | | | | | | |
| Other property and equipment | 3 – 10 years | | 619,000 | | | (611,000) | | | 8,000 | |
| Total | | | $ | 74,806,000 | | | $ | (61,205,000) | | | $ | 13,601,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Estimated
Useful
Lives | | Gross
Property and
Equipment | | Accumulated
Depletion,
Depreciation, Amortization, and Impairment | | Net
Property and
Equipment |
| At September 30, 2021: | | | | | | | |
| | | | | | | |
Oil and natural gas properties:
(full cost accounting) | | | | | | | |
| Proved properties | | | $ | 58,490,000 | | | $ | (56,067,000) | | | $ | 2,423,000 | |
| Unproved properties | | | 962,000 | | | — | | | 962,000 | |
| Total oil and natural gas properties | | | 59,452,000 | | | (56,067,000) | | | 3,385,000 | |
| Drilling rigs and equipment | 3 – 10 years | | 7,273,000 | | | (6,789,000) | | | 484,000 | |
| | | | | | | |
| Other property and equipment | 3 – 10 years | | 687,000 | | | (681,000) | | | 6,000 | |
| Total | | | $ | 67,412,000 | | | $ | (63,537,000) | | | $ | 3,875,000 | |
See Note 6 for discussion of acquisitions and divestitures of oil and natural gas properties in fiscal 2022 and 2021.
In September 2021, the Company’s Honolulu corporate office was sold for approximately $1,864,000, net of related costs, resulting in a gain of $1,164,000, which was recognized in the year ended September 30, 2021.
Asset Retirement Obligation
Barnwell recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The following is a reconciliation of the asset retirement obligation:
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2022 | | 2021 |
| Asset retirement obligation as of beginning of year | $ | 7,053,000 | | | $ | 6,194,000 | |
| Obligations incurred on new wells drilled or acquired | 1,682,000 | | | 532,000 | |
| Liabilities associated with properties sold | (483,000) | | | (375,000) | |
| Revision of estimated obligation | 1,021,000 | | | 279,000 | |
| Accretion expense | 767,000 | | | 580,000 | |
| Payments | (942,000) | | | (421,000) | |
| Foreign currency translation adjustment | (642,000) | | | 264,000 | |
| Asset retirement obligation as of end of year | 8,456,000 | | | 7,053,000 | |
| Less current portion | (1,327,000) | | | (713,000) | |
| Asset retirement obligation, long-term | $ | 7,129,000 | | | $ | 6,340,000 | |
Asset retirement obligations were reduced by $483,000 and $375,000, in fiscal 2022 and 2021, respectively, for those obligations that were assumed by purchasers of Barnwell's oil and natural gas properties. Asset retirement obligations increased by $1,021,000 and $279,000 in fiscal 2022 and 2021, respectively, primarily due to upward revisions from acceleration in the estimated timing of future abandonments as a result of changes in the estimated economic life of certain wells and changes in management's discretionary timing of abandonment projects due to an increase in estimated funds available as well as changes to the estimated cost of abandonments at the Manyberries area, as further discussed below. Asset retirement obligations also increased by $1,682,000 and $532,000 in fiscal 2022 and 2021, respectively, due primarily to our acquisitions (see Note 6 for additional details). The asset retirement obligation reflects the estimated present value of the amount of dismantlement, removal, site reclamation, and similar activities associated with Barnwell's oil and natural gas properties. Barnwell estimates the ultimate productive life of the properties, a credit-adjusted risk-free rate, and an inflation factor in order to determine the current present value of this obligation. The credit-adjusted risk-free rate for the entire asset retirement obligation is a blended rate which ranges from 6% to 13.5%.
In September 2019, the AER issued an abandonment/closure order for all wells and facilities in the Manyberries area which had been largely operated by LGX, an operating company that went into receivership in 2016. The estimated asset retirement obligation for the Company's interest in the wells and facilities in the Manyberries area is included in “Asset retirement obligation” in the Consolidated Balance Sheets.
Recently, the OWA created a WIP program for specific areas where there are a significant number of orphaned wells to abandon. The OWA has the ability and expertise to abandon wells using its internal resources and network of service providers resulting in efficiencies that companies such as Barnwell, would not be able to obtain on its own. Under the WIP program, the Company would be required to provide payment for only Barnwell’s working interest share, however, all WIP’s would have to participate in the program for the OWA to begin its work. In March 2021, the Company was notified by the OWA that Barnwell’s Manyberries wells were confirmed to be in the WIP program.
Under the new agreement with the OWA, the Company is required to pay the abandonment and reclamation costs in advance through a cash deposit. The total cash deposit amount was calculated to be approximately $1,525,000 and the Company paid $888,000 of the total deposit in July and August 2021 and will need to pay the remaining balance of $637,000 by August 2023. The Company revised its Manyberries ARO liability based on the OWA’s revised abandonment and reclamation estimates, which resulted in an increase of approximately $213,000 in the year ended September 30, 2021. The increase in the ARO liability was a result of higher reclamation and remediation costs than anticipated, partially offset by lower abandonment estimates. Based on a review of the details of the cash deposit calculation provided by the OWA, which includes amounts added for possible contingencies, the Company believes the required cash deposit amount by the OWA is higher than the actual costs of the asset retirement obligation for the Manyberries wells and that any excess of the deposit over actual asset retirement costs for the first phase of the work would be credited toward the second phase of the work. A remaining excess deposit, if any, would ultimately be refunded to the Company upon completion of all of the work. As of September 30, 2022, the Company recognized a cumulative reduction in the deposit balance of $113,000 for work performed under this program.
8. RETIREMENT PLANS
Barnwell sponsors a noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all of its U.S. employees, with benefits based on years of service and the employee’s highest consecutive 5 years average earnings. Barnwell’s funding policy is intended to provide for both benefits attributed to service to date and for those expected to be earned in the future. In addition, Barnwell sponsors a Supplemental Executive Retirement Plan (“SERP”), a noncontributory supplemental retirement benefit plan which covers certain current and former employees of Barnwell for amounts exceeding the limits allowed under the Pension Plan, and previously sponsored a post-retirement medical insurance benefits plan (“Post-retirement Medical”) covering officers of Barnwell Industries, Inc., the parent company, who have attained at least 20 years of service of which at least 10 years were at the position of Vice President or higher, their spouses and qualifying dependents.
In June 2021, the Company terminated its Post-retirement Medical plan effective June 4, 2021. Pursuant to the Post-retirement Medical plan document, the Company, as the sponsor of the Post-retirement Medical plan, had the right to terminate the plan by the resolution of the Board of the Directors of the Company and sixty days’ notice to each participant in the plan. Further, under the terms of the plan document, the participants in the Post-retirement Medical plan were not entitled to any unpaid vested benefits thereunder upon termination of the plan. The Post-retirement Medical plan was an unfunded plan and the Company funded benefits when payments were made. As a result of the plan termination, the Company recognized a non-cash gain of $2,341,000 during the year ended September 30, 2021.
The following tables detail the changes in benefit obligations, fair values of plan assets and reconciliations of the funded status of the retirement plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | SERP | | Post-retirement Medical |
| | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Change in Projected Benefit Obligation: | | | | | | | | | | |
| Benefit obligation at beginning of year | $ | 10,365,000 | | | $ | 10,280,000 | | | $ | 2,136,000 | | | $ | 2,031,000 | | | $ | — | | | $ | 2,839,000 | |
| | | | | | | | | | | |
| Interest cost | 290,000 | | | 258,000 | | | 60,000 | | | 51,000 | | | — | | | 48,000 | |
| Actuarial (gain) loss | (2,418,000) | | | (15,000) | | | (478,000) | | | 63,000 | | | — | | | — | |
| Benefits paid | (306,000) | | | (158,000) | | | (3,000) | | | (9,000) | | | — | | | (5,000) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Termination of post-retirement medical plan | — | | | — | | | — | | | — | | | — | | | (2,882,000) | |
| Benefit obligation at end of year | 7,931,000 | | | 10,365,000 | | | 1,715,000 | | | 2,136,000 | | | — | | | — | |
| Change in Plan Assets: | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | 12,594,000 | | | 11,051,000 | | | — | | | — | | | — | | | — | |
| Actual return on plan assets | (972,000) | | | 1,701,000 | | | — | | | — | | | — | | | — | |
| Employer contributions | — | | | — | | | — | | | — | | | — | | | 5,000 | |
| Benefits paid | (306,000) | | | (158,000) | | | — | | | — | | | — | | | (5,000) | |
| | | | | | | | | | | |
| Fair value of plan assets at end of year | 11,316,000 | | | 12,594,000 | | | — | | | — | | | — | | | — | |
| Funded status | $ | 3,385,000 | | | $ | 2,229,000 | | | $ | (1,715,000) | | | $ | (2,136,000) | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | SERP | | Post-retirement Medical |
| | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Amounts recognized in the Consolidated Balance Sheets: | | |
| Noncurrent assets | $ | 3,385,000 | | | $ | 2,229,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Current liabilities | — | | | — | | | (66,000) | | | (35,000) | | | — | | | — | |
| Noncurrent liabilities | — | | | — | | | (1,649,000) | | | (2,101,000) | | | — | | | — | |
| Net amount | $ | 3,385,000 | | | $ | 2,229,000 | | | $ | (1,715,000) | | | $ | (2,136,000) | | | $ | — | | | $ | — | |
| Amounts recognized in accumulated other comprehensive income before income taxes: | | |
| Net actuarial (gain) loss | $ | (353,000) | | | $ | 471,000 | | | $ | (343,000) | | | $ | 135,000 | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| Accumulated other comprehensive (income) loss | $ | (353,000) | | | $ | 471,000 | | | $ | (343,000) | | | $ | 135,000 | | | $ | — | | | $ | — | |
The accumulated benefit obligation for the Pension Plan was $7,931,000 and $10,365,000 at September 30, 2022 and 2021, respectively. The accumulated benefit obligation for the SERP was $1,715,000 and $2,136,000 at September 30, 2022 and 2021, respectively. The accumulated benefit obligations are the same as the projected benefit obligations due to the Pension Plan and SERP being frozen as of December 31, 2019.
Currently, no contributions will 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 is not material. Fluctuations in actual 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.
The Pension Plan actuarial gains in fiscal 2022 were primarily due to an increase in the discount rate, partially offset by an actuarial loss resulting from actual investment returns that were less than the assumed rate of return. The SERP actuarial gains in fiscal 2022 were primarily due to an increase in the discount rate.
The Pension Plan actuarial gains in fiscal 2021 were primarily due to an increase in the discount rate and actual investment returns that were greater than the assumed rate of return. The SERP actuarial losses in fiscal 2021 were primarily due to an updated mortality projection scale and adjustments due to experience, partially offset by an increase in the discount rate.
The following table presents the weighted-average assumptions used to determine benefit obligations and net benefit (income) costs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | SERP | | Post-retirement Medical |
| | Year ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Assumptions used to determine fiscal year-end benefit obligations: | | | | |
| Discount rate | 5.25% | | 2.84% | | 5.25% | | 2.84% | | N/A | | N/A |
| Rate of compensation increase | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
| Assumptions used to determine net benefit costs (years ended): | | | | | | |
| Discount rate | 2.84% | | 2.54% | | 2.84% | | 2.54% | | N/A | | 2.54% / 3.00%(1) |
| Expected return on plan assets | 5.00% | | 5.00% | | N/A | | N/A | | N/A | | N/A |
| Rate of compensation increase | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
_______________________________________________
(1) 2.54% as of September 30, 2020 and 3.00% as of May 31, 2021 termination.
We select a discount rate by reference to yields available on the ICE Bank of America Merrill Lynch AA-AAA 15+ Index at our consolidated balance sheet date. The expected return on plan assets is based on an actuarial model which takes into consideration our investment mix and market conditions.
The components of net periodic benefit (income) cost are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | SERP | | Post-retirement Medical |
| | Year ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Net periodic benefit (income) cost for the year: | | |
| | | | | | | | | | | |
| Interest cost | $ | 290,000 | | | $ | 258,000 | | | $ | 60,000 | | | $ | 51,000 | | | $ | — | | | $ | 48,000 | |
| Expected return on plan assets | (622,000) | | | (546,000) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Amortization of net actuarial loss | — | | | 39,000 | | | — | | | — | | | — | | | 62,000 | |
| | | | | | | | | | | |
| Net periodic benefit (income) cost | $ | (332,000) | | | $ | (249,000) | | | $ | 60,000 | | | $ | 51,000 | | | $ | — | | | $ | 110,000 | |
The benefits expected to be paid under the retirement plans as of September 30, 2022 are as follows:
| | | | | | | | | | | |
| Pension | | SERP |
| Expected Benefit Payments: | | | |
| Fiscal year ending September 30, 2023 | $ | 412,000 | | | $ | 66,000 | |
| Fiscal year ending September 30, 2024 | $ | 552,000 | | | $ | 130,000 | |
| Fiscal year ending September 30, 2025 | $ | 545,000 | | | $ | 129,000 | |
| Fiscal year ending September 30, 2026 | $ | 537,000 | | | $ | 128,000 | |
| Fiscal year ending September 30, 2027 | $ | 529,000 | | | $ | 127,000 | |
| Fiscal years ending September 30, 2028 through 2032 | $ | 2,969,000 | | | $ | 667,000 | |
Plan Assets
Management communicates periodically with its professional investment advisors to establish investment policies, direct investments and select investment options. The overall investment objective of the Pension Plan is to attain a diversified combination of investments that provides long-term growth in the assets of the plan to fund future benefit obligations while managing risk in order to meet current benefit obligations. Generally, interest and dividends received provide cash flows to fund current benefit obligations. Longer-term obligations are generally estimated to be provided for by growth in equity securities. The Company’s investment policy permits investments in a diversified mix of U.S. and international equities, fixed income securities and cash equivalents.
Barnwell’s investments in fixed income securities include corporate bonds, U.S. treasury and government securities, preferred securities, and fixed income exchange-traded funds. The Company’s investments in equity securities primarily include domestic and international large-cap companies, as well as, domestic and international equity securities exchange-traded funds.
The Company’s year-end target allocation, by asset category, and the actual asset allocations were as follows:
| | | | | | | | | | | | | | | | | |
| | Target | | September 30, |
| Asset Category | Allocation | | 2022 | | 2021 |
| Cash and other | 0% - 25% | | 14% | | —% |
| Fixed income securities | 15% - 40% | | 34% | | 31% |
| Equity securities | 45% - 75% | | 52% | | 69% |
Actual investment allocations may vary from our target allocations from time to time due to prevailing market conditions. We periodically review our actual investment allocations and rebalance our investments to our target allocations as dictated by current and anticipated market conditions and required cash flows.
We categorize plan assets into three levels based upon the assumptions used to price the assets. Level 1 provides the most reliable measure of fair value, whereas Level 3 requires significant management judgment in determining the fair value. Equity securities and exchange-traded funds are valued by obtaining quoted prices on recognized and highly liquid exchanges. Fixed income securities are valued based upon the closing price reported in the active market in which the security is traded. All of our plan
assets are categorized as Level 1 assets, and as such, the actual market value is used to determine the fair value of assets.
The following tables set forth by level, within the fair value hierarchy, pension plan assets at their fair value:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using: |
| Carrying
Amount
as of
September 30,
2022 | | Quoted
Prices in
Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Financial Assets: | | | | | | | |
| Cash | $ | 1,539,000 | | | $ | 1,539,000 | | | $ | — | | | $ | — | |
| | | | | | | |
| Corporate bonds | 1,000 | | | 1,000 | | | — | | | — | |
| U.S. treasury and government securities | 561,000 | | | 561,000 | | | — | | | — | |
| Fixed income exchange-traded funds | 3,223,000 | | | 3,223,000 | | | — | | | — | |
| Preferred securities | 67,000 | | | 67,000 | | | — | | | — | |
| Equity securities exchange-traded funds | 408,000 | | | 408,000 | | | — | | | — | |
| Equities | 5,517,000 | | | 5,517,000 | | | — | | | — | |
| Total | $ | 11,316,000 | | | $ | 11,316,000 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | Fair Value Measurements Using: |
| | Carrying
Amount
as of
September 30,
2021 | | Quoted
Prices in
Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Financial Assets: | | | | | | | |
| Cash | $ | 25,000 | | | $ | 25,000 | | | $ | — | | | $ | — | |
| | | | | | | |
| Corporate bonds | 1,000 | | | 1,000 | | | — | | | — | |
| Fixed income exchange-traded funds | 3,809,000 | | | 3,809,000 | | | — | | | — | |
| Preferred securities | 48,000 | | | 48,000 | | | — | | | — | |
| Equity securities exchange-traded funds | 459,000 | | | 459,000 | | | — | | | — | |
| Equities | 8,252,000 | | | 8,252,000 | | | — | | | — | |
| Total | $ | 12,594,000 | | | $ | 12,594,000 | | | $ | — | | | $ | — | |
9. INCOME TAXES
The components of earnings before income taxes, after adjusting the earnings for non-controlling interests, are as follows:
| | | | | | | | | | | |
| Year ended September 30, |
| 2022 | | 2021 |
| United States | $ | 739,000 | | | $ | 5,436,000 | |
| Canada | 5,121,000 | | | 1,149,000 | |
| $ | 5,860,000 | | | $ | 6,585,000 | |
The components of the income tax provision related to the above earnings are as follows:
| | | | | | | | | | | |
| Year ended September 30, |
| 2022 | | 2021 |
| Current provision: | | | |
| United States – Federal | | | |
| Before operating loss carryforwards | $ | 727,000 | | | $ | 60,000 | |
| Benefit of operating loss carryforwards | (665,000) | | | (60,000) | |
| After operating loss carryforwards | 62,000 | | | — | |
| United States – State | | | |
| Before operating loss carryforwards | 518,000 | | | 174,000 | |
| Benefit of operating loss carryforwards | (62,000) | | | (7,000) | |
| After operating loss carryforwards | 456,000 | | | 167,000 | |
| Canadian | | | |
| Before operating loss carryforwards | 510,000 | | | — | |
| Benefit of operating loss carryforwards | (510,000) | | | — | |
| After operating loss carryforwards | — | | | — | |
| Total current | 518,000 | | | 167,000 | |
| Deferred (benefit) provision: | | | |
| | | |
| United States – State | (171,000) | | | 165,000 | |
| Canadian | — | | | — | |
| Total deferred | (171,000) | | | 165,000 | |
| $ | 347,000 | | | $ | 332,000 | |
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.
Included in the current income tax provision for the year ended September 30, 2022 is a $62,000 expense for income tax penalties and interest thereon for the non-filing of IRS Form 8858 in each of our U.S. federal income tax returns for fiscal years 2019, 2020 and 2021. The Company is in the process of amending its U.S. federal tax returns to include Form 8858 and plans to request abatement of the potential penalties and interest. There was no such expense included in the current income tax provision for the year ended September 30, 2021.
On December 27, 2020, the President signed into law the Consolidated Appropriations Act (the “Act”), an omnibus spending bill to fund the federal government that also includes an array of COVID-related tax relief for individuals and businesses. The tax-related measures contained in the Act revise and expand provisions enacted earlier in the year by the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act. The Act also extends a number of expiring tax provisions. Additionally, the Act provides for a 100% deduction for certain business meals incurred in calendar years 2021 and 2022. The Company determined that income tax effects related to the passage of the Consolidated Appropriations Act were not material to the financial statements for the years ended September 30, 2021 and 2022.
A reconciliation between the reported income tax expense and the amount computed by multiplying the earnings attributable to Barnwell before income taxes by the U.S. federal tax rate of 21% is as follows:
| | | | | | | | | | | |
| Year ended September 30, |
| 2022 | | 2021 |
| Tax provision computed by applying statutory rate | $ | 1,231,000 | | | $ | 1,383,000 | |
| | | |
| Decrease in the valuation allowance | (1,450,000) | | | (1,427,000) | |
| | | |
| Additional effect of the foreign tax provision on the total tax provision | 130,000 | | | 31,000 | |
| Uncertain tax positions | 62,000 | | | — | |
| U.S. state tax provision, net of federal benefit | 285,000 | | | 332,000 | |
| Other | 89,000 | | | 13,000 | |
| $ | 347,000 | | | $ | 332,000 | |
The changes in the valuation allowance shown in the table above exclude the impact of changes in state taxes and foreign tax credit expiries, the valuation allowance impacts of which are incorporated within the respective reconciliation line items elsewhere in the table.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
| | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Foreign tax credit carryover under U.S. tax law | $ | 953,000 | | | $ | 1,197,000 | |
| | | |
| U.S. federal net operating loss carryover | 8,258,000 | | | 8,846,000 | |
| U.S. state unitary net operating loss carryovers | 1,117,000 | | | 939,000 | |
| Canadian net operating loss carryovers | 877,000 | | | 1,411,000 | |
| Tax basis of investment in land in excess of book basis under U.S. tax law | 26,000 | | | 305,000 | |
Property and equipment accumulated book depreciation and depletion in excess of tax under Canadian tax law
| — | | | 1,091,000 | |
| Property and equipment accumulated book depreciation and depletion in excess of tax under U.S. tax law | 568,000 | | | 699,000 | |
| Liabilities accrued for books but not for tax under U.S. tax law | 882,000 | | | 1,225,000 | |
| Liabilities accrued for books but not for tax under Canadian tax law | 2,120,000 | | | 1,813,000 | |
| Foreign currency loss under U.S. tax law | 102,000 | | | — | |
| Foreign currency loss under Canadian tax law | 124,000 | | | — | |
| Other | 278,000 | | | 442,000 | |
| Total gross deferred income tax assets | 15,305,000 | | | 17,968,000 | |
| Less valuation allowance | (12,608,000) | | | (14,616,000) | |
| Net deferred income tax assets | 2,697,000 | | | 3,352,000 | |
| Deferred income tax liabilities: | | | |
| Property and equipment accumulated tax depreciation and depletion in excess of book under Canadian tax law | (280,000) | | | — | |
| Book basis of investment in land development partnerships in excess of tax basis under U.S. tax law | (545,000) | | | (1,156,000) | |
| Book basis of investment in land development partnerships in excess of tax basis under U.S. state non-unitary tax law | (166,000) | | | (352,000) | |
| | | |
| U.S. oil and gas property and equipment accumulated tax depreciation and depletion in excess of book under U.S. tax law | (121,000) | | | (142,000) | |
| U.S. oil and gas property and equipment accumulated tax depreciation and depletion in excess of book under U.S. state tax law | (23,000) | | | (7,000) | |
| U.S. tax law impact of foreign branch deferred tax asset under Canadian tax law | (1,465,000) | | | (1,782,000) | |
| Other | (285,000) | | | (272,000) | |
| Total deferred income tax liabilities | (2,885,000) | | | (3,711,000) | |
| Net deferred income tax liability | $ | (188,000) | | | $ | (359,000) | |
| | | |
| Reported as: | | | |
| Deferred income tax assets | — | | | — | |
| Deferred income tax liabilities | (188,000) | | | (359,000) | |
| Net deferred income tax liability | $ | (188,000) | | | $ | (359,000) | |
The total valuation allowance decreased $2,008,000 for the year ended September 30, 2022. The decrease was due to current fiscal year operational activity that resulted in changes in deferred tax asset
and liability balances, and there were no changes in judgment about the realizability of related deferred tax assets in future years. Of the total net decrease in the valuation allowance for fiscal 2022, $1,614,000 was recognized as an income tax benefit and $394,000 was credited to accumulated other comprehensive loss.
Net deferred tax assets at September 30, 2022 of $2,697,000 consists of the portion of U.S. federal consolidated deferred tax assets that are estimated to be partially realized through corresponding reversals of U.S. federal consolidated deferred tax liabilities related to the Kukio Resort Land Development Partnerships' excess of book income over taxable income, the book basis of property and equipment in excess of tax basis under U.S federal and Canadian tax law, foreign branch deferred taxes and certain other minor deferred tax liabilities.
At September 30, 2022, Barnwell had U.S. federal foreign tax credit carryovers, U.S. federal net operating loss carryovers, U.S. state net operating loss carryovers and Canadian net operating loss carryovers totaling $953,000, $39,327,000, $17,452,000 and $3,411,000, respectively. All four items were fully offset by valuation allowances at September 30, 2022, except for a portion of Hawaii NOLs which is expected to shelter a portion of the reversal of the Company’s Hawaii non-unitary taxable temporary difference related to its investment in Hawaii land development partnerships. The U.S. federal net operating loss carryovers generated through September 30, 2018 expire in fiscal years 2032-2038, the U.S. state unitary net operating loss carryovers generated through September 30, 2017 expire in fiscal years 2033-2037, the Canadian net operating loss carryovers expire in fiscal years 2037-2042, and the foreign tax credit carryovers expire in fiscal years 2023-2025. The U.S. federal net operating loss carryovers generated in fiscal years 2019-2021 and the U.S. state net operating loss carryovers generated in fiscal years 2018-2022 have no expiry, however utilization of the U.S. state and U.S. federal net operating loss carryovers generated in these and future years are limited to 80% of taxable income.
FASB ASC Topic 740, Income Taxes, prescribes a threshold for recognizing the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority.
Barnwell files U.S. federal income tax returns, income tax returns in various U.S. states, and Canadian federal and provincial tax returns. A number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. We believe that our unrecognized tax benefits are reflected on a more likely than not basis. We evaluate uncertain tax positions based on ongoing facts and circumstances. Any change in judgment related to the expected resolution of uncertain tax positions is recognized in earnings in the period in which such change occurs. Interest and penalties, if any, related to unrecognized tax benefits are recorded as a component of income tax expense. Settlement of any particular position could require the use of cash. Favorable resolution for an amount less than the amount estimated by Barnwell would be recognized as a decrease in the effective income tax rate in the period of resolution, and unfavorable resolution in excess of the amount estimated by Barnwell would be recognized as an increase in the effective income tax rate in the period of resolution.
Below are the changes in unrecognized tax benefits.
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2022 | | 2021 |
| Balance at beginning of year | $ | — | | | $ | — | |
| Effect of tax positions taken in prior years | 60,000 | | | — | |
| Accrued interest related to tax positions taken | 2,000 | | | — | |
| Balance at end of year | $ | 62,000 | | | $ | — | |
Uncertain tax positions at September 30, 2022 are related to the potential assessment of penalties and interest for the failure to file certain foreign information forms with each of our U.S. federal income tax returns for fiscal years 2019, 2020 and 2021. The Company is in the process of amending its U.S. federal tax returns to include missing forms and plans to request abatement of the potential penalties and interest.
Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities at September 30, 2022:
| | | | | |
| Jurisdiction | Fiscal Years Open |
| U.S. federal | 2019 – 2021 |
| Various U.S. states | 2019 – 2021 |
| Canada federal | 2015 – 2021 |
| Various Canadian provinces | 2015 – 2021 |
10. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following tables provide information about disaggregated revenue by revenue streams, reportable segments, geographical region, and timing of revenue recognition for the years ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended September 30, 2022 |
| | Oil and natural gas | | Contract drilling | | Land investment | | Other | | Total |
| Revenue streams: | | | | | | | | | |
| Oil | $ | 15,747,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 15,747,000 | |
| Natural gas | 4,527,000 | | | — | | | — | | | — | | | 4,527,000 | |
| Natural gas liquids | 2,307,000 | | | — | | | — | | | — | | | 2,307,000 | |
| Drilling and pump | — | | | 4,540,000 | | | — | | | — | | | 4,540,000 | |
| Contingent residual payments | — | | | — | | | 1,295,000 | | | — | | | 1,295,000 | |
| Other | — | | | — | | | — | | | 111,000 | | | 111,000 | |
| Total revenues before interest income | $ | 22,581,000 | | | $ | 4,540,000 | | | $ | 1,295,000 | | | $ | 111,000 | | | $ | 28,527,000 | |
| Geographical regions: | | | | | | | | | |
| United States | $ | 3,496,000 | | | $ | 4,540,000 | | | $ | 1,295,000 | | | $ | 9,000 | | | $ | 9,340,000 | |
| Canada | 19,085,000 | | | — | | | — | | | 102,000 | | | 19,187,000 | |
| Total revenues before interest income | $ | 22,581,000 | | | $ | 4,540,000 | | | $ | 1,295,000 | | | $ | 111,000 | | | $ | 28,527,000 | |
| Timing of revenue recognition: | | | | | | | | | |
| Goods transferred at a point in time | $ | 22,581,000 | | | $ | — | | | $ | 1,295,000 | | | $ | 111,000 | | | $ | 23,987,000 | |
| Services transferred over time | — | | | 4,540,000 | | | — | | | — | | | 4,540,000 | |
| Total revenues before interest income | $ | 22,581,000 | | | $ | 4,540,000 | | | $ | 1,295,000 | | | $ | 111,000 | | | $ | 28,527,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended September 30, 2021 |
| | Oil and natural gas | | Contract drilling | | Land investment | | Other | | Total |
| Revenue streams: | | | | | | | | | |
| Oil | $ | 7,617,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 7,617,000 | |
| Natural gas | 1,871,000 | | | — | | | — | | | — | | | 1,871,000 | |
| Natural gas liquids | 766,000 | | | — | | | — | | | — | | | 766,000 | |
| Drilling and pump | — | | | 5,809,000 | | | — | | | — | | | 5,809,000 | |
| Contingent residual payments | — | | | — | | | 1,738,000 | | | — | | | 1,738,000 | |
| Other | — | | | — | | | — | | | 304,000 | | | 304,000 | |
| Total revenues before interest income | $ | 10,254,000 | | | $ | 5,809,000 | | | $ | 1,738,000 | | | $ | 304,000 | | | $ | 18,105,000 | |
| Geographical regions: | | | | | | | | | |
| United States | $ | 118,000 | | | $ | 5,809,000 | | | $ | 1,738,000 | | | $ | 35,000 | | | $ | 7,700,000 | |
| Canada | 10,136,000 | | | — | | | — | | | 269,000 | | | 10,405,000 | |
| Total revenues before interest income | $ | 10,254,000 | | | $ | 5,809,000 | | | $ | 1,738,000 | | | $ | 304,000 | | | $ | 18,105,000 | |
| Timing of revenue recognition: | | | | | | | | | |
| Goods transferred at a point in time | $ | 10,254,000 | | | $ | — | | | $ | 1,738,000 | | | $ | 304,000 | | | $ | 12,296,000 | |
| Services transferred over time | — | | | 5,809,000 | | | — | | | — | | | 5,809,000 | |
| Total revenues before interest income | $ | 10,254,000 | | | $ | 5,809,000 | | | $ | 1,738,000 | | | $ | 304,000 | | | $ | 18,105,000 | |
Contract Balances
The following table provides information about accounts receivables, contract assets and contract liabilities from contracts with customers:
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
| Accounts receivables from contracts with customers | $ | 4,038,000 | | | $ | 2,797,000 | |
| Contract assets | 580,000 | | | 581,000 | |
| Contract liabilities | 1,087,000 | | | 455,000 | |
| | | |
| | | |
| | | |
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 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 September 30, 2022 and 2021, the Company had $1,087,000 and $455,000, respectively, included in “Other current liabilities” on the Consolidated Balance Sheets for those performance obligations expected to be completed in the next twelve months.
During the years ended September 30, 2022 and 2021, the amount of revenue recognized that was previously included in contract liabilities as of the beginning of the respective period was $394,000 and $1,013,000, 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.
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 September 30, 2022, the Company had five contract drilling jobs with original expected durations of greater than one year. For these contracts, approximately 71% of the remaining performance obligation of $4,890,000 is expected to be recognized 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 September 30, 2022 and 2021, the Company had $689,000 and $326,000, respectively, in unamortized preconstruction costs related to contracts that were not completed. During the years ended September 30, 2022 and 2021, the amortization of preconstruction costs related to contracts was $296,000 and $224,000, respectively. These amounts have been included in “Contract drilling operating” costs and expenses in the accompanying Consolidated Statements of Operations. Additionally, no impairment charges in connection with the Company’s preconstruction costs were recorded during the years ended September 30, 2022 and 2021.
Uninstalled Materials
Uninstalled materials, which typically consists of well casing or pumps, are excluded in the costs-to-costs calculation for the duration of the contract as including these costs would result in a distortion of progress towards satisfaction of the performance obligation due to the resulting cumulative catch-up in margin in a single period. An equal amount of cost and revenue is recorded when uninstalled materials are controlled by the customer, which is typically when Barnwell has the right to payment for the materials and when the materials are delivered to the customer’s site or location and such materials have been accepted by the customer. Uninstalled materials are held in inventory and included in “Other current assets” on the Company’s Consolidated Balance Sheets.
A summary of Barnwell's uninstalled materials is as follows:
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
| Uninstalled materials | $ | 351,000 | | | $ | 226,000 | |
11. SEGMENT AND GEOGRAPHIC INFORMATION
Barnwell operates the following segments: 1) acquiring, developing, producing and selling oil and natural gas in Canada and Oklahoma (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.
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2022 | | 2021 |
| Revenues: | | | |
| Oil and natural gas | $ | 22,581,000 | | | $ | 10,254,000 | |
| Contract drilling | 4,540,000 | | | 5,809,000 | |
| Land investment | 1,295,000 | | | 1,738,000 | |
| | | |
| Other | 111,000 | | | 304,000 | |
Total before interest income | 28,527,000 | | | 18,105,000 | |
| Interest income | 18,000 | | | 8,000 | |
| Total revenues | $ | 28,545,000 | | | $ | 18,113,000 | |
| Depletion, depreciation, and amortization: | | | |
| Oil and natural gas | $ | 2,606,000 | | | $ | 645,000 | |
| Contract drilling | 171,000 | | | 305,000 | |
| Other | 1,000 | | | 13,000 | |
| Total depletion, depreciation, and amortization | $ | 2,778,000 | | | $ | 963,000 | |
| Impairment: | | | |
| Oil and natural gas | $ | — | | | $ | 630,000 | |
| Contract drilling | — | | | 38,000 | |
| Land investment | 89,000 | | | — | |
| | | |
| Total impairment | $ | 89,000 | | | $ | 668,000 | |
| Operating profit (loss) (before general and administrative expenses): | | | |
| Oil and natural gas | $ | 10,536,000 | | | $ | 2,423,000 | |
| Contract drilling | (222,000) | | | (89,000) | |
| Land investment | 1,206,000 | | | 1,738,000 | |
| | | |
| Other | 110,000 | | | 291,000 | |
| Gain on sale of assets | — | | | 1,982,000 | |
| Total operating profit | 11,630,000 | | | 6,345,000 | |
| Equity in income of affiliates: | | | |
| Land investment | 3,400,000 | | | 5,793,000 | |
| General and administrative expenses | (8,044,000) | | | (7,088,000) | |
| Foreign currency loss | (484,000) | | | — | |
| Interest expense | (1,000) | | | (13,000) | |
| | | |
| Interest income | 18,000 | | | 8,000 | |
| Gain on debt extinguishment | — | | | 149,000 | |
| Gain on termination of post-retirement medical plan | — | | | 2,341,000 | |
| Earnings before income taxes | $ | 6,519,000 | | | $ | 7,535,000 | |
Capital Expenditures:
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2022 | | 2021 |
| Oil and natural gas | $ | 13,755,000 | | | $ | 3,028,000 | |
| Contract drilling | 45,000 | | | 62,000 | |
| Other | 5,000 | | | 1,000 | |
| Total | $ | 13,805,000 | | | $ | 3,091,000 | |
Oil and natural gas capital expenditures include acquisitions as well as changes to capitalized asset retirement obligations, including revisions of asset retirement obligations (see Note 7 for additional details).
Assets By Segment:
| | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
Oil and natural gas (1) | $ | 17,477,000 | | | $ | 6,401,000 | |
Contract drilling (2) | 3,260,000 | | | 4,071,000 | |
| | | |
| Other: | | | |
| Cash and cash equivalents | 12,804,000 | | | 11,279,000 | |
| | | |
| | | |
| Corporate and other | 3,674,000 | | | 2,684,000 | |
| Total | $ | 37,215,000 | | | $ | 24,435,000 | |
______________
(1) Located primarily in the province of Alberta, Canada with a minor portion in Oklahoma.
(2) Located in Hawaii.
Long-Lived Assets By Geographic Area:
| | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
| United States | $ | 4,540,000 | | | $ | 4,180,000 | |
| Canada | 12,578,000 | | | 2,220,000 | |
| Total | $ | 17,118,000 | | | $ | 6,400,000 | |
Revenue By Geographic Area:
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2022 | | 2021 |
| United States | $ | 9,340,000 | | | $ | 7,700,000 | |
| Canada | 19,187,000 | | | 10,405,000 | |
| Total (excluding interest income) | $ | 28,527,000 | | | $ | 18,105,000 | |
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of accumulated other comprehensive income, net of taxes, are as follows:
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2022 | | 2021 |
| Foreign currency translation: | | | |
| Beginning accumulated foreign currency translation | $ | 262,000 | | | $ | 545,000 | |
| Change in cumulative translation adjustment before reclassifications | (40,000) | | | (283,000) | |
| | | |
| Income taxes | — | | | — | |
| Net current period other comprehensive loss | (40,000) | | | (283,000) | |
| Ending accumulated foreign currency translation | 222,000 | | | 262,000 | |
| Retirement plans: | | | |
| Beginning accumulated retirement plans benefit cost | (230,000) | | | (1,980,000) | |
| Amortization of net actuarial loss | — | | | 101,000 | |
| Net actuarial gain arising during the period | 1,302,000 | | | 1,108,000 | |
| Gain on termination of post-retirement medical plan | — | | | 541,000 | |
| Income taxes | — | | | — | |
| Net current period other comprehensive income | 1,302,000 | | | 1,750,000 | |
| Ending accumulated retirement plans benefit income (cost) | 1,072,000 | | | (230,000) | |
| Accumulated other comprehensive income, net of taxes | $ | 1,294,000 | | | $ | 32,000 | |
The amortization of net actuarial loss 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 Consolidated Statements of Operations (see Note 8 for additional details).
13. FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
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. See Note 6 for additional information regarding oil and natural gas property acquisitions.
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 and properties. Asset retirement obligation fair value measurements in the current period were Level 3 fair value measurements. As further described in Note 7, the Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. Asset retirement obligations are not measured at fair value subsequent to initial recognition.
14. DEBT
Canada Emergency Business Account Loan
In the quarter ended December 31, 2020, the Company’s Canadian subsidiary, Barnwell of Canada, received a loan of CAD$40,000 (in Canadian dollars) under the Canada Emergency Business Account (“CEBA”) loan program for small businesses. In the quarter ended March 31, 2021, the Company applied for an increase to our CEBA loan and received an additional CAD$20,000 for a total loan amount received of CAD$60,000 ($44,000) under the program. In January 2022, the Canadian government announced the extension of the CEBA loan repayment deadline and interest-free period from December 31, 2022 to December 31, 2023. Accordingly, the CEBA loan is interest-free with no principal payments required until December 31, 2023, after which the remaining loan balance is converted to a two year term loan at 5% annual interest paid monthly. If the Company repays 66.7% of the principal amount prior to December 31, 2023, there will be loan forgiveness of 33.3% up to a maximum of CAD$20,000.
Paycheck Protection Program Loan
In April 2020, the Company, as obligor, entered into a promissory note evidencing an unsecured loan in the approximate amount of $147,000 under the PPP pursuant to the CARES Act that was signed into law in March 2020. The note was to mature two years after the date of the loan disbursement with interest at a fixed annual rate of 1.00%, and with the principal and interest payments deferred until ten months after the last day of the covered period. In April 2021, the Company was notified by the lender of our PPP loan that the entire PPP loan amount and related accrued interest was forgiven by the Small Business Administration. As a result of the loan forgiveness, the Company recognized a gain on debt extinguishment of $149,000 during the year ended September 30, 2021.
15. LEASES
The Company’s right-of-use (“ROU”) assets and lease liabilities at September 30, 2022, primarily relate to non-cancelable operating leases for our Hawaii corporate and Canadian office spaces and our leasehold land interest for Lot 4C held by Kaupulehu Developments. Management determines if a contract is or contains a lease at inception of the contract or modification of the contract. A contract is or contains a lease if the contract conveys the right to control the use of the asset for a period in exchange for consideration.
Operating lease ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. The Company’s leases do not provide a readily determinable implicit rate; therefore, management uses the Company’s incremental borrowing rate to discount lease payments based on information available at lease commencement. Our
lease terms may include options to extend or terminate the lease when it is reasonably certain we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease terms. The Company has lease agreements with lease and non-lease components and the non-lease components are excluded in the calculation of the ROU asset and lease liability and expensed as incurred. None of the Company’s lease agreements contain material residual value guarantees or material restrictions or covenants.
A ROU asset and corresponding lease liability is not recorded for leases with an initial term of 12 months or less (short-term leases) as the Company recognizes lease expense for these leases as incurred over the lease term.
In September 2022, the Company determined that the right-of-use asset related to the operating lease for the Lot 4C leasehold land zoned conservation held by Kaupulehu Developments was fully impaired as of September 30, 2022. As a result, the Company recognized an $89,000 right-of-use asset impairment expense during the year ended September 30, 2022.
Leases recorded on the balance sheet consist of the following:
| | | | | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
| Assets: | | | |
| Operating lease right-of-use assets | $ | 132,000 | | | $ | 296,000 | |
| Total right-of-use assets | $ | 132,000 | | | $ | 296,000 | |
| Liabilities: | | | |
| Current portion of operating lease liabilities (1) | $ | 105,000 | | | $ | 117,000 | |
| Operating lease liabilities | 117,000 | | | 180,000 | |
| Total lease liabilities | $ | 222,000 | | | $ | 297,000 | |
______________
(1) Amount included in “Other Current Liabilities” in the Consolidated Balance Sheets.
The components of lease expense are as follows:
| | | | | | | | | | | |
| Year ended September 30, |
| 2022 | | 2021 |
| Operating lease cost | $ | 108,000 | | | $ | 130,000 | |
| Short-term lease cost | 327,000 | | | 254,000 | |
| Variable lease cost | 154,000 | | | 103,000 | |
| Total lease cost | $ | 589,000 | | | $ | 487,000 | |
Supplemental information related to leases is as follows:
| | | | | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
| Cash paid related to operating lease liabilities | $ | 108,000 | | | $ | 133,000 | |
| Operating leases: | | | |
| Weighted-average remaining lease term (in years) | 2.4 | | 2.9 |
| Weighted-average discount rate | 5.30% | | 5.19% |
The remaining lease payments for our operating leases as of September 30, 2022, are as follows:
| | | | | |
| Fiscal year ending: | |
| 2023 | $ | 113,000 | |
| 2024 | 75,000 | |
| 2025 | 41,000 | |
| 2026 | 8,000 | |
| 2027 | — | |
| Thereafter through 2028 | — | |
| Total lease payments | 237,000 | |
| Less: amounts representing interest | (15,000) | |
| Present value of lease liabilities | $ | 222,000 | |
The lease payments for the Lot 4C leasehold land zoned conservation were subject to renegotiation as of January 1, 2006. Per the lease agreement, the lease payments will remain unchanged pending an appraisal, whereupon the lease rent could be adjusted to fair market value. Barnwell does not know the amount of the new lease payments which could be effective upon performance of the appraisal; they may remain unchanged or increase, and Barnwell currently expects the adjustment, if any, to not be material. The future lease payment disclosures above assume the minimum lease payments for leasehold land in effect at December 31, 2005 remain unchanged through December 2025, the end of the lease term.
16. STOCKHOLDERS' EQUITY
In May 2022, Barnwell’s stockholders approved the amendment to increase the Company’s number of authorized shares of common stock from 20,000,000 to 40,000,000 shares and approved amendments to the Company’s 2018 Equity Incentive Plan which included the amendment to increase the total number of shares of stock authorized for awards from 800,000 to 1,600,000 shares among other amendments.
Share-based Compensation
2018 Equity Incentive Plan
The Company’s stock option plans are administered by the Compensation Committee of the Board of Directors. The stockholder-approved 2018 Equity Incentive Plan provides for the issuance of incentive stock options, nonstatutory stock options, stock options with stock appreciation rights, restricted stock, restricted stock units and performance units, qualified performance-based awards, and stock grants to employees, consultants and non-employee members of the Board of Directors. 1,600,000 shares of Barnwell common stock have been reserved for issuance and as of September 30, 2022, a total of 935,000 share options remain available for grant.
Barnwell currently has a policy of issuing new shares to satisfy share option exercises when the optionee requests shares.
Equity-classified Awards
In February 2021, the Board of Directors of the Company granted options to purchase 665,000 shares of common stock, 310,000 shares to independent directors and 355,000 shares to employees. 605,000 shares of the stock options granted have an exercise price equal to the closing market price of
Barnwell’s stock on the date of grant of $3.33, vest annually over three years, and expire in ten years from the date of grant. 60,000 shares of the stock options granted have an exercise price of $3.66 (110% of the closing market price on the date of grant for options granted to affiliates), vest annually over three years, and expire in five years from the date of grant.
The following assumptions were used in estimating the fair value for equity-classified share options granted in the year ended September 30, 2021:
| | | | | | | | | | | |
| > 10% Owner-Employee | | Others |
| Number of shares | 60,000 | | 605,000 |
| Expected volatility | 127.4% | | 105.8% |
| Expected dividends | None | | None |
| Expected term (in years) | 3.5 | | 6.0 |
| Risk-free interest rate | 0.19% | | 0.82% |
| Expected forfeitures | None | | None |
| Fair value per share | $2.51 | | $2.70 |
The application of alternative assumptions could produce significantly different estimates of the fair value of share-based compensation, and consequently, the related costs reported in the “General and administrative” expenses in the Consolidated Statements of Operations.
A summary of the activity in Barnwell’s equity-classified share options from October 1, 2021 through September 30, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | Shares | | Weighted-
Average
Exercise Price | | Weighted-
Average
Remaining
Contractual Term | | Aggregate
Intrinsic Value |
| Outstanding at October 1, 2021 | 615,000 | | | $ | 3.36 | | | | | |
| Granted | — | | | — | | | | | |
| Exercised | — | | | — | | | | | |
| Expired/Forfeited | — | | | — | | | | | |
| Outstanding at September 30, 2022 | 615,000 | | | $ | 3.36 | | | 7.9 | | $ | — | |
| Exercisable at September 30, 2022 | 205,000 | | | $ | 3.36 | | | 7.9 | | $ | — | |
Compensation cost for equity-classified awards is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period. During the years ended September 30, 2022 and 2021, the Company recognized share-based compensation expense of $657,000 and $643,000, respectively. There was no impact on income taxes for the years ended September 30, 2022 and 2021 due to a full valuation allowance on the related deferred tax asset. As of September 30, 2022, the total remaining unrecognized compensation cost related to nonvested share options was $348,000, which is expected to be recognized over the weighted-average remaining requisite service period of 1.4 years.
Cash Dividend
In August 2022, the Company's Board of Directors declared a cash dividend of $0.015 per share that was paid on September 6, 2022 to stockholders of record on August 23, 2022. No dividends were declared or paid during fiscal 2021.
At The Market Offering
On March 16, 2021, the Company entered into a Sales Agreement (the “Sales Agreement”) with A.G.P./Alliance Global Partners (“A.G.P,”), with respect to 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.
During the year ended September 30, 2022, the Company sold 509,467 shares of common stock resulting in net proceeds of $2,356,000 after commissions and fees of $75,000 and ATM-related professional services of $22,000. During the year ended September 30, 2021, the Company sold 1,167,987 shares of common stock resulting in net proceeds of $3,179,000 after commissions and fees of $123,000 and ATM-related professional services of $605,000.
As of September 30, 2022, the Company has received $5,535,000 in cumulative net proceeds from the shares sold under the ATM program. In August 2022, the Company’s Board of Directors suspended the sales of our common stock under the ATM until further notice.
17. COMMITMENTS AND CONTINGENCIES
Incentive compensation plan
Barnwell established an incentive compensation plan to compensate all Canadian oil and natural gas segment personnel and an incentive compensation plan to compensate Canadian executive officers. The value of the plans are directly related to our oil and natural gas segment's free cash flows from Canadian properties and the divestiture of Canadian oil and natural gas assets. As of September 30, 2022, Barnwell has accrued approximately $381,000 in bonus compensation under these plans and the amount is reported in “Accrued compensation” on the Consolidated Balance Sheet at September 30, 2022.
Subscription Receipts Agreement
In May 2022, Barnwell Investments LLC, a new wholly-owned subsidiary of Barnwell Industries Inc., entered into an agreement to participate in a private placement offering (the “Offering”) of subscriptions receipts (the “Subscription Agreement”) with 1287398 B.C. Ltd. (the “Issuer”) and agreed to purchase 1,724,138 subscription receipts at a price of $1.16 per subscription receipt for a total of
$2,000,000 from the Issuer. 1287398 B.C. Ltd. is a Canadian reporting issuer. The Offering is subject to regulatory approvals, including the conditional listing approval by the TSX Venture Exchange.
The Subscription Agreement was held in escrow by the Issuer until certain escrow release conditions were met which included the Issuer raising an additional $3,000,000 in gross proceeds from other parties under the private placement offering for total minimum gross proceeds of $5,000,000. As of September 30, 2022, the escrow release condition had not been satisfied and no cash was paid by the Company to the Issuer. In November 2022, the Subscription Agreement was terminated by the Company and therefore the Company no longer has a commitment with the Issuer.
Environmental Matters
Because of the inherent uncertainties associated with environmental assessment and remediation activities, future expenses to remediate sites identified in the future, if any, could be incurred. Barnwell's management is not currently aware of any significant environmental contingent liabilities requiring disclosure or accrual.
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 September 30, 2022 for any further costs related to this contract as there is no related probable or estimable contingent liability.
Other Matters
Barnwell is obligated to pay Nearco Enterprises Ltd. 10.4%, net of non-controlling interests' share, of Kaupulehu Developments’ gross receipts from real estate transactions. The fees represent compensation for promotion and marketing of Kaupulehu Developments’ property and were determined based on the estimated fair value of such services. These fees are included in general and administrative expenses.
Barnwell is obligated to pay its external real estate legal counsel 1.2%, net of non-controlling interests' share, of all Increment II payments received by Kaupulehu Developments for services provided
by its external real estate legal counsel in the negotiation and closing of the Increment II transaction. These fees are included in general and administrative expenses.
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 and a pool of various individuals, respectively, all of whom are partners of KKM and are unrelated to Barnwell, in compensation for the agreement of these parties to admit the new development partner for Increment II. Such compensation will be reflected as the obligation becomes probable and the amount of the obligation can be reasonably estimated.
18. INFORMATION RELATING TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
The following table details the effect of changes in current assets and liabilities on the Consolidated Statements of Cash Flows, and presents supplemental cash flow information:
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2022 | | 2021 |
| Increase (decrease) from changes in: | | | |
| Receivables | $ | (1,763,000) | | | $ | (814,000) | |
| Income tax receivable | 15,000 | | | 457,000 | |
| Other current assets | (531,000) | | | (920,000) | |
| Accounts payable | 110,000 | | | (746,000) | |
| Accrued compensation | (48,000) | | | 668,000 | |
| Other current liabilities | 1,190,000 | | | (796,000) | |
| Decrease from changes in current assets and liabilities | $ | (1,027,000) | | | $ | (2,151,000) | |
| Supplemental disclosure of cash flow information: | | | |
| Cash paid (received) during the year for: | | | |
| | | |
| Income taxes refunded, net | $ | (98,000) | | | $ | (303,000) | |
| Supplemental disclosure of non-cash investing activities: | | | |
| Canadian income tax withheld on proceeds from the sale of oil and natural gas properties | $ | — | | | $ | 598,000 | |
| | | |
Capital expenditure accruals related to oil and natural gas acquisition and development increased $882,000 and $346,000 during the years ended September 30, 2022 and 2021, respectively. Additionally, capital expenditure accruals related to oil and natural gas asset retirement obligations increased $2,703,000 and $811,000 during the years ended September 30, 2022 and 2021, respectively.
19. 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.
During the year ended September 30, 2022, Barnwell received $1,295,000 in percentage of sales payments from KD I from the sale of six lots within Increment I. During the year ended September 30, 2021, Barnwell received $1,738,000 in percentage of sales payments from KD I from the sale of eight lots within 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.
20. SUBSEQUENT EVENTS
Gain on Sale of Drilling Rig
In September 2022, the Company entered into a purchase and sale agreement with an independent third party for the sale of a contract drilling segment drilling rig and received a payment of $551,000, net of related costs. At September 30, 2022, the legal title for the drilling rig had not yet transferred to the buyer and therefore, the Company did not record a sale during the year ended September 30, 2022. The proceeds received from the buyer was recognized as a deposit and recorded in “Other Current Liabilities” on the Company's Consolidated Balance Sheet at September 30, 2022. No amount was recorded as assets held for sale at September 30, 2022 as the drilling rig was fully depreciated and therefore had a net book value of zero. In October 2022, the legal title for the drilling rig was transferred to the buyer and as a result, the Company will recognize a $551,000 gain on the sale of the drilling rig in the first quarter of fiscal 2023 ending December 31, 2022.
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 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 will be issued to stockholders of record at the close of business on October 27, 2022 pursuant to the Tax Plan. The Rights will be exercisable if a person or group of persons acquires 4.95% or more of the Company’s common stock. The Rights will also be 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 will be “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.
Kukio Resort Land Development Partnerships and Sale of Interest in Leasehold Land
In November 2022, Kaupulehu Developments received a percentage of sales payment of $265,000 from the sale of one lot within Increment I. Financial results from the receipt of this payment will be reflected in Barnwell's first quarter of fiscal 2023 ending December 31, 2022.
Additionally, in November 2022, Barnwell received a net cash distribution in the amount of $478,000 from the Kukio Resort Land Development Partnerships. Financial results from this distribution will be reflected in Barnwell's first quarter of fiscal 2023 ending December 31, 2022.
Oil and Natural Gas Investment
In December 2022, the Company, through a new wholly-owned subsidiary named Barnwell Texas, LLC, entered into agreements with an independent third party whereby the Company will now own a 22.3% non-operated working interest in oil and natural gas leasehold acreage and a 15.4% non-operated working interest in the planned drilling of two oil wells in the Permian Basin in Texas. The Company paid $5,099,000 to the independent third party under these agreements. In addition, the Company is obligated to pay a broker’s fee of 5% 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 (see Note 19 for additional details). This transaction will be reflected in Barnwell's first quarter of fiscal 2023 ending December 31, 2022.
Cash Dividend
In December 2022, the Company's Board of Directors declared a cash dividend of $0.015 per share payable on January 11, 2023 to stockholders of record on December 27, 2022.
21. SUMMARY OF SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Disclosure is not required as Barnwell qualifies as a smaller reporting company.
22. SUPPLEMENTARY OIL AND NATURAL GAS INFORMATION (UNAUDITED)
The following tables summarize information relative to Barnwell’s oil and natural gas operations, which are conducted in Canada and in the U.S. state of Oklahoma. Proved reserves are the estimated quantities of oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved producing oil and natural gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. The estimated net interests in total proved and proved producing reserves are based upon subjective engineering judgments and may be affected by the limitations inherent in such estimations. The process of estimating reserves is subject to continual revision as additional information becomes available as a result of drilling, testing, reservoir studies and production history. There can be no assurance that such estimates will not be materially revised in subsequent periods.
(A) Oil and Natural Gas Reserves
The following tables summarizes changes in the estimates of Barnwell’s net interests in total proved reserves of oil and natural gas liquids and natural gas, which are located in Canada and the U.S. state of Oklahoma. Proved oil, natural gas liquids and natural gas reserves located in the U.S state of Oklahoma were not significant in fiscal 2021 and was therefore not included in the tables below. All of the information regarding Canadian reserves in this Form 10-K is derived from the report of our independent petroleum reserve engineers, InSite, and is included as an Exhibit to this Form 10-K. All of the information regarding U.S. reserves in this Form 10-K is derived from the report of our independent petroleum reserve engineers, Ryder Scott, and is included as an Exhibit to this Form 10-K. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries and undeveloped locations are more imprecise than estimates of established proved producing oil and natural gas properties. Accordingly, these estimates are expected to change as future information becomes available.
Proved oil and natural gas reserves are the estimated quantities of oil and natural gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions (i.e., prices and costs) existing at the time the estimate is made. Proved developed oil and natural gas reserves are proved reserves that can be expected to be recovered through existing wells and equipment in place and under operating methods being utilized at the time the estimates were made.
| | | | | | | | | | | | | | | | | |
| Oil & NGL
(Bbls) |
| Canada | | United States | | Total |
| Proved reserves: | | | | | |
| Balance at September 30, 2020 | 535,000 | | | — | | | 535,000 | |
| Revisions of previous estimates | 291,000 | | | — | | | 291,000 | |
| | | | | |
| Acquisitions of reserves | 80,000 | | | — | | | 80,000 | |
| Less sales of reserves | (97,000) | | | — | | | (97,000) | |
| Less production | (169,000) | | | — | | | (169,000) | |
| Balance at September 30, 2021 | 640,000 | | | — | | | 640,000 | |
| Revisions of previous estimates | 154,000 | | | — | | | 154,000 | |
| Extensions, discoveries and other additions | 285,000 | | | 132,000 | | | 417,000 | |
| Acquisitions of reserves | 99,000 | | | — | | | 99,000 | |
| | | | | |
| Less production | (188,000) | | | (42,000) | | | (230,000) | |
| Proved Reserves, September 30, 2022 | 990,000 | | | 90,000 | | | 1,080,000 | |
| Proved Developed Reserves, September 30, 2022 | 956,000 | | | 90,000 | | | 1,046,000 | |
| Proved Undeveloped Reserves, September 30, 2022 | 34,000 | | | — | | | 34,000 | |
| | | | | | | | | | | | | | | | | |
| Natural Gas
(Mcf) |
| Canada | | United States | | Total |
| Proved reserves: | | | | | |
| Balance at September 30, 2020 | 2,310,000 | | | — | | | 2,310,000 | |
| Revisions of previous estimates | 1,345,000 | | | — | | | 1,345,000 | |
| | | | | |
| Acquisitions of reserves | 289,000 | | | — | | | 289,000 | |
| Less sales of reserves | (341,000) | | | — | | | (341,000) | |
| Less production | (690,000) | | | — | | | (690,000) | |
| Balance at September 30, 2021 | 2,913,000 | | | — | | | 2,913,000 | |
| Revisions of previous estimates | 968,000 | | | — | | | 968,000 | |
| Extensions, discoveries and other additions | 1,200,000 | | | 658,000 | | | 1,858,000 | |
| Acquisitions of reserves | 223,000 | | | — | | | 223,000 | |
| Less sales of reserves | (13,000) | | | — | | | (13,000) | |
| Less production | (772,000) | | | (192,000) | | | (964,000) | |
| Proved Reserves, September 30, 2022 | 4,519,000 | | | 466,000 | | | 4,985,000 | |
| Proved Developed Reserves, September 30, 2022 | 4,391,000 | | | 466,000 | | | 4,857,000 | |
| Proved Undeveloped Reserves, September 30, 2022 | 128,000 | | | — | | | 128,000 | |
| | | | | | | | | | | | | | | | | |
| Total Equivalent Reserves
(Boe) |
| Canada | | United States | | Total |
| Proved reserves: | | | | | |
| Balance at September 30, 2020 | 933,000 | | | — | | | 933,000 | |
| Revisions of previous estimates | 523,000 | | | — | | | 523,000 | |
| | | | | |
| Acquisitions of reserves | 130,000 | | | — | | | 130,000 | |
| Less sales of reserves | (156,000) | | | — | | | (156,000) | |
| Less production | (288,000) | | | — | | | (288,000) | |
| Balance at September 30, 2021 | 1,142,000 | | | — | | | 1,142,000 | |
| Revisions of previous estimates | 321,000 | | | — | | | 321,000 | |
| Extensions, discoveries and other additions | 492,000 | | | 245,000 | | | 737,000 | |
| Acquisitions of reserves | 137,000 | | | — | | | 137,000 | |
| Less sales of reserves | (2,000) | | | — | | | (2,000) | |
| Less production | (321,000) | | | (75,000) | | | (396,000) | |
| Proved Reserves, September 30, 2022 | 1,769,000 | | | 170,000 | | | 1,939,000 | |
| Proved Developed Reserves, September 30, 2022 | 1,713,000 | | | 170,000 | | | 1,883,000 | |
| Proved Undeveloped Reserves, September 30, 2022 | 56,000 | | | — | | | 56,000 | |
(B) Capitalized Costs Relating to Oil and Natural Gas Producing Activities
All capitalized costs relating to oil and natural gas producing activities in Canada and the U.S. are summarized as follows:
| | | | | | | | | | | | | | | | | |
| | September 30, 2022 |
| | Canada | | United States | | Total |
| Proved properties | $ | 66,825,000 | | | $ | 1,058,000 | | | $ | 67,883,000 | |
| Unproved properties | — | | | — | | | — | |
| Total capitalized costs | 66,825,000 | | | 1,058,000 | | | 67,883,000 | |
| Accumulated depletion, depreciation, and impairment | 54,248,000 | | | 403,000 | | | 54,651,000 | |
| Net capitalized costs | $ | 12,577,000 | | | $ | 655,000 | | | $ | 13,232,000 | |
| | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
| | Canada | | United States | | Total |
| Proved properties | $ | 58,273,000 | | | $ | 217,000 | | | $ | 58,490,000 | |
| Unproved properties | — | | | 962,000 | | | 962,000 | |
| Total capitalized costs | 58,273,000 | | | 1,179,000 | | | 59,452,000 | |
| Accumulated depletion, depreciation, and impairment | 56,053,000 | | | 14,000 | | | 56,067,000 | |
| Net capitalized costs | $ | 2,220,000 | | | $ | 1,165,000 | | | $ | 3,385,000 | |
(C) Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development
| | | | | | | | | | | | | | | | | |
| | Year ended September 30, 2022 |
| | Canada | | United States | | Total |
| Acquisition of properties: | | | | | |
| Proved | $ | 3,247,000 | | | $ | — | | | $ | 3,247,000 | |
| Unproved | — | | | — | | | — | |
| Exploration costs | 55,000 | | | — | | | 55,000 | |
| Development costs | 10,574,000 | | | (121,000) | | | 10,453,000 | |
| Total | $ | 13,876,000 | | | $ | (121,000) | | | $ | 13,755,000 | |
| | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
| | Canada | | United States | | Total |
| Acquisition of properties: | | | | | |
| Proved | $ | 1,032,000 | | | $ | 70,000 | | | $ | 1,102,000 | |
| Unproved | — | | | — | | | — | |
| Exploration costs | 255,000 | | | — | | | 255,000 | |
| Development costs | 563,000 | | | 1,108,000 | | | 1,671,000 | |
| Total | $ | 1,850,000 | | | $ | 1,178,000 | | | $ | 3,028,000 | |
Costs incurred in the tables above include additions and revisions to Barnwell’s asset retirement obligation of $2,703,000 and $811,000 for the years ended September 30, 2022 and 2021, respectively.
(D) Results of Operations for Oil and Natural Gas Producing Activities
| | | | | | | | | | | | | | | | | |
| | Year ended September 30, 2022 |
| | Canada | | United States | | Total |
| Net revenues | $ | 19,085,000 | | | $ | 3,496,000 | | | $ | 22,581,000 | |
| Production costs | (8,999,000) | | | (440,000) | | | (9,439,000) | |
| Depletion | (2,217,000) | | | (389,000) | | | (2,606,000) | |
| | | | | |
Pre-tax results of operations (1) | 7,869,000 | | | 2,667,000 | | | 10,536,000 | |
Estimated income tax expense (2) | — | | | 107,000 | | | 107,000 | |
Results of operations (1) | $ | 7,869,000 | | | $ | 2,560,000 | | | $ | 10,429,000 | |
| | | | | | | | | | | | | | | | | |
| | Year ended September 30, 2021 |
| | Canada | | United States | | Total |
| Net revenues | $ | 10,136,000 | | | $ | 118,000 | | | $ | 10,254,000 | |
| Production costs | (6,532,000) | | | (24,000) | | | (6,556,000) | |
| Depletion | (631,000) | | | (14,000) | | | (645,000) | |
| Reduction of carrying value of oil and natural gas properties | (630,000) | | | — | | | (630,000) | |
Pre-tax results of operations (1) | 2,343,000 | | | 80,000 | | | 2,423,000 | |
Estimated income tax expense (2) | — | | | — | | | — | |
Results of operations (1) | $ | 2,343,000 | | | $ | 80,000 | | | $ | 2,423,000 | |
_________________
(1) Before gain on sale of oil and natural gas properties, general and administrative expenses, interest expense, and foreign exchange gains and losses.
(2) Estimated income tax expense includes changes to the deferred income tax valuation allowance necessary for the portion of Canadian and U.S. federal tax law deferred tax assets that may not be realizable.
(E) Standardized Measure, Including Year-to-Year Changes Therein, of Estimated Discounted Future Net Cash Flows
The following tables utilize reserve and production data estimated by independent petroleum reserve engineers. The information may be useful for certain comparison purposes but should not be solely relied upon in evaluating Barnwell or its performance. Moreover, the projections should not be construed as realistic estimates of future cash flows, nor should the standardized measure be viewed as representing current value. Additionally, proved oil, natural gas liquids and natural gas reserves located in the U.S. were not significant in fiscal 2021 and was therefore not included in the tables below.
The estimated future cash flows at September 30, 2022 and 2021 were based on average sales prices in effect on the first day of the month for the preceding twelve month period in accordance with SEC Release No. 33-8995. The future production and development costs represent the estimated future expenditures that we will incur to develop and produce the proved reserves, assuming continuation of existing economic conditions. The future income tax expenses were computed by applying statutory income tax rates in existence at September 30, 2022 and 2021 to the future pre-tax net cash flows relating to proved reserves, net of the tax basis of the properties involved.
Material revisions to reserve estimates may occur in the future, development and production of the oil and natural gas reserves may not occur in the periods assumed and actual prices realized and actual costs incurred are expected to vary significantly from those used. Management does not rely upon this information in making investment and operating decisions; rather, those decisions are based upon a wide range of factors, including estimates of probable reserves as well as proved reserves and price and cost assumptions different than those reflected herein.
Barnwell has included all abandonment, decommissioning and reclamation costs and inactive well costs in accordance with best practice recommendations into the Company’s reserve reports.
Standardized Measure of Discounted Future Net Cash Flows
| | | | | | | | | | | | | | | | | |
| | Year ended September 30, 2022 |
| | Canada | | United States | | Total |
| Future cash inflows | $ | 93,658,000 | | | $ | 6,676,000 | | | $ | 100,334,000 | |
| Future production costs | (44,523,000) | | | (832,000) | | | (45,355,000) | |
| Future development costs | (274,000) | | | — | | | (274,000) | |
| Future income tax expenses | (6,908,000) | | | (233,000) | | | (7,141,000) | |
| Future net cash flows excluding abandonment, decommissioning and reclamation | 41,953,000 | | | 5,611,000 | | | 47,564,000 | |
| Future abandonment, decommissioning and reclamation | (16,719,000) | | | (11,000) | | | (16,730,000) | |
| Future net cash flows | 25,234,000 | | | 5,600,000 | | | 30,834,000 | |
| 10% annual discount for timing of cash flows | (1,144,000) | | | (1,812,000) | | | (2,956,000) | |
| Standardized measure of discounted future net cash flows | $ | 24,090,000 | | | $ | 3,788,000 | | | $ | 27,878,000 | |
| | | | | | | | | | | | | | | | | |
| | Year ended September 30, 2021 |
| | Canada | | United States | | Total |
| Future cash inflows | $ | 36,130,000 | | | $ | — | | | $ | 36,130,000 | |
| Future production costs | (25,323,000) | | | — | | | (25,323,000) | |
| Future development costs | (240,000) | | | — | | | (240,000) | |
| Future income tax expenses | (995,000) | | | — | | | (995,000) | |
| Future net cash flows excluding abandonment, decommissioning and reclamation | 9,572,000 | | | — | | | 9,572,000 | |
| Future abandonment, decommissioning and reclamation | (14,525,000) | | | — | | | (14,525,000) | |
| Future net cash flows | (4,953,000) | | | — | | | (4,953,000) | |
| 10% annual discount for timing of cash flows | 7,598,000 | | | — | | | 7,598,000 | |
| Standardized measure of discounted future net cash flows | $ | 2,645,000 | | | $ | — | | | $ | 2,645,000 | |
Changes in the Standardized Measure of Discounted Future Net Cash Flows
| | | | | | | | | | | |
| | Year ended September 30, |
| | 2022 | | 2021 |
| Beginning of year | $ | 2,645,000 | | | $ | (1,685,000) | |
| Sales of oil and natural gas produced, net of production costs | (13,142,000) | | | (3,604,000) | |
| Net changes in prices and production costs, net of royalties and wellhead taxes | 27,828,000 | | | 5,702,000 | |
| Extensions and discoveries | 8,889,000 | | | — | |
| Net change due to purchases and sales of minerals in place | 2,451,000 | | | (882,000) | |
| | | |
| | | |
| Revisions of previous quantity estimates | 4,270,000 | | | 4,217,000 | |
| Net change in income taxes | (4,774,000) | | | (845,000) | |
| Accretion of discount | (1,566,000) | | | (176,000) | |
| Other - changes in the timing of future production and other | 801,000 | | | (55,000) | |
| Other - net change in Canadian dollar translation rate | 476,000 | | | (27,000) | |
| Net change | 25,233,000 | | | 4,330,000 | |
| End of year | $ | 27,878,000 | | | $ | 2,645,000 | |