UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended: September 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ..................to ...................
Commission File Number: 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-1268729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 Travis, Suite 2100, Houston, Texas 77002
(Address of principal executive offices)(Zip Code)
(713) 227-7660
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
6,023,725 shares of the Registrants' common stock, par value $.01 per share,
--------------------------------------------------------------------------------
where outstanding at November 8, 2001.
--------------------------------------
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 ("SEC") 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.
The accompanying condensed consolidated financial statements of the Company
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Annual Report on Form 10-K for the year ended
December 31, 2000.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,136,835 $ 2,071,682
Trade accounts receivable 1,299,661 2,406,751
Funds escrowed for abandonment 69,604 1,485,728
Prepaid expenses 261,966 127,913
------------ ------------
TOTAL CURRENT ASSETS 4,768,066 6,092,074
Property and Equipment at cost:
Oil and Gas properties, including $430,782
of unproved leasehold cost at September 30, 2001
and December 31, 2000, respectively
(full-cost method) 28,562,867 28,032,211
Onshore separation and handling facilities 1,583,428 1,583,610
Land 850,000 930,500
Pipelines 2,950,621 4,845,975
Other property and equipment 402,994 397,683
------------ ------------
34,349,910 35,789,979
Accumulated depletion, depreciation and amortization (30,285,969) (30,444,622)
------------ ------------
4,063,941 5,345,357
Deferred federal income tax 244,444 244,444
Investment in Petroport 1,935,862 1,885,219
Other assets 841,660 345,861
------------ ------------
TOTAL ASSETS $ 11,853,973 $ 13,912,955
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 1,545,922 $ 1,557,850
Current portion of long term debt -- 218,412
Notes payable - related parties -- 2,000,000
Accrued expenses and other liabilities 1,673,151 927,347
------------ ------------
TOTAL CURRENT LIABILITIES 3,219,073 4,703,609
Other non-current liabilities -- 550,000
Minority interests 1,133,634 1,196,479
Contingencies
Common Stock, (10,000,000 shares authorized, 6,022,875 shares issued and outstanding
at September 30, 2001, 6,016,718 shares issued and outstanding at December 31, 2000.) 60,229 60,167
Additional Paid-in Capital 25,749,549 25,775,417
Accumulated Deficit (18,308,512) (18,372,717)
------------ ------------
7,501,266 7,462,867
TOTAL LIABILITES AND
STOCKHOLDERS' EQUITY $ 11,853,973 $ 13,912,955
============ ============
See accompanying notes to the condensed consolidated financial statements.
3
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Nine Months
Ended September 30,
2001 2000
------------ ------------
Revenue from operations:
Oil and gas sales $ 4,099,606 $ 3,810,333
Pipeline operations 784,003 1,716,102
Operating fees -- 234,338
------------ ------------
4,883,609 5,760,773
------------ ------------
Cost of operations:
Lease operating expenses 888,805 951,068
Pipeline operating expenses 425,852 753,726
Gain on sale of assets (1,417,626) --
Depletion, depreciation, amortization and abandonment 2,379,402 1,441,694
Impairment of oil and gas properties -- 10,654,976
General and administrative 2,138,475 1,583,151
------------ ------------
4,414,908 15,384,615
------------ ------------
OPERATING PROFIT (LOSS) 468,701 (9,623,842)
Other income (expense):
Interest and other expense (356,868) (140,405)
Interest and other income 125,013 77,418
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS,
AND INCOME TAXES 236,846 (9,686,829)
Minority interests (172,641) (219,223)
Income taxes -- --
------------ ------------
Net income (loss) $ 64,205 $ (9,906,052)
============ ============
Earnings (loss) per common share-basic $ 0.01 $ (1.66)
============ ============
Earnings (loss) per common share-diluted $ 0.01 $ (1.66)
============ ============
Weighted average number of common shares outstanding
and potential dilutive common shares:
Basic 6,019,463 5,955,645
============ ============
Diluted 6,035,216 5,955,645
============ ============
See accompanying notes to the condensed consolidated financial statements.
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months
Ended September 30,
2001 2000
------------ ------------
Revenue from operations:
Oil and gas sales $ 846,739 $ 1,633,118
Pipeline operations 229,927 657,020
Operating fees -- 77,924
------------ ------------
1,076,666 2,368,062
------------ ------------
Cost of operations:
Lease operating expenses 261,413 352,605
Pipeline operating expenses 156,904 247,481
Depletion, depreciation, amortization and abandonment 376,594 530,921
Impairment of oil and gas properties -- 10,654,976
General and administrative 708,965 512,418
------------ ------------
1,503,876 12,298,401
------------ ------------
OPERATING LOSS (427,210) (9,930,339)
Other income (expense):
Interest and other expense (27,225) (54,824)
Interest and other income 27,540 27,154
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS,
AND INCOME TAXES (426,895) (9,958,009)
Minority interests 7,595 (151,576)
Income taxes -- --
------------ ------------
Net loss $ (419,300) $(10,109,585)
============ ============
Loss per common share-basic and diluted $ (0.07) $ (1.69)
============ ============
Weighted average number of common shares outstanding
and potential dilutive common shares:
Basic 6,021,463 5,964,521
============ ============
Diluted 6,021,463 5,964,521
============ ============
See accompanying notes to the condensed consolidated financial statements.
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine Months
Ended September 30,
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 64,205 $ (9,906,052)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depletion, depreciation, amortization, abandonment and
impairment 2,379,402 12,096,670
Minority interests 172,641 --
Gain on sale of assets (1,417,626) --
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable 1,107,090 (634,071)
Increase in prepaid expenses (134,053) (613,739)
Abandonment costs incurred (2,061,525) --
Increase in accounts payable and other current liabilities 183,876 2,254,121
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 294,010 3,196,929
------------ ------------
INVESTING ACTIVITIES
Oil and gas prospect generation costs -- (811,555)
Reimbursement of oil and gas prospect generation costs -- 811,555
Purchases of property and equipment (1,737,331) (1,113,088)
Exploration and development costs (503,459) (1,254,952)
Net proceeds from sale of assets 4,625,000 144,999
Funds escrowed for abandonment costs (31,358) (298,293)
Release of escrowed funds for abandonment 1,447,482 --
Investment in Petroport (53,688) (138,855)
Investment in New Avoca (119,414) (60,475)
Investment in Drillmar (373,885) --
Increase in other assets (2,500) (32,261)
------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 3,250,847 (2,752,925)
------------ ------------
FINANCING ACTIVITIES
Net proceeds from borrowings -- 400,000
Net proceeds from the sale of stock (25,806) 85,117
Payments on borrowings (2,218,412) (100,633)
Dividends paid by subsidiary (235,486) --
Other -- (123,936)
------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (2,479,704) 260,548
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,065,153 704,552
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,071,682 1,166,730
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,136,835 $ 1,871,282
============ ============
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 98,500 $ 75,062
============ ============
Income taxes paid $ 6,530 $ 8,430
============ ============
See accompanying notes to the condensed consolidated financial statements.
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. Related Party Transactions
In December 1999, the Company issued a $1.0 million unsecured convertible
promissory note to Harris A. Kaffie, a director of the Company. This convertible
promissory note originally due June 1, 2000 was extended to March 31, 2001, bore
interest at 10% per annum, and was convertible into common stock at $6.00 per
share. This convertible promissory note and accrued interest of $64,361 were
paid in January 2001.
The Company issued three unsecured convertible promissory notes in 2000 totaling
$1.0 million; two in the principal amount of $200,000 each on May 25, 2000 and
July 6, 2000, issued to Ivar Siem, Chairman of the Company, and one in the
principal amount of $600,000 on November 30, 2000, issued to TI A/S,
beneficially controlled by Ivar Siem. The convertible promissory notes were due
March 31, 2001, bore interest at the rate of 10% per annum and were convertible
into common stock at the rate of $6.00 per share. These convertible promissory
notes and accrued interest of $32,790 were paid in January 2001.
At June 30, 2001, Ivar Siem loaned Drillmar, Inc., a Delaware corporation
("Drillmar"), $100,000 and was issued an unsecured promissory note due December
31, 2001, bearing interest at 10% per annum. In July 2001, Drillmar was loaned
$300,000 from Ivar Siem and $200,000 from Harris Kaffie and they were issued
unsecured promissory notes due December 31, 2001, bearing interest at 10% per
annum. The promissory note and accrued interest of $986 due to Harris Kaffie was
paid in August 2001. In August 2001, Drillmar was loaned $125,000 from Ivar Siem
and $125,000 from Harris Kaffie and they where issued unsecured promissory notes
due December 31, 2001, bearing interest at 10% per annum. In October 2001 Harris
Kaffie loaned an additional $200,000 to Drillmar under the same terms and due
date. The promissory notes issued by Drillmar are non-recourse to the Company.
2. Contingencies
The Company has previously announced a gas discovery in High Island Area Block
A-7, in the Gulf of Mexico. The Company owns an 8.9% reversionary working
interest in this field. The Company will begin to receive revenues from its
reversionary interest after "payout" occurs. Payout is scheduled to occur after
all of the other working interest owners have recovered their costs and expenses
associated with developing the field from sales of production from the field. At
the beginning of the third quarter of 2001, there were three wells producing in
this field at a combined rate of approximately 60 Mmcf of natural gas per day
and a fourth (exploratory) well was being drilled. However, two of the three
wells have stopped producing and the remaining well is currently producing
approximately 28 Mmcf of natural gas per day. Additionally, the exploratory well
that was being drilled was unsuccessful. The Company believes that one of the
non-producing wells will be worked-over and the other plugged and abandoned. As
a result of these occurrences the Company expects to begin to receive revenues
from its reversionary working interest in this field in the third quarter of
2002.
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
Prior to the decrease in production in the High Island A-7 field and the
corresponding delay in the Company's receipt of payments from its reversionary
working interest in this field, the Company believed that it would have adequate
capital to meet its obligations and operating needs for the current fiscal year.
However, due to this delay the Company now believes that it will need to raise
between $4.5 to $7.0 million of capital to meet its obligations and operating
needs. The Company will need to seek external financing and/or sell assets to
raise the necessary capital. There can be no assurance that the Company will be
able to obtain financing or sell assets on commercially reasonable terms. The
Company's inability to raise capital may have a material adverse effect on its
financial condition, ability to meet its obligations and operating needs and
results of operations.
In December 1999, Blue Dolphin Exploration Company, a wholly owned subsidiary of
the Company, purchased shares of American Resources Offshore, Inc. ("American
Resources") common stock representing a 75% ownership interest for approximately
$4.5 million, and concurrently with this transaction American Resources received
$24.2 million from Fidelity Oil Holdings, Inc. ("Fidelity Oil") for an 80%
interest in its Gulf of Mexico assets. American Resources senior secured debt
was held by Den norske Bank ("Den norske"). In connection with this transaction
Den norske sold the senior debt and all related security interests and liens to
the Company for the right to receive a possible future payment if the cumulative
net revenues received by American Resources and Fidelity Oil attributable to
American Resources, proved oil and gas reserves in the Gulf of Mexico as of
January 1, 1999, exceed $30.0 million during the period January 1, 1999 through
December 31, 2001. If that occurs, Den norske will be entitled to receive an
amount equal to 50% of the net revenues in excess of $30.0 million during that
three-year period. If any contingent amount becomes payable to Den norske, 80%
will be paid by Fidelity Oil and 20% will be paid by American Resources. The
payment, if any, is due on March 15, 2002. American Resources estimates that it
is probable that a payment to Den norske will be due based upon this agreement
and current market conditions. The Company has provided for a liability to Den
norske in the amount of $900,000 at September 30, 2001.
On May 8, 2000, American Resources, a majority owned subsidiary of the Company,
and its former Chief Financial Officer, were named in a lawsuit in the United
States District Court for the Southern District of Texas, Houston Division,
styled H&N Gas and Howard Energy Marketing, L.L.C. v. American Resources
Offshore, Inc. et al (Case No H-00-1371). The lawsuit alleges, among other
things, that H&N Gas ("H&N") was defrauded by American Resources in connection
with gas purchase options and gas price swap contracts entered into from
February 1998 through September 1999. H&N alleges unlawful collusion between
American Resources' prior management and the then president of H&N, Richard Hale
("Hale"), to the detriment of H&N. H&N generally alleges that Hale directed H&N
to purchase illusory options from American Resources that bore no relation to
any physical gas business and that American Resources did not have the financial
resources and/or sufficient quantity of gas to perform. H&N further alleges that
American Resources and Hale colluded with respect to swap transactions that were
designed to benefit American Resources at the expense of H&N Gas. H&N further
alleges civil conspiracy against all the defendants. H&N is seeking
approximately $6.2 million in actual damages plus treble damages, punitive
damages, prejudgment interest and attorneys' fees against American Resources
directly. As a result of its conspiracy allegation, H&N also contends that all
defendants are jointly and severally liable for over $62.0 million dollars in
actual damages plus treble damages, punitive damages, prejudgment interest and
attorneys' fees. American Resources intends to vigorously defend this claim.
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
As a result of the decision to cease operating activities in the Buccaneer
Field, the Company's leases in or around the Buccaneer Field terminated in
January 2001. The Company must plug and abandon all remaining wells and remove
platform facilities. The rules and regulations of the Material Management
Service ("MMS") requires that the Company complete the plugging and abandonment
within one year after termination of the lease. In the first quarter of 2001,
the Company plugged and abandoned the remaining wells at a cost of approximately
$1.4 million. Work to remove the two platform facilities began in August 2001
with $216,000 cost incurred as of September 30, 2001. The removal was expected
to be completed in December 2001. However, the Company has requested an
extension from the Minerals Management Service ("MMS") until mid-2002 to
complete the site clearance when weather conditions in the Gulf of Mexico are
typically more favorable. The Company received an extension from the MMS until
the second quarter of 2002 to begin site clearance at one platform facility
location and expects to receive a comparable extension for the remaining
platform facility location. The Company still believes that its provision for
total abandonment costs of $4.9 million at September 30, 2001 is adequate.
Petroport, Inc. ("Petroport") submitted a proposal for development of a
deepwater port in the Gulf of Mexico, south of Sabine Pass, Texas, to a group of
area refiners in September, 2001. The refiners are seeking proposals from
qualified parties with the intent of evaluating the proposals and developing a
consensus on which proposal best meets the objectives of the individual
refiners. The Company met with the refiners in October, 2001, to discuss its
proposal. No specific timetable has been set for a decision by the refiners
however it is anticipated that an indication of the project's viability will be
known by year-end. It is possible that the refiners may not reach a consensus,
or that the Company is not selected to participate in the project by the
individual refiners even if a consensus is reached. If this should occur, the
Company's investment in deepwater port project development would likely have no
or limited future value.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operations or cash flows.
3. Acquisition of Drillmar, Inc.
Effective May 1, 2001 the Company increased its ownership in Drillmar from 37.5%
to 64%. Consideration paid by the Company included cash of approximately
$131,000, a contribution of services in the amount of $434,000.
Effective as of September 30, 2001, Drillmar entered into a merger agreement and
merged with Zephyr Drilling Ltd. ("Zephyr"). Prior to the merger, Zephyr was a
limited partnership in which Drillmar was the general partner. Zephyr owns a
semi-submersible drilling rig that is being retrofitted into a semi-tender.
Accordingly, Drillmar and Zephyr were considered to be related parties at the
time of the transaction. As a result of the merger, the Company's interest in
Drillmar decreased from 64% to 12.8%. Prior to the merger, the Company entered
into an agreement with Drillmar whereby it agreed to provide
9
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
office space and certain administrative services to Drillmar for approximately
$40,000 per month. Historically the Company has used the payments it is entitled
to receive under this agreement to fund its
investment in Drillmar. In connection with the merger the Company received a
partial payment under the services agreement in October 2001 and expects to
receive full payments beginning in November 2001.
The Company records its investment in Drillmar using the equity method of
accounting. Under the equity method, investments are recorded at cost plus the
Company's equity in undistributed earnings and losses after acquisition.
Intercompany gains and losses are eliminated.
4. Earnings Per Share
The Company applies 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 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.
The following table provides a reconciliation between basic and diluted earnings
per share:
Weighted-
Average Number
of Common Shares
Outstanding
and Potential Per
Net Income Dilutive Share
(Loss) Common Shares Amount
------ ------------- ------
Nine Months ended September 30, 2001
Basic earnings per share $ 64,205 6,019,463 $ 0.01
Effect of dilutive stock options -- 15,753 --
------------ ------------ --------
Diluted earnings per share $ 64,205 6,035,216 $ 0.01
============ ============ ========
Nine Months ended September 30, 2000
Basic and diluted loss per share ($ 9,906,052) 5,955,645 ($ 1.66)
============ ============ ========
Quarter ended September 30, 2001
Basic and diluted loss per share ($ 419,300) 6,021,463 ($ 0.07)
============ ============ ========
Quarter ended September 30, 2000
Basic and diluted loss per share ($10,109,585) 5,964,521 ($ 1.69)
============ ============ ========
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
5. Sale of Assets
On January 22, 2001, the Company sold its 50% interest in the Black Marlin
Pipeline System to affiliates of the Williams Companies, Inc. for approximately
$4.6 million.
This disposition was consummated, in part, through a sale of all of the
outstanding capital stock of Black Marlin Pipeline Company (formerly an indirect
wholly owned subsidiary of the Company) the owner of a 50% interest in the Black
Marlin Pipeline, pursuant to a Purchase and Sale Agreement dated January 12,
2001 (the "Stock Purchase Agreement") among Black Marlin Energy Company, a
wholly owned subsidiary of the Company, MCNIC Offshore Pipeline & Processing
Company ("MCNIC"), WBI Southern, Inc. ("WBI") and Williams Field Services Group,
Inc. The Company received $3.6 million for the outstanding capital stock of
Black Marlin Pipeline Company and recorded a gain of $1.3 million.
The remaining part of this disposition was consummated through the sale of the
A-5 Lateral owned 50% by Blue Dolphin Pipe Line Company, a wholly owned
subsidiary of the Company ("BDPL"), pursuant to a Purchase and Sale Agreement
dated January 12, 2001, among BDPL, MCNIC, WBI and Williams Field Services -
Gulf Coast Company, L.P. The Company received $1.0 million for its interest in
the A-5 Lateral, and recorded a gain of $112,092.
6. Business Segment Information
The Company's income producing operations are conducted in two principal
business segments: oil and gas exploration and production; and pipeline
operations. Intersegment revenues consist of transportation, general processing
and storage fees charged by certain subsidiaries to another for natural gas and
crude oil transported through the Blue Dolphin Pipeline System. The intercompany
revenues and expenses are eliminated in consolidation. Information concerning
these segments for the nine months and three months ended September 30, 2001,
and 2000, and at September 30, 2001 and December 31, 2000 are as follows:
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
Depletion,
Depreciation,
Operating Amortization,
Intersegment Income Abandonment, and
Revenues Revenues (Loss)(1) Impairment(2)(3)
----------- ----------- ----------- ----------------
Nine months ended September 30, 2001:
Oil and gas exploration and
production and operating fees $ 4,099,606 -- 257,813 2,231,354
Pipeline operations 784,003 -- 1,510,597 127,175
Other -- (1,299,709) 20,873
----------- ----------- -----------
Consolidated 4,883,609 -- 468,701 2,379,402
----------- -----------
Other expense (231,855)
-----------
Income before minority interests, and income taxes 236,846
-----------
Nine months ended September 30, 2000:
Oil and gas exploration and
production and operating fees $ 4,049,171 4,500 (9,410,110) 11,806,953
Pipeline operations 1,729,102 13,000 408,648 267,272
Other (17,500) (622,380) 22,445
----------- ----------- -----------
Consolidated 5,760,773 -- (9,623,842) 12,096,670
----------- -----------
Other expense (62,987)
-----------
Loss before minority interests, and income taxes (9,686,829)
-----------
Three months ended September 30, 2001:
Oil and gas exploration and
production and operating fees $ 846,739 -- 163,887 334,359
Pipeline operations 229,927 -- 12,693 36,684
Other expense -- (603,790) 5,551
----------- ----------- -----------
Consolidated 1,076,666 -- (427,210) 376,594
----------- -----------
Other income 315
-----------
Loss before minority interests, and income taxes (426,895)
-----------
Three months ended September 30, 2000:
Oil and gas exploration and
production and operating fees $ 1,712,542 1,500 (9,967,164) 11,087,298
Pipeline operations 658,765 1,745 228,218 90,819
Other (3,425) -- (191,393) 7,780
----------- ----------- -----------
Consolidated 2,367,882 -- (9,930,339) 11,185,897
----------- -----------
Other expense (27,670)
-----------
Loss before minority interests, and income taxes (9,958,009)
-----------
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
September 30, December 31,
2001 2000
------------ ------------
Identifiable assets:
Oil and gas exploration
and production $ 3,543,141 $ 4,164,299
Pipeline operations 7,620,622 8,958,876
Other 690,210 789,780
------------ ------------
Consolidated $ 11,853,973 $ 13,912,955
============ ============
1. Consolidated income (loss) from operations includes $1,050,752 and
$582,436 in unallocated general and administrative expenses, and
unallocated depletion, depreciation and amortization of $20,873 and
$22,445 for the nine months ended September 30, 2001 and 2000,
respectively.
Consolidated income (loss) from operations includes $169,021 and
$180,369 in unallocated general and administrative expenses, and
unallocated depletion, depreciation and amortization of $5,551 and
$7,780 for the quarters ended September 30, 2001 and 2000,
respectively.
2. Pipeline depreciation and amortization includes a provision for
pipeline abandonment of $14,805 and $14,805 for the nine months ended
September 30, 2001 and 2000, respectively. Oil and gas depletion,
depreciation, amortization and abandonment includes a provision for
abandonment costs of platforms and wells of $5.3 million for the nine
months ended September 30, 2000. In addition, the Company recorded an
expense of approximately $1.1 million for the nine months ended
September 30, 2001, as a result of a change in the estimated costs
associated with the Buccaneer Field abandonment.
3. Pipeline depreciation and amortization includes a provision for
pipeline abandonment of $4,935 and $4,935 for the quarters ended
September 30, 2001 and 2000, respectively. Oil and gas depletion,
depreciation, amortization and abandonment includes a provision for
abandonment costs of platforms and wells of $5.3 million for the
quarter ended September 30, 2000.
7. Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), was issued in June 1998 by the
Financial Accounting Standards Board ("FASB"). SFAS 133 establishes new
accounting and reporting standards for derivative instruments and for hedging
activities. This statement requires an entity to establish at the inception of a
hedge, the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. Those methods must be consistent with the entity's approach to
managing risk. Certain provisions of SFAS 133 were amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of Statement 133". SFAS 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
adopted SFAS 133 effective January 1, 2001. Adoption of SFAS 133, as amended,
did not have an impact on the Company's consolidated financial position or the
results of operations.
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
In July 2001, the FASB issued Statement No. 141 ("SFAS 141"), "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill. SFAS
142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS 142. SFAS 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". As
of the date of adoption, the Company does not expect to have unamortized
goodwill, unamortized identifiable assets, or unamortized negative goodwill upon
adoption of SFAS 142 on January 1, 2002.
In August 2001, the FASB issued Statement 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.
SFAS 143 requires 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. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement.
The Company is required and plans to adopt the provisions of SFAS 143 for the
quarter ending March 31, 2003. To accomplish this, the Company must identify all
legal obligations for asset retirement obligations, if any, and determine the
fair value of these obligations on the date of adoption. The determination of
fair value is complex and will require the Company to gather market information
and develop cash flow models. Additionally, the Company will be required to
develop processes to track and monitor these obligations. Because of the effort
necessary to comply with the adoption of SFAS 143, it is not practicable for
management to estimate the impact of adopting this Statement at the date of this
report.
In October 2001, the FASB issued Statement No. 144 ("SFAS 144"), "Accounting for
the Impairment or Disposal of Long-Lived Assets". SFAS 144 provides that
long-lived assets to be disposed of by sale be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations, and broadens the reporting of
discontinued operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS 144 is effective for fiscal years beginning after December 15, 2001.
14
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
The Company is currently assessing the impact of SFAS 144 on its financial
condition and results of operations.
15
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements included below, including those regarding future
financial performance or results or that are not historical facts, are
"forward-looking" statements as that term is defined in Section 21E of the
Securities Exchange Act of 1934, as amended, 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" or the "Company")
cautions readers that any such statements are not guarantees of future
performance or events and such statements involve risks and uncertainties that
may cause actual results and outcomes to differ materially from those indicated
in forward-looking statements. Some of the important factors that could cause
actual results to vary from forward-looking statements are discussed in our
Registration Statement on Form S-3 filed with the SEC on January 11, 2001 under
the caption "Risk Factors". The Risk Factors section of this registration
statement is incorporated by reference into this report. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no duty to update these
forward-looking statements. Readers are urged to carefully review and consider
the various disclosures made by the Company which attempt to advise interested
parties of the additional factors which may affect the Company's business,
including the disclosures made under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this report.
The following is a review of certain aspects of the financial condition and
results of operations of the Company and should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and notes thereto included
in Item 1. of this report and the consolidated financial statements and notes
thereto included in the Annual Report on Form 10-K for the year ended December
31, 2000.
RECENT DEVELOPMENTS
-------------------
The Company previously announced a gas discovery in High Island Area Block A-7,
in the Gulf of Mexico. The Company owns an 8.9% reversionary working interest in
this field. The Company will begin to receive revenues from its reversionary
interest after "payout" occurs. Payout will occur after all of the other working
interest owners have recovered their costs and expenses associated with
developing the field from sales of production from the field. At the beginning
of the third quarter of 2001, there were three wells producing in this field at
a combined rate of approximately 60 Mmcf of natural gas per day and a fourth
(exploratory) well was being drilled. Based on the Company's estimate of when
payout would occur, it expected to begin receiving revenues from its
reversionary working interest in the fourth quarter of 2001 or first quarter of
2002. However, two of the three wells have stopped producing and the remaining
well is producing approximately 28 Mmcf of natural gas per day. Additionally,
the exploratory well that was being drilled was unsuccessful. The Company
believes that one of the non-producing wells will be worked-over and the other
plugged and abandoned. As a result of these occurrences the Company now expects
to begin to receive revenues from its reversionary working interest in this
field in the third quarter of 2002.
Effective as of September 30, 2001, Drillmar, Inc. ("Drillmar"), entered into a
merger agreement and merged with Zephyr Drilling Ltd. ("Zephyr"). Prior to the
merger, Zephyr was a limited partnership in which Drillmar was the general
partner. Zephyr owns a semi-submersible drilling rig that is being
16
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
(Continued)
retrofitted into a semi-tender. As a result of the merger, the Company's
interest in Drillmar decreased from 64% to 12.8%. Prior to the merger, the
Company entered into an agreement with Drillmar whereby it agreed to provide
office space and certain administrative services to Drillmar for approximately
$40,000 per month. Historically the Company has used the payments it is entitled
to receive under this agreement to fund its investment in Drillmar. However, in
connection with the merger the Company received a partial payment under the
services agreement in October 2001 and expects to receive full payments
beginning in November 2001.
On August 31, 2001, the Company, American Resources and BDCO Merger Sub, Inc., a
wholly owned subsidiary of the Company (the "Merger Subsidiary"), announced that
they entered into an Agreement and Plan of Merger (the "Merger Agreement")
pursuant to which the Merger Subsidiary will merge with and into American
Resources and the holders, other than the Company, of American Resources' shares
of common stock, par value $0.00001 per share (the "Common Stock"), and Series
1993 Preferred Stock, par value $12.00 per share (the "Preferred Stock"), will
receive approximately 326,000 and 1,200 shares of the Company's common stock,
par value $0.01 per share, respectively. The merger requires the approval of (i)
a majority of American Resources' outstanding Common Stock and Preferred Stock,
voting together as a class; and (ii) a majority of American Resources'
outstanding Preferred Stock voting separately as a class. The Company, the
beneficial owner, as of November 14, 2001, owned approximately 77% of the issued
and outstanding shares of Common Stock and 50.4% of the Preferred Stock.
American Resources' board of directors unanimously approved the transaction and
its submission to stockholders following a determination by a special committee
of the board, composed of individuals who are not directors or officers of the
Company, that the merger is fair and in the best interest of American Resources'
minority stockholders. The merger is subject to customary closing conditions.
In light of recent developments, the board of directors of the Company and a
special committee of the board of directors of American Resources are evaluating
whether it is in the best interests of their respective stockholders to proceed
with the merger. Although the Company and American Resources have entered into
the merger agreement, there can be no assurance that the merger will be
completed.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Prior to the decrease in production in the High Island A-7 field and the
corresponding delay in the Company's receipt of payments from its reversionary
working interest in this field, the Company believed that it would have adequate
capital to meet its obligations and operating needs for the current fiscal year.
However, due to this delay the Company now believes that it will need to raise
between $4.5 to $7.0 million of capital to meet its obligations and operating
needs. The Company will need to seek external financing and/or sell assets to
raise the necessary capital. There can be no assurance that the Company will be
able to obtain financing or sell assets on commercially reasonable terms. The
Company's inability to raise capital may have a material adverse effect on its
financial condition, ability to meet its obligations and operating needs and
results of operations.
17
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
(Continued)
The following table summarizes the Company's financial position at September 30,
2001 and December 31, 2000 (dollars in thousands):
September 30, 2001 December 31, 2000
------------------ -----------------
Amount % Amount %
-------- --- -------- ---
Working capital $ 1,549 18 $ 1,388 15
Property and equipment, net 4,064 47 5,345 58
Other noncurrent assets 3,022 35 2,476 27
-------- -------
Total $ 8,635 100 $ 9,209 100
======== ========
Other non-current liabilities $ - - $ 550 6
Minority interests 1,134 13 1,196 13
Stockholders' equity 7,501 87 7,463 81
-------- --------
Total $ 8,635 100 $ 9,209 100
======== ========
The change in the Company's financial position from December 31, 2000 to
September 30, 2001, was primarily due to the sale of its' 50% interest in the
Black Marlin Pipeline System in January 2001.
Historically, the Company has relied on the proceeds from financing activities
and the sale of assets to supplement its capital requirements. In the nine
months ended September 30, 2001 ("current period"), the Company financed its
activities through both the sale of assets and operating activities.
The Company's future cash flows are subject to a number of variables, including
the level of production from oil and gas natural gas properties that the Company
has an interest in, utilization of its pipeline systems, utilization of the
Company's services by third parties and commodity prices among others. See the
section titled "Recent Developments".
The net cash provided by or used in our operating, investing and financing
activities is summarized below (amounts in thousands):
Nine Months Ended
-----------------
September 30
------------
2001 2000
---- ----
Net cash provided by (used in):
Operating activities $ 294 $ 3,197
Investing activities 3,251 (2,753)
Financing activities (2,480) 261
------------------
Net increase in cash $ 1,065 $ 705
==================
18
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
(Continued)
The Company's cash flow from operating activities decreased by $2.9 million in
the current period compared to the nine months ended September 30, 2000
("previous period"), due primarily to abandonment costs offset in part by the
increased cash flow generated from the Company's American Resources oil and gas
properties.
Cash flow provided by investing activities during the current period included
the proceeds from the sale of the Company's interest in the Black Marlin
Pipeline System of approximately $4.6 million. Cash flow used in investing
activities included the construction of a new offshore platform installed to
operate the Blue Dolphin Pipeline of approximately $1.7 million, investment
costs associated with Drillmar of approximately $0.4 million and exploration and
development costs associated with an American Resources, oil and natural gas
properties of approximately $0.5 million.
Cash flow used in financing activities during the current period consisted of
the payment of convertible promissory notes in the principal amount of
approximately $2.2 million to related parties, see Item 1., Note 1., Related
Party Transactions.
On January 22, 2001, the Company and its partners sold the Black Marlin Pipeline
System for $7.3 million, and the High Island Block A-5 lateral constructed in
2000 for $2.0 million, to Williams Field Services; $3.6 million and $1.0
million, respectively, net to the Company's interest. The Black Marlin System
accounted for 15% of the Company's revenues for the nine months ended September
30, 2000.
In November 2000, the Company elected to abandon the Buccaneer Field due to
adverse developments in the field. The Company reached an agreement with Tetra
Applied Technologies, Inc. ("Tetra") to plug and abandon the wells in the field.
In the current period the remaining wells in the Buccaneer Field were plugged
and abandoned for approximately $1.4 million. The Company used its escrow fund
for abandonment obligations to fund the plugging of the Buccaneer Field wells.
In addition, Maritech Resources, Inc. ("Maritech") an affiliate of Tetra,
purchased an adjacent lease for which the Company provided production operating
services. In December 2000, as a result of the Company's plans to abandon the
Buccaneer Field platform facilities, the Company and Maritech terminated the
operating agreement. A new platform was installed in the current period in
Galveston Block 288 to operate and maintain the Blue Dolphin Pipeline System.
The Blue Dolphin Pipeline System was previously tied into and operated from the
Buccaneer Field platforms. The installation of the new platform and its
connection to the Blue Dolphin Pipeline System cost approximately $1.7 million
net to the Company's 50% interest.
In August 2001, the Company reached an agreement with Tetra to remove the
Buccaneer Field platforms for a cost of approximately $2.6 million. The Company
initially expected that the platform removal would be completed in the fourth
quarter of 2001. However, the Company has requested an extension from the
Minerals Management Service until mid-2002 to complete the site clearance when
weather conditions in the Gulf of Mexico are typically more favorable. The
Company received an extension from the Minerals Management Service until the
second quarter of 2002 to begin site clearance at one platform facility location
and expects to receive a comparable extension for the remaining platform
facility location. In addition, Tetra and the Company reached payment terms,
whereby the Company will pay 20% upon completion and 5% per month for twelve
months, with the remaining balance due in the thirteenth month. To provide
security for the extended payment, the Company is providing Tetra with a
19
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
(Continued)
first lien on its interest in the Blue Dolphin Pipeline System. The Company will
continue to seek extended payment arrangements for certain of its remaining
abandonment costs estimated to be $2.5 million. Work to remove the two platform
facilities began in August 2001 with $216,000 cost incurred as of September 30,
2001.
Although the abandonment may be delayed, the Company still believes that its
provision for total abandonment costs of $4.9 million at September 30, 2001 is
adequate.
In December 1999, the Company entered into an agreement with Fidelity Oil to
manage their interest in the oil and gas properties acquired from American
Resources for $40,000 per month. This amount was intended to reimburse the
Company for the cost of the services provided. The agreement expired in December
2000 and provided for continuation thereafter on a year to year basis unless
terminated by either party. Fidelity Oil terminated this agreement effective
January 31, 2001.
The Company's reserves and future net revenues reported at December 31, 2000
reflected capital expenditures totaling $898,900 for the year ending December
31, 2001. Management will continue to evaluate its capital expenditure program
based on, among other things, field reservoir performance, availability and cost
of drilling and workover equipment, and demand and prices obtainable for the
Company's production, as well as availability of capital resources. For the nine
months ended September 30, 2001, the Company incurred capital expenditures
totaling $738,000, which was associated with the development of its interest in
the American Resources' Galveston Block 418 property. The Company currently
believes that capital expenditures for the fourth quarter of 2001 will be
$535,000.
In December 1999, American Resources was paid approximately $4.5 million by Blue
Dolphin Exploration for American Resources common stock, representing a 75%
ownership interest, and $24.2 million by Fidelity Oil for an 80% interest in
its' Gulf of Mexico assets. The proceeds were used by American Resources to
retire certain indebtedness. The indebtedness included American Resources senior
secured debt totaling approximately $51.2 million to Den norske. Den norske sold
the senior debt for $27.0 million and a contingent future payment if the
cumulative net revenues received by American Resources and Fidelity Oil
attributable to American Resources proved oil and gas reserves in the Gulf of
Mexico as of January 1, 1999, exceed $30.0 million during the period January 1,
1999, through December 31, 2001. If that occurs Den norske will be entitled to
receive an amount equal to 50% of the net revenues in excess of $30.0 million
during that three-year period. If any contingent amount becomes payable to Den
norske, 80% will be paid by Fidelity Oil and 20% will be paid by American
Resources. The payment, if any, is due on March 15, 2002. American Resources
estimates that it is probable that a payment to Den norske will be due based
upon current market conditions. The Company has provided for a liability to Den
norske in the amount of $900,000 at September 30, 2001.
RESULTS OF OPERATIONS
---------------------
The Company reported net income for the nine months ended September 30, 2001,
("current period") of $64,205, compared to a net loss of $9.9 million reported
for the nine months ended September 30, 2000 ("previous period"). The increase
in net income is primarily due to an impairment of the Buccaneer Field of $10.7
million recorded in the previous period. In addition the Company recorded a gain
on the sale of the Black Marlin Pipeline System of $1.4 million in the current
period, offset in part by an increase of $1.1 million in the Company's Buccaneer
Field abandonment obligations.
20
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
(Continued)
For the quarter ended September 30, 2001 ("current quarter") the Company
reported a net loss of $419,300 compared to a net loss of $10.1 million for the
quarter ended September 30, 2000 ("previous quarter"). The change in the net
loss is primarily due to the Company recording an impairment charge for the
Buccaneer Field of $10.7 million in the previous quarter. Pipeline
transportation revenues decreased in the current quarter resulting from the sale
of the Black Marlin Pipeline System in January 2001.
Revenues:
Nine Months 2001 vs. Nine Months 2000. Current period oil and gas sales
increased by $289,273 from the previous period. The increase was primarily due
to an increase of 37% in gas prices and 3% in oil prices resulting in an
increase of $776,000 offset partially by a 5% reduction in volumes resulting in
a reduction of revenue of $192,000. The increase in oil and gas sales noted
above was partially offset by a loss of revenues totaling approximately $287,000
from the Buccaneer Field production in the previous period.
Current period revenues from pipeline operations decreased by $932,099 or 54%
from the previous period. The decrease was due to the sale of the Black Marlin
Pipeline System in January 2001. The Black Marlin Pipeline System provided
revenues of $1.0 million for the previous period compared to approximately
$50,000 for the current period.
The Company did not have current period revenues from operating fees due to the
termination of the operating agreement with Maritech in December 2000.
Third Quarter 2001 vs. Third Quarter 2000. Current quarter revenues from oil and
gas sales decreased by $786,379 from those of the previous quarter. The change
was due to a 26% decrease in gas prices resulting in a reduction of revenues of
$292,000, and a decrease of 28% in production volumes resulting in a reduction
of revenues of $367,000. The decrease in oil and gas sales in the current
quarter also resulted in a loss of revenues from the Buccaneer Field, which
totaled $54,000 in the previous quarter.
Current quarter revenues from pipeline operations decreased by $427,093 or 65%
from the previous quarter. The decrease was primarily due to the sale of the
Black Marlin Pipeline System in January 2001. The Black Marlin Pipeline System
provided revenues of approximately $450,000 for the third quarter of 2000.
The Company did not have current quarter revenues from operating fees due to the
termination of the operating agreement with Maritech in December 2000.
Costs and Expenses:
Nine Months 2001 vs. Nine Months 2000. Current period pipeline operating
expenses decreased by $327,874 or 44% from the previous period. The decrease was
primarily due to the sale of the Black Marlin Pipeline System in January 2001.
The Black Marlin Pipeline System operating expenses were approximately $377,000
for the previous period compared to approximately $33,000 for the current
period.
21
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
(Continued)
Current period depletion, depreciation, amortization and abandonment increased
$937,708 over the previous period. The increase was primarily due to the Company
increasing its abandonment estimate by $1.1 million associated with the
Buccaneer Field. This increase was partially offset by a $133,000 decrease in
depreciation related to the Black Marlin Pipeline System that was sold in
January 2001.
General and administrative expenses for the current period increased $555,324
from the previous period. The increase was due in part to an increase in legal
expense associated with the H&N lawsuit of approximately $177,000 net of
insurance proceeds and the termination of the Management Services Agreement
between the Company and Fidelity Oil, whereby the Company managed Fidelity Oil's
interest in the oil and gas assets it acquired from American Resources in
December 1999. Management fees of approximately $200,000 received from Fidelity
Oil were recorded as a reduction to general and administrative expenses during
the nine months ended September 30, 2000.
Interest and other expense increased $216,463 in the current period was due
primarily to a $350,000 increase in the provision for the contingent payment to
Den norske, offset in part by lower interest expense. In January 2001, the
Company retired debt totaling $2.2 million.
Third Quarter 2001 vs. Third Quarter 2000. Current quarter pipeline operating
expenses decreased by $90,577 or 37% from the previous quarter. The decrease was
primarily due to the sale of the Black Marlin Pipeline System in January 2001.
Current quarter depletion, depreciation, amortization and abandonment decreased
$154,327 from the previous quarter. The decrease was primarily due to a 28%
reduction in production volumes accounting for approximately $58,000 and the
sale of the Black Marlin Pipeline System in January 2001 resulting in lower
depreciation of $49,934 in the current quarter.
General and administrative expenses for the current quarter increased $196,547
from the previous quarter. The increase was primarily due to the termination of
the Management Services Agreement between the Company and Fidelity Oil, whereby
the Company managed Fidelity Oil's interest in the oil and gas assets it
acquired from American Resources in December 1999. Management fees of
approximately $120,000 received from Fidelity Oil were recorded as a reduction
to general and administrative expenses during the three months ended September
30, 2000.
Interest and other expense decreased $27,599 in the current quarter primarily
due to a $50,000 increase in the provision for the contingent payment to Den
norske, offset in part by lower interest expense. In January 2001, the Company
retired debt totaling $2.2 million.
22
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET PRICE
The Company is exposed to market risk, including adverse changes in commodity
prices and interest rates as discussed below.
Commodity Price Risk- The Company produces and sells natural gas, crude oil, and
natural gas liquids. As a result, the Company's financial results can be
significantly affected if these commodity prices fluctuate widely in response to
changing market forces. The Company does not use derivative products to manage
commodity price risk.
Interest Rate Risk- The Company currently has no short-term or long-term debt
with floating interest rates, and as such is not subject to risk of interest
rate changes.
23
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 2000, American Resources, a 77% indirectly owned subsidiary of the
Company, and its former Chief Financial Officer, were named in a lawsuit in the
United States District Court for the Southern District of Texas, Houston
Division, styled H&N Gas and Howard Energy Marketing, L.L.C. v. American
Resources Offshore, Inc. et al (Case No H-00-1371). The lawsuit alleges, among
other things, that H&N Gas ("H&N") was defrauded by American Resources in
connection with gas purchase options and gas price swap contracts entered into
from February 1998 through September 1999. H&N alleges unlawful collusion
between American Resources' prior management and the then president of H&N,
Richard Hale ("Hale"), to the detriment of H&N. H&N generally alleges that Hale
directed H&N to purchase illusory options from American Resources that bore no
relation to any physical gas business and that American Resources did not have
the financial resources and/or sufficient quantity of gas to perform. H&N
further alleges that American Resources and Hale colluded with respect to swap
transactions that were designed to benefit American Resources at the expense of
H&N Gas. H&N further alleges civil conspiracy against all the defendants. H&N is
seeking approximately $6.2 million in actual damages plus treble damages,
punitive damages, prejudgment interest and attorneys' fees against American
Resources directly. As a result of its conspiracy allegation, H&N also contends
that all defendants are jointly and severally liable for over $62.0 million
dollars in actual damages plus treble damages, punitive damages, prejudgment
interest and attorneys' fees. American Resources intends to vigorously defend
this claim.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) No Exhibits
B) Form 8-K - On August 31, 2001, the Company filed a current
report on Form 8-K dated August 30, 2001, with respect to
the execution of an agreement and plan of merger with
American Resources Offshore, Inc. The items reported in such
current report were Item 5 (Other Events).
On November 8, 2001, the Company filed a current report on
Form 8-K dated November 8, 2001, with respect to a
discussion of recent developments which have effected the
Company. The item reported in such current report was Item 5
(Other Events).
24
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: BLUE DOLPHIN ENERGY COMPANY
Date: November 14, 2001 /s/ Michael J. Jacobson
---------------------------------------
Michael J. Jacobson
President and Chief Executive Officer
/s/ G. Brian Lloyd
---------------------------------------
G. Brian Lloyd
Vice President, Treasurer
(Principal Accounting Officer)
25