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, 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.
5,953,665 SHARES $.01 PAR VALUE OUTSTANDING AT AUGUST 4, 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>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash ..................................................................... $ 1,199,407 $ 1,166,730
Trade accounts receivable ................................................ 1,948,643 1,542,328
Prepaid expenses ......................................................... 756,223 318,139
------------ ------------
Total Current Assets ........................... 3,904,273 3,027,197
Property and Equipment, at cost, using full cost method for oil and gas
properties. Including $950,813 of unproved leasehold cost and leases held
for sale at June 30, 2000 and December 31, 1999 ........................ 32,234,473 32,143,258
Accumulated depletion, depreciation
and amortization ........................................................ (18,293,228) (17,412,195)
------------ ------------
13,941,245 14,731,063
Land ........................................................................ 930,500 930,500
Acquisition and development costs - Petroport ............................... 1,803,326 1,741,823
Other Assets ................................................................ 2,008,683 1,574,621
------------ ------------
Total Assets ............................... $ 22,588,027 $ 22,005,204
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses .................................... $ 1,811,047 $ 1,614,921
Current portion of long term-debt ........................................ 218,412 319,045
Notes payable - related parties .......................................... 1,200,000 1,000,000
------------ ------------
Total Current Liabilities ......................... 3,229,459 2,933,966
Accrued Abandonment Costs ................................................... 488,783 466,988
Minority interest ........................................................... 1,026,168 958,521
Common Stock ................................................................ 59,537 59,509
Additional Paid-in Capital .................................................. 25,818,143 25,823,817
Accumulated (Deficit) since January 1, 1990 ................................. (8,034,063) (8,237,597)
------------ ------------
Total Liabilities and
Stockholders' Equity ........................... $ 22,588,027 $ 22,005,204
============ ============
</TABLE>
3
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue from operations:
Pipeline operations ............................. $ 588,236 $ 444,082
Oil and gas sales ............................... 1,141,506 84,674
Operating fees ................................. 78,188 75,482
------------ ------------
REVENUE FROM OPERATIONS ......... 1,807,930 604,238
Cost of operations:
Pipeline operating expenses ..................... 265,252 282,826
Lease operating expenses ........................ 314,875 227,909
Depletion, depreciation, and amortization ....... 454,502 145,853
General and administrative ...................... 572,198 496,905
------------ ------------
COST OF OPERATIONS .............. 1,606,827 1,153,493
------------ ------------
INCOME (LOSS) FROM OPERATIONS ... 201,102 (549,255)
Other income (expense):
Interest expense ................................ (32,586) (57,935)
Interest and other income ....................... 18,042 (36,637)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 186,558 (643,827)
Minority interest ................................... (35,861) --
Provision for income taxes .......................... -- 236,881
------------ ------------
Net income (loss) ................................... $ 150,697 $ (406,946)
============ ============
Earnings (loss) per share-basic ..................... $ 0.03 $ (0.09)
============ ============
Earnings (loss) per share-diluted ................... $ 0.03 $ (0.09)
============ ============
Weighted average number of common shares outstanding
and dilutive potential common shares:
Basic ........................................... 5,951,436 4,646,187
============ ============
Diluted ......................................... 6,002,072 4,705,986
============ ============
</TABLE>
4
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue from operations:
Pipeline operations ................................................ $ 1,059,082 $ 879,937
Oil and gas sales .................................................. 2,177,215 158,229
Operating fees .................................................... 156,414 150,514
------------ ------------
REVENUE FROM OPERATIONS ............................ 3,392,711 1,188,680
Cost of operations:
Pipeline operating expenses ........................................ 506,245 492,319
Lease operating expenses ........................................... 598,463 524,413
Depletion, depreciation, and amortization .......................... 910,772 246,960
General and administrative ......................................... 1,070,733 974,213
------------ ------------
COST OF OPERATIONS ................................. 3,086,213 2,237,905
------------ ------------
INCOME (LOSS) FROM OPERATIONS ...................... 306,498 (1,049,225)
Other income (expense):
Interest expense ................................................... (56,481) (117,253)
Gain on sale of assets ............................................. -- 2,052,920
Interest and other income .......................................... 21,164 (6,911)
------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ...... 271,181 879,531
Minority interest ...................................................... (67,647) --
Provision for income taxes ............................................. -- (281,310)
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN AN ACCOUNTING PRINCIPLE .................. 203,534 598,221
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 ............................................................. $ 203,534 $ 517,887
============ ============
Earnings per common share-basic
Income before accounting change .................................... $ 0.03 $ 0.13
Cumulative effect of a change in accounting principle .............. -- (0.02)
------------ ------------
Net income ......................................................... $ 0.03 $ 0.11
============ ============
Earnings per common share-diluted
Income before accounting change .................................... $ 0.03 $ 0.13
Cumulative effect of a change in accounting principle .............. -- (0.02)
------------ ------------
Net income ......................................................... $ 0.03 $ 0.11
============ ============
Weighted average number of common shares outstanding
and dilutive potential common shares:
Basic .............................................................. 5,951,158 4,582,428
============ ============
Diluted ............................................................ 6,001,794 4,642,227
============ ============
</TABLE>
5
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................... $ 203,534 $ 517,887
Adjustments to reconcile net income to net cash provided by
operating activities:
Depletion, depreciation and amortization ...................... 910,772 246,960
Deferred income taxes ......................................... -- 380,216
Change in accounting principle ................................ -- 121,814
Gain on sale of assets ........................................ -- (2,052,920)
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable .................. (406,315) (273,456)
(Increase) in prepaid expenses ........................... (438,085) (18,924)
Increase in accounts payable and other current liabilities 263,773 212,584
------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............... 533,679 (865,839)
INVESTING ACTIVITIES
Oil and gas prospect generation costs .................................... (563,222) (686,308)
Reimbursement of oil and gas prospect generation costs ................... 563,222 494,393
Purchases of property and equipment ...................................... (93,069) (5,436,183)
Net proceeds from sale of assets ......................................... -- 5,570,287
Funds escrowed for abandonment costs ..................................... (280,296) --
Development costs - Petroport ............................................ (67,593) (181,052)
Development costs - New Avoca ............................................ (111,411) --
(Increase) decrease in other assets ...................................... (42,355) 57,993
------------ ------------
NET CASH (USED IN)
INVESTING ACTIVITIES ............... (594,724) (180,870)
FINANCING ACTIVITIES
Net proceeds from borrowings ............................................. 200,000 200,000
Net proceeds from the sale of stock ...................................... -- 1,960,000
Payments on borrowings ................................................... (100,633) --
Other .................................................................... (5,645) 25,216
------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ............... 93,722 2,185,216
INCREASE IN CASH .................. 32,677 1,138,507
CASH AT BEGINNING OF YEAR .................................................... 1,166,730 593,509
------------ ------------
CASH AT JUNE 30 .............................................................. $ 1,199,407 $ 1,732,016
============ ============
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid ............................................................ $ 74,399 $ 116,020
============ ============
Income taxes paid ........................................................ $ 8,430 $ 12,620
============ ============
</TABLE>
6
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
JUNE 30, 2000
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:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
COMMON SHARES
OUTSTANDING
AND DILUTIVE PER
NET POTENTIAL SHARE
INCOME COMMON SHARES AMOUNT
---------- ------------- ----------
<S> <C> <C> <C>
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
========== ============= ==========
Six Months ended June 30, 1999
Basic earnings per share ............. $ 517,887 4,582,428 $ 0.11
Effect of dilutive stock
options .......................... -- 59,799 --
---------- ------------- ----------
Diluted earnings per share ........... $ 517,887 4,642,227 $ 0.11
========== ============= ==========
</TABLE>
7
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
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.
SECURITIES AND EXCHANGE COMMISSION REVIEW
The Securities and Exchange Commission ("SEC") is currently reviewing certain of
the Company's historical financial statements 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.
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 ended June 30, 2000 and 1999, and at June 30,
2000 and December 31, 1999 is as follow.
8
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
<TABLE>
<CAPTION>
OPERATING DEPLETION,
INTERSEGMENT INCOME DEPRECIATION AND
REVENUES REVENUES (LOSS)(1) AMORTIZATION (2)
------------ ------------ ---------- ----------------
<S> <C> <C> <C> <C>
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 income taxes ........ -- -- 271,181 --
Six months ended June 30, 1999:
Oil and gas exploration and
production and operating fees $ 311,743 3,000 (268,798) 53,314
Pipeline operations ............... 888,774 8,837 (72,602) 181,559
Other ............................. (11,837) (707,825) 12,087
------------ ---------- ----------------
Consolidated ...................... 1,188,680 -- (1,049,225) 246,960
Other expense ..................... -- 1,928,756
----------
Income before income taxes ........ 879,531
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)
----------
Loss before income taxes .......... 186,558
Three months ended June 30, 1999:
Oil and gas exploration and
production and operating fees $ 161,656 1,500 (129,243) 27,648
Pipeline operations ............... 448,336 4,524 (44,460) 111,953
Other ............................. (5,754) (375,552) 6,252
------------ ---------- ----------------
Consolidated ...................... 604,238 -- (549,255) 145,853
Other expense ..................... (94,572)
----------
Income before income taxes ........ (643,827)
</TABLE>
9
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
June 30, December 31,
2000 1999
------------ ------------
Identifiable assets:
Oil and gas exploration
and production ...................... $ 13,356,421 $ 12,816,861
Pipeline operations ....................... 8,700,047 8,202,137
Other ..................................... 531,559 986,206
------------ ------------
Consolidated .............................. 22,588,027 22,005,204
1. Consolidated income from operations includes $801,445 and $683,901
in unallocated general and administrative expenses, and unallocated
depletion, depreciation and amortization of $14,664 and $12,087 for
the six months ended June 30, 2000 and 1999, respectively.
Consolidated income from operations includes $403,792 and $363,546
in unallocated general and administrative expenses, and unallocated
depletion, depreciation and amortization of $7,661 and $6,252 for
the quarters ended June 30, 2000 and 1999, respectively.
2. Pipeline depletion, depreciation and amortization includes a
provision for pipeline abandonment of $9,870 and $10,970 for the six
months ended June 30, 2000 and 1999, respectively. Oil and gas
depletion, depreciation and amortization includes a provision for
abandonment costs of platforms and wells of $11,925 and $11,187 for
the six months ended June 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 June 30, 2000 and 1999, respectively. Oil and gas
depletion, depreciation and amortization includes a provision for
abandonment costs of platforms and wells of $5,430 and $5,851 for
the quarters ended June 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 that H&N
Gas and American Resources entered into illegal and fraudulent natural gas
purchase option agreements that benefited American Resources at the expense of
H&N Gas. H&N Gas is seeking a claim against American Resources of $2.8 million
plus treble damages. American Resources intends to vigorously defend this claim.
10
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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.
FINANCIAL CONDITION
The following table summarizes the Company's financial position at June 30, 2000
and December 31, 1999 (amounts in thousands):
JUNE 30, 2000 DECEMBER 31, 1999
---------------- -----------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
Working capital ................... 675 3 93 1
Property and equipment, net ....... 13,941 72 14,731 77
Other noncurrent assets ........... 4,743 25 4,247 22
-------- ----- -------- -----
Total ............................. 19,359 100 19,071 100
======== ===== ======== =====
Long-term debt .................... -- --
Other long-term liabilities ....... 489 3 467 2
Minority interest ................. 1,026 5 958 5
Stockholders' equity .............. 17,844 92 17,646 93
-------- ----- -------- -----
Total ............................. 19,359 100 19,071 100
======== ===== ======== =====
There have been no significant changes in the Company's financial position for
the period December 31, 1999 to June 30, 2000.
During the six months ended June 30, 2000, the Company funded its activities
through cash generated from operations and a short-term $200,000 promissory note
from a related party. The net cash provided by or used in operating, investing
and financing activities is summarized below (amounts in thousands):
11
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SIX MONTHS ENDED
JUNE 30
---------------------
2000 1999
-------- --------
Net cash provided by (used in):
Operating activities ............................ 534 (866)
Investing activities ............................ (595) (181)
Financing activities ............................ 94 2,185
-------- --------
Net increase in cash ................................. 33 1,138
======== ========
On December 2, 1999, the Company acquired a 75% ownership interest in American
Resources. The purchase price for the American Resources shares was
approximately $4.5 million. 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 assets to Fidelity Oil Holdings, Inc. a
subsidiary of MDU Resources Group, Inc. The proceeds received by American
Resources were used to retire certain indebtedness.
In order to provide funding for the acquisition of 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). The Company also 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 believes that if the
$1,000,000 convertible promissory note is not converted, the amount due will be
refinanced.
The Company entered into an agreement with Fidelity Oil Holdings, Inc. to manage
their interest in the properties acquired from American Resources for $40,000
per month. The agreement is in effect through December 2000 and provides for
continuation thereafter on a year to year basis unless terminated by either
party. The fees earned from Fidelity are recorded as a reduction to general and
administrative expenses.
The Company maintains a $10,000,000 reducing revolving credit facility with Bank
One, Texas, N.A. (the "Loan Agreement"). The term of 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. In January 2000, the Company paid the $80,000
outstanding balance under the Loan Agreement. At June 30, 2000 the Company did
not have an outstanding balance under the Loan Agreement and its borrowing
capacity under the Loan Agreement was adjusted to $0.
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
12
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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 than
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 may seek 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. American Resources 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 July 31, 2000, American Resources had expended approximately $1
million on exploration and development opportunities on its properties during
2000, funded out of working capital.
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.
The Company announced a natural gas discovery in High Island Area Block A-7, in
federal waters off the Texas coast. The Company acquired the block at MMS Sale
155 in 1995, and owns an 8.9% after payout reversionary working interest. High
Island Block A-7 was one of four blocks the Company acquired in the first year
of its offshore prospect generation program in 1995.
In July 2000, the Company reached an agreement to provide transportation
services for Vastar Resources, Inc. in High Island 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 A-5 to the Black Marlin Pipeline. The cost to construct the pipeline is
estimated to be $2.2 million, $1.1 million net to the Company's 50% interest.
The pipeline is expected to be completed in August 2000, with production from
High Island Block A-5 expected to commence in September or October 2000. The
Company expects to finance this pipeline with its credit facility with Bank One,
or from other external sources.
In late July 2000, oil and gas production from the only producing well in the
Buccaneer Field ceased due to down hole mechanical problems. The Company is
currently evaluating alternatives to reestablish production from this well and
the associated costs to do so. The Company has hired Ralph E. Davis Associates,
Petroleum Engineers, to assist with evaluating alternatives to reestablish
production in the field. If production is not reestablished or effects to
reestablish production are not commenced within six months from the date of last
production, the Company's leasehold on the Buccaneer Field will terminate, which
would result in a significant non-cash impairment of oil and gas properties.
13
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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 $269,000.
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 order to provide funding for the acquisition of the GA350 Pipeline and other
working capital needs, 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.
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 expire 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 are settled each month.
American Resources did not incur any liability from these options for the months
of October 1999 through May 2000. The liability from the June 2000 option was
$147,900, of which Fidelity Oil reimbursed ARO $118,320. For the months of July
and August 2000, the settlement amounts were $222,580 and $79,515, respectively,
of which Fidelity Oil has reimbursed ARO $178,064 and $63,612, respectively. The
settlement price for September 2000 is unknown at this time. As a result of the
legal proceedings with H & N Gas (see Part II, Item 1. Legal Proceedings,
below), we have suspended payments to H&N Gas.
In October 1999, the Company announced that Equilon Enterprises, LLC (an
alliance of two major oil companies, Shell and Texaco), agreed to jointly
continue development of the Petroport deepwater port project with the Company.
The agreement provided that the parties would share mutually agreed upon third
party costs of additional economic feasibility and design studies for the
purpose of determining whether to proceed with further development efforts,
including licensing and permitting of the facility. The same agreement
contemplated that the parties would enter into further contractual arrangements
in the event that Equilon chose to participate in the substantial additional
costs of proceeding with licensing of the facility, and that Equilon would have
no interest in the Petroport project if it did not. The agreement contemplated
that those additional contracts would address such matters as the parties'
respective ownership percentages of an entity to be formed to develop, own and
operate Petroport, the sharing of further development costs and cash payments to
the Company. Proposed, non-binding terms concerning those matters were contained
in the agreement but were subject to substantial change depending upon, among
other things, whether the Company or Equilon determined to sell a portion of
their respective interests in the project to other participants. Although the
Equilon agreement expired in December 1999, Equilon and the Company have
continued to share relatively minor development expenses, although neither party
is obligated to do so. Equilon has not advised the Company as to whether it will
proceed with licensing and further documentation. Whether or not Equilon
determines to participate further in the development of Petroport, the Company
intends to continue its efforts to attract
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
throughput commitments from prospective users and seek partners to participate
in the ownership and further costs of developing Petroport.
Costs of the offshore terminal complex, the pipeline to shore, onshore
facilities and facility licensing are estimated to be $200.0 million. The
Company expects that its' partner or partners in the Petroport project would be
responsible for all licensing and permitting costs, currently estimated to be
approximately $6.0 million. The Company plans to seek financing for the costs
associated with facility construction.
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 ($12,500 net to the Company's interest) and extended the remaining
$450,000 payment to August 22, 2000. The contingent payment will be excused, and
the $50,000 payment made will be refunded, if Northeastern successfully settles
a claim associated with Avoca Gas Storage, Inc. (the original owner of the Avoca
gas storage assets). A pending settlement of the claim is expected to be
completed, and the Company believes that the contingent payment will not be
made. New Avoca can elect to liquidate the project at any time. If liquidated,
after settling all accrued obligations, the first $400,000 of proceeds, if any,
goes to New Avoca, the next $500,000 goes to Northeastern (if the $500,000 has
not yet been paid as described above) and anything over $900,000, subject to
Northeastern successfully settling its claim with Avoca Gas Storage, Inc. goes
to New Avoca. New Avoca is currently evaluating all previously gathered data and
is preparing to test existing brine disposal wells to determine whether or not
to go forward with construction of the project or to liquidate. Testing of the
brine disposal wells is needed in order to complete the evaluation of the
project. The original owners of the Avoca gas storage assets encountered
difficulties associated with the rate at which the brine disposal wells accept
brine that is produced during construction of the gas storage caverns. New Avoca
believes that the brine disposal wells will accept brine at an acceptable rate.
New Avoca will conduct a test on the brine disposal wells as soon as the
necessary permits are received. The test, and evaluation of the test results,
will take approximately one month to complete. It is currently estimated that
the Company's share of the costs associated with these activities for 2000 will
be approximately $300,000. The Company's share of construction costs, should New
Avoca decide to go forward with the project, and the timing of such costs have
not been determined.
In general, the Company believes that it has or can obtain adequate capital
resources and liquidity to continue to finance and otherwise meet its
anticipated business requirements. The availability or cost of capital resources
may, however, adversely affect the Company's timing for major pipeline
expansions, further development of the Buccaneer Field, growth in oil and gas
prospect generation activities and the Petroport and New Avoca projects.
RESULTS OF OPERATIONS
The Company reported net income for the six months ended June 30, 2000,
("current period") of $203,534, compared to net income of $517,887 reported for
the six months ended June 30, 1999
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
("previous period"). Net income in the previous period included a gain on sale
of a one-sixth interest in the Blue Dolphin Pipeline system of $2,052,920.
For the quarter ended June 30, 2000 ("current quarter") the Company reported net
income of $150,697 compared to a net loss of $406,946 for the quarter ended June
30, 1999 ("previous quarter"). The improvement is due to increases in pipeline
transportation revenues and oil and gas sales in the current quarter.
REVENUES:
SIX MONTHS 2000 VS. 1999. Revenues for the current period increased by
$2,204,031 or 185% to $3,392,711 compared to revenues of $1,188,680 reported for
the previous period.
Current period revenues from pipeline operations increased by $179,145 or 20%
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 $354,317 increase in revenues. During
the current period average daily gas volumes transported by the Black Marlin
Pipeline System were 69,000 MMBtu/d compared to 51,000 MMBtu/d during the four
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 29,000 MMBtu/d compared to 40,000 MMBtu/d during
the previous period. On March 1, 1999, the Company sold a 1/6th interest in the
Blue Dolphin Pipeline System, reducing its interest to 50%.
Current period revenues from oil and gas sales increased by $2,018,986, from
those of the previous period primarily due to the acquisition of American
Resources in December 1999, resulting in additional revenues of $1,943,456 in
the current period. In addition, oil and gas sales from existing properties
increased by $75,530 due to higher commodity prices in the current period.
SECOND QUARTER 2000 VS. SECOND QUARTER 1999. Revenues for the current quarter
increased by $1,203,692 or 199% to $1,807,930 compared to revenues of $604,238
reported for the previous quarter.
Current quarter revenues from pipeline operations increased by $144,154 or 32%
from the previous quarter primarily due to an increase in gas volumes
transported on the Black Marlin Pipeline System, resulting in revenues of
$177,854, offset by a 22% decline in gas volumes transported on the Blue Dolphin
Pipeline System, resulting in a reduction of revenues of $33,700.
Current quarter revenues from oil and gas sales increased by $1,056,832, from
those of the previous quarter primarily due to the acquisition of American
Resources in December 1999, resulting in additional revenues of $1,018,000. In
addition, oil and gas sales from existing properties increased by $38,832 due to
higher commodity prices in the current period.
16
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
COSTS AND EXPENSES:
SIX MONTHS 2000 VS. 1999. Current period lease operating expenses increased
$74,050 or 14% from those of the previous period. Current period expenses from
the ARO properties that were acquired in December 1999 totaled $321,441. The
increase in expenses was offset by lower costs in the current period associated
with the Buccaneer Field. In the previous period, repairs and modifications to a
Buccaneer Field platform totaled $228,746.
Current period depletion, depreciation and amortization increased $663,812,
primarily due to the acquisition of American Resources in December 1999,
resulting in increased depletion of $654,093.
General and administrative expenses for the current period increased $96,520,
primarily due to the acquisition of American Resources in December 1999.
Current period interest expense decreased $60,772 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 $104,045. The decrease was offset
in part by interest expense of $51,990 on the $1,000,000 convertible promissory
note issued in December 1999 and the $200,000 convertible promissory note issued
in May 2000.
SECOND QUARTER 2000 VS. SECOND QUARTER 1999. Current quarter lease operating
expenses increased $86,966 or 38% from those of the previous quarter. Current
quarter expenses from the American Resources properties that were acquired in
December 1999 totaled $179,148. The increase in expenses was offset by lower
costs in the current quarter associated with the Buccaneer Field of $92,182.
Current quarter depletion, depreciation and amortization increased $308,649,
primarily due to the acquisition of ARO in December 1999, resulting in increased
depletion of $326,185.
General and administrative expenses for the current quarter increased $75,293,
primarily due to the acquisition of American Resources in December 1999.
Current quarter interest expense decreased $25,349 due to the retirement of
$1,811,555 principal amount of promissory notes in December 1999, resulting in a
decrease in interest expense of $52,023. The decrease was offset in part by
interest expense of $26,667 on the $1,000,000 convertible promissory note issued
in December 1999 and the $200,000 convertible promissory note issued in May
2000.
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<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
expire 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 are settled each month.
The months of October 1999 through May 2000 expired with no liability to
American Resources. The liability from the June 2000 option was $147,900, of
which Fidelity Oil reimbursed American Resources $118,320. For the months of
July and August 2000, the settlement amounts were $222,580 and $79,515,
respectively, of which Fidelity Oil has reimbursed American Resources $178,064
and $63,612, respectively.
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<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 that H&N Gas and American Resources
entered into illegal and fraudulent natural gas purchase option agreements that
benefited American Resources at the expense of H&N Gas. H&N Gas is seeking a
claim against American Resources of $2.8 million plus treble damages. American
Resources intends to vigorously defend this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 18, 2000. The
matters that were voted upon at the meeting, and the number of votes cast for,
against or withheld, as well as the number of abstentions and broker non-votes,
as to such matter, where applicable, are set forth below.
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
--------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Election of Directors
Ivar Siem ................... 3,615,694 2,947 -- 1,632 113,457
Michael S. Chadwick ......... 3,617,592 1,049 -- 1,632 113,457
Harris A. Kaffie ............ 3,617,592 1,049 -- 1,632 113,457
Daniel B. Porter ............ 3,617,592 1,049 -- 1,632 113,457
Proposal relating to
2000 Incentive Plan ......... 2,880,523 7,888 -- 245 113,457
</TABLE>
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) Exhibits - 27.1 Financial Data Schedule
B) Form 8-K - On June 5, 2000, the Company filed a current report
of Form 8-KA 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).
On June 5, 2000, the Company filed a current report of Form
8-K dated June 5, 2000, amending the description of
securities. The items reported in such current report were
Item 5 (Other Events) and Item 7 (Financial Statement and
Exhibits).
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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 21, 2000 /S/ MICHAEL J. JACOBSON
-----------------------------------------
Michael J. Jacobson
President and Chief Executive Officer
/S/ G. BRIAN LLOYD
-----------------------------------------
G. Brian Lloyd
Vice President, Treasurer
20
