**Table of Contents**

** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-K**

 

(Mark One)

**[X]****            ****ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended September 30,2009**

 

or

 

**[   ]****            ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**CommissionFile Number 1-5103**

 

**BARNWELLINDUSTRIES, INC.**

(Exact name ofregistrant 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** | **96813-2833** |
|------------------------------------------------------------|----------------|
| (Address of principal executive offices)                   | (Zip  code)    |

 

Registrant’s telephone number, including area code:**  (808) 531-8400**

 

**Securitiesregistered pursuant to Section 12(b) of the Act:**

 

| **Title  of each class**                 | ** ** | **Name  of each exchange on which registered** |
|------------------------------------------|------------|------------------------------------------------|
| Common Stock, par value  $0.50 per share |       | NYSE Amex                                      |

 

Securitiesregistered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

o Yes     x No

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

o Yes     x No

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

x Yes     o No

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted 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 registrantwas required to submit and post such files).

o Yes     o No

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.

x    

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of 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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).

o Yes     x No

 

The aggregate marketvalue of the voting common stock held by non-affiliates of the registrant,computed by reference to the closing price of a share of common stock on March 31,2009 (the last business day of the registrant’s most recently completed secondfiscal quarter) was $18,084,000.

 

As of December 1,2009 there were 8,277,160 shares of common stock outstanding.

 

DocumentsIncorporated by Reference

 

1.    Proxy statement to be forwarded tostockholders on or about January 22, 2010 is incorporated by reference in Part III hereof.

 

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**TABLE OF CONTENTS**

 
|          |        |                                                                                                                |   |  Page |
|---------------|-------------|---------------------------------------------------------------------------------------------------------------------|--------|------------|
| PART I   |        |                                                                                                                |   |       |
|          |        |                                                                                                                |   |       |
|          |        | Discussion of  Forward-Looking Statements                                                                           |   |       |
|          |        |                                                                                                                |   |       |
|          | Item 1.     | Business                                                                                                            |   | 4          |
|          |        |                                                                                                                |   |       |
|          | Item 1A.    | Risk  Factors                                                                                                       |   | 20         |
|          |        |                                                                                                                |   |       |
|          | Item 1B.    | Unresolved Staff Comments                                                                                           |   | 36         |
|          |        |                                                                                                                |   |       |
|          | Item 2.     | Properties                                                                                                          |   | 36         |
|          |        |                                                                                                                |   |       |
|          | Item 3.     | Legal Proceedings                                                                                                   |   | 36         |
|          |        |                                                                                                                |   |       |
|          | Item 4.     | Submission of Matters to a Vote of  Security Holders                                                                |   | 36         |
|          |        |                                                                                                                |   |       |
| PART II  |        |                                                                                                                |   |       |
|          |        |                                                                                                                |   |       |
|          | Item 5.     | Market  For Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |   | 37         |
|          |        |                                                                                                                |   |       |
|          | Item 6.     | Selected  Financial Data                                                                                            |   | 37         |
|          |        |                                                                                                                |   |       |
|          | Item 7.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |   | 38         |
|          |        |                                                                                                                |   |       |
|          | Item 7A.    | Quantitative  and Qualitative Disclosures About Market Risk                                                         |   | 62         |
|          |        |                                                                                                                |   |       |
|          | Item 8.     | Financial  Statements and Supplementary Data                                                                        |   | 63         |
|          |        |                                                                                                                |   |       |
|          | Item 9.     | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               |   | 114        |
|          |        |                                                                                                                |   |       |
|          | Item 9A(T). | Controls  and Procedures                                                                                            |   | 114        |
|          |        |                                                                                                                |   |       |
|          | Item 9B.    | Other  Information                                                                                                  |   | 115        |
|          |        |                                                                                                                |   |       |
| PART III |        |                                                                                                                |   |       |
|          |        |                                                                                                                |   |       |
|          | Item 10.    | Directors,  Executive Officers and Corporate Governance                                                             |   | 115        |
|          |        |                                                                                                                |   |       |
|          | Item 11.    | Executive  Compensation                                                                                             |   | 115        |
|          |        |                                                                                                                |   |       |
|          | Item 12.    | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |   | 116        |
|          |        |                                                                                                                |   |       |
|          | Item 13.    | Certain  Relationships and Related Transactions, and Director Independence                                          |   | 116        |
|          |        |                                                                                                                |   |       |
|          | Item 14.    | Principal  Accounting Fees and Services                                                                             |   | 116        |
|          |        |                                                                                                                |   |       |
| PART IV  |        |                                                                                                                |   |       |
|          |        |                                                                                                                |   |       |
|          | Item 15.    | Exhibits,  Financial Statement Schedules                                                                            |   | 117        |
|          |        |                                                                                                                |   |       |
|          |        | Signatures                                                                                                          |   | 118        |
|          |        |                                                                                                                |   |       |
|          |        | Index  to Exhibits                                                                                                  |   | 120        |

 

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**PART I**

 

 

**CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION**

**FOR THEPURPOSE OF “SAFE HARBOR” PROVISIONS OF THE**

**PRIVATESECURITIES LITIGATION REFORM ACT OF 1995**

 

*This Form 10-K,and the documents incorporated herein by reference, contain “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended.  A forward-looking statement is one which isbased on current expectations of future events or conditions and does not relateto historical or current facts.  Thesestatements include various estimates, forecasts, projections of BarnwellIndustries, Inc.’s (referred to herein together with its subsidiaries as “Barnwell,”“we,” “our,” “us” or the “Company”) future performance, statements of Barnwell’splans and objectives and other similar statements.  Forward-looking statements include phrasessuch as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates,”“assumes,” “projects,” “may,” “will,” “will be,” “should,” or similarexpressions.  Although Barnwell believesthat its current expectations are based on reasonable assumptions, it cannotassure that the expectations contained in such forward-looking statements willbe achieved.  Forward-looking statementsinvolve risks, uncertainties and assumptions which could cause actual resultsto differ materially from those contained in such statements.  Investors should not place undue reliance onthese forward-looking statements, as they speak only as of the date of filingof this Form 10-K, and Barnwell expressly disclaims any obligation orundertaking to publicly release any updates or revisions to any forward-lookingstatements contained herein.*

 

*Amongthe important factors that could cause actual results to differ materially fromthose in the forward-looking statements are domestic and international generaleconomic conditions, such as recessionary trends and inflation; domestic andinternational political, legislative, economic, regulatory and legal actions,including changes in the policies of the Organization of Petroleum ExportingCountries or other developments involving or affecting oil-producing countries;military conflict, embargoes, internal instability or actions or reactions ofthe governments of the United States and/or Canada in anticipation of or inresponse to such developments; interest costs, restrictions on production,restrictions on imports and exports in both the United States and Canada, themaintenance of specified reserves, tax increases and retroactive tax claims,royalty increases, expropriation of property, cancellation of contract rights,environmental protection controls, environmental compliance requirements andlaws pertaining to workers’ health and safety; the condition of Hawaii’s realestate market, including the level of real estate activity and prices, thedemand for new housing and second homes on the island of Hawaii, the rate ofincrease in the cost of building materials and labor, the introduction ofbuilding code modifications, changes to zoning laws, the condition of Hawaii’stourism industry and the level of confidence in Hawaii’s economy; levels ofland development activity in Hawaii; levels of demand for water well drillingand pump installation in Hawaii; the potential liability resulting from pendingor future litigation; the Company’s acquisition or disposition of assets; theeffects of changed accounting rules under generally accepted accountingprinciples promulgated by rule-setting bodies; and the factors set forth underthe heading “Risk Factors” in this Form 10-K, in other portions of this Form 10-K,in the Notes to Consolidated Financial Statements, and in other documents filedby Barnwell with the Securities and Exchange Commission (“SEC”).  In addition, unpredictable or unknown factorsnot discussed in this report could also cause actual results to materially andadversely differ from those discussed in the forward-looking statements.*

 

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Unlessotherwise indicated, all references to “dollars” in this Form 10-K are toUnited States dollars.

 

 

**ITEM 1.          BUSINESS**

 

**Overview**

 

Barnwell was incorporated in Delaware in 1956 andfiscal 2009 represented Barnwell’s 53rd year of operations.  Barnwell operates in the following fourprincipal business segments:

 

·                *Oil and Natural Gas Segment*. Barnwell engages in oil and natural gas exploration, development,production and sales in Canada.

 

·                *Land Investment Segment*. Barnwell invests in leasehold land and other real estate interests inHawaii.

 

·                *Residential Real Estate Segment*. Established in January 2007, Barnwell acquires house lots forinvestment and development of homes for sale in Hawaii.

 

·                *Contract Drilling Segment*. Barnwell provides well drilling services and water pumping systeminstallation and repairs in Hawaii.

 

 

**Oil and Natural Gas Segment**

 

*Overview*

 

Through our wholly-owned subsidiary, Barnwell ofCanada, Limited (“Barnwell of Canada”), we are involved in the acquisition,exploration and development of oil and natural gas properties.  Barnwell of Canada initiates and participatesin exploratory and developmental operations for oil and natural gas on propertyin which it has an interest, and evaluates proposals by third parties withregard to participation in such exploratory and developmental operationselsewhere.

 

*Operations*

 

Barnwell’s investments in oil and natural gasproperties consist of investments in Canada, principally in the Province ofAlberta, with minor holdings in the Provinces of Saskatchewan and BritishColumbia.  These property interests areprincipally held under governmental leases or licenses.  Under the typical Canadian provincialgovernmental lease, Barnwell must perform exploratory operations and complywith certain other conditions.  Leaseterms vary with each province, but, in general, the terms grant Barnwell theright to remove oil, natural gas and related substances subject to payment ofspecified royalties on production.

 

All exploratory and developmental operations areoverseen by Barnwell’s Calgary, Alberta staff and Barnwell’s Chief OperatingOfficer located in Honolulu, along with senior management and independentconsultants as necessary.  In fiscal2009, Barnwell participated in exploratory and developmental operationsprimarily in the Canadian Province of Alberta, although Barnwell does not limitits consideration of exploratory and developmental operations to this area.

 

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The Province of Alberta charges oil and natural gasproducers a royalty for production in Alberta. The Province of Alberta determines its royalty share of natural gas andoil by using reference prices that average all natural gas sales and oil sales,respectively, in Alberta.  Through December 31,2008, royalty rates were calculated on a sliding scale basis, increasing asprices increase up to a maximum royalty rate of 35%.  Barnwell also pays gross overriding royaltiesand leasehold royalties on a portion of its natural gas and oil sales toparties other than the Province of Alberta.

 

In October 2007, the Alberta Governmentannounced a New Royalty Framework (“NRF”) that took effect on January 1,2009.  The NRF changes royalty rates onconventional oil and natural gas production to be both price-sensitive andproduction-sensitive, and may increase up to a maximum royalty rate of50%.  The price-sensitive maximum isreached for oil when oil is selling at or above $120.00 Canadian dollars perbarrel and for natural gas when natural gas is selling at or above $17.50Canadian dollars per MCF.  Approximately96% of Barnwell’s gross revenues are derived from properties located withinAlberta.  Approximately 74% of all fiscal2009 royalties related to crown charges, and 26% of Barnwell’s fiscal 2009royalties related to freehold and override charges which are not directlyaffected by the NRF.

 

In November 2008, the Alberta Governmentannounced a one-time option of selecting new transitional rates or NRF rateswhen drilling a new natural gas or conventional oil well 1,000 to 3,500 metersin depth.  All wells drilled between January 1,2009 and December 31, 2013 that adopt the transitional rates will beshifted to the NRF on January 1, 2014. As of January 1, 2009, all of Barnwell’s wells in Alberta payroyalties under the NRF and all new commercial wells adopted the transitionalroyalty rates.

 

In fiscal 2009 and 2008, the weighted-averageroyalty rate paid on all of Barnwell’s natural gas was approximately 16% and23%, respectively.  The weighted-averagerate of all royalties paid to governments and others on natural gas from theDunvegan Unit, Barnwell’s principal oil and natural gas property, wasapproximately 18% and 25% in fiscal 2009 and 2008, respectively.  The decrease in royalty rate on allproperties and the Dunvegan Unit were primarily due to the lower royalties paidunder the NRF due to significantly lower prices.

 

In fiscal 2009 and 2008, the weighted-averageroyalty rate paid on oil was approximately 20% and 21%, respectively.

 

Natural gas prices are typically higher in thewinter than at other times due to increased heating demand.  Oil prices are also subject to seasonalfluctuations, but to a lesser degree. Oil and natural gas unit sales are based on the quantity produced fromthe properties by the operator.  Duringperiods of low demand for natural gas, the operator of the Dunvegan propertymay re-inject natural gas into underground storage facilities in the Dunveganproperty for delivery at a future date.

 

*Well Drilling Activities*

 

During fiscal 2009, Barnwell participated in thedrilling of 12 development wells, ten of which management believes should becapable of production and two which were dry holes.  Barnwell did not participate in the drillingof any exploratory wells during fiscal 2009. Of the 12 wells Barnwell participated in the drilling of in fiscal 2009,six (1.3 net) wells were on prospects developed by Barnwell.

 

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The following table sets forth moredetailed information with respect to the number of exploratory (“Exp.”) anddevelopment (“Dev.”) wells drilled for the fiscal years ended September 30,2009, 2008 and 2007 in which Barnwell participated:
| ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **            | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** |
|------------|------------|----------------|------------|----------------|------------|-----------------------|------------|----------------|------------|------------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|
| ** ** | ** ** | Productive     |       | Productive     |       | Total Productive |       |           |       |             |       |       |       |       |       |
| ** ** | ** ** | Oil Wells |       | Gas Wells |       | Wells                 |       | Dry Holes |       | Total Wells |       |
| ** ** | ** ** | Exp.           |       | Dev.           |       | Exp.                  |       | Dev.           |       | Exp.             |       | Dev.       |       | Exp.       |       | Dev.       |           | Exp.       |       | Dev.       |       |
| **2009**   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **            | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** |
| **Gross*** | ** ** | ** **     | **-**      | ** **     | **2.0**    | ** **            | ** ** | ** **     | **-**      | ** **       | **8.0**    | ** ** | ** ** | ** ** | **-**      | ** ** | **10.0 ** | ** ** | ** ** | ** ** | **-**      | ** ** | **2.0**    | ** ** | ** ** | ** ** | **-**      | ** ** | **12.0 ** | ** ** | ** ** |
| **Net***   | ** ** | ** **     | **-**      | ** **     | **0.5**    | ** **            | ** ** | ** **     | **-**      | ** **       | **1.1**    | ** ** | ** ** | ** ** | **-**      | ** ** | **1.6 **  | ** ** | ** ** | ** ** | **-**      | ** ** | **0.3**    | ** ** | ** ** | ** ** | **-**      | ** ** | **1.9 **  | ** ** | ** ** |
|       |       |           |       |           |       |                  |       |           |       |             |       |       |       |       |       |       |           |       |       |       |       |       |       |       |       |       |       |       |           |       |       |
| 2008       |       |           |       |           |       |                  |       |           |       |             |       |       |       |       |       |       |           |       |       |       |       |       |       |       |       |       |       |       |           |       |       |
| Gross*     |       |           | 3.0        |           | 3.0        |                  |       |           | 1.0        |             | 22.0       |       |       |       | 4.0        |       | 25.0** ** |       |       |       | 2.0        |       | 1.0        |       |       |       | 6.0        |       | 26.0** ** |       |       |
| Net*       |       |           | 1.2        |           | 0.8        |                  |       |           | 0.6        |             | 4.3        |       |       |       | 1.8        |       | 5.1** **  |       |       |       | 0.8        |       | 0.1        |       |       |       | 2.6        |       | 5.2** **  |       |       |
|       |       |           |       |           |       |                  |       |           |       |             |       |       |       |       |       |       |           |       |       |       |       |       |       |       |       |       |       |       |           |       |       |
| 2007       |       |           |       |           |       |                  |       |           |       |             |       |       |       |       |       |       |           |       |       |       |       |       |       |       |       |       |       |       |           |       |       |
| Gross*     |       |           | -          |           | 9.0        |                  |       |           | 2.0        |             | 18.0       |       |       |       | 2.0        |       | 27.0** ** |       |       |       | -          |       | 3.0        |       |       |       | 2.0        |       | 30.0** ** |       |       |
| Net*       |       |           | -          |           | 2.4        |                  |       |           | 0.9        |             | 2.3        |       |       |       | 0.9        |       | 4.7** **  |       |       |       | -          |       | 1.1        |       |       |       | 0.9        |       | 5.8** **  |       |       |
|            |            |                |            |                |            |                       |            |                |            |                  |            |            |            |            |            |            |                |            |            |            |            |            |            |            |            |            |            |            |                |            |            |  |  |  |  |  |

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*                  The term “Gross” refers to the totalnumber of wells in which Barnwell owns an interest, and “Net” refers toBarnwell’s aggregate interest therein. For example, a 50% interest in a well represents one gross well, but 0.5net well.  The gross figures includeinterests owned of record by Barnwell and, in addition, the portions owned byothers.

 

Barnwell invested $5,999,000 in oil and natural gasproperties during fiscal 2009, of which $184,000 (3%) was for acquisition ofoil and natural gas properties, $599,000 (10%) was for exploration costs,$3,539,000 (59%) was for development of oil and natural gas properties, and$1,677,000 (28%) was for support equipment and facilities.  The major areas of investments in fiscal 2009were in the Dunvegan, Boundary Lake, Spirit River, and Pouce Coupe areas ofAlberta and the Boundary Lake area of British Columbia.

 

In the Dunvegan area of Alberta, Canada, Barnwellholds an 8.9% working interest in the Dunvegan Unit, Barnwell’s principal oiland natural gas property.  At September 30,2009, the Dunvegan Unit had 216 producing natural gas wells.  In fiscal 2009, Barnwell completeddevelopment of a Non-Unit well drilled in the prior year and participated in thedrilling of one gross (0.1 net) Non-Unit horizontal development gas well in theDunvegan area which was successful. Total capital expenditures at Dunvegan were $1,873,000 in fiscal 2009 ascompared to $3,070,000 and $3,524,000 in fiscal 2008 and 2007, respectively.

 

Capital expenditures totaled $1,260,000 in theBoundary Lake area of Alberta in fiscal 2009 as compared to $2,557,000 infiscal 2008.  Four gross (1.1 net) wellswere drilled in fiscal 2009 of which one gross (0.3 net) well was successful andwaiting to be tied in, one gross (0.3 net) well was not successful, one gross(0.2 net) well is being evaluated, and one gross (0.3 net) well has not beencompleted or evaluated at September 30, 2009.  Barnwell also completed development of wellsdrilled in the prior year.  At September 30,2009, Barnwell’s average working interest in its productive wells in theBoundary Lake area of Alberta was 27%.

 

Capital expenditures totaled $328,000 in theBoundary Lake area of British Columbia in fiscal 2009 as compared to $1,557,000in fiscal 2008.  One gross (0.1 net) wellwas drilled in fiscal 2009 which was not successful.  At September 30, 2009, Barnwell’saverage working interest in its productive wells in the Boundary Lake area ofBritish Columbia was 22%.

 

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Capital expenditures totaled $1,074,000 in theSpirit River area in fiscal 2009 as compared to $749,000 in fiscal 2008.  In the Spirit River area, Barnwell completeddevelopment of a well drilled in the prior year.  At September 30, 2009, Barnwell’saverage working interest in its productive wells in the Spirit River area was32%.

 

Capital expenditures totaled $441,000 in the PouceCoupe area in fiscal 2009 as compared to $323,000 in fiscal 2008.  One gross (0.1 net) horizontal well wasdrilled in fiscal 2009 which was on production at September 30, 2009.  At September 30, 2009 Barnwell’s averageworking interest in its productive wells in the Pouce Coupe area was 8%.

 

At September 30, 2009, Barnwell was not in theprocess of drilling any oil or gas wells.

 

*Oil and Natural Gas Production*

 

The following table summarizes (a) Barnwell’snet unit production for the last three fiscal years, based on sales of naturalgas, oil and natural gas liquids, from all wells in which Barnwell has or hadan interest, and (b) the average sales prices and average production anddepletion costs for such production during the same periods.  Production amounts reported are net ofroyalties and the Alberta Royalty Tax Credit (“ARTC”), where applicable.  The ARTC was discontinued effective January 1,2007.  Barnwell’s net production infiscal 2009, 2008 and 2007 was derived primarily from the Province of Alberta.

 
|                                              |       | Year ended  September 30, |      |
|---------------------------------------------------|------------|--------------------------------|-----------|
| ** **                                        |       | **2009**                       |      | 2008 |   | 2007 |   |
| Annual net production:                            |       |                           |      |   |   |   |   |
| Natural gas liquids (BBLS)*                       | ** ** | **98,000**                     |      | 107,000 |   | 114,000 |   |
| Oil (BBLS)*                                       | ** ** | **170,000**                    |      | 160,000 |   | 146,000 |   |
| Natural gas (MCF)*                                | ** ** | **3,567,000**                  |      | 3,349,000 |   | 3,615,000 |   |
|                                              |       |                           |      |   |   |   |   |
| Annual average sale price per unit of production: |       |                           |      |   |   |   |   |
| BBL of natural gas liquids**                      | ** ** | **$**                          | **24.47** |   | $ | 61.02 |   | $ | 37.36 |   |
| BBL of oil**                                      | ** ** | **$**                          | **48.94** |   | $ | 100.15 |   | $ | 56.96 |   |
| MCF of natural gas***                             | ** ** | **$**                          | **3.79**  |   | $ | 7.77 |   | $ | 5.88 |   |
|                                              |       |                           |      |   |   |   |   |   |   |   |
| Annual average production cost                    |       |                           |      |   |   |   |   |   |   |   |
| per MCFE produced****                             | ** ** | **$**                          | **1.78**  |   | $ | 1.97 |   | $ | 1.83 |   |
|                                              |       |                           |      |   |   |   |   |   |   |   |
| Annual average depletion cost                     |       |                           |      |   |   |   |   |   |   |   |
| per MCFE produced*****                            | ** ** | **$**                          | **2.15**  |   | $ | 2.89 |   | $ | 2.49 |   |

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*                                          When used in this report, the term “BBL(S)”means stock tank barrel(s) of oil equivalent to 42 U.S. gallons and theterm “MCF” means 1,000 cubic feet of natural gas at 14.65 pounds per squareinch absolute and 60 degrees F.

**                                    Calculated on revenues before royaltyexpense and ARTC divided by gross production.

***                              Calculated on revenues net of pipelinecharges before royalty expense and ARTC divided by gross production.

****                        Naturalgas liquids, oil and natural gas units were combined by converting barrels ofnatural gas liquids and oil to an MCF equivalent (“MCFE”) on the basis of 1 BBL= 5.8 MCF.  Excludes natural gas pipelinecharges.

*****                  Naturalgas liquids, oil and natural gas units were combined by converting barrels ofnatural gas liquids and oil to an MCF equivalent (“MCFE”) on the basis of 1 BBL= 5.8 MCF.

 

In fiscal 2009, approximately 56%, 34% and 10% ofBarnwell’s oil and natural gas revenues were from the sale of natural gas, oiland natural gas liquids, respectively.

 

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In fiscal 2009, Barnwell’s net natural gasproduction after royalties averaged 9,770 MCF per day, an increase from 9,150MCF per day in fiscal 2008.  Grossnatural gas production decreased 2% in fiscal 2009, as compared to fiscal 2008;Dunvegan increased by 1% and all other properties decreased by 5%.  Dunvegan contributed approximately 55% ofBarnwell’s net natural gas production in fiscal 2009, as compared to 52% infiscal 2008.  In fiscal 2009, natural gasproduction from the Dunvegan Unit was responsible for approximately 53% ofBarnwell’s natural gas revenues, as compared to 50% in fiscal 2008.

 

Barnwell’s major oil producing properties are theRed Earth, Bonanza/Balsam and Wood River areas in Canada.  In fiscal 2009, net oil production afterroyalties averaged 470 barrels per day as compared to an average of 440 barrelsper day in fiscal 2008; gross oil production increased 5% as compared to theprior year.  The addition of new wells inthe Boundary Lake area of British Columbia and the Spirit River area werepartially offset by decreased production from the Red Earth and Bonanza/Balsamareas caused by natural declines from existing wells.

 

In fiscal 2009, net natural gas liquids productionafter royalties averaged 270 barrels per day, a decrease from 290 barrels perday in fiscal 2008.  Gross natural gasliquids production declined 4% in fiscal 2009, as compared to fiscal 2008.  These decreases were principally due to lowerDunvegan production which decreased 2% or 7 barrels per day.  Dunvegan contributed approximately 82% ofBarnwell’s net natural gas liquids production in fiscal 2009.

 

The average production cost per MCFE was $1.78 forfiscal 2009, a 10% decrease from $1.97 for fiscal 2008.  The decrease was due to a 14% decrease in theaverage exchange rate of the Canadian dollar to the U.S. dollar in fiscal 2009,as compared to fiscal 2008.  Actual fieldcosts increased by 9% due to higher repairs and maintenance expendituresincurred on all significant properties.

 

The average depletion cost per MCFE was $2.15 forfiscal 2009, a 26% decrease from $2.89 for fiscal 2008.  The decrease was due to a 12% decrease in thedepletion rate due to the reduction of the carrying value of oil and naturalgas properties during fiscal 2009 and a 14% decrease in the average exchangerate of the Canadian dollar to the U.S. dollar in fiscal 2009, as compared tofiscal 2008.

 

Petroleum and natural gas prices are very difficultto predict and fluctuate significantly. Oil and natural gas prices hit historic high levels in fiscal 2008.  Beginning in the fourth quarter of fiscal2008 through the date of this filing, oil and natural gas prices have fallensharply from their record levels.  Thesignificant declines in the prices of natural gas, oil and natural gas liquidscaused net capitalized costs at the end of the second and third quarters offiscal 2009 to exceed the ceiling limitation. As such in fiscal 2009, Barnwell was required to reduce the carrying valueof its oil and natural gas properties by $26,348,000.  Future declines in oil, natural gas andnatural gas liquids prices may result in additional reductions in the carryingvalue of our oil and natural gas properties in the absence of offsetting changes.

 

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*Productive Wells*

 

The following table sets forth the grossand net number of productive wells Barnwell has an interest in as of September 30,2009.

 
|             |   | Productive Wells* |   |
|------------------|--------|-------------------|--------|
|             |   | Gross**           |   | Net** |   |
| Location         |   |              | Oil    |   |   |   | Gas |   |   |   | Oil |   |   |   | Gas |   |   |
| Canada           |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Alberta          |   |              | 161    |   |   |   | 567 |   |   |   | 28.1 |   |   |   | 63.5 |   |   |
| Saskatchewan     |   |              | 7      |   |   |   | 33 |   |   |   | 0.3 |   |   |   | 5.3 |   |   |
| British Columbia |   |              | 5      |   |   |   | 1 |   |   |   | 1.0 |   |   |   | 0.3 |   |   |
| Total            |   |              | 173    |   |   |   | 601 |   |   |   | 29.4 |   |   |   | 69.1 |   |   |

----

*      Seventeen natural gas wells have dual ormultiple completions.

**    Please see note (**) on the followingtable.

 

*Developed Acreage and UndevelopedAcreage*

 

The following table sets forth certaininformation with respect to oil and natural gas properties of Barnwell as of September 30,2009.

 
|             |   |      |    |        |   |        |   |   |   |          |    |   |   |   |   |   |   |   |    |   |   |   |    |   |   |
|------------------|--------|-----------|---------|-------------|--------|-------------|--------|--------|--------|---------------|---------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|             |   |      |    |        |   |        |   |   |   | Developed and |    |
|             |   | Developed |    | Undeveloped |   | Undeveloped |   |
|             |   | Acreage*  |    | Acreage*    |   | Acreage*    |   |
| Location         |   | Gross**   |    | Net**       |   | Gross**     |   | Net**  |   | Gross**       |    | Net**  |   |
| Canada           |   |      |    |        |   |        |   |   |   |          |    |   |   |   |   |   |   |   |    |   |   |   |    |   |   |
| Alberta          |   |      | 246,160 |        |   |        | 38,908 |   |   |          | 191,148 |   |   |   | 79,777 |   |   |   | 437,308 |   |   |   | 118,685 |   |   |
| British Columbia |   |      | 1,827   |        |   |        | 542    |   |   |          | 4,704   |   |   |   | 1,167  |   |   |   | 6,531   |   |   |   | 1,709   |   |   |
| Saskatchewan     |   |      | 3,140   |        |   |        | 426    |   |   |          | 14,834  |   |   |   | 5,467  |   |   |   | 17,974  |   |   |   | 5,893   |   |   |
|             |   |      |    |        |   |        |   |   |   |          |    |   |   |   |   |   |   |   |    |   |   |   |    |   |   |
| Total            |   |      | 251,127 |        |   |        | 39,876 |   |   |          | 210,686 |   |   |   | 86,411 |   |   |   | 461,813 |   |   |   | 126,287 |   |   |
|                  |        |           |         |             |        |             |        |        |        |               |         |        |        |        |        |        |        |        |         |        |        |        |         |        |        |  |  |  |  |  |  |  |  |  |  |  |

----

*      “Developed Acreage” includes the acrescovered by leases upon which there are one or more producing wells.  “Undeveloped Acreage” includes acres coveredby leases upon which there are no producing wells and which are maintained ineffect by the payment of delay rentals or the commencement of drilling thereon.

 

**    Theterm “Gross” refers to the total number of acres or wells in which Barnwellowns an interest, and “Net” refers to Barnwell’s aggregate interesttherein.  For example, a 50% interest ina 320 acre lease represents 320 gross acres and 160 net acres.  The gross acreage and well figures includeinterests owned of record by Barnwell and, in addition, the portions owned byothers.

 

Barnwell’s leasehold interests in its undevelopedacreage expire over the next fiscal years, if not developed, as follows: 32%expire during fiscal 2010; 26% expire during fiscal 2011; 16% expire duringfiscal 2012; 6% expire during fiscal 2013; and 2% expire during fiscal2014.  Eighteen percent of Barnwell’sundeveloped acreage is related to heavy oil and therefore not subject toexpiration.  There can be no assurancethat Barnwell will be successful in renewing its leasehold interests in theevent of expiration.

 

Barnwell’s undeveloped acreage includesconcentrations in Alberta, at Doris (8,832 net acres), Bonanza/Balsam (6,793net acres), Thornbury (5,949 net acres), Rycroft (4,440 net acres) and PaddleRiver (3,296 net acres).  During fiscal2009, Barnwell acquired undeveloped land in Roncott (4,511 net acres), locatedin Saskatchewan.

 

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*Reserves*

 

The amounts set forth in the followingtable, prepared by Paddock Lindstrom & Associates Ltd., Barnwell’sindependent petroleum consultants, summarize the estimated net quantities ofproved developed producing reserves and proved developed reserves of oil(including natural gas liquids) and natural gas as of September 30, 2009,2008 and 2007 on all properties in which Barnwell has an interest; all reservesare developed.  These reserves are beforedeductions for indebtedness secured by the properties and are based on constantdollars.  No estimates of total provednet oil or natural gas reserves have been filed with or included in reports toany federal authority or agency, other than the United States Securities andExchange Commission (“SEC”), since October 1, 2008.

 

Proved Developed Producing Reserves
|                                                        |       | September 30, |           |
|-------------------------------------------------------------|------------|--------------------|----------------|
| ** **                                                  |       | **2009**           |           | 2008 |   | 2007 |   |
| Oil (including natural gas  liquids) – barrels (BBLS): |       |               |           |   |   |   |   |
| Dunvegan                                                    | ** ** | ** **         | **333,000**    | ** ** |   |   | 329,000 |   |   |   | 387,000 |   |   |
| All other properties                                        | ** ** | ** **         | **842,000**    | ** ** |   |   | 763,000 |   |   |   | 708,000 |   |   |
|                                                        | ** ** | ** **         | ** **     | ** ** |   |   |   |   |   |   |   |   |   |
| Total                                                       | ** ** | ** **         | **1,175,000**  | ** ** |   |   | 1,092,000 |   |   |   | 1,095,000 |   |   |
|                                                        |       |               |           |   |   |   |   |   |   |   |   |   |   |
| Natural gas – thousand  cubic feet (MCF):              |       |               |           |   |   |   |   |   |   |   |   |   |   |
| Dunvegan                                                    | ** ** | ** **         | **10,601,000** | ** ** |   |   | 10,493,000 |   |   |   | 11,577,000 |   |   |
| All other properties                                        | ** ** | ** **         | **6,431,000**  | ** ** |   |   | 8,321,000 |   |   |   | 7,281,000 |   |   |
|                                                        | ** ** | ** **         | ** **     | ** ** |   |   |   |   |   |   |   |   |   |
| Total                                                       | ** ** | ** **         | **17,032,000** | ** ** |   |   | 18,814,000 |   |   |   | 18,858,000 |   |   |

 

Total Proved DevelopedReserves (Includes Proved Developed Producing Reserves)
|                                                        |       | September 30, |           |
|-------------------------------------------------------------|------------|--------------------|----------------|
| ** **                                                  |       | **2009**           |           | 2008 |   | 2007 |   |
| Oil (including natural gas  liquids) – barrels (BBLS): |       |               |           |   |   |   |   |
| Dunvegan                                                    | ** ** | ** **         | **333,000**    | ** ** |   |   | 337,000 |   |   |   | 387,000 |   |   |
| All other properties                                        | ** ** | ** **         | **1,001,000**  | ** ** |   |   | 998,000 |   |   |   | 1,000,000 |   |   |
|                                                        | ** ** | ** **         | ** **     | ** ** |   |   |   |   |   |   |   |   |   |
| Total                                                       | ** ** | ** **         | **1,334,000**  | ** ** |   |   | 1,335,000 |   |   |   | 1,387,000 |   |   |
|                                                        |       |               |           |   |   |   |   |   |   |   |   |   |   |
| Natural gas – thousand  cubic feet (MCF):              |       |               |           |   |   |   |   |   |   |   |   |   |   |
| Dunvegan                                                    | ** ** | ** **         | **10,601,000** | ** ** |   |   | 10,697,000 |   |   |   | 11,577,000 |   |   |
| All other properties                                        | ** ** | ** **         | **10,009,000** | ** ** |   |   | 12,600,000 |   |   |   | 12,441,000 |   |   |
|                                                        | ** ** | ** **         | ** **     | ** ** |   |   |   |   |   |   |   |   |   |
| Total                                                       | ** ** | ** **         | **20,610,000** | ** ** |   |   | 23,297,000 |   |   |   | 24,018,000 |   |   |

 

As of September 30, 2009, essentially all ofBarnwell’s proved producing and total proved reserves were located in theProvince of Alberta, with minor volumes located in the Provinces ofSaskatchewan and British Columbia.

 

During fiscal 2009, Barnwell’s total net proveddeveloped reserves, including proved developed producing reserves, of oil andnatural gas liquids decreased by 1,000 barrels, and total net proved developedreserves of natural gas decreased by 2,687,000 MCF.

 

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The following table, basedon information prepared by independent petroleum consultants, Paddock Lindstrom &Associates Ltd., summarizes changes in the estimates of Barnwell’s netinterests in total proved reserves of oil and natural gas liquids (“NGL”) andnatural gas (“MCF” means 1,000 cubic feet of natural gas) which are all inCanada:

 
|                                         |       | OIL & NGL |          | GAS        |
|----------------------------------------------|------------|--------------------|---------------|------------|
|                                         |       | (Barrels)          |          | (MCF)      |
| Balance at  September 30, 2006          |       |               | 1,303,000     |       |   |   | 24,826,000 |   |   |
|                                         |       |               |          |       |   |   |   |   |   |
| Revisions of previous  estimates             |       |               | 176,000       |       |   |   | 1,279,000 |   |   |
| Extensions, discoveries  and other additions |       |               | 168,000       |       |   |   | 1,528,000 |   |   |
| Less production                              |       |               | (260,000      | )          |   |   | (3,615,000 | ) |   |
|                                         |       |               |          |       |   |   |   |   |   |
| Balance at September 30, 2007           |       |               | 1,387,000     |       |   |   | 24,018,000 |   |   |
|                                         |       |               |          |       |   |   |   |   |   |
| Revisions of previous  estimates             |       |               | 89,000        |       |   |   | 1,114,000 |   |   |
| Extensions, discoveries  and other additions |       |               | 126,000       |       |   |   | 1,514,000 |   |   |
| Less production                              |       |               | (267,000      | )          |   |   | (3,349,000 | ) |   |
|                                         |       |               |          |       |   |   |   |   |   |
| Balance at September 30, 2008           |       |               | 1,335,000     |       |   |   | 23,297,000 |   |   |
|                                         |       |               |          |       |   |   |   |   |   |
| Revisions of previous  estimates             |       |               | 239,000       |       |   |   | 82,000 |   |   |
| Extensions, discoveries  and other additions |       |               | 28,000        |       |   |   | 798,000 |   |   |
| Less production                              |       |               | (268,000      | )          |   |   | (3,567,000 | ) |   |
|                                         |       |               |          |       |   |   |   |   |   |
| **Balance at September 30,  2009**      | ** ** | ** **         | **1,334,000** | ** ** | ** ** | ** ** | **20,610,000** | ** ** | ** ** |

 

The upward revisions in reserves in fiscal 2009 weredue to improved performance on certain wells drilled in prior years and lowerroyalties due to lower prices.

 

Barnwell’s working interest in the Dunvegan areaaccounted for approximately 51% and 46% of its total proved natural gasreserves at September 30, 2009 and 2008, respectively, and approximately25% of total proved oil and natural gas liquids reserves at September 30,2009 and 2008.

 

The following table sets forth Barnwell’s oil andnatural gas reserves at September 30, 2009, by property name, based oninformation prepared by Paddock Lindstrom & Associates Ltd.  Gross reserves are before the deduction ofroyalties; net reserves are after the deduction of royalties.  This table is based on constant dollars wherereserve estimates are based on sales prices, costs and statutory tax rates inexistence at September 30, 2009, the date of the projection.  Oil, which includes natural gas liquids, isshown in thousands of barrels (“MBBLS”) and natural gas is shown in millions ofcubic feet (“MMCF”).

 

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OIL AND NATURAL GAS RESERVES AT SEPTEMBER 30, 2009
|                            |       |                    |      |         |       |               |      |       |       |       |       |       |       |       |       |       |       |       |      |       |       |       |      |       |       |       |       |       |       |       |       |       |       |
|---------------------------------|------------|-------------------------|-----------|--------------|------------|--------------------|-----------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                            |       | Total  Proved Producing |      | Total Proved |       |
|                            |       | Oil &  NGL     |      | Gas          |       | Oil & NGL |      | Gas        |       |
|                            |       | Gross                   |      | Net          |       | Gross              |      | Net        |       | Gross      |       | Net        |       | Gross      |       | Net        |       |
| Property  Name                  |       | (MBBLS)                 |      | (MMCF)       |       | (MBBLS)            |      | (MMCF)     |       |
| **Dunvegan**                    | ** ** | ** **              | **479**   | ** **   | ** ** | ** **         | **333**   | ** ** | ** ** | ** ** | **11,615** | ** ** | ** ** | ** ** | **10,601** | ** ** | ** ** | ** ** | **479**   | ** ** | ** ** | ** ** | **333**   | ** ** | ** ** | ** ** | **11,615** | ** ** | ** ** | ** ** | **10,601** | ** ** | ** ** |
| Red Earth                       |       |                    | 275       |         |       |               | 228       |       |       |       | 9          |       |       |       | 8          |       |       |       | 275       |       |       |       | 228       |       |       |       | 9          |       |       |       | 8          |       |       |
| Bonanza/Balsam                  |       |                    | 117       |         |       |               | 84        |       |       |       | 575        |       |       |       | 515        |       |       |       | 117       |       |       |       | 84        |       |       |       | 575        |       |       |       | 515        |       |       |
| Pouce Coupe South               |       |                    | 3         |         |       |               | 2         |       |       |       | 509        |       |       |       | 445        |       |       |       | 57        |       |       |       | 44        |       |       |       | 574        |       |       |       | 505        |       |       |
| Medicine River                  |       |                    | 26        |         |       |               | 20        |       |       |       | 357        |       |       |       | 311        |       |       |       | 26        |       |       |       | 20        |       |       |       | 357        |       |       |       | 311        |       |       |
| Doris                           |       |                    | -         |         |       |               | -         |       |       |       | 265        |       |       |       | 246        |       |       |       | -         |       |       |       | -         |       |       |       | 296        |       |       |       | 276        |       |       |
| Faith South                     |       |                    | -         |         |       |               | -         |       |       |       | -          |       |       |       | -          |       |       |       | -         |       |       |       | -         |       |       |       | 778        |       |       |       | 741        |       |       |
| Wood River                      |       |                    | 62        |         |       |               | 47        |       |       |       | 117        |       |       |       | 105        |       |       |       | 62        |       |       |       | 47        |       |       |       | 326        |       |       |       | 281        |       |       |
| Progress                        |       |                    | 111       |         |       |               | 88        |       |       |       | 1,648      |       |       |       | 1,469      |       |       |       | 185       |       |       |       | 145       |       |       |       | 2,830      |       |       |       | 2,493      |       |       |
| Pouce Coupe                     |       |                    | 4         |         |       |               | 3         |       |       |       | 452        |       |       |       | 417        |       |       |       | 4         |       |       |       | 3         |       |       |       | 452        |       |       |       | 417        |       |       |
| Boundary Lake, Alberta          |       |                    | 60        |         |       |               | 47        |       |       |       | 541        |       |       |       | 475        |       |       |       | 116       |       |       |       | 86        |       |       |       | 1,104      |       |       |       | 938        |       |       |
| Boundary Lake, British Columbia |       |                    | 55        |         |       |               | 49        |       |       |       | 76         |       |       |       | 65         |       |       |       | 65        |       |       |       | 57        |       |       |       | 286        |       |       |       | 235        |       |       |
| Other properties                |       |                    | 309       |         |       |               | 274       |       |       |       | 2,682      |       |       |       | 2,375      |       |       |       | 324       |       |       |       | 287       |       |       |       | 3,669      |       |       |       | 3,289      |       |       |
| **TOTAL**                       | ** ** | ** **              | **1,501** | ** **   | ** ** | ** **         | **1,175** | ** ** | ** ** | ** ** | **18,846** | ** ** | ** ** | ** ** | **17,032** | ** ** | ** ** | ** ** | **1,710** | ** ** | ** ** | ** ** | **1,334** | ** ** | ** ** | ** ** | **22,871** | ** ** | ** ** | ** ** | **20,610** | ** ** | ** ** |
|                                 |            |                         |           |              |            |                    |           |            |            |            |            |            |            |            |            |            |            |            |           |            |            |            |           |            |            |            |            |            |            |            |            |            |            |  |  |  |  |

 

*Standardized Measure of EstimatedDiscounted Future Net Cash Flows*

 

The following table sets forth Barnwell’s “EstimatedFuture Net Revenues” from total proved oil, natural gas and natural gas liquidsreserves and the present value of Barnwell’s “Estimated Future Net Revenues”(discounted at 10%).  Estimated futurenet revenues for total proved reserves are net of estimated future expendituresof developing and producing the proved reserves, and assume the continuation ofexisting economic conditions.  Netrevenues have been calculated using year-end sales prices and current costs,after deducting all royalties, operating costs, future estimated capitalexpenditures, and income taxes.

 
|                               |   | Proved Producing |              | Total Proved |   |
|------------------------------------|--------|------------------|-------------------|--------------|--------|
|                               |   | Reserves         |              | Reserves     |   |
| Year ending  September 30,    |   |             |              |         |   |
| 2010                               |   |             | $ 13,484,000 |         |   |   | $ 14,272,000 |   |   |
| 2011                               |   |             | 10,527,000        |         |   |   | 12,026,000 |   |   |
| 2012                               |   |             | 8,295,000         |         |   |   | 9,148,000 |   |   |
| Thereafter                         |   |             | 25,913,000        |         |   |   | 33,393,000 |   |   |
|                               |   |             |              |         |   |   |   |   |   |
|                               |   |             | $ 58,219,000 |         |   |   | $ 68,839,000 |   |   |
|                               |   |             |              |         |   |   |   |   |   |
| Present value (discounted  at 10%) |   |             |              |         |   |   |   |   |   |
| at September 30, 2009         |   |             | $ 42,491,000 | *            |   |   | $ 50,241,000 | * |   |

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*                  These amounts do not purport to represent,nor should they be interpreted as, the fair value of Barnwell’s natural gas andoil reserves.  An estimate of fair valuewould also consider, among other items, the value of Barnwell’s undevelopedland position, the recovery of reserves not presently classified as proved,anticipated future changes in oil and natural gas prices (these amounts werebased on a natural gas price of $3.43 per 1,000 cubic feet and an oil price of$65.57 per barrel as of September 30, 2009) and costs, and a discountfactor more representative of the time value of money and the risks inherent inreserve estimates.

 

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*Marketing of Oil and Natural Gas*

 

Barnwell sells substantially all of its oil andnatural gas liquids production under short-term contracts between itself andmarketers of oil.  The price of oil andnatural gas liquids is freely negotiated between the buyers and sellers and islargely determined by the world price for oil, which is principally denominatedin U.S. dollars.

 

Natural gas sold by Barnwell is generally sold underboth long-term and short-term contracts with prices indexed to marketprices.  The price of natural gas andnatural gas liquids is freely negotiated between buyers and sellers and isprincipally determined for Barnwell by western Canadian/Midwestern U.S. pricesfor natural gas.  In fiscal 2009, 2008and 2007, Barnwell took virtually all of its oil and natural gas “in kind”where Barnwell markets the products instead of having the operator of aproducing property market the products on Barnwell’s behalf.

 

Barnwell’s oil and natural gas segment derived 80%of its oil and natural gas revenues in fiscal 2009 from four individuallysignificant customers, ProGas Limited (25%), Glencoe Resources Ltd. (19%),Mercuria Energy Canada Inc. (16%), and Shell Trading Canada (20%).  A substantial portion of Barnwell’s naturalgas production from Dunvegan and other properties is sold to aggregators andmarketers under various short-term and long-term contracts, with the price ofnatural gas determined by negotiations between the aggregators and the finalpurchasers.  In fiscal 2009, over 90% ofBarnwell’s oil and natural gas revenues were from products sold at spotprices.  In fiscal 2010, 30% of Barnwell’sproduction will be marketed by an agent acting on behalf of Barnwell where allproducts are sold directly to the final purchasers with the agent not takingtitle of the production.

 

*Governmental Regulation*

 

The jurisdictions in which the oil and natural gasproperties of Barnwell are located have regulatory provisions relating topermits for the drilling of wells, the spacing of wells, the prevention of oiland natural gas waste, allowable rates of production and other matters.  The amount of oil and natural gas produced issubject to control by regulatory agencies in each province that periodicallyassign allowable rates of production. The Province of Alberta and Government of Canada also monitor andregulate the volume of natural gas that may be removed from the province andthe conditions of removal.

 

There is no current government regulation of theprice that may be charged on the sale of Canadian oil or natural gasproduction.  Canadian natural gasproduction destined for export is priced by market forces subject to exportcontracts meeting certain criteria prescribed by Canada’s National Energy Boardand the Government of Canada.

 

Different royalty rates are imposed by theprovincial governments, the Government of Canada and private interests withrespect to the production and sale of oil, natural gas and natural gasliquids.  In addition, provincialgovernments receive additional revenue through the imposition of taxes on oiland natural gas owned by private interests within the province.  Essentially, provincial royalties arecalculated as a percentage of revenue and vary depending on production volumes,selling prices and the date of discovery.

 

As discussed above, the NRF took effect on January 1,2009.  The NRF changes royalty rates onconventional oil and natural gas production to be both price-sensitive andproduction-sensitive, and may increase up to a maximum royalty rate of50%.  The price-sensitive maximum isreached for oil

 

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whenoil is selling at or above $120.00 Canadian dollars per barrel and for naturalgas when natural gas is selling at or above $17.50 Canadian dollars perMCF.  Approximately 96% of Barnwell’sgross revenues are derived from properties located within Alberta.  Approximately 74% of all fiscal 2009royalties related to crown charges, and 26% of Barnwell’s fiscal 2009 royaltiesrelated to freehold and override charges which are not directly affected by theNRF.

 

In November 2008, the Alberta Governmentannounced a one-time option of selecting new transitional rates or NRF rateswhen drilling a new natural gas or conventional oil well 1,000 to 3,500 metersin depth.  All wells drilled between January 1,2009 and December 31, 2013 that adopt the transitional rates will beshifted to the NRF on January 1, 2014. As of January 1, 2009, all of Barnwell’s wells in Alberta payroyalties under the NRF and all new commercial wells adopted the transitionalroyalty rates.

 

During fiscal 2007, the Canadian government enacteda minor reduction in federal tax rates. During fiscal 2008, the Canadian government enacted reductions in thecorporate tax rate from 20.5%, 20.0%, 19.0%, 18.5% and 18.5% in calendar years2008, 2009, 2010, 2011 and 2012, respectively, to 19.5%, 19.0%, 18.0%, 16.5%and 15%, respectively.  Accordingly, as aresult of these reductions in Canadian tax rates, Barnwell’s Canadian netdeferred income tax liability was reduced by approximately $100,000 in fiscal2007 and $909,000 in fiscal 2008.  Therewas no enactment of a reduction in Canadian tax rates during fiscal 2009.

 

In Alberta, a producer of oil or natural gas wasentitled to a credit against the royalties payable to Alberta called theAlberta Royalty Tax Credit (“ARTC”).  TheARTC was discontinued by the Alberta government effective January 1,2007.  Accordingly, no ARTC payments werereceived during fiscal years 2008 or 2009. Barnwell received ARTC payments of $111,000 in fiscal 2007.  The ARTC payments received through December 31,2006 were recorded as a credit against oil and natural gas royalties andreported in oil and natural gas revenues.

 

*Competition*

 

The majority of Barnwell’s natural gas sales takeplace in Alberta, Canada.  Natural gasprices in Alberta are generally competitive with other major North Americanareas due to sufficient pipeline capacity into the United States.  Barnwell’s oil and natural gas liquids aresold in Alberta with prices determined by the world price for oil.

 

Barnwell competes in the sale of oil and natural gason the basis of price and on the ability to deliver products.  The oil and natural gas industry is intenselycompetitive in all phases, including the exploration for new production andreserves and the acquisition of equipment and labor necessary to conductdrilling activities.  The competitioncomes from numerous major oil companies as well as numerous other independentoperators.  There is also competitionbetween the oil and natural gas industry and other industries in supplying theenergy and fuel requirements of industrial, commercial and individual consumers.  Barnwell is a minor participant in theindustry and competes in its oil and natural gas activities with many othercompanies having far greater financial, technical and other resources.

 

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**Land Investment Segment**

 

*Overview*

 

Barnwell owns a 77.6% controlling interest inKaupulehu Developments, a Hawaii general partnership that owns interests inleasehold land and development rights for property located approximately sixmiles north of the Kona International Airport in the North Kona District of theisland of Hawaii.

 

*Operations*

 

In the 1980’s, Kaupulehu Developments obtained thestate and county zoning changes necessary to permit development of the FourSeasons Resort Hualalai at Historic Ka’upulehu and Hualalai Golf Club, whichopened in 1996, a second golf course, and single-family and multi-familyresidential units.  These projects weredeveloped by an unaffiliated entity on leasehold land acquired from KaupulehuDevelopments.

 

Kaupulehu Developments holds development rights forresidentially-zoned leasehold land within and adjacent to Hualalai Golf Clubwhich are under option for $5,312,000 to Hualalai Investors JV, LLC andHualalai Investors II, LLC (hereinafter collectively referred to as “HualalaiInvestors”), two entities not affiliated with Barnwell.  In fiscal 2007, Barnwell acquired a 1.5%passive minority interest, through an 80%-owned joint venture, in HualalaiInvestors.

 

Between 1993 and 2001, Kaupulehu Developmentsobtained the state and county zoning changes necessary to permit development ofsingle-family and multi-family residential units, a golf course and a limitedcommercial area on approximately 870 leasehold acres, zoned forresort/residential development, located adjacent to and north of the FourSeasons Resort Hualalai at Historic Ka’upulehu.

 

In 2004, Kaupulehu Developments transferred itsleasehold interest in the approximately 870 acres in two increments (“IncrementI” and “Increment II”) to WB KD Acquisition, LLC (“WB”).  There is no affiliation between KaupulehuDevelopments and WB.  WB is affiliatedwith RP-Hualalai Investors, LLC, a managing member of Hualalai Investors, andWestbrook Partners, developers of Kuki’o located adjacent to HualalaiResort.  Increment I is an area plannedfor approximately 80 single-family lots and a beach club on the portion of theproperty bordering the Pacific Ocean. The purchasers of the 80 single-family lots will have the right to applyfor membership in the Kuki’o Golf and Beach Club, which is located adjacent toand south of the Four Seasons Resort Hualalai at Historic Ka’upulehu.  Increment II is the remaining portion of theapproximately 870-acre property and is zoned for single-family and multi-familyresidential units and a golf course and clubhouse.  The transfer of Increment II to WB wassubject to Kaupulehu Developments and WB’s negotiation of and entry into anIncrement II acquisition agreement by a deadline of three years from the dateof the sale of the first Increment I lot, or WB was obligated to surrender andtransfer Increment II back to Kaupulehu Developments.  WB and Kaupulehu Developments entered into anIncrement II acquisition agreement in fiscal 2006, as discussed below.

 

With respect to Increment I, Kaupulehu Developmentsreceived an $11,550,000 closing payment in fiscal 2004 and is entitled toreceive payments from WB based on the following percentages of the grossreceipts from WB’s sales of single-family residential lots in Increment I: 9%of the gross proceeds from single-family lot sales up to aggregate gross proceedsof $100,000,000; 10%

 

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ofsuch aggregate gross proceeds greater than $100,000,000 but less than$300,000,000; and 14% of such aggregate gross proceeds in excess of$300,000,000.  In fiscal 2009 onesingle-family lot was sold, in fiscal 2008 four single family lots were sold,in fiscal 2007 seven single family lots were sold and in fiscal 2006 fivesingle family lots were sold, bringing the total number of single-family lotssold through September 30, 2009 to 17.

 

In 2006, Kaupulehu Developments entered into anagreement with respect to the acquisition of Kaupulehu Developments’ leaseholdinterest in Increment II with WB and WB KD Acquisition II, LLC (“WBKD”).  There is no affiliation between KaupulehuDevelopments and WBKD.  WBKD isaffiliated with RP-Hualalai Investors, LLC and Westbrook Partners.  Pursuant to this agreement, KaupulehuDevelopments received a $10,000,000 closing payment and was entitled to receivefuture payments from WBKD based on a percentage of the sales prices of theresidential lots, ranging from 3.25% to 14%, to be determined in the futuredepending upon a number of variables, including whether the lots are sold priorto improvement.

 

In June 2009, Kaupulehu Developments enteredinto an agreement with WB and WBKD that modified the parties’ 2006 agreementfor the development of the Increment II portion of Lot 4A.  The modified agreement reduces KaupulehuDevelopments’ stated percentages to be received from the sale of residentiallots or units.  Pursuant to the modifiedagreement, Kaupulehu Developments will be entitled to receive future paymentsfrom WBKD based on a percentage of the sales prices of the residential lots orunits, ranging from 8% to 10% of the price of improved or unimproved lots or2.60% to 3.25% of the price of units constructed on a lot, to be determined inthe future depending upon a number of variables, including whether the lots aresold prior to improvement.  The modifiedagreement contains a new provision by which Kaupulehu Developments is entitledto receive up to $8,000,000 in additional payments after the members of WBKDhave received distributions equal to the capital they invested in theproject.  Any future payments from WBKDunder this agreement are contingent future profits which will be recognizedwhen they are realized.  Increment II iscurrently planned for approximately 400 residential units.

 

In addition, under the terms of the June 2009agreement between Kaupulehu Developments, WB and WBKD, WB and/or WBKD’sexclusive right to negotiate with Kaupulehu Developments with respect toapproximately 1,000 acres of vacant leasehold land zoned conservation in theKaupulehu area located adjacent to Increment II (“Lot 4C”) has been extendeduntil June 2015.  However, thisright to negotiate will terminate in June 2013 if WB and/or WBKD have notcompleted all environmental assessments and surveys reasonably required tosupport a petition to the Hawaii State Land Use Commission for reclassificationof Lot 4C.

 

Kaupulehu Mauka Investors, LLC, a limited liabilitycompany wholly-owned by Barnwell, holds 14 lot acquisition rights as to lotswithin approximately 5,000 acres of agricultural-zoned leasehold land in theupland area of Kaupulehu (“Mauka Lands”) situated between the Queen KaahumanuHighway and the Mamalahoa Highway at Kaupulehu, North Kona, island and state ofHawaii.  The 14 lot acquisition rightsgive Barnwell the right to acquire 14 residential lots, each of which iscurrently estimated to be two to five acres in size, which may be developed onthe Mauka Lands.  These lands arecurrently classified as agricultural by the state of Hawaii and, accordingly,the developer of these lands (Hualalai Investors) will need to pursue bothstate and county of Hawaii approvals for reclassification and rezoning topermit a residential subdivision and negotiate development terms.

 

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*Competition*

 

Barnwell’s land investment segment is subject tointense competition in all phases of its operations including the acquisitionof new properties, the securing of approvals necessary for land rezoning, andthe search for potential buyers of property interests presently owned.  The competition comes from numerousindependent land development companies and other industries involved in landinvestment activities.  The principalfactors affecting competition are the location of the project and pricing.  Kaupulehu Developments is a minor participantin the land development industry and competes in its land investment activitieswith many other entities having far greater financial and other resources.

 

 

**Residential Real Estate Segment**

 

*Overview*

 

Established in fiscal 2007, Kaupulehu 2007, LLLP (“Kaupulehu2007”), a Hawaii limited liability limited partnership 80%-owned by Barnwell,acquires house lots for investment and develops luxury residences for sale.

 

*Operations*

 

In fiscal 2007, Kaupulehu 2007 made nonrefundabledeposits of $200,000 each to secure the right to purchase seven parcels in theLot 4A Increment I area of Kaupulehu, North Kona, Hawaii from WB, anunaffiliated entity.  Each lot undercontract had a purchase price of $2,378,000 and the deposit for each lot was tobe applied to the purchase price of each lot.

 

In fiscal 2007, Kaupulehu 2007 purchased three ofthe aforementioned parcels and in fiscal 2008, acquired a fourth.  At September 30, 2009, Kaupulehu 2007owns four parcels; two luxury residences were complete and classified as “RealEstate Held for Sale” and two parcels were held for investment and classifiedas “Investment in Residential Parcels.”

 

The three remaining rights to purchase lots in theLot 4A Increment I area were sold to unaffiliated parties during fiscal years2008 and 2009, fulfilling Kaupulehu 2007’s obligation to purchase the threeparcels, and Kaupulehu 2007 received a $600,000 refund of its original depositsfor the three lots.

 

*Competition*

 

Barnwell’s residential real estate segment is subjectto intense competition in all phases of its operations including theacquisition of land, the building of residential homes, including the need forraw materials and skilled labor, and the search for potential purchasers ofcompleted homes.  The competition comesfrom numerous independent real estate developers.  The principal factors affecting competitionare the location of the project, reputation, design, quality and pricing.  Kaupulehu 2007 is a newcomer and a minorparticipant in the real estate development industry and competes with manyother entities having far greater financial and other resources.

 

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**Contract Drilling Segment**

 

*Overview*

 

Barnwell’s wholly-owned subsidiary, Water ResourcesInternational, Inc. (“Water Resources”), drills water, water monitoringand geothermal wells of varying depths in Hawaii, installs and repairs waterpumping systems, and is the state of Hawaii’s distributor for Floway pumps andequipment.

 

*Operations*

 

Water Resources owns and operates two Spencer-Harrisportable rotary drill rigs capable of drilling up to approximately 7,000 feet,an IDECO H-35 rotary drill/workover rig, a GEFCO 40-T portable rotary drillrig, a Walker-Neer P-15-A pump hoist rig, a Franks Explorer double drum pumphoist rig, and other installation and service equipment.  Additionally, Water Resources leases athree-quarter of an acre maintenance facility in Honolulu, Hawaii and a oneacre maintenance and storage facility with 2,800 square feet of interior spacein Kawaihae, Hawaii, and maintains an inventory of drilling materials and pumpsupplies.

 

The demand for Water Resources’ services isprimarily dependent upon land development activities in Hawaii.  Water Resources markets its services to landdevelopers and government agencies, and identifies potential contracts throughpublic notices, its officers’ involvement in community activities andreferrals.  Contracts are usually fixedprice per lineal foot drilled or day rate contracts and are negotiated withprivate entities or obtained through competitive bidding with private entitiesor local, state and federal agencies. Contract revenues are not dependent upon the discovery of water,geothermal production zones or other similar targets, and contracts are notsubject to renegotiation of profits or termination at the election of thegovernmental entities involved.  Contractsprovide for arbitration in the event of disputes.

 

Water Resources derived 39%, 24% and 47% of itscontract drilling revenues in fiscal 2009, 2008 and 2007, respectively,pursuant to federal, state of Hawaii and county contracts.  At September 30, 2009, Barnwell hadaccounts receivable from the state of Hawaii and county entities totalingapproximately $660,000.  Barnwell haslien rights on wells drilled and pumps installed for federal, state of Hawaii,county and private entities.

 

Water Resources currently operates in Hawaii and isnot subject to seasonal fluctuations.

 

In fiscal 2009, Water Resources started six welldrilling contracts and eight pump installation contracts and completed sevenwell drilling contracts and eight pump installation contracts.  Four of the seven completed well drillingcontracts were started in the prior year. Sixty-five percent (65%) of well drilling and pump installation jobs,representing 39% of total contract drilling revenues in fiscal 2009, have beenpursuant to government contracts.

 

At September 30, 2009, Water Resources had abacklog of six well drilling contracts and four pump installation and repaircontracts, of which three well drilling and three pump installation and repaircontracts were in progress as of September 30, 2009.

 

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The dollar amount of WaterResources’ backlog of firm well drilling and pump installation and repaircontracts at November 30, 2009 and 2008 was as follows:

 
|                          | ** ** | **2009**   |                 | 2008       |   |
|-------------------------------|------------|------------|----------------------|------------|--------|
|                          | ** ** | ** ** | ** **           | ** ** |   |   |   |   |   |
| Well drilling                 | ** ** | ** ** | **$ 2,840,000** | ** ** |   |   | $ 3,180,000 |   |   |
| Pump installation and  repair | ** ** | ** ** | **310,000**          | ** ** |   |   | 630,000 |   |   |
|                          | ** ** | ** ** | ** **           | ** ** |   |   |   |   |   |
|                          | ** ** | ** ** | **$ 3,150,000** | ** ** |   |   | $ 3,810,000 |   |   |

 

All of the contracts in backlog at November 30,2009 are expected to be completed within fiscal year 2010.

 

*Competition*

 

Water Resources competes with other drillingcontractors in Hawaii which use drill rigs similar to Water Resources’ drillingrigs or drilling rigs that drill as quickly as Water Resources’ equipment butrequire less labor.  These competitorsare also capable of installing and repairing vertical turbine and submersiblewater pumping systems in Hawaii.  Thesecontractors compete actively with Water Resources for government and privatecontracts.  Pricing is Water Resources’major method of competition; reliability of service is also a significantfactor.

 

Competitive pressures are expected to remain high,thus there is no assurance that the quantity of available or awarded jobs whichoccurred in fiscal 2009 will continue.

 

 

**Financial Information About Industry Segments and Geographic Areas**

 

Note 10 in the “Notes to Consolidated FinancialStatements” in Item 8 contains information on our segments and geographicareas.

 

 

**Employees**

 

As of December 7, 2009, Barnwell employed 47employees; 46 on a full time basis and one on a part time basis.  Twenty-one are employed in contract drillingactivities, 13 are employed in oil and natural gas activities, and 13 aremembers of the corporate and administrative staff.  None of our employees are union members.

 

 

**Environmental Costs**

 

Barnwell is subject to extensive environmental lawsand regulations.  Federal, state, andCanadian governmental agencies issue rules and regulations and enforcelaws to protect the environment which are often difficult and costly to complywith and which carry substantial penalties for failure to comply, particularlyin regard to the discharge of materials into the environment.  These laws, which are constantly changing,regulate the discharge of materials into the environment and maintenance ofsurface conditions and may require Barnwell to remove or mitigate theenvironmental effects of the disposal or release of petroleum or chemicalsubstances at various sites.  Barnwelldid not incur material environmental costs in fiscal 2009.

 

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**Available Information**

 

We are required to file annual, quarterly andcurrent reports and other information with the SEC.  These filings are not deemed to be incorporatedby reference in this report.  You mayread and copy any documents filed by us at the Public Reference Room ofthe SEC, 100 F Street, N.E., Washington, D.C. 20549.  You may obtain information on the operationof the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Our filings with the SEC are also availableto the public through the SEC’s website at www.sec.gov.  Furthermore, we maintain an Internet site atwww.brninc.com.  We make available on ourInternet website free of charge our annual reports on Form 10-K, quarterlyreports on Form 10-Q and current reports on Form 8-K as soon aspracticable after we electronically file such reports with the SEC.

 

 

**ITEM 1A.****        ****RISK FACTORS**

 

The business of Barnwell and its subsidiaries facenumerous risks, including those set forth below or those described elsewhere inthis Form 10-K or in Barnwell’s other filings with the SEC.  The risks described below are not the onlyrisks that Barnwell faces, nor are they necessarily listed in order ofsignificance.  If any of the followingrisk factors should occur, our profitability, financial condition or liquiditycould be materially impacted.

 

 

*Risks Related to Oil and Natural Gas Segment*

 

**The oil and natural gas industry is highly competitive.**

 

We compete for capital, acquisitions of reserves,undeveloped lands, skilled personnel, access to drilling rigs, service rigs andother equipment, access to processing facilities, pipeline capacity and in manyother respects with a substantial number of other organizations, many of whichmay have greater technical and financial resources than we do.  Some of these organizations explore for,develop and produce oil and natural gas, carry on refining operations andmarket oil and other products on a worldwide basis.  As a result of these complementaryactivities, some of our competitors may have competitive resources that aregreater and more diverse than ours. Furthermore, many of our competitors may have a competitive advantagewhen responding to factors that affect demand for oil and natural gasproduction, such as changing prices and production levels, the cost andavailability of alternative fuels and the application of governmentregulations.  If our competitors are ableto capitalize on these competitive resources, it could adversely affect ourrevenues.

 

**Oil and natural gas prices are volatile.  Our results of operations and financialcondition are highly dependent on the prices of and demand for our oil andnatural gas production.**

 

Oil and natural gas prices are volatile and havefluctuated widely during recent years in response to many factors that arebeyond our control.  These factorsinclude, but are not limited to, minor changes in supply and demand, marketuncertainty, weather, worldwide political instability, foreign supply of oiland natural gas, the level of consumer product demand, government regulationsand taxes, the price and availability of alternative fuels and the overalleconomic environment.  Any decline in oilor natural gas prices may have a material adverse effect on our operations,financial condition, operating cash flows, borrowing ability, reserves, and theamount of capital that we are able to allocate for the development of oil andnatural gas reserves and future growth.

 

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Energy prices are also subject to other politicaland regulatory actions outside our control, which may include changes in thepolicies of the Organization of Petroleum Exporting Countries or otherdevelopments involving or affecting oil-producing countries, or actions orreactions of the government of the United States in anticipation of or inresponse to such developments.

 

**If oil and natural gasprices decrease, we may be required to take write-downs of the carrying valueof our oil and natural gas properties.**

 

We follow the full cost method of accounting forcosts related to our oil and natural gas properties.  Under this method, the net book value ofproperties less related deferred income taxes, may not exceed a calculated “ceiling.”  The ceiling is the estimated after tax futurenet revenues from proved oil and natural gas properties, discounted at 10% peryear.  In calculating discounted futurenet revenues, oil and natural gas prices in effect at the time of thecalculation are held constant, except for changes which are fixed anddeterminable by existing contracts.  Thefull cost ceiling is evaluated at the end of each quarter using the prices foroil and natural gas at that date.  Theexcess, if any, of the net book value above the ceiling is required to bewritten off as an expense.  A significantdecline in oil and natural gas prices from current levels, or other factors, withoutother mitigating circumstances, could result in reductions of the carryingvalue of our oil and natural gas properties and an equivalent charge toearnings.

 

**An increase in operating costs or a decline in our production levelcould have a material adverse effect on our results of operations and financialcondition.**

 

Higher operating costs for our properties willdirectly decrease the amount of cash flow received by us.  Electricity, supplies, and labor costs are afew of the operating costs that are susceptible to material fluctuation.  A significant increase in operating costscould result in materially lower operating margin and cash flow.

 

The level of production from our existing propertiesmay decline at rates greater than anticipated due to unforeseen circumstances,many of which are beyond our control.  Asignificant decline in our production could result in materially lower revenuesand cash flow.

 

**Our operating results are affected by our ability tomarket the oil and natural gas that we produce.**

 

Our business depends in part upon the availability,proximity and capacity of natural gas gathering systems, pipelines andprocessing facilities.  Canadian federaland provincial, as well as United States federal and state, regulation of oiland natural gas production, processing and transportation, tax and energypolicies, general economic conditions, and changes in supply and demand couldadversely affect our ability to produce and market oil and natural gas.  If market factors change and inhibit the marketingof our production, overall production or realized prices may decline.

 

**We are not the operator and have limited influenceover the operations of the majority of our oil and natural gas properties.**

 

We hold minority interests in the majority of ouroil and natural gas properties.  As aresult, we cannot control the pace of exploration or development or majordecisions affecting the drilling of wells or the plan for development andproduction at non-operated properties, although contract provisions giveBarnwell certain consent rights in some matters.  The operator’s influence over these matterscan affect the pace at which we incur capital expenditures.  Additionally, as certain underlying jointventure data is not accessible to us, we depend on the operators atnon-operated properties to provide us with reliable accounting information.

 

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**Our operations are subject to domestic and foreign governmentregulation and other risks, particularly in Canada and the United States.**

 

Barnwell’s oil and natural gas operations areaffected by political developments and laws and regulations, particularly inCanada and the United States, such as restrictions on production, restrictionson imports and exports, the maintenance of specified reserves, tax increasesand retroactive tax claims, expropriation of property, cancellation of contractrights, environmental protection controls, environmental compliancerequirements and laws pertaining to workers’ health and safety.  Further, the right to explore for and developoil and natural gas on lands in Alberta, Saskatchewan and British Columbia iscontrolled by the governments of each of those provinces.  Changes in royalties and other terms ofprovincial leases, permits and reservations may have a substantial effect onBarnwell’s operations.  We derive asignificant portion of our revenues from our operations in Canada.  In fiscal 2009, we derived approximately 78%of our operating revenues from operations in Canada.

 

Additionally, our ability to compete in the Canadianoil and natural gas industry may be adversely affected by governmentalregulations or other policies that favor the awarding of contracts tocontractors in which Canadian nationals have substantial ownershipinterests.  Furthermore, we may facegovernmentally imposed restrictions or fees from time to time on the transferof funds to the U.S.

 

Government regulations control and often limitaccess to potential markets and impose extensive requirements concerningemployee safety, environmental protection, pollution control and remediation ofenvironmental contamination. Environmental regulations, in particular, prohibit access to somemarkets and make others less economical, increase equipment and personnel costsand often impose liability without regard to negligence or fault.  In addition, governmental regulations maydiscourage our customers’ activities, reducing demand for our products andservices.

 

****Compliance with foreign tax and other laws may adversely affect ouroperations.****

 

Tax and other laws and regulations are not alwaysinterpreted consistently among local, regional and national authorities.  Income tax laws, other legislation orgovernment incentive programs relating to the oil and natural gas industry mayin the future be changed or interpreted in a manner that adversely affects usand our stockholders.  It is also possiblethat in the future we will be subject to disputes concerning taxation and othermatters in Canada, including the manner in which we calculate our income fortax purposes, and these disputes could have a material adverse effect on ourfinancial performance.

 

****We are dependent upon future discoveries or acquisitions of oil andnatural gas to maintain our reserves.****

 

We actively explore for oil and natural gasreserves.  However, future explorationand drilling results are uncertain and may involve substantial costs.  Despite this uncertainty or potential cost,discoveries or acquisitions of additional reserves are needed to avoid amaterial decline in reserves and production. As a result, future oil and natural gas reserves may be dependent on oursuccess in exploiting existing properties and acquiring additionalreserves.  If our access to capitalbecomes limited or unavailable, our ability to make the necessary capitalinvestments to maintain or expand our

 

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oiland natural gas reserves will be impaired. Additionally, we cannot guarantee that we will be successful indeveloping additional reserves or acquiring additional reserves on terms thatmeet our investment objectives.  Withoutthese reserve additions, our reserves will deplete and as a consequence, eitherproduction from, or the average reserve life of, our properties will decline.

 

****Actual reserves will vary from reserve estimates.****

 

The value of our common stock depends upon, amongother things, the level of reserves of oil and natural gas.  Estimating reserves is inherently uncertain,and the figures herein are only estimates. Ultimately, actual reserves attributable to our properties will vary fromestimates, and those variations may be material.  The estimation of reserves involves a numberof factors and assumptions, including, among others:

·     historicalproduction from our wells compared with production rates from similar producingwells in the area;

·     futurecommodity prices, production and development costs, royalties and capitalexpenditures;

·     initialproduction rates;

·     productiondecline rates;

·     ultimaterecovery of reserves;

·     success offuture development activities;

·     marketabilityof production;

·     effects ofgovernment regulation; and

·     othergovernment levies that may be imposed over the producing life of reserves.

 

Reserve estimates are based on the relevant factors,assumptions and prices as of the date on which the evaluations areprepared.  Many of these factors aresubject to change and are beyond our control. If these factors, assumptions and prices prove to be inaccurate, actualresults may vary materially from reserve estimates.

 

****Delays in business operations could adversely affect our distributions.****

 

In addition to the usual delays in payment bypurchasers of oil and natural gas to the operators of our properties, and the delaysof those operators in remitting payment to us, payments between any of theseparties may also be delayed by:

·     restrictions imposed by lenders;

·     accounting delays;

·     delays in the sale or delivery of products;

·     delays in the connection of wells to a gathering system;

·     blowouts or other accidents;

·     adjustments for prior periods;

·     recovery by the operator of expenses incurred in the operation of theproperties; and

·     the establishment by the operator of reserves for these expenses.

 

Any of these delays could expose us to additionalthird party credit risks.

 

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****The industry in which we operate exposes us to potential liabilitiesthat may not be covered by insurance.****

 

Our operations are subject to all of the risksassociated with the operation and development of oil and natural gasproperties, including the drilling of oil and natural gas wells, and theproduction and transportation of oil and natural gas.  These risks include encountering unexpectedformations or pressures, premature declines of reservoirs, blow-outs, equipmentfailures and other accidents, cratering, sour gas releases, uncontrollableflows of oil, natural gas or well fluids, adverse weather conditions,pollution, other environmental risks, fires and spills.  A number of these risks could result inpersonal injury, loss of life, or environmental and other damage to ourproperty or the property of others.

 

While we maintain reserves for anticipatedliabilities and carry various levels of insurance, we could be affected bycivil, criminal, regulatory or administrative actions, claims orproceedings.  We cannot fully protectagainst all of the risks listed above, nor are all of these risksinsurable.  There is no assurance thatany applicable insurance or indemnification agreements will adequately protectus against liability for the risks listed above.  We could face substantial losses if an eventoccurs for which we are not fully insured or are not indemnified against or acustomer or insurer fails to meet its indemnification or insuranceobligations.  In addition, there can beno assurance that insurance will continue to be available to cover any or allof these risks, or, even if available, that insurance premiums or other costswill not rise significantly in the future, so as to make the cost of suchinsurance prohibitive.

 

****We may incur material costs to comply with or as a result of health,safety, and environmental laws and regulations.****

 

The oil and natural gas industry is subject toextensive environmental regulation pursuant to local, provincial and federallegislation.  A violation of thatlegislation may result in the imposition of fines or the issuance of “clean up”orders.  Legislation regulating the oiland natural gas industry may be changed to impose higher standards andpotentially more costly obligations.  Forexample, the 1997 Kyoto Protocol to the United Nation’s Framework Convention onClimate Change, known as the Kyoto Protocol, was ratified by the Canadiangovernment in December 2002 and will require, among other things,significant reductions in greenhouse gases. The impact of the Kyoto Protocol on us is uncertain and may result insignificant additional costs for our future operations.  Although we have recorded a provision in ourfinancial statements relating to our estimated future environmental andreclamation obligations that we believe is reasonable, we cannot guarantee thatwe will be able to satisfy our actual future environmental and reclamationobligations.

 

We are not fully insured against certainenvironmental risks, either because such insurance is not available or becauseof high premium costs.  In particular,insurance against risks from environmental pollution occurring over time, asopposed to sudden and catastrophic damages, is not available on economicallyreasonable terms.  Accordingly, any sitereclamation or abandonment costs actually incurred in the ordinary course ofbusiness in a specific period could negatively impact our cash flow.  Should we be unable to fully fund the cost ofremedying an environmental problem, we might be required to suspend operationsor enter into interim compliance measures pending completion of the requiredremedy.

 

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****We may have difficulty financing our planned capital expenditures,which could have an adverse affect on our business.****

 

We make and will continue to make substantialcapital expenditures in our exploration and development projects.  Without adequate capital resources, ourdrilling and other activities may be limited and our business, financialcondition and results of operations may suffer. We may not be able to secure necessary financing on reasonable terms orat all and financing may not continue to be available to us under our existingfinancing arrangements.  If capitalresources are unavailable, we may curtail our drilling, development and otheractivities or be forced to sell some of our assets under untimely orunfavorable terms.  Any such curtailmentor sale could have a material adverse effect on our business, financial conditionand results of operations.

 

****Unforeseen title defects may result in a loss of entitlement toproduction and reserves.****

 

Although we conduct title reviews in accordance withindustry practice prior to any purchase of resource assets or property, suchreviews do not guarantee that an unforeseen defect in the chain of title willnot arise and defeat our title to the purchased assets.  If such a defect were to occur, ourentitlement to the production from such purchased assets could be jeopardized.

 

 

*Risks Related to Land Investment Segment*

 

****The real estate investment industry is experiencing a severe andextended downturn that may continue for an indefinite period.  This downturn in economic conditions couldadversely affect our business.****

 

The real estate investment industry is cyclical innature and is particularly vulnerable to shifts in local, regional, andnational economic conditions outside of our control such as interest rates,housing demand, population growth, employment levels, job growth and propertytaxes.  Further, a weakening of theeconomic drivers in Hawaii, which include tourism, military spending,construction starts and employment, and a decrease in market demand adverselyimpacted the level of real estate activity in Hawaii.  The industry has experienced a significantdecrease in demand for new homes since 2007 and this trend may continue for anextended period of time.  Economicconditions in the United States have also weakened, which puts continued pressureon consumer confidence for residential real estate.  These challenging market conditions areexpected to continue for the foreseeable future and, in the near term, theseconditions may further deteriorate.  Weexpect that continued weakness in the industry could adversely affect our business,results of operations and financial condition.

 

Considerable economic and political uncertaintiescurrently exist that could have adverse effects on consumer buying habits,construction costs, availability of labor and materials and other factors affectingus and the real estate industry in general. Significant expenditures associated with investment in real estate, suchas real estate taxes, insurance, maintenance costs and debt payments, cannotgenerally be reduced even though changes in Hawaii’s or the nation’s economymay cause a decrease in revenues from our properties.

 

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****Our real estate business is concentrated in the state of Hawaii.  As a result, our financial results aredependent on the economic growth and health of Hawaii, particularly the islandof Hawaii.****

 

Barnwell’s land investment segment is affected bythe condition of Hawaii’s real estate market. The Hawaii real estate market is affected by Hawaii’s economy and Hawaii’stourism industry, as well as the United States’ economy in general.  Any future cash flows from Barnwell’s landdevelopment activities are subject to, among other factors, the level of realestate activity and prices, the demand for new housing and second homes on theisland of Hawaii, the rate of increase in the cost of building materials andlabor, the introduction of building code modifications, changes to zoning laws,and the level of confidence in Hawaii’s economy.  The future economic growth in certainportions of the island of Hawaii may be adversely affected if itsinfrastructure, such as roads, airports, medical facilities and schools, arenot improved to meet increased demand. There can be no assurance that these improvements will occur.

 

**The occurrence of natural disasters in Hawaii could adversely affectour business.**

 

The occurrence of natural disasters in Hawaii suchas, but not limited to, earthquakes, landslides, hurricanes, tornadoes,volcanic activity, droughts and floods, could have a material adverse effect onour ability to develop and sell properties or realize income from ourprojects.  The occurrence of naturaldisasters could also cause increases in property and flood insurance rates anddeductibles, which could reduce demand for our properties.

 

**Increases in interest rates, tightening of lending standards anddecreases, limitations or restrictions in the availability of mortgagefinancing and other economic factors outside our control, such as consumerconfidence and declines in employment levels could lead to slowed home sales,which could adversely affect our revenues and earnings.**

 

The United States residential mortgage market isexperiencing significant disruption. Mortgage interest rates have recently experienced significant volatilityand contributed to the challenging market conditions faced by us and theindustry.  In addition, as a result ofincreased default rates and other factors, the willingness of many lenders tomake home mortgage loans has decreased and lenders have tightened their lendingstandards.  The volatility in interestrates, the decrease in the willingness of lenders to make home mortgage loans,and the tightening of lending standards have made it more difficult for somepotential buyers to finance the purchase of our homes.  Potential buyers may not be able to obtainacceptable financing to purchase residential lots within the Kaupulehu area, leadingto further declines in the market for homes. Any limitations or restrictions on the availability of mortgagefinancing or increases in mortgage interest rates could reduce residential lotsales, thereby reducing our revenues and earnings.  Even if potential buyers do not needfinancing, changes in interest rates and mortgage availability could make itharder for them to sell their existing homes to potential buyers who needfinancing.  Any limitations orrestrictions on the availability of mortgage financing, further interest rateincreases or limits on the deductibility of home mortgages could adverselyaffect our sales, which would reduce our revenues.

 

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**Our business is subject to extensive regulation which makes itdifficult and expensive for us to conduct our operations.**

 

We are subject to a wide variety of federal, stateand local laws and regulations relating to land use and development and toenvironmental compliance and permitting obligations, including those related tothe use, storage, discharge, emission, and disposal of hazardousmaterials.  Any failure to comply withthese laws could result in capital or operating expenditures or the impositionof severe penalties or restrictions on operations that could adversely affectpresent and future operations, or jeopardize our ability to sell the leaseholdinterest currently held.

 

**Receipt of future percentage of sales payments is dependent upon thedeveloper’s continued efforts to develop and market the property.**

 

We are entitled to receive future payments based ona percentage of the sales prices of residential homes and lots withinapproximately 870 acres in the Kaupulehu area. However, in order to collect such percentage of sales payments we arereliant upon an unaffiliated third party developer to continue to develop andmarket the homes and lots.  The receiptof future percentage of sales payments could be jeopardized if the developerfails to proceed with development and marketing of the property.

 

****If required land use entitlements are not obtained at reasonable costs,or at all, our operating results could be adversely affected.****

 

We hold the leasehold interest to approximately1,000 acres of vacant land that is currently zoned conservation.  Our success in selling this interest may becontingent upon obtaining the necessary reclassification from the State ofHawaii Land Use Commission and county of Hawaii.  Obtaining the necessary reclassification andministerial approvals is often difficult, costly and may take several years, ormore, to complete.  Delays or failures toobtain the necessary reclassification approvals may adversely affect ourfinancial results.

 

****Environmental and other regulations may have an adverse effect on ourbusiness.****

 

Our properties are subject to federal, state andlocal environmental regulations and restrictions that may impose significantlimitations.  In most cases, approval todevelop requires multiple permits which involve a long, uncertain and costlyregulatory process.

 

**General economic conditions in the lodgingindustry****could adversely affect ourfinancial results.**

 

We own a 1.5% passive minority interest in HualalaiResort, which includes the Four Seasons Resort Hualalai at Historic Ka’upulehu,two golf courses and a clubhouse, and a 1.5% passive minority interest in theKona Village Resort, an 80-acre oceanfront hotel property.  Soft economic conditions and reduced travelto North Kona, Hawaii could adversely affect these interests and, therefore,our financial results related to our investment.  The aforementioned properties are alsosubject to risks that generally relate to investments in commercial realestate, including governmental regulations; real estate, insurance, zoning, taxand eminent domain laws; the ongoing need for capital improvements to maintainor upgrade properties; fluctuations in real estate values; and the relativeilliquidity of real estate compared to other investments.

 

****The value of our lot acquisition rights could be impaired if thedeveloper of the property is unable to obtain required land use entitlements orsuccessfully negotiate development terms and agreements.****

 

We hold acquisition rights to 14 lots inagricultural-zoned leasehold lands in the upland area of Kaupulehu (“MaukaLands”) situated between the Queen Kaahumanu Highway and the Mamalahoa Highwayat Kaupulehu, North Kona, island and state of Hawaii.  The lot acquisition rights give us the 

 

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rightto purchase residential lots which may be developed on the Mauka Lands.  The ability to purchase residential lots andthe value of such lots in the future is contingent upon the developer of theproperty obtaining the necessary land use reclassification, zoning anddevelopment approvals from regulatory entities. Obtaining the necessary reclassification and ministerial approvals isoften difficult, costly and may take several years, or more, to complete.  Delays or failures to obtain the necessaryreclassification and rezoning approvals may adversely affect our financialresults.  Our ability to purchase lotsand the value of such lots is also contingent upon the ability of the developerof the property to successfully negotiate development terms and agreementswithin the Mauka Lands.  If the developeris unsuccessful in such negotiations, our ability to purchase residential lotsin the Mauka Lands would be impaired.

 

 

*Risks Related to Residential Real Estate Segment*

 

**The homebuilding industry is experiencing a severe and extendeddownturn that may continue for an indefinite period and may continue toadversely affect our business, results of operations and stockholders’ equity.**

 

The residential homebuilding industry historicallyhas been cyclical and is sensitive to changes in economic conditions such asemployment levels, consumer confidence, consumer income, availability offinancing and interest rate levels. Adverse changes in any of these conditions generally, or in the marketin which we operate, could decrease demand and pricing for new homes or resultin customer cancellations of pending contracts, which could adversely affectthe number of home deliveries we make or reduce the prices we can charge forhomes, either of which could result in a reduction in our revenues ordeterioration of our margins.

 

The homebuilding industry has experienced asignificant and sustained downturn characterized by decreased demand for newhomes, an oversupply of both new and resale home inventories, includingforeclosed homes; aggressive price competition among homebuilders, includingincreased incentives for home sales; and a more restrictive mortgage lendingenvironment.  Economic conditions in theUnited States have also weakened recently, which puts continued pressure onconsumer confidence for residential real estate.  These challenging market conditions areexpected to continue for the foreseeable future and, in the near term, theseconditions may further deteriorate.  Weexpect that continued weakness in the homebuilding industry could furtheradversely affect our business, results of operations and financial condition.

 

**We are reliant upon sales of residential homes and lots as a source ofliquidity.  If we are unable to sell thehomes or lots within a reasonable timeframe, our revenues, operating results,cash inflows and financial condition could be materially impacted.**

 

Barnwell currently owns two luxury residences heldfor sale and two parcels held for investment in the Lot 4A Increment I area ofKaupulehu, North Kona, Hawaii.

 

The acquisition of the parcels and home constructioncosts on the two luxury homes were financed through a bank revolving creditfacility.  The entire unpaid principalbalance and any accrued interest is due in full on December 17, 2010,unless we sell a home and lot before then, in which case we will be required tomake a principal payment upon the sale of a home and lot in an amount equal to100% of the net sales proceeds of the home and lot.

 

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The timing and amount of residential home salesand/or lot sales are unpredictable and may be sporadic.  The inability to sell the homes or lotswithin a reasonable timeframe will lead to additional interest costs.  Additionally, if we are unable to sell thehomes or lots within a reasonable timeframe, we will need to refinance thedebt, obtain alternative terms or sources of financing, liquidate investmentsand/or operating assets, or reduce oil and natural gas capital expenditures tomake the required cash outflows.  Thiswould negatively impact our liquidity. Furthermore, if estimated cash inflows from home or lot sales do notoccur on a timely basis or are less than current expectations, our revenues,operating results, cash inflows and financial condition could be materiallyimpacted.

 

If we are unable to sell the homes by December 17,2010, the due date of the facility, and we are unable to refinance, we will needto obtain alternative terms or sources of financing or liquidate investmentsand/or operating assets to repay the facility on its due date.

 

****We have limited experience in the homebuilding industry.****

 

Homebuilding is a new business segment for us and weare relying to a material extent on our business partners to help us executeour business plan.

 

****We may need additional financing to fund our real estate developmentactivities.  If we are unable to obtainsufficient financing or such financing is obtained on adverse terms, we may notbe able to operate our business as planned, which could adversely affect ourresults of operations and future growth.****

 

The real estate development industry is capitalintensive and homebuilding requires significant up-front expenditures toacquire land and begin development. Accordingly, we will incur substantial indebtedness to finance ourhomebuilding activities.  Although webelieve that internally generated funds and borrowing capacity under our creditfacility will be sufficient to fund our development and constructionactivities, the amounts available from such sources may not be adequate to meetour needs especially in the tight credit market.  Additionally, we will need to establish newfunding sources to finance any future land acquisition capitalexpenditures.  If such sources are notsufficient, we would seek additional capital in the form of debt or equityfinancing from a variety of potential sources, including additional bankfinancing, joint venture partner financing, and/or securities offerings.  The amount and types of indebtedness which wemay incur are limited by the terms of the agreements governing our existingdebt.  In addition, the availability ofborrowed funds to be utilized for land acquisition, development andconstruction may be greatly reduced, and the lending community may requireincreased amounts of equity to be invested in a project by borrowers inconnection with both new loans and the extension of existing loans.  The failure to obtain sufficient capital tofund our planned capital and other expenditures could have a material adverseeffect on our business.

 

****Our operating results from homebuilding are expected to be variable.****

 

Due to the cyclical nature of the real estatedevelopment industry, we expect to experience variability in our futureoperating results on a quarterly and an annual basis.  Factors expected to contribute to thisvariability include, among other things:

·    thetiming of land acquisitions and permitting;

·    thetiming of home closings, land sales and level of home sales;

·    ourability to continue to acquire additional land or options thereon on acceptableterms;

 

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·    thecondition of the real estate market and the general economy; and

·    delaysin construction due to natural disasters, adverse weather, reduced contractoravailability and strikes.

 

For example, the timing of land acquisitions andpermitting impacts our ability to pursue the development of new housingprojects in accordance with our business plan. If the timing of land acquisitions or zoning or regulatory approvals isdelayed, we will be delayed in our ability to develop housing projects, whichwould likely decrease our backlog. Furthermore, these delays could result in a decrease in our revenues andearnings for the periods in which the delays occur and possibly subsequentperiods until the planned housing projects can be completed.  A delay in a significant number of homeclosings or land sales due to natural disasters, adverse weather or contractoravailability would have a similar impact on revenues and earnings for theperiod in which the delays occur. Further, revenues may increase in subsequent periods over what wouldnormally be expected as a result of increased home closings as the delaysdescribed above are resolved.

 

****Changes in the government regulations applicable to homebuilders couldrestrict our business activities, increase our operating expenses and cause ourrevenues to decline.****

 

Regulatory requirements applicable to homebuilderscould cause us to incur significant liabilities and operating expenses andcould restrict our business activities. We are subject to local, state and federal statutes and rules regulating,among other things, certain developmental matters, building and site design,and matters concerning the protection of worker health and safety, and theenvironment.  Our operating expenses maybe increased by governmental regulations, such as building permit allocationordinances, impact and other fees and taxes, which may be imposed to defray thecost of providing certain governmental services and improvements.  Other governmental regulations, such asbuilding moratoriums and “no growth’’ or “slow growth’’ initiatives, which maybe adopted in communities which have developed rapidly, may cause delays in ourhome projects or otherwise restrict our business activities resulting inreductions in our revenues.  Any delay orrefusal to grant us necessary licenses, permits or approvals from governmentagencies could cause substantial increases to development costs or cause us toabandon the project and to sell the affected land at a potential loss, which inturn could harm our operating results.

 

****Ourresidential real estate segment is dependent on the continued availability andsatisfactory********performance of our building contractors, which,if unavailable, could have a material adverse effect on our business.****

 

We conduct our construction operations throughunaffiliated building contractors.  As aconsequence, we depend on the continued availability of and satisfactoryperformance by the contractors for the construction of our homes.  There may not be sufficient availability ofand satisfactory performance by the contractors.  If the contractors’ quality of work is notsufficient, our ability to construct homes on the schedule we have plannedwould be affected.  This could result inan increase in our costs to construct homes in a timely manner, which couldresult in an increase in our overall costs and thus a decline in our marginsand in our net income.  Further,non-timely completion of work could affect our ability to sell homes based uponour projected timeline thus possibly affecting our ability to obtain additionalfinancing to continue our homebuilding efforts.

 

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****Shortages of labor or materials and/or increases in the price ofmaterials could delay construction or increase the cost of home constructionthereby reducing our sales and earnings.****

 

The homebuilding business has from time to timeexperienced building material and labor shortages, as well as volatility in theprices of certain materials, including lumber, framing, drywall and cement,which are significant components of home construction costs.  These labor and material shortages can bemore severe during periods of strong demand for housing or during periods wherethe area in which we operate experiences natural disasters that have asignificant impact on existing residential and commercial structures.  Shortages and price increases could causedelays in and increase our costs of home construction, which in turn could harmour operating results.

 

**The market value of ourreal estate interests could drop significantly, which may require write-downsof the carrying value of our real estate held for development and investment toits estimated fair value.  Anywrite-downs would negatively impact our results of operations.**

 

The risk of owning developed and undeveloped landcan be substantial for homebuilders. Homebuilding requires that we acquire landfor replacement and expansion of land inventory within our existing and newmarkets.  The risks inherent inpurchasing and developing land increase as consumer demand for housingdecreases.  Thus, we may have bought anddeveloped land which we cannot profitably sell or on which we cannot profitablybuild and sell homes.  The market valueof land, buildable lots and housing inventories can fluctuate significantly asa result of changing economic market conditions.  It is possible that the measures we employ tomanage inventory risks will not be successful and as a result our operationsmay suffer.  In addition, inventory carryingcosts can be significant and can result in losses in a poorly performingmarket.  Prevailing market conditions maysignificantly influence the market value of our real estate held for saleand/or our residential parcels held for investment.  In the event of significant changes ineconomic or market conditions, we may have to sell homes or land inventory atsignificantly lower margins or at a loss. Furthermore, if the market conditions continue to deteriorate, we may berequired to record write-downs of the carrying value of our real estate heldfor sale and residential parcels held for investment.  Such write-downs would have a negative impacton our results of operations and financial condition.

 

****Severe weather and other natural conditions or disasters may disrupt ordelay construction and may impair the value of our real estate property.****

 

Severe weather and other natural conditions ordisasters, such as, but not limited to, earthquakes, landslides, hurricanes,tornadoes, volcanic activity, droughts, floods, and heavy or prolonged rain,can negatively affect our operations by requiring us to delay or haltconstruction or to perform potentially costly repairs to our projects underconstruction and to unsold homes. Further, these conditions can delay home closings, adversely affect thecost or availability of materials or labor, or impair the value of the propertyon a temporary or permanent basis.  Tothe extent our insurance is not adequate to cover business interruption lossesor repair costs resulting from these events, our total earned revenues andearnings may be adversely affected.

 

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****The homebuilding industry is highly competitive and, with more limitedresources than some of our competitors, we may not be able to competeeffectively.****

 

The homebuilding industry is highlycompetitive.  We face competition fromother developers on the island of Hawaii, and from other luxury residentialproperties in Hawaii and the mainland United States.  In many cases, our competitors have greaterfinancial and other resources, more established market positions, lower costsof capital, labor and material than we do. Homebuilders compete for, among other things, desirable land, financing,raw materials, skilled labor and purchasers. We compete for residential sales on the basis of a number ofinterrelated factors, including location, reputation, amenities, design,quality and price, with numerous homebuilders, including some homebuilders withgreater financial resources and/or lower costs than us.  Increased competition could also reduce thenumber of homes we deliver, reducing our revenues, or cause us to acceptreduced margins to maintain sales volumes. A reduction in our revenue or margins due to competitive factors couldaffect our ability to service our debt, including the credit facilities.

 

 

*Risks Related to Contract Drilling Segment*

 

****Demand for water well drilling and/or pump installation isvolatile.  A decrease in demand for ourservices could adversely affect our revenues and results of operations.****

 

Demand for services is highly dependent upon landdevelopment activities in the state of Hawaii. As also noted above, the real estate development industry is cyclical innature and is particularly vulnerable to shifts in local, regional, andnational economic conditions outside of our control such as interest rates,housing demand, population growth, employment levels and job growth andproperty taxes.  If we experience adecrease in water well drilling and/or pump installation contracts, we mayexperience decreased revenues and operating results.

 

****A significant portion of our contract drilling business is dependent onmunicipalities and a decline in municipal spending could adversely impact ourbusiness.****

 

A significant portion of our contract drillingdivision revenues are derived from water and infrastructure contracts withgovernmental entities or agencies. Reduced tax revenues in certain regions may limit spending and newdevelopment by local municipalities which in turn will affect the demand forour services in these regions.  Materialreductions in spending by a significant number of municipalities or localgovernmental agencies could have a material adverse effect on our business,results of operations, liquidity and financial position.

 

****Our contract drilling operations face significant competition fromcompanies with greater financial resources.****

 

We face competition for our services from a varietyof competitors.  Many of our competitorsutilize drilling rigs that drill as quickly as our equipment but require lesslabor.  Our strategy is to compete basedon pricing and to a lesser degree, quality of service.  If we are unable to compete effectively withour competitors, our financial results could be adversely affected.

 

****The loss of or damage to key vendor, customer or sub-contractorrelationships would adversely affect our operations.****

 

Our business is dependent on our relationships withkey vendors, customers and subcontractors. The loss of or damage to any of our key relationships could negativelyaffect our business.

 

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*Entity-Wide Risks*

 

**The economic downturn may have impacts on our business and financialcondition that we currently cannot predict.**

 

The ongoing economic downturn may have furtherimpacts on our business and our financial condition, and we may face additionalchallenges if economic conditions do not improve.  Our ability to access the capital markets maybe restricted at a time when we would like, or need, to raise capital, whichcould have an impact on our flexibility to react to changing economic andbusiness conditions.  The economic situationcould adversely affect the demand for real estate development activities in thestate of Hawaii which in turn could cause a decline in the water well drillingand/or pump installation services required. Furthermore, weak market conditions could cause a deeper decrease indemand for luxury homes.  Additionally,economic conditions could lead to a further reduction in demand for oil andnatural gas, or lower prices for natural gas and oil, or both, which could havea negative impact on our revenues.

 

**We are reliant upon future cash flows from operations, land investmentsegment development rights and percentage of sales proceeds, and availablecredit as a source of liquidity.  Ifestimated cash inflows do not occur timely or are less than current expectations,our liquidity may be negatively impacted.**

 

In addition to cash flows from oil and natural gasand contract drilling operations, we rely upon land investment segmentdevelopment rights and percentage of sales payment proceeds as a source of liquidity.  However, oil and natural gas prices have beenhistorically volatile and the timing and amount of land investment segmentpercentage of sales proceeds are unpredictable, may be sporadic, and are notunder our control.  Development rightsproceeds, on the other hand, are scheduled but there is no assurance thatfuture monies will be received.

 

We also have a credit facility with a Canadian bankthat is denominated in Canadian dollars. Any decreases in currency exchange rates affect the amount of creditavailable to us.  Furthermore, our realestate revolving credit facility’s loan advance limitation is subject to theunderlying security’s appraised value. Any decreases in the appraised value of the underlying security couldresult in the need to pay down a portion of the outstanding borrowings.

 

Accordingly, if estimated cash inflows do not occuron a timely basis or are less than current expectations or if we are subject toreductions in available credit, our revenues, operating results, cash inflowsand financial condition could be materially impacted.

 

****Our future level of indebtedness and the terms of our financingarrangements may adversely affect our operations, financial condition and limitour growth.****

 

At September 30, 2009, we had borrowings underour credit facilities of approximately $31 million.  In the ordinary course of business, we mayincur significant additional debt, to the extent permitted by our revolvingcredit facilities, in order to fund future capital expenditures, acquisitionsand homebuilding activities.

 

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The terms of our revolving credit facilities imposerestrictions on our ability and, in some cases, the ability of our subsidiariesto take a number of actions that we may otherwise desire to take, including oneor more of the following:

·    incurringadditional debt, including guarantees of indebtedness;

·    makinginvestments;

·    creatingliens on our assets; and

·    sellingassets.

 

Our level of indebtedness and the covenantscontained in our financing agreements could have important consequences.  For example, it could:

·    limitour ability to obtain future financing, through equity offerings or debtfinancings, for working capital, capital expenditures, acquisitions,refinancing of indebtedness or general corporate and other activities;

·    requireus to dedicate a substantial portion of our cash flow from operations toservice our debt, thereby reducing our ability to use our cash flow for otherpurposes (i.e., working capital, capital expenditures, and other generalbusiness activities);

·    limitour flexibility in planning for, or reacting to, the changes in our business;

·    subjectus to higher costs and more restrictive covenants in the future for workingcapital, capital expenditures, acquisitions, general corporate or otherpurposes, if additional financing is obtained;

·    makeus vulnerable to increases in interest rates as our revolving credit facilitiesare subject to variable interest rates;

·    detractfrom our ability to successfully withstand a downturn in our business or theeconomy generally;

·    placeus at a competitive disadvantage because we have more debt than some of ourcompetitors; and

·    makeus more vulnerable to general economic downturns and adverse developments inour industries, especially declines in oil and natural gas prices, and theeconomy in general.

 

We may incur additional debt, including significantsecured indebtedness, or issue additional stock in order to fund capitalexpenditures, make future acquisitions, and develop our properties.  A higher level of indebtedness increases therisk that we may default on our obligations. Our ability to meet our debt obligations and to reduce our level ofindebtedness depends on our future performance. General economic conditions, oil and natural gas prices and financial,business and other factors affect our operations and our future performance.  Many of these factors are beyond ourcontrol.  Factors that will affect ourability to raise cash through a refinancing of our debt include financialmarket conditions, the value of our assets and our performance at the time weneed capital.

 

In addition, our bank borrowing base on our Canadianrevolving credit facility is subject to periodic redetermination.  A lowering of our borrowing base couldrequire us to repay indebtedness in excess of the borrowing base, or we mayneed to further secure the lenders with additional collateral.

 

Borrowings under the real estate revolving creditfacility are subject to a loan advance limitation based on the appraised valueof the underlying security.  The loanadvance limitation may be reduced as a result of a decrease in appraised valueof the underlying security.  Ifborrowings under the facility exceed the loan advance limitation, Barnwell willbe required to make debt repayments in the 

 

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amountof the excess.  Furthermore, the entireunpaid principal balance and all accrued interest is due in full on December 17,2010, unless we sell a home and lot before then, in which case we will berequired to make a principal payment upon the sale of a home and lot in anamount equal to 100% of the net sales proceeds of the home and lot.  If we are unable to sell the homes or lotswithin a reasonable timeframe, we will need to refinance the debt, obtainalternative terms or sources of financing, liquidate investments and/oroperating assets, or reduce oil and natural gas capital expenditures to makethe required cash outflows.

 

****The price of our common stock has been volatile and could continue tofluctuate substantially.****

 

The market price of our common stock has beenvolatile and could fluctuate based on a variety of factors, including:

·    fluctuationsin commodity prices;

·    variationsin results of operations;

·    announcementsby us and our competitors;

·    legislativeor regulatory changes;

·    generaltrends in the industry;

·    generalmarket conditions; and

·    analysts’estimates and other events in the oil and natural gas industry.

 

****Failure to retain key personnel could hurt our operations.****

 

We require highly skilled and experienced personnelto operate our business.  In addition tocompeting in highly competitive industries, we compete in a highly competitivelabor market.  Our business could beadversely affected by an inability to retain personnel or upward pressure onwages as a result of the highly competitive labor market.

 

****A small number of stockholders, including our executive officers, own asignificant amount of our common stock and have influence over our businessregardless of the opposition of other stockholders.****

 

As of September 30, 2009, two of our investorsand our executive officers held approximately 45% of our common stock.  The interests of these stockholders may notalways coincide with the interests of other stockholders.  These stockholders, acting together, havesignificant influence over all matters submitted to our stockholders, includingthe election of our directors, and could accelerate, delay, deter or prevent achange of control of us.  Thesestockholders are able to exercise significant control over our business,policies and affairs.

 

****We believe that the currently enacted requirement to comply with Section 404(b) ofthe Sarbanes-Oxley Act in fiscal 2010 will result in additional expenses andmay divert management’s attention.****

 

Under currently enacted rules, the Company will berequired to comply with the Section 404(b) auditor attestation of theSarbanes-Oxley Act for fiscal 2010 and our independent registered publicaccounting firm would be required to provide its attestation of the adequacy ofthe Company’s internal controls.  If suchcompliance is required, the Company anticipates incurring additional generaland administrative expenses and anticipates that its compliance efforts maydivert management’s time and attention away from other aspects of our business.

 

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****Adverse changes in actuarial assumptions used to calculate retirementplan costs due to economic or other factors, or lower returns on plan assetscould adversely affect Barnwell’s results and financial condition.****

 

Retirement plan cash funding obligations and planexpenses and obligations are subject to a high degree of uncertainty and couldincrease in future years depending on numerous factors, including theperformance of the financial markets, specifically the equity markets, and thelevels of interest rates.

 

****We are involved as a passive minority-interest partner in jointventures and are subject to risks associated with joint venture partnerships.****

 

We are involved****as a passive minority-interest partner****in joint venture relationships and may initiate future joint ventureprojects.  Entering into a joint venture****as a passiveminority-interest partner**** involves certain riskswhich include:

·    theinability to exercise voting control over the joint venture;

·    economicor business interests which are not aligned with our venture partner; and

·    theinability for the venture partner to fulfill its commitments and obligationsdue to financial or other difficulties.

 

 

**ITEM 1B.       UNRESOLVED STAFF COMMENTS**

 

None.

 

 

**ITEM 2.          PROPERTIES**

 

**Oil and Natural Gas, Land Investment and Residential Real EstateProperties**

 

The location and character of Barnwell’s oil andnatural gas properties, and its land investment and residential real estateproperties, are described above under Item 1, “Business.”

 

**Corporate Offices**

 

Barnwell owns and uses as its corporate office,4,600 square feet on the 29th floor of an office building in downtown Honolululocated at 1100 Alakea Street, Suite 2900, Honolulu, Hawaii 96813.

 

 

**ITEM 3.          LEGAL PROCEEDINGS**

 

Barnwell is occasionally involved in routinelitigation and is subject to governmental and regulatory controls that areincidental to the business.  Barnwell’smanagement believes that routine claims and litigation involving Barnwell arenot likely to have a material adverse effect on its financial position, resultsof operations or liquidity.

 

 

**ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

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**PART II**

 

**ITEM 5.         MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

**Market Information**

 

The principal market on which Barnwell’s commonstock is being traded is the NYSE Amex under the ticker symbol “BRN.”  The following tables present the quarterlyhigh and low sales prices, on the NYSE Amex, for Barnwell’s common stock duringthe periods indicated:

 
| Quarter Ended           |   | High   |   | Low   |   | Quarter  Ended           |   |    High |   | Low   |   |
|-------------------------|--------|--------|--------|-------|--------|--------------------------|--------|------------------------|--------|-------|--------|
| December 31, 2007  |   | $17.35 |   | $8.38 |   | December 31,  2008  |   | $10.22                 |   | $2.95 |   |
| March 31, 2008     |   | 12.59  |   | 7.75  |   | March 31,  2009     |   | 5.97                   |   | 2.25  |   |
| June 30, 2008      |   | 16.95  |   | 9.11  |   | June 30,  2009      |   | 5.72                   |   | 3.75  |   |
| September 30, 2008 |   | 13.21  |   | 8.50  |   | September 30,  2009 |   | 5.30                   |   | 2.96  |   |

 

**Holders**

 

As of December 1, 2009, there were 8,277,160shares of common stock, par value $0.50, outstanding.  There were approximately 950 holders of thecommon stock of the registrant as of December 1, 2009.

 

**Dividends**

 

The table below setsforth the cash dividends paid per share of common stock during fiscal 2008.

 
| Record Date            |   | Payable  Date            |   | Dividend Paid |   |
|------------------------|--------|--------------------------|--------|---------------|--------|
| September 8, 2008 |   | September 22,  2008 |   | $0.075        |   |
| June 2, 2008      |   | June 16,  2008      |   | $0.05         |   |
| March 3, 2008     |   | March 17,  2008     |   | $0.05         |   |
| January 7, 2008   |   | January 22,  2008   |   | $0.05         |   |

 

No dividends were declared or paid during fiscal2009.  The payment of future cashdividends will depend on, among other things, our financial condition,operating cash flows, the amount of cash inflows from land investmentactivities, and the level of our oil and natural gas capital expenditures.

 

**Securities Authorized for Issuance Under Equity Compensation Plans**

 

See the information included in Part III,Item12, under the caption “Equity Compensation Plan Information.”

 

**Stock Performance Graph and Cumulative Total Return**

 

Disclosure is not required as Barnwell qualifies asa smaller reporting company.

 

**ITEM 6.          SELECTED FINANCIAL DATA**

 

Disclosure is not required as Barnwell qualifies asa smaller reporting company.

 

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**ITEM 7.****                                    ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion is intended to assist inthe understanding of the Consolidated Balance Sheets of Barnwell Industries, Inc.and subsidiaries (collectively referred to herein as “Barnwell,” “we,” “our,” “us”or the “Company”) as of September 30, 2009 and 2008, and the relatedConsolidated Statements of Operations, Stockholders’ Equity and Comprehensive(Loss) Income, and Cash Flows for each of the years in the three-year periodended September 30, 2009.  Thisdiscussion should be read in conjunction with the consolidated financialstatements and related Notes to Consolidated Financial Statements included inthis report.

 

 

**Use of Estimates in thePreparation of Financial Statements**

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement of Barnwell to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenues and expenses and thedisclosure of contingent assets and liabilities.  Actual results could differ significantly fromthose estimates.

 

 

**Critical AccountingPolicies and Estimates**

 

The Company considers an accounting estimate to becritical if the accounting estimate requires the Company to make assumptionsthat are difficult or subjective about matters that were highly uncertain atthe time that the accounting estimate was made, and changes in the estimatethat are reasonably likely to occur in periods subsequent to the period inwhich the estimate was made, or use of different estimates that the Companycould have used in the current period, would have a material impact on thefinancial condition or results of operations. The most critical accounting policies inherent in the preparation of theCompany’s financial statements are described below.  We continue to monitor our accountingpolicies to ensure proper application of current rules and regulations.

 

*Oil and natural gas properties - full cost ceiling calculation anddepletion*

 

Policy Description

 

We use the full cost method of accounting for ouroil and natural gas properties, under which we are required to conductquarterly calculations of a “ceiling,” or limitation on the carrying value ofoil and natural gas properties.  Theceiling limitation is the sum of 1) the discounted present value (at 10%),using prices as of the end of each reporting period on a constant basis, ofBarnwell’s estimated future net cash flows from estimated production of provedoil and natural gas reserves, less estimated future expenditures to be incurredin developing and producing the proved reserves but excluding future cash outflowsassociated with settling asset retirement obligations accrued on the balancesheet; plus 2) the cost of major development projects and unprovenproperties not subject to depletion, if any; plus 3) the lower of cost orestimated fair value of unproven properties included in costs subject todepletion; less 4) related income tax effects.  If net capitalized costs exceed this limit,the excess is expensed unless subsequent market price changes eliminate or reducethe indicated write-down in accordance with Securities and Exchange Commission(“SEC”) Staff Accounting Bulletin (“SAB”) Topic 12D.

 

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Judgments and Assumptions

 

The estimate of our oil and natural gas reserves isa major component of the ceiling calculation and represents the component thatrequires the most subjective judgments. Estimates of reserves are forecasts based on engineering data, historicaldata, projected future rates of production and the timing of futureexpenditures.  The process of estimatingoil and natural gas reserves requires substantial judgment, resulting inimprecise determinations, particularly for new discoveries.  Our reserve estimates are prepared annuallyby independent petroleum consultants and quarterly by internal personnel.  The passage of time provides morequantitative and qualitative information regarding estimates of reserves, andrevisions are made to prior estimates to reflect updated information.  In the past three fiscal years, annualrevisions to our reserve volume estimates have averaged 6% of the previous year’sestimate.  However, there can be noassurance that more significant revisions will not be necessary in thefuture.  If future significant revisionsare necessary that reduce previously estimated reserve quantities, suchrevisions could result in a write-down of oil and natural gas properties.  If reported reserve volumes were reviseddownward by 5% at the end of fiscal 2009, the ceiling limitation would havedecreased approximately $2,575,000.  Thisdecrease would not have resulted in a write-down during the fourth quarter offiscal 2009.

 

In addition to the impact of the estimates of provedreserves on the calculation of the ceiling, estimated proved reserves are alsoa significant component of the quarterly calculation of depletion expense.  The lower the estimated reserves, the higherthe depletion rate per unit of production. Conversely, the higher the estimated reserves, the lower the depletionrate per unit of production.  If reportedreserve volumes were revised downward by 5% as of the beginning of fiscal 2009,depletion for fiscal 2009 would have increased by approximately $542,000.

 

While the quantities of proved reserves requiresubstantial judgment, the associated prices of oil, natural gas and natural gasliquids reserves, and the applicable discount rate, that are used to calculatethe discounted present value of the reserves do not require judgment.  The ceiling calculation dictates that a 10%discount factor be used and that prices and costs in effect as of the last dayof the period are held constant indefinitely which results in a value that isnot necessarily indicative of the fair market value of the reserves.  Therefore, the future net revenues associatedwith the estimated proved reserves are not based on our assessment of futureprices or costs.  Rather, they are basedon such prices and costs in effect as of the end of each period for which theceiling calculation is performed.

 

Oil and natural gas prices have historically beenvolatile.  Therefore, oil and natural gasproperty write-downs that result from applying the full cost ceilinglimitation, and that are caused by fluctuations in prices as opposed toreductions to the underlying quantities of reserves, should not be viewed asabsolute indicators of a reduction of the ultimate value of the relatedreserves.

 

*Impairment of Residential Real Estate Assets and Investment in LandInterests*

 

Policy Description

 

Residential real estate assets and investment inland assets are recorded at the lower of cost or estimated fair value lesscosts to sell.  If an asset’s fair valueless costs to sell, based on estimated future cash flows, management estimatesor market comparisons, is less than its carrying amount, the asset is writtendown to its estimated fair value.

 

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Judgments and Assumptions

 

Residential real estate assets and investment inland assets are reviewed for possible impairment when events or circumstancesindicate that the carrying values may not be recoverable.  The estimated future cash flows generated bythe asset, management estimates or market comparisons are compared with theamount recorded to assess the recoverability of the carrying value of theasset.  If the evaluation determines thatthe recorded value will not be recovered, the residential real estate assetsand land investments are written down to its estimated fair value.  This evaluation requires management to makeassumptions and apply considerable judgments to, among others, estimates of thetiming and amount of future cash flows, expected useful lives of the assets,uncertainty about future events, including changes in economic conditions,changes in operating performance, changes in the use of the assets, and ongoingcost of maintenance and improvements of the assets.  Changes in these and other assumptions mayrequire valuation adjustments that may materially impact the Company’sfinancial condition or its future operating results.

 

*Impairment of Investment in Joint Ventures*

 

Policy Description

 

Joint venture investments are reviewed for possibleimpairment when events or circumstances indicate that there is another-than-temporary loss in value.  Aninvestment is written down to fair value if there is evidence of a loss invalue which is other-than-temporary.

 

Judgments and Assumptions

 

The Company’s investments in joint ventures arereviewed for impairment whenever there is an indication of a loss invalue.  An investment is written down tofair value if the impairment is other-than-temporary.  In determining the fair value of aninvestment and assessing whether any identified impairment isother-than-temporary, significant estimates and considerable judgment areinvolved.  In evaluating whether animpairment is other-than-temporary, the Company considers all available information,including the length of time and extent of the impairment, the financialcondition and near-term prospects of the affiliate, the Company’s ability andintent to hold the investment for a period of time sufficient to allow for anyanticipated recovery in market value, and projected industry and economictrends.  These estimates and judgmentsare based, in part, on the Company’s current and future evaluation of economicconditions, as well as a joint venture’s current and future plans to the extentthat such plans are known to the Company. Impairment calculations contain additional uncertainties because theyrequire management to make assumptions and apply judgments to estimates offuture cash flows, probabilities related to various cash flow scenarios, andappropriate discount rates.  Changes inthese and other assumptions could affect the projected operational results ofthe unconsolidated affiliates and, accordingly, may require valuationadjustments to the Company’s investments that may materially impact the Company’sfinancial condition or its future operating results.

 

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*Income taxes*

 

Policy Description

 

Income taxes are determined using the asset andliability method.  Deferred tax assetsand liabilities are recognized for the estimated future tax impacts ofdifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax ratesin effect for the year in which those temporary differences are expected to berecovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  A valuation allowance is provided when it ismore likely than not that some portion or all of the deferred tax asset willnot be realized.

 

Judgments and Assumptions

 

We make estimates and judgments in determining ourincome tax expense for each reporting period. Significant changes to these estimates could result in an increase ordecrease in our tax provision in future periods.  We are also required to make judgments aboutthe recoverability of deferred tax assets and when it is more likely than notthat all or a portion of deferred tax assets will not be realized, a valuationallowance is provided.  Accordingly,changes in our business performance, unforeseen events, and changes inestimates of future taxable income could require a further increase in thevaluation allowance or a reversal in the valuation allowance in futureperiods.  This could result in a chargeto, or an increase in, income in the period such determination is made, and theimpact of these changes could be material. Historically, our current income tax estimates have not materiallydiffered from our income tax returns filed with taxing authorities.  However, there can be no assurance that materialdifferences will not occur in the future.

 

In addition, Barnwell operates within the U.S. andCanada and is subject to audit by taxing authorities in thesejurisdictions.  Barnwell records accrualsfor the estimated outcomes of these audits, and the accruals may change in thefuture due to new developments in each matter. Tax benefits are recognized when we determine that it is more likelythan not that such benefits will be realized. Management evaluates its potential exposures from tax positions takenthat have or could be challenged by taxing authorities.  These potential exposures result becausetaxing authorities may take positions that differ from those taken bymanagement in the interpretation and application of statutes, regulations andrules.  Management considers thepossibility of alternative outcomes based upon past experience, previousactions by taxing authorities (e.g., actions taken in other jurisdictions) andadvice from tax experts. Where uncertainty exists due to the complexity of incometax statutes and where the potential tax amounts are significant, we generallyseek independent tax opinions to support our positions.  If our evaluation of the likelihood of therealization of benefits is inaccurate, we could incur additional income tax andinterest expense that would adversely impact earnings, or we could receive taxbenefits greater than anticipated which would positively impact earnings,either of which could be material.

 

Management believes that Barnwell’s provision fortax contingencies is reasonable. However, the ultimate resolution of tax treatments disputed bygovernmental authorities may adversely affect Barnwell’s current and deferredincome tax amounts.

 

*Asset Retirement Obligation*

 

Policy Description

 

Barnwell records the fair value of a liability foran asset retirement obligation in the period in which it is incurred if areasonable estimate of fair value can be made. Barnwell’s estimated site restoration and abandonment costs of its oiland natural gas properties are capitalized as part of the carrying amount ofoil and natural gas properties and depleted over the life of the relatedreserves.  The liability is accreted atthe end of each period through charges to oil and natural gas operatingexpense.

 

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Judgments and Assumptions

 

The asset retirement obligation is recorded at fairvalue in the period in which it is incurred along with a corresponding increasein the carrying amount of the related asset. Barnwell has estimated fair value by discounting the estimated futurecash outflows required to settle abandonment and restoration liabilities.  The present value calculation includesnumerous estimates, assumptions and judgments regarding the existence ofliabilities, the amount and timing of cash outflows required to settle theliability, what constitutes adequate restoration, inflation factors, creditadjusted discount rates, and consideration of changes in legal, regulatory,environmental and political environments. Abandonment and restoration cost estimates are determined in conjunctionwith Barnwell’s reserve engineers based on historical information regardingcosts incurred to abandon and restore similar well sites, information regardingcurrent market conditions and costs, and knowledge of subject well sites andproperties.  The process of estimatingthe asset retirement obligation requires substantial judgment and use of estimates,resulting in imprecise determinations. Actual asset retirement obligations through the end of fiscal 2009 havenot materially differed from our estimates. However, because of the inherent imprecision of estimates as describedabove, there can be no assurance that material differences will not occur inthe future.  A 20% increase in accretionand depletion related to the asset retirement obligation would have increasedBarnwell’s fiscal 2009 expenses before taxes by approximately $138,000.

 

 

**Contractual Obligations**

 

Disclosure is not required as Barnwell qualifies asa smaller reporting company.

 

 

**Overview**

 

Barnwell is engaged in the following lines ofbusiness: 1) exploring for, developing, producing and selling oil andnatural gas in Canada (oil and natural gas segment), 2) investing inleasehold land and other real estate interests in Hawaii (land investmentsegment), 3) acquiring property for investment and development of homesfor sale in Hawaii (residential real estate segment), and 4) drillingwells and installing and repairing water pumping systems in Hawaii (contractdrilling segment).

 

*Oil and Natural Gas Segment*

 

Barnwell sells substantially all of its oil andnatural gas liquids production under short-term contracts with marketers of oil.  Natural gas sold by Barnwell is generallysold under both long-term and short-term contracts with prices indexed tomarket prices.  The price of natural gas,oil and natural gas liquids is freely negotiated between the buyers andsellers.  Oil and natural gas prices aredetermined by many factors that are outside of our control.  Market prices for petroleum products aredependent upon factors such as, but not limited to, changes in market supplyand demand, which are impacted by overall economic activity, changes inweather, pipeline capacity constraints, inventory storage levels, andoutput.  Petroleum and natural gas pricesare very difficult to predict and fluctuate significantly.  Natural gas prices tend to be higher in thewinter than in the summer due to increased demand, although this trend hasbecome less pronounced due to the increased use of natural gas to generateelectricity for air conditioning in the summer and increased natural gasstorage capacity in North America.

 

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Oil and natural gas exploration, development andoperating costs generally follow trends in product market prices, thus in timesof higher product prices the cost of exploration, development and operation ofoil and natural gas properties will tend to escalate as well.  Barnwell’s oil and natural gas operationsmake capital expenditures in the exploration, development, and production of oiland natural gas.  Cash outlays forcapital expenditures are largely discretionary, however, a minimum level ofcapital expenditures is required to replace depleting reserves.  Due to the nature of oil and natural gasexploration and development, significant uncertainty exists as to the ultimatesuccess of any drilling effort.

 

*Land Investment Segment*

 

Barnwell owns a 77.6% controlling interest inKaupulehu Developments, a Hawaii general partnership which owns interests inleasehold land and development rights for property located approximately sixmiles north of the Kona International Airport in the North Kona District of theisland of Hawaii, within and adjacent to Hualalai Resort at Historic Ka’upulehu,between the Queen Kaahumanu Highway and the Pacific Ocean.  A former director of Barnwell and minorityinterest owner in certain of Barnwell’s business ventures and his affiliatedentities indirectly own 19.3% of Kaupulehu Developments.  Refer to Note 13 of the “Notes toConsolidated Financial Statements” in Item 8 for further discussion onrelated party interests.

 

Kaupulehu Developments’ interests include thefollowing:

 
| · |   | Development rights for residentially-zoned  leasehold land within and adjacent to the Hualalai Golf Club which are under  option to a developer.  As of  September 30, 2009, the development rights are under option for  $5,312,000, comprised of two payments of $2,656,000 due on December 31,  2009 and December 31, 2010.                                                                                                                                                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | The right to receive payments resulting from the  sale of lots and/or residential units within approximately 870 acres in the  Kaupulehu area by third party developers.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | Approximately 1,000 acres of vacant leasehold land  zoned conservation in the Kaupulehu area located adjacent to the 870 acres  described above.  Kaupulehu  Developments has an agreement which provides a potential developer with 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 the developer has 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. |

 

Kaupulehu Mauka Investors, LLC, a limited liabilitycompany wholly-owned by Barnwell, holds 14 lot acquisition rights as to lotswithin approximately 5,000 acres of agricultural-zoned leasehold land in theupland area of Kaupulehu (“Mauka Lands”) situated between the Queen KaahumanuHighway and the Mamalahoa Highway at Kaupulehu, North Kona, island and state ofHawaii.  The 14 lot acquisition rightsgive Barnwell the right to acquire 14 residential lots, each of 

 

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whichis currently estimated to be two to five acres in size, which may be developedon the Mauka Lands.  These lands arecurrently classified as agricultural by the state of Hawaii and, accordingly,the developer of these lands will need to pursue both state and county ofHawaii approvals for reclassification and rezoning to permit a residentialsubdivision and negotiate development terms.

 

*Residential Real Estate Segment*

 

Barnwell owns an 80% controlling interest inKaupulehu 2007, LLLP (“Kaupulehu 2007”), a Hawaii limited liability limitedpartnership, which acquires house lots for investment and constructs luxurysingle-family homes for future sale.  Aformer director of Barnwell and minority interest owner in certain of Barnwell’sbusiness ventures and his affiliates have a 20% interest in Kaupulehu2007.  Refer to Note 13 of the “Notes toConsolidated Financial Statements” in Item 8 for further discussion onrelated party interests.

 

*Contract Drilling Segment*

 

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

 

*Investment in Joint Ventures*

 

Barnwell owns an 80% interest in KaupulehuInvestors, LLC, which owns 1.5% passive minority interests in three jointventures, Hualalai Investors JV, LLC and Hualalai Investors II, LLC(hereinafter collectively referred to as “Hualalai Investors”), which ownHualalai Resort, and Kona Village Investors, LLC, which owns Kona VillageResort.  A former director of Barnwelland minority interest owner in certain of Barnwell’s business ventures and hisaffiliates have a 20% interest in Kaupulehu Investors, LLC.  Refer to Note 13 of the “Notes toConsolidated Financial Statements” in Item 8 for further discussion onrelated party interests.

 

 

**Business Environment**

 

Our primary operations are concentrated in the stateof Hawaii and in Canada.  Accordingly,our business performance is directly affected by macroeconomic conditions inthose areas, as well as general economic conditions of the U.S. domestic andworld economies.

 

Widespread national and international concern overinstability in the credit and capital markets continued during recent monthswith unprecedented market volatility and disruption in the U.S. and worldeconomies.  The current recession that weare now experiencing differentiates recent months from years past with higherunemployment levels, collapses and government bail-outs of financialinstitutions, deterioration in consumer confidence, and reduced consumerspending.  All of the Company’s businesssegments have been adversely impacted by these changes.

 

According to the State of Hawaii Department ofBusiness, Economic Development and Tourism’s (“DBEDT”) 4th Quarter 2009Quarterly Statistical & Economic Report, Hawaii’s economy continued toslow through the third calendar quarter of 2009, primarily due to weak nationaland local economic conditions and continued declines in visitor spending.  DBEDT expects that the remainder of calendaryear 2009 will bring reduced visitor spending, increased unemployment rates,and slower construction activity.  Theaforementioned factors have had, and will presumably continue to have, anunfavorable impact on Barnwell’s Hawaii operations into fiscal 2010.

 

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To combat the tough economic conditions, the Companyhas implemented cost containment programs including reductions in capitalexpenditures, management and staff compensation costs, and other general andadministrative expenditures.

 

*Oil and Natural Gas Segment*

 

Our revenue, profitability, and future rate ofgrowth are substantially dependent on existing oil and natural gas prices.  Historically, oil and natural gas prices havebeen extremely volatile.  Oil and naturalgas prices hit historic high levels in fiscal 2008.  Through the date of this filing, oil andnatural gas prices have fallen sharply from their record levels.  Natural gas prices for Barnwell, based onquarterly averages during the three years ended September 30, 2009, haveranged from a low of $2.70 per thousand cubic feet (the average price for thequarter ended September 30, 2009) to a high of $9.70 per thousand cubicfeet (the average price for the quarter ended June 30, 2008).  Oil prices for Barnwell, based on quarterlyaverages 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).  Although oil prices haveincreased from March 2009 levels, natural gas prices have continued to beweak during the three months ended September 30, 2009 and into fiscal2010.  Continued or extended declines inprices for oil and natural gas could have a material adverse effect on ourfinancial condition, results of operations, liquidity and cash flows.

 

In response to the significant declines in oil andnatural gas prices and general economic conditions, the Company hassignificantly reduced oil and natural gas capital expenditures and expects tohold such capital expenditures at reduced levels into fiscal 2010.  Reduced capital expenditures, if significantand/or continued, will likely result in a reduction in reserve volumes and oiland natural gas production.

 

*Land Investment and Residential Real Estate Segments*

 

In prior years, Hawaii’s economy experiencedpositive growth and the South Kohala/North Kona area of the island of Hawaii,the area in which Kaupulehu Developments’ leasehold interests are located andKaupulehu 2007 is building homes, experienced strong demand for high endresidential real estate.  However,beginning in fiscal 2008 and throughout fiscal 2009, the economic recessioncaused sales prices and activity within the Kaupulehu area to be significantlylower than original expectations.  Due tosharp declines in demand for luxury real estate, we expect revenues from realestate sales through fiscal 2010 to be lower than in previous years.  This could adversely affect our operatingresults, financial condition, and liquidity and cash flows.

 

The value of the Company’s lot acquisition rights inthe Mauka Lands is also impacted by development activity and real estate valuesin the surrounding area.  During fiscal2009, as a result of protracted widespread impacts of the economic recessionand tightened credit markets on the real estate industry, it was determinedthat a decline in the value of the Company’s lot acquisition rights within theMauka Lands to below its carrying value existed.  Accordingly, the Company reduced the carryingvalue of its lot acquisition rights in the Mauka Lands by $912,000 during theyear ended September 30, 2009. Continued weak real estate sales activity could result in additionalwrite-downs of our investment in lot acquisition rights in the Mauka Lands.

 

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Kaupulehu 2007’s two luxury homes are complete andavailable for sale.  Our ability to sellthe completed residences and/or lots held for investment is contingent upon thestrength of the luxury real estate market. Because of the economic recession we are currently facing, it may takean extended period of time to sell the homes and/or lots and sales prices couldbe lower than our current estimates. Barnwell will have cash outflows such as interest, maintenance, propertytaxes, and other holding costs until the homes and lots are sold.

 

Barnwell’s $16,000,000 real estate revolving creditfacility expires in December 2010. If the economy remains weak or worsens and we are unable to sell thehomes and/or lots by the time the facility becomes due, it is possible that wewill be unable to meet our debt obligations. If that is the case, we will be required to refinance the debt, securealternative financing, reduce fiscal 2010 oil and natural gas capitalexpenditures, liquidate assets, or take other necessary actions in order tomake any required repayments.  Suchactions could have negative impacts on our operations and financial condition.

 

*Contract Drilling Segment*

 

Demand for water well drilling and/or pumpinstallation services is volatile and dependent upon land developmentactivities within the state of Hawaii. According to the DBEDT 4th Quarter 2009 Quarterly Statistical &Economic Report, substantial declines in the number of construction jobs, valueof private building authorizations, value of government contracts awarded, andmedian sales prices for both single family homes and condominiums during thefirst three calendar quarters of 2009 indicate slower construction activity inthe near future.

 

*Investment in Joint Ventures*

 

Hawaii’s real GDP is projected to decline 1.1percent in calendar year 2009.  This ishighlighted by such factors as reduced visitor counts and spending, increasedunemployment rates, and slower construction activity.

 

According to DBEDT’s 4th Quarter 2009 QuarterlyStatistical & Economic Report, tourism activity in Hawaii declinedsharply during the first three quarters of calendar year 2009 as compared tothe first three quarters of calendar year 2008. Both the number of visitor arrivals and hotel occupancy rates weredown.  Visitor arrivals, visitor days andvisitor spending are forecasted to decline through the remainder of calendaryear 2009.  In addition, beginning infiscal 2008 and throughout fiscal 2009, the economic recession caused realestate sales within the Hualalai Resort area to be lower than originalexpectations.

 

During the year ended September 30, 2009, as aresult of protracted widespread impacts of the economic recession and tightenedcredit markets on the real estate and hotel industries, the Company reduced thecarrying value of its joint venture investments by $1,127,000.  Further deterioration of these conditions andcontinued reduced tourism and real estate sales activity could result in asustained decrease in the value of our investment in these joint ventures,which may require us to record additional write-downs of these investments.

 

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**Results of Operations**

 

*Summary*

 

Infiscal 2009, Barnwell recorded a non-cash reduction of the carrying value ofoil and natural gas properties of $26,348,000 (approximately $18,556,000 net ofincome taxes).  The reduction wasprimarily due to a significant decline in petroleum prices.  Under the full cost method of accounting,prices as of the end of the quarter are used to determine the maximum carryingvalue of oil and natural gas properties. The full cost method assumes constant prices over the productive life ofthe underlying oil and natural gas reserves, and its results do not necessarilyreflect the true fair value of the underlying reserves as commodity prices arevolatile and subject to changes in economic conditions and market forces overtime.  Changes in oil and natural gasprices, as well as changes in production rates, levels of reserves, futuredevelopment costs and the market value of unproved properties, impact thedetermination of the maximum carrying value of oil and natural gasproperties.  Future declines in oil,natural gas and natural gas liquids prices may result in additional reductionsin the carrying value of our oil and natural gas properties in the absence ofoffsetting changes.

 

Barnwell reported a net loss of $24,362,000 infiscal 2009, a $36,094,000 decrease from net earnings of $11,732,000 in fiscal2008.  This decrease was largely due tothe following items:

 
| · | The aforementioned non-cash reduction of the carrying value of oil  and natural gas properties of $26,348,000 (approximately $18,556,000 net of  income taxes) as well as $2,039,000 in non-cash reductions of the carrying  values of Barnwell’s investments in joint ventures and lot acquisition rights  (approximately $1,507,000 net of minority interest and income taxes); |   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                                                                                                                                                                                                                                   |   |
| · | Decrease of $20,687,000 before taxes in oil and natural gas segment  operating profit (excluding the impact of the reduction in carrying value of  oil and natural gas properties discussed above), due primarily to lower  prices received for all petroleum products;                                                                                                                |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                   |   |
| · | Decreased land investment segment operating profits before income  taxes of $3,558,000 due to decreased receipts of development rights option  payments and percentage of sales payments;                                                                                                                                                                                              |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                   |   |
| · | A $4,789,000 non-cash charge to deferred income tax expense in fiscal  2009 resulting from an increase in the valuation allowance for certain  deferred tax assets; there was no such income tax charge in fiscal 2008; and                                                                                                                                                            |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                   |   |
| · | Fiscal 2008 earnings included a deferred income tax benefit of  $909,000 resulting from a decrease in Canadian federal income tax rates;  there was no such benefit in fiscal 2009.                                                                                                                                                                                                    |   |

 

The aforementioned items were partially offset by a$4,598,000 decrease, before income taxes, in general and administrativeexpenses.

 

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Barnwell generated net earnings of $11,732,000 infiscal 2008, an $8,216,000 increase from net earnings of $3,516,000 in fiscal2007.  This increase was largely due to a$13,586,000 increase in operating profits before income taxes, primarily due tohigher prices received for all petroleum products, partially offset by a$2,090,000 increase, before income taxes, in general and administrativeexpenses net of minority interest, and bad debt expense of $1,091,000, beforeincome taxes, principally related to oil and natural gas segment receivables.  The increase was further attributable to adeferred income tax benefit in fiscal 2008 of $909,000 resulting from adecrease in Canadian federal income tax rates as compared to a benefit of$100,000 in fiscal 2007.

 

*General*

 

In addition to U.S. operations, Barnwell conductsforeign operations in Canada. Consequently, Barnwell is subject to foreign currency translation andtransaction gains and losses due to fluctuations of the exchange rates betweenthe Canadian dollar and the U.S. dollar.

 

The fiscal year average exchange rate of theCanadian dollar to the U.S. dollar decreased 14% in fiscal 2009, as compared tofiscal 2008, and the exchange rate of the Canadian dollar to the U.S. dollardecreased 1% at September 30, 2009, as compared to September 30,2008.  Accordingly, the assets,liabilities, stockholders’ equity and revenues and expenses of Barnwell’ssubsidiaries operating in Canada have been adjusted to reflect the change inthe exchange rates.  Barnwell’s Canadiandollar assets are greater than its Canadian dollar liabilities; therefore,increases or decreases in the value of the Canadian dollar to the U.S. dollargenerate other comprehensive income or losses, respectively.  The fiscal year average exchange rate of theCanadian dollar to the U.S. dollar increased 10% in fiscal 2008, as compared tofiscal 2007, and the exchange rate of the Canadian dollar to the U.S. dollardecreased 6% at September 30, 2008, as compared to September 30,2007.  Other comprehensive income andlosses are not included in net (loss) earnings. The other comprehensive loss due to foreign currency translationadjustments, net of taxes, for fiscal 2009 was $1,959,000, a $107,000 decreasefrom other comprehensive loss due to foreign currency translation adjustments,net of taxes, of $2,066,000 in fiscal 2008.

 

Foreign currency transaction gains and losses werenot material in fiscal 2009, 2008 and 2007 and are reflected in “General andadministrative” expenses in the Consolidated Statements of Operations.

 

The impact of fluctuations of the exchange ratesbetween the Canadian dollar and the U.S. dollar may be material from period toperiod.  Barnwell cannot accuratelypredict future fluctuations between Canadian and U.S. dollars.

 

*Oil and natural gas revenues*

 

Selected OperatingStatistics

 

The following tables set forth Barnwell’s annual netproduction and annual average price per unit of production for fiscal 2009 ascompared to fiscal 2008, and fiscal 2008 as compared to fiscal 2007.  Production amounts reported are net of royaltiesand the Alberta Royalty Tax Credit (“ARTC”), where applicable.  As discussed in further detail below, theARTC was discontinued effective January 1, 2007.

 

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Fiscal 2009 - Fiscal 2008

 
| ** **         | ** ** | Annual Net Production |       |
|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | ** **            | ** ** | ** ** |   | Increase (Decrease) |   |
| ** **         | ** ** | **2009**              | ** ** | 2008 |   | Units |   | % |   |
| Natural gas (MCF)* | ** ** | **3,567,000**         |       | 3,349,000 |   | 218,000  |   | 7% |   |
| Oil (BBLS)**       | ** ** | **170,000**           |       | 160,000 |   | 10,000  |   | 6% |   |
| Liquids (BBLS)**   | ** ** | **98,000**            |       | 107,000 |   | (9,000) |   | (8%) |   |

 
|               |   | Annual Average Price Per  Unit    |   |
|--------------------|--------|-----------------------------------|--------|
|               |   | ** **                        |   |   |   | Decrease |   |
|               |   | **2009**                          |   | 2008 |   | $ |   | % |   |
| Natural gas (MCF)* |   | **$    3.79** |   | $     7.77 |   | $  (3.98) |   | (51%) |   |
| Oil (BBLS)**       |   | **$  48.94**            |   | $ 100.15 |   | $(51.21) |   | (51%) |   |
| Liquids  (BBLS)**  |   | **$  24.47**            |   | $   61.02 |   | $(36.55) |   | (60%) |   |

 

Fiscal 2008 - Fiscal 2007

 
|               |   | Annual  Net Production |   |
|--------------------|--------|------------------------|--------|
|               |   |                   |   |   |   | Increase  (Decrease) |   |
|               |   | 2008                   |   | 2007 |   | Units |   | % |   |
| Natural gas (MCF)* |   | 3,349,000              |   | 3,615,000 |   | (266,000) |   | (7%) |   |
| Oil (BBLS)**       |   | 160,000                |   | 146,000 |   | 14,000  |   | 10%  |   |
| Liquids (BBLS)**   |   | 107,000                |   | 114,000 |   | (7,000) |   | (6%) |   |

 
|               |   | Annual  Average Price Per Unit |                         |
|--------------------|--------|--------------------------------|------------------------------|
|               |   |                           |                         |   |   | Increase |   |
|               |   | 2008                           |                         | 2007 |   | $ |   | % |   |
| Natural gas (MCF)* |   | $                         |     7.77 |   | $   5.88 |   | $   1.89 |   | 32% |   |
| Oil (BBLS)**       |   | $                         | 100.15                       |   | $ 56.96 |   | $ 43.19 |   | 76% |   |
| Liquids (BBLS)**   |   | $                         |   61.02            |   | $ 37.36 |   | $ 23.66 |   | 63% |   |

 

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*                        MCF = 1,000 cubic feet.  Natural gas price per unit is net of pipelinecharges.

**                  BBL(S) = stock tank barrel equivalentto 42 U.S. gallons

 

In October 2007, the Alberta Governmentannounced a New Royalty Framework (“NRF”) that took effect on January 1,2009.  The NRF changes royalty rates onconventional oil and natural gas production to be both price-sensitive andproduction-sensitive, and may increase up to a maximum royalty rate of 50%.  The price-sensitive maximum is reached foroil when oil is selling at or above $120.00 Canadian dollars per barrel and fornatural gas when natural gas is selling at or above $17.50 Canadian dollars perMCF.  Approximately 96% of Barnwell’sgross revenues are derived from properties located within Alberta.

 

Oil and natural gas revenues decreased $24,491,000(50%) from $49,441,000 in fiscal 2008 to $24,950,000 in fiscal 2009, primarilydue to significant decreases in natural gas, oil and natural gas liquidsprices, which decreased 51%, 51% and 60%, respectively, as compared to pricesin fiscal 2008.

 

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Net natural gas production increased 7% in fiscal2009 as compared to fiscal 2008 due primarily to decreases in royalty ratesresulting from lower prices and the NRF, as well as favorable annual royaltyadjustments received from the Alberta government.  At Dunvegan, Barnwell’s principal oil and naturalgas property, net natural gas production increased 210,000 MCF (12%).  Gross natural gas production decreased 2% infiscal 2009 as compared to fiscal 2008; Dunvegan increased by 1% and all otherproperties decreased by 5%.  Dunvegancontributed approximately 55% of Barnwell’s net natural gas production infiscal 2009, as compared to 52% in fiscal 2008. In fiscal 2009, natural gas production from the Dunvegan Unit wasresponsible for approximately 53% of Barnwell’s natural gas revenues, ascompared to 50% in fiscal 2008.

 

Net oil production increased 6% during fiscal 2009as compared to fiscal 2008, due to production from newer areas, partiallyoffset by declines at older properties. Gross oil production increased 5% in fiscal 2009 as compared to fiscal2008.

 

In November 2008, the Alberta Governmentannounced a one-time option of selecting new transitional rates or NRF rateswhen drilling a new natural gas or conventional oil well 1,000 to 3,500 metersin depth.  All wells drilled between January 1,2009 and December 31, 2013 that adopt the transitional rates will beshifted to the NRF on January 1, 2014. As of January 1, 2009, all of Barnwell’s wells in Alberta payroyalties under the NRF and all new commercial wells adopted the transitionalroyalty rates.

 

Oil and natural gas revenues increased $14,842,000(43%) from $34,599,000 in fiscal 2007 to $49,441,000 in fiscal 2008, primarilydue to significant increases in oil, natural gas and natural gas liquidsprices, which increased 76%, 32% and 63%, respectively, as compared to pricesin fiscal 2007.

 

Net natural gas production decreased 7% in fiscal2008 as compared to fiscal 2007 due primarily to natural declines in productionfrom both older and newer properties.  AtDunvegan, Barnwell’s principal oil and natural gas property, net natural gasproduction at Dunvegan decreased 146,000 MCF (8%).

 

Net oil production increased 10% during fiscal 2008as compared to fiscal 2007, due to production from new oil wells.  The increase was partially offset by naturaldeclines in production from older properties.

 

The ARTC program was discontinued by the Albertagovernment, effective January 1, 2007. Accordingly, no ARTC credits were received during fiscal years 2008 or2009.  Barnwell received $111,000 infiscal 2007.  Credits received byBarnwell under the ARTC program through December 31, 2006 were recorded asa credit against oil and natural gas royalties and reported in oil and naturalgas revenues.

 

*Oil and natural gas operating expenses*

 

Operating expenses decreased $650,000 (6%) to$9,931,000 in fiscal 2009, as compared to $10,581,000 in fiscal 2008 primarilydue to a 14% decrease in the average exchange rate of the Canadian dollar tothe U.S. dollar that decreased oil and natural gas operating expenses $1,647,000in fiscal 2009 as compared to fiscal 2008. The decrease was partially offset by higher utility costs and higherthan usual workover activity which resulted in higher repairs and maintenancecosts.

 

Operating expenses increased $378,000 (4%) to $10,581,000in fiscal 2008, as compared to $10,203,000 in fiscal 2007 primarily due to a10% increase in the average exchange rate of the Canadian dollar to the U.S.dollar that increased oil and natural gas operating expenses $911,000 in fiscal2008 as compared to fiscal 2007.  Theincrease was partially offset by lower workover activity and repairs at certainolder properties.

 

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*Sale of development rights, Sale of interest in leasehold land, andMinority interest in earnings*

 

Kaupulehu Developments holds development rights forresidentially-zoned leasehold land within and adjacent to the Hualalai GolfClub which are under option for $5,312,000 to Hualalai Investors, the owner andcurrent developer of Hualalai Resort.

 

Revenues, minority interestin earnings and operating profit related to sales of development rights underoption for the fiscal years ended September 30, 2009, 2008 and 2007 aresummarized as follows:

 

 
|                                               |       | Year  ended September 30, |
|----------------------------------------------------|------------|--------------------------------|
|                                               |       |                           | **2009** |   |   |   | 2008 |   |   |   | 2007 |   |
| Sale of development rights  under option:          |       |                           |   |   |   |   |   |   |   |   |   |   |
| Proceeds                                           | ** ** | ** **                     | **$** | **886,000** | ** ** |   |   | $ | 4,426,000 |   |   |   | $ | 2,438,000 |   |
| Fees                                               | ** ** | ** **                     | **(53,000** | **)** |   |   | (265,000 | ) |   |   | (146,000 | ) |
| Revenues - sale of  development rights, net        | ** ** | ** **                     | **833,000** |   |   |   | 4,161,000 |   |   |   | 2,292,000 |   |
| Minority interest in  earnings                     | ** ** | ** **                     | **(182,000** | **)** |   |   | (910,000 | ) |   |   | (501,000 | ) |
| Operating profit - sale of development rights, net |       |                           | **$** | **651,000** |   |   |   | $ | 3,251,000 |   |   |   | $ | 1,791,000 |   |

 

The decrease in proceeds from the sale ofdevelopment rights during fiscal 2009 as compared to fiscal 2008 is due to thetiming of receipt of proceeds of scheduled development right options.  In fiscal 2008, $1,770,000 of the $2,656,000development rights option due on December 31, 2008 was received early, in May 2008.  Accordingly, only the remaining portion of$886,000 was received in the first quarter of fiscal 2009.

 

The total amount of remaining future optionreceipts, if all options are fully exercised, is $5,312,000 as of September 30,2009, comprised of two payments of $2,656,000 due on December 31, 2009 andDecember 31, 2010.  If any annualoption payment is not made, the then remaining development right options willexpire.  There is no assurance that anyportion of the remaining options will be exercised.

 

All capitalized costs associated with KaupulehuDevelopments’ development rights were expensed in previous years.

 

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The following tablesummarizes the sales proceeds received from WB KD Acquisition, LLC (“WB”), anentity not affiliated with Barnwell and its subsidiaries, and related minorityinterest in earnings and operating profit for the fiscal years ended September 30,2009, 2008 and 2007.  WB is affiliatedwith RP-Hualalai Investors, LLC, a managing member of Hualalai Investors, andWestbrook Partners, developers of Kuki’o located adjacent to Hualalai Resort.

 
|                                                        |       | Year  ended September 30, |
|-------------------------------------------------------------|------------|--------------------------------|
|                                                        |       |                           | **2009** |   |   |   | 2008 |   |   |   | 2007 |   |
| Sale of interest in  leasehold land:                        |       |                           |   |   |   |   |   |   |   |   |   |   |
| Revenues from percentage  of sales payments                 | ** ** | ** **                     | **$** | **214,000** | ** ** |   |   | $ | 517,000 |   |   |   | $ | 3,585,000 |   |
| Fees                                                        | ** ** | ** **                     | **(13,000** | **)** |   |   | (71,000 | ) |   |   | (215,000 | ) |
| Revenues - sale of  interest in leasehold land, net         | ** ** | ** **                     | **201,000** |   |   |   | 446,000 |   |   |   | 3,370,000 |   |
| Minority interest in  earnings                              | ** ** | ** **                     | **(44,000** | **)** |   |   | (243,000 | ) |   |   | (737,000 | ) |
| Operating profit - sale of  interest in leasehold land, net |       |                           | **$** | **157,000** |   |   |   | $ | 203,000 |   |   |   | $ | 2,633,000 |   |

 

WB sold one single-family lot in Increment I duringthe year ended September 30, 2009, four single-family lots during the yearended September 30, 2008, and seven single-family lots during the yearended September 30, 2007.

 

During fiscal 2009, development work on Lot 4A bythe developer included the completion and dedication of the Lot 4A Beach Club,which will help add a sense of community to the Lot 4A area, for futureresidents who will be able to use this area as a gathering place.  The Beach Club consists of a two-tiered pool,bar area, outdoor restaurant and lawn. The amenities at the Beach Club will also assist the developer’s salesteam with a useful venue to host potential buyers.

 

Other project work at Lot 4A by the developer waslimited to moving forward with implementing the overall landscape plan forIncrement I.  WBKD has planted a numberof trees and other groundscape materials at the gated entry, road intersectionsand various other areas of Increment I, which has improved the appearance ofthe project as the landscaping has begun to grow in.  WB plans to add a corridor of trees along theentry road in phases.  The first house tostart construction was completed in the summer of 2009.  Aside from this house and the two housesbuilt by our Kaupulehu 2007 residential development venture, two other housesare under construction and two others are in the late planning stages.

 

*Contract drilling*

 

Contract drilling revenues and costs are associatedwith well drilling and water pump installation, replacement and repair in Hawaii.

 

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Contract drilling revenues decreased $4,452,000(45%) to $5,335,000 in fiscal 2009, as compared to $9,787,000 in fiscal 2008,and contract drilling operating expenses decreased $3,292,000 (43%) to$4,392,000 in fiscal 2009, as compared to $7,684,000 in fiscal 2008.  The contract drilling segment generated a$531,000 operating profit before general and administrative expenses duringfiscal 2009, a decrease of $1,180,000 (69%) as compared to an operating profitbefore general and administrative expenses of $1,711,000 in fiscal 2008.  The decrease is primarily due to decreasedwell drilling activity during fiscal 2009 as compared to fiscal 2008.

 

At September 30, 2009, there was a backlog ofsix well drilling contracts and four pump installation and repair contracts, ofwhich three well drilling and three pump installation and repair contracts werein progress as of September 30, 2009. The backlog of contract drilling revenues as of November 30, 2009was approximately $3,150,000.  All of thecontracts in backlog at November 30, 2009 are expected to be completedwithin fiscal year 2010.

 

Contract drilling revenues increased $3,794,000(63%) to $9,787,000 in fiscal 2008, as compared to $5,993,000 in fiscal 2007,and contract drilling operating expenses increased $2,745,000 (56%) to$7,684,000 in fiscal 2008, as compared to $4,939,000 in fiscal 2007.  The contract drilling segment generated a$1,711,000 operating profit before general and administrative expenses duringfiscal 2008, an increase of $881,000 (106%) as compared to an operating profitbefore general and administrative expenses of $830,000 in fiscal 2007.  The increase is primarily due to increases inwell drilling and pump installation activity, higher values and margins ofcontracts performed in fiscal 2008 as compared to fiscal 2007, and lower welldrilling operating profit in fiscal 2007 due to higher drilling costs incurredon contracts performed.

 

Contract drilling revenues and costs are notseasonal in nature but can fluctuate significantly based on the awarding andtiming of contracts, which are determined by contract drilling customer demand.

 

*Gas processing and other income*

 

Gas processing and other income decreased $950,000(53%) to $859,000 in fiscal 2009 as compared to $1,809,000 in fiscal 2008.  The fiscal 2008 period included gains of$443,000 from the sale of lot purchase rights by the residential real estatesegment (see further discussion in Note 5 in the “Notes to ConsolidatedFinancial Statements” in Item 8) and $260,000 which represented insuranceproceeds received on the involuntary conversion of an incapacitated drill rigthat had been fully depreciated; no such revenues were received during fiscal2009.

 

Gas processing and other income increased $627,000(53%) to $1,809,000 in fiscal 2008 as compared to $1,182,000 in fiscal2007.  The increase is primarily due tothe aforementioned fiscal 2008 gains of $443,000 from the sale of lot purchaserights and $260,000 in insurance proceeds received.

 

*General and administrative expenses*

 

General and administrative expenses decreased$4,598,000 (37%) to $7,899,000 in fiscal 2009, as compared to $12,497,000 infiscal 2008.  The decrease was primarilyattributable to i) a $2,532,000 decrease in current compensation costs dueto reductions in compensation for both management and staff, ii) a$1,213,000 decrease in professional services, iii) a $561,000 decrease dueto a 14% decrease in the average exchange rate of the Canadian dollar to theU.S. dollar, and iv) a $303,000 decrease in travel and entertainmentcosts.

 

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General and administrative expenses increased$2,040,000 (20%) to $12,497,000 in fiscal 2008, as compared to $10,457,000 infiscal 2007.  The increase was primarilyattributable to i) a $1,222,000 increase in current compensation costs,ii) a $373,000 increase in professional services, primarily due toregulatory compliance efforts, and iii) a $407,000 increase due toincreases in the average exchange rate of the Canadian dollar to the U.S.dollar.

 

*Bad debt expense*

 

Bad debt expense decreased $521,000 (48%) to$570,000 in fiscal 2009, as compared to $1,091,000 in fiscal 2008.  The decrease is primarily attributable tolower bad debt provisions recorded during fiscal 2009, as well as the recoveryof $234,000 of previously reserved receivables in fiscal 2009.

 

No bad debt reserves were recorded during fiscal2007.

 

*Depletion, depreciation and amortization*

 

Depletion, depreciation and amortization decreased$3,173,000 (22%) to $11,553,000 in fiscal 2009, as compared to $14,726,000 infiscal 2008, due to a 14% decrease in the average exchange rate of the Canadiandollar to the U.S. dollar coupled with a 12% decrease in the depletion rate dueto the reduction of the carrying value of oil and natural gas properties duringfiscal 2009.

 

Depletion, depreciation and amortization increased$1,552,000 (12%) to $14,726,000 in fiscal 2008, as compared to $13,174,000 infiscal 2007, due to a 5% increase in the depletion rate due to increases inBarnwell’s costs of finding and developing proven reserves and a 10% increasein the average exchange rate of the Canadian dollar to the U.S. dollar.  The increase was partially offset by a 4%decrease in production.  Barnwell’s costsof finding and developing proven reserves increased due to the costs of oil andnatural gas exploration and development having increased along with productprices and the drilling of unsuccessful wells.

 

*Reduction of carrying value of assets*

 

During fiscal 2009, Barnwellreduced the carrying value of certain assets. A breakdown of the reduction of the carrying value of assets as reportedin the Consolidated Statements of Operations is as follows:

 
|                                         |       | Year  ended September 30, |       |
|----------------------------------------------|------------|--------------------------------|------------|
| ** **                                   |       | **2009**                       |       | 2008 |   | 2007 |   |
| Oil and natural gas properties               | ** ** | ** **                     | **$**      | **26,348,000** | ** ** |   |   | $ |         - |   |   |   | $ |       - |   |   |
| Investment in joint ventures                 | ** ** | ** **                     | ** ** | **1,127,000** | ** ** |   |   |   | - |   |   |   |   | - |   |   |
| Lot acquisition rights - Mauka Lands         | ** ** | ** **                     | ** ** | **912,000** | ** ** |   |   |   | - |   |   |   |   | - |   |   |
| Total  reduction of carrying value of assets | ** ** | ** **                     | **$**      | **28,387,000** | ** ** |   |   | $ |         - |   |   |   | $ |       - |   |   |

 

Under the full cost method of accounting, we arerequired to perform quarterly ceiling test calculations.  Due to a significant decline in prices,Barnwell’s net capitalized costs exceeded the ceiling limitation at the end ofthe second and third quarters of fiscal 2009. As such, Barnwell reduced the carrying value of its oil and natural gasproperties by $26,348,000 during the year ended September 30, 2009.  No such reduction was recorded during fiscalyears 2008 or 2007.

 

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Under the full cost method of accounting, prices asof the end of the quarter are used to determine the maximum carrying value ofoil and natural gas properties.  The fullcost method assumes constant prices over the productive life of the underlyingoil and natural gas reserves, and its results do not necessarily reflect thetrue fair value of the underlying reserves as commodity prices are volatile andsubject to changes in economic conditions and market forces over time.  Changes in oil and natural gas prices, aswell as changes in production rates, levels of reserves, future developmentcosts and the market value of unproved properties, impact the determination ofthe maximum carrying value of oil and natural gas properties.  Future declines in oil, natural gas andnatural gas liquids prices may result in additional reductions of the carryingvalue of our oil and natural gas properties in the absence of offsettingchanges.

 

As a result of protracted widespread impacts of theeconomic recession and tightened credit markets on the real estate and hotelindustries, Barnwell recorded a $1,127,000 non-cash reduction in the carryingvalue of its investment in joint ventures during the year ended September 30,2009, due to declines in values that are deemed other-than-temporary.  No such reduction was recorded during fiscalyears 2008 or 2007.  A market valueapproach was utilized to determine the other-than-temporary fair value ofBarnwell’s investment in joint ventures, based on estimates of theaforementioned impacts on the value of the underlying assets of the jointventures.

 

As a result of protracted widespread impacts of theeconomic recession and tightened credit markets on the real estate industry,during the year ended September 30, 2009, Barnwell determined that areduction of the carrying value of its lot acquisition rights in the MaukaLands was necessary as a result of the aforementioned impacts on real estate inthe area in which Barnwell holds interests. Accordingly, Barnwell reduced the carrying value of its investment inlot acquisition rights by $912,000.  Nosuch reduction was recorded during fiscal years 2008 or 2007.  A discounted cash flow valuation approach wasutilized to determine the fair value of the lot acquisition rights based onestimates of discounted market values of the lots to be developed in thefuture, as adjusted for land use zoning and development probabilities.

 

*Interest expense*

 

Interest expense decreased $131,000 (13%) to$912,000 in fiscal 2009, as compared to $1,043,000 in fiscal 2008, primarilydue to lower average interest rates, partially offset by higher average loanbalances, during fiscal 2009 as compared to fiscal 2008.  This decrease was also partially offset by adecrease in the amount of interest capitalized due to the completion of thedevelopment of residential homes during fiscal 2009.  The weighted-average balance of outstandingborrowings from Royal Bank of Canada increased to $15,566,000 in fiscal 2009 ascompared to $13,672,000 in fiscal 2008. The average interest rate incurred on Barnwell’s borrowings from RoyalBank of Canada decreased to 3.86% in fiscal 2009, as compared to 5.62% infiscal 2008.  The weighted-averagebalance of outstanding borrowings under the real estate credit facilityincreased to $14,211,000 in fiscal 2009 as compared to $8,530,000 in fiscal2008.  The average interest rate incurredon borrowings on the real estate credit facility decreased to 3.71% in fiscal2009, as compared to 6.33% in fiscal 2008. Of the interest amounts incurred, $253,000 was capitalized in fiscal2009 as compared to $394,000 during fiscal 2008.

 

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Interest expense increased $44,000 (4%) to$1,043,000 in fiscal 2008, as compared to $999,000 in fiscal 2007, due tohigher average loan balances, partially offset by lower average interest ratesduring fiscal 2008 as compared to fiscal 2007. The weighted-average balance of outstanding borrowings from Royal Bankof Canada increased to $13,672,000 in fiscal 2008 as compared to $12,566,000 infiscal 2007.  The average interest rateincurred during fiscal 2008 on Barnwell’s borrowings from Royal Bank of Canadadecreased to 5.62%, as compared to 7.28% in fiscal 2007.  The weighted-average balance of outstandingborrowings under the real estate credit facility increased to $8,530,000 infiscal 2008 as compared to $2,799,000 in fiscal 2007.  The average interest rate incurred duringfiscal 2008 from borrowings on the real estate credit facility decreased to6.33%, as compared to 7.25% in fiscal 2007. Of the interest amounts incurred, $394,000 was capitalized in fiscal2008 as compared to $142,000 during fiscal 2007.

 

Interest costs for the fiscal years ended September 30, 2009, 2008and 2007 are summarized as follows:

 
|                             |       | Year  ended September 30, |        |
|----------------------------------|------------|--------------------------------|-------------|
| ** **                       |       | **2009**                       |        | 2008 |   | 2007 |   |
| Interest  costs incurred         | ** ** | ** **                     | **$**       | **1,165,000** | ** ** |   |   | $ | 1,437,000 |   |   |   | $ | 1,141,000 |   |   |
| Less  interest costs capitalized | ** ** | ** **                     | **253,000** | ** ** |   |   | 394,000 |   |   |   | 142,000 |   |   |
| Interest  expense                | ** ** | ** **                     | **$**       | **912,000** | ** ** |   |   | $ | 1,043,000 |   |   |   | $ | 999,000 |   |   |

 

The majority of Barnwell’s debt is denominated inU.S. dollars.  Therefore, the decrease inthe average exchange rate of the Canadian dollar to the U.S. dollar had aminimal impact on interest expense.

 

*Income taxes*

 

Barnwell’s effective consolidated income tax benefitrate for fiscal 2009 was approximately 22%. This rate is lower than the expected statutory U.S. rate of 35% dueprimarily to a $4,789,000 non-cash charge to income tax expense resulting froman increase in the valuation allowance for certain deferred tax assets due torecent events regarding real estate in the area in which Barnwell holdsinterests that impacted management’s projections of future income levelsnecessary to benefit from such deferred tax assets.

 

Included in the income tax provision for fiscal 2008is a $909,000 reduction of the net deferred tax liability due to a reduction inCanadian federal tax rates.  During thefirst quarter of fiscal 2008, the Canadian government enacted reductions in thecorporate tax rate from 20.5%, 20.0%, 19.0%, 18.5% and 18.5% in calendar years2008, 2009, 2010, 2011 and 2012, respectively, to 19.5%, 19.0%, 18.0%, 16.5%and 15%, respectively.  A minor reductionin Canadian federal tax rates in fiscal 2007 resulted in a $100,000 reductionin net deferred tax liabilities in fiscal 2007. Barnwell’s effective consolidated income tax rate for the year ended September 30,2008, excluding the aforementioned $909,000 impact of the reduction in Canadianincome tax rates, was approximately 36%, and the effective consolidated incometax rate for the year ended September 30, 2007 was approximately 49%.

 

*Environmental Matters*

 

Federal, state, and Canadian governmental agenciesissue rules and regulations and enforce laws to protect the environmentwhich are often difficult and costly to comply with and which carry substantialpenalties for failure to comply, particularly in regard to the discharge ofmaterials into the environment.  Theregulatory burden on the oil and natural gas industry increases its cost ofdoing business.  These laws, rules andregulations affect the operations of Barnwell and could have a material adverseeffect upon the earnings or competitive position of Barnwell.  Although Barnwell’s experience has been tothe contrary, there is no assurance that this will continue to be the case.

 

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*Inflation*

 

The effect of inflation on Barnwell has generallybeen to increase its cost of operations, interest cost (as a substantialportion of Barnwell’s debt is at variable short-term rates of interest whichtend to increase as inflation increases), general and administrative costs anddirect costs associated with oil and natural gas production and contractdrilling operations.  Oil and natural gasprices realized by Barnwell are essentially determined by world prices for oiland western Canadian/Midwestern U.S. prices for natural gas.

 

*Recent Accounting Pronouncements*

 

In February 2008, the Financial AccountingStandards Board (“FASB”) updated FASB Accounting Standards Codification (“ASC”)Topic 820, *Fair Value Measurements and Disclosures*,(formerly FSP FAS 157-2).  FASB ASC Section 820-10-50defers the effective date of FASB ASC Topic 820 to fiscal years beginning afterNovember 15, 2008 and interim periods within those fiscal years fornonfinancial assets and liabilities, except for items that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  We have elected toutilize this deferral and accordingly, we will apply FASB ASC Topic 820 to ournonfinancial assets and liabilities that are measured at fair value on anonrecurring basis in the quarter ending December 31, 2009.  Barnwell is currently evaluating the impactthat the application of FASB ASC Topic 820 to nonfinancial assets andliabilities that are measured at fair value on a nonrecurring basis will haveon its consolidated financial position, results of operations and cash flows.

 

In December 2007, the FASB updated FASB ASCSubtopic 810-10, *Consolidation*, (formerly SFAS No. 160).  FASB ASC Subtopic 810-10 establishesaccounting and reporting standards that require the ownership interest insubsidiaries held by parties other than the parent be clearly identified andpresented in the Consolidated Balance Sheets within equity, but separate fromthe parent’s equity; the amount of consolidated net income attributable to theparent and the noncontrolling interest be clearly identified and presented onthe face of the Consolidated Statements of Operations; and changes in a parent’sownership interest while the parent retains its controlling financial interestin its subsidiary be accounted for consistently.  This statement is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December 15,2008.  Upon adoption, there will be nomaterial impact on Barnwell’s consolidated financial statements.

 

In December 2008, the FASB updated FASB ASCTopic 715, *Compensation - Retirement Benefits*,(formerly FSP FAS 132(R)-1).  FASB ASCTopic 715 provides additional guidance on an employer’s disclosures about planassets of a defined benefit pension or other postretirement plan.  FASB ASC Topic 715 is effective for financialstatements issued for fiscal years ending after December 15, 2009.  Barnwell’s management is currently evaluatingthe impact of adopting these provisions on the consolidated financialstatements.

 

In December 2008, the SEC adopted revisions toits required oil and natural gas reporting disclosures.  Additionally, in October 2009, the SECissued SAB No. 113, which revises or rescinds portions of the interpretiveguidance of its oil and natural gas rules. The revisions are intended to provide investors with a more meaningfuland comprehensive understanding of oil and natural gas 

 

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reserves.  In the three decades that have passed sinceadoption of the original disclosure requirements, there have been significantchanges in the oil and natural gas industry. The amendments are designed to modernize and update the oil and naturalgas disclosure requirements to align them with current practices and changes intechnology.  In addition, the amendmentsconcurrently align the SEC’s full cost accounting rules with the reviseddisclosures.  The revised disclosurerequirements must be incorporated in annual reports on Form 10-K forfiscal years ending on or after December 31, 2009.  A company may not apply the new rules todisclosures in quarterly reports prior to the first annual report in which therevised disclosures are required. Barnwell’s management is currently evaluating the impact of adoptingthese provisions on the consolidated financial statements.

 

 

**Liquidity and CapitalResources**

 

Barnwell’s primary sources of liquidity areinternally generated cash flows from operations, land investment segmentproceeds and borrowings on its credit facilities.  At September 30, 2009, Barnwell had$6,879,000 in cash and cash equivalents and approximately $3,654,000 ofavailable credit under its credit facility with its Canadian bank.  As of September 30, 2009, Barnwell hadborrowed the maximum amount available under its credit facility with a Hawaiibank, which is restricted in its use to the construction of homes and financingof lots by Kaupulehu 2007.  At September 30,2009, we maintained positive working capital of $3,356,000 as compared to positiveworking capital of $2,829,000 at September 30, 2008.  Barnwell’s future liquidity and ability tofund capital expenditures is dependent upon operating cash flows, existingworking capital, available credit under its credit facility with its Canadianbank, and ability to access debt and equity markets.

 

We believe our current cash balances, futureoperating cash flows, land investment segment proceeds, residential home andlot sales, and available credit will be sufficient to fund our operations, plannedfuture capital expenditures, scheduled debt repayments and related interest,and settle incentive compensation liabilities in cash, if necessary.  However, over the last year, the U.S. andinternational credit markets have experienced significant disruption.  Although some recovery has occurred in thecredit markets in recent months, these disruptions have resulted in greatervolatility, less liquidity, and limited availability of financing.  Therefore we cannot predict whether Barnwell’sCanadian revolving credit facility will be reduced below the current level ofborrowings under the facility because of significant decreases in the rate ofexchange of the Canadian dollar to the U.S. dollar or upon the April 2010review.  Furthermore, we cannot predictwhether our real estate revolving credit facility’s loan advance limitationwill be reduced below borrowed amounts due to a decrease in appraised values ofthe underlying security, which would require us to repay a portion of our loanborrowings, or whether the homes and residential lots will be sold before December 17,2010, the facility’s expiration date. Events and circumstances that lead to results that significantly differfrom management’s expectations could have a material adverse effect on our operations,liquidity, cash flows, and financial condition.

 

Oil and natural gas prices, land investment segmentproceeds, and residential real estate home and lot sales are driven by marketsupply and demand factors which are impacted by the overall state of theeconomy.  Oil and natural gas prices havehistorically been volatile and the timing and amount of land investment segmentproceeds are unpredictable, sporadic, and not under Barnwell’s control.  Development rights proceeds, on the otherhand, are scheduled, but there is no assurance that future monies will bereceived.  If oil and natural gas pricescontinue to decline and land investment segment proceeds and residential realestate home and lot sales are less than current expectations, we will be facedwith reduced operating cash flows which in turn could have a material adverseeffect on our 

 

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operations,liquidity, cash flows, and financial condition. In response to significant declines in oil and natural gas prices andland investment segment proceeds and resulting decreases in cash inflows, theCompany significantly reduced oil and natural gas capital expenditures infiscal 2009 and is holding such capital expenditures at reduced levels throughat least the first half of fiscal 2010. In the event a reduction in capital expenditures is not sufficient tofund our future cash needs, we will need to obtain alternative terms or sourcesof financing or liquidate investments and/or operating assets to make anyrequired cash outflows.  Reduced oil andnatural gas capital expenditures, if significant and/or continued, will likelyresult in a reduction in future oil and natural gas reserve volumes andproduction.

 

*Cash Flows*

 

Cash flows used in operations totaled $3,060,000 forfiscal 2009, as compared to $18,440,000 of cash flows provided by operationsfor the same period in fiscal 2008.  The$21,500,000 decrease in cash flows was primarily due to a decrease in operatingprofit generated by Barnwell’s oil and natural gas segment resulting fromdeclines in the market prices for oil and natural gas during fiscal 2009, anincrease in residential real estate home development costs, and changes inworking capital primarily due to fluctuations in the timing and amount ofpayments of accrued taxes and accrued bonuses in fiscal 2009 as compared to thesame period in fiscal 2008.

 

Net cash used in investing activities totaled $7,611,000for fiscal 2009, as compared to $12,037,000 for fiscal 2008.  The decrease in net cash used was primarilyattributable to reduced capital expenditures, offset in part by decreasedproceeds from land investment segment sales, during fiscal 2009, as compared tothe same period in fiscal 2008.

 

Cash flows provided by financing activities totaled$4,579,000 for fiscal 2009, as compared to $2,504,000 of cash flows used infinancing activities for fiscal 2008. This increase in cash inflows was primarily due to increased long-termdebt borrowings in Hawaii related to the residences under construction andreduced Barnwell stock repurchases and dividend payments in fiscal 2009 ascompared to fiscal 2008.

 

*Residential Real Estate Capitalized Costs*

 

Construction of two luxury residences commenced in January 2008and as of September 30, 2009, both homes are complete and available forsale.  Capitalized expenditures relatedto construction of the two residences, including accrued construction costs andcapitalized interest, totaled $4,709,000 for the year ended September 30,2009.

 

The first home, on Lot 35, was completed and listedfor sale at an offering price of $9,400,000 in June 2009.  The home is a fully furnished 5-bedroom,6.5-bath ranch-style home with a 6th bedroom that can also be used as anoffice.  The home is 6,337 square feet insize.  It is designed with an open-airbreezeway connecting the 3-bedroom main house with a separate 2 or 3-bedroomguest quarters, creating privacy for both living areas.

 

The second home, on Lot 36, was recently completedand is anticipated to be listed for sale at a similar price.  This home is planned to be soldunfurnished.  It is of similar design tothe Lot 35 home and is 6,275 square feet in size.

 

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*Oil and Natural Gas Capital Expenditures*

 

Barnwell’s oil and natural gas capital expenditures,including accrued capital expenditures, decreased $11,663,000 (66%) from$17,662,000 in fiscal 2008 to $5,999,000 in fiscal 2009.  Due to sharp declines in oil and natural gasprices, spending for fiscal 2009 was significantly reduced from previous estimates.  During the year ended September 30,2009, Barnwell participated in drilling 12 gross (1.9 net) wells, of which 10gross (1.6 net) wells appear to be successful or are currently being evaluatedand 2 gross (0.3 net) wells were not successful.  Including revisions of previous estimates,Barnwell replaced 100% of oil production (including natural gas liquids) and25% of natural gas production during fiscal 2009, as compared to 81% and 78%,respectively, during fiscal 2008. Excluding revisions of previous estimates, Barnwell replaced 11% of oilproduction (including natural gas liquids) and 22% of natural gas productionduring fiscal 2009, as compared to 47% and 45%, respectively, during fiscal2008.  Of the 12 gross wells drilled infiscal 2009, Barnwell initiated 6 gross (1.3 net) wells.  The term “gross” refers to the total numberof wells in which Barnwell owns an interest, and “net” refers to Barnwell’saggregate 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 ofrecord by Barnwell and, in addition, the portion owned by others.  Of the $5,999,000 total oil and natural gasproperties investments for fiscal 2009, $184,000 (3%) was for acquisition ofoil and natural gas properties, $599,000 (10%) was for exploration costs,$3,539,000 (59%) was for development of oil and natural gas properties, and$1,677,000 (28%) was for support equipment and facilities.

 

The followingtable sets forth the gross and net numbers of oil and natural gas wells Barnwellparticipated in drilling for each of the last three fiscal years:

 
|                                   | **2009**                  |       | **2008** |              | **2007** |
|----------------------------------------|---------------------------|------------|----------|-------------------|----------|
|                                   | **Gross**                 | **Net**    |     | **Gross**         | **Net**  |   | Gross | Net |
|                                   | ** **                | ** ** |     |              |     |   |   |   |
| Exploratory oil and  natural gas wells | **-**                     | **-**      |     |  ** **6 | 2.6      |   |  ** **2 | 0.9 |
|                                   |                      |       |     |              |     |   |   |   |
| Development oil and  natural gas wells | **12**                    | **1.9**    |     | 26                | 5.2      |   | 30 | 5.8 |
|                                   | ** **                | ** ** |     |              |     |   |   |   |
| Successful oil and natural  gas wells  | **10**                    | **1.6**    |     | 29                | 6.9      |   | 29 | 5.6 |
|                                   | ** **                | ** ** |     |              |     |   |   |   |
| Unsuccessful oil and natural gas wells | ** **** ****2** | **0.3**    |     |  ** **3 | 0.9      |   |  ** **3 | 1.1 |

 

Barnwell estimates that oil and natural gas capitalexpenditures for fiscal 2010 will range from $5,000,000 to $8,000,000.  This estimated amount will decrease orincrease as dictated by cash flows generated by operations and management’sassessment of the oil and natural gas environment and prospects.  The Company is currently unable to estimatewhen it will increase its oil and natural gas exploration and developmentactivity as such a determination will depend upon future oil and natural gasprices and a strengthening of general economic conditions.  Reduced capital expenditures, if significantand/or continued, will likely result in a reduction in reserve volumes and oiland natural gas production.

 

*Credit Arrangements*

 

Barnwell’s credit facility at Royal Bank of Canada,a Canadian bank, was renewed in April 2010 for $20,000,000 Canadiandollars, unchanged from the prior year amount, or approximately US$18,654,000at the September 30, 2009 exchange rate. At September 30, 2009, borrowings under this facility wereUS$15,000,000, unchanged from the balance borrowed at September 30, 2008,and Barnwell had approximately $3,654,000 of unused credit available.  The facility is available in U.S. 

 

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dollarsat the London Interbank Offer Rate plus 3.5%, at U.S. prime plus 2.5%, or inCanadian dollars at Canadian prime plus 2.5%. A standby fee of 1.0% per annum is charged on the unused facilitybalance.  Additionally, Barnwell paid afee of $70,000 Canadian dollars to renew the facility.

 

As also discussed in Note 9 in the “Notes toConsolidated Financial Statements” in Item 8, Kaupulehu 2007 has a creditfacility with a Hawaii financial institution providing a $16,000,000 revolvingline of credit with which Kaupulehu 2007 finances four parcels and the costs ofhome construction.  At September 30,2009, borrowings under this facility were $16,000,000.  Under the terms of the facility, financingfor home construction is limited to a maximum of two unsold homes under constructionat any given time.  Both of the homes arecomplete and available for sale.  Thereal estate revolving credit facility pertaining to the homes and lots held forinvestment is due on December 17, 2010. We cannot predict whether our real estate revolving credit facility’sloan advance limitation will be reduced below borrowed amounts due to adecrease in appraised values of the underlying security, or whether the homesand residential lots will be sold before the facility’s expiration date.  If Barnwell is unable to sell the homes andlots held for investment within a reasonable timeframe, Barnwell will berequired to refinance the debt, secure alternative financing, reduce fiscal2010 oil and natural gas capital expenditures, liquidate assets, or take othernecessary actions in order to make any required repayments.  In addition, Barnwell will have cash outflowssuch as interest, maintenance, property taxes, and other holding costs untilthe homes and lots are sold.

 

*Contractual Obligations*

 

Kaupulehu 2007 has an agreement with the son of aformer director of Barnwell and minority interest owner in certain of Barnwell’sbusiness ventures, including a 20% interest in Kaupulehu 2007 (see furtherdiscussion on related party interests at Note 13 in the “Notes to ConsolidatedFinancial Statements” in Item 8), under which he served as Kaupulehu 2007’sproject manager.  Kaupulehu 2007 also hasan agreement with the independent building contractor for Kaupulehu 2007’s twoluxury homes; a significant provision of which is that each will receive 20% ofthe sales profit, which is contingent on the sale of each of the two homesconstructed by Kaupulehu 2007.

 

*Share Repurchase Program*

 

In December 2005, Barnwell’s Board of Directorsauthorized the purchase of up to 250,000 shares of its common stock in the openmarket or in privately negotiated transactions. On September 20, 2007, the Board of Directors authorized a stockrepurchase program in the open market of up to 150,000 shares of these 250,000shares during the period commencing on September 24, 2007 and ending on March 24,2008.  During the year ended September 30,2007, Barnwell repurchased 10,000 shares for an aggregate purchase price of$155,000, or approximately $15.50 per share, pursuant to the plan.  From October 1, 2007 to March 24,2008, Barnwell repurchased 106,500 shares of its common stock for $1,597,000,or approximately $15.00 per share.  Ofthese amounts, 71,500 shares were purchased for $1,063,000, or approximately$14.87 per share, on the open market under the September 20, 2007authorization, and 35,000 shares were purchased for $15.25 per share, theclosing market price on the date of the transaction, or approximately $534,000,in a privately negotiated transaction with an officer/director of Barnwell.

 

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In August 2008, the Board of Directorsauthorized the Company to acquire in the open market, from time-to-timecommencing on August 18, 2008 and ending on December 31, 2008, and inaccordance with applicable laws, rules and regulations, up to 150,000shares of the Company’s common stock. During the year ended September 30, 2009, Barnwell repurchased12,700 shares of its common stock for $97,000, or approximately $7.65 pershare.

 

 

**ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Disclosure is not required as Barnwell qualifies asa smaller reporting company.

 

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**ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA**

 

 

**Reportof Independent Registered Public Accounting Firm**

 

 

The Board of Directors

Barnwell Industries, Inc.:

 

 

Wehave audited the accompanying consolidated balance sheets of BarnwellIndustries, Inc. and subsidiaries as of September 30, 2009 and 2008,and the related consolidated statements of operations, stockholders’ equity andcomprehensive (loss) income, and cash flows for each of the years in thethree-year period ended September 30, 2009. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financial statementsbased on our audits.

 

Weconducted our audits in accordance with standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of BarnwellIndustries, Inc. and subsidiaries as of September 30, 2009 and 2008,and the results of their operations and their cash flows for each of the yearsin the three-year period ended September 30, 2009, in conformity withU.S. generally accepted accounting principles.

 

 

/s/ KPMG LLP

 

Honolulu,Hawaii

December 15,2009

 

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                            | September 30, |
|---------------------------------------------------------------------------------------|--------------------|
| ** **                                                                            | ** **         | **2009** | ** ** | ** ** | ** ** | 2008 | ** ** |
| ASSETS                                                                                | ** **         | ** ** |   |   |   |   |   |
| CURRENT  ASSETS:                                                                      | ** **         | ** ** |   |   |   |   |   |
| Cash  and cash equivalents                                                            | ** **         | **$** | **6,879,000** |   |   |   | $ | 13,618,000 |   |
| Accounts  receivable, net of allowance for doubtful accounts of:                      | ** **         | ** ** |   |   |   |   |   |
| $47,000  at September 30, 2009; $1,078,000 at September 30, 2008            | ** **         | **3,978,000** |   |   |   | 7,524,000 |   |
| Current  taxes receivable                                                             | ** **         | **653,000** |   |   |   | 975,000 |   |
| Prepaid  expenses                                                                     | ** **         | **1,403,000** |   |   |   | 250,000 |   |
| Deferred  income taxes                                                                | ** **         | **272,000** |   |   |   | 2,134,000 |   |
| Real  estate held for sale                                                            | ** **         | **13,585,000** |   |   |   | - |   |
| Other  current assets                                                                 | ** **         | **591,000** |   |   |   | 1,161,000 |   |
| TOTAL  CURRENT ASSETS                                                                 | ** **         | **27,361,000** |   |   |   | 25,662,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| DEPOSITS  ON RESIDENTIAL PARCELS                                                      | ** **         | **-** |   |   |   | 200,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| RESIDENTIAL  LOTS UNDER DEVELOPMENT                                                   | ** **         | **-** |   |   |   | 8,876,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| INVESTMENT  IN RESIDENTIAL PARCELS                                                    | ** **         | **4,598,000** |   |   |   | 4,708,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| INVESTMENT  IN JOINT VENTURES                                                         | ** **         | **1,920,000** |   |   |   | 2,776,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| INVESTMENT  IN LAND INTERESTS                                                         | ** **         | **538,000** |   |   |   | 1,450,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| PROPERTY  AND EQUIPMENT, NET                                                          | ** **         | **51,687,000** |   |   |   | 88,690,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| TOTAL  ASSETS                                                                         | ** **         | **$** | **86,104,000** |   |   |   | $ | 132,362,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                            | ** **         | ** ** |   |   |   |   |   |
| CURRENT  LIABILITIES:                                                                 | ** **         | ** ** |   |   |   |   |   |
| Accounts  payable                                                                     | ** **         | **$** | **3,277,000** |   |   |   | $ | 6,516,000 |   |
| Accrued  capital expenditures                                                         | ** **         | **588,000** |   |   |   | 3,071,000 |   |
| Accrued  incentive plan costs                                                         | ** **         | **1,427,000** |   |   |   | 2,372,000 |   |
| Other  accrued compensation costs                                                     | ** **         | **546,000** |   |   |   | 3,481,000 |   |
| Payable  to joint interest owners                                                     | ** **         | **1,001,000** |   |   |   | 1,581,000 |   |
| Income  taxes payable                                                                 | ** **         | **619,000** |   |   |   | 3,506,000 |   |
| Current  portion of long-term debt                                                    | ** **         | **14,335,000** |   |   |   | - |   |
| Other  current liabilities                                                            | ** **         | **2,212,000** |   |   |   | 2,306,000 |   |
| TOTAL  CURRENT LIABILITIES                                                            | ** **         | **24,005,000** |   |   |   | 22,833,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| LONG-TERM  DEBT                                                                       | ** **         | **16,665,000** |   |   |   | 26,217,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| LIABILITY  FOR RETIREMENT BENEFITS                                                    | ** **         | **4,848,000** |   |   |   | 2,041,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| ASSET  RETIREMENT OBLIGATION                                                          | ** **         | **4,508,000** |   |   |   | 4,565,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| DEFERRED  INCOME TAXES                                                                | ** **         | **2,858,000** |   |   |   | 14,375,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| MINORITY  INTEREST                                                                    | ** **         | **902,000** |   |   |   | 1,067,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| COMMITMENTS  AND CONTINGENCIES                                                        | ** **         | ** ** |   |   |   |   |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| STOCKHOLDERS’  EQUITY:                                                           | ** **         | ** ** |   |   |   |   |   |
| Common  stock, par value $0.50 per share; Authorized, 20,000,000 shares:              | ** **         | ** ** |   |   |   |   |   |
| 8,403,060  issued at September 30, 2009 and 2008                                 | ** **         | **4,202,000** |   |   |   | 4,202,000 |   |
| Additional  paid-in capital                                                           | ** **         | **1,227,000** |   |   |   | 1,222,000 |   |
| Retained  earnings                                                                    | ** **         | **30,500,000** |   |   |   | 54,862,000 |   |
| Accumulated  other comprehensive (loss) income, net                                   | ** **         | **(1,349,000** | **)** |   |   | 3,143,000 |   |
| Treasury  stock, at cost:                                                             | ** **         | ** ** |   |   |   |   |   |
| 162,900  shares at September 30, 2009; 150,200 shares at September 30, 2008 | ** **         | **(2,262,000** | **)** |   |   | (2,165,000 | ) |
| TOTAL  STOCKHOLDERS’ EQUITY                                                      | ** **         | **32,318,000** |   |   |   | 61,264,000 |   |
|                                                                                  | ** **         | ** ** |   |   |   |   |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                      | ** **         | **$** | **86,104,000** |   |   |   | $ | 132,362,000 |   |

 

See Notes toConsolidated Financial Statements

 

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BARNWELL INDUSTRIES, INC.AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 
| ** **                                             | Year ended  September 30, |
|--------------------------------------------------------|--------------------------------|
| ** **                                             | ** **                     | **2009** | ** ** | ** ** | ** ** | 2008 |   |   |   | 2007 | ** ** |
| Revenues:                                              | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| Oil  and natural gas                                   | ** **                     | **$** | **24,950,000** |   |   |   | $ | 49,441,000 |   |   |   | $ | 34,599,000 |   |
| Contract  drilling                                     | ** **                     | **5,335,000** |   |   |   | 9,787,000 |   |   |   | 5,993,000 |   |
| Sale  of interest in leasehold land, net               | ** **                     | **201,000** |   |   |   | 446,000 |   |   |   | 3,370,000 |   |
| Sale  of development rights, net                       | ** **                     | **833,000** |   |   |   | 4,161,000 |   |   |   | 2,292,000 |   |
| Gas  processing and other                              | ** **                     | **859,000** |   |   |   | 1,809,000 |   |   |   | 1,182,000 |   |
|                                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
|                                                   | ** **                     | **32,178,000** |   |   |   | 65,644,000 |   |   |   | 47,436,000 |   |
|                                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| Costs  and expenses:                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| Oil  and natural gas operating                         | ** **                     | **9,931,000** |   |   |   | 10,581,000 |   |   |   | 10,203,000 |   |
| Contract  drilling operating                           | ** **                     | **4,392,000** |   |   |   | 7,684,000 |   |   |   | 4,939,000 |   |
| General  and administrative                            | ** **                     | **7,899,000** |   |   |   | 12,497,000 |   |   |   | 10,457,000 |   |
| Bad  debt expense                                      | ** **                     | **570,000** |   |   |   | 1,091,000 |   |   |   | - |   |
| Depreciation,  depletion and amortization              | ** **                     | **11,553,000** |   |   |   | 14,726,000 |   |   |   | 13,174,000 |   |
| Reduction  of carrying value of assets                 | ** **                     | **28,387,000** |   |   |   | - |   |   |   | - |   |
| Interest  expense, net                                 | ** **                     | **912,000** |   |   |   | 1,043,000 |   |   |   | 999,000 |   |
| Minority  interest in (losses) earnings                | ** **                     | **(186,000** | **)** |   |   | 1,006,000 |   |   |   | 988,000 |   |
|                                                   |                           |   |   |   |   |   |   |   |   |   |   |
|                                                   | ** **                     | **63,458,000** |   |   |   | 48,628,000 |   |   |   | 40,760,000 |   |
|                                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| (Loss)  earnings before income taxes                   | ** **                     | **(31,280,000** | **)** |   |   | 17,016,000 |   |   |   | 6,676,000 |   |
|                                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| Income  tax benefit (provision)                        | ** **                     | **6,918,000** |   |   |   | (5,284,000 | ) |   |   | (3,160,000 | ) |
|                                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| NET  (LOSS) EARNINGS                                   | ** **                     | **$** | **(24,362,000** | **)** |   |   | $ | 11,732,000 |   |   |   | $ | 3,516,000 |   |
|                                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| BASIC  NET (LOSS) EARNINGS PER COMMON SHARE            | ** **                     | **$** | **(2.96** | **)** |   |   | $ | 1.42 |   |   |   | $ | 0.43 |   |
|                                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| DILUTED  NET (LOSS) EARNINGS PER COMMON SHARE          | ** **                     | **$** | **(2.96** | **)** |   |   | $ | 1.39 |   |   |   | $ | 0.41 |   |
|                                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| WEIGHTED-AVERAGE  NUMBER OF COMMON SHARES OUTSTANDING: | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
|                                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| BASIC                                                  | ** **                     | **8,240,444** |   |   |   | 8,248,581 |   |   |   | 8,208,189 |   |
|                                                   | ** **                     | ** ** |   |   |   |   |   |   |   |   |   |
| DILUTED                                                | ** **                     | **8,240,444** |   |   |   | 8,438,914 |   |   |   | 8,608,759 |   |

 

See Notes to Consolidated Financial Statements

 

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
| ** **                                                                                             | Year ended September 30, |
|--------------------------------------------------------------------------------------------------------|-------------------------------|
| ** **                                                                                             | ** **                    | **2009** | ** ** | ** ** | ** ** | 2008 |   |   |   | 2007 | ** ** |
| Cash  flows from operating activities:                                                                 | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Net  (loss) earnings                                                                                   | ** **                    | **$** | **(24,362,000** | **)** |   |   | $ | 11,732,000 |   |   |   | $ | 3,516,000 |   |
| Adjustments  to reconcile net (loss) earnings to net cash (used in) provided by operating  activities: | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Reduction  of carrying value of assets                                                                 | ** **                    | **28,387,000** |   |   |   | - |   |   |   | - |   |
| Depreciation,  depletion and amortization                                                              | ** **                    | **11,553,000** |   |   |   | 14,726,000 |   |   |   | 13,174,000 |   |
| Bad  debt expense                                                                                      | ** **                    | **570,000** |   |   |   | 1,091,000 |   |   |   | - |   |
| Retirement  benefits expense                                                                           | ** **                    | **503,000** |   |   |   | 528,000 |   |   |   | 511,000 |   |
| Accretion  of asset retirement obligation                                                              | ** **                    | **270,000** |   |   |   | 314,000 |   |   |   | 232,000 |   |
| Share-based  compensation payments                                                                     | ** **                    | **-** |   |   |   | (458,000 | ) |   |   | (2,024,000 | ) |
| Asset  retirement obligation payments                                                                  | ** **                    | **(130,000** | **)** |   |   | (48,000 | ) |   |   | (42,000 | ) |
| Minority  interest in (losses) earnings                                                                | ** **                    | **(186,000** | **)** |   |   | 1,006,000 |   |   |   | 988,000 |   |
| Retirement  benefits contribution and payments                                                         | ** **                    | **(229,000** | **)** |   |   | (456,000 | ) |   |   | (250,000 | ) |
| Share-based  compensation (benefit) expense                                                            | ** **                    | **(259,000** | **)** |   |   | (402,000 | ) |   |   | 462,000 |   |
| Sale  of interest in leasehold land, net                                                               | ** **                    | **(201,000** | **)** |   |   | (446,000 | ) |   |   | (3,370,000 | ) |
| Sale  of development rights, net                                                                       | ** **                    | **(833,000** | **)** |   |   | (4,161,000 | ) |   |   | (2,292,000 | ) |
| (Benefit)  provision for deferred income taxes                                                         | ** **                    | **(6,641,000** | **)** |   |   | (2,404,000 | ) |   |   | 1,456,000 |   |
| Additions  to residential lots under development                                                       | ** **                    | **(5,547,000** | **)** |   |   | (3,277,000 | ) |   |   | (4,868,000 | ) |
| (Decrease)  increase from changes in current assets and liabilities                                    | ** **                    | **(5,955,000** | **)** |   |   | 695,000 |   |   |   | 1,299,000 |   |
|                                                                                                   | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Net  cash (used in) provided by operating activities                                                   | ** **                    | **(3,060,000** | **)** |   |   | 18,440,000 |   |   |   | 8,792,000 |   |
|                                                                                                   | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Cash  flows from investing activities:                                                                 | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Proceeds  from sale of development rights, net of fees paid                                            | ** **                    | **833,000** |   |   |   | 4,161,000 |   |   |   | 2,292,000 |   |
| Proceeds  from sale of interest in leasehold land, net of fees paid                                    | ** **                    | **201,000** |   |   |   | 1,111,000 |   |   |   | 3,370,000 |   |
| Refund  of deposits on residential parcels                                                             | ** **                    | **200,000** |   |   |   | 400,000 |   |   |   | - |   |
| Proceeds  from gas over bitumen royalty adjustments                                                    | ** **                    | **179,000** |   |   |   | 259,000 |   |   |   | 248,000 |   |
| Return  of capital distribution from joint venture                                                     | ** **                    | **-** |   |   |   | - |   |   |   | 525,000 |   |
| Deposits  on residential parcels                                                                       | ** **                    | **-** |   |   |   | - |   |   |   | (800,000 | ) |
| Purchase  of lot acquisition rights                                                                    | ** **                    | **-** |   |   |   | - |   |   |   | (1,400,000 | ) |
| Additions  to investment in residential parcels                                                        | ** **                    | **-** |   |   |   | (279,000 | ) |   |   | (2,383,000 | ) |
| Investment  in joint ventures                                                                          | ** **                    | **(271,000** | **)** |   |   | (11,000 | ) |   |   | (3,290,000 | ) |
| Capital  expenditures                                                                                  | ** **                    | **(8,753,000** | **)** |   |   | (17,678,000 | ) |   |   | (16,597,000 | ) |
|                                                                                                   | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Net  cash used in investing activities                                                                 | ** **                    | **(7,611,000** | **)** |   |   | (12,037,000 | ) |   |   | (18,035,000 | ) |
|                                                                                                   | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Cash  flows from financing activities:                                                                 | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Proceeds  from long-term debt borrowings                                                               | ** **                    | **6,457,000** |   |   |   | 3,594,000 |   |   |   | 9,486,000 |   |
| Repayments  of long-term debt                                                                          | ** **                    | **(1,742,000** | **)** |   |   | (1,460,000 | ) |   |   | (52,000 | ) |
| Contributions  from minority interest partner                                                          | ** **                    | **202,000** |   |   |   | 4,000 |   |   |   | 751,000 |   |
| Proceeds  from exercise of stock options                                                               | ** **                    | **-** |   |   |   | 241,000 |   |   |   | 329,000 |   |
| Payment  of dividends                                                                                  | ** **                    | **-** |   |   |   | (1,858,000 | ) |   |   | (2,052,000 | ) |
| Payment  of loan commitment fee                                                                        | ** **                    | **(60,000** | **)** |   |   | (100,000 | ) |   |   | - |   |
| Purchases  of common stock for treasury                                                                | ** **                    | **(97,000** | **)** |   |   | (1,892,000 | ) |   |   | (155,000 | ) |
| Distributions  to minority interest partners                                                           | ** **                    | **(181,000** | **)** |   |   | (1,033,000 | ) |   |   | (1,032,000 | ) |
|                                                                                                   | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Net  cash provided by (used in) financing activities                                                   | ** **                    | **4,579,000** |   |   |   | (2,504,000 | ) |   |   | 7,275,000 |   |
|                                                                                                   | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                                          | ** **                    | **(647,000** | **)** |   |   | (388,000 | ) |   |   | 103,000 |   |
|                                                                                                   | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Net  (decrease) increase in cash and cash equivalents                                                  | ** **                    | **(6,739,000** | **)** |   |   | 3,511,000 |   |   |   | (1,865,000 | ) |
|                                                                                                   | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents at beginning of year                                                        | ** **                    | **13,618,000** |   |   |   | 10,107,000 |   |   |   | 11,972,000 |   |
|                                                                                                   | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents at end of year                                                              | ** **                    | **$** | **6,879,000** |   |   |   | $ | 13,618,000 |   |   |   | $ | 10,107,000 |   |

 

See Notes to Consolidated Financial Statements

 

66

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BARNWELL INDUSTRIES, INC.AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE(LOSS) INCOME

Years ended September 30, 2007, 2008 and 2009

 
| ** ** |   |   |        |   |   |   |   |   |   |   |       |   |   |   |          |   |   |   |     |   |   |   |          |   |   |   |     |   |   |   |               |   |   |   |   |   |   |   |
|------------|--------|--------|-------------|--------|--------|--------|--------|--------|--------|--------|------------|--------|--------|--------|---------------|--------|--------|--------|----------|--------|--------|--------|---------------|--------|--------|--------|----------|--------|--------|--------|--------------------|--------|--------|--------|--------|--------|--------|--------|
|       |   |   |        |   |   |   |   |   |   |   |       |   |   |   |          |   |   |   |     |   |   |   | Accumulated   |   |   |   |     |   |   |   |               |   |
|       |   |   |        |   |   |   |   |   |   |   | Additional |   |   |   |          |   |   |   |     |   |   |   | Other         |   |   |   |     |   |   |   | Total              |   |
|       |   |   | Shares      |   |   |   | Common |   |   |   | Paid-In    |   |   |   | Comprehensive |   |   |   | Retained |   |   |   | Comprehensive |   |   |   | Treasury |   |   |   | Stockholders’ |   |
|       |   |   | Outstanding |   |   |   | Stock  |   |   |   | Capital    |   |   |   | (Loss) Income |   |   |   | Earnings |   |   |   | (Loss) Income |   |   |   | Stock    |   |   |   | Equity             |   |
|       |   |   |        |   |   |   |   |   |   |   |       |   |   |   |          |   |   |   |     |   |   |   |          |   |   |   |     |   |   |   |               |   |
| **Balance at September 30, 2006**                                                                   |   |   | 8,169,060 |   |   |   | $      | 4,085,000 |   |   |    |   | $      | 144,000 |      |      |   |   |       |      |   | $      | 43,524,000 |   |   |   |     | $          | 2,852,000 |   |       |      |   | $      | -        |   |   |   | $          | 50,605,000 |   |
|----------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|--------|-----------|--------|--------|---------|--------|--------|---------|-----------|-----------|--------|--------|------------|-----------|--------|--------|------------|--------|--------|--------|----------|------------|-----------|--------|------------|-----------|--------|--------|----------|--------|--------|--------|------------|------------|--------|
|                                                                                                     |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |
| Exercise  of stock options, 111,000 shares net of 1,900 shares tendered and placed in  treasury          |   |   | 109,100   |   |   |   | 55,000 |      |   |   | 314,000 |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   | (40,000  | )          |      |   | 329,000    |      |
|                                                                                                     |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |
| Share-based  compensation costs                                                                          |   |   |      |   |   |   |   |      |   |   | 77,000  |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   | 77,000     |      |
|                                                                                                     |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |
| Tax  benefit from employee stock option transactions                                                     |   |   |      |   |   |   |   |      |   |   | 203,000 |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   | 203,000    |      |
|                                                                                                     |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |
| Purchases  of 10,000 common shares for treasury                                                          |   |   | (10,000   | )      |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   | (155,000 | )          |      |   | (155,000   | )         |
|                                                                                                     |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |
| Dividends  declared, $0.25 per share                                                                     |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   | (2,052,000 | )         |   |   |       |   |   |   |     |       |      |   | (2,052,000 | )         |
|                                                                                                     |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |
| Comprehensive  income:                                                                                   |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |
| Net  earnings                                                                                            |   |   |      |   |   |   |   |      |   |   |    |   |   |    | $         | 3,516,000 |   |   |       | 3,516,000 |   |   |       |   |   |   |     |       |      |   |       | 3,516,000 |   |
| Other  comprehensive income – foreign currency translation adjustments, net of  $2,883,000 of taxes |   |   |      |   |   |   |   |      |   |   |    |   |   |    | 3,316,000 |      |   |   |       |      |   |   | 3,316,000  |   |   |   |     |       |      |   | 3,316,000  |      |
| Total  comprehensive income                                                                              |   |   |      |   |   |   |   |      |   |   |    |   |   |    | $         | 6,832,000 |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |   |
|                                                                                                     |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |
| Adjustment  for initial adoption of FASB ASC Topic 715, net of $636,000 tax benefit                 |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     | (1,235,000 | )         |   |       |      |   |   |     |   |   |   | (1,235,000 | )          |
|                                                                                                     |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |   |
|                                                                                                     |   |   |      |   |   |   |   |      |   |   |    |   |   |    |      |      |   |   |       |      |   |   |       |   |   |   |     |       |      |   |       |      |
| **At September 30, 2007**                                                                           |   |   | 8,268,160 |   |   |   | $      | 4,140,000 |   |   |    |   | $      | 738,000 |      |      |   |   |       |      |   | $      | 44,988,000 |   |   |   |     | $          | 4,933,000 |   |       |      |   | $      | (195,000 | )      |   |   | $          | 54,604,000 |   |

 

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE(LOSS) INCOME

Years ended September 30, 2007, 2008 and 2009

 

(continued fromprevious page)

 
| ** **                                                                                                                                                                |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |   |   |   |   |       |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|--------|-----------|--------|--------|------------|--------|-----------|--------|---------------|------------|--------|--------|------------|------------|--------|------------|---------------|--------|--------|--------|------------|--------|--------|--------|--------------------|------------|--------|--------|--------|--------|------------|--------|
|                                                                                                                                                                      |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       | Accumulated   |   |   |   |       |   |   |   |               |       |
|                                                                                                                                                                      |   |   |        |   |   |   |   |      |   |   | Additional |   |      |   |          |       |   |   |       |       |   |       | Other         |   |   |   |       |   |   |   | Total              |       |
|                                                                                                                                                                      |   |   | Shares      |   |   |   | Common |      |   |   | Paid-In    |   |      |   | Comprehensive |       |   |   | Retained   |       |   |       | Comprehensive |   |   |   | Treasury   |   |   |   | Stockholders’ |       |
|                                                                                                                                                                      |   |   | Outstanding |   |   |   | Stock  |      |   |   | Capital    |   |      |   | (Loss) Income |       |   |   | Earnings   |       |   |       | (Loss) Income |   |   |   | Stock      |   |   |   | Equity             |       |
|                                                                                                                                                                      |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |
| **Balance at September 30, 2007**                                                                                                                                    |   |   | 8,268,160   |   |   |   | $      | 4,140,000 |   |   |       | $      | 738,000   |   |          |       |   |   |       |       | $      | 44,988,000 |          |   |   | $      | 4,933,000  |   |   |   | $                  | (195,000   | )      |   |   | $      | 54,604,000 |   |
|                                                                                                                                                                      |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |
| Exercise  of stock options, 123,000 shares net of 5,200 shares tendered and placed in  treasury                                                                           |   |   | 117,800     |   |   |   | 62,000 |      |   |   | 257,000    |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   | (78,000    | )      |   |   | 241,000            |       |
|                                                                                                                                                                      |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |
| Share-based  compensation costs                                                                                                                                           |   |   |        |   |   |   |   |      |   |   | 35,000     |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   | 35,000             |       |
|                                                                                                                                                                      |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |
| Tax  benefit from employee stock option transactions                                                                                                                      |   |   |        |   |   |   |   |      |   |   | 192,000    |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   | 192,000            |       |
|                                                                                                                                                                      |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |
| Purchases  of 133,100 common shares for treasury                                                                                                                          |   |   | (133,100    | )      |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   | (1,892,000 | )      |   |   | (1,892,000         | )          |
|                                                                                                                                                                      |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |
| Dividends  declared, $0.23 per share                                                                                                                                      |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   | (1,858,000 | )          |   |       |          |   |   |   |       |   |   |   | (1,858,000         | )          |
|                                                                                                                                                                      |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |
| Comprehensive  income:                                                                                                                                                    |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |
| Net  earnings                                                                                                                                                             |   |   |        |   |   |   |   |      |   |   |       |   |      |   | $             | 11,732,000 |   |   |       | 11,732,000 |   |       |          |   |   |   |       |   |   |   |               | 11,732,000 |   |
| Other  comprehensive loss – foreign currency translation adjustments, net of  $1,748,000 tax benefit                                                                 |   |   |        |   |   |   |   |      |   |   |       |   |      |   | (2,066,000    | )          |   |   |       |       |   |       | (2,066,000    | )      |   |   |       |   |   |   | (2,066,000         | )          |
| Other  comprehensive income – retirement plans – amortization of accumulated other  comprehensive loss into net periodic benefit cost, net of $143,000 of taxes |   |   |        |   |   |   |   |      |   |   |       |   |      |   | 276,000       |       |   |   |       |       |   |       | 276,000       |   |   |   |       |   |   |   | 276,000            |       |
| Total  comprehensive income                                                                                                                                               |   |   |        |   |   |   |   |      |   |   |       |   |      |   | $             | 9,942,000  |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |   |
|                                                                                                                                                                      |   |   |        |   |   |   |   |      |   |   |       |   |      |   |          |       |   |   |       |       |   |       |          |   |   |   |       |   |   |   |               |       |
| **At September 30, 2008**                                                                                                                                            |   |   | 8,252,860   |   |   |   | $      | 4,202,000 |   |   |       | $      | 1,222,000 |   |          |       |   |   |       |       | $      | 54,862,000 |          |   |   | $      | 3,143,000  |   |   |   | $                  | (2,165,000 | )      |   |   | $      | 61,264,000 |   |

 

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE(LOSS) INCOME

Years ended September 30, 2007, 2008 and 2009

 

(continued fromprevious page)

 
| ** **                                                                                                |       |       |          |       |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   |           |   |       |       |               |           |   |       |       |   |           |       |
|-----------------------------------------------------------------------------------------------------------|------------|------------|---------------|------------|------------|------------|--------|---------------|------------|------------|------------|--------|---------------|--------|---------------|-----------------|--------|------------|------------|-------------|--------|----------------|---------------|------------|------------|--------|----------------|--------|------------|------------|--------------------|----------------|--------|------------|------------|--------|----------------|------------|
|                                                                                                      |       |       |          |       |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           | Accumulated   |       |       |   |           |   |       |       |               |           |
|                                                                                                      |       |       |          |       |       |       |   |          |       |       | Additional |   |          |   |          |            |   |       |       |        |   |           | Other         |       |       |   |           |   |       |       | Total              |           |
|                                                                                                      |       |       | Shares        |       |       |       | Common |          |       |       | Paid-In    |   |          |   | Comprehensive |            |   |       | Retained   |        |   |           | Comprehensive |       |       |   | Treasury       |   |       |       | Stockholders’ |           |
|                                                                                                      |       |       | Outstanding   |       |       |       | Stock  |          |       |       | Capital    |   |          |   | (Loss) Income |            |   |       | Earnings   |        |   |           | (Loss) Income |       |       |   | Stock          |   |       |       | Equity             |           |
|                                                                                                      |       |       |          |       |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   |           |   |       |       |               |           |
| **Balance at September 30, 2008**                                                                    |       |       | 8,252,860     |       |       |       | $      | 4,202,000     |       |       |       | $      | 1,222,000     |   |          |            |   |       |       |        | $      | 54,862,000     |          |       |       | $      | 3,143,000      |   |       |       | $                  | (2,165,000     | )      |       |       | $      | 61,264,000     |       |
|                                                                                                      |       |       |          |       |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   |           |   |       |       |               |           |
| Share-based  compensation costs                                                                           |       |       |          |       |       |       |   |          |       |       | 5,000      |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   |           |   |       |       | 5,000              |           |
|                                                                                                      |       |       |          |       |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   |           |   |       |       |               |           |
| Purchases  of 12,700 common shares for treasury                                                           |       |       | (12,700       | )          |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   | (97,000        | )      |       |       | (97,000            | )              |
|                                                                                                      |       |       |          |       |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   |           |   |       |       |               |           |
| Comprehensive  loss:                                                                                      |       |       |          |       |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   |           |   |       |       |               |           |
| Net  loss                                                                                                 |       |       |          |       |       |       |   |          |       |       |       |   |          |   | $             | (24,362,000     | )      |       |       | (24,362,000 | )      |           |          |       |       |   |           |   |       |       |               | (24,362,000    | )      |
| Other  comprehensive loss:                                                                                |       |       |          |       |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   |           |   |       |       |               |           |
| Foreign  currency translation adjustments, net of $1,781,000 tax benefit                                  |       |       |          |       |       |       |   |          |       |       |       |   |          |   | (1,959,000    | )               |   |       |       |        |   |           | (1,959,000    | )          |       |   |           |   |       |       | (1,959,000         | )              |
| Retirement  plans:                                                                                        |       |       |          |       |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   |           |   |       |       |               |           |
| Amortization  of accumulated other comprehensive loss into net periodic benefit cost, net  of taxes of $0 |       |       |          |       |       |       |   |          |       |       |       |   |          |   | 142,000       |            |   |       |       |        |   |           | 142,000       |       |       |   |           |   |       |       | 142,000            |           |
| Net  losses arising during the period, net of taxes of $0                                                 |       |       |          |       |       |       |   |          |       |       |       |   |          |   | (2,675,000    | )               |   |       |       |        |   |           | (2,675,000    | )          |       |   |           |   |       |       | (2,675,000         | )              |
| Total  comprehensive loss                                                                                 | ** ** | ** ** |          |       |       |       |   |          |       |       |       |   |          |   | **$**         | **(28,854,000** | **)**  |       |       |        |   |           |          |       |       |   |           |   |       |       |               |           |   |
|                                                                                                      |       |       |          |       |       |       |   |          |       |       |       |   |          |   |          |            |   |       |       |        |   |           |          |       |       |   |           |   |       |       |               |           |
| **At September 30, 2009**                                                                            | ** ** | ** ** | **8,240,160** | ** ** | ** ** | ** ** | **$**  | **4,202,000** | ** ** | ** ** | ** ** | **$**  | **1,227,000** |   |          |            |   | ** ** | ** ** | ** **  | **$**  | **30,500,000** | ** **    | ** ** | ** ** | **$**  | **(1,349,000** | **)**  | ** ** | ** ** | **$**              | **(2,262,000** | **)**  | ** ** | ** ** | **$**  | **32,318,000** | ** ** |

 

See Notes to Consolidated Financial Statements

 

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**BARNWELL INDUSTRIES, INC.**

 

**AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**YEARS ENDED SEPTEMBER 30, 2009, 2008 AND 2007**

 

 

**1.         DESCRIPTIONOF THE REPORTING ENTITY AND BUSINESS**

 

*Principles of Consolidation*

 

The consolidated financial statements include theaccounts of Barnwell Industries, Inc. and all majority-owned subsidiaries,including an indirect 77.6%-owned land investment general partnership and two80%-owned joint ventures (collectively referred to herein as “Barnwell,” “we,” “our,”“us,” or the “Company”).  All significantintercompany accounts and transactions have been eliminated.  Investments in companies over which Barnwellhas the ability to exercise significant influence, but not control, areaccounted for using the equity method.

 

*Description of Business*

 

During its last three fiscal years, Barnwell wasengaged in the following lines of business: 1) exploring for, developing,producing and selling oil and natural gas in Canada, 2) investing inleasehold land and other real estate interests in Hawaii, 3) acquiringproperty for investment and development of homes for sale in Hawaii(established January 2007), and 4) drilling wells and installing andrepairing water pumping systems in Hawaii. Barnwell’s oil and natural gas activities comprise its largest businesssegment.  Approximately 78% of Barnwell’srevenues and 93% of Barnwell’s capital expenditures for the fiscal year ended September 30,2009 were attributable to its oil and natural gas activities.  Barnwell’s land investment segment revenuesaccounted for 3% of fiscal 2009 revenues; Barnwell’s contract drillingactivities accounted for 17% of fiscal 2009 revenues; and Barnwell’s residentialreal estate segment and other revenues comprised 2% of fiscal 2009 revenues.

 

 

**2.         SIGNIFICANTACCOUNTING POLICIES**

 

*Overview*

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued a standard that establishes the FASB AccountingStandards Codification (“Codification” or “ASC”) as the single source ofauthoritative U.S. generally accepted accounting principles (“GAAP”) recognizedby the FASB to be applied by nongovernmental entities for financial statementsissued for interim and annual periods ending after September 15,2009.  Rules and interpretivereleases of the Securities and Exchange Commission (“SEC”) under federalsecurities laws are also sources of authoritative GAAP for SECregistrants.  The Company has adoptedthis standard and as such, all references to GAAP issued by the FASB in thesenotes to the consolidated financial statements are to the FASB ASC.  All references made to GAAP use the newCodification numbering system.

 

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*Use ofEstimates in the Preparation of Financial Statements*

 

The preparation of financial statements inconformity with U.S. GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expensesand the disclosure of contingent assets and liabilities.  Actual results could differ significantlyfrom those estimates.  Significantassumptions are required in the valuation of deferred tax assets, assetretirement obligations, share-based payment arrangements, obligations forretirement plans, contract drilling estimated costs to complete, proved oil andnatural gas reserves, and the carrying value of other assets, and suchassumptions may impact the amount at which such items are recorded.

 

*Reclassifications*

 

Certain reclassifications have been made to the September 30,2008 and 2007 consolidated financial statements to conform to classificationsused in the September 30, 2009 consolidated financial statements.

 

*Cash and CashEquivalents*

 

Cash and cash equivalents include cash on hand,demand deposits and short-term investments with original maturities of threemonths or less.

 

*AccountsReceivable*

 

Accounts receivable are recorded at the invoicedamount and do not bear interest.  Theallowance for doubtful accounts is Barnwell’s best estimate of the amount ofprobable credit losses in Barnwell’s existing accounts receivable and is basedon historical write-off experience and the application of the specificidentification method.  Account balancesare charged off against the allowance after all means of collection have beenexhausted and the potential for recovery is considered remote.  Barnwell does not have any off-balance sheetcredit exposure related to its customers.

 

*Oil and NaturalGas Properties*

 

Barnwell uses the full cost method of accountingunder which all costs incurred in the acquisition, exploration and developmentof oil and natural gas reserves, including costs related to unsuccessful wellsand estimated future site restoration and abandonment, are capitalized untilsuch time as the aggregate of such costs net of accumulated depletion and oiland natural gas related deferred income taxes, on a country-by-country basis,equals the sum of 1) the discounted present value (at 10%), using pricesas of the end of each reporting period on a constant basis, of Barnwell’sestimated future net cash flows from estimated production of proved oil andnatural gas reserves as determined by independent petroleum consultants, lessestimated future expenditures to be incurred in developing and producing theproved reserves but excluding future cash outflows associated with settlingasset retirement obligations accrued on the balance sheet; plus 2) thecost of major development projects and unproven properties not subject todepletion, if any; plus 3) the lower of cost or estimated fair value ofunproven properties included in costs subject to depletion; less 4) relatedincome tax effects.  If net capitalizedcosts exceed this limit, the excess is expensed unless subsequent market pricechanges eliminate or reduce the indicated write-down in accordance with U.S.SEC Staff Accounting Bulletin (“SAB”) Topic 12D.  Depletion is computed using theunits-of-production method whereby capitalized costs, net of estimated salvagevalues, plus estimated future costs to develop proved reserves and satisfyasset retirement obligations, are amortized over the total estimated 

 

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provedreserves on a country-by-country basis. Investments in major development projects are not depleted until eitherproved reserves are associated with the projects or impairment has beendetermined.  At September 30, 2009and 2008, Barnwell had no investments in oil and natural gas developmentprojects, proved or unproved, that were not being depleted.  General and administrative costs related tooil and natural gas operations are expensed as incurred.  Proceeds from the disposition of minorproducing oil and natural gas properties are credited to the cost of oil andnatural gas properties.  Gains or lossesare recognized on the disposition of significant oil and natural gasproperties.

 

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

 

Barnwell’s sales reflect its gross working interestshare.  Barnwell’s production isdelivered and sold at the plant gate and Barnwell does not hold anytransportation contracts with pipelines. Additionally, Barnwell does not have contractual obligations related tothe physical amount of natural gas to be delivered nor does Barnwell havenatural gas imbalances related to natural gas-balancing arrangements with itspartners.

 

*Investment inLand Interests*

 

Barnwell accounts for sales of development rightsunder option and the Increment I and Increment II leasehold landinterest sales under the full accrual method. Gains from such sales are recognized when the buyer’s investments areadequate to demonstrate a commitment to pay for the property, risks and rewardsof ownership have been transferred to the buyer, and Barnwell does not have asubstantial continuing involvement with the property sold.  With regard to the sales of Increment Iand Increment II leasehold land interests, the percentage of salespayments are contingent future profits which will be recognized when they arerealized, and all costs of the sales were recognized at the time of sale andnone were deferred to future periods when any contingent profits will berecognized.  Costs incurred for theacquisition and improvement of leasehold land interests and lot acquisitionrights not yet sold are included in the Consolidated Balance Sheets under the caption“Investment in Land Interests.”

 

Investment in land interests is reported at thelower of the asset carrying value or fair value and is evaluated for impairmentwhenever events or changes in circumstances indicate that the recordedinvestment balance may not be fully recoverable.  This evaluation requires management to makeassumptions and apply considerable judgments to, among others, estimates of thetiming and amount of future cash flows, expected useful lives of the assets,uncertainty about future events, including changes in economic conditions,changes in operating performance, changes in the use of the assets, and ongoingcost of maintenance and improvements of the assets.  Changes in these and other assumptions mayrequire valuation adjustments that may materially impact the Company’sfinancial condition or its future operating results.  If economic conditions worsen in the futureor if difficult market conditions extend beyond the Company’s expectationsresulting in a decrease in the fair value of the aforementioned assets below carryingvalue, the Company will be required to record an impairment loss.

 

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*Real EstateHeld for Sale, Residential Lots Under Development, Investment in ResidentialParcels, and Deposits on Residential Parcels*

 

The costs of acquiring land, development andconstruction costs, interest, property taxes and general and administrativeexpenses related to the development of land and home construction arecapitalized.  Costs that relate to aspecific lot or home are assigned to that lot or home while common costsrelated to multiple lots or homes will be allocated to each in proportion totheir anticipated sales value.

 

Barnwell capitalizes interest costs duringdevelopment and construction and includes these costs in cost of sales whenhomes are sold.

 

Barnwell classifies its residential real estate inone of the following categories:

 

·                Real estate held for sale, which includescompleted assets or land for sale in its present condition;

 

·                Residential lots under development (current),which includes real estate that we are in the process of developing that isexpected to be completed and disposed of within one year of the balance sheetdate;

 

·                Residential lots under development(non-current), which includes real estate that we are in the process ofdeveloping that is expected to be completed and disposed of more than one yearfrom the balance sheet date; or

 

·                Investment in residential parcels(non-current), which consists of land held for speculative purposes and onwhich development activities have not commenced, and which is not expected tobe disposed of within one year of the balance sheet date.

 

Real estate held for sale, residential lots underdevelopment, investment in residential parcels, and deposits on residentialparcels are reported at the lower of the asset carrying value or fairvalue.  The recorded balances areevaluated for impairment whenever events or changes in circumstances indicatethat the balance may not be fully recoverable. This evaluation requires management to make assumptions and applyconsiderable judgments to, among others, estimates of the timing and amount offuture cash flows, expected useful lives of the assets, uncertainty aboutfuture events, including changes in economic conditions, changes in operatingperformance, changes in the use of the assets, and ongoing cost of maintenanceand improvements of the assets.  Changesin these and other assumptions may require impairment charges that maymaterially impact the Company’s financial condition or its future operatingresults.  If economic conditions worsenin the future or if difficult market conditions extend beyond the Company’sexpectations resulting in a decrease in the fair value of the aforementionedassets below carrying value, the Company will be required to record animpairment loss.

 

*Investment inJoint Ventures*

 

Barnwell accounts for its investment in jointventures under the cost method when Barnwell’s ownership interest is no morethan 20% and Barnwell does not exercise significant influence or control overthe investee.  Factors that areconsidered in determining whether or not Barnwell exercises control includerights of partners regarding significant strategic and operational decisions.

 

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Joint venture investments are reviewed for impairmentwhenever factors indicate a decrease in value of the investment has occurredthat is other-than-temporary.  Inevaluating whether an impairment is other-than-temporary, the Company considersall available information, including the length of time and extent of theimpairment, the financial condition and near-term prospects of the affiliate,the Company’s ability and intent to hold the investment for a period of timesufficient to allow for any anticipated recovery in market value, and projectedindustry and economic trends, among others. In determining the fair value of an investment and assessing whether anyidentified impairment is other-than-temporary, significant estimates andconsiderable judgment are involved. These estimates and judgments are based in part on the Company’s currentand future evaluation of economic conditions in general, as well as a jointventure’s current and future plans. These impairment calculations contain additional uncertainties becausethey also require management to make assumptions and apply judgments to, amongothers, estimates of future cash flows, probabilities related to various cashflow scenarios, and appropriate discount rates. Changes in these and other assumptions could affect the projectedoperational results of the unconsolidated affiliates and, accordingly, mayrequire valuation adjustments to the Company’s investments that may materiallyimpact the Company’s financial condition or its future operating results.  If economic conditions worsen in the futureor if difficult market conditions extend beyond the Company’s expectations,resulting in declines in the fair value of the aforementioned assets belowcarrying value that are other-than-temporary, the Company will be required torecord an impairment loss.

 

*ContractDrilling*

 

Revenues, costs and profits applicable to contractdrilling contracts are included in the Consolidated Statements of Operationsusing the percentage of completion method, principally measured by thepercentage of labor dollars incurred to date for each contract to totalestimated labor dollars for each contract. Contract losses are recognized in full in the period the losses areidentified.  The performance of drillingcontracts may extend over more than one year and, in the interim periods,estimates of total contract costs and profits are used to determine revenuesand profits earned for reporting the results of contract drillingoperations.  Revisions in the estimatesrequired by subsequent performance and final contract settlements are includedas adjustments to the results of operations in the period such revisions andsettlements occur.  Contracts arenormally less than one year in duration.

 

*Income Taxes*

 

Income taxes are determined using the asset andliability method.  Deferred tax assetsand liabilities are recognized for the estimated future tax impacts ofdifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax ratesin effect for the year in which those temporary differences are expected to berecovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  A valuation allowance is provided when it ismore likely than not that some portion or all of the deferred tax asset willnot be realized.

 

Management evaluates its potential exposures fromtax positions taken that have or could be challenged by taxing authorities inthe evaluation.  These potentialexposures result because taxing authorities may take positions that differ fromthose taken by management in the interpretation and application of statutes,regulations and rules.  Management considersthe possibility of alternative outcomes based upon past experience, previousactions by taxing authorities (e.g., actions taken in other jurisdictions) andadvice from tax experts.  Recognized taxpositions are initially and 

 

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subsequentlymeasured as the largest amount of tax benefit that is more likely than not ofbeing realized upon ultimate settlement with a taxing authority on ajurisdiction-by-jurisdiction basis. Liabilities for unrecognized tax benefits related to such tax positionsare included in long-term liabilities unless the tax position is expected to besettled within the upcoming year, in which case the liabilities are included incurrent liabilities.  Interest andpenalties related to unrecognized tax benefits are included in income taxexpense.  Assets for any offsettingforeign tax credit benefits in the U.S. related to liabilities for foreignunrecognized tax benefits are included in current or long-term receivablesdepending upon the estimated timing of settlement.

 

*RetirementPlans*

 

Barnwell sponsors a noncontributory defined benefitpension plan covering substantially all of its U.S. employees, with benefitsbased on years of service and the employee’s highest consecutive five-yearaverage earnings.  Additionally, Barnwellsponsors a Supplemental Employee Retirement Plan (“SERP”), a noncontributorysupplemental retirement benefit plan which covers certain current and formeremployees of Barnwell for amounts exceeding the limits allowed under thepension plan.  In December 2006,Barnwell adopted a postretirement medical insurance benefits plan coveringcertain U.S. employees.

 

Barnwell accounts for its defined benefit pensionplan, SERP, and postretirement medical insurance benefits plan by recognizingthe over-funded or under-funded status of defined benefit pension and otherpostretirement plans (other than a multiemployer plan) as an asset or liabilityin its Consolidated Balance Sheet and recognizes changes in that funded statusin the year in which the changes occur through comprehensive income.  Barnwell measures retirement plan assets andobligations as of the date of the employer’s fiscal year-end ConsolidatedBalance Sheet.  See further discussion atNote 12 below.

 

The estimation of Barnwell’s retirement planobligations, costs and liabilities requires management to estimate the amountand timing of cash outflows for projected future payments and cash inflows formaturities and expected returns on plan assets. These assumptions may have an effect on the amount and timing of futurecontributions.

 

At the end of each year, Barnwell determines thediscount rate to be used to calculate the present value of plan liabilities andthe net periodic benefit cost.  Thediscount rate is an estimate of the current interest rate at which theretirement plan liabilities could be effectively settled at the end of theyear.  In estimating this rate, Barnwelllooks to rates of return on high-quality, fixed-income investments.  The discount rate used to value the futurebenefit obligation as of each year-end is the rate used to determine theperiodic benefit cost in the following year. The estimated rate of return on plan assets is based on historicaltrends combined with long-term expectations, the mix of plan assets andlong-term inflation assumptions.  Forboth the discount rate and the plan asset return rate, a range of estimatescould reasonably have been used which would affect the amount of retirementplan expense and retirement plan liability recorded.

 

The effects of actual results differing from theabove assumptions or revisions to actuarial assumptions could materially affectBarnwell’s financial condition and/or results of operations.  The effects of changing assumptions areincluded in unamortized net gains and losses, which directly affect accumulatedother comprehensive income (loss). These unamortized gains and losses areamortized and reclassified to income (loss) over future periods.

 

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*Long-livedAssets*

 

Long-lived assets to be held and used, other thanoil and natural gas properties, are evaluated for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe fully recoverable.  If the future cashflows expected to result from use of the asset (undiscounted and withoutinterest charges) are less than the carrying amount of the asset, an impairmentloss is recognized.  Such impairment lossis measured as the amount by which the carrying amount of the asset exceeds thefair value of the asset.  Long-livedassets to be disposed of are reported at the lower of the asset carrying valueor fair value, less cost to sell.

 

Drilling rigs, office and other property andequipment are depreciated using the straight-line method based on estimateduseful lives.

 

*Environmental*

 

Barnwell is subject to extensive environmental lawsand regulations.  These laws, which areconstantly changing, regulate the discharge of materials into the environmentand maintenance of surface conditions and may require Barnwell to remove ormitigate the environmental effects of the disposal or release of petroleum orchemical substances at various sites. Environmental expenditures are expensed or capitalized depending ontheir future economic benefit. Expenditures that relate to an existing condition caused by pastoperations and that have no future economic benefits are expensed.  Liabilities for expenditures of a noncapitalnature are recorded when environmental assessment and/or remediation isprobable, and the costs can be reasonably estimated.

 

*AssetRetirement Obligation*

 

Barnwell accounts for asset retirement obligationsby recognizing the fair value of a liability for an asset retirement obligationin the period in which it is incurred if a reasonable estimate of fair value canbe made.  Barnwell’s estimated siterestoration and abandonment costs of its oil and natural gas properties arecapitalized as part of the carrying amount of oil and natural gas propertiesand depleted over the life of the related reserves.  The liability is accreted at the end of eachperiod through charges to oil and natural gas operating expense.

 

*(Loss) EarningsPer Common Share*

 

Basic earnings per share excludes dilution andis computed by dividing net earnings by the weighted-average number of commonshares outstanding for the period. Diluted earnings per share includes the potentially dilutive effect ofoutstanding common stock options.

 

Reconciliations between net (loss) earnings andcommon shares outstanding of the basic and diluted net (loss) earnings pershare computations for the years ended September 30, 2009, 2008 and 2007are as follows:

 
|                                                  |       | September 30, 2009 |
|-------------------------------------------------------|------------|-------------------------|
|                                                  |       | Net Loss                |   | Shares |   | Per-Share |
|                                                  |       | (Numerator)             |   | (Denominator) |   | Amount |
| Basic  loss per share                                 | ** ** | ** **              | ** ** | **$(24,362,000** | **)** | ** ** | ** ** | **8,240,444** | ** ** | ** ** | ** ** | ** ** | **$(2.96** | **)** |
| Effect of dilutive securities - common stock  options | ** ** | ** **              | ** ** | **-** | ** ** | ** ** | ** ** | **-** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted  loss per share                               | ** ** | ** **              | ** ** | **$(24,362,000** | **)** | ** ** | ** ** | **8,240,444** | ** ** | ** ** | ** ** | ** ** | **$(2.96** | **)** |

 

 

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|                                                 |   | September 30, 2008 |
|------------------------------------------------------|--------|-------------------------|
|                                                 |   | Net Earnings            |   | Shares |   | Per-Share |
|                                                 |   | (Numerator)             |   | (Denominator) |   | Amount |
| Basic earnings per share                             |   |                    | $ 11,732,000 |   |   |   | 8,248,581 |   |   |   | $ 1.42 |   |
| Effect of dilutive securities - common stock options |   |                    | - |   |   |   | 190,333 |   |   |   |   |   |
| Diluted earnings per share                           |   |                    | $ 11,732,000 |   |   |   | 8,438,914 |   |   |   | $ 1.39 |   |

 
|                                                 |   | September 30, 2007 |
|------------------------------------------------------|--------|-------------------------|
|                                                 |   | Net Earnings            |   | Shares |   | Per-Share |
|                                                 |   | (Numerator)             |   | (Denominator) |   | Amount |
| Basic earnings per share                             |   |                    | $  3,516,000 |   |   |   | 8,208,189 |   |   |   | $ 0.43 |   |
| Effect of dilutive securities - common stock options |   |                    | - |   |   |   | 400,570 |   |   |   |   |   |
| Diluted earnings per share                           |   |                    | $  3,516,000 |   |   |   | 8,608,759 |   |   |   | $ 0.41 |   |

 

Potential dilutive shares consist of the commonshares issuable upon the exercise of outstanding stock options (both vested andnon-vested) using the treasury stock method. Potential dilutive shares are excluded from the computation of (loss)earnings per share if their effect is antidilutive.  Options to purchase 718,000 shares of commonstock were excluded from the computation of diluted shares for fiscal 2009 astheir inclusion would have been antidilutive given the net loss generatedduring the period.  There were noantidilutive shares for fiscal years 2008 and 2007.

 

*Share-BasedCompensation*

 

Barnwell accounts for its share-based compensationplans in accordance with the modified prospective method.  Share-based compensation cost is measured atfair value.  Under the modifiedprospective transition method, compensation cost recognized in the years ended September 30,2009, 2008 and 2007 include the cost for equity-classified share options vestedduring the period and all vested liability-classified share-based awardsgranted prior to October 1, 2005.

 

Share-based compensation cost is measured at fairvalue.  Barnwell utilizes a closed-formvaluation model to determine the fair value of each option award.  Expected volatilities are based on thehistorical volatility of Barnwell’s stock over a period consistent with that ofthe expected terms of the options.  Theexpected terms of the options represent expectations of future employeeexercise and are estimated based on factors such as vesting periods,contractual expiration dates, historical trends in Barnwell’s stock price, andhistorical exercise behavior.  The risk-freerates for periods within the contractual life of the options are based on theyields of U.S. Treasury instruments with terms comparable to the estimatedoption terms.  Expected dividends arebased on current and historical dividend payments.  Share-based compensation expense recognizedin earnings for the years ended September 30, 2009, 2008 and 2007 arereflected in “General and administrative” expenses in the ConsolidatedStatements of Operations.

 

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*ForeignCurrency Translation*

 

Assets and liabilities of foreign subsidiaries aretranslated at the year-end exchange rate and resulting translation gains orlosses are accounted for in a stockholders’ equity account entitled “Accumulatedother comprehensive (loss) income, net.” Operating results of foreign subsidiaries are translated at averageexchange rates during the period. Realized foreign currency transaction gains or losses were not materialin fiscal years 2009, 2008, and 2007.

 

*Fair ValueMeasurements*

 

Effective October 1, 2008, Barnwell adopted theprovisions of FASB ASC Topic 820, *Fair Value Measurementsand Disclosures*, (formerly SFAS No. 157), for financial assetsand liabilities and nonfinancial assets and liabilities that are required to beremeasured on a recurring basis.  Theadoption did not have an impact on Barnwell’s financial statements.

 

The effective date of ASC Topic 820 for nonfinancialassets and liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis, was deferred tofiscal years beginning after November 15, 2008 and interim periods withinthose fiscal years.  Accordingly, we willbegin application of FASB ASC Topic 820 to our nonfinancial assets andliabilities that are measured at fair value on a nonrecurring basis in thequarter ending December 31, 2009.

 

*SubsequentEvents*

 

FASB ASC Topic 855, *SubsequentEvents*, establishes general standards of accounting for anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued.  In particular, FASB ASC Topic 855 sets forth (1) theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements; (2) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements; and (3) thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date.

 

*RecentAccounting Pronouncements*

 

In February 2008, the FASB updated FASB ASCTopic 820, *Fair Value Measurements and Disclosures*,(formerly FSP FAS 157-2).  FASB ASC Section 820-10-50defers the effective date of FASB ASC Topic 820 to fiscal years beginning afterNovember 15, 2008 and interim periods within those fiscal years fornonfinancial assets and liabilities, except for items that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  We have elected toutilize this deferral and accordingly, we will apply FASB ASC Topic 820 to ournonfinancial assets and liabilities that are measured at fair value on anonrecurring basis in the quarter ending December 31, 2009.  Barnwell is currently evaluating the impactthat the application of FASB ASC Topic 820 to nonfinancial assets andliabilities that are measured at fair value on a nonrecurring basis will haveon its consolidated financial position, results of operations and cash flows.

 

In December 2007, the FASB updated FASB ASCSubtopic 810-10, *Consolidation*, (formerly SFAS No. 160).  FASB ASC Subtopic 810-10 establishesaccounting and reporting standards that require the ownership interest insubsidiaries held by parties other than the parent be clearly identified andpresented in the Consolidated Balance Sheets within equity, but separate fromthe parent’s equity; 

 

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theamount of consolidated net income attributable to the parent and thenoncontrolling interest be clearly identified and presented on the face of theConsolidated Statements of Operations; and changes in a parent’s ownershipinterest while the parent retains its controlling financial interest in itssubsidiary be accounted for consistently. This statement is effective for fiscal years, and interim periods withinthose fiscal years, beginning on or after December 15, 2008.  Upon adoption, there will be no materialimpact on Barnwell’s consolidated financial statements.

 

In December 2008, the FASB updated FASB ASCTopic 715, *Compensation - Retirement Benefits*,(formerly FSP FAS 132(R)-1).  FASB ASCTopic 715 provides additional guidance on an employer’s disclosures about planassets of a defined benefit pension or other postretirement plan.  FASB ASC Topic 715 is effective for financialstatements issued for fiscal years ending after December 15, 2009.  Barnwell’s management is currently evaluatingthe impact of adopting these provisions on the consolidated financialstatements.

 

In December 2008, the SEC adopted revisions toits required oil and natural gas reporting disclosures.  Additionally, in October 2009, the SECissued SAB No. 113, which revises or rescinds portions of the interpretiveguidance of its oil and natural gas rules. The revisions are intended to provide investors with a more meaningfuland comprehensive understanding of oil and natural gas reserves.  In the three decades that have passed sinceadoption of the original disclosure requirements, there have been significantchanges in the oil and natural gas industry. The amendments are designed to modernize and update the oil and naturalgas disclosure requirements to align them with current practices and changes intechnology.  In addition, the amendmentsconcurrently align the SEC’s full cost accounting rules with the reviseddisclosures.  The revised disclosurerequirements must be incorporated in annual reports on Form 10-K forfiscal years ending on or after December 31, 2009.  A company may not apply the new rules todisclosures in quarterly reports prior to the first annual report in which therevised disclosures are required. Barnwell’s management is currently evaluating the impact of adoptingthese provisions on the consolidated financial statements.

 

 

**3.         ACCOUNTSRECEIVABLE AND CONTRACT COSTS**

 

Accounts receivable are net of allowances fordoubtful accounts of $47,000 and $1,078,000 as of September 30, 2009 and2008, respectively.  Included in accountsreceivable are contract retainage balances of $403,000 and $532,000 as of September 30,2009 and 2008, respectively.  Theretainage balance as of September 30, 2009 is expected to be collectedwithin one year, generally within 45 days after the related contracts havereceived final acceptance and approval.

 

The decrease in the allowance for doubtful accountsat September 30, 2009 as compared to September 30, 2008 isprincipally due to the write-off of the allowance established in fiscal 2008related to the bankruptcy of SemGroup, L.P. and the recovery of otherpreviously reserved receivables.

 

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Costsand estimated earnings on uncompleted contracts are as follows:

 
|                                     |       | September 30, |
|------------------------------------------|------------|--------------------|
|                                     | ** ** |               | **2009** |   |   |   | 2008 |   |
| Costs incurred on  uncompleted contracts | ** ** |               | **$** | **5,742,000** |   |   |   | $ | 7,629,000 |   |
| Estimated earnings                       | ** ** |               | **1,664,000** |   |   |   | 1,271,000 |   |
|                                     | ** ** |               | **7,406,000** |   |   |   | 8,900,000 |   |
| Less billings to date                    | ** ** |               | **7,412,000** |   |   |   | 8,252,000 |   |
|                                     | ** ** |               | **$** | **(6,000** | **)** |   |   | $ | 648,000 |   |

 

Costs and estimated earningson uncompleted contracts are included in the Consolidated Balance Sheets asfollows:

 
|                                                                                                                  |       | September 30, |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------|
|                                                                                                                  | ** ** | ** **         | **2009** |   |   |   | 2008 |   |
| Costs and estimated  earnings in excess of billings on uncompleted contracts (included in other  current assets)      | ** ** | ** **         | **$** | **276,000** |   |   |   | $ | 884,000 |   |
| Billings in excess of  costs and estimated earnings on uncompleted contracts (included in other  current liabilities) | ** ** | ** **         | **(282,000** | **)** |   |   | (236,000 | ) |
|                                                                                                                  | ** ** | ** **         | **$** | **(6,000** | **)** |   |   | $ | 648,000 |   |

 

 

**4.         SHARE-BASEDPAYMENTS**

 

Barnwell has stockholder-approved qualified optionswhich were granted in accordance with the 1998 Stock Option Plan with anexercise price equal to the closing market price of Barnwell’s stock on thedate preceding the date of grant (110% of the closing market price on the datepreceding the date of grant for options granted to affiliates), vest annuallyover four years of continuous service, and expire ten years from the date ofgrant (five years from date of grant for options granted to affiliates).  The qualified plan permits the grant of shareoptions to employees for up to 780,000 shares of common stock.  A total of 774,000 share options have beengranted under this plan.  No optionshares were available for grant under the qualified plan as of the date of thisfiling.

 

Barnwell also has non-qualified options which weregranted with an exercise price equal to the closing market price of Barnwell’sstock on the date of grant, vest annually over five years of continuousservice, and expire ten years from the date of grant.  The non-qualified options have stockappreciation rights features that permit the holder to receive stock, cash or acombination thereof equal to the amount by which the fair market value, at thetime of exercise of the option, exceeds the option price.

 

On March 3, 2008, the stockholders of Barnwellapproved the 2008 Equity Incentive Plan (the “2008 Plan”).  Under the 2008 Plan, the CompensationCommittee, which consists of independent members of Barnwell’s Board ofDirectors, is authorized to grant incentive stock options, nonstatutory stockoptions, stock options with stock appreciation rights, restricted stock,restricted stock units and performance units, qualified performance-basedawards, and stock grants to employees, consultants and non-employee members ofthe Board of Directors.  800,000 sharesof Barnwell common stock have been reserved for issuance pursuant to the 2008Plan.  A total of 340,000 share optionshave been granted under this plan, leaving 460,000 option shares available forgrant under the 2008 Plan at September 30, 2009.

 

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Barnwell currently has a policy of issuing newshares to satisfy share option exercises under both the qualified plans andnon-qualified plans when the optionee requests shares.

 

The Company’s share-basedcompensation (benefit) expense and related income tax effects are as follows:

 
|                                        | ** ** | Year ended September 30, |
|---------------------------------------------|------------|-------------------------------|
|                                        | ** ** | ** **                    | **2009** |   |   |   | 2008 |   |   |   | 2007 |   |
| Share-based compensation (benefit)  expense | ** ** | ** **                    | **$** | **(259,000** | **)** |   |   | $ | (402,000 | ) |   |   | $ | 462,000 |   |
| Income tax effect -  provision (benefit)    | ** ** | ** **                    | **$** | **90,000** |   |   |   | $ | 149,000 |   |   |   | $ | (133,000 | ) |

 

As of September 30, 2009, there was $158,000 oftotal unrecognized compensation cost related to nonvested equity-classified andliability-classified share options.  Thatcost is expected to be recognized over 2.5 years.  Total share-based compensation expenserelated to the vesting of awards in the years ended September 30, 2009,2008 and 2007 was $202,000, $374,000 and $408,000, respectively.  Share-based compensation (benefit) expenserecognized in (loss) earnings for the years ended September 30, 2009, 2008and 2007 are reflected in “General and administrative” expenses in theConsolidated Statements of Operations.

* *

*Equity-classified Awards*

 

Compensation cost for equity-classified awards, suchas Barnwell’s stock options issued under the qualified plan, is measured at thegrant date based on the fair value of the award and is recognized as an expensein earnings over the requisite service period using a graded vesting method.

 

A summary of the activity inBarnwell’s equity-classified share options as of the beginning and end of theyear ended September 30, 2009 is presented below:

 
|                                    |   |   |    |   |   |      |   |        |   | Weighted- |   |   |   |   |
|-----------------------------------------|--------|--------|---------|--------|--------|-----------|--------|-------------|--------|-----------|--------|--------|--------|--------|
|                                    |   |   |    |   |   | Weighted- |   | Average     |   |      |   |   |
|                                    |   |   |    |   |   | Average   |   | Remaining   |   | Aggregate |
|                                    |   |   |    |   |   | Exercise  |   | Contractual |   | Intrinsic |
| Options                                 |   | Shares |    | Price  |   | Term      |   | Value       |
| Outstanding  at October 1, 2008    |   |   | 222,000 |   |   |      | $      | 7.83        |   |      |   |   |   |   |   |   |   |
| Granted                                 |   |   | -       |   |   |      |   |        |   |      |   |   |   |   |   |   |
| Exercised                               |   |   | -       |   |   |      |   |        |   |      |   |   |   |   |   |   |
| Forfeited/Expired                       |   |   | -       |   |   |      |   |        |   |      |   |   |   |   |   |   |
| Outstanding  at September 30, 2009 |   |   | 222,000 |   |   |      | $      | 7.83        |   |      |   | 1.5    |   |   |   | $ | 100,000 |   |
|                                    |   |   |    |   |   |      |   |        |   |      |   |   |   |   |   |   |
| Exercisable at  September 30, 2009 |   |   | 222,000 |   |   |      | $      | 7.83        |   |      |   | 1.5    |   |   |   | $ | 100,000 |   |

 

Total share-based compensation expense forequity-classified awards vested in the years ended September 30, 2009,2008 and 2007 was $5,000, $35,000 and $77,000, respectively.  There was no impact on income taxes as theexpense relates to qualified options.

 

No equity options were exercised during the yearended September 30, 2009.  The totalintrinsic value of equity options exercised during the years ended September 30,2008 and 2007 was $1,077,000 and $1,733,000, respectively.

 

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There was no disqualification of stock optionsduring the year ended September 30, 2009. Barnwell recorded tax benefits related to employees’ disqualification ofqualified stock options of $192,000 and $203,000 during the years ended September 30,2008 and 2007, respectively.  The taxbenefits were reflected as increases in additional paid-in capital in fiscal2008 and 2007.

 

*Liability-classified Awards*

 

Compensation cost for liability-classified awards,such as Barnwell’s non-qualified stock options with stock appreciation rightsfeatures, is remeasured at each period-end using a closed-form valuation modelbased on current values and is recognized as an expense over the requisiteservice period.

 

Barnwell granted stock options to acquire a total of340,000 shares of Barnwell’s common stock under non-qualified plans duringfiscal 2008.  No stock options weregranted during fiscal 2009 or 2007.

 

The following assumptionswere used in estimating fair value for all liability-classified share optionsoutstanding during the years ended September 30, 2009, 2008 and 2007:

 
|                         |   | Year ended  September 30, |
|------------------------------|--------|--------------------------------|
|                         |   | 2009                           |   | 2008 |   | 2007 |
| Expected volatility range    |   | 47.1% to 58.9%                 |   | 37.4% to 43.4% |   | 35.0% to 35.2% |
| Weighted-average  volatility |   | 51.0%                          |   | 39.4% |   | 35.2% |
| Expected dividends           |   | 0.4% to 0.6%                   |   | 2.4% |   | 1.2% to 1.3% |
| Expected term (in years)     |   | 5.2 to 8.6                     |   | 6.2 to 9.6 |   | 0.7 to 4.8 |
| Risk-free interest rate      |   | 2.3% to 3.1%                   |   | 3.2% to 3.9% |   | 4.1% to 4.2% |
| Expected forfeitures         |   | None                           |   | None |   | None |

 

The application of alternative assumptions couldproduce significantly different estimates of the fair value of stock-basedcompensation, and consequently, the related costs reported in the ConsolidatedStatements of Operations.

 

A summary of the activity inBarnwell’s liability-classified share options as of the beginning and end ofthe year ended September 30, 2009 is presented below:

 
|                                    |   |   |    |   |   |      |   | Weighted-   |   |      |   |   |
|-----------------------------------------|--------|--------|---------|--------|--------|-----------|--------|-------------|--------|-----------|--------|--------|
|                                    |   |   |    |   |   | Weighted- |   | Average     |   |      |   |   |
|                                    |   |   |    |   |   | Average   |   | Remaining   |   | Aggregate |
|                                    |   |   |    |   |   | Exercise  |   | Contractual |   | Intrinsic |
| Options                                 |   | Shares |    | Price  |   | Term      |   | Value       |
| Outstanding  at October 1, 2008    |   |   | 496,000 |   |   |      | $      | 10.89       |   |      |   |   |   |   |   |   |   |
| Granted                                 |   |   | -       |   |   |      |   |        |   |      |   |   |   |   |   |   |
| Exercised                               |   |   | -       |   |   |      |   |        |   |      |   |   |   |   |   |   |
| Forfeited/Expired                       |   |   | -       |   |   |      |   |        |   |      |   |   |   |   |   |   |
| Outstanding  at September 30, 2009 |   |   | 496,000 |   |   |      | $      | 10.89       |   |      |   | 7.4    |   |   |   | $ | - |   |
|                                    |   |   |    |   |   |      |   |        |   |      |   |   |   |   |   |   |
| Exercisable  at September 30, 2009 |   |   | 199,000 |   |   |      | $      | 10.10       |   |      |   | 6.6    |   |   |   | $ | - |   |

 

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Total share-basedcompensation (benefit) expense for liability-classified awards and the relatedincome tax effects for the years ended September 30, 2009, 2008 and 2007are as follows:

 
|                                        | ** ** | Year ended September 30, |
|---------------------------------------------|------------|-------------------------------|
|                                        | ** ** | ** **                    | **2009** |   |   |   | 2008 |   |   |   | 2007 |   |
| Share-based compensation  (benefit) expense | ** ** | ** **                    | **$** | **(264,000** | **)** |   |   | $ | (437,000 | ) |   |   | $ | 385,000 |   |
| Income tax effect -  provision (benefit)    | ** ** | ** **                    | **$** | **90,000** |   |   |   | $ | 149,000 |   |   |   | $ | (133,000 | ) |

 

Included in share-based compensation forliability-classified awards for fiscal 2009, 2008 and 2007 was $197,000,$339,000 and $331,000, respectively, of compensation expense related to sharesthat vested during each respective period and benefits of $461,000 and $776,000and an expense of $54,000, respectively, due to remeasurement at September 30,2009, 2008 and 2007 of the fair value of previously vested shares.

 

There were no liability-classified share optionexercises, expirations, or forfeitures in the year ended September 30,2009.

 

In fiscal 2008, the stock appreciation rightsfeature of 40,000 shares of non-qualified options was exercised and $458,000 waspaid in cash by Barnwell.  The taxbenefit realized for the tax deduction of these exercised options was $156,000for the year ended September 30, 2008. There were no other liability-classified share option exercises,expirations, or forfeitures in the year ended September 30, 2008.

 

During fiscal 2007, the stock appreciation rightsfeature of 104,000 shares of non-qualified options was exercised and $2,024,000was paid in cash by Barnwell.  The taxbenefit realized for the tax deduction of the exercised options was $705,000for the year ended September 30, 2007. There were no other liability-classified share option grants, exercises,expirations, or forfeitures in the year ended September 30, 2007.

 

*Summary of Stock Awards*

 

In June 1998, Barnwell granted 180,000 stockoptions under a non-qualified plan at a purchase price of $2.60 per share(market price on date of grant). Barnwell did not recognize any compensation expense or benefit relatingto this award in fiscal 2009.  Barnwellrecognized a compensation benefit of $108,000 and a compensation expense of$229,000 relating to these options in fiscal years 2008 and 2007, respectively.

 

In December 1999, Barnwell granted qualifiedstock options to acquire 582,000 shares of Barnwell’s common stock at a weighted-averageexercise price per share of $2.04 (based on grants at market price and 110% ofmarket price at date of grant).  Theremaining 42,000 shares of unexercised options outstanding as of September 30,2009 expire in December 2009. During the years ended September 30, 2008 and 2007, Barnwell issued113,000 shares and 91,000 shares, respectively, of its common stock resultingfrom exercises of these qualified stock options; no shares were issued duringthe year ended September 30, 2009. No compensation cost was recognized for these options for the yearsended September 30, 2009, 2008 and 2007 as these options were fully vestedprior to 2005.

 

In December 2004, Barnwell granted qualifiedstock options to acquire 210,000 shares of Barnwell’s common stock at aweighted-average exercise price per share of $9.23 (based on grants at marketprice and 110% of market price at the date of grant).  These options vest annually over four yearscommencing one year from the date of grant and expire in December 2014 andDecember 2009 

 

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(foroptions granted to affiliates).  Duringthe years ended September 30, 2008 and 2007, Barnwell issued 10,000 and20,000 shares of its common stock, respectively, resulting from exercises ofthese stock options.  No shares wereissued during the year ended September 30, 2009.  Barnwell recognized compensation expense of$5,000, $35,000 and $77,000 relating to these options in fiscal years 2009,2008 and 2007, respectively.

 

In December 2004, Barnwell granted stockoptions to acquire 210,000 shares of Barnwell’s common stock under anon-qualified plan at a purchase price of $8.80 per share (market price on dateof grant).  These options vest annuallyover five years commencing one year from the date of grant and expire in December 2014.  These options have stock appreciation rightsthat permit the holder to receive stock, cash or a combination thereof equal tothe amount by which the fair market value, at the time of exercise of theoption, exceeds the option price.  Duringthe year ended September 30, 2007, the stock appreciation rights featureof 24,000 shares of these options was exercised and the difference between theexercise price and the closing price per share on the day prior to the date ofexercise was paid by Barnwell; no options were exercised during fiscal years2009 or 2008.  Barnwell recognizedcompensation benefits of $296,000 and $590,000 relating to these options infiscal years 2009 and 2008, respectively, and compensation expense of $156,000in fiscal 2007.

 

In December 2007, Barnwell granted stockoptions to acquire 100,000 shares of Barnwell’s common stock under a non-qualifiedplan at a purchase price of $12.92 per share (market price on date ofgrant).  The stock options were issuedunder the 2008 Plan.  These options vestannually over four years commencing one year from the date of grant and expirein December 2017.  These optionshave stock appreciation rights that permit the holder to receive stock, cash ora combination thereof equal to the amount by which the fair market value, atthe time of exercise of the option, exceeds the option price.  Barnwell recognized a $16,000 compensationbenefit and a $104,000 compensation expense relating to these options in fiscalyears 2009 and 2008, respectively.

 

In May 2008, Barnwell granted stock options toacquire 240,000 shares of Barnwell’s common stock under a non-qualified plan ata purchase price of $11.40 per share (market price on date of grant).  The stock options were issued under the 2008Plan.  These options vest annually overfour years commencing one year from the date of grant and expire in May 2018.  These options have stock appreciation rightsthat permit the holders to receive stock, cash or a combination thereof equalto the amount by which the fair market value, at the time of exercise of theoption, exceeds the option price. Barnwell recognized compensation expense of $48,000 and $157,000relating to these options in fiscal years 2009 and 2008, respectively.

 

 

**5.****                                   ****REAL ESTATE HELD FOR SALE,DEPOSITS ON RESIDENTIAL PARCELS, INVESTMENT IN RESIDENTIAL PARCELS ANDRESIDENTIAL LOTS UNDER DEVELOPMENT**

 

Established in fiscal 2007, Kaupulehu 2007, LLLP (“Kaupulehu2007”) is a Hawaii limited liability limited partnership 80%-owned by Barnwelland 20%-owned by Nearco, Inc. (“Nearco”), a company controlled by a formerdirector of Barnwell and minority interest owner in certain of Barnwell’sbusiness ventures (see further discussion on related party interests at Note 13below).

 

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Kaupulehu 2007 develops luxury residences for saleand invests in residential lots in the Lot 4A Increment I area locatedapproximately six miles north of the Kona International Airport in the NorthKona District of the island of Hawaii, adjacent to Hualalai Resort at HistoricKa’upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean.  Upon establishment, Kaupulehu 2007 madenonrefundable initial deposits of $200,000 each to secure the right to purchaseseven parcels at a purchase price of $2,378,000 each in the Lot 4A Increment Iarea of Kaupulehu, North Kona, Hawaii from WB KD Acquisition, LLC (“WB”), anunaffiliated entity.  WB is affiliatedwith RP-Hualalai Investors, LLC, a managing member of Hualalai Investors,owners and current developers of Hualalai Resort, and Westbrook Partners,developers of Kuki’o located adjacent to Hualalai Resort.

 

In fiscal 2007, Kaupulehu 2007 purchased three ofthe aforementioned parcels and in January 2008, Kaupulehu 2007 acquired afourth parcel.  At September 30, 2009,Kaupulehu 2007 owns four parcels - two completed luxury residences classifiedas “Real Estate Held for Sale” and two parcels held for investment classifiedas “Investment in Residential Parcels.”

 

In fiscal 2008, Kaupulehu 2007 sold its investmentsin two rights to purchase lots in the Lot 4A Increment I area to anunaffiliated party at a price of $221,000 each. The $443,000 gain from the sale of lot purchase rights is reflected in “Gasprocessing and other” on the Consolidated Statement of Operations for the yearended September 30, 2008.  Theunaffiliated party used the lot purchase rights acquired from Kaupulehu 2007 topurchase two parcels in the Lot 4A Increment I area from WB.  In December 2008, Kaupulehu 2007 sold,at a profit, its last remaining right to purchase a lot in the Lot 4A IncrementI area to an unaffiliated party.  AsKaupulehu 2007 no longer had an obligation to purchase the aforementioned threeparcels, Kaupulehu 2007 received refunds in fiscal 2009 and fiscal 2008 of$200,000 and $400,000, respectively, of its original deposits for the threelots at $200,000 per lot.

 

Kaupulehu 2007 capitalizes interest costs duringdevelopment and construction and includes these costs in cost of sales whenhomes are sold.  Interest costscapitalized during the years ended September 30, 2009, 2008 and 2007totaled $253,000, $394,000 and $142,000, respectively.

 

Kaupulehu 2007 has an agreement with the son of aformer director of Barnwell and minority interest owner in certain of Barnwell’sventures (see further discussion on related party interests at Note 13 below),under which he served as Kaupulehu 2007’s project manager.  Kaupulehu 2007 also has an agreement with theindependent building contractor that constructed the two luxury homes forKaupulehu 2007; a significant provision of which is that each will receive 20%of the sales profit upon the sale of each of the two homes constructed byKaupulehu 2007.

 

 

**6.****                                   ****INVESTMENT IN JOINT VENTURES**

 

Kaupulehu Investors, LLC, a limited liabilitycompany 80%-owned by Barnwell and 20%-owned by Nearco, a company controlled bya former director of Barnwell and minority interest owner in certain ofBarnwell’s business ventures (see further discussion on related party interestsat Note 13 below), owns 1.5% passive minority interests in Hualalai InvestorsJV, LLC and Hualalai Investors II, LLC (hereinafter collectively referred to as“Hualalai Investors”), owners of Hualalai Resort, and a 1.5% passive minorityinterest in Kona Village Investors, LLC, owner of Kona Village Resort.

 

Nearco purchased its 20% interest in KaupulehuInvestors, LLC, from Barnwell in fiscal 2007. No gain or loss was recognized by Barnwell on this sale and Barnwell’sinterest in Kaupulehu Investors, LLC was reduced to 80% as a result of this transaction.

 

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As a result of continued impacts of the economicrecession, tightened credit markets and the outlook of a sluggish recovery forthe hotel industry and real estate in the area in which Barnwell’s jointventure investment holds interests, Barnwell recorded a $1,127,000 non-cashreduction in the carrying value of its investment in joint ventures during theyear ended September 30, 2009, due to declines in fair values that aredeemed other-than-temporary.  No suchreduction was recorded during fiscal years 2008 or 2007.  A market value approach was utilized todetermine the other-than-temporary fair value of Barnwell’s investment in jointventures, based on estimates of the aforementioned impacts on the value of theunderlying assets of the joint ventures.

 

 

**7.         INVESTMENTIN LAND INTERESTS**

 

*Background*

 

Barnwell owns a 77.6% controlling interest inKaupulehu Developments, a Hawaii general partnership that owns interests inleasehold land and development rights for property located approximately sixmiles north of the Kona International Airport in the North Kona District of theisland of Hawaii.

 

In the 1980’s, Kaupulehu Developments obtained thestate and county zoning changes necessary to permit development of the FourSeasons Resort Hualalai at Historic Ka’upulehu and Hualalai Golf Club, whichopened in 1996, a second golf course, and single-family and multi-familyresidential units.  These projects weredeveloped on leasehold land acquired from Kaupulehu Developments by KaupulehuMakai Venture, an unaffiliated entity, which was subsequently acquired in June 2006by Hualalai Investors, an unaffiliated entity in which Barnwell acquired a 1.5%passive minority interest in fiscal 2007 (see further discussion in Note 6above).

 

Between 1993 and 2001, Kaupulehu Developmentsobtained the state and county zoning changes necessary to permit development ofsingle-family and multi-family residential units, a golf course and a limitedcommercial area on approximately 870 leasehold acres located adjacent to andnorth of the Four Seasons Resort Hualalai at Historic Ka’upulehu.

 

*Development Rights Under Option*

 

Kaupulehu Developments holds development rights forresidentially-zoned leasehold land within and adjacent to the Hualalai GolfClub.  The development rights are underoption to Hualalai Investors.  Revenues,minority interest in earnings and operating profit related to sales ofdevelopment rights under option for the fiscal years ended September 30,2009, 2008 and 2007 are summarized as follows:

 
|                                               |       | Year  ended September 30, |
|----------------------------------------------------|------------|--------------------------------|
|                                               |       |                           | **2009** |   |   |   | 2008 |   |   |   | 2007 |   |
| Sale of development rights  under option:          |       |                           |   |   |   |   |   |   |   |   |   |   |
| Proceeds                                           | ** ** | ** **                     | **$** | **886,000** |   |   |   | $ | 4,426,000 |   |   |   | $ | 2,438,000 |   |
| Fees                                               | ** ** | ** **                     | **(53,000** | **)** |   |   | (265,000 | ) |   |   | (146,000 | ) |
| Revenues - sale of  development rights, net        | ** ** | ** **                     | **833,000** |   |   |   | 4,161,000 |   |   |   | 2,292,000 |   |
| Minority interest in  earnings                     | ** ** | ** **                     | **(182,000** | **)** |   |   | (910,000 | ) |   |   | (501,000 | ) |
| Operating profit - sale of development rights, net |       |                           | **$** | **651,000** |   |   |   | $ | 3,251,000 |   |   |   | $ | 1,791,000 |   |

 

Fiscal 2008 proceeds from the sale of developmentrights of $4,426,000 include $2,656,000 of proceeds received for thedevelopment rights option that was due on December 31, 2007 as well as 

 

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$1,770,000of proceeds related to the development rights option due on December 31,2008.  The $886,000 balance for thedevelopment rights option due on December 31, 2008 was received duringfiscal 2009.

 

The total amount of remaining future optionreceipts, if all options are fully exercised, is $5,312,000 as of September 30,2009, comprised of two payments of $2,656,000 due on December 31, 2009 andDecember 31, 2010.  If any annualoption payment is not made, the then remaining development right options willexpire.  There is no assurance that anyportion of the remaining options will be exercised.

 

All capitalized costs associated with KaupulehuDevelopments’ development rights were expensed in previous years.  The development rights option revenues, netof related fees, are recorded in the Consolidated Statements of Operations as “Saleof development rights, net.”

 

*Lot 4A Increments I and II*

 

In 2004, Kaupulehu Developments entered into aPurchase and Sale Agreement with WB KD Acquisition, LLC (“WB”) under whichKaupulehu Developments transferred its leasehold interest in approximately 870acres zoned for resort/residential development, in two increments (“Increment I”and “Increment II”), to WB.  There is noaffiliation between Kaupulehu Developments or Barnwell and WB.  WB is affiliated with RP-Hualalai Investors,LLC, a managing member of Hualalai Investors, and Westbrook Partners,developers of Kuki’o located adjacent to Hualalai Resort.  Increment I is an area planned forapproximately 80 single-family lots and a beach club on the portion of theproperty bordering the Pacific Ocean. The purchasers of the 80 single-family lots will have the right to applyfor membership in the Kuki’o Golf and Beach Club, which is located adjacent toand south of the Four Seasons Resort Hualalai at Historic Ka’upulehu.  Increment II is the remaining portion of theapproximately 870-acre property and is zoned for single-family and multi-familyresidential units and a golf course and clubhouse.  The transfer of Increment II to WB wassubject to Kaupulehu Developments and WB’s negotiation of and entry into anIncrement II acquisition agreement by a deadline of three years from the dateof the sale of the first Increment I lot, or WB was obligated to surrender andtransfer Increment II back to Kaupulehu Developments.  WB and Kaupulehu Developments entered into anIncrement II acquisition agreement in fiscal 2006, as discussed below.

 

With respect to Increment I, Kaupulehu Developmentsreceived an $11,550,000 closing payment in fiscal 2004 and is entitled toreceive payments from WB based on the following percentages of the grossreceipts from WB’s sales of single-family residential lots in Increment I: 9%of the gross proceeds from single-family lot sales up to aggregate grossproceeds of $100,000,000; 10% of such aggregate gross proceeds greater than$100,000,000 but less than $300,000,000; and 14% of such aggregate grossproceeds in excess of $300,000,000.

 

In 2006, Kaupulehu Developments entered into anagreement with respect to the acquisition of Kaupulehu Developments’ leaseholdinterest in Increment II with WB and WB KD Acquisition II, LLC (“WBKD”).  There is no affiliation between KaupulehuDevelopments and WBKD.  WB and WBKD areboth affiliates of RP-Hualalai Investors, LLC and Westbrook Partners.  Pursuant to this agreement, KaupulehuDevelopments received a $10,000,000 closing payment and was entitled to receivefuture payments from WBKD based on a percentage of the sales prices of theresidential lots, ranging from 3.25% to 14%, to be determined in the futuredepending upon a number of variables, including whether the lots are sold priorto improvement.

 

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In June 2009, Kaupulehu Developments enteredinto an agreement with WB and WBKD that modified the parties’ 2006 agreementfor the development of the Increment II portion of Lot 4A.  The modified agreement reduces KaupulehuDevelopments’ stated percentages to be received from the sale of residentiallots or units.  Pursuant to the modifiedagreement, Kaupulehu Developments will be entitled to receive future paymentsfrom WBKD based on a percentage of the sales prices of the residential lots orunits, ranging from 8% to 10% of the price of improved or unimproved lots or2.60% to 3.25% of the price of units constructed on a lot, to be determined inthe future depending upon a number of variables, including whether the lots aresold prior to improvement.  The modifiedagreement contains a new provision by which Kaupulehu Developments is entitledto receive up to $8,000,000 in additional payments after the members of WBKDhave received distributions equal to the capital they invested in theproject.  There was no financialstatement impact resulting from the June 2009 modification of the 2006agreement.  Any future payments from WBKDunder this agreement are contingent future profits which will be recognizedwhen they are realized.  Increment II iscurrently planned for approximately 400 residential units.

 

The following table summarizes the revenues receivedfrom WB for the sale of Kaupulehu Developments’ interest in leasehold land,related minority interest in earnings and operating profit for the years ended September 30,2009, 2008 and 2007:

 
|                                                        |       | Year ended September 30, |               |
|-------------------------------------------------------------|------------|-------------------------------|--------------------|
| ** **                                                  |       | **2009**                      |               | 2008 |   | 2007 |   |
| Sale of interest in leasehold land:                         |       |                          |               |   |   |   |   |   |   |
| Revenues from percentage of sales payments                  | ** ** | **$ 214,000**            |               |   | $ 517,000 |   |   | $ 3,585,000 |   |
| Fees                                                        | ** ** | ** **                    | **(13,000**        | **)** |   |   | (71,000 | ) |   |   | (215,000 | ) |
| Revenues - sale of interest in leasehold land, net          | ** ** | **201,000**                   |               |   | 446,000 |   |   | 3,370,000 |   |
| Minority interest in earnings                               | ** ** | ** **                    | **(44,000**        | **)** |   |   | (243,000 | ) |   |   | (737,000 | ) |
| Operating profit - sale of interest in leasehold  land, net | ** ** | ** **                    | **$ 157,000** |   |   |   | $ 203,000 |   |   |   | $ 2,633,000 |   |

 

WB sold one single-family lot in Increment I duringthe year ended September 30, 2009, four single-family lots during the yearended September 30, 2008, and seven single-family lots during the yearended September 30, 2007.  There isno assurance that any future payments will be received.

 

Revenues from percentage of sales payments, net ofrelated costs, are recorded in the Consolidated Statements of Operations forthe years ended September 30, 2009, 2008 and 2007, respectively, as “Saleof interest in leasehold land, net.”

 

*Lot 4C*

 

Lot 4C is an area of approximately 1,000 acres ofvacant leasehold land zoned conservation and is located adjacent to Lot4A.  Under the terms of the 2006agreement between Kaupulehu Developments, WB and WBKD, WBKD had an exclusiveright to negotiate with Kaupulehu Developments with respect to Lot 4C which wasscheduled to expire in June 2009. The June 2009 

 

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modifiedagreement discussed above extends the expiration of WB and/or WBKD’s exclusiveright to negotiate with Kaupulehu Developments with respect to Lot 4C until June 2015.  However, this right to negotiate willterminate in June 2013 if WB and/or WBKD have not completed allenvironmental assessments and surveys reasonably required to support a petitionto the Hawaii State Land Use Commission for reclassification of Lot 4C.

 

*Investment inLot Acquisition Rights*

 

Kaupulehu Mauka Investors, LLC, a limited liabilitycompany wholly-owned by Barnwell, holds 14 lot acquisition rights as to lotswithin approximately 5,000 acres of agricultural-zoned leasehold land in theupland area of Kaupulehu (“Mauka Lands”) situated between the Queen KaahumanuHighway and the Mamalahoa Highway at Kaupulehu, North Kona, island and state ofHawaii.  The 14 lot acquisition rightsgive Barnwell the right to acquire 14 residential lots, each of which iscurrently estimated to be two to five acres in size, which may be developed onthe Mauka Lands.  These lands arecurrently classified as agricultural by the state of Hawaii and, accordingly,the developer of these lands (Hualalai Investors) will need to pursue bothstate and county of Hawaii approvals for reclassification and rezoning topermit a residential subdivision and negotiate development terms.  There is no assurance that the developer ofthe Mauka Lands will obtain the necessary land use reclassification, rezoning,permits, approvals, and development terms and agreements needed to develop theMauka Lands.  If the developer of theMauka Lands is unable to obtain such required land use changes, developmentterms and agreements with respect to the Mauka Lands and Barnwell is thereforeunable to fully recover its investment in the Mauka Lands, we will incur anexpense resulting from a write-off of the lot acquisition rights.

 

As a result of protracted widespread impacts of theeconomic recession and tightened credit markets on the real estate industry,during the year ended September 30, 2009, Barnwell determined that areduction of the carrying value of the Mauka Lands was necessary.  Accordingly, Barnwell reduced the carryingvalue of its investment in lot acquisition rights by $912,000.  No reductions were recorded during fiscalyears 2008 or 2007.

 

*Summary ofInterests*

 

The land interests held by Barnwell at September 30,2009 include:

 
| · | Development rights under option;                                                                                                                                            |   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                        |   |
| · | Rights to receive payments from WB and WBKD resulting from the sale  of lots and/or residential units within approximately 870 acres in the  Kaupulehu area by WB and WBKD; |   |
|   |                                                                                                                                                                        |   |
| · | Approximately 1,000 acres of vacant leasehold land zoned conservation  (“Lot 4C”) which is under a right of negotiation with WB and/or WBKD; and                  |   |
|   |                                                                                                                                                                        |   |
| · | Lot acquisition rights in agricultural-zoned leasehold land in the  upland area of Kaupulehu.                                                                               |   |

 

There is no assurance that any future payments willbe received, nor is there any assurance that WB and/or WBKD will enter into anagreement with Kaupulehu Developments regarding Lot 4C.  Furthermore, there is no assurance that therequired land use reclassification and rezoning from regulatory agencies willbe obtained nor is there any assurance that the necessary development terms 

 

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andagreements will be successfully negotiated for the Mauka Lands.  Barnwell’s cost of land interests at September 30,2009 and 2008 is classified as “Investment in Land Interests” and consists ofthe following amounts:

 
|                                            |       | September 30, |        |
|-------------------------------------------------|------------|--------------------|-------------|
| ** **                                      |       | **2009**           |        | 2008 |   |
| Leasehold land zoned conservation – Lot 4C | ** ** | ** **         | **$**       | **50,000** | ** ** |   |   | $ | 50,000 |   |   |
| Lot acquisition rights – Mauka Lands       | ** ** | ** **         | **488,000** | ** ** |   |   | 1,400,000 |   |   |
| Total investment in land interests              | ** ** | ** **         | **$**       | **538,000** | ** ** |   |   | $ | 1,450,000 |   |   |

 

 

**8.         PROPERTYAND EQUIPMENT AND ASSET RETIREMENT OBLIGATION**

 

Barnwell’s property and equipment is detailed asfollows:

 
|                           |       |              |       |         |        | Accumulated           |       |         |         |
|--------------------------------|------------|-------------------|------------|--------------|-------------|-----------------------|------------|--------------|--------------|
|                           |       | Estimated         |       | Gross        |        | Depreciation,         |       | Net          |
|                           |       | Useful            |       | Property and |        | Depletion and         |       | Property and |
|                           |       | Lives             |       | Equipment    |        | Amortization          |       | Equipment    |
| At September 30, 2009:    |       |              |       |         |        |                  |       |         |         |   |
| Land                           |       |              |       |         | $           | 365,000               |       |         |         | $ | -    |   |   |   | $ | 365,000 |   |
| Oil and natural gas properties |       |              |       |         |        |                  |       |         |         |   |   |   |   |   |
| (full cost accounting)         |       |              |       |         | 201,404,000 |                  |       |         | (153,065,000 | ) |   |   | 48,339,000 |   |
| Drilling rigs and equipment    |       | 3 – 10 years |       |         | 5,846,000   |                  |       |         | (4,044,000   | ) |   |   | 1,802,000 |   |
| Office                         |       | 40 years          |       |         | 857,000     |                  |       |         | (124,000     | ) |   |   | 733,000 |   |
| Other property and equipment   |       | 3 – 17 years |       |         | 3,743,000   |                  |       |         | (3,295,000   | ) |   |   | 448,000 |   |
| Total                          | ** ** | ** **        | ** ** | ** **   | **$**       | ** 212,215,000** | ** ** | ** **   | ** **   | **$** | **(160,528,000** | **)** | ** ** | ** ** | **$** | ** 51,687,000** | ** ** |
|                           |       |              |       |         |        |                  |       |         |         |   |   |   |   |   |
|                           |       |              |       |         |        |                  |       | Accumulated  |         |   |   |   |
|                           |       | Estimated         |       | Gross        |        | Depreciation,         |       | Net          |
|                           |       | Useful            |       | Property and |        | Depletion and         |       | Property and |
|                           |       | Lives             |       | Equipment    |        | Amortization          |       | Equipment    |
| At September 30, 2008:    |       |              |       |         |        |                  |       |         |         |   |   |   |   |   |
| Land                           |       |              |       |         | $           | 365,000               |       |         |         | $ | -    |   |   |   | $ | 365,000 |   |
| Oil and natural gas properties |       |              |       |         |        |                  |       |         |         |   |   |   |   |   |
| (full cost accounting)         |       |              |       |         | 197,135,000 |                  |       |         | (111,895,000 | ) |   |   | 85,240,000 |   |
| Drilling rigs and equipment    |       | 3 – 10 years |       |         | 5,524,000   |                  |       |         | (3,774,000   | ) |   |   | 1,750,000 |   |
| Office                         |       | 40 years          |       |         | 857,000     |                  |       |         | (102,000     | ) |   |   | 755,000 |   |
| Other property and equipment   |       | 3 – 17 years |       |         | 3,791,000   |                  |       |         | (3,211,000   | ) |   |   | 580,000 |   |
| Total                          |       |              |       |         | $           |  207,672,000     |       |         |         | $ | (118,982,000 | ) |   |   | $ |  88,690,000 |   |
|                                |            |                   |            |              |             |                       |            |              |              |  |  |  |  |  |  |  |  |  |  |

 

In October 2004, the Government of Albertaenacted amendments to the Natural Gas Royalty Regulation which provide amechanism to reduce royalties for operators of natural gas wells which havebeen denied the right to produce by the Energy Resources Conservation Board asa result of government bitumen conservation policies.  If production recommences from zonespreviously ordered to be shut-in, Barnwell may pay an incremental royalty tothe Crown on production from the reinstated pools, along with Alberta Gas CrownRoyalties otherwise payable.  Barnwellreceived a total of approximately $179,000, $259,000 and $248,000 for wellsshut-in in the Thornbury area in fiscal years 2009, 2008 and 2007, respectively.  It is Barnwell’s estimation that the subjectThornbury wells will not recommence production and the receipts are paymentsfor deemed production by the Government of Alberta to Barnwell for condemnationof the wells and accordingly, were credited to oil and natural gas propertiesfor book purposes.

 

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Barnwell recognizes the fair value of a liabilityfor an asset retirement obligation in the period in which it is incurred if areasonable estimate of fair value can be made. The following is a reconciliation of the asset retirement obligation forthe years ended September 30, 2009, 2008 and 2007:

 
|                                                 |       | Year  ended September 30, |
|------------------------------------------------------|------------|--------------------------------|
| ** **                                           |       | **2009**                       |   | 2008 |   | 2007 |
| Asset retirement obligation as of beginning of  year | ** ** | ** **                     | **$** | ** 4,565,000** |   |   |   | $ | 4,734,000 |   |   |   | $ | 3,753,000 |   |
| Obligations incurred on new wells drilled            | ** ** | ** **                     | **46,000** |   |   |   | 101,000 |   |   |   | 300,000 |   |
| Revision of estimated obligation                     | ** ** | ** **                     | **(199,000** | **)** |   |   | (232,000 | ) |   |   | (7,000 | ) |
| Accretion expense                                    | ** ** | ** **                     | **270,000** |   |   |   | 314,000 |   |   |   | 232,000 |   |
| Payments                                             | ** ** | ** **                     | **(130,000** | **)** |   |   | (48,000 | ) |   |   | (42,000 | ) |
| Foreign currency translation adjustment              | ** ** | ** **                     | **(44,000** | **)** |   |   | (304,000 | ) |   |   | 498,000 |   |
| Asset retirement obligation as of end of year        | ** ** | ** **                     | **$** | **4,508,000** |   |   |   | $ | 4,565,000 |   |   |   | $ | 4,734,000 |   |

 

**9.         LONG-TERMDEBT**

 

A summary of Barnwell’s long-term debt as of September 30,2009 and 2008 is as follows:

 
|                                  |       | September 30, |
|---------------------------------------|------------|--------------------|
| ** **                            |       | **2009**           |   | 2008 |
| Canadian revolving credit facility    | ** ** | ** **         | **$** | **15,000,000** |   |   |   | $ | 15,000,000 |   |
| Real estate revolving credit facility | ** ** | ** **         | **16,000,000** |   |   |   | 11,217,000 |   |
| ** **                            |       | ** **         | **31,000,000** |   |   |   | 26,217,000 |   |
| Less current portion                  | ** ** | ** **         | **(14,335,000** | **)** |   |   | -        |   |
| Total long-term debt                  | ** ** | ** **         | **$** | **16,665,000** |   |   |   | $ | 26,217,000 |   |

 

Barnwell has a credit facility at Royal Bank ofCanada, a Canadian bank, for $20,000,000 Canadian dollars, or approximatelyUS$18,654,000 at the September 30, 2009 exchange rate.  Borrowings under this facility wereUS$15,000,000 at September 30, 2009 and 2008; at September 30, 2009,Barnwell had unused credit available under this facility of approximatelyUS$3,654,000.

 

The facility is available in U.S. dollars at theLondon Interbank Offer Rate plus 3.5%, at U.S. prime plus 2.5%, or in Canadiandollars at Canadian prime plus 2.5%.  Astandby fee of 1.0% per annum is charged on the unused facility balance.  Additionally, in fiscal 2009, Barnwell paid afee of $70,000 Canadian dollars to renew the facility.  Under the financing agreement with Royal Bankof Canada, the facility is reviewed annually, with the next review planned for April 2010.  Subject to that review, the facility may beextended one year with no required debt repayments for one year or converted toa two-year term loan by the bank.  If thefacility is converted to a two-year term loan, Barnwell has agreed to thefollowing repayment schedule of the then outstanding loan balance:  first year of the term period – 20% (5% perquarter), and in the second year of the term period – 80% (5% per quarter forthe first three quarters and 65% in the final quarter).  Based on the terms of the existing agreement,if Royal Bank of Canada were to convert the facility to a two-year term loanupon its next review in April 2010, Barnwell would be obligated to makequarterly principal and interest repayments beginning in July 2010.  As such, one quarterly repayment of 5% wouldbe due within one year of September 30, 2009 and accordingly, we haveincluded $750,000, representing 5% of the outstanding loan balance at September 30,2009, in the current portion of long-term debt.

 

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Barnwell has the option to change the currencydenomination and interest rate applicable to the loan at periodic intervalsduring the term of the loan.  During theyear ended September 30, 2009, Barnwell paid interest at rates rangingfrom 2.41% to 5.70%.  Theweighted-average interest rate on the facility at September 30, 2009 was3.76%.  The facility is guaranteed byBarnwell and is collateralized by a general security agreement on all of theassets of Barnwell’s oil and natural gas segment.  No compensating bank balances are requiredfor this facility.

 

Barnwell, through its 80%-owned real estate jointventure, Kaupulehu 2007, has a credit facility with a Hawaii financialinstitution providing a $16,000,000 revolving line of credit with whichKaupulehu 2007 finances four parcels and the costs of home construction.  Under the terms of the facility, financingfor home construction is limited to a maximum of two unsold homes underconstruction at any given time.  The termof the loan is 36 months and advances may not exceed: (i) 75% of theappraised as-is value of each parcel or (ii) 80% of the appraised value ofthe completed home and parcel for each home under construction.  The interest rate available for borrowingsunder this facility is a floating rate equal to the financial institution’sfloating base rate or the one-month London Interbank Offer Rate plus 2.50%.

 

Kaupulehu 2007 will be required to make a principalpayment upon the sale of a home and lot in an amount equal to 100% of the netsales proceeds of the home and lot; the loan agreement defines net salesproceeds as the gross sales price of the home and lot, less reasonable realestate commissions, closing costs, and fees of the building contractor andproject manager, as approved by the financial institution.  The credit facility, which is fullyguaranteed by Barnwell and guaranteed 20% by Mr. Terry Johnston, iscollateralized by, among other things, a first mortgage lien on the parcels andhomes.  Borrowings under the facility aresubject to a loan advance limitation based on the appraised value of theunderlying security.  The loan advancelimitation may be reduced as a result of a decrease in appraised value of theunderlying security.  If borrowings underthe facility exceed the loan advance limitation, Barnwell will be required tomake debt repayments in the amount of the excess.  At September 30, 2009, Kaupulehu 2007has reached its maximum amount of borrowings under its revolving creditfacility of $16,000,000.  The facilityexpires in December 2010.  Bothhomes are available for sale and reflected as current assets of $13,585,000,and an equivalent amount of debt has been classified as a currentliability.  The remainder of theborrowings under Kaupulehu 2007’s revolving facility is classified as long-termdebt.

 

Kaupulehu 2007 capitalizes interest costs onresidential lots under development while development and construction is inprogress and includes these costs in cost of sales when homes are sold.  Interest costs for the fiscal years ended September 30,2009, 2008 and 2007 are summarized as follows:

 
|                            |       | Year  ended September 30, |        |
|---------------------------------|------------|--------------------------------|-------------|
| ** **                      |       | **2009**                       |        | 2008 |   | 2007 |   |
| Interest costs incurred         | ** ** | ** **                     | **$**       | **1,165,000** | ** ** |   |   | $ | 1,437,000 |   |   |   | $ | 1,141,000 |   |   |
| Less interest costs capitalized | ** ** | ** **                     | **253,000** | ** ** |   |   | 394,000 |   |   |   | 142,000 |   |   |
| Interest expense                | ** ** | ** **                     | **$**       | **912,000** | ** ** |   |   | $ | 1,043,000 |   |   |   | $ | 999,000 |   |   |

 

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Combined maturities of borrowings under the Company’stwo credit facilities are as follows based on the assumption that Royal Bank ofCanada does not renew our facility upon the next review in April 2010 andthe facility is therefore converted to a term loan:

 
| Fiscal year ending | ** ** | ** **                                  | ** ** |
|--------------------|------------|---------------------------------------------|------------|
| 2010               |       | $ 14,335,000                           |       |
| 2011               |       | 5,415,000                                   |       |
| 2012               |       | 11,250,000                                  |       |
| 2013               |       | -        |       |
| 2014               |       | -        |       |
| Thereafter         |       | -        |       |
| Total              |       | $ 31,000,000                           |       |

 

 

**10.       SEGMENTAND GEOGRAPHIC INFORMATION**

 

Barnwell operates four segments: 1) exploringfor, developing, producing and selling oil and natural gas in Canada (oil andnatural gas); 2) investing in leasehold land and other real estateinterests in Hawaii (land investment); 3) drilling wells and installingand repairing water pumping systems in Hawaii (contract drilling); and4) acquiring property for investment and development of homes for sale inHawaii (residential real estate, established January 2007).

 

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The following is certain financial informationrelated to Barnwell’s reporting segments. All revenues reported are from external customers with no intersegmentsales or transfers.

 
|                                                                    |       | Year ended September 30, |
|-------------------------------------------------------------------------|------------|-------------------------------|
| ** **                                                              |       | **2009**                      |   | 2008 |   | 2007 |
| Revenues:                                                               |       |                          |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas                                                     | ** ** | ** **                    | **$** | ** 24,950,000** |   |   |   | $ |  49,441,000 |   |   |   | $ |  34,599,000 |   |
| Land investment                                                         | ** ** | ** **                    | **1,034,000** |   |   |   | 4,607,000 |   |   |   | 5,662,000 |   |
| Contract drilling                                                       | ** ** | ** **                    | **5,335,000** |   |   |   | 9,787,000 |   |   |   | 5,993,000 |   |
| Residential real estate                                                 | ** ** | ** **                    | **-**        |   |   |   | 443,000 |   |   |   | -        |   |
| Other                                                                   | ** ** | ** **                    | **785,000** |   |   |   | 1,108,000 |   |   |   | 867,000 |   |
| Total before interest income                                            | ** ** | ** **                    | **32,104,000** |   |   |   | 65,386,000 |   |   |   | 47,121,000 |   |
| Interest income                                                         | ** ** | ** **                    | **74,000** |   |   |   | 258,000 |   |   |   | 315,000 |   |
| Total revenues                                                          | ** ** | ** **                    | **$** | ** 32,178,000** |   |   |   | $ |  65,644,000 |   |   |   | $ |  47,436,000 |   |
|                                                                    |       |                          |   |   |   |   |   |   |   |   |   |   |
| Depreciation, depletion and amortization:                               |       |                          |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas                                                     | ** ** | ** **                    | **$** | ** 10,996,000** |   |   |   | $ |  14,150,000 |   |   |   | $ |  12,753,000 |   |
| Contract drilling                                                       | ** ** | ** **                    | **412,000** |   |   |   | 392,000 |   |   |   | 224,000 |   |
| Other                                                                   | ** ** | ** **                    | **145,000** |   |   |   | 184,000 |   |   |   | 197,000 |   |
| Total depreciation, depletion and amortization                          |       |                          | **$** | ** 11,553,000** |   |   |   | $ |  14,726,000 |   |   |   | $ |  13,174,000 |   |
|                                                                    |       |                          |   |   |   |   |   |   |   |   |   |   |
| Reduction of carrying value of assets:                                  |       |                          |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas                                                     | ** ** | ** **                    | **$** | ** 26,348,000** |   |   |   | $ |  -        |   |   |   | $ |  -        |   |
| Land investment                                                         | ** ** | ** **                    | **912,000** |   |   |   | -        |   |   |   | -        |   |
| Other                                                                   | ** ** | ** **                    | **1,127,000** |   |   |   | -        |   |   |   | -        |   |
| Total reduction of carrying value of assets                             | ** ** | ** **                    | **$** | ** 28,387,000** |   |   |   | $ |  -        |   |   |   | $ |  -        |   |
|                                                                    |       |                          |   |   |   |   |   |   |   |   |   |   |
| Operating (loss) profit  (before general and  administrative expenses): |       |                          |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas                                                     | ** ** | ** **                    | **$** | ** (22,325,000** | **)** |   |   | $ |  24,710,000 |   |   |   | $ |  11,643,000 |   |
| Land investment, net of minority interest                               | ** ** | ** **                    | **(104,000** | **)** |   |   | 3,454,000 |   |   |   | 4,424,000 |   |
| Contract drilling                                                       | ** ** | ** **                    | **531,000** |   |   |   | 1,711,000 |   |   |   | 830,000 |   |
| Residential real estate, net of minority interest                       |       |                          | **-**        |   |   |   | 354,000 |   |   |   | -        |   |
| Other, net of minority interest                                         | ** ** | ** **                    | **(262,000** | **)** |   |   | 924,000 |   |   |   | 670,000 |   |
| Total operating (loss) profit                                           | ** ** | ** **                    | **(22,160,000** | **)** |   |   | 31,153,000 |   |   |   | 17,567,000 |   |
|                                                                    |       |                          |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses, net of minority interest           |       |                          | **(7,788,000** | **)** |   |   | (12,297,000 | ) |   |   | (10,207,000 | ) |
| Bad debt expense, net of minority interest                              | ** ** | ** **                    | **(549,000** | **)** |   |   | (1,091,000 | ) |   |   | -        |   |
| Interest expense, net of minority interest                              | ** ** | ** **                    | **(857,000** | **)** |   |   | (1,007,000 | ) |   |   | (999,000 | ) |
| Interest income                                                         | ** ** | ** **                    | **74,000** |   |   |   | 258,000 |   |   |   | 315,000 |   |
| (Loss) earnings before income taxes                                     | ** ** | ** **                    | **$** | ** (31,280,000** | **)** |   |   | $ |  17,016,000 |   |   |   | $ |  6,676,000 |   |

 

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|                  |       | Year ended September 30, |
|-----------------------|------------|-------------------------------|
| ** **            |       | **2009**                      |   | 2008 |   | 2007 |
| Capital expenditures: |       |                          |   |   |   |   |   |   |   |   |   |   |
| Oil and natural gas   | ** ** | ** **                    | **$** | **5,999,000** |   |   |   | $ | 17,662,000 |   |   |   | $ | 14,164,000 |   |
| Contract drilling     | ** ** | ** **                    | **440,000** |   |   |   | 658,000 |   |   |   | 1,230,000 |   |
| Other                 | ** ** | ** **                    | **21,000** |   |   |   | 52,000 |   |   |   | 84,000 |   |
| Total                 | ** ** | ** **                    | **$** | **6,460,000** |   |   |   | $ | 18,372,000 |   |   |   | $ | 15,478,000 |   |

 

Depletion per 1,000 cubic feet (“MCF”) of naturalgas and natural gas equivalent (“MCFE”), converted at a rate of one barrel ofoil and natural gas liquids to 5.8 MCFE, was $2.15 in fiscal 2009, $2.89 infiscal 2008, and $2.49 in fiscal 2007. The lower depletion rate for fiscal 2009, as compared to fiscal 2008, isdue to the fiscal 2009 reduction of the carrying value of oil and natural gas propertiesand a 14% decrease in the average exchange rate of the Canadian dollar to theU.S. dollar.  The higher depletion ratefor fiscal 2008, as compared to fiscal 2007, is due to increased costs offinding and developing proven reserves and a 10% increase in the averageexchange rate of the Canadian dollar to the U.S. dollar.

 

*Assets BySegment:*

 
|                         |       | September 30, |
|------------------------------|------------|--------------------|
| ** **                   |       | **2009**           |   | 2008 |
| Oil  and natural gas (1)     | ** ** | ** **         | **$** | **52,575,000** | ** ** | **61%** |   |   | $ | 91,673,000 |   | 69% |   |
| Land  investment (2)         | ** ** | ** **         | **538,000** | ** ** | **1%** |   |   | 1,450,000 |   | 1% |   |
| Residential  real estate (2) | ** ** | ** **         | **18,183,000** | ** ** | **21%** |   |   | 13,784,000 |   | 11% |   |
| Contract  drilling (2)       | ** ** | ** **         | **3,812,000** | ** ** | **4%** |   |   | 5,005,000 |   | 4% |   |
| Other:                       |       |               |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents    | ** ** | ** **         | **6,879,000** | ** ** | **8%** |   |   | 13,618,000 |   | 10% |   |
| Corporate and other          | ** ** | ** **         | **4,117,000** | ** ** | **5%** |   |   | 6,832,000 |   | 5% |   |
| Total                        | ** ** | ** **         | **$** | **86,104,000** | ** ** | **100%** |   |   | $ | 132,362,000 |   | 100% |   |

 

----

(1)       Primarilylocated in the Province of Alberta, Canada.

(2)       Locatedin Hawaii.

 

*Long-LivedAssets By Geographic Area:*

 
|          |       | September 30, |
|---------------|------------|--------------------|
| ** **    | ** ** | **2009**           |   | 2008 |
| United States |       | ** **         | **$** | **3,670,000** | ** ** | **7%** |   |   | $ | 4,651,000 |   | 5% |   |
| Canada        |       | ** **         | **48,555,000** | ** ** | **93%** |   |   | 85,489,000 |   | 95% |   |
| Total         |       | ** **         | **$** | **52,225,000** | ** ** | **100%** |   |   | $ | 90,140,000 |   | 100% |   |

 

*Revenue ByGeographic Area:*

 
|                              |       | Year ended September 30, |
|-----------------------------------|------------|-------------------------------|
| ** **                        |       | **2009**                      |   | 2008 |   | 2007 |
| United States                     | ** ** | ** **                    | **$** | **6,468,000** |   |   |   | $ | 15,211,000 |   |   |   | $ | 11,896,000 |   |
| Canada                            | ** ** | ** **                    | **25,636,000** |   |   |   | 50,175,000 |   |   |   | 35,225,000 |   |
| Total (excluding interest income) | ** ** | ** **                    | **$** | **32,104,000** |   |   |   | $ | 65,386,000 |   |   |   | $ | 47,121,000 |   |

 

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**11.       TAXES ONINCOME**

 

Thecomponents of (loss) earnings before income taxes are as follows:

 
| ** **                              | Year ended September 30, |
|-----------------------------------------|-------------------------------|
| ** **                              | ** **                    | **2009** | ** ** | ** ** | ** ** | 2008 |   |   |   | 2007 | ** ** |
| (Loss) earnings before income taxes in: | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| United States                           | ** **                    | **$** | **(3,313,000** | **)** |   |   | $ |  (1,327,000 | ) |   |   | $ | 45,000 |   |
| Canada                                  | ** **                    | **(27,967,000** | **)** |   |   | 18,343,000 |   |   |   | 6,631,000 |   |
|                                    | ** **                    | **$** | **(31,280,000** | **)** |   |   | $ | 17,016,000 |   |   |   | $ | 6,676,000 |   |

 

The components of the income tax (benefit) provisionrelated to the above (loss) earnings are as follows:

 
| ** **                    | Year ended September 30, |
|-------------------------------|-------------------------------|
| ** **                    | ** **                    | **2009** | ** ** | ** ** | ** ** | 2008 |   |   |   | 2007 | ** ** |
| Current (benefit) provision:  | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| United States – Federal  | ** **                    | **$** | **-** |   |   |   | $ | 76,000 |   |   |   | $ | 260,000 |   |
| United States – State    | ** **                    | **-** |   |   |   | 54,000 |   |   |   | 1,000 |   |
|                          | ** **                    | **-** |   |   |   | 130,000 |   |   |   | 261,000 |   |
| Canadian                      | ** **                    | **(277,000** | **)** |   |   | 7,558,000 |   |   |   | 1,443,000 |   |
| Total current                 | ** **                    | **(277,000** | **)** |   |   | 7,688,000 |   |   |   | 1,704,000 |   |
|                          | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Deferred (benefit) provision: | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| United States                 | ** **                    | **1,063,000** |   |   |   | (855,000 | ) |   |   | 765,000 |   |
| Canadian                      | ** **                    | **(7,704,000** | **)** |   |   | (1,549,000 | ) |   |   | 691,000 |   |
| Total deferred                | ** **                    | **(6,641,000** | **)** |   |   | (2,404,000 | ) |   |   | 1,456,000 |   |
|                          | ** **                    | **$** | **(6,918,000** | **)** |   |   | $ | 5,284,000 |   |   |   | $ | 3,160,000 |   |

 

Barnwell’s effective consolidated income tax benefitrate for fiscal 2009 was approximately 22%. This rate is lower than the expected statutory U.S. rate of 35% dueprimarily to a $4,789,000 non-cash charge to income tax expense resulting froman increase in the valuation allowance for certain deferred tax assets.

 

Included in the income tax provision for fiscal 2008is a $909,000 reduction of the net deferred tax liability due to a reduction inCanadian federal tax rates.  During thefirst quarter of fiscal 2008, the Canadian government enacted reductions in thecorporate tax rate from 20.5%, 20.0%, 19.0%, 18.5% and 18.5% in calendar years2008, 2009, 2010, 2011 and 2012, respectively, to 19.5%, 19.0%, 18.0%, 16.5%and 15%, respectively.  Excluding theimpact of the decrease in Canadian federal tax rates, Barnwell’s effectiveconsolidated income tax rate for the year ended September 30, 2008, wasapproximately 36%.  A minor reduction inCanadian federal tax rates in fiscal 2007 resulted in a $100,000 reduction innet deferred tax liabilities in fiscal 2007.

 

In fiscal 2008 and 2007, Barnwell recorded taxbenefits of $192,000 and $203,000, respectively, related to employees’disqualification of qualified stock options which were reflected as increasesin additional paid-in capital.  There wasno such tax benefit related to stock option disqualifications in fiscal 2009.

 

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A reconciliation between the reported income tax(benefit) provision and the amount computed by multiplying the (loss) earningsbefore income taxes by the U.S. federal tax rate of 35% is as follows:

 
| ** **                                                                                                            | Year ended September 30, |
|-----------------------------------------------------------------------------------------------------------------------|-------------------------------|
| ** **                                                                                                            | ** **                    | **2009** | ** ** | ** ** | ** ** | 2008 |   |   |   | 2007 | ** ** |
| Tax (benefit) expense computed by applying  statutory rate                                                            | ** **                    | **$** | **(10,948,000** | **)** |   |   | $ | 5,956,000 |   |   |   | $ | 2,336,000 |   |
|                                                                                                                  | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Effect of reduction of Canadian tax rates on  Canadian deferred taxes                                                 | ** **                    | **-** |   |   |   | (909,000 | ) |   |   | (100,000 | ) |
|                                                                                                                  | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Effect of the foreign tax provision, excluding  effect of reduction in Canadian tax rates, on the total tax provision | ** **                    | **(1,535,000** | **)** |   |   | (12,000 | ) |   |   | 672,000 |   |
|                                                                                                                  | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| State income taxes                                                                                                    | ** **                    | **-** |   |   |   | 54,000 |   |   |   | 1,000 |   |
|                                                                                                                  | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Increase in the valuation allowance for U.S.  source deferred tax assets                                              | ** **                    | **4,789,000** |   |   |   | - |   |   |   | - |   |
|                                                                                                                  | ** **                    | ** ** |   |   |   |   |   |   |   |   |   |
| Other                                                                                                                 | ** **                    | **776,000** |   |   |   | 195,000 |   |   |   | 251,000 |   |
|                                                                                                                  | ** **                    | **$** | **(6,918,000** | **)** |   |   | $ | 5,284,000 |   |   |   | $ | 3,160,000 |   |

 

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The tax effects of temporary differences that giverise to significant portions of the deferred tax assets and deferred taxliabilities at September 30, 2009 and 2008 are as follows:

 
| ** **                                                                                                  | September 30, |
|-------------------------------------------------------------------------------------------------------------|--------------------|
| ** **                                                                                                  | ** **         | **2009** | ** ** | ** ** | ** ** | 2008 | ** ** |
| Deferred income tax assets:                                                                                 | ** **         | ** ** |   |   |   |   |   |
| U.S. tax effect of deferred Canadian taxes                                                                  | ** **         | **$** | **839,000** |   |   |   | $ | 3,878,000 |   |
| Foreign tax credit carryforwards                                                                            | ** **         | **275,000** |   |   |   | 122,000 |   |
| Net operating loss carryover under U.S. tax law                                                             | ** **         | **2,344,000** |   |   |   | - |   |
| Tax basis of investment in land and residential  real estate in excess of book basis                        | ** **         | **760,000** |   |   |   | 507,000 |   |
| Property and equipment accumulated tax  depreciation and depletion in excess of book under U.S. tax law     | ** **         | **8,754,000** |   |   |   | 482,000 |   |
| Liabilities accrued for books                                                                               | ** **         | ** ** |   |   |   |   |   |
| but not for tax under U.S. tax law                                                                          | ** **         | **2,057,000** |   |   |   | 3,036,000 |   |
| Liabilities accrued for books                                                                               | ** **         | ** ** |   |   |   |   |   |
| but not for tax under Canadian tax law                                                                      | ** **         | **1,569,000** |   |   |   | 1,210,000 |   |
| Bad debt allowance for books                                                                                | ** **         | ** ** |   |   |   |   |   |
| but not for tax under U.S. tax law                                                                          | ** **         | **16,000** |   |   |   | 374,000 |   |
| Bad debt allowance for books                                                                                | ** **         | ** ** |   |   |   |   |   |
| but not for tax under Canadian tax law                                                                      | ** **         | **-** |   |   |   | 269,000 |   |
| Other                                                                                                       | ** **         | **877,000** |   |   |   | 621,000 |   |
| Total gross deferred tax assets                                                                             | ** **         | **17,491,000** |   |   |   | 10,499,000 |   |
| Less valuation allowance                                                                                    | ** **         | **(15,856,000** | **)** |   |   | (6,400,000 | ) |
| Net deferred income tax assets                                                                              | ** **         | **1,635,000** |   |   |   | 4,099,000 |   |
|                                                                                                        | ** **         | ** ** |   |   |   |   |   |
| Deferred income tax liabilities:                                                                            | ** **         | ** ** |   |   |   |   |   |
| Property and equipment accumulated tax  depreciation and depletion in excess of book under Canadian tax law | ** **         | **(4,037,000** | **)** |   |   | (12,885,000 | ) |
| Property and equipment accumulated tax  depreciation and depletion in excess of book under U.S. tax law     | ** **         | **-** |   |   |   | (3,205,000 | ) |
| Other                                                                                                       | ** **         | **(184,000** | **)** |   |   | (250,000 | ) |
| Total deferred income tax liabilities                                                                       | ** **         | **(4,221,000** | **)** |   |   | (16,340,000 | ) |
|                                                                                                        | ** **         | ** ** |   |   |   |   |   |
| Net deferred income tax liability                                                                           | ** **         | **$** | **(2,586,000** | **)** |   |   | $ | (12,241,000 | ) |

 

The total valuation allowance increased $9,456,000for the year ended September 30, 2009 and decreased $558,000 for the yearended September 30, 2008.  Theincrease in the valuation allowance in fiscal 2009 relates primarily to theU.S. tax effects of Canadian oil and natural gas property and equipment bookdepreciation, depletion and reductions in carrying value in excess of tax forwhich it is not more likely than not that such deductions will result in anincremental benefit over any benefits derived for Canadian tax purposes.  The increase in fiscal 2009 was also due tovaluation allowances for U.S. net operating loss carryovers, foreign taxcredits and other U.S. deferred tax assets for which it is not more likely thannot that such deferred tax assets will provide a future tax benefit.  The valuation allowances for U.S. sourcedeferred tax assets were established due to recent events regarding real 

 

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estatein the area in which Barnwell holds interests that impacted management’sprojections of future income levels necessary to benefit from such deferred taxassets.  Accordingly, in fiscal 2009there was a $1,526,000 increase in the beginning-of-year valuation allowanceresulting from changes in judgment about the realization of deferred tax assetsthat was recognized as a non-cash charge to income tax expense.  Of the total increase in the valuationallowance for fiscal 2009, $8,586,000 was recognized as a non-cash charge toincome tax expense, while the remaining $870,000 was charged against accumulatedother comprehensive loss.  Approximately$3,797,000 of the $8,586,000 non-cash charge to income tax expense was offsetby a portion of the effects of the Canadian tax provision on the total taxprovision, leaving a $4,789,000 net charge to income tax expense in fiscal 2009as the result of the increase in the valuation allowance.

 

The change in the valuation allowance in fiscal 2008relates primarily to the U.S. tax effects of a decrease in deferred Canadiantaxes.

 

Net deferred tax assets at September 30, 2009of $1,635,000 consists primarily of $1,569,000 related to Canadian deferred taxassets related to liabilities accrued for book purposes but not for taxpurposes that are estimated to be realized through future Canadian income taxdeductions against future Canadian oil and natural gas earnings.

 

At September 30, 2009, Barnwell had foreign taxcredit carryforwards and U.S. net operating loss carryovers totaling $275,000and $6,895,000, respectively.  Both itemswere fully offset by valuation allowances at September 30, 2009.  The foreign tax credit carryforwards expirein fiscal years 2013-2019 and the U.S. net operating loss carryovers expire infiscal 2029.

 

FASB ASC Topic 740, *Income Taxes*,prescribes a threshold for recognizing the financial statement effects of a taxposition when it is more likely than not, based on the technical merits, thatthe 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 provincialtax returns.  A number of years mayelapse before an uncertain tax position, for which we have unrecognized taxbenefits, is audited and finally resolved. While it is often difficult to predict the final outcome or the timingof resolution of any particular uncertain tax position, we believe that ourunrecognized tax benefits reflect the more likely than not outcome.  We adjust these unrecognized tax benefits, aswell as the related interest, based on ongoing changes in facts andcircumstances.  Settlement of anyparticular position could require the use of cash.  Favorable resolution for an amount less thanthe amount estimated by Barnwell would be recognized as a decrease in theeffective income tax rate in the period of resolution, and unfavorableresolution in excess of the amount estimated by Barnwell would be recognized asan increase in the effective income tax rate in the period of resolution.

 

In January 2008, the U.S. Internal RevenueService notified Barnwell that it would examine Barnwell’s U.S. consolidatedincome tax return for fiscal 2006.  Thatexamination has been concluded with no changes to the return.

 

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In June 2008, the Canada Revenue Agencynotified Barnwell that it would examine Barnwell of Canada, Limited’s Canadianfederal income tax returns for fiscal 2005 and 2006.  This examination was still in progress as of September 30,2009.  Below are the changes inunrecognized tax benefits for the years ended September 30, 2009 and 2008.

 
| ** **                                           |          |     |          |       | Total        |
|------------------------------------------------------|---------------|----------|---------------|------------|--------------|
| ** **                                           |          |     |          |       | Unrecognized |
| ** **                                           | Tax Positions |     | Accrued       |       | Tax          |
| ** **                                           | Taken         |     | Interest      |       | Benefits     |
| Balance as of October 1, 2007                   |          | $        | -             |       |         |   | $ | - |   |   |   | $ | - |   |
| Effect of tax positions taken in prior years         |          | 981,000  |          |       |         | - |   |   |   | 981,000 |   |
| Additions to accrued interest                        |          | -        |          |       |         | 298,000 |   |   |   | 298,000 |   |
| Balance as of September 30, 2008                |          | 981,000  |          |       |         | 298,000 |   |   |   | 1,279,000 |   |
|                                                 |          |     |          |       |         |   |   |   |   |   |   |
| Effect of tax positions taken in prior years         |          | (100,000 | )             |       |         | - |   |   |   | (100,000 | ) |
| Effect of tax positions related to the current  year |          | 378,000  |          |       |         | - |   |   |   | 378,000 |   |
| Additions to accrued interest                        |          | -        |          |       |         | 86,000 |   |   |   | 86,000 |   |
| Translation adjustments                              |          | (28,000  | )             |       |         | (9,000 | ) |   |   | (37,000 | ) |
| **Balance as of  September 30, 2009**           | ** **    | **$**    | **1,231,000** | ** ** | ** **   | ** ** | **$** | **375,000** | ** ** | ** ** | ** ** | **$** | **1,606,000** | ** ** |

 

Barnwell estimates that the unrecognized taxbenefits above had an indirect offsetting tax benefit of $839,000 at September 30,2009, primarily due to foreign tax credit benefits for U.S. tax purposes.  Accordingly, the total amount of unrecognizedtax benefits at September 30, 2009 that, if recognized, would impact theeffective tax rate was $767,000.

 

Unrecognized tax benefits consist primarily ofCanadian federal and provincial audit issues that involve the timing of oil andnatural gas capital expenditure deductions and transfer pricingadjustments.  Because of a lack ofclarity and uniformity regarding allowable transfer pricing valuations bydiffering jurisdictions, it is reasonably possible that the total amount ofunrecognized tax benefits and any offsetting foreign tax credit benefits maysignificantly increase or decrease within the next fiscal year, and theestimated range of any such variance is not currently estimable based upon factsand circumstances as of September 30, 2009.

 

Included below is a summary of the tax years, byjurisdiction, that remain subject to examination by taxing authorities:

 
| Jurisdiction               |   | Fiscal Years Open |
|----------------------------|--------|-------------------|
| U.S. federal               |   | 2006 – 2008  |
| Various U.S. states        |   | 2006 – 2008  |
| Canada federal             |   | 2001 – 2008  |
| Various Canadian provinces |   | 2001 – 2008  |

 

U.S. income tax legislation enacted in November 2009,subsequent to Barnwell’s fiscal year ended September 30, 2009, extends thecarryback period for net operating losses from two years to up to fiveyears.  The ultimate impact of thisrecent legislation on Barnwell’s results of operations, financial condition andliquidity has not yet been determined.

 

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**12.****                           ****RETIREMENT PLANS**

 

Barnwell sponsors a noncontributory defined benefitpension plan (“Pension Plan”) covering substantially all of its U.S. employees,with benefits based on years of service and the employee’s highest consecutivefive-year average earnings.  Barnwell’sfunding policy is intended to provide for both benefits attributed to serviceto date and for those expected to be earned in the future.  In addition, Barnwell sponsors a SupplementalEmployee Retirement Plan (“SERP”), a noncontributory supplemental retirementbenefit plan which covers certain current and former employees of Barnwell foramounts exceeding the limits allowed under the defined benefit pension plan anda postretirement medical insurance benefits plan (“Postretirement Medical”)covering U.S. employees who have attained at least 20 years of service withBarnwell and served at least 10 years at the position of Vice President orhigher.  Health benefits are also providedto spouses and qualifying dependents of eligible officers.

 

The following tables detail the changes in benefitobligations, fair values of plan assets and reconciliations of the fundedstatus of the retirement plans:

 
|                                            | Pension            |          | SERP           |     | Postretirement  Medical |
|-------------------------------------------------|--------------------|---------------|----------------|----------|-------------------------|
|                                            | September 30, |
|                                            |               | **2009**      |           |     |                    | 2008 |   |   |   | **2009** |   |   |   | 2008 |   |   |   | **2009** |   |   |   | 2008 |   |
| *Change in Projected Benefit Obligation:*       |               |          |           |     |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Benefit  obligation at beginning of year        | ** **         | **$**         | **4,299,000**  |     |                    |   | $ | 4,702,000 | ** ** | ** ** | ** ** | **$** | **670,000** |   |   |   | $ | 722,000 | ** ** | ** ** | ** ** | **$** | **704,000** |   |   |   | $ | 861,000 |   |
| Service  cost                                   | ** **         | **178,000**   |           |     |                    | 221,000 | ** ** | ** ** | ** ** | **27,000** |   |   |   | 36,000 | ** ** | ** ** | ** ** | **8,000** |   |   |   | 10,000 |   |
| Interest  cost                                  | ** **         | **300,000**   |           |     |                    | 290,000 | ** ** | ** ** | ** ** | **45,000** |   |   |   | 46,000 | ** ** | ** ** | ** ** | **51,000** |   |   |   | 52,000 |   |
| Plan  amendment                                 | ** **         | **-**         |           |     |                    | - | ** ** | ** ** | ** ** | **-** |   |   |   | - | ** ** | ** ** | ** ** | **-** |   |   |   | - |   |
| Actuarial  loss (gain)                          | ** **         | **1,732,000** |           |     |                    | (782,000 | ) | ** ** | ** ** | **282,000** |   |   |   | (128,000 | ) | ** ** | ** ** | **417,000** |   |   |   | (219,000 | ) |
| Benefits  paid                                  | ** **         | **(160,000**  | **)**          |     |                    | (121,000 | ) | ** ** | ** ** | **(5,000** | **)** |   |   | (6,000 | ) | ** ** | ** ** | **-** |   |   |   | - |   |
| Administrative  expenses paid                   | ** **         | **(7,000**    | **)**          |     |                    | (11,000 | ) | ** ** | ** ** | **-** |   |   |   | - | ** ** | ** ** | ** ** | **-** |   |   |   | - |   |
| Benefit  obligation at end of year              | ** **         | **6,342,000** |           |     |                    | 4,299,000 | ** ** | ** ** | ** ** | **1,019,000** |   |   |   | 670,000 | ** ** | ** ** | ** ** | **1,180,000** |   |   |   | 704,000 |   |
| * *                                        | * *           | * *      | * *       | * * | * *                | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| *Change in Plan Assets:*                        |               |          |           |     |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair  value of plan assets at beginning of year | ** **         | **3,627,000** |           |     |                    | 3,893,000 | ** ** | ** ** | ** ** | **-** |   |   |   | - | ** ** | ** ** | ** ** | **-** |   |   |   | - |   |
| Actual  return on plan assets                   | ** **         | **2,000**     |           |     |                    | (584,000 | ) | ** ** | ** ** | **-** |   |   |   | - | ** ** | ** ** | ** ** | **-** |   |   |   | - |   |
| Employer  contribution                          | ** **         | **226,000**   |           |     |                    | 450,000 | ** ** | ** ** | ** ** | **5,000** |   |   |   | 6,000 | ** ** | ** ** | ** ** | **-** |   |   |   | - |   |
| Benefits  paid                                  | ** **         | **(160,000**  | **)**          |     |                    | (121,000 | ) | ** ** | ** ** | **(5,000** | **)** |   |   | (6,000 | ) | ** ** | ** ** | **-** |   |   |   | - |   |
| Administrative  expenses paid                   | ** **         | **(7,000**    | **)**          |     |                    | (11,000 | ) | ** ** | ** ** | **-** |   |   |   | - | ** ** | ** ** | ** ** | **-** |   |   |   | - |   |
| Fair value of plan assets at end of year        | ** **         | **3,688,000** |           |     |                    | 3,627,000 | ** ** | ** ** | ** ** | **-** |   |   |   | - | ** ** | ** ** | ** ** | **-** |   |   |   | - |   |
| Funded status                                   | ** **         | **$**         | **(2,654,000** | **)**    |                    |   | $ | (672,000 | ) | ** ** | ** ** | **$** | **(1,019,000** | **)** |   |   | $ | (670,000 | ) | ** ** | ** ** | **$** | **(1,180,000** | **)** |   |   | $ | (704,000 | ) |

 

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|                                                                                                                                                                                 | Pension            |           | SERP           |     | Postretirement  Medical |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------|----------------|----------------|----------|-------------------------|
|                                                                                                                                                                                 | September 30, |
|                                                                                                                                                                                 |               | **2009**       |           |     |                    | 2008 |   |   |   | **2009** |   |   |   | 2008 |   |   |   | **2009** |   |   |   | 2008 |   |
| *Amounts  recognized in the Consolidated Balance Sheets:*                                                                                                                            | * *           | * *       | * *       | * * | * *                | * * | * * | * * | * * | * * | * * | * * | * * |
| Current  assets                                                                                                                                                                      | ** **         | **$**          | **-**          |     |                    |   | $ | - | ** ** | ** ** | ** ** | **$** | **-** |   |   |   | $ | - | ** ** | ** ** | ** ** | **$** | **-** |   |   |   | $ | - |   |
| Current  liabilities                                                                                                                                                                 | ** **         | **-**          |           |     |                    | - | ** ** | ** ** | ** ** | **(5,000** | **)** |   |   | (5,000 | ) | ** ** | ** ** | **-** |   |   |   | - |   |
| Noncurrent  liabilities                                                                                                                                                              | ** **         | **(2,654,000** | **)**          |     |                    | (672,000 | ) | ** ** | ** ** | **(1,014,000** | **)** |   |   | (665,000 | ) | ** ** | ** ** | **(1,180,000** | **)** |   |   | (704,000 | ) |
| Net amount                                                                                                                                                                           | ** **         | **$**          | **(2,654,000** | **)**    |                    |   | $ | (672,000 | ) | ** ** | ** ** | **$** | **(1,019,000** | **)** |   |   | $ | (670,000 | ) | ** ** | ** ** | **$** | **(1,180,000** | **)** |   |   | $ | (704,000 | ) |
|                                                                                                                                                                                 |               |           |           |     |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Amounts recognized in  accumulated other comprehensive (income) loss:*                                                                                                              | * *           | * *       | * *       | * * | * *                | * * | * * | * * | * * | * * | * * | * * | * * |
| Net  loss (gain)                                                                                                                                                                     | ** **         | **$**          | **2,950,000**  |     |                    |   | $ | 996,000 | ** ** | ** ** | ** ** | **$** | **360,000** |   |   |   | $ | 78,000 | ** ** | ** ** | ** ** | **$** | **96,000** |   |   |   | $ | (348,000 | ) |
| Prior  service cost (credit)                                                                                                                                                         | ** **         | **108,000**    |           |     |                    | 114,000 | ** ** | ** ** | ** ** | **(85,000** | **)** |   |   | (80,000 | ) | ** ** | ** ** | **556,000** |   |   |   | 692,000 |   |
| Accumulated other comprehensive (income) loss                                                                                                                                        | ** **         | **$**          | **3,058,000**  |     |                    |   | $ | 1,110,000 | ** ** | ** ** | ** ** | **$** | **275,000** |   |   |   | $ | (2,000 | ) | ** ** | ** ** | **$** | **652,000** |   |   |   | $ | 344,000 |   |
|                                                                                                                                                                                 | ** **         | ** **     |           |     |                    |   | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| For the fiscal years ended  September 30, 2009 and 2008, the following weighted-average assumptions  were used to determine benefit obligations at the end of the fiscal years: |
|                                                                                                                                                                                 | ** **         | ** **     |           |     |                    |   | ** ** | ** ** | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
|                                                                                                                                                                                 | Pension            |           | SERP           |     | Postretirement  Medical |
|                                                                                                                                                                                 | September 30, |
|                                                                                                                                                                                 |               | **2009**       |           |     |                    | 2008 |   |   |   | **2009** |   |   |   | 2008 |   |   |   | **2009** |   |   |   | 2008 |   |
| *Assumptions used to determine  the fiscal year-end benefit obligations:*                                                                                                            | * *           | * *       | * *       | * * | * *                | * * | * * | * * | * * | * * | * * | * * | * * |
| Discount  rate                                                                                                                                                                       |               | **5.25%**      |           |     |                    | 7.25% |   |   |   | **5.25%** |   |   |   | 7.25% |   |   |   | **5.25%** |   |   |   | 7.25% |   |
| Rate  of compensation increase                                                                                                                                                       |               | **5.00%**      |           |     |                    | 5.00% |   |   |   | **5.00%** |   |   |   | 5.00% |   |   |   | **N/A** |   |   |   | N/A |   |

 

The overall investment objective of the Pension Planis to provide growth in the assets of the plan to fund future benefitobligations while managing risk in order to meet current benefitobligations.  To develop the expectedlong-term rate of return on assets assumption, historical returns and thefuture expectations for returns for each asset class were considered.  Generally, principal repayments and interestreceived on government mortgage securities provide cash flows to fund currentbenefit obligations.  Longer-termobligations are generally estimated to be provided for by growth in equitysecurities.  The plan assets at September 30,2009 were invested as follows: 19% in cash and other, 21% in debt securities,and 60% in equity securities.  The planassets at September 30, 2008 were invested as follows: 23% in cash, 25% indebt securities, and 52% in equity securities. Target asset allocations are not used, and allocations are adjusted fromtime to time as dictated by current and anticipated market conditions andrequired cash flows.

 

Barnwell estimates that it will make approximately$265,000 in contributions to the pension plan during fiscal 2010.  The SERP and Postretirement Medical plans areunfunded and Barnwell will fund benefits when payments are made.  Barnwell does not expect to make any benefitpayments under the Postretirement Medical plan during fiscal 2010 and expectedpayments under the SERP for fiscal 2010 are not significant.  Fluctuations in actual equity market returnsas well as changes in general interest rates will result in changes in themarket value of plan assets and may result in increased or decreased retirementbenefits costs and contributions in future periods.

 

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For the fiscal years ended September 30, 2009,2008 and 2007, the following weighted-average assumptions were used todetermine net periodic benefit cost for the fiscal years shown:

 
|                                                            |     | Pension                        |       | SERP     |     | Postretirement  Medical |       |
|-----------------------------------------------------------------|----------|--------------------------------|------------|----------|----------|-------------------------|------------|
|                                                            |     | Year ended  September 30, |       |
|                                                            |     | **2009**                       |       | 2008     |     | 2007                    |       | **2009** |   | 2008 |   | 2007 |   | **2009** |   | 2008 |   | 2007 |   |
| *Assumptions used to determine  the net periodic benefit cost:* | * * | * *                       | * *   | * * | * * | * *                | * *   | * * | * * | * * |
| Discount rate                                                   |     | **7.25%**                      |       | 6.00%    |     | 5.50%                   | ** ** | **7.25%** | ** ** | 6.00% |   | 5.50% | ** ** | **7.25%** | ** ** | 6.00% |   | 5.50% |   |
| Expected return on  plan assets                                 |     | **7.00%**                      |       | 8.00%    |     | 8.00%                   | ** ** | **N/A** | ** ** | N/A |   | N/A | ** ** | **N/A** | ** ** | N/A |   | N/A |   |
| Rate of  compensation increase                                  |     | **5.00%**                      | ** ** | 5.00%    |     | 5.00%                   | ** ** | **5.00%** | ** ** | 5.00% |   | 5.00% | ** ** | **N/A** | ** ** | N/A |   | N/A |   |

 

Thecomponents of net periodic benefit cost are as follows:

 
|                                       | ** ** | ** **   | ** **  |   |       |       |       |       |   |     |       |       |       | ** **                     | ** ** | ** ** | ** ** | ** ** |       |       |   |   |       |       |       |                    |   |   | ** ** | ** ** | ** ** | ** ** | ** **  |    |   |   |   |    |   |   |   |   |    |   |
|--------------------------------------------|------------|--------------|-------------|--------|------------|------------|------------|------------|--------|----------|------------|------------|------------|--------------------------------|------------|------------|------------|------------|------------|------------|--------|--------|------------|------------|------------|-------------------------|--------|--------|------------|------------|------------|------------|-------------|---------|--------|--------|--------|---------|--------|--------|--------|--------|---------|--------|
|                                       | ** ** | ** **   |        |   |       | Pension    |       |       |   |     | ** ** | ** ** | ** ** | ** **                     |       |       |       | SERP       |       |       |   |   | ** ** | ** ** | ** ** | Postretirement  Medical |   |
|                                       | ** ** | ** **   |        |   |       |       |       |       |   |     | ** ** | ** ** | ** ** | Year ended  September 30, | ** ** | ** ** | ** ** | ** ** |       |       |   |   |       |       |       |                    |   |
|                                       | ** ** | **2009**     |        |   |       | 2008       |       |       |   | 2007     | ** ** | ** ** | ** ** | **2009**                       |       |       |       | 2008       |       |       |   | 2007   | ** ** | ** ** | ** ** | **2009**                |   |   |       | 2008       |       |       |        | 2007    |   |
| *Net periodic benefit cost for  the year:* |       |         |        |   | ** ** | ** ** | ** ** | ** ** |   |     |       |       |       |                           |       |       | ** ** | ** ** | ** ** | ** ** |   |   |       |       |       |                    |   |   |       |
| Service  cost                              | ** ** | **$**        | **178,000** |   |       |       | $          | 221,000    |   |     |       | $          | 214,000    | ** **                     | ** ** | ** ** | **$**      | **27,000** |       |       |   | $      | 36,000     |       |       |                    | $      | 35,000 | ** ** | ** ** | ** ** | **$**      | **8,000**   |    |   |   | $      | 10,000  |   |   |   | $      | 9,000   |   |
| Interest  cost                             | ** ** | **300,000**  |        |   |       | 290,000    |       |       |   | 260,000  | ** ** | ** ** | ** ** | **45,000**                     |       |       |       | 46,000     |       |       |   | 40,000 | ** ** | ** ** | ** ** | **51,000**              |   |   |       | 52,000     |       |       |        | 43,000  |   |
| Expected  return on plan assets            | ** ** | **(248,000** | **)**       |   |       | (305,000   | )          |       |   | (268,000 | )          | ** ** | ** ** | **-**                          |       |       |       | -          |       |       |   | -      | ** ** | ** ** | ** ** | **-**                   |   |   |       | -          |       |       |        | -       |   |
| Recognized  net actuarial gain             | ** ** | **-**        |        |   |       | -          |       |       |   | -        | ** ** | ** ** | ** ** | **-**                          |       |       |       | -          |       |       |   | -      | ** ** | ** ** | ** ** | **(27,000**             | **)**  |   |       | (4,000     | )          |       |        | -       |   |
| Amortization  of prior service cost        | ** ** | **5,000**    |        |   |       | 6,000      |       |       |   | 5,000    | ** ** | ** ** | ** ** | **5,000**                      |       |       |       | 4,000      |       |       |   | 4,000  | ** ** | ** ** | ** ** | **136,000**             |   |   |       | 136,000    |       |       |        | 114,000 |   |
| Amortization  of net actuarial loss        | ** ** | **23,000**   |        |   |       | 28,000     |       |       |   | 45,000   | ** ** | ** ** | ** ** | **-**                          |       |       |       | 8,000      |       |       |   | 10,000 | ** ** | ** ** | ** ** | **-**                   |   |   |       | -          |       |       |        | -       |   |
| Net  periodic benefit cost                 | ** ** | **$**        | **258,000** |   |       |       | $          | 240,000    |   |     |       | $          | 256,000    | ** **                     | ** ** | ** ** | **$**      | **77,000** |       |       |   | $      | 94,000     |       |       |                    | $      | 89,000 | ** ** | ** ** | ** ** | **$**      | **168,000** |    |   |   | $      | 194,000 |   |   |   | $      | 166,000 |   |
|                                       | ** ** | ** **   | ** **  |   |       |       |       |       |   |     |       |       |       | ** **                     | ** ** | ** ** | ** ** | ** ** |       |       |   |   |       |       |       |                    |   |   | ** ** | ** ** | ** ** | ** ** | ** **  |    |   |   |   |    |   |   |   |   |    |   |

 

The amounts that are estimated to be amortized fromaccumulated other comprehensive (income) loss into net periodic benefit cost inthe next fiscal year are as follows:

 
|               |                |    |    |   | Postretirement |
|--------------------|---------------------|---------|---------|--------|----------------|
|               |   Pension |    | SERP    |   | Medical        |
| Prior service cost |                | $       | 5,000   |   |           |   | $ | 4,000 |   |   |   | $ | 136,000 |   |
| Net loss (gain)    |                | 109,000 |    |   |           | 12,000 |   |   |   | -       |   |
|               |                | $       | 114,000 |   |           |   | $ | 16,000 |   |   |   | $ | 136,000 |   |

 

The accumulated benefit obligation differs from theprojected benefit obligation in that it assumes future compensation levels willremain unchanged.  The accumulatedbenefit obligation for the pension plan was $4,275,000 and $2,958,000 at September 30,2009 and 2008, respectively.  Theaccumulated benefit obligation for the SERP was $641,000 and $389,000 at September 30,2009 and 2008, respectively.

 

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The benefits expected to bepaid under the retirement plans as of September 30, 2009 are as follows:
|                                                      |     |     |     |      |     |     | Postretirement |     |
|-----------------------------------------------------------|----------|----------|----------|-----------|----------|----------|----------------|----------|
|                                                      |     |     | Pension  |      | SERP     |     | Medical        |     |
| *Expected Benefit Payments:*                              | * * | * * | * * | * *  | * * | * * | * *       | * * |
| Fiscal year ending  September 30, 2010               |     |     | $        | 152,000   |     |     | $ 5,000   |     |   | $ | -        |   |   |
| Fiscal year ending  September 30, 2011               |     |     | $        | 142,000   |     |     | $ 4,000   |     |   | $ | -        |   |   |
| Fiscal year ending  September 30, 2012               |     |     | $        | 133,000   |     |     | $ 4,000   |     |   | $ | 13,000 |   |   |
| Fiscal year ending  September 30, 2013               |     |     | $        | 124,000   |     |     | $ 3,000   |     |   | $ | 14,000 |   |   |
| Fiscal year ending  September 30, 2014               |     |     | $        | 189,000   |     |     | $ 3,000   |     |   | $ | 14,000 |   |   |
| Fiscal years ending  September 30, 2015 through 2019 |     |     | $        | 1,284,000 |     |     | $ 8,000   |     |   | $ | 117,000 |   |   |

 

The following provides theassumed health care cost trend rates related to the measurement of Barnwell’spostretirement medical obligations for fiscal years ended September 30,2009, 2008 and 2007.
|                                                |       | Year  ended September 30, |       |
|-----------------------------------------------------|------------|--------------------------------|------------|
|                                                |       | **2009**                       |       | 2008 |   | 2007 |   |
| Health care cost trend  rates assumed for next year | ** ** | **8.0%**                       | ** ** |   | 8.5% |   |   | 9.0% |   |   |
| Ultimate cost trend rate                            | ** ** | **6.0%**                       | ** ** |   | 6.0% |   |   | 6.0% |   |   |
| Year that the rate reaches  the ultimate trend rate | ** ** | **2014   **     | ** ** |   | 2014   |   |   | 2010   |   |   |

 

The assumed health care costtrend rates have a significant effect on the amounts reported for thepostretirement medical obligations.  Aone-percentage-point change in the assumed health care cost trend rates wouldhave the following effects:
|                                                      |   | 1-Percentage              |   | 1-Percentage                |   |
|-----------------------------------------------------------|--------|---------------------------|--------|-----------------------------|--------|
|                                                      |   | Point  Increase           |   | Point (Decrease)            |   |
| Effect on total service  and interest cost components     |   | $   15,000 |   | $   (11,000) |   |
| Effect on accumulated  postretirement benefit obligations |   | $ 318,000            |   | $ (241,000)            |   |

 

In 2003, the Medicare Prescription Drug, Improvementand Modernization Act of 2003 (“Act”) was signed into law.  The Act introduced a prescription drugbenefit under Medicare as well as a potential federal subsidy to sponsors ofretiree health care benefit plans that provide a benefit that is at leastactuarially equivalent to Medicare Part D to help offset the costs ofparticipant prescription drug benefits. Any measures of the accumulated postretirement benefit obligation or netperiodic postretirement benefit cost in the consolidated financial statementsor accompanying notes for fiscal 2009 do not reflect the effects of the Act onthe Postretirement Medical insurance benefits plan.

 

 

**13.       RELATEDPARTY TRANSACTIONS**

 

This section discusses certain direct and indirectrelationships and transactions involving Barnwell and Mr. Terry Johnston,a minority interest owner in certain of Barnwell’s business ventures anddirector of Barnwell until March 2, 2009, when his term ended.

 

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Mr. Johnston and his affiliated entitiesindirectly own 19.3% of Kaupulehu Developments, a general partnership in whichBarnwell has a 77.6% controlling interest. The development rights proceeds received during fiscal years 2009, 2008and 2007 were reduced by fees of $53,000, $265,000 and $146,000, respectively,and the percentage of sales payment proceeds received during fiscal years 2009,2008 and 2007 were reduced by fees of $13,000, $71,000 and $215,000,respectively; these fees were paid to Nearco, a company controlled by Mr. TerryJohnston.  Under agreements entered intoin 1987, prior to Mr. Johnston’s election to Barnwell’s Board ofDirectors, Barnwell’s wholly-owned subsidiary, Barnwell Hawaiian Properties, Inc.,a 50.1% partner of Kaupulehu Developments, is obligated to pay Nearco 2% ofKaupulehu Developments’ gross receipts from real estate transactions, andCambridge Hawaii Limited Partnership, a 49.9% partner of Kaupulehu Developmentsin which Barnwell purchased a 55.2% interest in April 2001, is obligatedto pay Nearco 4% of Kaupulehu Developments’ gross receipts from real estatetransactions.  The fees representcompensation for promotion and marketing of Kaupulehu Developments’ propertyand were determined at that time based on the estimated fair value of suchservices.

 

Nearco has a 20% ownership interest in Kaupulehu2007, a limited liability limited partnership that acquires house lots forinvestment and constructs luxury single-family homes.  As noted in Note 5 above, Kaupulehu 2007 hasan agreement with Mr. David Johnston, the son of Mr. Terry Johnston,under which Mr. David Johnston served as Kaupulehu 2007’s projectmanager.  A significant provision of thisagreement is that in addition to a fixed monthly project management fee, for amaximum of 18 months, Mr. David Johnston will receive 20% of the salesprofit upon the sale of each of the two homes constructed by Kaupulehu2007.  Kaupulehu 2007 paid $94,000 inproject management fees to Nearco for project management services during eachof the years ended September 30, 2009 and 2008.  No such fees were paid during fiscal year2007.  Project management fees arecapitalized as they are associated with the development and construction of areal estate project; these fees reached their maximum amount in June 2009and have ended.

 

Kaupulehu 2007 has borrowings under a creditfacility that are guaranteed jointly and severally by Barnwell and Mr. TerryJohnston, with Mr. Terry Johnston’s guarantee limited to 20% (see furtherdiscussion regarding the credit facility at Note 9 above).

 

In September 2007, Nearco made a $525,000 loanto Kaupulehu 2007 to partially fund Kaupulehu 2007’s acquisition of a thirdresidential lot.  The loan plus accruedinterest, at a floating rate equivalent to the highest interest rate incurredby Kaupulehu 2007 on its bank debt, was payable upon Kaupulehu 2007’s sale ofits second completed home.  Kaupulehu2007 repaid this loan, including interest of $20,000, in full in July 2008.

 

Also during fiscal 2007, Nearco paid Barnwell$553,000 to acquire a 20% minority interest in Kaupulehu Investors fromBarnwell (see discussion in Note 6 above). No gain or loss was recognized by Barnwell as a result of thetransaction.

 

General and administrative expenses include feespaid to Nearco for services related to Kaupulehu Developments’ leasehold landand Kaupulehu 2007’s residential property. Fees paid to Nearco by Kaupulehu Developments and Kaupulehu 2007 totaled$44,000, $63,000 and $171,000, before minority interest, in fiscal 2009, 2008and 2007, respectively.  Additionally,Kaupulehu 2007 incurred fees to Nearco of $27,000, before minority interest, infiscal 2008 for professional services rendered in connection with Kaupulehu2007’s sale of two lot purchase rights to an unaffiliated party.  There were no such fees incurred in fiscalyears 2009 or 2007.

 

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**14.       SHAREREPURCHASE PROGRAM**

 

In December 2005, Barnwell’s Board of Directorsauthorized the purchase of up to 250,000 shares of its common stock in the openmarket or in privately negotiated transactions. On September 20, 2007, the Board of Directors authorized a stockrepurchase program in the open market of up to 150,000 shares of these 250,000shares during the period commencing on September 24, 2007 and ending on March 24,2008.  During the year ended September 30,2007, Barnwell repurchased 10,000 shares for an aggregate purchase price of$155,000, or approximately $15.50 per share, pursuant to the plan.  From October 1, 2007 to March 24,2008, Barnwell repurchased 106,500 shares of its common stock for $1,597,000,or approximately $15.00 per share.  Ofthese amounts, 71,500 shares were purchased for $1,063,000, or approximately$14.87 per share, on the open market under the September 20, 2007authorization, and 35,000 shares were purchased for $15.25 per share, theclosing market price on the date of the transaction, or approximately $534,000,in a privately negotiated transaction with an officer/director of Barnwell.

 

In August 2008, the Board of Directorsauthorized the Company to acquire in the open market, from time-to-timecommencing on August 18, 2008 and ending on December 31, 2008, and inaccordance with applicable laws, rules and regulations, up to 150,000shares of the Company’s common stock. From August 18, 2008 to September 30, 2008, Barnwellrepurchased 26,600 shares of its common stock for $295,000, or approximately$11.10 per share.  During the year ended September 30,2009, Barnwell repurchased 12,700 shares of its common stock for $97,000, orapproximately $7.65 per share.

 

 

**15.       COMMITMENTSAND CONTINGENCIES**

 

Barnwell has committed to compensate certainCanadian personnel pursuant to an incentive compensation plan, the value ofwhich directly relates to Barnwell’s oil and natural gas segment’s net incomeand the value of Barnwell’s oil and natural gas reserves discovered, commencingin fiscal 2002, for projects developed by such personnel.  Barnwell recognized approximately $416,000and $495,000 of costs pursuant to this plan in fiscal 2008 and 2007,respectively.  No costs were recognizedduring fiscal 2009.

 

Barnwell has several non-cancelable operating leasesfor office space and leasehold land. Rental expense was $581,000 in 2009, $649,000 in 2008, and $598,000 in2007.  Barnwell is committed under theseleases for minimum rental payments summarized by fiscal year as follows: 2010 -$571,000, 2011 - $512,000, 2012 - $499,000, 2013 - $511,000, 2014 - $453,000and thereafter through 2026 an aggregate of $697,000.  The lease payments for land were subject torenegotiation as of January 1, 2006. Per the lease agreement, the lease payments will remain unchanged pendingan appraisal, whereupon the lease rent could be adjusted to fair marketvalue.  Barnwell does not know the amountof the new lease payments which could be effective upon performance of theappraisal; they may remain unchanged or increase, and Barnwell currentlyexpects the adjustment, if any, to not be material.  The future rental payment disclosures aboveassume the minimum lease payments for land in effect at December 31, 2005remain unchanged through December 2025, the end of the lease term.

 

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Barnwell is committed to pay fees to Nearco, acompany controlled by Mr. Terry Johnston, a former director of Barnwelland minority interest owner in certain of Barnwell’s business ventures (seefurther discussion on related party interests at Note 13 above).  Under an agreement entered into in 1987,prior to Mr. Johnston’s election to Barnwell’s Board of Directors, Barnwellis obligated to pay Nearco 2% of Kaupulehu Developments’ gross receipts fromreal estate transactions, and Cambridge Hawaii Limited Partnership, a 49.9%partner of Kaupulehu Developments in which Barnwell purchased a 55.2% interestin April 2001, is obligated under an agreement entered into in 1987 to payNearco 4% of Kaupulehu Developments’ gross receipts from real estatetransactions.  The fees representcompensation for promotion and marketing of Kaupulehu Developments’ propertyand were determined based on the estimated fair value of such services.

 

In conjunction with the closing of the Increment IItransaction in fiscal 2006, Kaupulehu Developments entered into an agreement topay its external real estate legal counsel 1.5% of all Increment II percentageof sales payments received by Kaupulehu Developments for services provided byits external real estate legal counsel in the negotiation and closing of theIncrement II transaction.  No amountswere paid pursuant to this arrangement in fiscal 2009, 2008 and 2007.

 

Kaupulehu 2007 has an agreement with the son of aformer director of Barnwell and minority interest owner in certain of Barnwell’sventures (see further discussion on related party interests at Note 13 above),under which he served as Kaupulehu 2007’s project manager.  Kaupulehu 2007 also has an agreement with theindependent building contractor that constructed the two luxury homes forKaupulehu 2007; a significant provision of which is that each will receive 20%of the sales profit upon the sale of each of the two homes constructed byKaupulehu 2007.

 

Barnwell, as an investor in various joint ventures,may be periodically called upon to make additional capital contributions.

 

Barnwell is occasionally involved in routinelitigation and is subject to governmental and regulatory controls that areincidental to the ordinary course of business. Barnwell’s management believes that all claims and litigation involvingBarnwell are not likely to have a material adverse effect on its results ofoperations, financial position or liquidity.

 

 

**16.       FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

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

 

 

**17.       CONCENTRATIONSOF CREDIT RISK**

 

Our oil and natural gas segment’s primaryconcentration of credit risk is associated with four individually significantcustomers, Shell Trading Canada, Mercuria Energy Canada Inc., ProGas Limited,and Glencoe Resources Ltd.  At September 30,2009, these customers accounted for approximately 32%, 22%, 18% and 14%,respectively, of our oil and natural gas accounts receivable.  At September 30, 2009, these customersaccounted for approximately $1,398,000 of our oil and natural gas accountsreceivables.  No other customer accountedfor more than 10% of our oil and natural gas accounts receivables.

 

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At September 30, 2009, Barnwell’s contractdrilling subsidiary had accounts receivables from the federal, state of Hawaiiand county entities totaling approximately $660,000.  Barnwell has lien rights on wells drilled andpumps installed for federal, state of Hawaii, county and private entities.

 

Management does not believe significant credit riskrelated to these trade receivables exists at September 30, 2009 based onprior historical experience.

 

 

**18.****                           ****INFORMATION RELATING TO THECONSOLIDATED STATEMENTS OF CASH FLOWS**

 

The following details theeffect of changes in current assets and liabilities on the ConsolidatedStatements of Cash Flows, and presents supplemental cash flow information:
|                                                                                                            | ** ** | Year ended  September 30, |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------|
|                                                                                                            | ** ** | ** **                     | **2009** |   |   |   |   | 2008 |   |   |   |   | 2007 |   |   |
| *(Decrease) increase from changes  in:*                                                                         | ** ** | ** **                     | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Receivables                                                                                                     | ** ** | ** **                     | **$** | **3,046,000** |   |   |   |   | $ | (2,362,000 | ) |   |   |   | $ | (904,000 | ) |   |
| Other current assets                                                                                            | ** ** | ** **                     | ** ** | **(452,000** | **)** |   |   |   |   | 383,000 |   |   |   |   |   | 1,079,000 |   |   |
| Accounts payable                                                                                                | ** ** | ** **                     | ** ** | **(2,107,000** | **)** |   |   |   |   | (38,000 | ) |   |   |   |   | 1,717,000 |   |   |
| Accrued incentive plan and  other compensation costs                                                            | ** ** | ** **                     | ** ** | **(3,461,000** | **)** |   |   |   |   | (301,000 | ) |   |   |   |   | (338,000 | ) |   |
| Other current liabilities                                                                                       | ** ** | ** **                     | ** ** | **(2,981,000** | **)** |   |   |   |   | 3,013,000 |   |   |   |   |   | (255,000 | ) |   |
| (Decrease) increase from  changes in current assets and liabilities                                             |       |                           | **$** | **(5,955,000** | **)** |   |   |   | $ | 695,000 |   |   |   |   | $ | 1,299,000 |   |   |
|                                                                                                            |       |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Supplemental disclosure of cash  flow information:*                                                            | * *   | * *                       | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Cash paid during the year  for:                                                                                 |       |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest, net of amount  capitalized                                                                            | ** ** | ** **                     | **$** | **887,000** |   |   |   |   | $ | 931,000 |   |   |   |   | $ | 1,000,000 |   |   |
| Income taxes                                                                                                    | ** ** | ** **                     | **$** | **2,703,000** |   |   |   |   | $ | 3,957,000 |   |   |   |   | $ | 859,000 |   |   |
|                                                                                                            |       |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Supplemental disclosure of  non-cash investing and financing activities:*                                      | * *   | * *                       | * * | * * | * * | * * | * * | * * |
| Capitalized interest  financed and not paid in cash                                                             |       |                           | **$** | -        |   |   |   |   | $ | 68,000 |   |   |   |   | $ | 141,000 |   |   |
| Long-term debt borrowings  refinanced                                                                           | ** ** | ** **                     | **$** | -        |   |   |   |   | $ | 6,600,000 |   |   |   |   | $ | -        |   |   |
| Debt assumed in purchase  of drilling rig                                                                       | ** ** | ** **                     | **$** | -        |   |   |   |   | $ | -        |   |   |   |   | $ | 620,000 |   |   |
| Debt assumed in purchase  of residential parcel held for investment                                             |       |                           | **$** | -        |   |   |   |   | $ | 2,178,000 |   |   |   |   | $ | -        |   |   |
| Reduction in deposits on  residential parcels with corresponding increase in investment in residential  parcels |       |                           | **$** | -        |   |   |   |   | $ | 200,000 |   |   |   |   | $ | -        |   |   |

 

During the year ended September 30,2009, the two luxury residences under construction by Kaupulehu 2007 at September 30,2008 were completed and were available for sale at September 30,2009.  Accordingly, all costs related tothe two luxury residences were reported at September 30, 2009 on theConsolidated Balance Sheet under the caption “Real Estate Held for Sale.”

 

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During the year ended September 30, 2008,40,000 stock options were exercised by tendering 5,200 shares of Barnwell stockat a market value of $14.95 per share plus $1,000 of cash, resulting in a$20,000 increase in common stock, a $59,000 increase in additional paid-incapital and a $78,000 increase in treasury stock.  During the year ended September 30, 2007,20,000 stock options were exercised by tendering 1,900 shares of Barnwell stockat an average market value of $21.09 per share, resulting in a $10,000 increasein common stock, a $30,000 increase in additional paid-in capital and a $40,000increase in treasury stock.

 

During the years ended September 30, 2009 and2008, capital expenditure accruals related to oil and natural gas assetretirement obligations decreased $153,000 and $131,000, respectively.  Additionally, capital expenditure accrualsrelated to oil and natural gas exploration and development decreased $2,140,000and increased $825,000 during the years ended September 30, 2009 and 2008,respectively.

 

During the years ended September 30, 2009 and2008, accruals related to residential lots under development decreased $838,000and increased $855,000, respectively.

 

 

**19.       SUBSEQUENT EVENTS**

 

From October 1, 2009 through the date of thisfiling, Kaupulehu Developments, a partnership in which the Company has a 77.6%controlling interest, received percentage of sales payments totaling $1,160,000from the sales of three lots within the Kaupulehu Increment I area by thedeveloper of that area.  Financialresults from the receipt of these payments will be reflected in Barnwell’s Form 10-Qfor the quarter ended December 31, 2009.

 

U.S. income tax legislation enacted in November 2009,subsequent to Barnwell’s fiscal year ended September 30, 2009, extends thecarryback period for net operating losses from two years to up to fiveyears.  The ultimate impact of thisrecent legislation on Barnwell’s results of operations, financial condition andliquidity has not yet been determined.

 

The Company’s management evaluated subsequent eventsthrough the date this Annual Report on Form 10-K was issued and filed withthe SEC, which was December 15, 2009. There were no subsequent events that required recognition in theconsolidated financial statements.

 

 

**20.       SUMMARY OF SELECTEDQUARTERLY FINANCIAL DATA (UNAUDITED)**

 

Disclosure is not required as Barnwell qualifies asa smaller reporting company.

 

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**21.       REDUCTION OF CARRYINGVALUE OF ASSETS**

 

During fiscal 2009, Barnwellreduced the carrying value of certain assets. A breakdown of the reduction of the carrying value of assets as reportedin the Consolidated Statements of Operations is as follows:
|                                         |       | Year  ended September 30, |       |
|----------------------------------------------|------------|--------------------------------|------------|
| ** **                                   |       | **2009**                       |       | 2008 |   | 2007 |   |
| Oil  and natural gas properties              | ** ** | ** **                     | **$**      | **26,348,000** |   |   |   | $ | -        |   |   |   | $ | -        |   |   |
| Investment  in joint ventures                | ** ** | ** **                     | ** ** | **1,127,000** |   |   |   |   | -        |   |   |   |   | -        |   |   |
| Lot  acquisition rights - Mauka Lands        | ** ** | ** **                     | ** ** | **912,000** |   |   |   |   | -        |   |   |   |   | -        |   |   |
| Total reduction of  carrying value of assets | ** ** | ** **                     | **$**      | **28,387,000** |   |   |   | $ | -        |   |   |   | $ | -        |   |   |

 

Under the full cost method of accounting, we arerequired to perform quarterly ceiling test calculations.  Due to a significant decline in prices,Barnwell’s net capitalized costs exceeded the ceiling limitation at the end ofthe second and third quarters of fiscal 2009. As such, Barnwell reduced the carrying value of its oil and natural gasproperties by $26,348,000 during the year ended September 30, 2009.  No such reduction was recorded during fiscalyears 2008 or 2007.

 

Changes in oil and natural gas prices, as well aschanges in production rates, levels of reserves, future development costs andthe market value of unproved properties, impact the determination of themaximum carrying value of oil and natural gas properties.  Future declines in oil, natural gas andnatural gas liquids prices may result in additional reductions of the carryingvalue of our oil and natural gas properties in the absence of offsettingchanges.

 

As a result of protracted widespread impacts of theeconomic recession and tightened credit markets on the real estate and hotelindustries, Barnwell recorded a $1,127,000 non-cash reduction in the carryingvalue of its investment in joint ventures during the year ended September 30,2009, due to declines in values that are deemed other-than-temporary.  No such reduction was recorded during fiscalyears 2008 or 2007.

 

As a result of protracted widespread impacts of theeconomic recession and tightened credit markets on the real estate industry,during the year ended September 30, 2009, Barnwell determined that areduction of the carrying value of its lot acquisition rights in the MaukaLands was necessary.  Accordingly,Barnwell reduced the carrying value of its investment in lot acquisition rightsby $912,000.  No such reduction wasrecorded during fiscal years 2008 or 2007.

 

 

**22.       SUPPLEMENTARYOIL AND NATURAL GAS INFORMATION (UNAUDITED)**

 

The following tables summarize information relativeto Barnwell’s oil and natural gas operations, which are substantially conductedin Canada.  Proved reserves are theestimated quantities of oil, natural gas and natural gas liquids whichgeological and engineering data demonstrate with reasonable certainty to berecoverable in future years from known reservoirs under existing economic andoperating conditions.  Proved producingoil and natural gas reserves are reserves that can be expected to be recoveredthrough existing wells with existing equipment and operating methods.  The estimated net interests in total provedand proved producing reserves are based upon subjective engineering judgmentsand may be affected by the limitations inherent in such estimations.  The process of estimating reserves is subjectto continual revision as additional information becomes available as a resultof drilling, testing, reservoir studies and production history.  There can be no assurance that such estimateswill not be materially revised in subsequent periods.

 

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*(A)**                           **Oil and NaturalGas Reserves*

 

The following table, basedon information prepared by independent petroleum consultants, Paddock Lindstrom &Associates Ltd., summarizes changes in the estimates of Barnwell’s netinterests in total proved reserves of oil and natural gas liquids (“NGL”) andnatural gas (“MCF” means 1,000 cubic feet of natural gas) which are all inCanada.  All of Barnwell’s oil andnatural gas reserves are developed reserves in all years presented; Barnwellhad no undeveloped reserves in these years:
|                                         |       | OIL & NGL |       | GAS           |
|----------------------------------------------|------------|--------------------|------------|---------------|
|                                         |       | (Barrels)          |       | (MCF)         |
| Balance at  September 30, 2006          |       |               |       | 1,303,000     |   |   |   | 24,826,000 |   |
|                                         |       |               |       |          |   |   |   |   |   |
| Revisions of previous  estimates             |       |               |       | 176,000       |   |   |   | 1,279,000 |   |
| Extensions, discoveries  and other additions |       |               |       | 168,000       |   |   |   | 1,528,000 |   |
| Less production                              |       |               |       | (260,000      | ) |   |   | (3,615,000 | ) |
| Balance at  September 30, 2007          |       |               |       | 1,387,000     |   |   |   | 24,018,000 |   |
|                                         |       |               |       |          |   |   |   |   |   |
| Revisions of previous  estimates             |       |               |       | 89,000        |   |   |   | 1,114,000 |   |
| Extensions, discoveries  and other additions |       |               |       | 126,000       |   |   |   | 1,514,000 |   |
| Less production                              |       |               |       | (267,000      | ) |   |   | (3,349,000 | ) |
| Balance at  September 30, 2008          |       |               |       | 1,335,000     |   |   |   | 23,297,000 |   |
|                                         |       |               |       |          |   |   |   |   |   |
| Revisions of previous  estimates             |       |               |       | 239,000       |   |   |   | 82,000 |   |
| Extensions, discoveries  and other additions |       |               |       | 28,000        |   |   |   | 798,000 |   |
| Less production                              |       |               |       | (268,000      | ) |   |   | (3,567,000 | ) |
| **Balance at  September 30, 2009**      | ** ** | ** **         | ** ** | **1,334,000** | ** ** | ** ** | ** ** | **20,610,000** | ** ** |
|                                         |       |               |       |          |
|                                         |       | OIL & NGL |       | GAS           |
| Proved producing reserves  at:               |       | (Barrels)          |       | (MCF)         |
| September 30,  2006                     |       |               |       | 1,069,000     |   |   |   | 18,558,000 |   |
| September 30,  2007                     |       |               |       | 1,095,000     |   |   |   | 18,858,000 |   |
| September 30,  2008                     |       |               |       | 1,092,000     |   |   |   | 18,814,000 |   |
| **September 30,  2009**                 |       |               |       | **1,175,000** |   |   |   | **17,032,000** |   |

 

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*(B)**                            **CapitalizedCosts Relating to Oil and Natural Gas Producing Activities*

 

All capitalized costs relating to oil and natural gas producingactivities, both proved properties and unproved properties, were being depletedin all years.
|                                    |       | September 30, |
|-----------------------------------------|------------|--------------------|
| ** **                              |       | **2009**           |   | 2008 |   | 2007 |
| Proved properties                       | ** ** | ** **         | **$** | **196,114,000** |   |   |   |   | $ | 186,085,000 |   |   |   |   | $ | 179,404,000 |   |   |
| Unproved properties                     | ** ** | ** **         | ** ** | **5,290,000** |   |   |   |   |   | 11,050,000 |   |   |   |   |   | 12,650,000 |   |   |
| Total capitalized costs                 | ** ** | ** **         | ** ** | **201,404,000** |   |   |   |   |   | 197,135,000 |   |   |   |   |   | 192,054,000 |   |   |
| Accumulated depletion and  depreciation | ** ** | ** **         | ** ** | **153,065,000** |   |   |   |   |   | 111,895,000 |   |   |   |   |   | 104,706,000 |   |   |
| Net capitalized costs                   | ** ** | ** **         | **$** | **48,339,000** |   |   |   |   | $ | 85,240,000 |   |   |   |   | $ | 87,348,000 |   |   |

 

*(C)**                          **Costs Incurredin Oil and Natural Gas Property Acquisition, Exploration and Development*
|                       |       | Year ended  September 30, |
|----------------------------|------------|--------------------------------|
| ** **                 |       | **2009**                       |   | 2008 |   | 2007 |
| Acquisition of properties: | ** ** | ** **                     | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unproved                   | ** ** | ** **                     | **$** | **4,000** |   |   |   |   | $ | 268,000 |   |   |   |   | $ | 968,000 |   |   |
| Proved                     | ** ** | ** **                     | **$** | -        |   |   |   |   | $ | -        |   |   |   |   | $ | -        |   |   |
|                       | ** ** | ** **                     | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exploration costs          | ** ** | ** **                     | **$** | **1,018,000** |   |   |   |   | $ | 4,770,000 |   |   |   |   | $ | 4,406,000 |   |   |
|                       | ** ** | ** **                     | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Development costs          | ** ** | ** **                     | **$** | **4,977,000** |   |   |   |   | $ | 12,624,000 |   |   |   |   | $ | 8,790,000 |   |   |

 

*(D)**                          **The Results ofOperations of Barnwell’s Oil and Natural Gas Producing Activities*
|                                                            |       | Year ended  September 30, |
|-----------------------------------------------------------------|------------|--------------------------------|
| ** **                                                      |       | **2009**                       |   | 2008 |   | 2007 |
| Gross revenues                                                  | ** ** | ** **                     | **$** | **30,934,000** |   |   |   |   | $ | 64,502,000 |   |   |   |   | $ | 44,759,000 |   |   |
| Royalties, net of credit                                        | ** ** | ** **                     | ** ** | **5,984,000** |   |   |   |   |   | 15,061,000 |   |   |   |   |   | 10,160,000 |   |   |
| Net revenues                                                    | ** ** | ** **                     | ** ** | **24,950,000** |   |   |   |   |   | 49,441,000 |   |   |   |   |   | 34,599,000 |   |   |
| Production costs                                                | ** ** | ** **                     | ** ** | **9,931,000** |   |   |   |   |   | 10,581,000 |   |   |   |   |   | 10,203,000 |   |   |
| Depletion and depreciation                                      | ** ** | ** **                     | ** ** | **10,996,000** |   |   |   |   |   | 14,150,000 |   |   |   |   |   | 12,753,000 |   |   |
| Reduction of carrying  value of oil and natural gas  properties | ** ** | ** **                     | ** ** | **26,348,000** |   |   |   |   |   | -        |   |   |   |   |   | -        |   |   |
| Pre-tax results of  operations*                                 | ** ** | ** **                     | ** ** | **(22,325,000** | **)** |   |   |   |   | 24,710,000 |   |   |   |   |   | 11,643,000 |   |   |
| Estimated income tax  benefit (expense)                         | ** ** | ** **                     | ** ** | **7,591,000** |   |   |   |   |   | (8,649,000 | ) |   |   |   |   | (4,424,000 | ) |   |
| Results of operations*                                          | ** ** | ** **                     | **$** | **(14,734,000** | **)** |   |   |   | $ | 16,061,000 |   |   |   |   | $ | 7,219,000 |   |   |

----

*                        Before general and administrativeexpenses, interest expense, and foreign exchange gains and losses.

 

*(E)**                           **StandardizedMeasure, Including Year-to-Year Changes Therein, of Estimated Discounted FutureNet Cash Flows*

 

The following tables utilize reserve and productiondata estimated by independent petroleum consultants.  The information may be useful for certaincomparison purposes but should not be solely relied upon in evaluating Barnwellor its performance.  Moreover, theprojections should not be construed as realistic estimates of future cashflows, nor should the standardized measure be viewed as representing currentvalue.

 

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The estimated future cash flows are based on salesprices, costs, and statutory income tax rates in existence at September 30,2009, 2008 and 2007.  Material revisionsto reserve estimates may occur in the future, development and production of theoil and natural gas reserves may not occur in the periods assumed and actualprices realized and actual costs incurred are expected to vary significantlyfrom those used.  Management does notrely upon this information in making investment and operating decisions;rather, those decisions are based upon a wide range of factors, includingestimates of probable reserves as well as proved reserves and price and costassumptions different than those reflected herein.

 

Standardized Measure of Estimated Discounted FutureNet Cash Flows
|                                                                  |       | As of September 30, |
|-----------------------------------------------------------------------|------------|--------------------------|
| ** **                                                            |       | **2009**                 |   | 2008 |   | 2007 |
| Future cash inflows                                                   | ** ** | ** **               | **$** | **148,441,000** |   |   |   |   | $ | 245,977,000 |   |   |   |   | $ | 224,114,000 |   |   |
| Future production costs                                               | ** ** | ** **               | ** ** | **(60,518,000** | **)** |   |   |   |   | (79,014,000 | ) |   |   |   |   | (75,216,000 | ) |   |
| Future development costs                                              | ** ** | ** **               | ** ** | **(3,901,000** | **)** |   |   |   |   | (4,854,000 | ) |   |   |   |   | (4,775,000 | ) |   |
| Future net cash flows before income  taxes                            | ** ** | ** **               | ** ** | **84,022,000** |   |   |   |   |   | 162,109,000 |   |   |   |   |   | 144,123,000 |   |   |
| Future income tax expenses                                            | ** ** | ** **               | ** ** | **(15,183,000** | **)** |   |   |   |   | (38,153,000 | ) |   |   |   |   | (35,416,000 | ) |   |
| Future net cash flows                                                 | ** ** | ** **               | ** ** | **68,839,000** |   |   |   |   |   | 123,956,000 |   |   |   |   |   | 108,707,000 |   |   |
| 10% annual discount for timing of cash flows                          | ** ** | ** **               | ** ** | **(18,598,000** | **)** |   |   |   |   | (35,710,000 | ) |   |   |   |   | (30,407,000 | ) |   |
| Standardized measure of estimated discounted future net cash flows(1) | ** ** | ** **               | **$** | **50,241,000** |   |   |   |   | $ | 88,246,000 |   |   |   |   | $ | 78,300,000 |   |   |

----

(1)          Based on natural gas prices of $3.43, $5.94 and $5.37per 1,000 cubic feet, and oil prices of $65.57, $92.76 and $76.75 per barrel,as of September 30, 2009, 2008 and 2007, respectively.

 

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Changesin the Standardized Measure of Estimated Discounted Future Net Cash Flows

 
|                                                                             |       | Year ended September 30, |           |
|----------------------------------------------------------------------------------|------------|--------------------------|----------------|
| ** **                                                                       | ** ** | **2009**                 | ** **     | 2008 |   | 2007 |   |
| ** **                                                                       | ** ** | ** **               | ** **     |   |   |   |   |
| Beginning of year                                                                | ** ** | **$**                    | **88,246,000** |   | $ | 78,300,000 |   | $ | 49,923,000 |   |
| Sales of oil and natural gas produced, net of  production costs                  | ** ** | **(15,019,000**          | **)**          | (38,860,000 | ) | (24,299,000 | ) |
| Net changes in prices and production costs, net of  royalties and wellhead taxes | ** ** | **(52,011,000**          | **)**          | 30,542,000 |   | 29,674,000 |   |
| Extensions and discoveries                                                       | ** ** | **2,037,000**            |           | 10,691,000 |   | 8,775,000 |   |
| Revisions of previous quantity estimates                                         | ** ** | **6,407,000**            |           | 13,589,000 |   | 9,681,000 |   |
| Net change in Canadian dollar translation rate                                   | ** ** | **(2,592,000**           | **)**          | (2,908,000 | ) | 3,165,000 |   |
| Changes in the timing of future production and  other                            | ** ** | **(2,730,000**           | **)**          | 1,362,000 |   | 6,411,000 |   |
| Net change in income taxes                                                       | ** ** | **17,179,000**           |           | (11,830,000 | ) | (10,619,000 | ) |
| Accretion of discount                                                            | ** ** | **8,724,000**            |           | 7,360,000 |   | 5,589,000 |   |
| Net change                                                                       | ** ** | **(38,005,000**          | **)**          | 9,946,000 |   | 28,377,000 |   |
| End of year                                                                      | ** ** | **$**                    | **50,241,000** |   | $ | 88,246,000 |   | $ | 78,300,000 |   |
|                                                                                  |            |                          |                |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

**ITEM 9.****                                     ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

** **

** **

**ITEM 9A(T).****      ****CONTROLS AND PROCEDURES**

** **

**DisclosureControls and Procedures**

 

We have establisheddisclosure controls and procedures to ensure that material information relatingto Barnwell, including its consolidated subsidiaries, is made known to theofficers who certify Barnwell’s financial reports and to other members ofexecutive management and the Board of Directors.

 

As of September 30, 2009, anevaluation was carried out by Barnwell’s Chief Executive Officer and ChiefFinancial Officer of the effectiveness of Barnwell’s disclosure controls andprocedures.  Based on that evaluation,the Chief Executive Officer and Chief Financial Officer have concluded thatBarnwell’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) were effective as of September30, 2009 to ensure that information required to be disclosed by Barnwell inreports that it files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the Securities Exchange Act of 1934 and the rules thereunder.

 

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**Management’s Annual Report on Internal Control OverFinancial Reporting**

 

Barnwell’s management is responsiblefor establishing and maintaining adequate internal control over financialreporting for Barnwell, as such term is defined in Rules 13a-15(f) and 15d-15(f)under the Securities Exchange Act of 1934. Under the supervision and with the participation of Barnwell’smanagement, including our Chief Executive Officer and Chief Financial Officer,Barnwell conducted an evaluation of the effectiveness of its internal controlover financial reporting based on the framework in *Internal Control over Financial Reporting — Guidance for Smaller PublicCompanies*issued by the Committee of Sponsoring Organizations of theTreadway Commission (the “COSO Framework”). Based on this evaluation under the COSO Framework, management concludedthat its internal control over financial reporting was effective as of September30, 2009.

 

This annual report does notinclude an attestation report of Barnwell’s registered public accounting firmregarding internal control over financial reporting.  Management’s report was not subject toattestation by Barnwell’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit Barnwellto provide only management’s report in this annual report.

** **

**Changes in Internal Control Over Financial Reporting**

 

There was no change inBarnwell’s internal control over financial reporting during the quarter ended September30, 2009, that materially affected, or is reasonably likely to materiallyaffect, Barnwell’s internal control over financial reporting.

** **

** **

**ITEM 9B.****                          ****OTHER INFORMATION**

 

None.

** **

** **

**PART III**

** **

**ITEM 10.****                             ****DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE**

 

The information required is omitted pursuant toGeneral Instruction G(3) of Form 10-K, since the Registrant will file itsdefinitive proxy statement for the 2010 Annual Meeting of Stockholders no laterthan 120 days after the close of its fiscal year ended September 30, 2009,which proxy statement is incorporated herein by reference.

 

Barnwell adopted a Code of Ethics that applies toits Chief Executive Officer and the Chief Financial Officer.  This Code of Ethics has been posted onBarnwell’s website at www.brninc.com.

** **

** **

**ITEM 11.****                             ****EXECUTIVE COMPENSATION**

 

The information required is omitted pursuant toGeneral Instruction G(3) of Form 10-K, since the Registrant will file itsdefinitive proxy statement for the 2010 Annual Meeting of Stockholders no laterthan 120 days after the close of its fiscal year ended September 30, 2009,which proxy statement is incorporated herein by reference.

 

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**ITEM 12.****                             ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The information required is omitted pursuant toGeneral Instruction G(3) of Form 10-K, since the Registrant will file itsdefinitive proxy statement for the 2010 Annual Meeting of Stockholders no laterthan 120 days after the close of its fiscal year ended September 30, 2009,which proxy statement is incorporated herein by reference.

* *

*Equity Compensation PlanInformation*

 

The following table provides information aboutBarnwell’s common stock that may be issued upon exercise of options and rightsunder all of Barnwell’s existing equity compensation plans as of September 30,2009:

 
|                                                        |   | (a)                                               |   | (b)                                               |   | (c)                                               |   |
|-------------------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                        |   | Number of                                         |   | Weighted-                                         |   | Number of securities                              |   |
|                                                        |   | securities                                        |   | average                                           |   | remaining available                               |   |
|                                                        |   | to be issued                                      |   | price of                                          |   | for future issuance                               |   |
|                                                        |   | upon exercise                                     |   | outstanding                                       |   | under equity                                      |   |
|                                                        |   | of outstanding                                    |   | options,                                          |   | compensation plans                                |   |
|                                                        |   | options, warrants                                 |   | warrants                                          |   | (excluding securities                             |   |
| Plan Category                                               |   | and rights                                        |   | and rights                                        |   | reflected in column (a))                          |   |
|                                                        |   |                                              |   |                                              |   |                                              |   |
| Equity compensation plans approved by security  holders     |   | 718,000                                           |   | $9.94                                             |   | 460,000                                           |   |
| Equity compensation plans not approved by security  holders |   |     -     |   |     -     |   |     -     |   |
| Total                                                       |   | 718,000                                           |   | $9.94                                             |   | 460,000                                           |   |
|                                                             |        |                                                   |        |                                                   |        |                                                   |        |  |  |  |  |  |  |

 

 

**ITEM 13.****                             ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

The information required is omitted pursuant toGeneral Instruction G(3) of Form 10-K, since the Registrant will file itsdefinitive proxy statement for the 2010 Annual Meeting of Stockholders no laterthan 120 days after the close of its fiscal year ended September 30, 2009,which proxy statement is incorporated herein by reference.

** **

** **

**ITEM 14.****                             ****PRINCIPAL ACCOUNTING FEES ANDSERVICES**

 

The information required is omitted pursuant toGeneral Instruction G(3) of Form 10-K, since the Registrant will file itsdefinitive proxy statement for the 2010 Annual Meeting of Stockholders no laterthan 120 days after the close of its fiscal year ended September 30, 2009,which proxy statement is incorporated herein by reference.

 

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**PART IV**

** **

** **

**ITEM 15.****                             ****EXHIBITS, FINANCIAL STATEMENTSCHEDULES**

 

(a)      Financial Statements

The following consolidated financial statements of Barnwell Industries,Inc. and its subsidiaries are included in Part II, Item 8:

Report of Independent Registered Public Accounting Firm – KPMG LLP

Consolidated Balance Sheets – September 30, 2009 and 2008

Consolidated Statements of Operations – for the three years ended September30, 2009

Consolidated Statements of Cash Flows – for the three years ended September30, 2009

Consolidated Statements of Stockholders’ Equity and Comprehensive(Loss) Income for the three years ended September 30, 2009

Notes to Consolidated Financial Statements

Scheduleshave been omitted because they were not applicable, not required, or theinformation is included in the consolidated financial statements or notesthereto.

(b)      Exhibits
| Exhibit  Number |   | Description                                                                                                                                                            |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |   | Certificate of Incorporation(1)                                                                                                                                        |
| 3.2             |   | Amended and Restated By-Laws(2)                                                                                                                                        |
| 4.0             |   | Form of the Registrant’s certificate of common stock, par value $.50  per share.(3)                                                                               |
| 10.1            |   | The Barnwell Industries, Inc. Employees’ Pension Plan (restated as of  October 1, 1989).(4)                                                                       |
| 10.2            |   | Phase I Makai Development Agreement dated June 30, 1992, by and  between Kaupulehu Makai Venture and Kaupulehu Developments.(5)                                        |
| 10.3            |   | KD/KMV Agreement dated June 30, 1992 by and between Kaupulehu Makai  Venture and Kaupulehu Developments.(5)                                                            |
| 10.4            |   | Form of Purchase and Sale Agreement dated February 13, 2004 by and  between Kaupulehu Developments and WB KD Acquisition, LLC.(6)                                      |
| 10.5            |   | Form of Agreement Re Step In Rights of Kaupulehu Developments dated  February 13, 2004.(7)                                                                             |
| 10.6            |   | Agreement dated May 27, 2009 which became effective June 23, 2009 by  and between Kaupulehu Developments and WB KD Acquisition, LLC and WB KD  Acquisition II, LLC.(8) |

 

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| Exhibit  Number      |   | Description                                                                                          |
|----------------------|--------|------------------------------------------------------------------------------------------------------|
| 21    |   | List of Subsidiaries                                                                                 |
| 23    |   | Consent of KPMG LLP                                                                                  |
| 31.1                 |   | Certification of Chief Executive Officer Pursuant To Section 302 of  the Sarbanes-Oxley Act of 2002. |
| 31.2                 |   | Certification of Chief Financial Officer Pursuant To Section 302 of  the Sarbanes-Oxley Act of 2002. |
| 32    |   | Certification Pursuant To Section 906 of the Sarbanes-Oxley Act of  2002.                            |

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(1)     Incorporated by reference to the Registrant’s Form S-8dated November 8, 1991.

(2)     Incorporated by reference to the Registrant’s Form 8-Kfiled December 12, 2007.

(3)     Incorporated by reference to the registration statementon Form S-1 originally filed by the Registrant January 29, 1957 and as amended February15, 1957 and February 19, 1957.

(4)     Incorporated by reference to Form 10-K for the yearended September 30, 1989.

(5)     Incorporated by reference to Form 10-K for the yearended September 30, 1992.

(6)     Incorporated by reference to the Registrant’s Form 8-Kfiled on February 13, 2004 and previously listed as Exhibit 2.1 in Barnwell’s Form10-QSB for the quarterly period ended March 31, 2004.

(7)     Incorporated by reference tothe Registrant’s Form 8-K filed on February 13, 2004 and previously listed as Exhibit2.2 in Barnwell’s Form 10-QSB for the quarterly period ended March 31, 2004.

(8)     Incorporated by reference to Form10-Q for the quarterly period ended June 30, 2009.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

BARNWELLINDUSTRIES, INC.

(Registrant)

 

 
|   | /s/  Russell M. Gifford                                                                              |   |
|--------|------------------------------------------------------------------------------------------------------|--------|
| By:    | Russell  M. Gifford

Chief  Financial Officer,

Executive  Vice President,

Treasurer  and Secretary |   |
| Date:  | December  15, 2009                                                                                   |   |

 

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SIGNATURES(continued)

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 

 
| /s/ Morton H. Kinzler                                                                                                               |   | /s/ Alexander C. Kinzler                                                                                         |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------|
| Morton H. Kinzler

Chief Executive Officer and

Chairman of the Board

Date: December 15, 2009                                      |   | Alexander C. Kinzler

President, Chief Operating Officer,

General Counsel and Director

Date: December 15, 2009 |
|                                                                                                                                |   |                                                                                                             |
|                                                                                                                                |   |                                                                                                             |
| /s/ Russell M. Gifford                                                                                                              |   | /s/ Martin Anderson                                                                                              |
| Russell M. Gifford

Executive Vice President,

Chief Financial Officer, Treasurer,

Secretary and Director

Date: December 15, 2009 |   | Martin Anderson

Director

Date: December 15, 2009                                                               |
|                                                                                                                                |   |                                                                                                             |
|                                                                                                                                |   |                                                                                                             |
| /s/ Murray C. Gardner                                                                                                               |   | /s/ Ahron H. Haspel                                                                                              |
| Murray C. Gardner

Director

Date: December 15, 2009                                                                                |   | Ahron H. Haspel

Director

Date: December 15, 2009                                                               |
|                                                                                                                                |   |                                                                                                             |
|                                                                                                                                |   |                                                                                                             |
| /s/ Alan D. Hunter                                                                                                                  |   | /s/ Diane G. Kranz                                                                                               |
| Alan D. Hunter

Director

Date: December 15, 2009                                                                                   |   | Diane G. Kranz

Director 

Date: December 15, 2009                                                               |
|                                                                                                                                |   |                                                                                                             |
|                                                                                                                                |   |                                                                                                             |
| /s/ Kevin K. Takata                                                                                                                 |   | /s/ Robert J. Inglima, Jr.                                                                                       |
| Kevin K. Takata

Director

Date: December 15, 2009                                                                                  |   | Robert J. Inglima, Jr.

Director

Date: December 15, 2009                                                        |

 

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**INDEX TO EXHIBITS**

** **
| Exhibit

Number      |   | Description                                                                                                                                                            |   | Page   |
|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 3.1                  |   | Certificate of Incorporation(1)                                                                                                                                        |   |   |
| 3.2                  |   | Amended and Restated By-Laws(2)                                                                                                                                        |   |   |
| 4.0                  |   | Form of the Registrant’s certificate of common stock, par value $.50  per share.(3)                                                                               |   |   |
| 10.1                 |   | The Barnwell Industries, Inc. Employees’ Pension Plan (restated as of  October 1, 1989).(4)                                                                       |   |   |
| 10.2                 |   | Phase I Makai Development Agreement dated June 30, 1992, by and  between Kaupulehu Makai Venture and Kaupulehu Developments.(5)                                        |   |   |
| 10.3                 |   | KD/KMV Agreement dated June 30, 1992 by and between Kaupulehu Makai  Venture and Kaupulehu Developments.(5)                                                            |   |   |
| 10.4                 |   | Form of Purchase and Sale Agreement dated February 13, 2004 by and  between Kaupulehu Developments and WB KD Acquisition, LLC.(6)                                      |   |   |
| 10.5                 |   | Form of Agreement Re Step In Rights of Kaupulehu Developments dated  February 13, 2004.(7)                                                                             |   |   |
| 10.6                 |   | Agreement dated May 27, 2009 which became effective June 23, 2009 by  and between Kaupulehu Developments and WB KD Acquisition, LLC and WB KD  Acquisition II, LLC.(8) |   |   |
| 21    |   | List of Subsidiaries.                                                                                                                                                  |   | 121    |
| 23    |   | Consent of KPMG LLP.                                                                                                                                                   |   | 122    |
| 31.1                 |   | Certification of Chief Executive Officer Pursuant To Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                   |   | 123    |
| 31.2                 |   | Certification of Chief Financial Officer Pursuant To Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                   |   | 124    |
| 32    |   | Certification Pursuant To Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                              |   | 125    |

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(1)     Incorporated by reference to the Registrant’s Form S-8dated November 8, 1991.

(2)     Incorporated by reference to the Registrant’s Form 8-Kfiled December 12, 2007.

(3)     Incorporated by reference to the registration statementon Form S-1 originally filed by the Registrant January 29, 1957 and as amended February15, 1957 and February 19, 1957.

(4)     Incorporated by reference to Form 10-K for the yearended September 30, 1989.

(5)     Incorporated by reference to Form 10-K for the yearended September 30, 1992.

(6)     Incorporated by reference to the Registrant’s Form8-K filed on February 13, 2004 and previously listed as Exhibit 2.1in Barnwell’s Form 10-QSB for the quarterly period ended March 31, 2004.

(7)     Incorporated by reference tothe Registrant’s Form 8-K filed on February 13, 2004 and previouslylisted as Exhibit 2.2 in Barnwell’s Form 10-QSB for the quarterlyperiod ended March 31, 2004.

(8)     Incorporated by reference to Form10-Q for the quarterly period ended June 30, 2009.

 

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