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: SEPTEMBER 30, 2000
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.
6,037,770 SHARES, PAR VALUE $.01 PER SHARE, OUTSTANDING AT NOVEMBER 8, 2000
----------------------------------------------------------------------------
1
<PAGE>
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
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash ........................................ $ 1,871,282 $ 1,166,730
Trade accounts receivable ................... 2,176,399 1,542,328
Funds Escrowed for abandonment .............. 1,466,857 --
Prepaid expenses ............................ 931,878 318,139
------------- -------------
Total Current Assets ................. 6,446,416 3,027,197
Property and Equipment, at cost, using full cost
method for oil and gas properties .......... 34,331,212 32,143,258
Accumulated depletion, depreciation
and amortization ........................... (29,931,631) (17,879,183)
------------- -------------
4,399,581 14,264,075
Land ........................................... 930,500 930,500
Acquisition and development costs - Petroport .. 1,871,543 1,741,823
Other Assets ................................... 498,793 1,574,621
------------- -------------
Total Assets ......................... $ 14,146,833 $ 21,538,216
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ....... $ 3,650,044 $ 1,614,921
Current portion of long term-debt ........... 218,412 319,045
Notes payable - related parties ............. 1,400,000 1,000,000
------------- -------------
Total Current Liabilities ............. 5,268,456 2,933,966
Minority interest .............................. 1,177,744 958,521
Common Stock ................................... 59,749 59,509
Additional Paid-in Capital ..................... 25,784,758 25,823,817
Accumulated (Deficit) .......................... (18,143,874) (8,237,597)
------------- -------------
Total Liabilities and
Stockholders' Equity ................. $ 14,146,833 $ 21,538,216
============= =============
</TABLE>
3
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue from operations:
Pipeline operations ............................ $ 657,020 $ 513,942
Oil and gas sales .............................. 1,633,118 33,720
Operating fees ................................ 77,924 83,831
------------ ------------
REVENUE FROM OPERATIONS ........ 2,368,062 631,493
Cost of operations:
Pipeline operating expenses .................... 247,481 285,386
Lease operating expenses ....................... 352,605 333,272
Depletion, depreciation, and amortization ...... 530,921 108,986
Impairment of oil and gas properties ........... 10,654,976 --
General and administrative ..................... 512,418 497,116
------------ ------------
COST OF OPERATIONS ............. 12,298,401 1,224,760
------------ ------------
LOSS FROM OPERATIONS ........... (9,930,339) (593,267)
Other income (expense):
Interest and other expense ..................... (54,824) (64,580)
Interest and other income ...................... 27,154 15,008
------------ ------------
LOSS BEFORE INCOME TAXES ....... (9,958,009) (642,839)
Minority interest .................................. (151,576) --
Provision for income taxes ......................... -- 213,806
------------ ------------
Net loss ........................................... $(10,109,585) $ (429,033)
============ ============
Loss per share-basic ............................... $ (1.69) $ (0.09)
============ ============
Loss per share-diluted ............................. $ (1.69) $ (0.09)
============ ============
Weighted average number of common shares outstanding
and dilutive potential common shares:
Basic .......................................... 5,964,521 4,921,028
============ ============
Diluted ........................................ 5,964,521 5,019,727
============ ============
</TABLE>
4
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Revenue from operations:
Pipeline operations ................................................... $ 1,716,102 $ 1,393,880
Oil and gas sales ..................................................... 3,810,333 191,948
Operating fees ....................................................... 234,338 234,346
------------- -------------
REVENUE FROM OPERATIONS ............................... 5,760,773 1,820,174
Cost of operations:
Pipeline operating expenses ........................................... 753,726 777,705
Lease operating expenses .............................................. 951,068 857,685
Depletion, depreciation, and amortization ............................. 1,441,694 355,946
Impairment of oil and gas properties .................................. 10,654,976 --
General and administrative ............................................ 1,583,151 1,486,258
------------- -------------
COST OF OPERATIONS .................................... 15,384,615 3,477,594
------------- -------------
LOSS FROM OPERATIONS .................................. (9,623,842) (1,657,420)
Other income (expense):
Interest and other expense ............................................ (140,405) (181,834)
Gain on sale of assets ................................................ -- 2,052,920
Interest and other income ............................................. 77,418 15,106
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF A
CHANGE IN AN ACCOUNTING PRINCIPLE ..................... (9,686,829) 228,772
Minority interest ......................................................... (219,223) --
Provision for income taxes ................................................ -- (67,503)
------------- -------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A
CHANGE IN AN ACCOUNTING PRINCIPLE ..................... (9,906,052) 161,269
Cumulative effect at January 1, 1999 of a change in accounting principle
for start up costs, net of income tax benefit of $41,480 .................. -- (80,334)
------------- -------------
Net income (loss) ......................................................... $ (9,906,052) $ 80,935
============= =============
Earnings per common share-basic
Income before accounting change ....................................... $ (1.66) $ 0.03
Cumulative effect of a change in accounting principle ................. -- (0.01)
------------- -------------
Net income ............................................................ $ (1.66) $ 0.02
============= =============
Earnings per common share-diluted
Income before accounting change ....................................... $ (1.66) $ 0.03
Cumulative effect of a change in accounting principle ................. -- (0.01)
------------- -------------
Net income ............................................................ $ (1.66) $ 0.02
============= =============
Weighted average number of common shares outstanding and dilutive potential
common shares:
Basic ................................................................. 5,955,645 4,694,895
============= =============
Diluted ............................................................... 5,955,645 4,793,594
============= =============
</TABLE>
5
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .......................................................... $ (9,906,052) $ 80,935
Adjustments to reconcile net income to net cash provided by
operating activities:
Depletion, depreciation and amortization ........................ 1,441,694 345,408
Deferred income taxes ........................................... -- 35,644
Change in accounting principle .................................. -- 121,814
Impairment of oil and gas properties ............................ 10,654,976 --
Gain on sale of assets .......................................... -- (2,052,920)
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable ........... (634,071) (197,715)
(Increase) in prepaid expenses ............................. (613,739) (682)
Increase in minority interest, accounts payable and other
current liabilities ...................................... 2,254,121 411,636
-------------- --------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................. 3,196,929 (1,255,880)
INVESTING ACTIVITIES
Oil and gas prospect generation costs ...................................... (811,555) (1,426,529)
Reimbursement of oil and gas prospect generation costs ..................... 811,555 794,393
Purchases of property and equipment ........................................ (1,254,952) (5,564,068)
Net proceeds from sale of assets ........................................... 144,999 5,570,287
Development costs - oil and gas properties ................................. (1,113,088) --
Development costs - Petroport .............................................. (138,855) (245,881)
Development costs - New Avoca .............................................. (60,475) --
Funds escrowed for abandonment costs ....................................... (298,293) --
(Increase) decrease in other assets ........................................ (32,261) 89,193
-------------- --------------
NET CASH (USED IN)
INVESTING ACTIVITIES ................. (2,752,925) (782,605)
FINANCING ACTIVITIES
Net proceeds from borrowings ............................................... 400,000 200,000
Net proceeds from the sale of stock ........................................ 85,117 1,960,000
Payments on borrowings ..................................................... (100,633) (150,000)
Other ...................................................................... (123,936) 50,834
-------------- --------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ................. 260,548 2,060,834
INCREASE IN CASH .................... 704,552 22,349
CASH AT BEGINNING OF YEAR ...................................................... 1,166,730 593,509
-------------- --------------
CASH AT SEPTEMBER 30 ........................................................... $ 1,871,282 $ 615,858
============== ==============
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid .............................................................. $ 75,062 $ 178,872
============== ==============
Income taxes paid .......................................................... $ 8,430 $ 12,620
============== ==============
</TABLE>
6
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
SEPTEMBER 30, 2000
1. OIL AND GAS PROPERTIES
At September 30, 2000, the Company recorded an impairment of oil and gas
properties of $10,654,976, comprised of a non-cash write off of proved reserves
from the Galveston Area Block 288 Buccaneer Field of $5,354,976 and the
recognition of associated plugging and abandonment costs estimated to be
$5,300,000. The Buccaneer Field is located offshore in the Gulf of Mexico. The
Company's $5,300,000 accrued abandonment liability is reflected on its Balance
Sheet as a component of accumulated depletion, depreciation and amortization.
In July 2000, production from the only producing well in the Buccaneer Field,
the A-12 well, ceased due to down-hole mechanical problems. The Company retained
an outside consultant to advise it concerning the best method to restore
production from the well. Among the various alternatives being considered were:
drilling a new vertical well; sidetracking; conducting a workover; drilling a
new horizontal well and sidetracking the A-12 well horizontally. The consultant
concluded that the drilling of a new well, estimated to cost $2,800,000, was the
best technical solution to restoring production because of the age and condition
of the A-12 well bore. He also recommended that the Company should not drill the
new well, based on his opinion that the most likely rate that the new well could
be expected to produce at was 1,000 Mcf per day and that positive discounted
cash flow from the well could not be achieved unless a daily production rate of
1,500 Mcf per day or more was experienced. The consultant advised the Company
that he did not feel that the possible returns from the new well justified the
risks involved and recommended the abandonment of the Buccaneer Field. Based on
this recommendation the Company chose not to attempt to restore production to
the A-12 well or redrill.
In early October 2000, as a result of a routine inspection by the U.S. Minerals
Management Service ("MMS") of the two major platform complexes in the field, the
MMS dictated that certain repairs to the platforms must be made before operating
activities can resume. The Company estimates the cost of these required,
unplanned repairs to be in excess of $1,000,000. The Company estimates that if
it had chosen to pursue restoration of production in the field the actual
infrastructure cost to do so would have been $2,600,000, because only one of the
two platform complexes is needed. If the Company were to have made repairs in
accordance with the MMS order, it would have been required to expend an
estimated $600,000 to repair a platform that it may not have used. Instead of
making this expenditure and thereafter continue to incur ongoing operating costs
associated with the platform, the Company could abandon the unneeded platform
and repair the remaining platform to meet MMS requirements, at an estimated cost
of $2,600,000. Thus, the cost to reestablish production would have increased to
an estimated $5,400,000, consisting of $2,600,000 in front-end infrastructure
costs and $2,800,000 in drilling costs.
Buccaneer Field oil and gas sales, operating fees and associated lease operating
expenses for the nine months ended September 30, 2000 and 1999, are as follows:
7
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
2000 1999
---------- ----------
Oil and gas sales ...................... 287,496 191,948
Operating fees ......................... 234,338 234,346
Lease operating expenses ............... (454,207) (857,685)
---------- ----------
67,627 (431,391)
========== ==========
The following table reflects the estimates of Proved Reserves, future net
revenues and the discounted present value of future net revenues at 10% from
Proved Reserves before income taxes to the net interest of the Company from the
Buccaneer Field as of December 31, 1999, as included in the Proved Reserves
Information in the December 31, 1999 10K, such reserves have been restored, see
Note 5.
NET OIL NET GAS FUTURE DISCOUNTED FUTURE
RESERVES RESERVES NET REVENUES NET REVENUES
(Thousand Barrels) (Million Cubic Feet) ($000) ($000)
---------------- ------------------- ------------ -----------------
111 17,869 $25,726 $8,890
2. NOTES - RELATED PARTIES
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 has been extended to March 31, 2001, bears interest
at 10% per annum, and is convertible into common stock at $6.00 per share
The Company issued two convertible promissory notes each in the principal amount
of $200,000 on May 25, 2000 and July 6, 2000. Both notes were issued to Ivar
Siem, Chairman of the Company. These convertible promissory notes are due March
31, 2001, bear interest at the rate of 10% per annum and are convertible into
common stock at the rate of $6.00 per share.
3. 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.
8
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
The following table provides a reconciliation between basic and diluted earnings
per share:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING
AND DILUTIVE PER
NET INCOME POTENTIAL SHARE
(LOSS) COMMON SHARES AMOUNT
------------- ---------------- --------
<S> <C> <C> <C>
Nine Months ended September 30, 2000
Basic earnings per share ............... $ (9,906,052) 5,955,645 $ (1.66)
------------- ---------------- --------
Diluted earnings per share ............. $ (9,906,052) 5,955,645 $ (1.66)
============= ================ ========
Nine Months ended September 30, 1999
Basic earnings per share ............... $ 80,935 4,694,895 $ 0.02
Effect of dilutive stock
options ............................ -- 98,699 --
------------- ---------------- --------
Diluted earnings per share ............. $ 80,935 4,793,594 $ 0.02
============= ================ ========
</TABLE>
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, as amended, Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133), was issued by the
Financial Accounting Standards Board in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. In July 1999, SFAS No. 137, "Deferral of the
Effective Date of SFAS No. 133," was issued and delays the effective date for
one year, to fiscal years beginning after June 15, 2000. The Company believes
that adoption of this financial accounting standard will not have a material
effect on its financial condition or results of operations.
5. SECURITIES AND EXCHANGE COMMISSION REVIEW
The Securities and Exchange Commission ("SEC") is currently reviewing certain of
the Company's historical financial statements included in certain of the
Company's periodic reports in conjunction with the Company's filing of a
registration statement on Form S-3. The SEC review could result in significant
modifications to such financial statements upon conclusion of the review
process. As of November 20, 2000, the SEC review process has not concluded.
However, discussions with the SEC indicate that the Company's December 31, 1999
Supplemental Oil and Gas Information - Unaudited will need to be restated. The
purpose of the restatement is to eliminate Proved Undeveloped Reserves
attributable to the Buccaneer Field from the supplemental disclosures. The
following table reflects the Company's estimated quantities of proved oil and
gas reserves and standardized measure of discounted future net cash flows at
December 31, 1999 on a summarized basis:
STANDARDIZED
MEASURE OF
OIL GAS DISCOUNTED FUTURE
(BBLS) (MCF) NET CASH FLOWS
----------- ----------- --------------
Total Proved Reserves ... 332,298 35,341,835 $16,138,356.00
Less:
Buccaneer Field Proved
Undeveloped Reserves (76,074) (13,123,893) $(2,034,230.00)
----------- ----------- --------------
Total Restated Proved
Reserves ............. 256,224 22,217,942 $14,104,126.00
----------- ----------- --------------
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. Intersegment revenues consist of transportation, general processing
and storage fees charged by certain subsidiaries to another for natural gas and
crude
9
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
oil transported through the Blue Dolphin Pipeline System. The intercompany
revenues and expenses are eliminated in consolidation. Information concerning
these segments for the nine months and three months ended September 30, 2000 and
1999, and at September 30, 2000 and December 31, 1999 as follow.
<TABLE>
<CAPTION>
DEPLETION,
OPERATING DEPRECIATION,
INTERSEGMENT INCOME AMORTIZATION AND
REVENUES REVENUES (LOSS)(1) IMPAIRMENT (2)
----------- ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Nine months ended September 30, 2000:
Oil and gas exploration and
production and operating fees ....................... $ 4,049,171 4,500 (9,410,110) 11,806,953
Pipeline operations ...................................... 1,729,102 13,000 408,648 267,272
Other .................................................... (17,500) (622,380) 22,445
----------- ----------- ----------------
Consolidated ............................................. 5,760,773 -- (9,623,842) 12,096,670
Other expense ............................................ (62,987)
-----------
Loss before income taxes ................................. (9,686,829)
Nine months ended September 30, 1999:
Oil and gas exploration and
production and operating fees ......................... $ 430,794 4,500 (699,509) 71,684
Pipeline operations ...................................... 1,404,817 10,937 (213,273) 272,065
Other .................................................... (15,437) (744,638) 12,197
----------- ----------- ----------------
Consolidated ............................................. 1,820,174 -- (1,657,420) 355,946
Other income ............................................. 1,886,192
-----------
Income before income taxes ............................... 228,772
Three months ended September 30, 2000:
Oil and gas exploration and
production and operating fees ........................... $ 1,712,542 1,500 (9,967,164) 11,087,298
Pipeline operations ...................................... 658,765 1,745 228,218 90,819
Other .................................................... (3,245) (191,393) 7,780
----------- ----------- ----------------
Consolidated ............................................. 2,368,062 -- (9,930,339) 11,185,897
Other expense ............................................ (27,670)
-----------
Loss before income taxes ................................. (9,958,009)
Three months ended September 30, 1999:
Oil and gas exploration and
production and operating fees ......................... $ 120,551 3,000 (312,228) 14,836
Pipeline operations ...................................... 516,042 2,100 (50,052) 84,754
Other .................................................... (5,100) (230,987) 9,396
----------- ----------- ----------------
Consolidated ............................................. 631,493 -- (593,267) 108,986
Other expense ............................................ (49,572)
-----------
Loss before income taxes ................................. (642,839)
</TABLE>
10
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
Identifiable assets:
Oil and gas exploration
and production ............... $ 3,187,107 $ 12,816,861
Pipeline operations ............. 10,139,781 7,735,149
Other ........................... 819,945 986,206
------------- -------------
Consolidated .................... $ 14,146,833 $ 21,538,216
1. Consolidated income from operations includes $582,436 and $1,486,590
in unallocated general and administrative expenses, and unallocated
depletion, depreciation and amortization of $22,445 and $17,674 for
the nine months ended September 30, 2000 and 1999, respectively.
Consolidated income from operations includes $180,369 and $497,116
in unallocated general and administrative expenses, and unallocated
depletion, depreciation and amortization of $7,780 and $6,107 for
the quarters ended September 30, 2000 and 1999, respectively.
2. Pipeline depletion, depreciation and amortization includes a
provision for pipeline abandonment of $14,805 and $15,905 for the
nine months ended September 30, 2000 and 1999, respectively. Oil and
gas depletion, depreciation, amortization and impairment includes a
provision for abandonment costs of platforms and wells of $5,313,793
and $13,746 for the nine months ended September 30, 2000 and 1999,
respectively.
Pipeline depletion, depreciation and amortization includes a
provision for pipeline abandonment of $4,935 and $4,935 for the
quarters ended September 30, 2000 and 1999, respectively. Oil and
gas depletion, depreciation, amortization and impairment includes a
provision for abandonment costs of platforms and wells of $5,301,868
and $2,559 for the quarters ended September 30, 2000 and 1999,
respectively.
LEGAL PROCEEDINGS
On May 8, 2000, American Resources Offshore, Inc., a 75% 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 was defrauded by American Resources in connection
with natural gas purchase options and natural 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 Gas to purchase illusory options from American Resources that bore
no relation to any physical gas
11
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
business and that American Resources did not have the financial resources and/or
sufficient quantity of natural gas to perform. H&N further alleges that American
Resources and H&N colluded with respect to swap transactions that were designed
to benefit American Resources at the expense of H&N Gas. H&N Gas is seeking
approximately $5.65 million in actual damages, treble damages, punitive damages,
prejudgment interest and attorneys' fees. American Resources intends to
vigorously defend this claim.
12
<PAGE>
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. The Company cautions readers
that any such statements are not guarantees of future performance or events and
such statements involve risks, uncertainties and assumptions, including, but not
limited to, industry conditions, prices of crude oil and natural gas, regulatory
changes, general economic conditions, interest rates and competition. Should one
or more of these risks or uncertainties materialize or should the underlying
assumptions prove incorrect, actual results and outcomes may differ materially
from those indicated in the forward-looking statements. 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 obligation to update the
forward looking statements or republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
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 recently announced that it was awarded three leases by the MMS on
prospects developed by the Company through its offshore prospect generation
program. The leases were awarded to Callon Petroleum Operating Company
("Callon"), a subsidiary of Callon Petroleum Company, on high bids submitted at
MMS Western Gulf of Mexico Lease Sale 177 held August 23, 2000. The leases cover
Galveston Area Blocks 271 and 284, and Matagorda Island Area Block 710. Callon
will own a 50% interest and operate all leases. Other owners include Fidelity
Oil Holdings, Inc., 40% and Black Hills Exploration and Production, Inc., a
subsidiary of Black Hills Corporation, 10%. A fourth block, Galveston Area Block
285 acquired by the Company in 1998, will be assigned to the same ownership
group. The Company's subsidiary Blue Dolphin Exploration Company owns a 10%
after payout reversionary working interest in the four leases.
The Company recently announced a natural gas discovery in High Island Area Block
A-7, in the Gulf of Mexico. The Company acquired the block at MMS Sale 155 in
1995, and owns an 8.9% after payout reversionary working interest. High Island
Area Block A-7 was one of four blocks the Company acquired in the first year of
its offshore prospect generation program. Production from the first well began
in September 2000 at a rate of 34 million cubic feet of gas per day. A second
discovery well is currently being drilled lower to test for additional reserves
and is expected to be on production in mid to late 2001. Before the Company is
assigned its working interest, the initial working interest owners must recover
their costs associated with the lease and its development.
13
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Company's primary efforts to advance the Petroport project continues to
center on development of market support, evidenced by firm commitments from
refineries to use Petroport when completed. While many of the refiners in the
primary market area are prospective users of Petroport, the Company's efforts
have focused on those refiners whose production requirements would be at least
150,000 barrels of oil per day.
Uncertainties associated with recent and anticipated industry consolidations,
combined with the extent of displacement of long haul imported barrels by future
deepwater Gulf of Mexico production, has resulted in the deferring of throughput
commitment decisions by these refiners. The Company believes firm throughput
commitments for Petroport will materialize, but are several months off in the
future. However, there can be no assurance that the Company will receive such
commitments.
The Company's work on the Petroport project has resulted in the opportunity to
evaluate a second offshore crude oil terminal to serve an alternative market.
This facility, designed to fill a niche created by long term arrangements for
the supply of short haul Caribbean Basin crudes delivered to a shallow
water-congested port complex, would be located off the coast of Port Arthur,
Texas. The Company believes that the use of Caribbean Basin crudes by refineries
in this market area is likely to grow as refineries complete processing projects
and system expansions are made. Additionally the Company believes the long-term
supply arrangements, intended to capture market share by the exporting
countries, will minimize displacement of these barrels by future deepwater Gulf
of Mexico production. The effect is to reduce refiners' uncertainties concerning
future supply sources and a current willingness to enter into long term
commitments for use of the offshore port.
Petroport's main focus remains the offloading of larger tankers used for longer
haul shipments, whereas this facility's focus will be the smaller tankers used
in the short haul trade, primarily for shipments from Mexico, and secondarily,
Venezuela.
Preliminary conceptual design and costing work, and a general commercial
assessment for this project have been completed. Discussions are now under way
with a potential primary user of the system. The Company expects to have reached
an understanding with such user within approximately 60 days. The Company does
not intend to go forward with the project without a major user's commitment and
support.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's financial position at September 30,
2000 and December 31, 1999 (amounts in thousands):
14
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- -------------------
AMOUNT % AMOUNT %
-------- -------- -------- --------
Working capital .................... 1,178 13 93 --
Property and equipment, net ........ 4,400 50 14,264 77
Other noncurrent assets ............ 3,301 37 4,247 23
-------- -------- -------- --------
Total .............................. 8,879 100 18,604 100
======== ======== ======== ========
Minority interest .................. 1,178 13 958 5
Stockholders' equity ............... 7,701 87 17,646 95
-------- -------- -------- --------
Total .............................. 8,879 100 18,604 100
======== ======== ======== ========
At September 30, 2000, the Company recorded an impairment of oil and gas
properties of $10,654,976, comprised of a non-cash write off of proved reserves
from the Galveston Area Block 288 Buccaneer Field of $5,354,975, and the
recognition of associated plugging and abandonment costs estimated to be
$5,300,000 (see footnote 1. "Oil and Gas Properties").
In October 2000 the MMS notified the Company that they required additional
security to ensure that its abandonment obligations associated with the
Buccaneer Field will be met. The Company has escrowed approximately $1.47
million for abandonment costs and provided $1.3 million in surety bonds. At the
request of the MMS, the Company has delivered an additional $2.9 million in
surety bonds and used the escrowed funds as collateral for the surety bonds.
The Company has reached a tentative agreement, with a third party to plug and
abandon the wells and remove certain of its facilities located in the Buccaneer
Field. The third party would plug and abandon the remaining ten wells in the
Buccaneer Field and remove the platform and attached quarters platform in
Galveston Area Block 288. An affiliate of the third party would lease and
refurbish the remaining platform and attached quarters platform in Galveston
Area Block 296 to handle production from an adjacent lease that it intends to
acquire. The Company currently provides operating services to the owner of this
lease pursuant to an operating agreement, however this agreement will terminate
when the company leases the Galveston Block 296 platform. Plugging and
abandonment of the Buccaneer Field wells is expected to begin as soon as the
agreement is completed. This agreement is subject to MMS approval and the third
party closing its agreement to acquire the adjacent lease. Presently it is
estimated that the plugging and abandonment costs will be $1,000,000. The
removal of the Galveston Area Block 288 platform facilities is expected to begin
in the first half of 2001, at an estimated cost of $2,000,000. The provision for
future abandonment costs associated with the Galveston Block 296 platform
facilities is $2,300,000.
During the nine months ended September 30, 2000, the Company funded its
activities through cash generated from operations and short-term promissory
notes from Ivar Siem, Chairman of the Company in the aggregate principal amount
of $400,000 (see footnote 2 "Notes Payable - Related Parties"). The net cash
provided by or used in operating, investing and financing activities is
summarized below (amounts in thousands):
15
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
2000 1999
-------- --------
Net cash provided by (used in):
Operating activities ................................. 3,197 (1,256)
Investing activities ................................. (2,753) (783)
Financing activities ................................. 261 2,061
-------- --------
Net increase in cash ............................ 705 22
======== ========
On December 2, 1999, the Company acquired a 75% ownership interest in American
Resources Offshore, Inc. by purchasing approximately 39.0 million shares of
American Resources common stock. The Company paid approximately $4.5 million for
the shares of American Resources common stock. Concurrently with the sale of its
common stock to the Company, American Resources sold an 80% interest in its
offshore oil and gas properties located in the Gulf of Mexico to Fidelity Oil
Holdings, Inc. a subsidiary of MDU Resources Group, Inc.
In order to provide funding for the acquisition of its interest in American
Resources in December 1999, the Company arranged a private placement and
conversion of principal and accrued interest on promissory notes into common
stock, $.01 par value per share, of 701,820 shares and 314,898 shares,
respectively (see Notes 5 and 7 in Item 8. Financial Statements and
Supplementary Data in the Company's Form 10-K for the year ended December 31,
1999). Two members and one former member of the board of directors participated
in this private placement. Daniel B. Porter, a former director of the Company,
(i) paid $100,000 for 16,667 shares of common stock and (ii) paid $325 and
tendered a note and accrued interest totaling $99,875 for an additional 16,700
shares. Additionally, Harris A. Kaffie, a director of the Company, paid $149 and
tendered a note and accrued interest totaling $187,651 for 31,300 shares of
common stock and Ivar Siem, Chairman of the Board of Directors, paid $281 and
tendered a note and accrued interest totaling $27,919 for 4,700 shares. The
Company also issued a $1,000,000 convertible promissory note to Harris A.
Kaffie, a director of the Company (see footnote 2. "Notes Payable - Related
Parties").
In connection with the acquisition of a majority interest in American Resources
the Company entered into an agreement with Fidelity Oil to manage their interest
in the properties acquired from American Resources for $40,000 per month. This
agreement is in effect through December 2000 and provides for continuation
thereafter on a year to year basis unless terminated by either party.
The Company maintains a $10,000,000 reducing revolving credit facility with Bank
One, Texas, N.A. (the "Loan Agreement"). The Loan Agreement expires on December
31, 2000, when the outstanding balance, if any, is due and payable. The facility
is available for the acquisition of oil and gas reserve based assets and working
capital. The maximum amount the Company has been able to borrow under the Loan
Agreement was $6,500,000. In January 2000, the Company paid the $80,000
outstanding balance under the Loan Agreement and its borrowing capacity under
the Loan Agreement was adjusted to $0. At September 30, 2000 the Company did not
have an outstanding balance under the Loan Agreement.
16
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The bank redetermines the borrowing base semi-annually based on its valuation of
the Company's oil and gas properties and pipeline contracts. Accordingly, the
bank may increase the borrowing base under the Loan Agreement to $10,000,000,
the maximum amount the Company could borrow under the Loan Agreement, or some
lesser amount based upon the banks valuation of these assets. Until the bank
increases the borrowing base of the Loan Agreement, the Company will not be able
to use the Loan Agreement as a resource for capital. Presently, the Company is
negotiating with Bank One to increase the Borrowing Base of the Loan Agreement.
There can be no assurance that the bank will increase the amount of the
Company's borrowing base under the Loan Agreement.
The Loan Agreement includes certain restrictive covenants that are applicable if
any amounts are outstanding under the agreement, including restrictions on the
Company's ability to pay dividends on its capital stock and the maintenance of
certain financial ratios. Among the various financial covenants the Company must
comply with, it must maintain (i) a total tangible net worth of $10,250,000,
(ii) a debt coverage ratio of not less that 1.2 to 1 calculated on a rolling
four-quarter basis and (iii) a current ratio (as defined in the Loan Agreement)
of at least 1 to 1. The Company expects to renegotiate the terms of the Loan
Agreement including, but not limited to, the borrowing capacity and restrictive
covenants or enter into a credit agreement with another financial institution.
There can be no assurance that the Company will be able to renegotiate the terms
of the Loan Agreement or enter into a new credit agreement with commercially
reasonable terms.
The Company has exploration and development opportunities associated with its
offshore properties owned through American Resources. The Company will evaluate
each of the exploration and development opportunities and its available capital
resources to determine whether to participate, sell its interest or sell a
portion of its interest and use the proceeds to participate at a reduced
interest. As of September 30, 2000, American Resources had expended
approximately $1.8 million on exploration and development opportunities on its
properties during 2000, of which $1.1 million has been recorded in Property and
Equipment and $0.7 million is included in prepaid expenses as of September 30,
2000. These expenditures were funded by working capital generated by American
Resources. The Company expects to spend an additional $0.3 million during the
remainder of 2000 on exploration and development opportunities.
In April 2000, the Company amended its prospect generation program agreement
with Fidelity Oil, whereby in exchange for certain participation rights of up to
100%, Fidelity Oil will fund $1,060,000 of the costs associated with the program
during 2000. Fidelity Oil will also reimburse the Company for seismic data
acquired. The available interests in the prospect inventory developed in the
program are for sale on an individual prospect basis. Fidelity Oil currently has
not committed to fund the prospect generation program after December 31, 2000.
If they do not continue to fund the program or funding from another company is
not arranged, the Company may terminate its prospect generation program.
In July 2000, the Company reached an agreement to provide transportation
services for Vastar Resources, Inc. in High Island Area Block A-5 offshore Texas
in the Gulf of Mexico. To accommodate this production, the Company agreed to
construct a 3.4 mile 12" diameter pipeline from the production platform in High
Island Area Block A-5 to the Black Marlin Pipeline. The cost to construct the
pipeline
17
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
was $2.0 million, $1.0 million net to the Company's 50% interest in the
pipeline. The pipeline was completed with minimal production from High Island
Area Block A-5 commencing in September 2000. Full operations are expected to
commence in December 2000. Presently, the Company is negotiating to finance this
pipeline with Bank One by increasing the borrowing base of its credit facility.
However, there is no assurance that the Company will be able to use its credit
facility to finance this pipeline. If the Company is not able to use the credit
facility to finance this pipeline, it will seek financing from other sources.
In July 2000, the Company acquired a 5/6th's ownership interest in an 8-inch,
12.78 mile pipeline from Walter Oil and Gas Corp. for approximately $224,000 net
to the Company interest. The pipeline extends from Galveston Area Block 350 to
an interconnect to another pipeline in Galveston Area Block 391 (the "GA350
Pipeline"), approximately 14 miles south of the Company's Blue Dolphin Pipeline.
The pipeline currently transports nominal volumes of gas, but the Company
believes it is well positioned to attract future discoveries in the area.
In October 1999, American Resources sold call options for 5 MMBtu's per day of
gas at a call price of $3.25 per MMBtu to H & N Gas. The call options expired in
September 2000. In exchange for establishing a ceiling of $3.25 per MMBtu over
the option term, American Resources received an average option premium of
approximately $0.12 per MMBtu on the volumes contracted for under the call
option agreement. Fidelity Oil agreed to assume 80%, or 4 MMBtu's per day, of
any liability from these options. The call options were settled monthly. The
liability for the months of June 2000 through September 2000 options was
$665,245, of which Fidelity Oil reimbursed American Resources $532,196. As a
result of the legal proceedings with H & N Gas (see Part II, Item 1. Legal
Proceedings, below), American Resources is holding the funds due to H&N Gas in a
separate interest bearing bank account.
In November 1999, the Company and WBI Holdings, Inc. (WBI) formed New Avoca Gas
Storage LLC, 25% owned and managed by the Company and 75% owned by WBI, and
acquired the Avoca gas storage assets for $400,000 ($100,000 net to the
Company's interest) from Northeastern Gas Caverns ("Northeastern").
Additionally, a contingent payment of $500,000 ($125,000 net to the Company's
interest) was due to Northeastern on May 22, 2000. New Avoca made a payment of
$50,000 and extended the remaining $450,000 payment to August 22, 2000. In
August 2000, Northeastern extended the contingent payment until October 2000 in
exchange for increasing the contingent payment by $10,000 to $460,000. The
contingent payment would be excused, and the $40,000 net payment made would be
refunded, if Northeastern successfully settles a claim associated with Avoca Gas
Storage, Inc. (the original owner of the Avoca gas storage assets). In October
2000, Northeastern received a payment on its claim and refunded the $40,000
previously paid by New Avoca. New Avoca can elect to liquidate the project at
any time.
New Avoca completed an analysis of the project. Based on this analysis and
recent technological advances, New Avoca believes the disposal wells will be
capable of handling the more moderate rates of brine injection expected to be
produced under its proposed construction schedule. In October 2000, New Avoca
commenced testing of the disposal wells to determine the rate that these wells
will accept brine. New Avoca estimates that the test of the disposal wells and
the subsequent evaluation of the test results will take approximately two months
to complete. Based on the results of the tests, New Avoca expects to
18
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
make a decision to either proceed with or liquidate the project. If liquidated,
the Company believes that it can recover its investment in this project. If the
decision is made to proceed with the project, New Avoca estimates that it will
take between one and one-half to two years to begin operations at partial
capacity, and three to four years for the facility to operate at full capacity.
However, until the Company has reviewed and analyzed the results from the tests
of the disposal wells it will be unable to establish a definitive schedule or
accurately estimate the costs to complete this project.
In general, the Company believes that it has or can obtain adequate capital
resources to continue to finance and otherwise meet its anticipated business
requirements. In the past, the Company's capital requirements have been financed
by the disposition of certain assets, for example, interests in its pipelines,
and equity and debt investments by its directors and others. The Company's
directors have also facilitated the Company's access to other sources of capital
in the private equity and debt markets. 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 reasonable terms. The Company's inability to finance
its capital requirements may adversely effect its results of operations, timing
for major pipeline expansions, growth in oil and gas prospect generation
activities and other projects.
RESULTS OF OPERATIONS
The Company reported a net loss for the nine months ended September 30, 2000,
("current period") of $9,906,052, compared to net income of $80,935 reported for
the nine months ended September 30, 1999 ("previous period"). For the quarter
ended September 30, 2000 ("current quarter") the Company reported a net loss of
$10,109,585 compared to a net loss of $429,033 for the quarter ended September
30, 1999 ("previous quarter").
The net loss in the current period and current quarter is due to the impairment
of oil and gas properties recorded at September 30, 2000 of $10,654,976 as a
result of writing off proved reserves from the Buccaneer Field.
REVENUES:
NINE MONTHS 2000 VS. 1999. Revenues for the current period increased by
$3,940,599 or 216% to $5,760,773 compared to revenues of $1,820,174 reported for
the previous period.
Current period revenues from pipeline operations increased by $322,222 or 23%
from the previous period. The increase was primarily due to an increase in gas
volumes transported on the Black Marlin Pipeline System, which system was
acquired on March 1, 1999, resulting in a $471,083 increase in pipeline revenues
in the current period. During the current period, average daily gas volumes
transported by the Black Marlin Pipeline System were 81,000 MMBtu/d compared to
58,000 MMBtu/d during the seven months the Company owned the system in the
previous period. This increase was offset in part by a decline in gas volumes in
the Blue Dolphin Pipeline System. During the current period, average daily gas
volumes transported by the Blue Dolphin Pipeline System were 30,000 MMBtu/d
compared to 38,000 MMBtu/d during the previous period, resulting in a reduction
in pipeline revenues of $95,281.
19
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The reduction in pipeline revenue is partially attributable to a decrease in the
Company's interest in the Blue Dolphin Pipeline System. On March 1, 1999, the
Company sold a 1/6th interest in the Blue Dolphin Pipeline System, reducing its
interest from 67% to 50%.
Current period revenues from oil and gas sales increased by $3,618,385, from
those of the previous period due to the acquisition of American Resources in
December 1999, resulting in additional revenues of $3,522,838 in the current
period. In addition, oil and gas sales from the Buccaneer Field increased by
$95,547 due to higher commodity prices in the current period. However, Buccaneer
Field production ceased in July 2000, due to downhole mechanical problems. The
Company does not expect to re-establish production in the Buccaneer Field (see
"Liquidity and Capital Resources" in Part I, Item 2 in this report).
THIRD QUARTER 2000 VS. THIRD QUARTER 1999. Revenues for the current quarter
increased by $1,736,569 or 275% to $2,368,062 compared to revenues of $631,493
reported for the previous quarter.
Current quarter revenues from pipeline operations increased by $143,078 or 28%
from the previous quarter primarily due to an increase in gas and oil volumes
transported on the Black Marlin Pipeline System, resulting in additional
revenues of $200,253. The increase in revenues was offset by a 40% decline in
gas volumes transported on the Blue Dolphin Pipeline System in the current
quarter, resulting in a reduction in revenues of $57,175.
Current quarter revenues from oil and gas sales increased by $1,599,398, from
those of the previous quarter due to the acquisition of American Resources in
December 1999, resulting in additional revenues of $1,579,382. Buccaneer Field
production ceased in July 2000, due to downhole mechanical problems. The Company
does not expect to re-establish production in the Buccaneer Field (see
"Liquidity and Capital Resources" in Part I, Item 2 in this report).
COSTS AND EXPENSES:
NINE MONTHS 2000 VS. 1999. Current period lease operating expenses increased
$93,383 or 11% from those of the previous period due to the acquisition of
American Resources in December 1999 resulting in additional lease operating
expenses in the current period totaling $496,861. The increase in expenses was
offset by lower lease operating expenses in the current period associated with
the Buccaneer Field of $403,478. In the previous period, lease operating
expenses in the Buccaneer Field totaled $404,215 as compared to $80,683 in the
current period. The Company expects that lease operating expenses will decrease
as a result of the termination of production from the Buccaneer Field.
Current period depletion, depreciation and amortization increased $1,085,748,
primarily due to the acquisition of American Resources in December 1999,
resulting in increased depletion of $1,069,018.
General and administrative expenses for the current period increased $96,893,
primarily due to the acquisition of American Resources in December 1999,
resulting in additional costs of $554,408. The increase in expenses was offset
by reimbursements of $360,000 associated with proceeds received pursuant to the
Management Services Agreement between the Company and Fidelity Oil, whereby the
Company manages Fidelity Oil's interest in the oil and gas assets it acquired
from American Resources
20
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
in December 1999. Additionally current period general and administrative
expenses of Blue Dolphin Energy was reduced $97,515 from that of the previous
period.
The Company recorded an impairment of oil and gas properties of $10,654,976 in
the current period associated with the Buccaneer Field (see "Liquidity and
Capital Resources" in Part I, Item 2 in this report).
Current period interest and other expense decreased $41,429 due primarily to the
retirement of $1,811,555 principal amount of promissory notes in December 1999
resulting in a decrease in interest expense of $156,068. The decrease was offset
in part by interest expense of $86,990 on the $1,000,000 convertible promissory
note issued in December 1999, the $200,000 convertible promissory note issued in
May 2000, and the $200,000 convertible promissory note issued in July 2000.
THIRD QUARTER 2000 VS. THIRD QUARTER 1999. Current quarter lease operating
expense increased $19,333, due to the acquisition of American Resources in
December 1999, resulting in additional operating expenses of $175,420. The
increase in expenses was offset by a $156,087 reduction in current period lease
operating costs associated with the Buccaneer Field.
Current quarter depletion, depreciation and amortization increased $421,935, due
to the acquisition of American Resources in December 1999, resulting in
increased depletion of $415,622.
The Company recorded an impairment of oil and gas properties of $10,654,976 in
the current quarter associated with the Buccaneer Field (see "Liquidity and
Capital Resources" in Part I, Item 2 in this report).
21
<PAGE>
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. Except as described below the Company does not use
derivative products to manage commodity price risk.
INTEREST RATE RISK- The Company's exposure to changes in interest rates
primarily results from its short-term and long-term debt with floating interest
rates. Since the Company does not have an outstanding balance under the Loan
Agreement, a 10% change in the interest rate on the credit facility would not
effect interest expense.
DERIVATIVES- In October 1999, American Resources sold call options for 5 MMBtu's
per day of gas at a call price of $3.25 per MMBtu to H & N Gas. The call options
expired in September 2000. In exchange for establishing a ceiling of $3.25 per
MMBtu over the option term, American Resources received an average option
premium of approximately $0.12 per MMBtu on the volumes contracted for under the
call option agreement. Fidelity Oil agreed to assume 80%, or 4 MMBtu's per day,
of any liability from these options. The call options were settled monthly. The
liability for the months of June 2000 through September 2000 options was
$665,245, of which Fidelity Oil reimbursed American Resources $532,196. At
September 30, 2000 American Resources had no open forward sales contracts or
option contracts on its production or price swap agreements.
22
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 2000, American Resources, a 75% 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
was defrauded by American Resources in connection with natural gas purchase
options and natural 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
Gas 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 natural gas to perform. H&N
further alleges that American Resources and H&N colluded with respect to swap
transactions that were designed to benefit American Resources at the expense of
H&N Gas. H&N Gas is seeking approximately $5.65 million in actual damages,
treble damages, punitive damages, prejudgment interest and attorneys' fees.
American Resources intends to vigorously defend this claim
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) Exhibits - 27.1 Financial Data Schedule
B) Form 8-K - On September 6, 2000, the Company filed an
amendment to its current report of Form 8-K dated December 2,
1999, with respect to the acquisition of American Resources
Offshore, Inc. The items reported in such current report were
Item 2 (Acquisitions or Dispositions of Assets) and Item 7
(Financial Statement and Exhibits).
23
<PAGE>
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: November 20, 2000 /S/ MICHAEL J. JACOBSON
------------------------------------
Michael J. Jacobson
President and Chief Executive Officer
/S/ G. BRIAN LLOYD
------------------------------------
G. Brian Lloyd
Vice President, Treasurer
24
<PAGE>
EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
27.1 Financial Data Schedule
25
