TPS Trade Alert – June 29, 2016

Recommendation:

Buy Barnwell Industries Inc. (NYSE: BRN) up to $1.65 per share.

 

The Opportunity:

You’ve got to hand it to Mort Kinzler.

He’s 90 years old and still shows up for work.  Mr. Kinzler has been the Chairman of Barnwell Industries Inc. since 1980, and a Director since 1956.

Barnwell is focused on the energy business.  The Honolulu-based firm operates in the Canadian province of Alberta for oil and natural gas exploration, development, production and sales.

But it is also in three other businesses, each based in Hawaii.  Barnwell invests in land, develops and sells expensive homes, and provides well drilling and water pumping services through a wholly owned subsidiary, Water Resources.

As you can imagine, Barnwell has been battered by the collapse in energy prices.  It sold off its interests in its largest oil and natural gas properties in Alberta last fall for a net profit of $14.1 million.

Today, the firm holds interests in 104 oil wells and 95 natural gas wells. All of them are productive.  It also holds both developed and undeveloped oil and natural gas leases covering 297,000 acres.

The company makes money selling oil and natural gas under short-term contracts.  It has multiple customers and because market conditions drive prices, all of them are paying less.  Barnwell revenues have been beaten down.

Here’s a sobering example of how the energy price collapse battered Barnwell.

For the two quarters that ended March 31, 2016, Barnwell sold oil for an average of $26.46 a barrel.

The corresponding two quarters the year before, the average price was $48.16.

The same thing happened with natural gas, down to $1.33 per Mcf from $2.47.

It hasn’t been pretty.  And Barnwell’s relatively small businesses in Hawaii, real estate and well drilling, haven’t done much to ease the pain.

 

Financials:

For 2015 fiscal year, Barnwell revenues were $17.5 million, down from $31.4 in 2014 and $24.6 million in 2013.

Net income was $1.26 million.

On the balance sheet, there is no long-term debt, but liabilities are significant.  The $22 million include $11 million carried as “Other Liabilities”.  Net tangible assets are valued at $18.6 million.

For the quarter ending March 31, 2016, the net loss was $1,608,000, a $409,000 step in the right direction from a net loss of $2,017,000 for the corresponding quarter in 2015.

Land development profits were off $533,000.  That’s because of soft sales from the company’s Kukio Resort land development partnerships. Kukio is on the Kona-Kohala coast on Hawaii’s Big Island.  It’s a private, residential equity club next door to the Four Seasons Hotel.

 

Trade Rationale:

We’ve been watching Barnwell for a while.  What first attracted us to the company was its “survival of the fittest” performance as the energy collapse took down one small company after another.

It swallowed some tough medicine and sold off some holdings, but has kept its balance sheet in good shape.  Three years ago, the company was saddled with more than $11 million in long-term debt.  Now it has none.  And there’s $15.9 million in the bank.

We believe this is an undervalued stock.  We also believe it will benefit significantly as energy prices continue to stabilize, as we’ve seen over the past few months.

In 2015, the lion’s share, more than 90% of Barnwell’s oil and natural gas was sold at spot prices.  This means the company is not locked into unfavorable contracts that can throttle revenue potential as energy prices climb.

 

Investment Risks:

The rebound in energy prices we’ve seen could sputter out, and the opportunities for Barnwell to increase revenues could fade away.

The real estate market in Hawaii could collapse, or other parties in the Kukio Resort land development partnership could default and leave Barnwell holding an undesirable bag of debt.

The death of Mort Kinzler, the firm’s 90 year-old Chairman, could rattle investors and drive down the share price.

 

Potential Return: 

We see an opportunity for a 20% short-term gain.  When Q2 results are reported, we expect to see a loss turned into a modest profit, and as we move into Q3 and Q4, we are looking for these profits to grow.

It is not unrealistic to expect Barnwell to trade in the $4-6 range later this year, and to continue to solidify its gains through 2017.

 

Key Facts:

Company:                                  Barnwell Industries Inc.

Ticker:                                         $BRN

Recent Price:                             $1.42

Buy up to Price:                         $1.65

Market Cap:                               $11.75 million

Avg. Daily Volume (3 month):        3,275 shares

 

Chart:

 

Category: TPS Trade Alert