Edgar Filing: BARNWELL INDUSTRIES INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2010

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-5103

BARNWELL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		72-0496921
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1100 Alakea Street, Suite 2900, Honolulu, Hawaii		96813
(Address of principal executive offices)		(Zip code)

(808) 531-8400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o		Accelerated filer o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

As of February 8, 2011 there were 8,277,160 shares of common stock, par value $0.50, outstanding.

BARNWELL INDUSTRIES, INC.

AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets - December 31, 2010 and September 30, 2010 (Unaudited)	3

	Condensed Consolidated Statements of Operations - three months ended December 31, 2010 and 2009 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows - three months ended December 31, 2010 and 2009 (Unaudited)	5

	Condensed Consolidated Statements of Equity and Comprehensive Income - three months ended December 31, 2010 and 2009 (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 4.	Controls and Procedures	30

PART II.	OTHER INFORMATION:

Item 6.	Exhibits	30

	Signature	31

	Index to Exhibits	32

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	December 31,			September 30,
	2010			2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	12,071,000		$	10,674,000
Restricted cash	680,000			218,000
Accounts receivable, net of allowance for doubtful accounts of:
$71,000 at December 31, 2010; $70,000 at September 30, 2010	4,688,000			6,535,000
Income taxes receivable	398,000			2,240,000
Prepaid expenses	666,000			400,000
Real estate held for sale	13,058,000			13,058,000
Other current assets	1,001,000			1,242,000

TOTAL CURRENT ASSETS	32,562,000			34,367,000

INVESTMENTS	5,433,000			5,433,000

PROPERTY AND EQUIPMENT	238,244,000			226,368,000
ACCUMULATED DEPLETION, DEPRECIATION, AND AMORTIZATION	(184,759,000		)	(176,280,000		)
PROPERTY AND EQUIPMENT, NET	53,485,000			50,088,000

TOTAL ASSETS	$	91,480,000		$	89,888,000

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	2,448,000		$	1,442,000
Accrued capital expenditures	1,648,000			2,269,000
Accrued compensation	2,162,000			2,142,000
Payable to joint interest owners	482,000			1,265,000
Income taxes payable	235,000			1,072,000
Current portion of long-term debt	13,800,000			13,650,000
Other current liabilities	2,682,000			2,966,000

TOTAL CURRENT LIABILITIES	23,457,000			24,806,000

LONG-TERM DEBT	11,700,000			12,350,000

LIABILITY FOR RETIREMENT BENEFITS	5,265,000			5,391,000

ASSET RETIREMENT OBLIGATION	5,113,000			4,869,000

DEFERRED INCOME TAXES	4,138,000			3,864,000

TOTAL LIABILITIES	49,673,000			51,280,000

EQUITY:
BARNWELL INDUSTRIES, INC. STOCKHOLDERS’ EQUITY:
Common stock, par value $0.50 per share; Authorized, 20,000,000 shares:
8,445,060 issued at December 31, 2010 and September 30, 2010	4,223,000			4,223,000
Additional paid-in capital	1,289,000			1,289,000
Retained earnings	35,425,000			34,340,000
Accumulated other comprehensive income, net	1,413,000			49,000
Treasury stock, at cost:
167,900 shares at December 31, 2010 and September 30, 2010	(2,286,000		)	(2,286,000		)

TOTAL BARNWELL INDUSTRIES, INC. STOCKHOLDERS’ EQUITY	40,064,000			37,615,000
Non-controlling interests	1,743,000			993,000

TOTAL EQUITY	41,807,000			38,608,000

TOTAL LIABILITIES AND EQUITY	$	91,480,000		$	89,888,000

See Notes to Condensed Consolidated Financial Statements

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended
	December 31,
	2010		2009
Revenues:
Oil and natural gas	$	6,598,000	$	7,144,000
Contract drilling	1,569,000		2,288,000
Sale of interest in leasehold land, net	564,000		1,091,000
Sale of development rights, net	2,497,000		2,497,000
Gas processing and other	91,000		145,000

	11,319,000		13,165,000
Costs and expenses:
Oil and natural gas operating	2,719,000		2,309,000
Contract drilling operating	1,367,000		1,632,000
General and administrative	2,314,000		2,387,000
Depletion, depreciation, and amortization	2,430,000		2,341,000
Reduction of carrying value of assets	-		798,000
Interest expense	308,000		297,000

	9,138,000		9,764,000

Earnings before income taxes	2,181,000		3,401,000

Income tax provision	486,000		974,000

NET EARNINGS	1,695,000		2,427,000

Less: Net earnings attributable to non-controlling interests	610,000		475,000

NET EARNINGS ATTRIBUTABLE TO BARNWELL INDUSTRIES, INC.	$	1,085,000	$	1,952,000

BASIC NET EARNINGS PER COMMON SHARE ATTRIBUTABLE TO BARNWELL INDUSTRIES, INC. STOCKHOLDERS	$	0.13	$	0.24

DILUTED NET EARNINGS PER COMMON SHARE ATTRIBUTABLE TO BARNWELL INDUSTRIES, INC. STOCKHOLDERS	$	0.13	$	0.24

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
BASIC	8,277,160		8,264,021
DILUTED	8,277,160		8,267,075

See Notes to Condensed Consolidated Financial Statements

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended
	December 31,
	2010			2009
Cash flows from operating activities:
Net earnings	$	1,695,000		$	2,427,000
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depletion, depreciation, and amortization	2,430,000			2,341,000
Share-based compensation expense	240,000			171,000
Retirement benefits expense	188,000			202,000
Deferred income tax expense	131,000			956,000
Accretion of asset retirement obligation	81,000			77,000
Reduction of carrying value of assets	-			798,000
Asset retirement obligation payments	(10,000		)	(30,000		)
Retirement plan contributions	(252,000		)	(1,000		)
Sale of interest in leasehold land, net	(564,000		)	(1,091,000		)
Sale of development rights, net	(2,497,000		)	(2,497,000		)
Increase (decrease) from changes in current assets and liabilities	1,885,000			(2,290,000		)

Net cash provided by operating activities	3,327,000			1,063,000

Cash flows from investing activities:
Proceeds from sale of development rights	2,656,000			2,656,000
Proceeds from sale of interest in leasehold land, net of fees paid	564,000			1,091,000
Proceeds from gas over bitumen royalty adjustments	17,000			22,000
Proceeds from sale of oil and natural gas properties	-			539,000
Capital expenditures - oil and natural gas	(3,016,000		)	(1,179,000		)
Capital expenditures - all other	(1,860,000		)	(30,000		)

Net cash (used in) provided by investing activities	(1,639,000		)	3,099,000

Cash flows from financing activities:
Repayments of long-term debt	(500,000		)	-
Contributions from non-controlling interests	240,000			87,000
Proceeds from exercise of stock options	-			59,000
Distributions to non-controlling interests	(100,000		)	(231,000		)

Net cash used in financing activities	(360,000		)	(85,000		)

Effect of exchange rate changes on cash and cash equivalents	69,000			41,000

Net increase in cash and cash equivalents	1,397,000			4,118,000
Cash and cash equivalents at beginning of period	10,674,000			6,879,000

Cash and cash equivalents at end of period	$	12,071,000		$	10,997,000

See Notes to Condensed Consolidated Financial Statements

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME

Three months ended December 31, 2010 and 2009

(Unaudited)


											Accumulated
				Additional							Other
	Shares	Common		Paid-In		Comprehensive			Retained		Comprehensive			Treasury			Non-controlling			Total
	Outstanding	Stock		Capital		Income			Earnings		Income (Loss)			Stock			Interests			Equity
Balance at September 30, 2009	8,240,160	$	4,202,000	$	1,227,000				$	30,500,000	$	(1,349,000	)	$	(2,262,000	)	$	902,000		$	33,220,000

Exercise of stock options - 42,000 shares, net of 5,000 shares tendered and placed in treasury	37,000	21,000		62,000										(24,000		)				59,000

Contributions from non-controlling interests																	87,000			87,000

Distributions to non-controlling interests																	(231,000		)	(231,000		)

Comprehensive income:
Net earnings						$	2,427,000		1,952,000								475,000			2,427,000
Other comprehensive income:
Foreign currency translation adjustments, net of taxes of $0						964,000					964,000									964,000
Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0						67,000					67,000									67,000
Total comprehensive income						3,458,000
Comprehensive income attributable to non-controlling interests						(475,000		)
Comprehensive income attributable to Barnwell Industries, Inc.						$	2,983,000

At December 31, 2009	8,277,160	$	4,223,000	$	1,289,000				$	32,452,000	$	(318,000	)	$	(2,286,000	)	$	1,233,000		$	36,593,000

Balance at September 30, 2010	8,277,160	$	4,223,000	$	1,289,000				$	34,340,000	$	49,000		$	(2,286,000	)	$	993,000		$	38,608,000

Contributions from non-controlling interests																	240,000			240,000

Distributions to non-controlling interests																	(100,000		)	(100,000		)

Comprehensive income:
Net earnings						$	1,695,000		1,085,000								610,000			1,695,000
Other comprehensive income:
Foreign currency translation adjustments, net of taxes of $0						1,301,000					1,301,000									1,301,000
Retirement plans - amortization of accumulated other comprehensive income into net periodic benefit cost, net of taxes of $0						63,000					63,000									63,000
Total comprehensive income						3,059,000
Comprehensive income attributable to non-controlling interests						(610,000		)
Comprehensive income attributable to Barnwell Industries, Inc.						$	2,449,000

At December 31, 2010	8,277,160	$	4,223,000	$	1,289,000				$	35,425,000	$	1,413,000		$	(2,286,000	)	$	1,743,000		$	41,807,000

See Notes to Condensed Consolidated Financial Statements

BARNWELL INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Barnwell Industries, Inc. and all majority-owned subsidiaries, including an indirect 77.6%-owned land investment general partnership and two 80%-owned joint ventures (collectively referred to herein as “Barnwell,” “we,” “our,” “us,” or the “Company”). All significant intercompany accounts and transactions have been eliminated. Investments in companies over which Barnwell has the ability to exercise significant influence, but not control, are accounted for using the equity method.

Unless otherwise indicated, all references to “dollars” in this Form 10-Q are to U.S. dollars.

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements and notes have been prepared by Barnwell in accordance with the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Barnwell’s September 30, 2010 Annual Report on Form 10-K. The Condensed Consolidated Balance Sheet as of September 30, 2010 has been derived from audited consolidated financial statements.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at December 31, 2010, results of operations for the three months ended December 31, 2010 and 2009, and cash flows for the three months ended December 31, 2010 and 2009, have been made. The results of operations for the period ended December 31, 2010 are not necessarily indicative of the operating results for the full year.

Use of Estimates

The preparation of the 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 Accounting Policies

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 until such time as the aggregate of such costs net of accumulated depletion and oil and natural gas related deferred income taxes, on a country-by-country basis, equals the sum of 1) the discounted present value (at 10%), using average first-day-of-the-month prices during the 12-month period ending in the reporting period on a constant basis, of Barnwell’s estimated future net cash flows from estimated production of proved oil and natural gas reserves as determined by independent petroleum consultants, 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 accrued on the balance sheet; 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. At December 31, 2010 and September 30, 2010, Barnwell had no investments in oil and natural gas development projects, proved or unproved, that were not being depleted. General and administrative costs related to oil and natural gas operations are expensed as incurred. Proceeds from the disposition of minor producing oil and natural gas properties are credited to the cost of oil and natural gas properties. Gains or losses are recognized on the disposition of significant oil and natural gas properties.

Revenues associated with the sale of oil, natural gas and natural gas liquids are recognized in the Consolidated Statements of Operations when the oil, natural gas and natural gas liquids are delivered and title has passed to the customer.

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 contracts with pipelines and does not have natural gas imbalances related to natural gas balancing arrangements with its partners.

Other

Barnwell’s other significant accounting policies are described in the Notes to Consolidated Financial Statements included in Item 8 of the Company’s most recently filed Annual Report on Form 10-K.

2. EARNINGS PER COMMON SHARE

Basic earnings per share excludes dilution and is computed by dividing net earnings attributable to Barnwell stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the potentially dilutive effect of outstanding common stock options.

Reconciliations between net earnings attributable to Barnwell stockholders and common shares outstanding of the basic and diluted net earnings per share computations for the three months ended December 31, 2010 and 2009 are as follows:

Three months ended December 31, 2010

Net Earnings

Per-Share

(Numerator)

(Denominator)

Amount

Basic net earnings per share

1,085,000

8,277,160

0.13

Effect of dilutive securities - common stock options

Diluted net earnings per share

1,085,000

8,277,160

0.13

	Three months ended December 31, 2009
	Net Earnings			Shares		Per-Share
	(Numerator)			(Denominator)		Amount

Basic net earnings per share		$	1,952,000		8,264,021		$	0.24

Effect of dilutive securities - common stock options		-			3,054

Diluted net earnings per share		$	1,952,000		8,267,075		$	0.24

Potential dilutive shares consist of the common shares issuable upon the exercise of outstanding stock options (both vested and non-vested) using the treasury stock method. Potential dilutive shares are excluded from the computation of earnings per share if their effect is antidilutive. Options to purchase 858,500 and 556,000 shares of common stock were excluded from the computation of diluted shares for the three months ended December 31, 2010 and 2009, respectively, as their inclusion would have been antidilutive.

3. SHARE-BASED PAYMENTS

The Company’s share-based compensation expense and related income tax effects for the three months ended December 31, 2010 and 2009 are as follows:

	Three months ended December 31,
	2010			2009

Share-based compensation expense		$	240,000		$	171,000

Income tax effect - provision		$	-		$	-

Share-based compensation expense recognized in earnings for the three months ended December 31, 2010 and 2009 are reflected in “General and administrative” expenses in the Condensed Consolidated Statements of Operations. There was no impact on income taxes for the three months ended December 31, 2010 and 2009 due to a full valuation allowance on the related deferred tax asset.

Equity-classified Awards

A summary of the activity in Barnwell’s equity-classified share options as of the beginning and end of the three months ended December 31, 2010 is presented below:

	Three months ended December 31, 2010
						Weighted-
						Average
			Weighted-			Remaining
			Average			Contractual		Aggregate
			Exercise			Term		Intrinsic
Options	Shares		Price			(in years)		Value
Outstanding at October 1, 2010		60,000		$	8.62
Granted		-
Exercised		-
Expired		-
Forfeited		-
Outstanding at December 31, 2010		60,000		$	8.62		3.9		$	-

Exercisable at December 31, 2010		60,000		$	8.62		3.9		$	-

There was no share-based compensation expense for equity-classified awards in the three months ended December 31, 2010 and 2009.

The total intrinsic value of equity options exercised during the three months ended December 31, 2009 was $115,000. No equity options were exercised during the three months ended December 31, 2010.

Liability-classified Awards

As of December 31, 2010, there was $344,000 of total unrecognized compensation cost related to nonvested liability-classified share options. That cost is expected to be recognized over 2.7 years.

The following assumptions were used in estimating fair value for all liability-classified share options outstanding during the three months ended December 31, 2010 and 2009:

	Three months ended December 31,
	2010	2009

Expected volatility range	49.5% to 65.4%	45.2% to 60.6%
Weighted-average volatility	54.7%	49.5%
Expected dividends	0.0%	0.0%
Expected term (in years)	3.9 to 9.0	4.9 to 9.9
Risk-free interest rate	1.5% to 3.0%	2.7% to 3.9%
Expected forfeitures	None	None

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 Condensed Consolidated Statements of Operations.

A summary of the activity in Barnwell’s liability-classified share options as of the beginning and end of the three months ended December 31, 2010 is presented below:

	Three months ended December 31, 2010
Options	Shares		Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at October 1, 2010		798,500		$	8.18
Granted		-
Exercised		-
Expired		-
Forfeited		-
Outstanding at December 31, 2010		798,500		$	8.18		7.3		$	-

Exercisable at December 31, 2010		420,375		$	9.33		6.3		$	-

Total share-based compensation expense for liability-classified awards for the three months ended December 31, 2010 and 2009 was $240,000 and $171,000, respectively. Included in share-based compensation for liability-classified awards for the three months ended December 31, 2010 and 2009 were $91,000 and $68,000, respectively, of compensation expense related to shares that vested during each respective period and $149,000 and $103,000, respectively, of compensation expense due to remeasurement at December 31, 2010 and 2009 of the fair value of previously vested shares.

4. REAL ESTATE HELD FOR SALE

Kaupulehu 2007, LLLP (“Kaupulehu 2007”) is a Hawaii limited liability limited partnership 80%-owned by Barnwell.

At December 31, 2010, Kaupulehu 2007 owns two luxury residences listed for sale for $7,950,000 and $7,650,000 in the Lot 4A Increment I area located approximately six miles north of the Kona International Airport in the North Kona District of the island of Hawaii, north of Hualalai Resort at Historic Ka’upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean.

Kaupulehu 2007 has agreements with the project manager and the independent building contractor that constructed the two luxury homes for Kaupulehu 2007 which provide that each is entitled to receive 20% of the sales profit upon the sale of each of the two homes constructed by Kaupulehu 2007. At the current list prices, it is unlikely there would be a profit distribution.

5. INVESTMENTS

A summary of Barnwell’s investments as of December 31, 2010 and September 30, 2010 is as follows:

Investment in residential parcels	$	3,020,000
Investment in joint ventures	1,875,000
Investment in land interests:
Leasehold land zoned conservation – Lot 4C	50,000
Lot acquisition rights – Mauka Lands	488,000

Total investments	$	5,433,000

Investment in residential parcels

Kaupulehu 2007 owns two residential parcels in the Lot 4A Increment I area located approximately six miles north of the Kona International Airport in the North Kona District of the island of Hawaii, north of Hualalai Resort at Historic Ka’upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean.

During the three months ended December 31, 2009, as a result of real estate sales prices and activity in the area where Barnwell’s investment in residential parcels is located, Barnwell determined that a $798,000 reduction of the carrying value of its investment in residential parcels was necessary. No reduction was necessary during the three months ended December 31, 2010.

Investment in joint ventures

Kaupulehu Investors, LLC, a limited liability company 80%-owned by Barnwell, owns 1.5% passive minority interests in Hualalai Investors JV, LLC and Hualalai Investors II, LLC (hereinafter collectively referred to as “Hualalai Investors”), owners of Hualalai Resort, and a 1.5% passive minority interest in Kona Village Investors, LLC, owner of Kona Village Resort. Kaupulehu Investors, LLC accounts for its 1.5% passive investments under the cost method.

Lot 4C

Barnwell owns a 77.6% controlling interest in Kaupulehu Developments, a Hawaii general partnership that owns interests in leasehold land for property located approximately six miles north of the Kona International Airport in the North Kona District of the island of Hawaii.

Lot 4C is an area of approximately 1,000 acres of vacant leasehold land zoned conservation and is located adjacent to Lot 4A. WB KD Acquisition, LLC (“WB”) and/or WB KD Acquisition II, LLC (“WBKD”), entities not affiliated with Barnwell and its subsidiaries, have the exclusive right to negotiate with Kaupulehu Developments with respect to Lot 4C until June 2015. However, this right to negotiate will terminate in June 2013 if WB and/or WBKD have not completed all environmental assessments and surveys reasonably required to support a petition to the Hawaii State Land Use Commission for reclassification of Lot 4C.

There is no assurance that the required land use reclassification and rezoning from regulatory agencies will be obtained, that the necessary development terms and agreements will be successfully negotiated for Lot 4C, or that WB and/or WBKD will enter into an agreement with Kaupulehu Developments regarding Lot 4C.

Lot acquisition rights

Barnwell, through wholly-owned Kaupulehu Mauka Investors, LLC, owns acquisition rights as to 14 lots within agricultural-zoned leasehold land in the upland area of Kaupulehu (“Mauka Lands”) situated between the Queen Kaahumanu Highway and the Mamalahoa Highway at Kaupulehu, on the island of Hawaii. The acquisition rights give Barnwell the right to acquire 14 residential lots, currently estimated to be two to five acres in size, which may be developed on the Mauka Lands. These lands are currently classified as agricultural by the state of Hawaii and, accordingly, the developer of these lands (Hualalai Investors) will need to pursue both state and county of Hawaii approvals for reclassification and rezoning to permit the development of residential lots and negotiate development terms.

There is no assurance that the developer of the Mauka Lands will obtain the necessary land use reclassification, rezoning, permits, approvals, and development terms and agreements needed to develop the Mauka Lands. If the developer of the Mauka Lands is unable to obtain such required land use changes, development terms and agreements with respect to the Mauka Lands and Barnwell is therefore unable to fully recover its investment in the Mauka Lands, we will incur an expense resulting from a write-off of the lot acquisition rights.

6. LONG-TERM DEBT

A summary of Barnwell’s long-term debt as of December 31, 2010 and September 30, 2010 is as follows:

	December 31,				September 30,
	2010				2010

Canadian revolving credit facility		$	13,000,000			$	13,000,000
Real estate credit facility		12,500,000				13,000,000

		25,500,000				26,000,000
Less: current portion		(13,800,000		)		(13,650,000		)

Total long-term debt		$	11,700,000			$	12,350,000

Canadian revolving credit facility

Barnwell has a credit facility at Royal Bank of Canada, a Canadian bank, for $20,000,000 Canadian dollars, or approximately US$20,108,000 at the December 31, 2010 exchange rate. Borrowings under this facility were US$13,000,000 and unused credit available under this facility was approximately US$7,108,000 at December 31, 2010. The interest rate on the facility was 3.5% at December 31, 2010.

Under the financing agreement with Royal Bank of Canada, the facility is reviewed annually with the next review planned for April 2011. Subject to that review, the facility may be extended one year with no required debt repayments for one year or converted to a two-year term loan by the bank. If the facility is converted to a two-year term loan, Barnwell has agreed to the following repayment schedule of the then outstanding loan balance: first year of the term period – 20% (5% per quarter), and in the second year of the term period – 80% (5% per quarter for the first three quarters and 65% in the final quarter). Based on the terms of this agreement, if Royal Bank of Canada were to convert the facility to a two-year term loan upon its next review in April 2011, Barnwell would be obligated to

make quarterly principal and interest repayments beginning in July 2011. As such, two quarterly repayments of 5% each would be due within one year of December 31, 2010 and accordingly, we have included $1,300,000, representing 10% of the outstanding loan balance at December 31, 2010, in the current portion of long-term debt.

Real estate credit facility and restricted cash

Barnwell, through its 80%-owned real estate joint venture, Kaupulehu 2007, has a non-revolving credit facility with a Hawaii financial institution. Under the terms of the credit facility agreement, Kaupulehu 2007 is required to make a scheduled principal payment of $500,000 per quarter due on March 31, June 30, September 30 and December 31 of each year. Kaupulehu 2007 made a $500,000 principal payment in December 2010, reducing the facility amount to $12,500,000 at December 31, 2010. If Kaupulehu 2007 sells one of its homes, it will be required to make a principal payment in an amount equal to the greater of (1) 100% of the net sales proceeds of the home or (2) $7,000,000, and the scheduled quarterly payment would be reduced to $250,000 per quarter. The outstanding principal balance bears interest at a rate equal to the higher of the financial institution’s floating base rate or 4.5%. The interest rate on this facility at December 31, 2010 was 4.5%. Any unpaid principal balance and accrued interest will be due and payable on February 1, 2012. The credit facility, which is fully guaranteed by Barnwell and guaranteed 20% by Mr. Terry Johnston, is collateralized by, among other things, a first mortgage lien on the parcels and homes.

The agreement requires Kaupulehu 2007 to maintain an interest reserve account which serves as collateral for the facility and from which interest will be deducted on a monthly basis. In December 2010, Kaupulehu 2007 replenished the interest reserve account with $610,000 to cover estimated interest payments through February 1, 2012, the credit facility termination date. At December 31, 2010, the balance of the interest reserve account was $680,000 and is classified as restricted cash on the Condensed Consolidated Balance Sheet.

Under the agreement, the principal balance of the credit facility was not to exceed the sum of 60% of the as-is value of the lots and 70% of the as-is value of the homes effective December 31, 2010. If borrowings under the facility exceeded this loan to value ratio on that date, Kaupulehu 2007 would have been required to make debt repayments in the amount of the excess. The credit facility agreement was modified to defer the aforementioned date of the loan to value ratio measurement from December 31, 2010 to July 1, 2011 thereby eliminating the need to make a $1,054,000 debt repayment as of December 31, 2010. All other terms of the credit facility were unchanged.

Both houses are currently listed for sale, therefore, the entire $12,500,000 outstanding at December 31, 2010 under the real estate credit facility has been classified as a current liability.

7. RETIREMENT PLANS

Barnwell sponsors a noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all of its U.S. employees. Additionally, Barnwell sponsors a Supplemental Employee 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 defined benefit pension plan, and a postretirement medical insurance benefits plan (“Postretirement Medical”) covering eligible U.S. employees.

The following table details the components of net periodic benefit cost for Barnwell’s retirement plans for the three months ended December 31, 2010 and 2009:

	Pension Plan								SERP						Postretirement Medical
	Three months ended December 31,
	2010				2009				2010			2009			2010			2009
Service cost		$	75,000			$	74,000			$	11,000		$	11,000		$	4,000		$	4,000
Interest cost		78,000				82,000				14,000			13,000			17,000			15,000
Expected return
on plan assets		(74,000		)		(63,000		)		-			-			-			-
Amortization of
prior service cost		1,000				1,000				1,000			1,000			34,000			34,000
Amortization of net
actuarial loss		21,000				27,000				4,000			3,000			2,000			-

Net periodic benefit cost		$	101,000			$	121,000			$	30,000		$	28,000		$	57,000		$	53,000

Barnwell contributed $250,000 to the Pension Plan during the three months ended December 31, 2010 and does not expect to make any further contributions during the remainder of fiscal 2011. The SERP and Postretirement Medical plans are unfunded and Barnwell will fund benefits when payments are made. Barnwell does not expect to make any benefit payments under the Postretirement Medical plan during fiscal 2011 and expected payments under the SERP for fiscal 2011 are not material. Fluctuations in actual equity market returns as well as changes in general interest rates will result in changes in the market value of plan assets and may result in increased or decreased retirement benefits costs and contributions in future periods.

8. INCOME TAXES

The components of the income tax provision for the three months ended December 31, 2010 and 2009 are as follows:

	Three months ended December 31,
	2010			2009

Current		$	355,000		$	18,000
Deferred		131,000			956,000

		$	486,000		$	974,000

Barnwell’s effective consolidated income tax rate, after adjusting earnings before income taxes to remove the portion attributable to non-controlling interests, was approximately 31% and 33% for the three months ended December 31, 2010 and 2009, respectively.

Included in the income tax provision for the three months ended December 31, 2010 is a $130,000 benefit from the lapsing of the statute of limitations related to a prior year uncertain tax position for Canadian income tax purposes.

Included in the income tax provision for the three months ended December 31, 2009 is a $1,252,000 benefit from a change in tax law enacted in November 2009 which expanded the number of

years Barnwell can carry back U.S. federal income tax losses. There was no such benefit in the same period of the current year. Partially offsetting this benefit in the three months ended December 31, 2009 was an increase in deferred income tax expense due to valuation allowances on U.S. deferred tax assets generated during the period.

Uncertain tax positions consist primarily of Canadian federal and provincial audit issues that involve transfer pricing adjustments. In November 2010, the Company settled and paid the province of Alberta’s reassessment of Canadian provincial taxes. The Alberta provincial reassessment resulted from the Canada Revenue Agency’s examination of the Company’s fiscal 2005 and 2006 Canadian federal returns, which was settled in September 2010. There was no material difference between the province of Alberta’s reassessment and the related uncertain tax provision previously recorded by the Company. Because of a lack of clarity and uniformity regarding allowable transfer pricing valuations by differing jurisdictions, it is reasonably possible that the total amount of uncertain tax positions may significantly increase or decrease during the next 12 months, and the estimated range of any such variance is not currently estimable based upon facts and circumstances as of December 31, 2010.

Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities at December 31, 2010:

Jurisdiction		Fiscal Years Open
U.S. federal		2006 – 2009
Various U.S. states		2007 – 2009
Canada federal		2003 – 2009
Various Canadian provinces		2003 – 2009

9. SEGMENT INFORMATION

Barnwell operates four segments: 1) exploring for, developing, producing and selling oil and natural gas in Canada (oil and natural gas); 2) investing in land interests in Hawaii (land investment); 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling); and 4) developing homes for sale in Hawaii (residential real estate).

The following table presents certain financial information related to Barnwell’s reporting segments. All revenues reported are from external customers with no intersegment sales or transfers.

	Three months ended December 31,
	2010				2009
Revenues:
Oil and natural gas		$	6,598,000			$	7,144,000
Land investment		3,061,000				3,588,000
Contract drilling		1,569,000				2,288,000
Other		83,000				136,000
Total before interest income		11,311,000				13,156,000
Interest income		8,000				9,000
Total revenues		$	11,319,000			$	13,165,000

Depletion, depreciation,
and amortization:
Oil and natural gas		$	2,263,000			$	2,199,000
Contract drilling		145,000				115,000
Other		22,000				27,000
Total depletion,
depreciation, and amortization		$	2,430,000			$	2,341,000

Reduction of carrying value of assets:
Land investment		$	-			$	798,000

Operating profit
(before general and administrative expenses):
Oil and natural gas		$	1,616,000			$	2,636,000
Land investment		3,061,000				2,790,000
Contract drilling		57,000				541,000
Other		61,000				109,000
Total operating profit		4,795,000				6,076,000

General and administrative expenses		(2,314,000		)		(2,387,000		)
Interest expense		(308,000		)		(297,000		)
Interest income		8,000				9,000
Earnings before income taxes		$	2,181,000			$	3,401,000

10. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income, net of taxes, at December 31, 2010 and September 30, 2010 are as follows:

	December 31,				September 30,
	2010				2010

Foreign currency translation		$	4,840,000			$	3,539,000
Retirement plans liability		(3,427,000		)		(3,490,000		)

Accumulated other comprehensive income		$	1,413,000			$	49,000

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and payables to joint interest owners approximate their fair values due to the short-term nature of the instruments. The carrying value of long-term debt approximates fair value as the terms approximate current market terms for similar debt instruments of comparable risk and maturities.

12. FAIR VALUE MEASUREMENTS

Barnwell does not have any assets and liabilities that are required to be remeasured on a recurring basis.

Certain of our assets and liabilities are reported at fair value in the accompanying balance sheets on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. There were no nonrecurring fair value measurements recorded for such assets and liabilities during the three months ended December 31, 2010. The following table provides carrying value and fair value measurement information for nonrecurring fair value measurements recorded during the three months ended December 31, 2009:

		Fair Value Measurements Using:
	Carrying	Quoted	Significant		Total Reduction of
	Amount	Prices in	Other	Significant	Carrying Value
	as of	Active	Observable	Unobservable	for the
	December 31,	Markets	Inputs	Inputs	three months ended
	2009	(Level 1)	(Level 2)	(Level 3)	December 31, 2009
Investment in residential parcels *	$ 3,800,000	$ -	$ 3,800,000	$ -	$ 798,000

* The fair value included in the table above represents only the asset whose carrying value was adjusted to fair value in the period.

In determining the fair value of Barnwell’s investment in residential parcels, prices for comparable sales transactions were used by an independent real estate consulting and appraisal firm to estimate fair value. Such fair value measurements have been classified as Level 2 valuations.

13. INFORMATION RELATING TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three months ended December 31,
	2010			2009
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	229,000		$	232,000
Income taxes		$	835,000		$	-

During the three months ended December 31, 2009, 12,300 stock options were exercised by tendering 5,000 shares of Barnwell stock at a market value of $4.84 per share, resulting in a $6,000 increase in common stock, an $18,000 increase in additional paid-in capital and a $24,000 increase in treasury stock.

Capital expenditure accruals related to oil and natural gas exploration and development decreased $659,000 and $9,000 during the three months ended December 31, 2010 and 2009, respectively. Additionally, during the three months ended December 31, 2010 and 2009, capital expenditure accruals related to oil and natural gas asset retirement obligations remained unchanged.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Relevant to Forward-Looking Information

For the Purpose Of “Safe Harbor” Provisions Of The

Private Securities Litigation Reform Act of 1995

This Form 10-Q, and the documents incorporated herein by reference, contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement is one which is based on current expectations of future events or conditions and does not relate to historical or current facts. These statements include various estimates, forecasts, projections of Barnwell’s future performance, statements of Barnwell’s plans and objectives, and other similar statements. Forward-looking statements include phrases such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates,” “assumes,” “projects,” “may,” “will,” “will be,” “should,” or similar expressions. Although Barnwell believes that its current expectations are based on reasonable assumptions, it cannot assure that the expectations contained in such forward-looking statements will be achieved. Forward-looking statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from those contained in such statements. The risks, uncertainties and other factors that might cause actual results to differ materially from Barnwell’s expectations are set forth in the “Forward-Looking Statements” and “Risk Factors” sections of Barnwell’s Annual Report on Form 10-K for the year ended September 30, 2010. Investors should not place undue reliance on these forward-looking statements, as they speak only as of the date of filing of this Form 10-Q, and Barnwell expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein.

Critical Accounting Policies and Estimates

Management has determined that our most critical accounting policies and estimates are those related to the evaluation of recoverability of assets, depletion of our oil and natural gas properties, income taxes and asset retirement obligation which are discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010. There have been no significant changes to these critical accounting policies and estimates during the three months ended December 31, 2010. We continue to monitor our accounting policies to ensure proper application of current rules and regulations.

Impact of Recently Issued Accounting Standards on Future Filings

None

Overview

Barnwell is engaged in the following lines of business: 1) exploring for, developing, producing and selling oil and natural gas in Canada (oil and natural gas segment), 2) investing in land interests in Hawaii (land investment segment), 3) drilling wells and installing and repairing water pumping

systems in Hawaii (contract drilling segment), and 4) developing homes for sale in Hawaii (residential real estate segment).

Oil and Natural Gas Segment

Barnwell is involved in the acquisition, exploration and development of oil and natural gas properties in Canada where we initiate and participate in exploratory and developmental operations for oil and natural gas on property in which we have an interest, and evaluate proposals by third parties with regard to participation in such exploratory and developmental operations elsewhere.

Land Investment Segment

Barnwell owns an 80% controlling interest in Kaupulehu 2007, LLLP (“Kaupulehu 2007”), a Hawaii limited liability limited partnership. Kaupulehu 2007 owns two residential parcels in the Kaupulehu area.

Barnwell owns a 77.6% controlling interest in Kaupulehu Developments, a Hawaii general partnership which owns interests in leasehold land for property located approximately six miles north of the Kona International Airport in the North Kona District of the island of Hawaii, within and adjacent to Hualalai Resort at Historic Ka’upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean. Kaupulehu Developments’ interests include the following:

· The right to receive payments from WB KD Acquisition, LLC (“WB”) and WB KD Acquisition II, LLC (“WBKD”), entities not affiliated with Barnwell and its subsidiaries, resulting from the sale of lots and/or residential units within approximately 870 acres of the Kaupulehu Lot 4A area by WB and WBKD in two increments (“Increment I” and “Increment II”). Increment I is an area planned for approximately 80 single-family lots and a beach club on the portion of the property bordering the Pacific Ocean. The purchasers of the 80 single-family lots will have the right to apply for membership in the Kuki’o Golf and Beach Club, which is located adjacent to and south of the Four Seasons Resort Hualalai at Historic Ka’upulehu. Increment II is the remaining portion of the approximately 870-acre property and is zoned for single-family and multi-family residential units and a golf course and clubhouse. Increment II is currently planned for approximately 400 residential units; and

· Approximately 1,000 acres of vacant leasehold land zoned conservation in the Kaupulehu Lot 4C area located adjacent to the 870-acre Lot 4A described above. Kaupulehu Developments has an agreement which provides WB and/or WBKD the exclusive right to negotiate with Kaupulehu Developments with respect to these 1,000 acres. This right expires in June 2015 or in June 2013 if WB and/or WBKD have not completed all environmental assessments and surveys reasonably required to support a petition to the Hawaii State Land Use Commission for reclassification of the 1,000 acres.

are currently classified as agricultural by the state of Hawaii and, accordingly, the developer of these lands will need to pursue both state and county of Hawaii approvals for reclassification and rezoning to permit the development of residential lots and negotiate development terms.

Contract Drilling Segment

Barnwell drills water, water monitoring and geothermal wells and installs and repairs water pumping systems in Hawaii. Contract drilling results are highly dependent upon the quantity, dollar value and timing of contracts awarded by governmental and private entities and can fluctuate significantly.

Residential Real Estate Segment

Barnwell, through its 80%-owned real estate joint venture, Kaupulehu 2007, constructs and sells luxury single-family homes. Kaupulehu 2007 owns two luxury residences listed for sale and does not have any homes under construction.

Investment in Joint Ventures

Business Environment

Our primary operations are concentrated in Canada and in the state of Hawaii. Accordingly, our business performance is directly affected by macroeconomic conditions in those areas, as well as general economic conditions of the U.S. domestic and world economies. Current global economic conditions differentiate recent times from years past. Although signs of economic recovery appear to exist, sluggish demand continues to impact all of the Company’s segments in both Hawaii and Canada.

Oil and Natural Gas Segment

Our revenue, profitability, and future rate of growth are substantially dependent on existing oil and natural gas prices. Historically, oil and natural gas prices have been extremely volatile. Oil and natural gas prices hit historic high levels in fiscal 2008. Through the date of this filing, oil and natural gas prices have fallen sharply from their record levels. Natural gas prices for Barnwell, based on quarterly averages during the three years ended December 31, 2010, have ranged from a low of $2.70 per thousand cubic feet (the average price for the quarter ended September 30, 2009) to a high of $9.70 per thousand cubic feet (the average price for the quarter ended June 30, 2008). Oil prices for Barnwell, based on quarterly averages for the period discussed above, ranged from a low of $35.20 per barrel (the average price for the quarter ended March 31, 2009) to a high of $117.22 per barrel (the average price for the quarter ended June 30, 2008). Declines in oil and natural gas prices could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

Although the Company estimates that it will increase its fiscal 2011 oil and natural gas capital expenditures as compared to the prior year, the Company will continue to hold such capital expenditures at reduced levels through the end of calendar 2011 as a result of the continued poor outlook for natural gas prices and diminished demand for luxury real estate. Reduced capital

expenditures, if significant and/or continued, will likely result in a reduction in future oil and natural gas reserve volumes and production.

Land Investment and Residential Real Estate Segments

The economic recession has caused real estate sales prices and activity within the Kaupulehu area to decrease significantly. Real estate sales results in the area near Kaupulehu continue to be mixed, with sporadic activity and wide variations in sales prices. If future real estate activity in the Kaupulehu and surrounding areas is lower than management’s current expectations, our operating results, financial condition, liquidity and cash flows could be adversely affected.

Kaupulehu 2007’s two luxury homes are complete and available for sale. One home is a fully furnished 5-bedroom, 6.5-bath ranch-style home, 6,337 square feet in size and is currently listed for sale for $7,950,000. The second home, currently unfurnished, is of similar design, 6,275 square feet in size and is currently listed for sale for $7,650,000.

Our ability to achieve our expectations regarding the sale of the completed residences and/or lots held for investment is contingent upon the strength of the luxury real estate market. Actual future results could be lower than our current estimates. Barnwell will have continuing cash outflows such as debt repayments, interest, maintenance, property taxes, and other holding costs until the homes and lots are sold.

Contract Drilling Segment

Demand for water well drilling and/or pump installation and repair services is volatile and dependent upon land development activities within the state of Hawaii. The latest University of Hawaii Economic Research Organization (“UHERO”) report indicates the construction industry experienced a decline in both activity and job count in 2010, but it is believed that the industry has reached the bottom of the cycle.

Investment in Joint Ventures

According to the State of Hawaii Department of Business, Economic Development and Tourism, signs are pointing to economic recovery at a slow and gradual pace. Hawaii’s visitor arrivals, visitor days, and visitor spending in 2011 are anticipated to exceed 2010 levels. However, these estimates are cautiously optimistic and depend greatly on the recovery of both the national and international economies.

Results of Operations

Summary

Net earnings attributable to Barnwell for the three months ended December 31, 2010 totaled $1,085,000, an $867,000 decrease from net earnings of $1,952,000 for the three months ended December 31, 2009. This decrease was largely attributable to the following items:

· Oil and natural gas operating profits before income taxes decreased $1,020,000. During the quarter ended December 31, 2009, Barnwell was notified that a non-consent 300% penalty well, of which Barnwell is a non-operator, had reached recovery. Net earnings for the quarter ended December 31, 2009 included $220,000

related to the operations of this well; there were no such revenues during the quarter ended December 31, 2010. Also contributing to the decrease was an increase in operating expenses as a result of an increase in workovers and repairs;

· Land investment segment revenues decreased $527,000 due to decreased receipts of percentage of sales payments resulting from a decrease in sales of residential lots by the developer of the project;

· A $484,000 decrease in contract drilling operating profits before income taxes due to a decrease in well drilling activity; and

· The prior year period included a $1,252,000 current income tax benefit from legislation which expanded the number of years Barnwell can carry back U.S. federal income tax losses.

The decreases in earnings above were partially offset by the fact that land investment operating profits before income taxes in the prior year quarter included a $798,000 non-cash reduction of the carrying value of Barnwell’s investment in residential parcels, whereas there was no such reduction in the current year quarter. The decrease in earnings was also partially offset by a decrease in deferred tax expense as income taxes in the prior year quarter included a significant increase in the valuation allowance for deferred tax assets.

General

In addition to U.S. operations, Barnwell conducts operations in Canada. Consequently, Barnwell is subject to foreign currency translation and transaction gains and losses due to fluctuations of the exchange rates between the Canadian dollar and the U.S. dollar. The impact of fluctuations of the exchange rates between the Canadian dollar and the U.S. dollar may be material from period to period. Barnwell cannot accurately predict future fluctuations between the Canadian and U.S. dollar.

The average exchange rate of the Canadian dollar to the U.S. dollar increased 4% in the three months ended December 31, 2010 as compared to the same period in the prior year, and the exchange rate of the Canadian dollar to the U.S. dollar increased 4% at December 31, 2010 as compared to September 30, 2010. Accordingly, the assets, liabilities, equity, revenues and expenses of Barnwell’s subsidiaries operating in Canada have been adjusted to reflect the change in the exchange rates. Barnwell’s Canadian dollar assets are greater than its Canadian dollar liabilities; therefore, increases or decreases in the value of the Canadian dollar to the U.S. dollar generate other comprehensive income or losses, respectively. Other comprehensive income and losses are not included in net earnings. The other comprehensive income due to foreign currency translation adjustments, net of taxes, for the three months ended December 31, 2010 was $1,301,000, a $337,000 increase from the $964,000 other comprehensive income due to foreign currency translation adjustments, net of taxes, for the same period in the prior year. There were no taxes on other comprehensive income due to foreign currency translation adjustments in the three months ended December 31, 2010 and 2009 due to a full valuation allowance on the related deferred tax asset.

Oil and natural gas

Oil and natural gas revenues decreased $546,000 (8%) for the three months ended December 31, 2010, as compared to the same period in the prior year. The following tables set forth Barnwell’s average prices per unit of production and net production volumes for the three months

ended December 31, 2010 as compared to the same period of the prior year. Production amounts reported are net of royalties.

	Average Price Per Unit
	Three months ended				Increase
	December 31,				(Decrease)
	2010		2009		$		%
Natural Gas (Mcf)*	$	3.18	$	3.84		($ 0.66)	(17%)
Oil (Bbls)**	$	72.86	$	67.58		$ 5.28	8%
Liquids (Bbls)**	$	42.01	$	36.65		$ 5.36	15%

	Net Production
	Three months ended		Increase
	December 31,		(Decrease)
	2010	2009	Units	%
Natural Gas (Mcf)*	800,000	814,000	(14,000)	(2%)
Oil (Bbls)**	37,000	35,000	2,000	6%
Liquids (Bbls)**	27,000	28,000	(1,000)	(4%)

* Mcf = 1,000 cubic feet. Natural gas price per unit is net of pipeline charges.

** Bbl = stock tank barrel equivalent to 42 U.S. gallons

During the three months ended December 31, 2010, natural gas prices decreased 17% and oil and natural gas liquids prices increased 8% and 15%, respectively, as compared to the same period in the prior year.

Net natural gas production decreased 2% during the three months ended December 31, 2010, as compared to the three months ended December 31, 2009, due primarily to natural declines, including at the Dunvegan property. Gross natural gas production for the three months ended December 31, 2010 decreased 7%, as compared to the same period in the prior year.

Net oil production for the three months ended December 31, 2010 increased 6%, as compared to the same period in the prior year, due primarily to increased production from newer properties partially offset by higher Alberta crown royalty rates due to higher oil prices. Gross oil production for the three months ended December 31, 2010 increased 13%, as compared to the same period in the prior year.

Effective January 1, 2011, the Government of Alberta modified Alberta’s royalty framework. The modified framework reduced the maximum royalty rate for oil and natural gas production from 50% to 40% and 36%, respectively.

Oil and natural gas operating expenses increased $410,000 (18%) for the three months ended December 31, 2010, as compared to the same period in the prior year, due primarily to higher workover activity and repairs in the Dunvegan field due to corrosion and aging. Also contributing to the increase was a 4% increase in the average exchange rate of the Canadian dollar to the U.S. dollar.

Sale of development rights and Sale of interest in leasehold land

Kaupulehu Developments received its final development rights option payment in December 2010. Revenues related to sales of development rights under option for the three months ended December 31, 2010 and 2009 are summarized as follows:

	Three months ended
	December 31,
	2010			2009
Sale of development rights under option:
Proceeds		$ 2,656,000			$ 2,656,000
Fees		(159,000	)		(159,000	)
Revenues - sale of development rights, net		$ 2,497,000			$ 2,497,000

All capitalized costs associated with Kaupulehu Developments’ development rights were expensed in previous years. There are no more development right options outstanding as of December 31, 2010.

The following table summarizes the percentage of sales payment revenues received from WB for the three months ended December 31, 2010 and 2009:

	Three months ended
	December 31,
	2010			2009
Sale of interest in leasehold land:
Proceeds		$ 600,000			$ 1,160,000
Fees		(36,000	)		(69,000	)
Revenues - sale of interest in leasehold land, net		$ 564,000			$ 1,091,000

WB sold one ocean front single-family lot in Increment I during the three months ended December 31, 2010, and paid Kaupulehu Developments a percentage of sales payment totaling $600,000. WB sold three single-family lots in the three months ended December 31, 2009 and paid Kaupulehu Developments percentage of sales payments totaling $1,160,000. Twenty-seven of the 80 single-family lots planned for Increment I have been sold as of December 31, 2010, twenty of which are ocean front lots and seven of which are ocean view lots. There is no assurance with regards to the amounts of future payments to be received.

Contract drilling

Contract drilling revenues and operating costs decreased $719,000 (31%) and $265,000 (16%), respectively, for the three months ended December 31, 2010, as compared to the same period in the prior year. The contract drilling segment generated a $57,000 operating profit before general and administrative expenses in the three months ended December 31, 2010, a decrease of $484,000 as compared to the $541,000 operating profit generated during the same period of the prior year, primarily due to decreased well drilling activity during the current year quarter.

Contract drilling revenues and costs are not seasonal in nature, but can fluctuate significantly based on the awarding and timing of contracts, which are determined by contract drilling customer

demand. Management currently estimates that well drilling activity for the remainder of fiscal 2011 will be lower than the same period of the prior year based upon contracts in backlog.

Reduction of carrying value of assets

Income taxes

Included in the income tax provision for the three months ended December 31, 2009 is a $1,252,000 benefit from a change in tax law enacted in November 2009 which expanded the number of years Barnwell can carry back U.S. federal income tax losses. There was no such benefit in the same period of the current year. Partially offsetting this benefit in the three months ended December 31, 2009 was an increase in deferred income tax expense due to valuation allowances on U.S. deferred tax assets generated during the period.

Net earnings attributable to non-controlling interests

Earnings and losses attributable to non-controlling interests represent the non-controlling interests’ share of revenues and expenses related to the various partnerships and joint ventures in which Barnwell has interests.

Net earnings attributable to non-controlling interests increased $135,000 (28%) for the three months ended December 31, 2010, as compared to the same period in the prior year. The increase is primarily attributable to the prior year period’s reduction of the carrying value of Barnwell’s investment in residential parcels which impacts non-controlling interests; there was no such reduction in the current year period. The increase was partially offset by the impacts to non-controlling interests of lower revenues reported by the land investment segment in the current year quarter as compared to the same period in the prior year.

Liquidity and Capital Resources

Barnwell’s primary sources of liquidity are cash on hand, cash flows from operations, land investment segment proceeds and available credit. At December 31, 2010, Barnwell had $12,071,000 in cash and cash equivalents, $9,105,000 in working capital, and approximately $7,108,000 of available credit under its credit facility with its Canadian bank. Barnwell’s future liquidity and ability to fund capital expenditures is dependent upon operating cash flows, existing working capital, available credit under its credit facility with its Canadian bank, and its ability to access debt markets.

Cash Flows

Cash flows provided by operations totaled $3,327,000 for the three months ended December 31, 2010, as compared to $1,063,000 of cash flows provided by operations for the same period in the prior year. The $2,264,000 change was primarily due to changes in working capital.

Net cash used in investing activities totaled $1,639,000 during the three months ended December 31, 2010, as compared to $3,099,000 of cash flows provided by investing activities during the same period of the prior year. The $4,738,000 change was primarily attributable to a $3,667,000 increase in capital expenditures due to higher oil and natural gas capital expenditures and the purchase of the Company’s office in New York City during the three months ended December 31, 2010, as compared to the same period of the prior year.

Cash flows used in financing activities totaled $360,000 for the three months ended December 31, 2010, as compared to $85,000 of cash flows used in financing activities during the same period of the prior year. The $275,000 change was primarily due to debt repayments of $500,000 during the three months ended December 31, 2010.

Credit Arrangements

Barnwell has a credit facility at Royal Bank of Canada, a Canadian bank, for $20,000,000 Canadian dollars, or approximately US$20,108,000 at the December 31, 2010 exchange rate of 1.0054. At December 31, 2010, borrowings under this facility were US$13,000,000 and Barnwell had approximately US$7,108,000 of unused credit available. The interest rate on this facility at December 31, 2010 was 3.5%. Under the financing agreement with Royal Bank of Canada, the facility is reviewed annually, with the next review planned for April 2011. Subject to that review, the facility may be extended one year with no required debt repayments for one year or converted to a two-year term loan by the bank.

Barnwell also has a non-revolving credit facility with a Hawaii financial institution through its 80%-owned real estate joint venture, Kaupulehu 2007. Under the terms of the credit facility agreement, Kaupulehu 2007 is required to make a scheduled principal payment of $500,000 per quarter due on March 31, June 30, September 30 and December 31 of each year. Kaupulehu 2007 made a $500,000 principal payment in December 2010, reducing the facility amount to $12,500,000 at December 31, 2010. If Kaupulehu 2007 sells one of its homes, it will be required to make a principal payment in an amount equal to the greater of (1) 100% of the net sales proceeds of the home or (2) $7,000,000, and the scheduled quarterly payment would be reduced to $250,000 per quarter. The outstanding principal balance bears interest at a rate equal to the higher of the financial institution’s floating base rate or 4.5%. The interest rate on this facility at December 31, 2010 was 4.5%. Any unpaid principal balance and accrued interest will be due and payable on February 1, 2012. The credit facility, which is fully guaranteed by Barnwell and guaranteed 20% by Mr. Terry Johnston, is collateralized by, among other things, a first mortgage lien on the parcels and homes.

Oil and Natural Gas and Other Capital Expenditures

Barnwell’s oil and natural gas capital expenditures, including accrued capital expenditures, totaled $2,357,000 for the three months ended December 31, 2010, as compared to $1,170,000 for the three months ended December 31, 2009. Management expects that oil and natural gas capital expenditures in fiscal 2011 will range from $7,000,000 to $9,000,000. This estimated amount may increase or decrease as dictated by cash flows and management’s assessment of the oil and natural gas environment and prospects.

During the three months ended December 31, 2010, Barnwell participated in the drilling of 1 gross (0.1 net) well in Canada which has been deemed successful. The term “gross” refers to the total number of wells in which Barnwell owns an interest, and “net” refers to Barnwell’s aggregate interest therein. For example, a 50% interest in a well represents 1 gross well, but 0.5 net well. The gross figure includes interests owned of record by Barnwell and, in addition, the portion owned by others. During the quarter ended December 31, 2010, Barnwell’s capital expenditures included $840,000 for the acquisition of oil and natural gas leases, primarily in the Canadian province of Saskatchewan.

On October 28, 2010, the Company completed the acquisition of a cooperative apartment it was leasing as its New York City office for $2,061,000, paid entirely in cash. The apartment continues to be utilized as an office.

Other Considerations

We believe our capital resources (current cash balances, future operating cash flows, land investment segment proceeds, residential home sales, and available credit) will provide sufficient liquidity to fund our operations, planned future capital expenditures, scheduled debt repayments and related interest, and settle incentive compensation liabilities in cash, if necessary. If oil and natural gas prices and production, land investment segment proceeds, and residential real estate home sales are less than current expectations, we will be faced with reduced operating cash flows which in turn could have a material adverse effect on our operations, liquidity, cash flows, and financial condition. In addition, we cannot predict whether Barnwell’s Canadian revolving credit facility will be reduced below the current level of borrowings under the facility upon the April 2011 review or whether our real estate credit facility will be reduced below borrowed amounts in the event of declines in the appraised values of the underlying security, which would require us to repay a portion of our loan borrowings earlier than anticipated.

In the event our capital resources are not sufficient to fund our future cash needs, the Company will need to obtain alternative terms or sources of financing or liquidate investments and/or operating assets to make any required cash outflows. Events and circumstances that lead to results that

significantly differ from management’s expectations could have a material adverse effect on our operations, liquidity, cash flows, and financial condition.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to Barnwell, including its consolidated subsidiaries, is made known to the officers who certify Barnwell’s financial reports and to other members of executive management and the Board of Directors.

As of December 31, 2010, an evaluation was carried out by Barnwell’s Chief Executive Officer and Chief Financial Officer of the effectiveness of Barnwell’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that Barnwell’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of December 31, 2010 to ensure that information required to be disclosed by Barnwell in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Act of 1934 and the rules thereunder.

Changes in Internal Control Over Financial Reporting

There was no change in Barnwell’s internal control over financial reporting during the quarter ended December 31, 2010, that materially affected, or is reasonably likely to materially affect, Barnwell’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit Number		Description

31.1		Certification of Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BARNWELL INDUSTRIES, INC.
	(Registrant)


Date: February 11, 2011	/s/ Russell M. Gifford
	Russell M. Gifford
	Chief Financial Officer,
	Executive Vice President,
	Treasurer and Secretary

INDEX TO EXHIBITS

Exhibit Number	Description	Page

31.1	Certification of Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002.	33

31.2	Certification of Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002.	34

32	Certification Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.	35