# TO OUR STOCKHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/AMEX_BRN_2018/AMEX_BRN_2018.mmd` · pages 2-8_

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TO OUR STOCKHOLDERS:

Fiscal 2018 was a year of significant transition for the Company. In June of 2018, we were saddened by the passing of Mr. Morton H. Kinzler, "Morton", a founder of the Company and its Chief Executive Officer for over 45 years. The Board as a whole, as well as the Company's officers and staff, wish to acknowledge his leadership and many contributions to the Company for over six decades, from before the Company's 1956 incorporation until his passing. Morton's vision for the Company was to maintain a solid base of oil & gas operations as a platform for other investment opportunities. Successful oil & gas development in Canada in the 1970's financed our successful investment in the 1980's and 1990's at Kaupulehu, North Kona, Hawaii, which is still a significant asset for the Company and is poised to enter new phases of development by the developers of the property.

Fiscal 2018 was transformative for our Canadian oil and gas operations. Over the past five years, we divested most of our mature, non-operated natural gas properties and all of our heavy oil assets, while retaining and focusing on our core conventional oil assets. These timely sales allowed us to pay off our debt, generate significant cash for reinvestment, and reduce our future liabilities as most of these assets were nearing the end of their useful lives. They were done in anticipation of the looming market and pipeline bottlenecks for natural gas and heavy oil in Western Canada that have impacted netback prices received for those commodities. We consider our Canadian oil and gas operations to be a successful base for Company growth and will continue to invest in this segment of our business.

For the past two years, we have also been actively searching to acquire an appropriate conventional oil asset with substantial "oil-in-place" to be exploited using modern horizontal well drilling and completion techniques. In late August 2018, we closed a major transaction, spending \(10,300,000 in cash to acquire a conventional oil property in the Twining area of Central Alberta, which has medium/light, sweet crude oil production, facility infrastructure and a large volume of undeveloped oil in place, all of which will provide opportunities for optimization and capital investment to grow reserves, production and cash flow for years to come.

The Board of Directors believes that our investment in the Twining asset will bring greater consistency and predictability to our results over time, despite the commodity price swings that are inevitable in this business. We believe this acquisition also makes sense within the Company's business plan. As a conventional oil play, it is not as susceptible to natural gas and heavy oil price differentials that result from Canada's current marketing and pipeline issues that have intensified as political 'hot topic' issues in the months following closing the Twining acquisition. As operator of the prospect, we are in control of our destiny, enabling us to manage the resource in the most efficient way, increasing drilling and production when prices are rising and deferring investment and even holding back some production if needed when prices fall. As an established asset with a large quantity of oil, Twining is a "pure play" asset which can produce significant revenues over decades in the future, as it is primarily held through a new wholly-owned Canadian subsidiary, giving us greater flexibility and some improved tax treatment going forward. Given the current low oil price environment, current activity contemplated at Twining includes workovers and stimulations which can offset declines and also facilities enhancements, which reduce operating costs, extend the life of the pool and allow increased production from drilling. Drilling is not scheduled to commence at Twining until late fiscal 2019 with timing dependent on commodity pricing, availability of services, and other strategic considerations.

Barnwell had a net loss for fiscal 2018 of \(1,770,000 (\)0.21 per share), as compared to a net profit of \(1,171,000 (\)0.14 per share) in fiscal 2017. This $2,941,000 decrease in the Company's bottom line in

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one year was predominantly due to 1) a \(2,053,000 decrease in equity in income from affiliates as a result of decreased operating results of the Kukio Resort land development partnerships, which also led to a lower land investment segment operating profit; 2) a \)541,000 decrease in contract drilling segment operating results, before income taxes, primarily resulting from a high value contract in the prior year, whereas there was no such high value contract in the current year; and 3) a $260,000 decrease in oil and natural gas segment operating results, before income taxes, due to an overall decrease in reported year over year oil and natural gas production, since fiscal 2018 only includes just over one month of revenue from the newly-acquired Twining property. These results were partially offset by a $1,728,000 increase in gain on sale of assets resulting from the sale of our Red Earth Canadian oil asset.

In fiscal 2018 both our oil and natural gas and land investment segments had operating profits, before general and administrative expenses, however, these operating profits were lower than in fiscal 2017. The impact of the Twining acquisition will be more apparent in our Statement of Operations as we go forward in fiscal 2019.

Of notable importance in fiscal 2018 was the continued success of our investments in Kukio Resort, made five years ago in fiscal 2014. During fiscal 2018, we saw the sale of three lots by the Kukio Resort land development partnerships in which the Company indirectly owns a 19.6% non-controlling ownership interest and $735,000 was distributed to us as a result. Our 77.6%-owned Kaupulehu Developments entity received percentage payments of $645,000 resulting from these sales as well, and also a $1,000,000 preferential payment from the Kukio development partnerships. Planning is currently underway for new development projects at Kaupulehu and we hope to see these projects move forward in fiscal 2019 to begin generating new sales in the years to come.

The Company continues to take steps to reduce its general and administrative expenses and saw general administrative expenses fall by approximately ten percent from fiscal 2017 to 2018, reflecting reductions in compensation and directors' fees, reduced post-retirement medical obligations and reductions in various types of controllable general and administrative expenses.

We believe that the Company is moving in the right direction with our major Twining acquisition this year. Our balance sheet continues to be stronger than it was five years ago, and we continue to be debt free. This sets us apart from our peers and, provides us with a positive story to tell the public, and we are beginning to take steps to draw more attention to our Company in the stock market, in order to improve our share price. We continue to believe that our shares are undervalued and that the price should be higher to reflect the intrinsic value of the Company.

The Company leaves fiscal 2018 with \(6,700,000 in cash, cash equivalents and certificates of deposit, and with working capital of \)8,453,000 at September 30, 2018, which positions the Company for a positive start to fiscal 2019, even as we invested about \(10,300,000 in the Twining property. We have restored a stronger oil and gas division with an inventory of growth opportunities, and look forward to the challenges and opportunities this provides as we endeavor to deliver improved results.

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

For the Board of Directors,

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James S. Barnwell III
Chairman of the Board

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Alexander C. Kinzler
Chief Executive Officer,
President and Director