UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended: June 30, 2001
or
[ ] 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 registrant 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
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X 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.
6,020,051 shares of the Registrants' common stock, par value $.01 per share,
----------------------------------------------------------------------------
where outstanding at August 14, 2001.
-------------------------------------
1
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 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.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 3,753,378 $ 2,071,682
Trade accounts receivable 1,377,477 2,406,751
Funds escrowed for abandonment 68,629 1,485,728
Prepaid expenses 297,395 127,913
------------ ------------
TOTAL CURRENT ASSETS 5,496,879 6,092,074
Property and Equipment, at cost:
Oil and Gas properties, including $430,782 of
unproved leasehold cost at June 30, 2001
and December 31, 2000, respectively
(full-cost method) 28,224,430 28,032,211
Onshore separation and handling facilities 1,583,428 1,583,610
Land 850,000 930,500
Pipelines 2,771,142 4,845,975
Other property and equipment 734,657 397,683
------------ ------------
34,163,657 35,789,979
Accumulated depletion, depreciation
and amortization (30,376,970) (30,444,622)
------------ ------------
3,786,687 5,345,357
Deferred federal income tax 244,444 244,444
Acquisition and development costs - Petroport 1,934,729 1,885,219
Other assets 628,104 345,861
------------ ------------
TOTAL ASSETS $ 12,090,843 $ 13,912,955
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 975,043 $ 1,557,850
Current portion of long term debt -- 218,412
Notes payable - related parties 100,000 2,000,000
Accrued expenses and other liabilities 1,863,679 927,347
------------ ------------
TOTAL CURRENT LIABILITIES 2,938,722 4,703,609
Other non-current liabilities -- 550,000
Minority interests 1,212,399 1,196,479
Common Stock 60,201 60,167
Additional Paid-in Capital 25,768,727 25,775,417
Accumulated Deficit (17,889,206) (18,372,717)
------------ ------------
7,939,722 7,462,867
TOTAL LIABILITES AND
STOCKHOLDERS EQUITY $ 12,090,843 $ 13,912,955
============ ============
See accompanying notes to consolidated financial statements.
3
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
Three Months
Ended June 30,
2001 2000
----------- -----------
Revenue from operations:
Oil and gas sales $ 1,462,015 $ 1,141,506
Pipeline operations 231,878 588,236
Operating fees -- 78,188
----------- -----------
REVENUE FROM OPERATIONS 1,693,893 1,807,930
Cost of operations:
Lease operating expenses 293,626 314,876
Pipeline operating expenses 118,210 265,252
Depletion, depreciation, amortization and abandonment 424,646 454,502
General and administrative 777,661 572,198
----------- -----------
COST OF OPERATIONS 1,614,143 1,606,828
----------- -----------
INCOME FROM OPERATIONS 79,750 201,102
Other income (expense):
Interest and other expense (164,402) (32,586)
Interest and other income 44,352 18,042
----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND INCOME TAXES (40,300) 186,558
Minority interests (29,106) (35,861)
Provision for income taxes -- --
----------- -----------
Net income (loss) $ (69,406) $ 150,697
=========== ===========
Earnings (loss) per share-basic $ (0.01) $ 0.03
=========== ===========
Earnings (loss) per share-diluted $ (0.01) $ 0.03
=========== ===========
Weighted average number of common shares outstanding
and potential dilutive common shares:
Basic 6,020,051 5,951,436
=========== ===========
Diluted 6,020,051 6,002,072
=========== ===========
See accompanying notes to consolidated financial statements.
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
Six Months
Ended June 30,
2001 2000
----------- -----------
Revenue from operations:
Oil and gas sales $ 3,252,867 $ 2,177,215
Pipeline operations 554,076 1,059,082
Operating fees -- 156,414
----------- -----------
REVENUE FROM OPERATIONS 3,806,943 3,392,711
Cost of operations:
Lease operating expenses 627,390 598,463
Pipeline operating expenses 268,948 506,245
Gain on sale of assets (1,417,626) --
Depletion, depreciation, amortization and abandonment 2,002,808 910,772
General and administrative 1,596,164 1,070,733
----------- -----------
COST OF OPERATIONS 3,077,684 3,086,213
----------- -----------
INCOME FROM OPERATIONS 729,259 306,498
Other income (expense):
Interest and other expense (329,642) (56,481)
Interest and other income 97,473 21,164
----------- -----------
INCOME BEFORE MINORITY
INTEREST AND INCOME TAXES 497,090 271,181
Minority interests (13,582) (67,647)
Provision for income taxes -- --
----------- -----------
Net income $ 483,508 $ 203,534
=========== ===========
Earnings per common share-basic $ 0.08 $ 0.03
=========== ===========
Earnings per common share-diluted $ 0.08 $ 0.03
=========== ===========
Weighted average number of common shares outstanding
and potential dilutive common shares:
Basic 6,018,440 5,951,158
=========== ===========
Diluted 6,037,458 6,001,794
=========== ===========
See accompanying notes to consolidated financial statements.
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
Six Months
Ended June 30,
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net income $ 483,508 $ 203,534
Adjustments to reconcile net income to net cash provided by
operating activities:
Depletion, depreciation, amortization and abandonment 2,002,808 910,772
Minority interest 13,582 (67,647)
Gain on sale of assets (1,417,626) --
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable 957,069 (406,315)
(Increase) in prepaid expenses (169,482) (438,085)
Abandonment costs incurred (1,473,960) --
Increase in accounts payable and other current liabilities 51,013 331,420
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 446,912 533,679
INVESTING ACTIVITIES
Oil and gas prospect generation costs -- (563,222)
Reimbursement of oil and gas prospect generation costs -- 563,222
Purchases of property and equipment (1,602,571) (93,069)
Exploration and development costs (387,000) --
Net proceeds from sale of assets 4,625,000 --
Funds escrowed for abandonment costs (34,347) (280,296)
Release of escrowed funds for abandonment 1,451,446 --
Development costs - Petroport (49,510) (67,593)
Development costs - New Avoca (158,497) (111,411)
Acquisition of additional interest in Drillmar, net of cash acquired (270,529) --
Increase in other assets (214,140) (42,355)
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 3,359,852 (594,724)
FINANCING ACTIVITIES
Net proceeds from borrowings 100,000 200,000
Payments on borrowings (2,218,412) (100,633)
Other (6,656) (5,645)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (2,125,068) 93,722
INCREASE IN CASH 1,681,696 32,677
CASH AT BEGINNING OF PERIOD 2,071,682 1,166,730
----------- -----------
CASH AT JUNE 30 $ 3,753,378 $ 1,199,407
=========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 98,500 $ 74,399
=========== ===========
Income taxes paid $ 6,530 $ 8,430
=========== ===========
See accompanying notes to consolidated financial statements.
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
June 30, 2001
1. Related Party Transactions
In December 1999, the Company issued a $1,000,000 convertible promissory note to
Harris A. Kaffie, a director of the Company. This convertible promissory note
originally due June 1, 2000 was extended to March 31, 2001, bore interest at 10%
per annum, and was convertible into common stock at $6.00 per share. This
convertible promissory note and accrued interest of $64,361 were paid in January
2001.
The Company issued three convertible promissory notes in 2000 totaling
$1,000,000; two in the principal amount of $200,000 each on May 25, 2000 and
July 6, 2000, issued to Ivar Siem, Chairman of the Company, and one in the
principal amount of $600,000 on November 30, 2000, issued to TI A/S,
beneficially controlled by Ivar Siem. These convertible promissory notes and
accrued interest of $32,790 were paid in January 2001. The convertible
promissory notes were due March 31, 2001, bore interest at the rate of 10% per
annum and were convertible into common stock at the rate of $6.00 per share.
At June 30, 2001, Ivar Siem provided Drillmar $100,000 and was issued an
unsecured promissory note due December 31, 2001, bearing interest at 10% per
annum. In July 2001, Drillmar was provided $300,000 from Ivar Siem and $200,000
from Harris Kaffie and were issued unsecured promissory notes due December 31,
2001, bearing interest at 10% per annum. The promissory note due to Harris
Kaffie was paid on August 7, 2001. Accrued interest of $986 was also paid to Mr.
Kaffie in August 2001. The promissory notes issued by Drillmar are non recourse
to the Company.
2. Contingencies
In December 1999, American Resources Offshore, Inc. ("American Resources")
received approximately $4.5 million from Blue Dolphin Exploration Company for
American Resources common stock representing a 75% ownership interest, and $24.2
million from Fidelity Oil Holdings, Inc. ("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 if the cumulative net
revenues received by American Resources and Fidelity Oil attributable to
American Resources proved oil and gas reserves in the Gulf of Mexico as of
January 1, 1999, exceed $30.0 million during the period January 1, 1999 through
December 31, 2001. If that occurs, Den norske will be entitled to receive an
amount equal to 50% of the net revenues in excess of $30.0 million during that
three-year period. If any contingent amount becomes payable to Den norske, 80%
will be paid by Fidelity Oil and 20% will be paid by American Resources. The
payment, if any, is due on March 15, 2002. American Resources estimates that it
is probable that a payment to Den norske will be due based upon these terms and
current market conditions. The Company has provided for a liability to Den
norske in the amount of $850,000 at June 30, 2001.
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
On May 8, 2000, American Resources, a 77% indirectly owned subsidiary of the
Company, 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 and Howard Energy Marketing, L.L.C. v. American
Resources Offshore, Inc. 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 Gas. 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, prejudgment interest and attorneys' fees 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 $62.0 million
dollars in actual damages plus treble damages, punitive damages, prejudgment
interest and attorneys' fees. American Resources intends to vigorously defend
this claim.
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 the first
quarter of 2001, the Company plugged and abandoned its remaining wells at a cost
of approximately $1.4 million. Removal of the platform facilities is expected to
take place in the second half of 2001 at an additional cost estimated to be $5.1
million. The Company increased its estimate of the cost of abandonment of the
Buccaneer Field by approximately $1.1 million from December 31, 2000. The
Company used $1.4 million of funds escrowed to pay for well plugging and
abandonment costs.
The Company is involved in various 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 Drillmar Inc.
Effective May 1, 2001 the Company increased its ownership in Drillmar Inc.
("Drillmar") from 37.5% to 64%. Consideration paid by the Company includes cash
of approximately $131,000, a contribution of services in the amount of $298,000,
and an undertaking to contribute an additional $136,000 of cash and/or services.
The Company's consolidated income for the six months ended June 30, 2001
includes 37.5% of Drillmar's operations for the four months ended April 30, 2001
and 64% of Drillmar's operations for the two months ended June 30, 2001.
Certain amounts in the six month consolidated statements of operations and cash
flows have been reclassified to reflect the consolidation of Drillmar effective
January 1, 2001.
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
4. Earnings Per Share
The Company applies the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings per Share." SFAS No. 128 requires
the presentation of basic earnings per share ("EPS") which excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of shares of common stock outstanding for the period.
SFAS No. 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
common shares
outstanding
and dilutive Per
Net Income potential share
(Loss) common shares amount
--------- ------------- ---------
Six Months ended June 30, 2001
Basic earnings per share $ 483,508 6,018,440 $ 0.08
Effect of dilutive stock
options 19,018
--------- ------------- ---------
Diluted earnings per share $ 483,508 6,037,458 $ 0.08
========= ============= =========
Six Months ended June 30, 2000
Basic earnings per share $ 203,534 5,951,158 $ 0.03
Effect of dilutive stock
options 50,636
--------- ------------- ---------
Diluted earnings per share $ 203,534 6,001,794 $ 0.03
========= ============= =========
Quarter ended June 30, 2001
Basic earnings (loss) per share $ (69,406) 6,021,051 $ (0.01)
--------- ------------- ---------
Diluted earnings (loss) per share $ (69,406) 6,021,051 $ (0.01)
========= ============= =========
Quarter ended June 30, 2000
Basic earnings per share $ 150,697 5,951,436 $ 0.03
Effect of dilutive stock
options 50,636
--------- ------------- ---------
Diluted earnings per share $ 150,697 6,002,072 $ 0.03
========= ============= =========
9
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
5. Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), was issued in June 1998 by the
Financial Accounting Standards Board. SFAS 133 establishes new accounting and
reporting standards for derivative instruments and for hedging activities. This
statement requires an entity to establish at the inception of a hedge, the
method it will use for assessing the effectiveness of the hedging derivative and
the measurement approach for determining the ineffective aspect of the hedge.
Those methods must be consistent with the entity's approach to managing risk.
Certain provisions of SFAS 133 were amended by SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of
Statement 133". SFAS 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company adopted SFAS 133
effective January 1, 2001. Adoption of SFAS 133, as amended, did not have an
impact on the Company's consolidated financial position or the results of
operations.
In July 2001, the Financial Accounting Standards Board 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 will require 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 will also require 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 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. As of the date of adoption, the Company does not expect to have
unamortized goodwill, unamortized identifiable assets, or unamortized negative
goodwill.
In August 2001, the Financial Accounting Standards Board approved Statement No.
143 ("SFAS 143") "Asset Retirement Obligations". The Company has not assessed
the impact of SFAS 143 at this time.
6. Sale of Assets
On January 22, 2001, the Company sold its 50% interest in the Black Marlin
Pipeline System to affiliates of the Williams Companies, Inc. for approximately
$4.6 million. The Black Marlin Pipeline System includes a 75-mile gas and
condensate gathering line with related shore facilities servicing the High
Island Area, offshore Texas (the "Black Marlin Pipeline") and the 3-mile lateral
pipeline constructed in 2000, extending from High Island Block A-5 to an
interconnection into the Black Marlin Pipeline in High Island Block A-6 (the
"A-5 Lateral").
This disposition was consummated, in part, through a sale of all of the
outstanding capital stock of Black Marlin Pipeline Company (formerly an indirect
wholly owned subsidiary of the Company) the owner of a 50% interest in the Black
Marlin Pipeline, pursuant to a Purchase and Sale Agreement dated January 12,
2001 (the "Stock Purchase Agreement") among Black Marlin Energy Company, a
wholly owned subsidiary of the Company, MCNIC Offshore Pipeline & Processing
Company ("MCNIC"), WBI Southern, Inc. ("WBI") and Williams Field Services Group,
Inc. The Company received $3.6 million for the outstanding capital stock of
Black Marlin Pipeline Company and recorded a gain of $1,305,534.
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
The remaining part of this disposition was consummated through the sale of the
A-5 Lateral owned 50% by Blue Dolphin Pipe Line Company, a wholly owned
subsidiary of the Company ("BDPL"), pursuant to a Purchase and Sale Agreement
dated January 12, 2001, among BDPL, MCNIC, WBI and Williams Field Services -
Gulf Coast Company, L.P. The Company received $1.0 million for its interest in
the A-5 Lateral, and recorded a gain of $112,092.
7. 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. Intersegment revenues consist of transportation, general processing
and storage fees charged by certain subsidiaries to another for natural gas and
crude oil transported through the Blue Dolphin Pipeline System. The intercompany
revenues and expenses are eliminated in consolidation. Information concerning
these segments for the six months and three months ended June 30, 2001, and
2000, and at June 30, 2001 and December 31, 2000 is as follow:
Depletion,
Operating depreciation,
Intersegment income amortization, and
Revenues revenues (loss)(1) abandonment(2)
------------- ------------- ------------- -------------
Six months ended June 30, 2001:
Oil and gas exploration and
production and operating fees $ 3,252,867 -- (167,317) 1,896,995
Pipeline operations 554,076 -- 1,459,676 90,491
Other -- (563,100) 15,322
------------- ------------- -------------
Consolidated 3,806,943 -- 729,259 2,002,808
Other income (232,169)
-------------
Income before minority interest and income taxes 497,090
Six months ended June 30, 2000:
Oil and gas exploration and
production and operating fees $ 2,336,629 3,000 833,823 719,654
Pipeline operations 1,070,337 11,255 303,039 176,454
Other (14,255) (830,364) 14,664
------------- ------------- -------------
Consolidated 3,392,711 -- 306,498 910,772
Other expense (35,317)
-------------
Income before minority interest and income taxes 271,181
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
Depletion,
Operating depreciation,
Intersegment income amortization, and
Revenues revenues (loss)(1) abandonment(2)
------------- ------------- ------------- -------------
Three months ended June 30, 2001:
Oil and gas exploration and
production and operating fees $ 1,462,015 -- 364,289 383,703
Pipeline operations 231,878 -- 10,307 36,684
Other -- (294,846) 4,259
------------- ------------- -------------
Consolidated 1,693,893 -- 79,750 424,646
Other expense (120,050)
-------------
Loss before minority interest and income taxes (40,300)
Three months ended June 30, 2000:
Oil and gas exploration and
production and operating fees $ 1,221,194 1,500 434,293 358,667
Pipeline operations 593,006 4,770 184,534 88,173
Other (6,270) (417,725) 7,662
------------- ------------- -------------
Consolidated 1,807,930 -- 201,102 454,502
Other expense (14,544)
-------------
Income before minority interest and income taxes 186,558
June 30, December 31,
2001 2000
----------- -----------
Identifiable assets:
Oil and gas exploration
and production $ 3,993,445 $ 4,164,299
Pipeline operations 6,870,778 8,958,876
Other 1,226,620 789,780
----------- -----------
Consolidated 12,090,843 13,912,955
1. Consolidated income from operations includes $547,780 and
$801,445 in unallocated general and administrative expenses,
and unallocated depletion, depreciation and amortization of
$15,322 and $14,664 for the six months ended June 30, 2001 and
2000, respectively.
Consolidated income from operations includes $290,587 and
$403,792 in unallocated general and administrative expenses,
and unallocated depletion, depreciation and amortization of
$4,259 and $7,662 for the quarters ended June 30, 2001 and
2000, respectively.
2. Pipeline depletion, depreciation and amortization includes a
provision for pipeline abandonment of $9,870 and $9,870 for
the six months ended June 30, 2001 and 2000, respectively. Oil
and gas depletion, depreciation, amortization and abandonment
includes a provision for abandonment costs of platforms and
wells of $11,925 for the six months ended June 30, 2000. In
addition, the Company recorded an expense of approximately
$1,100,000 for the six months ended June 30, 2001, as a result
of a change in the estimation of costs associated with the
Buccaneer Field abandonment.
12
3. Pipeline depletion, depreciation and amortization includes a
provision for pipeline abandonment of $4,935 and $4,935 for
the quarters ended June 30, 2001 and 2000, respectively. Oil
and gas depletion, depreciation, amortization and abandonment
includes a provision for abandonment costs of platforms and
wells of $5,430 for the quarter ended June 30, 2000.
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements included below, 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. The words "expect", "plan",
"believe", "anticipate", "project", "estimate", and similar expressions are
intended to identify forward-looking statements. Blue Dolphin Energy Company
(referred to herein, with its predecessors and subsidiaries, as "Blue Dolphin"
or 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 forward-looking statements. Some of the important
factors that could cause actual results to vary from forward-looking statements
are discussed in our Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on January 11, 2001 under the caption "Risk
Factors". The Risk Factors section of this Registration Statement is
incorporated by reference into this report. 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.
The following is a review of certain aspects of the financial condition and
results of operations of the Company and should be read in conjunction with the
Condensed Consolidated Financial Statements included in Item 1. of this report.
RECENT DEVELOPMENTS
-------------------
The Company previously announced a gas discovery in High Island Area Block A-7,
in the Gulf of Mexico. The Company acquired the block in 1995, and owns an 8.9%
reversionary working interest after lease-wide payout is first achieved.
Production from the first well in the block began in September 2000. Currently
there are three wells producing at a combined rate of approximately 60 Mmcf of
gas per day. A fourth well is currently being drilled. Before the Company is
assigned its working interest, the initial working interest owners must achieve
lease-wide payout of their investment. The Company expects payout to occur in
the fourth quarter 2001 or first quarter 2002, however, if additional wells are
drilled, payout may not occur until later in 2002.
Effective May 1, 2001 the Company increased its ownership in Drillmar Inc. from
37.5% to 64%. Consideration paid by the Company includes cash of approximately
$131,000, a contribution of services in the amount of $298,000, and an
undertaking to contribute an additional $136,000 of cash and/or services. At
June 30, 2001, Ivar Siem provided Drillmar $100,000 and was issued an unsecured
promissory note due December 31, 2001, bearing interest at 10% per annum. In
July 2001, Drillmar was provided $300,000 from Ivar Siem and $200,000 from
Harris Kaffie and were issued unsecured promissory notes due December 31, 2001,
bearing interest at 10% per annum. The promissory note due to Harris Kaffie was
paid on August 7, 2001. Accrued interest of $986 was also paid to Mr. Kaffie in
August 2001. The promissory notes issued by Drillmar are non recourse to the
Company.
14
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The following table summarizes the Company's financial position at June 30, 2001
and December 31, 2000 (amounts in thousands):
June 30, 2001 December 31, 2000
------------- ---------------
Amount % Amount %
------ ------ ------ ------
Working capital $2,558 28 $1,388 15
Property and equipment, net 3,787 41 5,345 58
Other noncurrent assets 2,807 31 2,476 27
------ ------ ------ ------
Total $9,152 100 $9,209 100
====== ====== ====== ======
Other non-current liabilities $ -- -- $ 550 6
Minority interest 1,212 13 1,196 13
Stockholders' equity 7,940 87 7,463 81
------ ------ ------ ------
Total $9,152 100 $9,209 100
====== ====== ====== ======
The change in the Company's financial position from December 31, 2000 to June
30, 2001, was primarily due to the sale of its' 50% interest in the Black Marlin
Pipeline System.
Historically, the Company has relied on the proceeds from financing activities
and the sale of assets to supplement its capital requirements. In the six months
ended June 30, 2001 ("current period"), the Company financed its activities
through both the sale of assets and operating activities.
The Company's future cash flows are subject to a number of variables, including
the level of production, utilization of its pipeline systems, utilization of the
Company's services by third parties and commodity prices among others. The
Company believes that it will have sufficient cash flow from operations, private
equity or debt financing activities and the sale of assets to meet its
obligations and operating needs for the current year. However, the Company
cannot be assured that operations and other capital resources will provide cash
in sufficient amounts to maintain planned levels of capital expenditures. The
net cash provided by or used in our operating, investing and financing
activities is summarized below (amounts in thousands):
Six Months Ended
----------------
June 30
-------
2001 2000
------- -------
Net cash provided by (used in):
Operating activities $ 447 $ 534
Investing activities 3,360 (595)
Financing activities (2,125) 94
------- -------
Net increase in cash $ 1,682 $ 33
======= =======
The Company's cash flow from operating activities decreased by $0.1 million in
the current period compared to the six months ended June 30, 2000 ("previous
period"), due primarily to the decrease in cash flow from abandonment costs
offset in part by the increased cash flow generated from the Company's American
Resources oil and gas properties.
15
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Cash flow provided by investing activities during the current period included
the proceeds from the sale of the Company's interest in the Black Marlin
Pipeline System of approximately $4.6 million. Cash flow used in investing
activities included the construction of a new offshore platform installed to
operate the Blue Dolphin Pipeline of approximately $1.5 million, investment
costs associated with Drillmar of approximately $0.2 million and exploration and
development costs associated with an American Resources oil and gas property of
approximately $0.3 million.
Cash flow used in financing activities during the current period consisted of
the payment of promissory notes in the principal amount of approximately $2.2
million, see Item 1., Note 1., Related Party Transactions.
On January 22, 2001, the Company and its partners sold the Black Marlin Pipeline
System for $7.3 million, and the High Island Block A-5 lateral constructed in
2000 for $2.0 million, to Williams Field Services; $3.6 million and $1.0
million, respectively, net to the Company's interest. The Black Marlin System
accounted for 15% of the Company's revenues in the previous period.
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
to plug and abandon the wells in the field. In the current period the remaining
wells in the Buccaneer Field were plugged and abandoned for approximately $1.4
million. The Company used its escrow fund for abandonment obligations to fund
the plugging of the Buccaneer Field wells. In addition, Maritech Resources, Inc.
("Maritech") an affiliate of Tetra, purchased an adjacent lease for 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. A new platform was
installed in the current period in Galveston Block 288 to operate and maintain
the Blue Dolphin Pipeline System. The Blue Dolphin Pipeline System was
previously tied into and operated from the Buccaneer Field platforms. The
installation of the new platform and its connection to the Blue Dolphin Pipeline
System cost approximately $1.5 million net to the Company's 50% interest.
In August 2001, the Company reached an agreement with Tetra to remove the
Buccaneer Field platforms for a cost of approximately $2.6 million. In addition,
Tetra 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, the Company is
providing Tetra with a first lien on its interest in the Blue Dolphin Pipeline
System. The Company will continue to seek extended payment arrangements for
certain of its remaining abandonment costs estimated to be $2.5 million.
In December 1999, the Company entered into an agreement with Fidelity Oil to
manage their interest in the oil and gas properties acquired from American
Resources for $40,000 per month. This amount was intended to reimburse the
Company for the cost of the services provided. The agreement expired in December
2000 and provided for continuation thereafter on a year to year basis unless
terminated by either party. Fidelity Oil terminated this agreement effective
January 31, 2001.
16
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Company's reserves and future net revenues reported at December 31, 2000
reflect capital expenditures totaling $898,900 for the year ending December 31,
2001. 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. At June 30,
2001, the Company incurred capital expenditures totaling 387,000 which was
associated with the development of its interest in the American Resources'
Galveston Block 418 property. The Company currently believes that capital
expenditures for the second half of 2001 will be $753,000.
In December 1999, American Resources was paid approximately $4.5 million by Blue
Dolphin Exploration for American Resources common stock, representing a 75%
ownership interest, and $24.2 million by Fidelity Oil for an 80% interest in
its' Gulf of Mexico assets. The proceeds were used by American Resources to
retire certain indebtedness. The indebtedness included American Resources senior
secured debt totaling approximately $51.2 million to Den norske bank ("Den
norske"). Den norske sold the senior debt for $27.0 million and a contingent
future payment if the cumulative net revenues received by American Resources and
Fidelity Oil attributable to American Resources proved oil and gas reserves in
the Gulf of Mexico as of January 1, 1999, exceed $30.0 million during the period
January 1, 1999, through December 31, 2001. If that occurs Den norske will be
entitled to receive an amount equal to 50% of the net revenues in excess of
$30.0 million during that three-year period. If any contingent amount becomes
payable to Den norske, 80% will be paid by Fidelity Oil and 20% will be paid by
American Resources. The payment, if any, is due on March 15, 2002. American
Resources estimates that it is probable that a payment to Den norske will be due
based upon current market conditions. The Company has provided for a liability
to Den norske in the amount of $850,000 at June 30, 2001.
The Company believes that it has, or can obtain, adequate capital to continue to
meet its anticipated capital requirements. In the past, the Company's
requirements have been financed by the disposition of certain assets, for
example, interests in its pipelines, by borrowings from a commercial bank,
private placements of its equity and debt securities, and investments by its
directors. However, there can be no assurance that the Company will be able to
continue to obtain financing from these sources or sell assets on commercially
acceptable terms. The Company's inability to finance its capital requirements
may adversely affect its' results of operations, timing for major pipeline
expansions, growth in oil and gas prospect generation activities, developmental
midstream projects and other projects.
RESULTS OF OPERATIONS
---------------------
The Company reported net income for the six months ended June 30, 2001,
("current period") of $483,508, compared to net income of $203,534 reported for
the six months ended June 30, 2000 ("previous period"). The difference in net
income is primarily due to the gain on the sale of the Black Marlin Pipeline
System of $1,417,626 offset in part by a current period increase to the
Company's Buccaneer Field abandonment obligations of approximately $1,100,000.
For the quarter ended June 30, 2001 ("current quarter") the Company reported a
net loss of $69,406 compared to net income of $150,697 for the quarter ended
June 30, 2000 ("previous quarter"). The reduction is due to decreases in
pipeline transportation revenues in the current quarter from the sale of the
Black Marlin Pipeline System in January 2001 and the consolidation of Drillmar
Inc. which had an operating loss of $61,968, (net of minority interest) for the
quarter ended June 30, 2001.
17
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Revenues:
First Half 2001 vs. First Half 2000. Current period revenues from oil and gas
sales increased by $1,075,652, from those of the previous period. Revenues from
American Resources properties increased by $1,308,090 in the current period
compared to the previous period due to a 60% increase in commodity prices on a
million cubic feet of gas equivalent basis ("Mmcfe"), resulting in increased
revenues of $1,222,620 and an increase in production volumes of 8% on an Mmcfe
basis, resulting in a $155,760 increase in revenues. The increase in oil and gas
sales in the current period was partially offset by loss of revenues from the
Buccaneer Field, which were $233,759 in the previous period.
Current period revenues from pipeline operations decreased by $505,006 or 48%
from the previous period. The decrease was due to the sale of the Black Marlin
Pipeline System on January 22, 2001. The Black Marlin Pipeline System provided
revenues of $568,776 for the previous period compared to $49,640 for the current
period.
The Company did not have current period revenues from operating fees due to the
termination of the operating agreement with Maritech in December 2000.
Second Quarter 2001 vs. Second Quarter 2000. Current quarter revenues from oil
and gas sales increased by $320,509, from those of the previous quarter.
Revenues from American Resources properties increased by $443,877 in the current
quarter compared to the previous quarter due to a 62% increase in gas prices.
The increase in oil and gas sales in the current quarter was partially offset by
loss of revenues from the Buccaneer Field, which were $123,368 in the previous
quarter.
Current quarter revenues from pipeline operations decreased by $356,358 or 61%
from the previous quarter. The decrease was primarily due to the sale of the
Black Marlin Pipeline System on January 22, 2001. The Black Marlin Pipeline
System provided revenues of $337,327 for the second quarter of 2000 compared to
no revenues for the current quarter.
The Company did not have current quarter revenues from operating fees due to the
termination of the operating agreement with Maritech in December 2000.
Costs and Expenses:
First Half 2001 vs. First Half 2000. Current period pipeline operating expenses
decreased by $237,297 or 47% from the previous period. The decrease was
primarily due to the sale of Black Marlin Pipeline System on January 22, 2001.
Black Marlin Pipeline System operating expenses were $244,474 for the previous
period compared to $33,462 for the current period.
18
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Current period depletion, depreciation, amortization and abandonment increased
$1,092,036 from the previous period. The increase was due to an 8% increase in
production volumes resulting in increased depletion of $68,103 offset in part by
a decrease of $83,223, resulting from the sale of the Black Marlin Pipeline
System. The Company recorded depletion expense of $33,916 in the previous period
for the Buccaneer Field. The Company recorded an increase in the estimated costs
associated with the Buccaneer Field abandonment of approximately $1,100,000 in
the current period. During the current period, the Company plugged and abandoned
the remaining Buccaneer Field wells for a total cost of approximately $1.4
million. In addition, the Company estimates cost of $5.1 million to remove the
Buccaneer Field platforms. At December 31, 2000, the provision for abandonment
was approximately $5.4 million, thus the Company has recorded an adjustment to
the estimated abandonment cost of approximately $1,100,000 in the current
period.
General and administrative expenses for the current period increased $525,431
from the previous period. The increase was due in part to an increase in legal
expense associated with the H&N lawsuit of approximately $74,000 and the
termination of the Management Services Agreement between the Company and
Fidelity Oil, whereby the Company managed Fidelity Oil's interest in the oil and
gas assets it acquired from American Resources in December 1999, resulting in an
increase of approximately $200,000. The management fees received from Fidelity
Oil had been recorded as a reduction to general and administrative expenses. In
addition, general and administrative expenses of $299,472 were recorded in the
current period as a result of the consolidation of Drillmar.
Interest and other expense increased $273,161 in the current period due to a
$300,000 increase in the provision for the contingent payment to Den norske
Bank.
Second Quarter 2001 vs. Second Quarter 2000. Current quarter pipeline operating
expenses decreased by $147,042 or 55% from the previous quarter. The decrease
was primarily due to the sale of the Black Marlin Pipeline System on January 22,
2001.
Current quarter depletion, depreciation and amortization decreased $29,856 from
the previous quarter. The decrease was primarily due to decrease of $49,934,
resulting from the sale of the Black Marlin Pipeline System.
General and administrative expenses for the current quarter increased $205,463
from the previous quarter. The increase was primarily due to expenses of
$110,538 recorded in the current quarter associated with Drillmar and the
termination of the Management Services Agreement between the Company and
Fidelity Oil, whereby the Company managed Fidelity Oil's interest in the oil and
gas assets it acquired from American Resources in December 1999, resulting in an
increase of approximately $120,000. The management fees received from Fidelity
Oil had been recorded as a reduction to general and administrative expenses.
Interest and other expense increased $131,816 in the current quarter due to a
$150,000 increase in the provision for the contingent payment to Den norske
Bank.
19
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 is not subject to risk of interest rate
changes.
20
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 2000, American Resources, a 77% indirectly owned subsidiary of the
Company, 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 and Howard Energy Marketing, L.L.C. v. American
Resources Offshore, Inc. 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 Gas. 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, prejudgment interest and attorneys' fees 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 $62.0 million
dollars in actual damages plus treble damages, punitive damages, prejudgment
interest and attorneys' fees. American Resources intends to vigorously defend
this claim.
ITEM 5. OTHER INFORMATION
During the second quarter of 2000, American Resources' Board of Directors formed
a special committee for the purpose of evaluating the possible exchange of its'
outstanding common stock and preferred stock for shares of the common stock of
the Company. The special committee is made up of American Resources' directors
who are not affiliated with the Company.
On August 6, 2001, the Company and American Resources reached an agreement in
principle for the Company to acquire by merger all outstanding shares of
American Resources' common stock not owned by the Company and all outstanding
shares of American Resources' Series 1993 8% Convertible Preferred Stock. The
agreements in principle calls for the holders of American Resources' common
stock to receive one share of Blue Dolphin common stock for each 36.2 shares of
American Resources common stock owned and for holders of American Resources'
preferred stock to receive one share of Blue Dolphin common stock for each 33.2
shares of American Resources preferred stock owned. If the proposed merger is
completed, American Resources will become a wholly-owned subsidiary of the
Company and former stockholders of American Resources will become stockholders
of the Company. The proposed merger is subject to, among other things, execution
of a definitive merger agreement and approval of the merger by American
Resources' stockholders.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) No Exhibits
B) Form 8-K - None
21
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: August 20, 2001 /s/ Michael J. Jacobson
-------------------------------
Michael J. Jacobson
President and Chief Executive Officer
/s/ G. Brian Lloyd
-------------------------------
G. Brian Lloyd
Vice President, Treasurer
22