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, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ..................to ...................
Commission File Number: 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of small business issuer as specified in its charter)
Delaware 73-1268729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 Travis, Suite 2100, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 227-7660
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
As of May 12, 2004, there were 6,712,438 shares of the registrants' common
stock, par value $.01 per share, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET -UNAUDITED
March 31, 2004
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Blue Dolphin Energy Company
and subsidiaries (referred to herein, with its predecessors and subsidiaries, as
"Blue Dolphin", "we", "us" and "our") included herein have been prepared by us,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, reflect all
adjustments necessary to present a fair statement of operations, financial
position and cash flows. We follow the full-cost method of accounting for oil
and gas properties, wherein costs incurred in the acquisition, exploration and
development of oil and gas reserves are capitalized. We believe that the
disclosures are adequate and the information presented is not misleading,
although certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
Our accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-KSB/A-1 for the year ended December 31,
2003.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET -UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 1,727,101
Accounts receivable 606,939
Related party receivable 6,984
Prepaid expenses and other assets 152,729
------------
TOTAL CURRENT ASSETS 2,493,753
Property and Equipment at cost:
Oil and Gas properties, including $160,697
of unproved leasehold cost (full-cost method) 529,258
Pipelines 4,546,287
Onshore separation and handling facilities 1,664,128
Land 860,275
Other property and equipment 307,238
------------
7,907,186
Less: Accumulated depletion, depreciation and amortization 2,261,745
------------
5,645,441
Deferred federal income tax 244,444
Investment in New Avoca 581,897
Other assets 14,664
------------
TOTAL ASSETS $ 8,980,199
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,954,332
Accrued expenses and other liabilities 136,585
------------
TOTAL CURRENT LIABILITIES 2,090,917
Note payable 750,000
Asset retirement obligations 1,574,865
Common Stock, ($.01 par value, 10,000,000 shares authorized,
6,712,438 shares issued and outstanding) 67,124
Additional Paid-in Capital 26,349,762
Accumulated Deficit (21,852,469)
------------
4,564,417
TOTAL LIABILITES AND
STOCKHOLDERS' EQUITY $ 8,980,199
============
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,
2004 2003
----------- -----------
Revenue from operations:
Pipeline operations $ 204,039 $ 246,668
Oil and gas sales 154,892 74,306
----------- -----------
358,931 320,974
----------- -----------
Cost of operations:
Pipeline operating expenses 243,251 193,394
Lease operating expenses 31,839 12,060
Depletion, depreciation and amortization 134,782 89,048
General and administrative 496,014 482,706
Accretion expense 23,356 21,729
----------- -----------
929,242 798,937
----------- -----------
LOSS FROM OPERATIONS (570,311) (477,963)
Other income (expense):
Interest and other expense (11,702) (12,692)
Interest and other income 85,709 134,600
Equity in loss of affiliate (23,302) --
----------- -----------
LOSS BEFORE INCOME TAXES (519,606) (356,055)
Income taxes -- --
----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (519,606) (356.055)
Cumulative effect of a change in accounting principle
for asset retirement obligations -- (40,455)
----------- -----------
Net loss $ (519,606) $ (396,510)
=========== ===========
Loss per common share before cumulative effect of a change in
accounting principle - basic and diluted $ (0.08) $ (0.05)
=========== ===========
Cumulative effect of a change in accounting principle - basic and diluted $ -- $ (0.01)
=========== ===========
Loss per common share - basic and diluted $ (0.08) $ (0.06)
=========== ===========
Weighted average number of common shares outstanding - basic and diluted 6,663,990 6,611,982
=========== ===========
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,
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net loss $ (519,606) $ (396,510)
Adjustments to reconcile net loss to net cash used in operating activities
Depletion, depreciation and amortization 134,782 89,048
Change in accounting principle -- 40,455
Accretion of asset retirement obligations 23,356 21,729
Equity in loss of affiliate 23,302 --
Common stock issued for services 83,000 19,722
Changes in operating assets and liabilities:
Accounts receivable (124,838) 5,378
Prepaid expenses and other assets 4,925 41,938
Abandonment costs incurred -- (64,472)
Trade accounts payable and accrued expenses (578,445) 50,044
----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (953,524) (192,668)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (5,767) (5,721)
Development costs - New Avoca (16,500) (25,085)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (22,267) (30,806)
----------- -----------
FINANCING ACTIVITIES -- --
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (975,791) (223,474)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,702,892 4,405,676
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,727,101 $ 4,182,202
=========== ===========
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, 2004
1. Liquidity and Going Concern
At March 31, 2004, our working capital was approximately $400,000. In order to
satisfy our working capital and capital expenditure requirements for the twelve
months ending March 31, 2005, we believe that we will need to raise
approximately $1.5 million of capital. We will need to arrange external
financing and/or sell assets to raise the necessary capital.
Historically, we have relied on the proceeds from the sale of assets and capital
raised from the issuance of debt and equity securities to individual investors
and related parties to sustain our operations. There can be no assurance that we
will be able to obtain financing or sell assets on commercially acceptable terms
to meet our capital requirements. Our inability to raise capital will have a
material adverse effect on our financial condition, ability to meet our
obligations and operating needs, and results of operations. Our financial
statements contained herein have been prepared assuming that we will continue as
a going concern, however our working capital deficiency raises substantial doubt
about our ability to continue as a going concern. Our financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
2. Related Party Transactions
We own 12.8% of the common stock of Drillmar, Inc. Our Chairman, Ivar Siem, and
one of our Directors, Harris A. Kaffie, are owners of 30.3%, and 30.6%,
respectively, of Drillmar's common stock. Messrs. Siem and Kaffie are both
Directors, and Mr. Siem is Chairman and President of Drillmar.
In 2002, we recorded a full impairment of our investment in Drillmar of
approximately $340,000 and a full reserve for the accounts receivable amount
owed to us from Drillmar of approximately $200,000 due to Drillmar's working
capital deficiency and delays in securing capital funding. During the quarter
ended March 31, 2004, we collected $30,000 from Drillmar and we expect to
receive $15,000 per month until the accounts receivable is fully collected.
In January 2003, Drillmar stockholders approved a restructuring plan whereby
Drillmar will issue up to $3.0 million of convertible notes that are convertible
into common stock representing over 99% of Drillmar's outstanding shares. As a
result, our ownership in Drillmar can be reduced to less than 1%. However, in
November 2003, we converted our contingent obligation due from Drillmar for
providing office space, accounting and administrative services from May 2002
through January 2003 totaling $162,000 (9 months at $18,000 per month) into a
convertible note, which if converted along with all of Drillmar's outstanding
convertible notes would represent 7.7% of Drillmar's common stock. Messrs. Siem,
Kaffie and Trimble (one of our Directors) also hold Drillmar convertible notes,
which if converted along with all of Drillmar's outstanding convertible notes
would represent 22.2%, 27.5% and 2.1%, respectively, of Drillmar's common stock.
We entered into a new agreement with Drillmar effective as of February 1, 2003,
whereby we provide office space to Drillmar which is currently $2,000 per month.
We also provide professional, accounting and administrative services to Drillmar
based on hourly rates based on our cost. The agreement can be terminated upon 30
days notice or by the mutual agreement of the parties.
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2004
Effective April 1, 2003, we entered into a sublease agreement expiring December
31, 2006 for certain of our office space with Tri-Union Development Corporation.
Our receipts from this sublease will be approximately $78,500 annually. Mr.
Trimble is the Chairman and Chief Executive Officer of Tri-Union.
3. Contingencies
We are involved in various claims and legal actions arising in the ordinary
course of business. In our opinion, the ultimate disposition of these matters
will not have a material effect on our financial position, results of operations
or cash flows.
4. Change in Accounting Principle
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Asset Retirement Obligations", which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal use of the asset.
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. If the obligation is settled for
other than the carrying amount of the liability, we will recognize a gain or
loss on settlement.
SFAS 143 amended Statement of Financial Accounting Standards No. 19, Financial
Accounting and Reporting by Oil and Gas Producing Companies ("SFAS 19") to
require that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. Under the provisions of SFAS 143, asset retirement
obligations are capitalized as part of the carrying value of the long-lived
asset. Under the provisions of SFAS 19, asset retirement obligations were
recognized using a cost-accumulation approach. Prior to the adoption of SFAS
143, we recorded asset retirement obligations through the unit-of-production
method for oil and gas properties, and the straight line method for pipelines
and related facilities.
The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect
adjustment to record (i) a $1.0 million increase in the carrying value of
pipelines, (ii) a $ .4 million decrease in accumulated depreciation, depletion,
and amortization of property, plant and equipment, and (iii) a $1.4 million
increase in non-current abandonment liabilities. The net impact of items (i)
through (iii) was to record an expense of $40 thousand, net of tax, as a
cumulative effect adjustment of a change in accounting principle in the
Company's consolidated statement of operations upon adoption on January 1, 2003.
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2004
5. Earnings Per Share
We apply the provisions of Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share". SFAS 128 requires the presentation of basic
earnings per share ("EPS") which excludes dilution and is computed by dividing
net income (loss) available to common stockholders by the weighted-average
number of shares of common stock outstanding for the period. SFAS 128 requires
dual presentation of basic EPS and diluted EPS on the face of the income
statement and requires a reconciliation of the numerators and denominators of
basic EPS and diluted EPS.
The employee stock options at March 31, 2004 and 2003 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.
6. Business Segment Information
Our income producing operations are conducted in two principal business
segments: oil and gas exploration and production, and pipeline operations. There
were no intersegment revenues during the periods presented. Information
concerning these segments for the quarters ended March 31, 2004 and 2003, and at
March 31, 2004 are as follows:
Operating Depletion,
Income Depreciation and
Revenues (Loss)(1) Amortization
---------------- --------------- ----------------
Quarter ended March 31, 2004:
Oil and gas exploration and production $ 154,892 (63,877) 49,791
Pipeline operations 204,039 (317,915) 81,798
Other -- (188,519) 3,193
---------------- --------------- ----------------
Consolidated 358,931 (570,311) 134,782
---------------- 50,705 ----------------
---------------
Loss before income taxes (519,606)
Quarter ended March 31, 2003:
Oil and gas exploration and production $ 74,306 (12,864) --
Pipeline operations 246,668 (301,772) 83,977
Other -- (163,327) 5,071
---------------- --------------- ----------------
Consolidated 320,974 (477,963) 89,048
---------------- 121,908 ----------------
---------------
Loss before income taxes (356,055)
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2004
March 31,
2004
-----------
Identifiable assets:
Oil and gas exploration and production $ 745,471
Pipeline operations 5,683,441
Other 2,551,287
-----------
Consolidated $ 8,980,199
===========
(1) Consolidated income (loss) from operations includes $185,326
and $158,256 in unallocated general and administrative
expenses, and unallocated depletion, depreciation and
amortization of $3,193 and $5,071 for the quarters ended March
31, 2004 and 2003, respectively.
7. Stock Based Compensation
We account for stock-based compensation granted under our long-term incentive
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Stock-based compensation expenses associated with option grants
were not recognized in our net loss in the three months ended March 31, 2004 and
2003, as all options granted had exercise prices equal to the market value of
the underlying common stock on the dates of grant. The following table
illustrates the effect on net loss and loss per share if we had applied the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" to stock-based employee
compensation:
Three months ended
March 31,
------------------------
2004 2003
---------- ----------
(in thousands, except
per share amounts)
Net loss, as reported .............................. $ (520) $ (397)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects -- --
---------- ----------
Pro forma net loss ................................. $ (520) $ (397)
========== ==========
Net loss per share:
Basic and diluted - as reported ................. $ (.08) $ (.06)
========== =========
Basic and diluted - pro forma ................... $ (.08) $ (.06)
========== ==========
9
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. We caution
readers that any such statements are not guarantees of future performance or
events and such statements involve risks and uncertainties that may cause actual
results and outcomes to differ materially from those indicated in the
forward-looking statements. Some of the important factors, risks and
uncertainties that could cause actual results to vary from the forward-looking
statements include:
o availability and cost of capital;
o the level of utilization of our pipelines;
o the risks associated with exploration;
o the level of production from oil and gas properties;
o gas and oil price volatility;
o uncertainties in the estimation of proved reserves and in the
projection of future rates of production and timing of
development expenditures;
o actions or inactions of third party operators for properties
where we have an interest;
o regulatory developments; and
o general economic conditions.
Additional factors that could cause actual results to differ materially from
those indicated in the forward-looking statements are discussed under the
caption "Risk Factors" in our Form 10-KSB/A-1 for the fiscal year ended December
31, 2003. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. We undertake
no duty to update these forward-looking statements. Readers are urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the additional factors which may affect our
business, including the disclosures made under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this report.
EXECUTIVE SUMMARY
We are engaged in two lines of business; pipeline operations and oil
and gas exploration and production. We are a holding company and conduct our
operations through our subsidiaries. We provide pipeline transportation services
to producer/shippers, and sell oil and gas from our producing properties. Our
assets primarily are located offshore and onshore in the Texas Gulf coast area.
We also own an interest in and manage the New Avoca gas storage project located
in Avoca, New York.
Our future cash flows are subject to a number of variables, primarily,
utilization of our pipeline systems. Approximately 57% of our revenues for the
year ended December 31, 2003 were from sales of oil and gas production from the
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
High Island Block A-7 field. Oil and gas production from the High Island Block
A-7 field has declined significantly and production is expected to cease during
the third or fourth quarter of 2004. We expect a significant portion of our
revenues in 2004 will be derived from utilization of our pipeline systems. As a
result of our expected decline in revenues from oil and gas sales and our
remaining payments associated with the abandonment/reefing of the Buccaneer
Field of approximately $1.3 million during the remainder of 2004, we expect that
we will need to raise approximately $1.5 million of capital. Our inability to
raise capital may have a material adverse effect on our financial condition,
ability to meet our obligations and operating needs, and results of operations.
In addition to satisfying our liquidity and capital needs, our focus in
2004 is to increase utilization of existing assets, strategic acquisitions and
cost management. Our long-term goal is to create greater value for our
stockholders.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have relied on the proceeds from the sale of assets
and capital raised from the issuance of debt and equity securities to individual
investors and related parties to sustain our operations. In order to satisfy our
working capital and capital expenditure requirements for the twelve months
ending March 31, 2005, we believe that we will need to raise approximately $1.5
million of capital. We incurred a net loss of approximately $.5 million in the
first quarter 2004 and currently continue to operate at a net loss. Combined
with our ongoing cash requirements, substantial doubt exists about our ability
to continue as a going concern. Accordingly, as a result of our ongoing
liquidity problems, our auditors, Mann Frankfort Stein & Lipp CPAs, L.L.P. added
an explanatory paragraph in their opinion on our consolidated financial
statements as of and for the year ended December 31, 2003, indicating that
substantial doubt exists about our ability to continue as a going concern. Our
long-term viability as a going concern is dependent upon the following factors:
o our ability to raise capital to meet current commitments and
fund the continuation of our business operations; and
o our ability to ultimately achieve profitability and positive
cash flows from operations in amounts that will sustain our
operations.
The following table summarizes certain of our contractual obligations
and other commercial commitments at March 31, 2004 (amounts in thousands):
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Payments Due by Period
---------------------------------------------
Contractual 1 year After
Obligations Total or less 1-3 years 3-5 years 5 years
----------- --------- --------- --------- --------- ---------
Accounts Payable - Tetra $ 1,336 1,336 -- -- --
Long-Term Debt 849 -- 849 -- --
Operating Leases, net of sublease 330 124 206 -- --
--------- --------- --------- --------- ---------
Total Contractual
Obligations $ 2,515 1,460 1,055 -- --
========= ========= ========= ========= =========
Amount of Commitment Expiration Per Period
---------------------------------------------
Other Commercial 1 year After
Commitments Total or less 1-3 years 3-5 years 5 years
---------------- --------- --------- --------- --------- ---------
Abandonment - Costs $ 1,575 -- 199 -- 1,376
--------- --------- --------- --------- ---------
Total Commercial
Obligations $ 1,575 -- 199 -- 1,376
========= ========= ========= ========= =========
The following table summarizes our financial position for the periods
indicated (amounts in thousands):
March 31, December 31,
2004 2003
------------------- -------------------
Amount % Amount %
-------- -------- -------- --------
Working Capital $ 403 6 $ 680 9
Property and equipment, net 5,645 82 5,775 79
Other noncurrent assets 841 12 848 12
-------- -------- -------- --------
Total $ 6,889 100 $ 7,303 100
======== ======== ======== ========
Long-term Liabilities $ 2,325 34 $ 2,302 32
Stockholders' equity 4,564 66 5,001 68
-------- -------- -------- --------
Total $ 6,889 100 $ 7,303 100
======== ======== ======== ========
The change in our financial position from December 31, 2003 to March
31, 2004, was primarily due to our net loss for the three months ended March 31,
2004 of approximately $.5 million.
The net cash provided by or used in operating, investing and financing
activities is summarized below:
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Three Months Ended March 31
---------------------------
(amounts in thousands)
2004 2003
----------- -----------
Net cash used in:
Operating activities $ (954) $ (192)
Investing activities (22) (31)
Financing activities -- --
----------- -----------
Net decrease in cash $ (976) $ (223)
=========== ===========
The net cash used in operating activities during the three months ended
March 31, 2004, reflects the payment of Buccaneer Field abandonment costs and
other payables, and the net loss from operations. In August 2003, we completed
the abandonment/reefing of the Buccaneer Field. As of March 31, 2004, remaining
costs of $1.3 million are due to our contractor, Tetra Technologies, with whom
we arranged payment terms. The remaining payments include six monthly
installments of $133,600 and a final payment of $534,400 due in October 2004.
During 2002, we sold substantially all of our interests in our proved
oil and gas properties for approximately $5.0 million. From October 2002 to late
April 2003, we had no interest in any producing oil and gas properties. In late
April 2003, we began to receive revenue from our 8.9% reversionary working
interest in the High Island Area Block A-7 field, in the Gulf of Mexico. Oil and
gas production from this field now comes from one well that currently produces
at a gross rate of 1.9 MMcf/day.
During the three months ended March 31, 2004, we incurred no capital
expenditures for the development of our proved reserves. Projected capital
expenditures totaling $27,000 and $199,000 are expected to be incurred in the
years ending December 31, 2004 and 2005, respectively. Capital expenditures in
2005 represent the abandonment costs of our High Island Area Block A-7 and Block
34 properties.
We have significant available capacity in our Blue Dolphin Pipeline
system in a market area that we believe is experiencing an increased level of
interest by oil and gas operators. Natural gas throughput on our Blue Dolphin
Pipeline system is currently 8 MMBtu per day, representing 6% of system
capacity. Future utilization of our pipeline and related facilities will depend
upon the success of drilling programs around our pipeline systems, and
attraction and retention of producer/shippers to the systems. As a result of
increased leasing and oil and gas prospect development activity around the Blue
Dolphin Pipeline system and anticipated drilling activity, we expect that
utilization of the Blue Dolphin Pipeline system will increase in late 2004 or
2005.
We are planning to expand our Freeport, Texas operations to include
terminalling and shipment by barge of oil and condensate received by truck
and/or pipeline (in addition to the Blue Dolphin pipeline). With excess
capacity, including ample available acreage to handle liquids, we believe a
liquids storage and transportation service can add to the base Blue Dolphin
Pipeline production gathering business.
We currently are continuing our efforts to sell our interest in the New
Avoca gas storage project. To enhance this effort, we are marketing prospective
capacity to potential users of the project. We currently expect that costs net
to our interest during the year ending December 31, 2004 will be approximately
$80,000.
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
In February 2002, we acquired an additional 1/3 interest in the Blue
Dolphin Pipeline System and the inactive Omega Pipeline from MCNIC Pipeline and
Processing Group, Inc. ("MCNIC"). Pursuant to the terms of the purchase and
sales agreement, Blue Dolphin Pipeline Company issued MCNIC a $750,000
promissory note due December 31, 2006, with required monthly payments to be made
out of 90% of the net revenues of the interest acquired. As of March 31, 2004,
the amount owed MCNIC is $750,000 plus accrued interest of approximately
$99,000.
RESULTS OF OPERATIONS
For the three months ended March 31, 2004 ("2004"), we reported a net
loss of $519,606, compared to a net loss of $396,510 for the three months ended
March 31, 2003 ("2003").
2004 compared to 2003
---------------------
Revenue from pipeline operations. Revenues from pipeline operations
decreased by $42,629 or 17% in 2004 to $204,039. The decrease was due primarily
to a decrease in transportation volumes on the Blue Dolphin Pipeline system of
30% resulting in a decrease in revenues of approximately $65,000, offset in part
by a 42% increase in revenues of approximately $23,000 from the GA 350 Pipeline.
Revenue from oil and gas sales. Our revenues from oil and gas sales
increased by $80,586 in 2004, from those of 2003. 2004 revenues include oil and
gas sales from our interest in the High Island Block A-7 field, which interest
was received in April 2003 and our interest in the High Island Block 34 field,
which interest was received effective August 2003. 2003 revenues represent
adjustments for periods prior to the sale of oil and gas properties in 2002.
Pipeline operating expenses. Pipeline operating expenses in 2004
increased by $49,857 from $193,394 in 2003. The increase was due to higher legal
costs of approximately $27,000, and repairs and maintenance of approximately
$13,000. The legal costs are associated with an action filed against us, the
outcome of which we do not believe will have a material impact. However, if this
litigation continues for a prolonged period of time, we would incur significant
legal expenses, which could have a material effect on our financial condition.
Depletion, depreciation and amortization expense. Depletion,
depreciation and amortization expense increased by $45,734 from 2003. In 2004 we
recorded depletion and depreciation associated with our interest in the High
Island Area Block A-7 and Block 34 fields, which interests we received in April
and August 2003, respectively.
Interest and other income. Interest and other income decreased $48,891
in 2004. Other income in 2004 includes consulting services provided by us
associated with the evaluation of oil and gas properties of approximately
$50,000, and collection of accounts receivable that were previously written off
of $30,000. Other income in 2003 includes consulting services provided by us
associated with the evaluation of oil and gas properties of approximately
$72,000, and the refund of prepaid costs associated with the oil and gas
properties sold effective October 2002 that were in excess of actual costs
incurred of approximately $40,000.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Equity in loss of affiliate. In 2004, we recorded a loss from our
equity interest in New Avoca of $23,302.
Cumulative effect of a change in accounting principal. In 2003, as a
result of our adoption of SFAS No. 143, we recorded a cumulative effect
adjustment at January 1, 2003 of a change in accounting principle for asset
retirement obligations of $40,455 (see note 4 to the Condensed Consolidated
Financial Statements).
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Principal Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13(a) - 14(c) and 15(d) - 14(c) under the
Securities Exchange Act of 1934, as amended). Based upon the evaluation, the
Chief Executive Officer and Principal Accounting Officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934, are recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. There were no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) Exhibits
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.
B) Reports on Form 8-K
On March 26, 2004, we filed a current report on Form 8-K dated
March 26, 2004 reporting our fourth quarter 2003 earnings. The
Item in such current report was Item 5 (Other Events).
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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 14, 2004 /s/ Ivar Siem
--------------------------------------------
Ivar Siem
Chairman and Chief Executive Officer
/s/ G. Brian Lloyd
--------------------------------------------
G. Brian Lloyd
Vice President, Treasurer
(Principal Accounting and Financial Officer)
16