# TO OUR SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/AMEX_BRN_2019/AMEX_BRN_2019.mmd` · pages 2-8_

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TO OUR SHAREHOLDERS:

Fiscal 2019 was a challenging year as we continued to rebuild the Company. However, the steps we have taken over the last five years to restructure our Canadian operations, reduce general and administrative expense and lay the foundation for future growth have begun to bear fruit, and we expect will drive Barnwell's growth and create stockholder value into the future.

Barnwell has been investing in the upstream oil and gas business in Canada for over 50 years. These activities are a major part of who we are, and it is our intention to continue investing in Canada. Our strategy for our oil and gas segment in the past 5 years has been twofold: (i) maximizing the value of our "legacy" oil assets through strategic acquisitions, exploitation and timely dispositions, while; (ii) evaluating and securing a new conventional oil asset that offered a stable base of production, operated infrastructure with year-round access, and a dominant land holding in a large underdeveloped pool that can provide a long-term inventory of horizontal wells that could be developed with modern completion technology.

Barnwell had a net loss for fiscal 2019 of \(12,414,000, \)1.50 per share, as compared to a net loss of \(1,770,000, \)0.21 per share, in fiscal 2018. This \(10,644,000 decrease in the Company's bottom line in one year was predominantly due to the following factors: a \)5,710,000 non-cash impairment of our oil and gas properties during fiscal 2019 due to lower commodity prices in 2019 as compared to 2018; a \(2,255,000 gain recognized in fiscal 2018 primarily from the sale of oil properties in the Red Earth area; a \)1,443,000 decrease in land investment segment operating profit, before income taxes and non-controlling interests' share of such profits, in fiscal 2019 due to a decrease in sale proceeds received as compared to fiscal 2018 and a $499,000 decrease in equity in income from affiliates as a result of decreased operating results of the Kukio Resort Land Development Partnerships.

## Canadian Oil & Gas Segment

Fiscal 2019's challenges originated with the low oil prices we experienced in November and December of 2018, the beginning of our 2019 fiscal year. Starting with the oil price collapse in late 2014, we took actions to defend our balance sheet by divesting of our mature natural gas and heavy oil properties. We also were proactive in abandoning wells to address our asset retirement obligations and acquiring additional interests in our profitable conventional oil areas. We acquired a new conventional oil asset (Iwinning) that will provide a platform for horizontal drilling for years to come. These actions have allowed us to avoid the debt issues plaguing many of our peers, while getting back to investing in drilling oil wells.

In Canada, the global supply and demand realities that have depressed commodity prices have been compounded by unique difficulties in getting new pipelines built. This led to a virtually unprecedented differential in oil prices between Canada and the U.S. in November 2018, severely reducing prices for our oil in our first fiscal quarter of 2019. In addition to the short term disruption in our revenue and due to the full-cost accounting rules which require us to value our oil and gas assets based on the average of first day of the month prices, November and December 2018's low prices triggered significant non-cash write-downs of our oil and gas asset values in the first and fourth quarters of fiscal 2019. These non-cash write downs did not affect cash or liquidity.

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Just prior to the end of fiscal 2019, we participated with a 28.3% interest in a horizontal well in the Spirit River area of Alberta. This well commenced drilling in late September 2019, came on production in mid-November 2019 and has proven to be one of the best wells drilled in Alberta in the past year and one of the best, if not the best, well that Barnwell has been part of in its history. In only 3 months this well has produced over 65,000 barrels of oil and 160,000 thousand cubic feet ("Mcf") of natural gas of which Barnwell's share was 18,000 barrels and 45,000 Mcf, respectively. We expect to achieve payout on the capital invested in this well in the second quarter of fiscal 2020. That well is currently producing about 400 barrels per day of oil and 1,500 Mcf per day of gas.

That well is admittedly a phenomenal well, but it is a good example of the prize that is available from applying modern horizontal well technology in large conventional oil reservoirs. However, the Spirit River area mineral rights are tightly held by large, well-capitalized companies that Barnwell simply cannot compete against, and we must be satisfied with what we have been able to achieve.

In August 2018, we acquired a significant asset base in the Twining field in Central Alberta. Barnwell was very selective in its search for a new area that fit our criteria and was very fortunate to acquire the Twining asset. There is significant oil to be recovered there through modern techniques. That is the business model – to execute a long-term drilling program where wells are investment opportunities that deliver high internal rates of return. We have acquired rights to roughly 30% of this pool and have identified over 50 locations that could be developed using horizontal drilling and multi-stage fracing over the next several years. We have strategic facilities that we operate to handle this incremental production. We drilled our first operated horizontal well in Twining in the first quarter of fiscal 2020 (Barnwell has 100% interest in the well), completed it with 26 frac stages and connected it for production. Oil and gas rates have been steadily increasing as the load water is recovered, and we are currently producing about 70 Boe/d net to Barnwell.

We are currently marketing all of our "legacy" properties in a brokered process. Since 2014, we have generated over $30 million through asset sales and paid off our debt, while reducing our asset retirement obligations. It is our intention that a significant portion of any proceeds from such sales would be used to re-invest in Twining.

## Hawaii Real Estate

Our land project at Kaupulehu on the Big Island of Hawaii did not see any sales during fiscal 2019. However, a new developer has come in and is moving forward with development plans for the Increment II area of Kaupulehu, which is approved and entitled for a density of up to approximately 400 units, as well as amenities and other uses. The developer, an affiliate of Replay, based in Vancouver B.C., hopes to release their master plan to the public soon, which we believe would aid in future lot sales of the remaining 19 lots in the Increment I portion of the project.

## Hawaii Contract Drilling

Our Water Resources International, Inc. contracting subsidiary had an excellent fiscal year, and we expect that it will have an even better fiscal 2020, as it saw its revenues increase by \(1,580,000, or 42%, to \)5,349,000 in fiscal 2019, generating an operating profit. This improvement was primarily due to a new well drilling contract that is based on a fixed rate per day or hour, depending upon the activity, as opposed to the Company's typical contract that is based on a fixed price per lineal foot drilled. Also, this contract includes revenues from a contract payment that was used to fund the Company's purchase of a new drilling rig and ancillary equipment, which will be available for use on other future jobs with other customers after this contract is completed. We expect significantly higher

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revenues under this contract during fiscal 2020. Additionally, the Company has a backlog of drilling and pump installation and repair contracts of approximately $11,000,000 at February 1, 2020, of which $8,000,000 is expected to be realized in fiscal 2020, which may make this segment's operating profit substantially higher in fiscal 2020 as compared to fiscal 2019.

## Conclusion

Mr. Martin Anderson and Dr. Murray C. Gardner will not be nominated for reelection to our Board of Directors at our 2020 Annual Meeting. Mr. Anderson and Dr. Gardner have served with distinction for 35 years and 24 years, respectively. The Board of Directors wishes to thank them for their years of service and acknowledge the many contributions that each has made to the Company's success through their wisdom, sage advice, business experience and commitment to the Company. Mr. Anderson was part of the group that founded our contract drilling subsidiary in the 1970's, and Dr. Gardner advised us on our geothermal operations in the early 1980's. Once again, we thank them for their many contributions to the Company.

Over the last several years, we have asked for your patience, as stockholders of Barnwell, as we moved through a restructuring process to change the way we do business in Canada and lower our general and administrative expense. Over the last five years, we have lowered our general and administrative expense from \(8,551,000 in fiscal 2015 to \)5,524,000 in fiscal 2019, a reduction of 35.4%. This has been accomplished through reductions in salaries and wages, professional fees, travel and entertainment, medical expenses, and various other controllable general and administrative expenses. We intend to continue exploring ways to significantly reduce our general and administrative expenses in absolute terms and as a percentage of our revenues as we move forward.

We are proud of the steps we have taken and the results we recently announced for the first quarter of our 2020 fiscal year which show a 90% improved bottom line and operating profits in our oil and gas and water well company divisions.

We thank you, our stockholders, for your continued support.

For the Board of Directors,

James S. Barnwell III
Chairman of the Board

On the

Alexander C. Kinzler
Chief Executive Officer,
President and Director