UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: March 31, 2005
[ ] 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)
(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 [ ]
State the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
As of May 13, 2005, there were 8,988,546 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
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 for the year ended December 31,
2004.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
March 31, 2005
ASSETS
Current assets:
Cash and cash equivalents $ 1,262,071
Accounts receivable 582,936
Prepaid expenses and other assets 262,747
------------
TOTAL CURRENT ASSETS 2,107,754
Property and Equipment, at cost:
Oil and Gas properties, including $103,366 of unproved
leasehold cost (full-cost method) 443,009
Pipelines 4,547,362
Onshore separation and handling facilities 1,664,128
Land 860,275
Other property and equipment 257,020
------------
7,771,794
Less: Accumulated depletion, depreciation, amortization and impairment 2,604,761
------------
5,167,033
Other Assets 11,359
------------
TOTAL ASSETS $ 7,286,146
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 930,256
Notes payable 300,000
Current portion of long-term debt 130,000
Accrued expenses and other liabilities 50,744
------------
TOTAL CURRENT LIABILITIES 1,411,000
Long-term debt 1,040,000
Interest payable 21,403
Asset retirement obligations 1,646,134
Common Stock, ($.01 par value, 25,000,000 shares authorized,
7,736,199 shares issued and outstanding) 77,362
Additional Paid-in Capital 27,120,436
Accumulated Deficit (24,030,189)
------------
3,167,609
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,286,146
============
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 March 31,
2005 2004
----------- -----------
Revenue from operations:
Pipeline operations $ 321,615 $ 204,039
Oil and gas sales 37,415 154,892
----------- -----------
359,030 358,931
----------- -----------
Cost of operations:
Pipeline operating expenses 287,860 243,251
Lease operating expenses 16,634 31,839
Depletion, depreciation and amortizaton 85,829 134,782
General and administrative 427,295 496,014
Accretion expense 24,405 23,356
----------- -----------
842,023 929,242
----------- -----------
LOSS FROM OPERATIONS (482,993) (570,311)
Other Income (expense):
Interest and other expense (39,447) (11,702)
Interest and other income 325,448 85,709
Equity in loss of affiliate -- (23,302)
----------- -----------
LOSS BEFORE INCOME TAXES (196,992) (519,606)
Income taxes -- --
----------- -----------
Net loss $ (196,992) $ (519,606)
=========== ===========
Loss per common share
- basic and diluted $ (0.03) $ (0.08)
=========== ===========
Weighted average number of common shares outstanding
- basic and diluted 7,669,083 6,663,990
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three Months
Ended March 31,
2005 2004
----------- -----------
OPERATING ACTIVITIES
Net loss $ (196,992) $ (519,606)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depletion, depreciation and amortization 85,829 134,782
Amortization of debt issue costs 11,439 --
Gain on sale of oil and gas property (140,409) --
Accretion of asset retirement obligations 24,405 23,356
Equity in loss of affiliate -- 23,302
Common stock issued for services -- 83,000
Gain on debt restructuring (132,368) --
Changes in operating assets and liabilities:
Accounts receivable (266,572) (124,838)
Prepaid expenses and other assets (80,518) 4,925
Trade accounts payable and accrued expenses 217,635 (578,445)
----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (477,551) (953,524)
----------- -----------
INVESTING ACTIVITIES
Property, equipment and other assets (3,284) (5,767)
Proceeds from sale of assets
214,632 --
Development costs - New Avoca -- (16,500)
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 211,348 (22,267)
----------- -----------
FINANCING ACTIVITIES
Payments on Borrowings (30,000) --
Financing costs (2,275) --
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (32,275) --
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (298,478) (975,791)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,560,549 2,702,892
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,262,071 $ 1,727,101
=========== ===========
See accompanying notes to the condensed consolidated financial statements
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 2005
1. Liquidity
At March 31, 2005, our working capital was approximately $.6 million. Because of
our recurring losses and negative cash flows from operations, our independent
registered public accounting firm included a "going concern" explanatory
paragraph in their report on our audited financial statements as of December 31,
2004 and for the two-year period ended December 31, 2004. There was substantial
doubt about our ability to continue as a going concern. As of December 31, 2004,
in order to satisfy our debt and working capital and capital expenditure
requirements for the year ending December 31, 2005, we believed that we would
need to raise approximately $500,000.
During April 2005, we arranged an extension of the maturity dates from September
8, 2005 to June 30, 2006 and deferred the payment of all interest on the
$450,000 promissory notes until maturity. Even though we continue to incur
losses from operations due to the poor performance of our assets, we currently
believe that we have sufficient resources in order to satisfy our working
capital and capital expenditure requirements for the twelve months ending March
31, 2006. However, we must achieve positive operating results or acquire assets
with positive cash flows in order to satisfy our cash requirements thereafter.
The net cash provided by or used in operating, investing and financing
activities is summarized below:
Three Months Ended March 31,
(amounts in thousands)
----------------------------
2005 2004
--------- ---------
Net cash provided by (used in):
Operating activities $ (477) $ (954)
Investing activities 211 (22)
Financing activities (32) --
--------- ---------
Net decrease in cash $ (298) $ (976)
========= =========
2. Related Party Transactions
On September 8, 2004, we sold the common stock of our wholly owned subsidiary
American Resources Offshore, Inc. ("ARO") to Ivar Siem on behalf of those
stockholders who hold a number of shares of our common stock above a threshold
determined by Mr. Siem, which included 30 of our largest shareholders on a
proportionate basis. Messrs. Siem and Kaffie, Michael J. Jacobson, our
President, and G. Brian Lloyd, our Vice President and Treasurer received stock
representing approximately 12%, 14%, 3% and 3%, respectively, of ARO. ARO had no
revenue and no assets, except for federal net operating loss carryforwards. The
consideration paid to us consisted of $1,000 cash, the assumption of the
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2005
transaction costs, including incremental costs associated with the reporting and
disclosure of this transaction incurred by us in our filings with the SEC and
any other required filings or announcements, and the assumption of any and all
liabilities of ARO.
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. 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.
Employee stock options and stock warrants at March 31, 2005 and 2004 were not
included in the computation of diluted earnings per share because the effect of
their assumed exercise and conversion would have an antidilutive effect on the
computation of diluted loss per share.
Weighted-
Average Number
of Common Shares
Outstanding and Per
Net Potential Dilutive Share
Loss Common Shares Amount
--------- ------------------ ---------
Three months ended March 31, 2005
Basic and diluted loss per share $(196,992) 7,669,083 $ (0.03)
========= ================== =========
Three months ended March 31, 2004
Basic and diluted loss per share $(519,606) 6,663,990 $ (0.08)
========= ================== =========
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2005
5. Business Segment Information
Our income producing operations are conducted in two principal business
segments: pipeline operations and oil and gas exploration and production. There
were no intersegment revenues during the periods presented. Information
concerning these segments for the three months ended March 31, 2005 and 2004,
and at March 31, 2005 are as follows:
Depletion,
Operating Depreciation and
Revenues Loss(*) Amortization
------------ ------------ ------------
Three months ended March 31, 2005:
Pipeline operations $ 321,615 (349,604) 81,873
Oil and gas exploration and
production 37,415 (16,058) 1,372
Other -- (117,331) 2,584
------------ ------------ ------------
Consolidated 359,030 (482,993) 85,829
------------ 286,001 ------------
Other income, net ------------
Loss before income taxes (196,992)
Three months ended March 31, 2004:
Pipeline operations $ 204,039 (317,915) 81,798
Oil and gas exploration and 154,892 (63,877) 49,791
production
Other -- (188,519) 3,193
------------ ------------ ------------
Consolidated 358,931 (570,311) 134,782
------------ 50,705 ------------
Other income, net ------------
Loss before income taxes (519,606)
March 31, 2005
--------------
Identifiable assets:
Pipeline operations $ 5,637,412
Oil and gas exploration and production 462,470
Other 1,186,264
--------------
Consolidated $ 7,286,146
==============
(*) Consolidated loss from operations includes $114,746 and $185,326 in
unallocated general and administrative expenses, and unallocated
depletion, depreciation and amortization of $2,584 and $3,193 for the
three months ended March 31, 2005 and 2004, respectively.
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2005
6. 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 three months ended March 31, 2005 and
2004, 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.
12, "Accounting for Stock-Based Compensation" to stock-based employee
compensation:
Three months ended
March 31,
---------
2005 2004
-------- --------
(in thousands, except per share amounts)
Net loss, as reported ......................... $ (197) $ (520)
Add: Total stock-based employee compensation
expense included in reported net loss,
net of related tax effects ................. -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for awards, net of related tax effects (66) --
-------- --------
Pro forma net loss ............................ $ (263) $ (520)
======== ========
Net loss per share:
Basic and Diluted - as reported ............... $ (0.03) $ (0.08)
======== ========
Basic and Diluted - pro forma ................. $ (0.03) $ (0.08)
======== ========
During the three months ended March 31, 2005, 156,250 stock options were
exercised, with exercise prices ranging from $.43 per share to $1.55 per share.
At March 31, 2005 there were 280,068 stock options outstanding with exercise
prices ranging from $.35 per share to $6.00 per share. All of the stock options
exercised were done so by using the quoted market value of the shares of common
stock issued to pay for the option exercise price. As a result, 27,711 shares of
common stock issued were surrendered to us for payment of the option exercise
price.
9
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2005
7. Exercise of Warrants
As of January 1, 2005, there were 3,100,000 warrants outstanding that were
issued pursuant to the Note and Warrant Purchase Agreement dated September 8,
2004. During the three months ended March 31, 2005, 791,666 warrants were
exercised.
The exercise of the warrants was accomplished via net exercises, whereby holders
surrendered their right to purchase a portion of the shares of common stock,
resulting in 47,697 shares of common stock being surrendered to pay for the
warrant exercise price and 743,969 shares issued to warrant holders.
Subsequent to March 31, 2005, an additional 1,416,671 warrants were exercised
via net exercises, resulting in the issuance of 1,252,347 shares of common
stock. As of the filing of this report, there were 891,663 warrants outstanding.
The outstanding warrants are fully vested, exercisable at $.25 per warrant into
one share of common stock, and expire between September 8, 2009 and November 30,
2009.
8. Recent Accounting Developments
In December, 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," that
addresses the accounting for share-based payment transactions in which a company
receives employee services in exchange for equity instruments of the company,
such as stock options and restricted stock. SFAS No. 123R eliminates the ability
to account for share-based compensation transactions using APB Opinion No. 25
and requires instead that such transactions be accounted for using a fair
value-based method. We currently account for stock-based compensation using the
intrinsic method pursuant to APB Opinion No. 25. SFAS No. 123R requires that all
stock-based payments to employees, including grants of employee stock options
and restricted stock, be recognized as compensation expense in the financial
statements based on their fair values. Public entities that file as small
business issuers will be required to apply Statement 123R in the first interim
or annual reporting period that begins after December 15, 2005. Accordingly, we
will be required to apply SFAS No. 123R beginning in the fiscal quarter ending
March 31, 2006. We are currently assessing the provisions of SFAS No. 123R and
its impact on our consolidated financial statements.
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Forward Looking Statements. Certain of the statements included in this quarterly
report on Form 10-QSB, including those regarding future financial performance or
results or that are not historical facts, are "forward-looking" statements as
that term is defined in Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect", "plan", "believe", "anticipate", "project", "estimate", and similar
expressions are intended to identify forward-looking statements. Blue Dolphin
Energy Company (referred to herein, with its predecessors and subsidiaries, as
"Blue Dolphin", "we", "us" and "our") cautions readers that these statements are
not guarantees of future performance or events and such statements involve risks
and uncertainties that may cause actual results and outcomes to differ
materially from those indicated in forward-looking statements. Some of the
important factors, risks and uncertainties that could cause actual results to
vary from forward-looking statements include:
o the level of utilization of our pipelines;
o availability and cost of capital;
o actions or inactions of third party operators for properties where we
have an interest;
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 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 annual report on Form 10-KSB for the year ended
December 31, 2004. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date thereof. 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.
11
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: (i) pipeline transportation services to
producer/shippers, and (ii) oil and gas exploration and production. We conduct
our operations through our subsidiaries and our assets are located offshore and
onshore in the Texas Gulf coast area. In addition to satisfying our liquidity
and capital needs, our focus in 2005 is to increase utilization of our
pipelines, strategic acquisitions and cost management. Our long-term goal is to
create greater value for our stockholders through the addition of assets.
Although we continue to have interest in oil and gas properties and will
consider acquiring interests in producing oil and gas properties, as a result of
implementing cost savings measures in 2004 we are primarily focused on our
pipeline business.
At the beginning of 2004 we faced a significant liquidity shortage. We estimated
that we would need to raise approximately $1,500,000 to satisfy our liquidity
and working capital requirements through 2004. To address our liquidity shortage
in 2004 we:
o Implemented cost savings measures in mid 2004 that included, among
other things, reducing the number of employees and contract personnel,
resulting in expected annual cost savings of approximately $360,000,
o Extended the payment terms of $668,000 of indebtedness that was due in
August and September 2004, to now be payable over a twelve month
period from September 2004 through August 2005,
o Raised capital through the issuance of $750,000 of promissory notes in
September 2004,
o Sold our interest in New Avoca Gas Storage, LLC for approximately
$930,000 in October 2004, and
o Negotiated an increase in gas transportation rates on the Blue Dolphin
System effective October 2004, that provided additional revenues of
approximately $210,000 and $150,000 in the fourth quarter 2004 and the
first quarter 2005, respectively.
As a result of our ongoing liquidity problems, our auditors UHY Mann Frankfort
Stein & Lipp CPAs, LLP added an explanatory paragraph in their opinion on our
consolidated financial statements as of the year ended December 31, 2004,
indicating that substantial doubt exists about our ability to continue as a
going concern. At the beginning of 2005, we estimated that we would need to
raise approximately $500,000 to satisfy our liquidity and working capital
requirements through 2005.
Although we have not raised capital in 2005, we have been able to work with our
creditors and restructure the terms of our indebtedness. As a result of these
and other actions taken in 2004, we now believe that we have sufficient
liquidity and working capital at March 31, 2005 to satisfy our requirements
through March 31, 2006.
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Liquidity And Capital Resources
While we have been able to implement cost savings measures and restructure the
terms of some of our indebtedness we were not able to generate sufficient cash
from operations to cover operating costs and general and administrative
expenses. Furthermore, our financial condition has been significantly and
negatively affected by the poor performance of our businesses and our
significant indebtedness. For the three months ended March 31, 2005, we
generated total revenues of approximately $360,000 while operating costs and
general administrative expenses, totaled approximately $732,000.
In August 2004, we extended the remaining payments totaling $668,000 due in
September and October 2004 to Tetra Applied Technologies, Inc. ("Tetra") for the
abandonment/reefing of the Buccaneer Field. Under the revised terms, on
September 1, 2004 we began paying Tetra the outstanding balance in twelve
monthly installments of $55,667 plus interest on the outstanding balance at the
rate of six percent per annum. As of March 31, 2005, the remaining balance due
Tetra was approximately $280,000.
On September 8, 2004, we entered into a Note and Warrant Purchase Agreement
("Purchase Agreement") with certain accredited investors and certain of our
directors for the purchase and sale of promissory notes in an aggregate
principal amount of $750,000 (the "Promissory Notes") and 2,800,000 warrants
("Warrants") to purchase shares of our common stock at a purchase price of
$0.003 per Warrant. The sale of the Promissory Notes and the first tranche of
1,250,000 initial Warrants closed on September 8, 2004, and the closing of the
sale of the second tranche of 1,550,000 additional Warrants closed on November
30, 2004 after we received stockholder approval of the issuance of the
additional Warrants at our November 11, 2004 special stockholders meeting. We
received proceeds of $758,400 from the issuance of the Promissory Notes and the
Warrants. The Promissory Notes mature on September 8, 2005, and accrue interest
at a rate of 12.0% per annum, of which 4% is payable monthly and 8% is payable
at maturity. However, in April 2005, the holders of $450,000 aggregate principal
amount of Promissory Notes agreed to extend the maturity date of their
Promissory Notes to June 30, 2006 and to defer the payment of all interest on
their Promissory Notes until maturity. In exchange for extending the maturity of
the Promissory Notes, we waived compliance with the lock-up provisions of the
Purchase Agreement allowing them to sell shares of our common stock that they
may receive upon exercise of their Warrants, and to accelerate the date we are
required to file a registration statement registering the resale of their shares
of common stock that they may acquire upon exercise of Warrants to May 15, 2005.
As of March 31, 2005, we issued 743,969 shares of common stock as a result of
the exercise of Warrants, and in April and May 2005, we issued an additional
1,252,347 shares of common stock as a result of the exercise of Warrants. The
exercise of the Warrants was accomplished via net exercises, whereby holders
surrendered their right to receive 212,021 shares of common stock. We filed a
Form S-3 registration statement with the Securities and Exchange Commission on
May 12, 2005 to register the shares of common stock that were issued pursuant to
the exercise of warrants and shares that are issuable upon exercise of warrants.
In October 2004, we sold our 25% equity interest in New Avoca. Pursuant to the
terms of a Purchase and Sale Agreement, we received approximately $930,000 for
our interest in New Avoca, and may receive an additional payment of up to
approximately $375,000, subject to the commencement of commercial operations at
the New Avoca natural gas storage facility prior to October 29, 2011. The
proceeds from the sale of our interest in New Avoca is being used for general
corporate purposes.
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
The following table summarizes certain of our contractual obligations and other
commercial commitments at March 31, 2005 (amounts in thousands):
Payments Due by Period
---------------------------------------------------------
Contractual Obligations and Other 1 year After
Commercial Commitments Total or less 1-3 years 3-5 years 5 years
--------------------------------- --------- --------- --------- --------- ---------
Accounts Payable - Tetra $ 278 278 -- -- --
Notes Payable and Long-Term Debt 1,506 445 1,061
Operating Leases, net of sublease 215 120 91 4 --
Abandonment - Costs 1,646 -- 191 -- 1,455
--------- --------- --------- --------- ---------
Total Contractual Obligations
and Other Commercial Commitments $ 3,645 843 1,343 4 1,455
========= ========= ========= ========= =========
The following table summarizes our financial position for the periods indicated
(amounts in thousands):
March 31, December 31,
2005 2004
---- ----
Amount % Amount %
-------- ------ -------- ------
Working Capital $ 697 12 $ 404 7
Property and equipment, net 5,167 88 5,324 93
Other noncurrent assets - 11 -- - 11 --
-------- ------ -------- ------
Total $ 5,875 100 $ 5,739 100
======== ====== ======== ======
Long-term Liabilities $ 2,707 46 $ 2,374 41
Stockholders' equity 3,168 54 3,365 59
-------- ------ -------- ------
Total $ 5,875 100 $ 5,739 100
======== ====== ======== ======
Our financial position did not significantly change from December 31, 2004 to
March 31, 2005.
14
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Natural gas transportation throughput on our Blue Dolphin System is currently 6
MMBtu per day representing 4% of system capacity. 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. Effective
October 1, 2004, we renegotiated the gas transportation rates on the Blue
Dolphin System due to operating losses incurred from operating the system. As a
result, first quarter 2005 gas transportation revenues from the Blue Dolphin
System totaled approximately $209,000. Without the increased rates, gas
transportation revenues would have been approximately $60,000 for this same
period. Future utilization of our pipelines 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. Two new successful
wells have recently been drilled in lease blocks in the vicinity of the Blue
Dolphin Pipeline. As a result of current and anticipated drilling activity
around the Blue Dolphin System, we expect that utilization of the Blue Dolphin
System will increase in late 2005.
On February 28, 2005 (effective as of January 1, 2005), we entered into an
amendment to our purchase agreement with MCNIC Pipeline and Processing Group,
Inc. ("MCNIC"). Under the terms of the original purchase agreement, we acquired
MCNIC's one-third interests in both the Blue Dolphin System and the inactive
Omega Pipeline. Pursuant to the terms of the amendment, the original promissory
note was exchanged for a new promissory note, and all accrued interest on the
original promissory note was forgiven, approximately $132,000. In addition to
the new promissory note, MCNIC can receive additional payments of up to $500,000
from 50% of the net profits, if any, realized from the one-third interest in the
Blue Dolphin System through December 31, 2006. We made a principal payment on
the new promissory note of $30,000 upon the execution of the amendment. Under
the terms of the new promissory note, we will make monthly principal payments of
$10,000 through its maturity date of December 31, 2006. The principal amount of
the new promissory note may be increased by up to $500,000, if 50% or more of
our 83% interest in the Blue Dolphin System is sold before December 31, 2006.
During the three months ended March 31, 2005, we incurred no capital
expenditures for the development of our proved reserves. However, we do expect
to make capital expenditures totaling $13,000 and $203,000 in the years ending
December 31, 2005 and 2007, respectively. Capital expenditures in 2005 represent
workover costs, net to our interest, for the producing well in the High Island
Block A-7 field and in 2007, the abandonment costs of our High Island Block A-7
field, net to our interest.
15
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
RESULTS OF OPERATIONS
We reported a net loss for the three months ended March 31, 2005 ("current
period") of $196,992 compared to a net loss of $519,606 reported for the three
months ended March 31, 2004 ("previous period").
Revenue from pipeline operations. Revenues from pipeline operations increased by
$117,576 or 58% in the current period to $321,615. Revenues in the current
period from the Blue Dolphin System totaled approximately $253,000 compared to
approximately $134,000 in the previous period primarily as a result of an
increase in our average gas transportation rates on the Blue Dolphin System
effective as of October 2004. The increased rates will decrease as our net
operating results from the Blue Dolphin System improve, but in any case, the
rates will be no lower than the rates that were in effect prior to October 2004.
Revenue from oil and gas sales. Revenues from oil and gas sales decreased by
$117,477 in the current period from those of the previous period primarily due
to a significant production decline in the High Island Block A-7 field, which
provided revenues from oil and gas sales of approximately $37,000 in the current
period compared to approximately $118,000 in the previous period. We expect that
production from the reservoir currently producing will cease in mid 2005.
However there is an additional reservoir in which a recompletion in the existing
well is possible. Oil and gas sales from this additional reservoir are not
expected to significantly increase our total revenues in 2005. Previous period
oil and gas sales include approximately $36,000 from our interest in the High
Island Block 34 field, which was sold in June 2004.
Pipeline operating expenses. Pipeline operating expenses in the current period
increased by $44,609 to $287,860 due to an increase in legal costs of
approximately $94,000 and other expenses of approximately $20,000, offset in
part by a decrease of approximately $70,000 in insurance costs due to a refund
received for having no claims in the previous policy period and the elimination
of property insurance coverage on our pipelines in mid 2004. 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, as this litigation continues we
will continue to incur significant legal expenses which could have a material
adverse effect on our financial condition.
General and administrative. General and administrative expenses decreased by
$68,719 to $427,295 in the current period. The decrease was due to lower
personnel and other costs as a result of our cost reduction plans implemented in
2003 and 2004. The 2004 cost reductions included the termination of certain
employees in mid 2004. The annual cost savings associated with measures taken is
expected to be approximately $360,000. As a result, 2005 general and
administrative expenses are expected to be lower. However, if our business
activities expand, we will need to hire additional employees, and personnel and
associated costs may increase.
16
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Depletion, depreciation and amortization. Depletion, depreciation and
amortization expense decreased by $48,953 in the current period to $85,829. In
the previous period we recorded depletion of approximately $38,000 associated
with our oil and gas properties, while we had none in the current period. The
decrease in depletion was a result of there being no remaining unamortized oil
and gas costs in the current period.
Interest and other expense. Interest and other expense increased $27,745 in the
current period. Interest expense in the current period increased by
approximately $16,000 due to the issuance of the Promissory Notes in September
2004. Other expense in the current period increased by approximately $11,000 due
to the amortization of debt issuance costs.
Interest and other income. Interest and other income increased $239,739 in the
current period. Other income in the current period includes a gain of the
placement of our interests in the Galveston Block 287/297 leases of
approximately $140,000, a gain on the elimination of accrued interest pursuant
to the restructuring of the MCNIC promissory note of approximately $132,000 and
the collection of accounts receivable that were previously written off of
approximately $45,000. Other income in the previous period includes fees
generated for consulting services we provided, associated with the evaluation of
oil and gas properties of $50,000 and the collection of accounts receivable that
were previously written off of $30,000.
Equity in loss of affiliate. In the previous period we recorded a loss from our
equity interest in New Avoca of $23,302. Our interest in New Avoca was sold in
October 2004.
Recent Accounting Developments
See Note 8 in Item 1.
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.
17
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
A) Exhibits
3.1 (1) Amended and Restated Certificate of Incorporation of the
Company.
3.2 (2) Amended and Restated 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.
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.
--------------------
(1) Incorporated herein by reference to Exhibits filed in
connection with the definitive Proxy Statement of
Blue Dolphin Energy Company under the Securities and
Exchange Act of 1934, dated October 13, 2004
(Commission File No. 000-15905).
(2) Incorporated herein by reference to Exhibits filed in
connection with Form 10-QSB of Blue Dolphin Energy
Company for the quarter ended June 30, 2004 under the
Securites and Exchange Act of 1934, dated August 20,
2004 (Commission File No. 000-15905).
B) Reports on Form 8-K
On February 22, 2005 we filed a current report on Form 8-K
dated February 16, 2005 reporting a delisting notice received
from the Nasdaq Stock Market. The item in such current report
was Item 3.01 (Notice of Delisting or Failure to Satisfy a
Continued Listing Rate or Standard; Transfer of Listing).
On March 2, 2005 we filed a current report on Form 8-K dated
February 28, 2005 reporting a debt restructuring. The items in
such current report were Item 1.01 (Entry Into a Material
Definitive Agreement) and Item 2.03 (Creation of a Direct
Financial Obligation or an Obligation Under an Off-Balance
Sheet Arrangement of a Registrant).
On March 25, 2005 we filed a current report on Form 8-K dated
March 24, 2005 reporting our fourth quarter and year end 2004
earnings. The item in such current report was Item 2.02
(Results of Operations and Financial Condition).
18
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: BLUE DOLPHIN ENERGY COMPANY
Date: May 13, 2005 /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)
19