The largest shareholder of Honolulu-based energy and real estate company Barnwell Industries Inc. yesterday publicly urged the firm's board to sell its largest assets, including 1,000 acres of Big Island land, and buy back shares of its stock.

In a letter to Barnwell distributed publicly as a press release, shareholder Mercury Real Estate Advisors LLC argued that Barnwell is an undervalued company because of its diverse operations and high administrative expenses including executive pay.

"Although there remains substantial unrealized value in these assets, we believe the company's current corporate structure, egregious executive compensation and disparate business divisions are fundamentally flawed," the letter said.

Alexander Kinzler, Barnwell's president and chief operating officer, said he isn't concerned about Mercury's demand for Barnwell directors to hire an investment bank to evaluate selling parts of Barnwell and buy back shares.

"We're going to do what's best for all our shareholders," he said. "We're prepared to stand on our financial results."

Kinzler said the last nine months have yielded record revenue and profits for the 50-year-old company involved in Canadian oil and natural gas and Hawai'i real estate and groundwater businesses.

For the nine-month period ended on June 30, Barnwell reported net income of $12.8 million, compared with $4.2 million in the same period a year earlier.

Part of Barnwell's recent income has been from single-family lots being developed and sold at Kaupulehu on the Big Island.

Mercury in its letter praised Barnwell for its Kaupulehu venture, which involved selling Barnwell's interest the 870-acre project two years ago for cash and a percentage of future house lot sale proceeds.

Mercury also said Barnwell has improved profitability of its oil and gas business in Canada, but advocated for the sale of the energy division and 1,000 acres of conservation-zoned land on the Big Island.

Another Mercury request was for Barnwell to use proceeds from Kaupulehu lot sales to buy back stock, in effect increasing shareholder value by reducing the number of shares outstanding.

Mercury did not suggest Barnwell sell its Hawai'i groundwater exploration and development company, Water Resources International Inc.

But the investment firm did criticize Barnwell's executive pay as high. Barnwell CEO Morton Kinzler received nearly $1.1 million in compensation in fiscal year 2005. That was roughly on par with pay for the chief executives of Hawaiian Airlines, First Hawaiian Bank and Central Pacific Financial Corp. but far less than other public Hawai'i companies such as Alexander & Baldwin and Bank of Hawaii.

Mercury has a history of acquiring stock in public companies and openly pressing for the liquidation of assets or stock buybacks.

The firm is an affiliate of Greenwich, Conn.-based real estate investment management company Mercury Partners LLC. The firm owns about 19 percent of Barnwell stock. The next largest shareholder is Barnwell's Kinzler with about 16 percent.

Shares of Barnwell closed yesterday up $2.36 at $21.35, about where the stock price was a month ago. Barnwell stock had fallen to a 52-week low of $16.82 on Oct. 5. The 52-week high was $28.25 on Nov. 15, 2005.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.