In a 13D filing
of Barnwell Industries, Inc.'s (AMEX: BRN
), Mercury Real Estate Advisors LLC disclosed a 16.3% stake (1.33 million shares) in the company This is below the 1.55 million share stake the firm disclosed in a quarterly filing with regulators. The investment firm sent a letter to the company urging that "strategic alternatives, including the sale of its energy division, must be evaluated to fully maximize the value of the Company for all shareholders." The firm also said, "a substantial share buyback program should be put into effect immediately."
Commenting on valuation the firm said, "With the combined value of its real estate and energy divisions implying a $29 per share price at a minimum, Barnwell is a dramatically undervalued company."
Shares of Barnwell Industries are currently trading at $21.70, up 1.6% on the session.
A Copy of the Letter:Barnwell Industries, Inc.
Board of Directors
1100 Alakea Street
Honolulu, Hawaii 96813
As you are aware, Mercury Real Estate Advisors LLC and its affiliates (“Mercury”) are the largest shareholders of Barnwell Industries, Inc. (“Barnwell” or the “Company”). As a significant shareholder of the Company for approximately the past two years, we have witnessed the Company’s preliminary success in unlocking the significant value in its desirable real estate holdings on the western coast of the main island of Hawaii and the improvement in profitability of its oil and natural gas business in Canada. Although there remains substantial unrealized value in these assets, we believe the Company’s current corporate structure, egregious executive compensation and disparate business divisions are fundamentally flawed. We further believe that strategic alternatives, including the sale of its energy division, must be evaluated to fully maximize the value of the Company for all shareholders. Finally, a substantial share buyback program should be put into effect immediately.
As you know, Barnwell’s majority-owned subsidiary, Kaupulehu Developments, has strategically negotiated the sale of its leasehold interests in 870 acres of prime coastal real estate (Increment I and II) to an affiliate of Westbrook Partners (“Westbrook”), which allows Kaupulehu, and ultimately Barnwell, to profit substantially from the development of the land into a luxurious residential community with limited execution risk. As of April 2006, five of the planned 80 lots in Increment I had been sold for what we estimate to be an average price above $8 million per lot. Based on our underwriting of the real estate, as well as discussions with local real estate brokers, we believe that many of the remaining lots in Increment I may sell for $10 million or more, while the lots in Increment II will also sell for millions of dollars each. Given Barnwell’s percentage interest in the revenues associated with these property sales, the Company stands to realize a significant return over the next several years as Westbrook continues to sell these highly desirable residential lots and creates a high-end residential community that rivals its Kukio Resort to the south. Based on our analysis, we believe the value of Barnwell’s real estate interests alone translates into a per share value in excess of $11. Further, this estimate attributes no value to the potentially substantial profits to be earned from the entitlement to and or sale of the 1,000 acres of land to the east of Lot 4-C in which Barnwell has an interest.
Concurrently, Barnwell has seen dramatic growth in the operating profit of its oil and natural gas business in Canada as a result of a substantial increase in market prices and, to a lesser extent, increased production of oil and natural gas liquids. As the largest shareholder of the Company, we have applauded these significant improvements in profitability and believe that strong and increasing global demand for petroleum products will allow Barnwell’s energy business to experience further enhancements in profitability. Looking at recent energy transactions in Alberta, we currently believe that the value of Barnwell’s proven BoEs (barrels of oil equivalent) translates on a standalone basis into a per share value of approximately $18.
With the combined value of its real estate and energy divisions implying a $29 per share price at a minimum, Barnwell is a dramatically undervalued company. However, its unnecessarily complex corporate structure, which includes independent businesses with no synergies, obfuscates its intrinsic value. Further, an executive management team at Barnwell characterized by nepotism in the Chief Executive Officer and President positions continues to reap million dollar-plus salaries, in part driving general and administrative expenses to an astronomical 21% of total revenues for the nine months ended June 30, 2006.
As the largest shareholder of the Company, we demand that the Board hire an investment bank to evaluate strategic alternatives, including a sale of the energy division and a share buyback program using proceeds received from lot sales in Increment I and II. As noted above, we believe there is no synergistic advantage to the current corporate structure and believe that the full value of Barnwell will only be recognized if the energy division, which would be an attractive acquisition candidate for any of the energy companies with a presence in Canada, is sold immediately. Further, this sale would significantly reduce general administrative expenses as the real estate division, which already has sold its most valuable asset and is passively collecting funds from Westbrook in an annuity-like fashion, could focus singularly on cultivating value in the 1,000 acres it owns north of Lot 4A (which is currently zoned as conservation land) through a sale to a strategic buyer. Given the minimal capital requirements associated with this project, a substantial share buyback could be easily instituted with the percentage payments received from the lot sales.
Further, given that the shares are trading at a substantial discount to their intrinsic value, the Board should immediately implement a share buyback using both the $10,807,000 of cash and cash equivalents on the balance sheet as well as proceeds received from lot sales in Increment I and Increment II. This share buyback could also be significantly increased in scale after a sale of the oil and gas operations.
We believe that the Board should be committed to maximizing value for all shareholders, not paying excessive compensation to a complacent management team lacking in transparency. To this end, we are requesting a meeting with the Independent Members of the Board to discuss our proposed strategy as well as the hiring of an investment bank to evaluate strategic alternatives.
MERCURY REAL ESTATE ADVISORS LLC
David R. Jarvis Chief Executive Officer
Malcolm F. MacLean IV President
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