UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: March 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
------------------ -------------------
Commission File Number: 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of small business issuer as specified in its charter)
Delaware 73-1268729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 Travis, Suite 2100, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 227-7660
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
6,371,845 shares of the registrants' common stock, par value $.01 per share,
were outstanding at May 3, 2002.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET -UNAUDITED
March 31, 2002
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Blue Dolphin Energy Company
and subsidiaries (the "Company") included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC") and, in the opinion of management, reflect all
adjustments necessary to present a fair statement of operations, financial
position and cash flows. The Company follows the full-cost method of accounting
for oil and gas properties, wherein costs incurred in the acquisition,
exploration and development of oil and gas reserves are capitalized. The Company
believes that the disclosures are adequate and the information presented is not
misleading, although certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
The accompanying condensed consolidated financial statements of the Company
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Annual Report on Form 10-KSB for the year ended
December 31, 2001.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLODATED BALANCE SHEET - UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 2,345,880
Accounts receivable, net of allowance of $197,500 1,060,318
Prepaid expenses and other assets 278,111
------------
TOTAL CURRENT ASSETS 3,684,309
Property and Equipment at cost:
Oil and Gas properties, including $221,832
of unproved leasehold cost (full-cost method) 27,126,133
Pipelines 3,580,910
Onshore separation and handling facilities 1,664,128
Land 860,275
Other property and equipment 272,091
------------
33,503,537
Accumulated depletion, depreciation and amortization (27,117,808)
------------
6,385,729
Deferred federal income tax 244,444
Other assets 463,189
------------
TOTAL ASSETS $ 10,777,671
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 818,555
Accrued expenses and other liabilities 4,983,527
------------
TOTAL CURRENT LIABILITIES 5,802,082
Note payable 750,000
Contingencies --
Common Stock, ($.01 par value, 10,000,000
shares authorized, 6,371,845 shares issued and outstanding) 63,720
Additional Paid-in Capital 26,107,139
Accumulated Deficit (21,945,270)
------------
4,225,589
TOTAL LIABILITES AND
STOCKHOLDERS' EQUITY $ 10,777,671
============
See accompanying notes to the condensed consolidated financial statements.
3
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLODATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months
Ended March 31,
2002 2001
----------- -----------
Revenue from operations:
Oil and gas sales $ 578,269 $ 1,790,852
Pipeline operations 329,297 322,198
----------- -----------
907,566 2,113,050
----------- -----------
Cost of operations:
Lease operating expenses 217,647 333,764
Pipeline operating expenses 144,716 150,738
Depletion, depreciation, amortization and abandonment 289,567 649,012
Impairment of assets 339,984 1,000,000
General and administrative 584,615 629,569
----------- -----------
1,576,529 2,763,083
----------- -----------
LOSS FROM OPERATIONS (668,963) (650,033)
Other income (expense):
Interest and other expense (15,792) (165,240)
Bad debt expense (197,500) --
Gain on sale of assets -- 1,417,626
Interest and other income 14,590 53,121
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST,
AND INCOME TAXES (867,665) 655,474
Minority interest (55,746) (102,560)
Income taxes -- --
----------- -----------
Net income (loss) $ (923,411) $ 552,914
=========== ===========
Earnings (loss) per common share-basic $ (0.15) $ 0.09
=========== ===========
Earnings (loss) per common share-diluted $ (0.15) $ 0.09
=========== ===========
Weighted average number of common shares outstanding:
Basic 6,213,324 6,016,829
=========== ===========
Diluted 6,213,324 6,036,437
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLODATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three Months
Ended March 31,
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ (923,411) $ 552,914
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depletion, depreciation, amortization, abandonment 289,567 649,012
Minority interests 55,746 102,560
Gain on sale of assets -- (1'417'626)
Impairment of assets 339,984 1,000,000
Bad debt expense 197,500 --
Changes in operating assets and liabilities:
Accounts receivable 421 (901,770)
Prepaid expenses and other assets (114,286) (297,602)
Abandonment costs incurred -- (1,388,185)
Trade accounts payable, accrued expenses, and
other current liabilities (160,823) 1,962,300
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (315,302) 261,603
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (103,979) (927,242)
Exploration and development costs (331,313) (235,330)
Net proceeds from sale of assets -- 4,625,000
Other assets (4,302) (194,153)
Purchase of minority interest from subsidiary (254,786) --
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (694,380) 3,268,275
----------- -----------
FINANCING ACTIVITIES
Payments on borrowings -- (2,218,412)
Other 12,002 (6,657)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 12,002 (2,225,069)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (997,680) 1,304,809
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,343,560 2,071,682
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,345,880 $ 3,376,491
=========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ -- $ 98,500
=========== ===========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property and equipment financed with debt $ 750,000 $ --
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. Related Party Transactions
In May 2002, the Company terminated its agreement with Drillmar, effective as of
May 1, 2002, whereby it provided office space and certain management and
administrative services to Drillmar for approximately $40,000 per month.
Drillmar will owe the Company approximately $235,000 as of May 1, 2002.
Also in May 2002, the Company and Drillmar entered into a new agreement
effective as of May 1, 2002, whereby the Company will provide office space and
minimal accounting and administrative services to Drillmar for $2,000 per month.
The agreement can be terminated upon 30 days notice or by the mutual agreement
of the parties.
Due to Drillmar's working capital deficiency and delays in securing capital
funding, the Company has elected to record a full impairment of its investment
in Drillmar of approximately $340,000 and a full reserve for the accounts
receivable amount owed from Drillmar, $197,500 at March 31, 2002. Except for an
initial contribution of approximately $125,000 cash, the Company's investment in
Drillmar and the accounts receivable emanated primarily from a contribution of
services for which the Company incurred essentially no incremental cost.
Ivar Siem, Chairman of the Company, and Harris A. Kaffie, a Director of the
Company, are owners of 30.3% and 30.6%, respectively, of Drillmar's common
stock. As of March 31, 2002, Messrs. Siem and Kaffie provided funding to
Drillmar of $525,000 and $425,000, respectively, and were issued unsecured
promissory notes from Drillmar. The promissory notes are due June 30, 2002 and
bear interest at the rate of 10% per annum. Along with the promissory notes,
Drillmar issued detachable warrants to Messrs. Siem and Kaffie of 52,500 and
42,500, respectively. Each warrant provides for the purchase of one share of
Drillmar common stock at $5 per share and are exercisable for three years from
issuance. The promissory notes issued by Drillmar are nonrecourse to the
Company.
2. Contingencies
As a result of the decision to cease operating activities in the Buccaneer
Field, the Company's leases in or on the Buccaneer Field terminated in January
2001. The Company must plug and abandon all remaining wells and remove platform
facilities within one year from the termination of the leases. In 2001, the
Company plugged its remaining wells at a cost of approximately $1.4 million.
During 2001 the Company also commenced operations to remove the Buccaneer Field
platform complexes at a cost of approximately $0.4 million. After the Company
commenced removal operations, discussions were initiated with the Texas Parks
and Wildlife ("TP&W") in an effort to leave certain of the underwater portions
of the platform complexes in place as artificial reefs. In December 2001,
operations to remove the platform complexes were suspended while the Company
continues its discussions with the TP&W.
The Company expects that the TP&W will make a decision whether the Company can
leave portions of the Buccaneer Field platform complexes in place as artificial
reefs late in the second quarter 2002. If one or both of the platform complexes
are left in place as an artificial reef, certain site clearance costs would be
eliminated. The Company requested and has received an extension from the MMS
until October 1, 2002 to complete the removal and site clearance of the platform
complexes. The Company still believes that its provision for abandonment costs
of $4.6 million at December 31, 2001 is adequate.
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
On May 8, 2000, American Resources and its former Chief Financial Officer were
named in a lawsuit in the United States District Court for the Southern District
of Texas, Houston Division, styled H&N Gas, Limited Partnership, et al. v.
Richard Hale, et al (Case No H-00-1371). The lawsuit alleges, among other
things, that H&N Gas ("H&N") was defrauded by American Resources in connection
with gas purchase options and gas price swap contracts entered into from
February 1998 through September 1999. H&N alleges unlawful collusion between
American Resources' prior management and the then president of H&N, Richard Hale
("Hale"), to the detriment of H&N. H&N generally alleges that Hale directed H&N
to purchase illusory options from American Resources that bore no relation to
any physical gas business and that American Resources did not have the financial
resources and/or sufficient quantity of gas to perform. H&N further alleges that
American Resources and Hale colluded with respect to swap transactions that were
designed to benefit American Resources at the expense of H&N. H&N further
alleges civil conspiracy against all the defendants. H&N is seeking
approximately $6.2 million in actual damages plus treble damages, punitive
damages and prejudgment interest against American Resources directly. As a
result of its conspiracy allegation, H&N also contends that all defendants are
jointly and severally liable for over $40.0 million in actual damages plus
treble damages, punitive damages and prejudgment interest. Settlement
discussions with H&N are currently in progress; however, if these discussions
are unsuccessful, American Resources intends to vigorously defend this claim.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operations or cash flows.
3. Acquisition of assets
In February 2002, the Company acquired a 1/3 interest in the Blue Dolphin
Pipeline System and the inactive Omega Pipeline from MCNIC Pipeline and
Processing Company ("MCNIC"). Pursuant to the terms of the purchase and sales
agreement, Blue Dolphin issued MCNIC a $750,000 promissory note due December 31,
2006, with required monthly payments to be made out of 90% of the net revenues
of the interest acquired. The note bears interest at the rate of 6% per annum
and is secured by the interest acquired. Additionally, a contingent payment of
up to $750,000 will be made, if the promissory note is retired before its
maturity date, payable annually after the promissory note is retired until
December 31, 2006 out of 50% of the net revenues from the interest acquired. The
termination date, December 31, 2006, will be extended by one additional year, up
to a maximum of two years, for years in which non-recurring, extraordinary
expenditures attributable to the interest acquired exceeds $200,000, in the
aggregate, during any year.
On December 2, 1999, the Company, through Blue Dolphin Exploration, acquired a
75% ownership interest in American Resources by purchasing approximately 39.5
million shares of American Resources common stock. On February 19, 2002, the
Company completed its acquisition of American Resources, pursuant to the Amended
and Restated Agreement and Plan of Merger dated as of December 19, 2001 (the
"Merger Agreement"). Pursuant to the Merger Agreement, American Resources became
a wholly owned subsidiary of the Company and each outstanding share of (i)
American Resources common stock, par value $.00001 per share, was converted into
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
the right to receive, at the option of the holder, either $.06 per share in cash
or .0362 of a share of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), and (ii) American Resources Series 1993 Preferred Stock, par
value $12.00 per share, was converted into the right to receive, at the option
of the holder, either $.07 in cash or .0301 of a share of Common Stock.
As a result of elections made by American Resources' stockholders, the Company
issued 273,336 shares of Common Stock and paid approximately $255,000 in cash.
4. Other Liabilities
In December 1999, American Resources received approximately $4.5 million from
Blue Dolphin Exploration for American Resources common stock representing a 75%
ownership interest and $24.2 million from Fidelity Oil for an 80% interest in
its Gulf of Mexico assets. American Resources senior secured debt was held by
Den norske Bank ("Den norske"). Den norske sold the senior debt to the Company
for the right to receive a possible future payment. A payment of approximately
$.8 million is owed by American Resources. The original due date of this
obligation has been extended by Den norske from March 15 to May 31, 2002. The
Company and Den norske are currently negotiating an extended payment arrangement
of this obligation.
5. Earnings Per Share
The Company applies the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS 128 requires the
presentation of basic earnings per share ("EPS") which excludes dilution and is
computed by dividing income (loss) available to common stockholders by the
weighted-average number of shares of common stock outstanding for the period.
SFAS 128 requires dual presentation of basic EPS and diluted EPS on the face of
the income statement and requires a reconciliation of the numerators and
denominators of basic EPS and diluted EPS.
The following table provides a reconciliation between basic and diluted earnings
per share:
Weighted-
Average Number
of Common Shares
Outstanding
and Potential Per
Net Income Dilutive Share
(Loss) Common Shares Amount
------------- ------------- -------------
Quarter ended March 31, 2002
Basic and diluted loss per share $ (923,411) 6,213,324 $ (0.15)
============= ============= =============
Quarter ended March 31, 2001
Basic earnings per share $ 552,914 6,016,829 $ 0.09
Effect of dilutive stock options 19,608
------------- ------------- -------------
Diluted earnings per share $ 552,914 6,036,437 $ 0.09
============= ============= =============
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
6. Business Segment Information
The Company's income producing operations are conducted in two principal
business segments: oil and gas exploration and production; and pipeline
operations. There were no intersegment revenues during the periods presented.
Information concerning these segments for the quarters ended March 31, 2002 and
2001, and at March 31, 2002 are as follows:
Depletion,
Depreciation,
Amortization,
Operating Abandonment,
Income and
Revenues (3) (Loss) (1) (3) Impairment (2)(3)
----------------- ----------------- -----------------
Quarter ended March 31, 2002:
Oil and gas exploration and production $ 578,269 (44,601) 232,433
Pipeline operations 329,297 34,408 51,778
Other -- (658,770) 345,340
----------------- ----------------- -----------------
Consolidated 907,566 (688,963) 629,551
----------------- -----------------
Other expense (198,702)
-----------------
Loss before minority interest and income taxes (867,665)
-----------------
Quarter ended March 31, 2001:
Oil and gas exploration and production $ 1,790,852 (442,651) 1,584,142
Pipeline operations 332,198 1,478,499 53,807
Other -- (268,255) 11,063
----------------- ----------------- -----------------
Consolidated 2,113,050 767,593 1,649,012
----------------- -----------------
Other expense (112,119)
-----------------
Income before minority interest and income taxes 655,474
-----------------
March 31,
2002
-----------
Identifiable assets:
Oil and Gas exploration and
production $ 4,117,803
Pipeline operations 4,953,117
Other 1,706,751
-----------
Consolidated $10,777,671
===========
1. Consolidated income (loss) from operations includes $313,431 and
$257,193 in unallocated general and administrative expenses, and
unallocated depletion, depreciation and amortization of $5,356 and
$11,063 for the quarters ended March 31, 2002 and 2001, respectively.
2. Pipeline depreciation and amortization includes a provision for
pipeline abandonment of $8,225 and $4,935 for the quarters ended March
31, 2002 and 2001, respectively. In addition, the Company recorded an
impairment expense of $339,984 for the three months ended March 31,
2002, of its investment in Drillmar, and an expense of approximately
9
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
$1.0 million for the three months ended March 31, 2001, as a result of
a change in the estimated abandonment costs associated with the
Buccaneer Field.
3. Pipeline revenues include $49,640 for the quarter ended March 31, 2001
from the Black Marlin Pipeline System. Pipeline operations include
$50,107 of operating expenses and depreciation for the quarter ended
March 31, 2001 from the Black Marlin Pipeline System.
7. Recently Issued Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141 ("SFAS 141"), "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill. SFAS
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Upon adoption of SFAS 142 on January 1, 2002,
the Company did not have unamortized goodwill, unamortized identifiable assets,
or unamortized negative goodwill
In August 2001, the FASB issued Statement No. 143 ("SFAS 143"), "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal use of the asset.
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. If the obligation is settled for
other than the carrying amount of the liability, the Company will recognize a
gain or loss on settlement.
The Company is required and plans to adopt the provisions of SFAS 143 for the
quarter ending March 31, 2003. To accomplish this, the Company must identify all
legal obligations for asset retirement obligations and determine the fair value
of these obligations on the date of adoption. The determination of fair value is
complex and will require the Company to gather market information and develop
cash flow models. Additionally, the Company will be required to develop
processes to track and monitor these obligations. Because of the effort
necessary to comply with the adoption of SFAS 143, it is not practicable for
management to estimate the impact of adopting this Statement at the date of this
report.
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
In October 2001, the FASB issued Statement No. 144 ("SFAS 144"), "Accounting for
the Impairment or Disposal of Long-Lived Assets". SFAS 144 provides that
long-lived assets to be disposed of by sale be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations, and broadens the reporting of
discontinued operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. SFAS
144 did not have a material effect on the Company's financial condition and
results of operations.
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Forward Looking Statements. Certain of the statements included in this quarterly
report on Form 10-QSB, including those regarding future financial performance or
results or that are not historical facts, are "forward-looking" statements as
that term is defined in Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect", "plan", "believe", "anticipate", "project", "estimate", and similar
expressions are intended to identify forward-looking statements. The Company
cautions readers that any such statements are not guarantees of future
performance or events and such statements involve risks and uncertainties that
may cause actual results and outcomes to differ materially from those indicated
in the forward-looking statements. Some of the important factors, risks and
uncertainties that could cause actual results to vary from the forward-looking
statements include:
o the risks associated with exploration;
o gas and oil price volatility;
o uncertainties in the estimation of proved reserves and in the
projection of future rates of production and timing of development
expenditures;
o availability and cost of capital;
o actions or inactions of third party operators for properties where the
Company has an interest;
o regulatory developments; and
o general economic conditions.
Additional factors that could cause actual results to differ materially from
those indicated in the forward-looking statements are discussed under the
caption "Risk Factors" in the Company's Form 10-KSB for the fiscal year ended
December 31, 2001. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no duty to update these forward-looking statements. Readers are urged
to carefully review and consider the various disclosures made by the Company
which attempt to advise interested parties of the additional factors which may
affect the Company's business, including the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At March 31, 2002 the Company's working capital deficit was approximately $2.1
million. In order to satisfy its working capital and capital expenditure
requirements for the remainder of 2002, the Company believes that it will need
to raise between $2.0 to $3.0 million of capital. The Company will need to seek
external financing and/or sell assets to raise the necessary capital.
Historically, the Company has relied on the proceeds from the sale of assets and
capital raised from the issuance of debt and equity securities to individual
investors and related parties to sustain its operations. There can be no
assurance that the Company will be able to obtain financing or sell assets on
commercially reasonable terms. The Company's inability to raise capital may have
a material adverse effect on its financial condition, ability to meet its
obligations and operating needs and results of operations. In addition, the
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Company's audit report as of and for the year ended December 31, 2001 contained
a qualification as to the Company's ability to continue as a going concern due
to its financing needs. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The following table summarizes certain of the Company's contractual cash
obligations and other commercial cash commitments at March 31, 2002 (amounts in
thousands).
Payments Due by Period
----------------------
Contractual Less than After
Obligations Total 1 year 1-3 years 4-5 years 5 years
----------- ---------- ---------- ---------- ---------- ----------
Long-Term Debt $ 750 -- -- 750 --
Other Contractual
Obligations 5,010 2,986 1,877 147 --
---------- ---------- ---------- ---------- ----------
Total Contractual
Cash Obligations $ 5,760 2,986 1,877 897 --
========== ========== ========== ========== ==========
Amount of Commitment Expiration Per Period
------------------------------------------
Other Commercial Less than After
Commitments Total 1 year 1-3 years 4-5 years 5 years
----------- ---------- ---------- ---------- ---------- ----------
Long-Term Debt $ -- -- -- -- --
Other Commercial
Obligations 2,000 2,000 -- -- --
---------- ---------- ---------- ---------- ----------
Total Commercial
Cash Obligations $ 2,000 2,000 -- -- --
========== ========== ========== ========== ==========
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The following table summarizes the Company's financial position at March 31,
2002 and December 31, 2001 (dollars in thousands):
March 31, December 31,
------------------- -------------------
2002 2001
------------------- -------------------
Amount % Amount %
-------- -------- -------- --------
Property and equipment, net $ 6,386 90 $ 5,980 85
Other noncurrent assets 708 10 1,043 15
-------- -------- -------- --------
Total $ 7,094 100 $ 7,023 100
======== ======== ======== ========
Working capital $ 2,118 30 $ 1,197 17
Minority interest -- 0 1,065 15
Long term debt 750 10 -- 0
-- -- -- --------
Stockholders' equity 4,226 60 4,761 68
-------- -------- -------- --------
Total $ 7,094 100 $ 7,023 100
======== ======== ======== ========
The change in the Company's financial position from December 31, 2001 to March
31, 2002, was primarily due to acquisitions of the 23% minority interest in
American Resources and the 1/3 interest in the Blue Dolphin Pipeline System.
Historically, the Company has relied on the proceeds from financing activities
and the sale of assets to supplement its capital requirements. During the three
months ended March 31, 2002 ("current period"), the Company financed its
activities from revenues generated from its operating activities and working
capital.
The Company's future cash flows are subject to a number of variables, including
the level of production from oil and natural gas properties that the Company has
an interest in, utilization of its pipeline systems and commodity prices among
others.
The net cash provided by or used in our operating, investing and financing
activities is summarized below (amounts in thousands):
Three Months Ended
--------------------------
March 31
--------------------------
2002 2001
----------- -----------
Net cash provided by (used in): $ (315) $ 262
Investing activities (695) 3,268
Financing activities 12 (2,225)
----------- -----------
Net increase (decrease) in cash $ (998) $ 1,305
=========== ===========
The Company's cash flow from operating activities decreased by $0.6 million in
the current period compared to the three months ended March 31, 2001 ("previous
period"), due primarily to a decrease in oil and gas revenues of approximately
$1.2 million.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Cash flow used in investing activities during the current period decreased by
approximately $4.0 million compared to the previous period due primarily to
proceeds received from the sale of the Black Marlin Pipeline System in the prior
period of approximately $4.6 million.
The Company previously announced a gas discovery in High Island Area Block A-7,
in the Gulf of Mexico. The Company owns an 8.9% reversionary working interest in
this field and it will begin to receive revenues from its reversionary interest
after "payout" occurs. Payout occurs after all of the other working interest
owners have recovered their costs and expenses associated with developing the
field from sales of gas and oil production from the field. In mid 2001, there
were three wells producing in this field at a combined rate of approximately 60
Mmcf of natural gas per day. However, two of the three wells stopped producing
and the remaining well is currently producing approximately 14 Mmcf of natural
gas per day. Additionally, two unsuccessful exploratory wells were drilled in
late 2001. The Company expected to begin to receive revenues from its
reversionary working interest in this field in late 2001, however, as a result
of the above mentioned occurrences the Company does not expect to receive
revenues until 2005.
In November 2000, the Company elected to abandon the Buccaneer field due to
adverse developments in the field. The Company reached an agreement with Tetra
Applied Technologies, Inc. ("Tetra"), to plug and abandon the wells located in
the Buccaneer Field which was completed in the first quarter of 2001 for
approximately $1.4 million. In addition, Maritech Resources, Inc. ("Maritech")
an affiliate of Tetra purchased an adjacent lease from Apache Corporation on
which the Company provided production operating services. In December 2000, as a
result of the Company's plans to abandon the Buccaneer Field platform
facilities, the Company and Maritech terminated the operating agreement. The
Company installed a new platform in 2001 at a cost of $1.7 million net to its
interest, to operate and maintain the Blue Dolphin Pipeline System, as well as
handle the production from Maritech's lease. The Blue Dolphin System was
previously tied into and operated from the Buccaneer Field platforms.
In August 2001, the Company reached an agreement with Tetra to remove the
Buccaneer Field platforms for a cost of approximately $2.6 million. Pursuant to
the agreement, Tetra and the Company agreed to extended payment terms, whereby
the Company will pay 20% upon completion and 5% per month for twelve months,
with the remaining balance due in the thirteenth month. To provide security for
the extended payment terms, the Company provided Tetra with a first lien on its
50% interest in the Blue Dolphin Pipeline System. Operations to remove the
platforms commenced in August 2001 and were suspended in December 2001, while
the Company continues its discussions with the Texas Parks and Wildlife to leave
the underwater portion of the platforms in place as artificial reefs. The
Company expects that the Texas Parks and Wildlife will make a decision as to
whether the Company will be able to leave any of the Buccaneer Field platforms
in place as artificial reefs, in late second quarter 2002. The Company requested
and has received an extension from the Minerals Management Service until October
1, 2002, to complete the removal and site clearance of the platform complexes.
After the decision is made by the Texas Parks and Wildlife, Tetra will resume
its removal operations. If a platform complex is left in place as an artificial
reef, certain site clearance operations would be eliminated. The Company
believes that its provision for abandonment costs of $4.6 million at March 31,
2002 is adequate. The Company expects to finance the remaining abandonment costs
from working capital, the private placement of debt or equity securities, or the
sale of assets.
15
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
In January 2001, the Company and its partners sold the Black Marlin Pipeline
System for $7.3 million and the High Island Block A-5 pipeline for $2.0 million
to Williams Field Services; $3.6 million and $1.0 million, respectively, net to
the Company's interest.
The Company's proved reserves and future net revenues reported at December 31,
2001 reflect capital expenditures totaling $150,000, for the year ending
December 31, 2002. Management will continue to evaluate its capital expenditure
program based on, among other things, field reservoir performance, availability
and cost of drilling and workover equipment, and demand and prices obtainable
for the Company's production, as well as availability of capital resources.
There can be no assurance that reserves will be developed as currently planned.
For the three months ended March 31, 2002, the Company incurred capital
expenditures of approximately $331,000, including approximately $133,000 for its
share of drilling costs for an exploratory well in High Island Block 34 which is
currently being drilled. In May 2002, the Company sold its interest in the High
Island Block 34 field for approximately $150,000. The Company is currently not
aware of any further planned capital expenditures associated with its proved
reserves.
In February 2002, the Company acquired a 1/3 interest in the Blue Dolphin
Pipeline System and the inactive Omega Pipeline from MCNIC. Pursuant to the
terms of the purchase and sales agreement, Blue Dolphin issued MCNIC a $750,000
promissory note due December 31, 2006, with required monthly payments to be made
out of 90% of the net revenues of the interest acquired. See Note 3. Acquisition
of Assets, in Part 1., Item 1.
On December 2, 1999, the Company, through Blue Dolphin Exploration, acquired a
75% ownership interest in American Resources by purchasing approximately 39.5
million shares of American Resources common stock. On February 19, 2002, the
Company completed its acquisition of American Resources, pursuant to the Amended
and Restated Agreement and Plan of Merger dated as of December 19, 2001 (the
"Merger Agreement"). Pursuant to the Merger Agreement, American Resources became
a wholly owned subsidiary of the Company and each outstanding share of (i)
American Resources common stock, par value $.00001 per share, was converted into
the right to receive, at the option of the holder, either $.06 per share in cash
or .0362 of a share of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), and (ii) American Resources Series 1993 Preferred Stock, par
value $12.00 per share, was converted into the right to receive, at the option
of the holder, either $.07 in cash or .0301 of a share of Common Stock.
As a result of elections made by American Resources' stockholders, the Company
issued 273,336 shares of Common Stock and paid approximately $255,000 in cash.
In December 1999, American Resources received approximately $4.5 million from
Blue Dolphin Exploration for American Resources common stock representing a 75%
ownership interest and $24.2 million from Fidelity Oil for an 80% interest in
its Gulf of Mexico assets. American Resources senior secured debt was held by
Den norske Bank ("Den norske"). Den norske sold the senior debt to the Company
for the right to receive a possible future payment. A payment of approximately
$.8 million is owed by American Resources. The original due date of this
obligation has been extended by Den norske from March 15 to May 31, 2002. The
Company and Den norske are currently negotiating an extended payment arrangement
of this obligation.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
---------------------
The Company reported a net loss for the current period of $923,411, compared to
net income of $552,914 reported for the previous period. The decrease is
primarily due to a decline in revenues from oil and gas sales of $1.2 million,
the impairment of the Company's investment in Drillmar of $.3 million and the
reserve recorded against the account receivable from Drillmar of $.2 million. In
2001, the Company recorded a gain on the sale of the Black Marlin Pipeline
system of $1.4 million, offset in part by an increase of $1.0 million in the
Company's Buccaneer Field abandonment obligations.
Revenues:
Current period revenues from oil and gas sales decreased by $1,212,583 from
those of the previous period. The change was due to a 55% decrease in gas prices
resulting in a reduction of revenues of approximately $710,000, and a decrease
of 28% in production volumes resulting in a reduction of revenues of
approximately $500,000.
Costs and Expenses:
Current period lease operating expenses decreased by $116,117 or 35% from the
previous period. The decrease was primarily due to elimination of costs
associated with maintaining the Buccaneer Field platform facilities.
Current period depletion, depreciation, amortization and abandonment decreased
$359,445 or 55% from the previous period. The decrease was primarily due to a
decrease in production of approximately 72% and a 14% decrease in the depletion
rate in the current period.
Impairment of assets included an impairment of the Company's investment in
Drillmar of $339,984 in the current period and an increase in the estimated cost
associated with the Buccaneer Field abandonment of $1,000,000 recorded in the
previous period.
General and administrative expenses for the current period decreased $44,954, or
7% from the previous period. In the current period, the Company's cost reduction
plan resulted in a reduction in staff costs of approximately $155,000, offset in
part by an increase in contract labor of approximately $46,000, and elimination
of management fees received in the previous period for managing Fidelity Oil's
interest in properties acquired from American Resources of $40,000 and MCNIC's
1/3 interest in the Blue Dolphin Pipeline System of $19,200.
The gain on sale of assets in the previous period represents the gain on the
sale of the Black Marlin Pipeline System of $1,417,626.
Interest and other expense decreased in the current period by $149,448. The
previous period included a charge for the contingent payment due to Den norske
Bank of $150,000.
17
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET PRICE
The Company is exposed to market risk, including adverse changes in commodity
prices and interest rates as discussed below.
Commodity Price Risk- The Company produces and sells natural gas, crude oil, and
natural gas liquids. As a result, the Company's financial results can be
significantly affected if these commodity prices fluctuate widely in response to
changing market forces. The Company does not use derivative products to manage
commodity price risk.
Interest Rate Risk- The Company currently has no short-term or long-term debt
with floating interest rates, and thus currently is not subject to risk of
interest rate changes.
18
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 2000, American Resources and its former Chief Financial Officer, were
named in a lawsuit in the United States District Court for the Southern District
of Texas, Houston Division, styled H&N Gas, Limited Partnership, et al. v.
Richard Hale, et al (Case No H-00-1371). The lawsuit alleges, among other
things, that H&N Gas ("H&N") was defrauded by American Resources in connection
with gas purchase options and gas price swap contracts entered into from
February 1998 through September 1999. H&N alleges unlawful collusion between
American Resources' prior management and the then president of H&N, Richard Hale
("Hale"), to the detriment of H&N. H&N generally alleges that Hale directed H&N
to purchase illusory options from American Resources that bore no relation to
any physical gas business and that American Resources did not have the financial
resources and/or sufficient quantity of gas to perform. H&N further alleges that
American Resources and Hale colluded with respect to swap transactions that were
designed to benefit American Resources at the expense of H&N. H&N further
alleges civil conspiracy against all the defendants. H&N is seeking
approximately $6.2 million in actual damages plus treble damages, punitive
damages and prejudgment interest against American Resources directly. As a
result of its conspiracy allegation, H&N also contends that all defendants are
jointly and severally liable for over $40.0 million in actual damages plus
treble damages, punitive damages and prejudgment interest. Settlement
discussions with H&N are currently underway; however, if these discussions are
unsuccessful, American Resources intends to vigorously defend this claim.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) No Exhibits
B) Reports on Form 8-K
On February 25, 2002, the Company filed a current report on Form 8-K
dated February 15, 2002, reporting a change in Certifying Accountant.
The items reported in such current report were Item 4 (Change in
Registrant's Certifying Accountant).
On March 1, 2002, the Company filed a current report on Form 8-K dated
February 19, 2002, reporting it completed the acquisition of American
Resources Offshore, Inc. The items in such current report were Item 2
(Acquisition or Disposition of Assets).
On March 13, 2002, the Company filed a current report on Form 8-K
dated February 28, 2002, reporting the acquisition of an additional
1/3 interest in the Blue Dolphin Pipeline System from MCNIC Pipeline &
Processing Company. The items reported in such current report were
Item 5 (Other Events).
19
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: BLUE DOLPHIN ENERGY COMPANY
Date: May 14, 2002 /s/ Michael J. Jacobson
-------------------------------------
Michael J. Jacobson
President and Chief Executive Officer
/s/ G. Brian Lloyd
-------------------------------------
G. Brian Lloyd
Vice President, Treasurer
(Principal Accounting Officer)
20