UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: June 30, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ...............to ................
Commission File Number: 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of small business issuer as specified in its charter)
Delaware 73-1268729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 Travis, Suite 2100, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 227-7660
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
As of August 19, 2004, there were 6,720,001 shares of the registrants' common
stock, par value $.01 per share, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET -UNAUDITED
June 30, 2004
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 (referred to herein, with its predecessors and subsidiaries, as
"Blue Dolphin", "we", "us" and "our") included herein have been prepared by us,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, reflect all
adjustments necessary to present a fair statement of operations, financial
position and cash flows. We follow 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. We believe 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 U.S. generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
Our accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-KSB/A-1 for the year ended December 31,
2003.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
June 30, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 1,030,013
Accounts receivable 236,405
Related party receivable 7,362
Deferred federal income tax 244,444
Prepaid expenses and other assets 173,331
------------
TOTAL CURRENT ASSETS 1,691,555
Property and Equipment at cost:
Oil and Gas properties, including $167,684
of unproved leasehold cost (full-cost method) 519,505
Pipelines 4,546,287
Onshore separation and handling facilities 1,664,128
Land 860,275
Other property and equipment 307,238
------------
7,897,433
Less: Accumulated depletion, depreciation and amortization 2,390,403
------------
5,507,030
Investment in New Avoca 581,996
Other assets 26,977
------------
TOTAL ASSETS $ 7,807,558
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,575,484
Accrued expenses and other liabilities 47,267
------------
TOTAL CURRENT LIABILITIES 1,622,751
Note payable 750,000
Interest payable 109,745
Asset retirement obligations 1,584,051
Common Stock, ($.01 par value, 10,000,000 shares authorized,
6,712,438 shares issued and outstanding) 67,124
Additional Paid-in Capital 26,349,762
Accumulated Deficit (22,675,875)
------------
3,741,011
TOTAL LIABILITES AND
STOCKHOLDERS' EQUITY $ 7,807,558
============
See accompanying notes to the condensed consolidated financial statements.
3
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months
Ended June 30,
2004 2003
----------- -----------
Revenue from operations:
Pipeline operations $ 193,498 $ 256,931
Oil and gas sales 126,278 745,011
Gain on sale of oil and gas property 25,809 --
----------- -----------
345,585 1,001,942
----------- -----------
Cost of operations:
Pipeline operating expenses 405,281 274,425
Lease operating expenses 35,187 18,218
Depletion, depreciation and amortization 119,726 99,421
General and administrative 400,227 394,617
Accretion expense 23,286 19,167
----------- -----------
983,707 805,848
----------- -----------
INCOME (LOSS) FROM OPERATIONS (638,122) 196,094
Other income (expense):
Interest and other expense (213,960) (30,606)
Interest and other income 53,744 305,088
Equity in loss of affiliate (25,068) --
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (823,406) 470,576
Income taxes -- --
----------- -----------
Net income (loss) $ (823,406) $ 470,576
=========== ===========
Income (loss) per common share
- basic $ (0.12) $ 0.07
=========== ===========
- diluted $ (0.12) $ 0.07
=========== ===========
Weighted average number of common shares outstanding - basic 6,712,438 6,637,163
=========== ===========
Weighted average number of common shares outstanding - diluted 6,712,438 6,793,779
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Six Months
Ended June 30,
2004 2003
----------- -----------
Revenue from operations:
Pipeline operations $ 397,537 $ 503,599
Oil and gas sales 281,170 819,317
Gain on sale of oil and gas property 25,809 --
----------- -----------
704,516 1,322,916
----------- -----------
Cost of operations:
Pipeline operating expenses 648,532 467,819
Lease operating expenses 67,026 30,278
Depletion, depreciation and amortization 254,508 188,469
General and administrative 896,241 877,323
Accretion expense 46,642 40,896
----------- -----------
1,912,949 1,604,785
----------- -----------
LOSS FROM OPERATIONS (1,208,433) (281,869)
Other income (expense):
Interest and other expense (225,662) (43,298)
Interest and other income 139,453 439,688
Equity in loss of affiliate (48,370) --
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,343,012) 114,521
Income taxes -- --
----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (1,343,012) 114,521
Cumulative effect of a change in accounting principle
for asset retirement obligations -- (40,455)
----------- -----------
Net income (loss) $(1,343,012) $ 74,066
=========== ===========
Income (loss) per common share - basic
Income (loss) before accounting change $ (0.20) $ 0.02
=========== ===========
Cumulative effect of a change in accounting principle $ -- $ (0.01)
=========== ===========
Net income (loss) $ (0.20) $ 0.01
=========== ===========
Income (loss) per common share - diluted
Income (loss) before accounting change $ (0.20) $ 0.02
=========== ===========
Cumulative effect of a change in accounting principle $ -- $ (0.01)
=========== ===========
Net income (loss) $ (0.20) $ 0.01
=========== ===========
Weighted average number of common shares outstanding
- basic 6,688,082 6,624,642
=========== ===========
- diluted 6,688,082 6,740,267
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Six Months
Ended June 30,
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $(1,343,012) $ 74,066
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depletion, depreciation and amortization 254,508 188,469
Gain from change in estimate of abandonment costs -- (278,653)
Gain on sale of oil and gas property (25,809) --
Change in accounting principle -- 40,455
Accretion of asset retirement obligations 46,642 40,896
Equity in loss of affiliate 48,370 --
Common stock issued for services 83,000 19,722
Changes in operating assets and liabilities:
Accounts receivable 245,318 (628,026)
Prepaid expenses and other assets (27,990) 194,067
Abandonment costs incurred -- (126,766)
Trade accounts payable and accrued expenses (936,866) (2,509)
----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (1,655,839) (478,279)
----------- -----------
INVESTING ACTIVITIES
Property, equipment and other assets (9,556) (37,941)
Proceeds from sale of assets 34,183 --
Development costs - New Avoca (41,667) (46,585)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (17,040) (84,526)
----------- -----------
FINANCING ACTIVITIES -- --
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,672,879) (562,805)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,702,892 4,405,676
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,030,013 $ 3,842,871
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
JUNE 30, 2004
1. Liquidity and Going Concern
At June 30, 2004, we had working capital of approximately $70,000. In August
2004, we extended the remaining payments totaling $668,000 due in September and
October 2004 to Tetra Applied Technologies, Inc. associated with the Buccaneer
Field abandonment/reefing whereby we will pay Tetra in twelve monthly
installments of $55,667 beginning September 1, 2004, plus interest on the
outstanding balance at the rate of six percent per annum.
We are currently able to pay our debts as they become due, however, we expect
that we will need to raise approximately $0.5 million to satisfy our liquidity
needs in the fourth quarter 2004. In order to satisfy our working capital and
capital expenditure requirements for the year ending December 31, 2005, we
believe that we will need to raise approximately $2.0 million of additional
capital. We will need to arrange external financing and/or sell assets to raise
all of the necessary capital.
Historically, we have relied on the proceeds from the sale of assets and capital
raised from the issuance of debt and equity securities to individual investors
and related parties to sustain our operations. While we are currently seeking
capital, there can be no assurance that we will be able to obtain financing or
sell assets on commercially acceptable terms to meet our capital requirements.
Our inability to raise capital will have a material adverse effect on our
financial condition, ability to meet our obligations and operating needs, and
results of operations. Our financial statements contained herein have been
prepared assuming that we will continue as a going concern, however our working
capital and capital expenditure requirements for the next twelve months raise
substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
2. Related Party Transactions
We own 12.8% of the common stock of Drillmar, Inc. Our Chairman, Ivar Siem
(along with certain of his affiliated entities), and one of our Directors,
Harris A. Kaffie, are owners of 30.3%, and 30.6%, respectively, of Drillmar's
common stock. Messrs. Siem and Kaffie are both Directors, and Mr. Siem is
Chairman and President of Drillmar.
In 2002, we recorded a full impairment of our investment in Drillmar of
approximately $340,000 and a full reserve for the accounts receivable amount
owed to us from Drillmar of approximately $200,000 due to Drillmar's working
capital deficiency and delays in securing capital funding. During the six months
ended June 30, 2004, we collected $75,000 from Drillmar and we expect to
continue to receive $15,000 per month until the accounts receivable is fully
collected.
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2004
In January 2003, Drillmar stockholders approved a restructuring plan whereby
Drillmar will issue up to $3.0 million of convertible notes that are convertible
into common stock representing over 99% of Drillmar's outstanding shares. As a
result, our ownership in Drillmar can be reduced to less than 1%. However, in
November 2003, we converted a contingent obligation due from Drillmar for
providing office space, accounting and administrative services from May 2002
through January 2003 totalling $162,000 (9 months at $18,000 per month) into a
convertible note, which if converted along with all of Drillmar's outstanding
convertible notes, would represent 7.7% of Drillmar's common stock. Messrs.
Siem, Kaffie and Trimble (one of our Directors) also hold Drillmar convertible
notes, which if converted along with all of Drillmar's outstanding convertible
notes, would represent 22.2%, 27.5% and 2.1%, respectively, of Drillmar's common
stock.
We entered into a new agreement with Drillmar effective as of February 1, 2003,
whereby we provide office space to Drillmar, which is currently approximately
$4,000 per month. We also provide professional, accounting and administrative
services to Drillmar billed at hourly rates based on our cost. The agreement can
be terminated upon 30 days notice or by the mutual agreement of the parties.
Effective April 1, 2003, we entered into a sublease agreement expiring December
31, 2006 for certain of our office space with Tri-Union Development Corporation.
Our receipts from this sublease are approximately $78,500 annually. Mr. Trimble
is the Chairman and Chief Executive Officer of Tri-Union.
3. Contingencies
We are involved in various claims and legal actions arising in the ordinary
course of business. In our opinion, the ultimate disposition of these matters
will not have a material effect on our financial position, results of operations
or cash flows.
4. Change in Accounting Principle
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Asset Retirement Obligations", which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal use of the asset.
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2004
SFAS 143 amended Statement of Financial Accounting Standards No. 19, Financial
Accounting and Reporting by Oil and Gas Producing Companies ("SFAS 19") to
require that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. Under the provisions of SFAS 143, asset retirement
obligations are capitalized as part of the carrying value of the long-lived
asset and this additional carrying amount is depreciated over the life of the
asset. If the obligation is settled for other than the carrying amount of the
liability, we will recognize a gain or loss on settlement. Under the provisions
of SFAS 19, asset retirement obligations were recognized using a
cost-accumulation approach. Prior to the adoption of SFAS 143, we recorded asset
retirement obligations through the unit-of-production method for oil and gas
properties, and the straight line method for pipelines and related facilities.
The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect
adjustment to record (i) a $1.0 million increase in the carrying value of
pipelines, (ii) a $.4 million decrease in accumulated depreciation, depletion,
and amortization of property, plant and equipment, and (iii) a $1.4 million
increase in non-current abandonment liabilities. The net impact of items (i)
through (iii) was to record an expense of $40 thousand, net of tax, as a
cumulative effect adjustment of a change in accounting principle in the
Company's consolidated statement of operations upon adoption on January 1, 2003.
5. Earnings Per Share
We apply the provisions of Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share". SFAS 128 requires the presentation of basic
earnings per share ("EPS") which excludes dilution and is computed by dividing
net income (loss) available to common stockholders by the weighted-average
number of shares of common stock outstanding for the period. SFAS 128 requires
dual presentation of basic EPS and diluted EPS on the face of the income
statement and requires a reconciliation of the numerators and denominators of
basic EPS and diluted EPS.
9
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2004
Weighted-
Average Number
of Common Shares
Outstanding
and Potential Per
Net Income Dilutive Share
(Loss) Common Shares Amount
---------------- ---------------- ----------------
Six Months ended June 30, 2004
Basic and diluted loss per share $ (1,343,012) 6,688,082 $ (0.20)
================ ================ ================
Six Months ended June 30, 2003
Basic earnings per share $ 74,066 6,624,642 $ 0.01
Effect of dilutive stock options 115,625
---------------- ---------------- ----------------
Diluted earnings per share $ 74,066 6,740,267 $ 0.01
================ ================ ================
Quarter ended June 30, 2004
Basic and diluted loss per share $ (823,406) 6,712,438 $ (0.12)
================ ================ ================
Quarter ended June 30, 2003
Basic earnings per share 470,576 6,637,163 $ 0.07
-- 156,616 --
---------------- ---------------- ----------------
Diluted earnings per share $ 470,576 6,793,779 $ 0.07
================ ================ ================
6. Business Segment Information
Our income producing operations are conducted in two principal business
segments: oil and gas exploration and production, and pipeline operations. There
were no intersegment revenues during the periods presented. Information
concerning these segments for the six months and quarters ended June 30, 2004
and 2003, and at June 30, 2004 are as follows:
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2004
Operating Depletion,
Income Depreciation and
Revenues (Loss)(1) Amortization
------------ ------------ ------------
Six months ended June 30, 2004:
Oil and gas exploration and production $ 281,170 (121,170) 84,789
Pipeline operations 397,537 (800,888) 163,671
Other -- (312,184) 6,048
------------ ------------ ------------
Consolidated 678,707 (1,234,242) 254,508
Other income (loss), net ------------ (108,770) ------------
------------
Loss before income taxes (1,343,012)
Six months ended June 30, 2003:
Oil and gas exploration and production $ 819,317 397,127 16,141
Pipeline operations 503,599 (394,077) 162,206
Other -- (284,919) 10,122
------------ ------------ ------------
Consolidated 1,322,916 (281,869) 188,469
Other income, net ------------ 396,390 ------------
------------
Income before income taxes 114,521
Quarter ended June 30, 2004:
Oil and gas exploration and production $ 126,278 (57,293) 34,997
Pipeline operations 193,498 (482,974) 81,874
Other loss -- (123,664) 2,855
------------ ------------ ------------
Consolidated 319,776 (663,931) 119,726
Other income, net ----------- (159,475) ------------
------------
Loss before income taxes (823,406)
Quarter ended June 30, 2003:
Oil and gas exploration and production $ 745,011 409,991 16,141
Pipeline operations 256,931 (114,034) 78,230
Other -- (121,592) 5,050
------------ ------------ ------------
Consolidated 1,001,942 174,365 99,421
Other income (loss), net 296,211
------------
Income before income taxes 470,576
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2004
June 30, 2004
-------------
Identifiable assets:
Oil and gas exploration and production $ 428,221
Pipeline operations 5,650,648
Other 1,728,689
-------------
Consolidated $ 7,807,558
=============
(1) Consolidated loss from operations includes $306,136 and
$274,797 in unallocated general and administrative expenses,
and unallocated depletion, depreciation and amortization of
$6,048 and $10,122 for the six months ended June 30, 2004 and
2003, respectively.
Consolidated income (loss) from operations includes $120,809
and $116,542 in unallocated general and administrative
expenses, and unallocated depletion, depreciation and
amortization of $2,855 and $5,050 for the quarters ended June
30, 2004 and 2003, respectively.
7. Stock Based Compensation
We account for stock-based compensation granted under our long-term incentive
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Stock-based compensation expenses associated with option grants
were not recognized in our net loss in the six months and three months ended
June 30, 2004 and 2003, as all options granted had exercise prices equal to the
market value of the underlying common stock on the dates of grant. The following
table illustrates the effect on net loss and loss per share if we had applied
the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" to stock-based
employee compensation:
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2004
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(in thousands, except
per share amounts)
Net income (loss), as reported ..................... $ (823) $ 471 $ (1,343) $ 74
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects -- (30) -- (30)
----------- ----------- ----------- -----------
Pro forma net income (loss) ........................ $ (823) $ 441 $ (1,343) $ 44
=========== =========== =========== ===========
Net income (loss) per share:
Basic - as reported ............................. $ (0.12) $ 0.07 $ (0.20) $ 0.01
=========== =========== =========== ===========
Basic - pro forma ................................ $ (0.12) $ 0.07 $ (0.20) $ 0.01
=========== =========== =========== ===========
Diluted - as reported ............................ $ (0.12) $ 0.07 $ (0.20) $ 0.01
=========== =========== =========== ===========
Diluted - pro forma .............................. $ (0.12) $ 0.06 $ (0.20) $ 0.01
=========== =========== =========== ===========
8. Recent Accounting Developments
In July 2003, an issue was brought before the FASB regarding whether or not
contract-based oil and gas mineral rights held by lease or contract ("mineral
rights") should be recorded or disclosed as intangible assets. The issue
presents a view that these mineral rights are intangible assets as defined in
SFAS No. 141, "Business Combinations," and, therefore, should be classified
separately on the balance sheet as intangible assets. SFAS No. 141 and SFAS No.
142, "Goodwill and Other Intangible Assets," became effective for transactions
subsequent to June 30, 2001, with the disclosure requirements of SFAS No. 142
required as of January 1, 2002. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method and that intangible assets be disaggregated and reported separately from
goodwill. SFAS No. 142 established new accounting guidelines for both finite
lived intangible assets and indefinite lived intangible assets. Under the
statements, intangible assets should be separately reported on the face of the
balance sheet and accompanied by disclosure in the notes to financial
statements. SFAS No. 142 does not apply to accounting utilized by the oil and
gas industry as prescribed by SFAS No. 19, and is silent about whether or not
its disclosure provisions apply to oil and gas companies.
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
In July 2004, the FASB proposed FASB staff position ("FSP") SFAS 142-b,
"Application of SFAS 142 to Oil and Gas Producing Entities." The proposed FSP
clarifies that the exception in paragraph 8(b) of SFAS No. 142, "Goodwill and
Other Intangible Assets," includes the balance sheet classification and
disclosures for drilling and mineral rights of oil and gas producing entities.
Accordingly, the FASB staff believes that the scope exception extends to the
disclosure provisions of SFAS No. 142 for drilling and mineral rights of oil and
gas producing entities. SFAS 142-b will be effective when the FSP is finalized.
Forward Looking Statements. Certain of the statements included in this quarterly
report on Form 10-QSB, including those regarding future financial performance or
results or that are not historical facts, are "forward-looking" statements as
that term is defined in Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect", "plan", "believe", "anticipate", "project", "estimate", and similar
expressions are intended to identify forward-looking statements. We caution
readers that any such statements are not guarantees of future performance or
events and such statements involve risks and uncertainties that may cause actual
results and outcomes to differ materially from those indicated in the
forward-looking statements. Some of the important factors, risks and
uncertainties that could cause actual results to vary from the forward-looking
statements include:
o availability and cost of capital;
o the level of utilization of our pipelines;
o the risks associated with exploration;
o the level of production from oil and gas properties;
o gas and oil price volatility;
o uncertainties in the estimation of proved reserves and in the
projection of future rates of production and timing of
development expenditures;
o actions or inactions of third party operators for properties
where we have an interest;
o regulatory developments; and
o general economic conditions.
Additional factors that could cause actual results to differ materially from
those indicated in the forward-looking statements are discussed under the
caption "Risk Factors" in our Form 10-KSB/A-1 for the fiscal year ended December
31, 2003. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We undertake
no duty to update these forward-looking statements. Readers are urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the additional factors which may affect our
business, including the disclosures made under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this report.
14
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
EXECUTIVE SUMMARY
We are engaged in two lines of business; pipeline operations and oil
and gas exploration and production. We are a holding company and conduct our
operations through our subsidiaries, which provide pipeline transportation
services to producer/shippers, and sell oil and gas from our producing
properties. Our assets primarily are located offshore and onshore in the Texas
Gulf coast area. We also own an interest in and manage the New Avoca gas storage
project located in Avoca, New York.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition has been significantly and negatively affected
by the poor performance of our businesses and our significant indebtedness. For
the year ended December 31, 2003, we generated $1.4 million of revenue from the
sales of oil and gas production from the High Island Block A-7 field,
approximately 57% of our revenues for that period. Oil and gas production from
the High Island Block A-7 field has declined significantly and for the six
months ended June 30, 2004 we had generated $0.2 million of revenue from the
sales of oil and gas production, approximately 31% of our revenues for that
period. Production from the High Island Block A-7 field is expected to cease in
2005. As a result of the decline in production from this field we expect that a
significant portion of our revenues in 2004 will be derived from utilization of
our pipeline systems. Presently, our pipeline systems are generating negative
cash flow. We are currently able to pay our debts as they become due, however,
we expect that we will need to raise approximately $0.5 million to satisfy our
liquidity needs in the fourth quarter 2004.
o our ability to raise capital to meet current commitments and fund
the continuation of our business operations; and
o our ability to ultimately achieve profitability and positive cash
flows from operations in amounts that will sustain our
operations.
In order to address our financing needs, we (i) have engaged a
financial adviser to assist us in raising capital, (ii) implemented a cost
savings plan to reduce our operating costs and overhead costs and (iii) are
currently attempting to restructure the terms of our indebtedness.
15
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
The following table summarizes certain of our contractual obligations
and other commercial commitments at June 30, 2004 (amounts in thousands):
Payments Due by Period
----------------------
Contractual 1 year After
Obligations Total or less 1-3 years 3-5 years 5 years
----------- --------- --------- --------- --------- ---------
Accounts Payable - Tetra $ 935 935 -- - --
Long-Term Debt 860 -- 860 - --
Operating Leases, net of sublease 300 124 176 - --
--------- --------- --------- --------- ---------
Total Contractual
Obligations $ 2,095 1,059 1,036 - --
========= ========= ========= ========= =========
Amount of Commitment Expiration Per Period
------------------------------------------
Other Commercial 1 year After
Commitments Total or less 1-3 years 3-5 years 5 years
----------- --------- --------- --------- --------- ---------
Abandonment - Costs $ 1,584 -- 191 - 1,393
--------- --------- --------- --------- ---------
Total Commercial
Obligations $ 1,584 -- 191 - 1,393
========= ========= ========= ========= =========
16
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
The following table summarizes our financial position for the periods
indicated (amounts in thousands):
June 30, December 31,
2004 2003
---- ----
Amount % Amount %
------ ------ ------ ------
Working Capital $ 69 1 $ 680 9
Property and equipment, net 5,507 89 5,775 79
Other noncurrent assets 609 10 848 12
------ ------ ------ ------
Total $6,185 100 $7,303 100
====== ====== ====== ======
Long-term Liabilities $2,444 40 $2,302 32
Stockholders' equity 3,741 60 5,001 68
------ ------ ------ ------
Total $6,185 100 $7,303 100
====== ====== ====== ======
The change in our financial position from December 31, 2003 to June 30,
2004, was primarily due to our net loss for the six months ended June 30, 2004
of approximately $1.3 million.
The net cash provided by or used in operating, investing and financing
activities is summarized below:
Six Months Ended June 30,
2004 2003
---------- ----------
Net cash used in: (amounts in thousands)
Operating activities $ (1,656) $ (478)
Investing activities (17) (85)
Financing activities -- --
---------- ----------
Net decrease in cash $ (1,673) $ (563)
========== ==========
The net cash used in operating activities during the six months ended
June 30, 2004, reflects the payment of Buccaneer Field abandonment costs and
other payables, and the net loss from operations. In August 2003, we completed
the abandonment/reefing of the Buccaneer Field. As of June 30, 2004, remaining
costs of $0.9 million are due to our contractor, Tetra Technologies, with whom
we arranged payment terms. In August 2004, we extended the remaining payments
totaling $668,000 due in September and October 2004 to Tetra whereby we will pay
them in twelve monthly installments of $55,667 beginning September 1, 2004, plus
interest on the outstanding balance at the rate of six percent per annum.
17
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
During 2002, we sold substantially all of our interests in our proved
oil and gas properties. From October 2002 to late April 2003, we had no interest
in any producing oil and gas properties. In late April 2003, we began to receive
revenue from our 8.9% reversionary working interest in the High Island Area
Block A-7 field, in the Gulf of Mexico. Oil and gas production from this field
comes from one well that currently produces at a gross rate of 1.4 MMcf/day.
Pursuant to a cost reduction program, we implemented personnel
reductions, among other things, in June and July 2004. The annual cost savings
associated with the cost reductions are expected to be approximately $360,000.
During 2004, we were in negotiations with a group of private investors
to provide capital to us. In July 2004, the negotiations ended unsuccessfully.
Legal and other fees incurred associated with the proposed transaction were
approximately $200,000.
During the six months ended June 30, 2004, we incurred no capital
expenditures for the development of our proved reserves. Projected capital
expenditures totaling $27,000 and $191,000 are expected to be incurred in the
years ending December 31, 2004 and 2005, respectively. Capital expenditures in
2005 represent the abandonment costs net to our interest of our High Island Area
Block A-7 property.
We have significant available capacity in our Blue Dolphin Pipeline
system in a market area that we believe is experiencing an increased level of
interest by oil and gas operators. Natural gas throughput on our Blue Dolphin
Pipeline system is currently 7 MMBtu per day, representing 4% of system
capacity, however we are currently not aware of additional throughput volumes
that could be connected to the system in the short term and existing throughput
volumes are expected to decline. Future utilization of our pipeline and related
facilities will depend upon the success of drilling programs around our pipeline
systems, and attraction and retention of producer/shippers to the systems. As a
result of increased leasing and oil and gas prospect development activity around
the Blue Dolphin Pipeline system and anticipated drilling activity, we expect
that utilization of the Blue Dolphin Pipeline system will increase in 2005.
We continue to explore the possibility of expanding our Freeport, Texas
operations to include terminalling and shipment by barge of oil and condensate
received by truck and/or pipeline (in addition to the Blue Dolphin pipeline).
With excess capacity, including ample available acreage to handle liquids, we
believe a liquids storage and transportation service can add to the base Blue
Dolphin Pipeline production gathering business.
We currently are continuing our efforts to sell our interest in the New
Avoca gas storage project. To enhance this effort, we are marketing prospective
capacity to potential users of the project. We currently expect that costs net
to our interest during the year ending December 31, 2004 will be approximately
$100,000.
18
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
In February 2002, we acquired an additional 1/3 interest in the Blue
Dolphin Pipeline System and the inactive Omega Pipeline from MCNIC Pipeline and
Processing Group, Inc. ("MCNIC"). Pursuant to the terms of the purchase and
sales agreement, Blue Dolphin Pipeline Company issued MCNIC a $750,000
promissory note due December 31, 2006, with required monthly payments to be made
out of 90% of the net revenues of the interest acquired. As of June 30, 2004,
the amount owed MCNIC is $750,000 plus accrued interest of approximately
$110,000.
RESULTS OF OPERATIONS
We reported a net loss for the six months ended June 30, 2004 ("current
period") of $1,343,012 compared to net income of $74,066 reported for the six
months ended June 30, 2003 ("previous period"), and for the three months ended
June 30, 2004 ("current quarter"), we reported a net loss of $823,406, compared
to net income of $470,576 for the three months ended June 30, 2003 ("previous
quarter").
First Half of 2004 compared to First Half of 2003
Revenue from pipeline operations. Revenues from pipeline operations
decreased by $106,062 or 21% in the current period to $397,537. The decrease was
due primarily to a decrease in transportation volumes on the Blue Dolphin
Pipeline system of 34% resulting in a decrease in revenues of approximately
$149,000, offset in part by a 34% increase in revenues of approximately $42,000
from the GA 350 Pipeline.
Revenue from oil and gas sales. Our revenues from oil and gas sales
decreased by $538,147 in the current period from those of the previous period
primarily due to significant production declines from our interest in the High
Island Block A-7 field, which provided revenues from oil and gas sales of
approximately $217,000 in the current period compared to approximately $745,000
in the previous period. Current period oil and gas sales include approximately
$64,000 from our interest in the High Island Block 34 field, which interest was
received in late 2003.
Gain on sale of oil and gas property. Gain on sale of oil and gas
property represents the gain recognized from the sale of our interest in the
High Island Block 34 oil and gas property.
Pipeline operating expenses. Pipeline operating expenses in the current
period increased by $180,713 from $467,819 in the previous period due to higher
repairs and maintenance costs of approximately $171,000, and legal costs of
approximately $54,000, offset in part by cost reductions that were implemented
during 2003 that resulted in lower operating costs of approximately $50,000. The
legal costs are associated with an action filed against us, the outcome of which
we do not believe will have a material impact. However, if this litigation
continues for a prolonged period of time, we would incur significant legal
expenses, which could have a material effect on our financial condition.
Interest and other expense. Interest and other expense increased
$182,364 in the current period. Other expense in the current period includes
legal and other fees associated with a proposed financing transaction that was
subsequently terminated of approximately $200,000.
19
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
Interest and other income. Interest and other income decreased $300,235
in the current period. Other income in the current period includes the
collection of accounts receivable that were previously written off of $75,000,
consulting services provided by us associated with the evaluation of oil and gas
properties of approximately $50,000. Other income in the previous period
includes an approximately $280,000 gain from a reduction in our provision for
the Buccaneer Field abandonment costs, and fees generated for consulting
services we provided associated with the evaluation of oil and gas properties of
approximately $93,000.
Equity in loss of affiliate. In the current period we recorded a loss
from our equity interest in New Avoca of $48,370.
Cumulative effect of a change in accounting principal. In the previous
period, as a result of our adoption of SFAS No. 143, we recorded a cumulative
effect adjustment at January 1, 2003 of a change in accounting principle for
asset retirement obligations of $40,455 (see note 4 to the Condensed
Consolidated Financial Statements).
Second Quarter of 2004 compared to Second Quarter of 2003
Revenue from pipeline operations. Current quarter revenues from
pipeline operations decreased by $63,433 or 25% from the previous quarter to
$193,498 due to a 37% decrease in throughput on the Blue Dolphin System in the
current quarter, partially offset by a 33% increase in throughput on the GA 350
System.
Revenue from oil and gas sales. Current quarter revenues from oil and
gas sales decreased by $618,733 primarily due to significant production declines
from our interest in the High Island Block A-7 field, which provided revenues
from oil and gas sales of approximately $99,000 in the current quarter compared
to approximately $745,000 in the previous quarter.
Pipeline operating expenses. Pipeline operating expenses in the current
quarter increased by $130,856 from $274,425 in the previous quarter due to
higher repairs and maintenance costs of approximately $157,000 and legal costs
of approximately $26,000, offset in part by cost reductions that were
implemented during 2003 that resulted lower operating costs of approximately
$50,000.
Interest and other expense. Interest and other expense increased
$183,354 in the current quarter. Other expense in the current quarter includes
legal and other fees associated with a proposed financing transaction that was
subsequently terminated of approximately $200,000.
Interest and other income. Interest and other income decreased $251,344
in the current quarter. Other income in the current quarter includes the
collection of accounts receivable that were previously written off of $45,000.
Other income in the previous quarter includes an approximately $280,000 gain
from a reduction in our provision for the Buccaneer Field abandonment costs.
Equity in loss of affiliate. In the current quarter, we recorded a loss
from our equity interest in New Avoca of $25,068.
20
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
Recent Accounting Developments. In July 2003, an issue was brought
before the FASB regarding whether or not contract-based oil and gas mineral
rights held by lease or contract ("mineral rights") should be recorded or
disclosed as intangible assets. The issue presents a view that these mineral
rights are intangible assets as defined in SFAS No. 141, "Business
Combinations," and, therefore, should be classified separately on the balance
sheet as intangible assets. SFAS No. 141 and SFAS No. 142, "Goodwill and Other
Intangible Assets," became effective for transactions subsequent to June 30,
2001, with the disclosure requirements of SFAS No. 142 required as of January 1,
2002. SFAS No. 141 requires that all business combinations initiated after June
30, 2001 be accounted for using the purchase method and that intangible assets
be disaggregated and reported separately from goodwill. SFAS No. 142 established
new accounting guidelines for both finite lived intangible assets and indefinite
lived intangible assets. Under the statements, intangible assets should be
separately reported on the face of the balance sheet and accompanied by
disclosure in the notes to financial statements. SFAS No. 142 does not apply to
accounting utilized by the oil and gas industry as prescribed by SFAS No. 19,
and is silent about whether or not its disclosure provisions apply to oil and
gas companies.
In July 2004, the FASB proposed FASB staff position ("FSP") SFAS 142-b,
"Application of SFAS 142 to Oil and Gas Producing Entities." The proposed FSP
clarifies that the exception in paragraph 8(b) of SFAS No. 142, "Goodwill and
Other Intangible Assets," includes the balance sheet classification and
disclosures for drilling and mineral rights of oil and gas producing entities.
Accordingly, the FASB staff believes that the scope exception extends to the
disclosure provisions of SFAS No. 142 for drilling and mineral rights of oil and
gas producing entities. SFAS 142-b will be effective when the FSP is finalized.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Principal Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13(a) - 14(c) and 15(d) - 14(c) under the
Securities Exchange Act of 1934, as amended). Based upon the evaluation, the
Chief Executive Officer and Principal Accounting Officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934, are recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. There were no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) Exhibits
3.1 Amended Bylaws of the Company
31.1 Ivar Siem Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
31.2 G. Brian Lloyd Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
21
32.1 Ivar Siem Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
32.2 G. Brian Lloyd Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
B) Reports on Form 8-K
On May 14, 2004, we filed a current report on Form 8-K dated
May 14, 2004 reporting our first quarter 2004 earnings. The
Item in such current report was Item 12 (Results of Operations
and Financial Condition).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: BLUE DOLPHIN ENERGY COMPANY
Date: August 20, 2004 /s/ Ivar Siem
--------------------------------------------
Ivar Siem
Chairman and Chief Executive Officer
/s/ G. Brian Lloyd
--------------------------------------------
G. Brian Lloyd
Vice President, Treasurer
(Principal Accounting and Financial Officer)