UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: JUNE 30, 1998
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.)
ELEVEN GREENWAY PLAZA, SUITE 1606, HOUSTON, TEXAS 77046
(Address of principal executive offices) (Zip Code)
(713)621-3993
(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.
4,491,847 shares $.01 par value outstanding at July 28, 1998
1
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART. I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Blue Dolphin Energy
Company and Subsidiaries (the "Company") included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the
opinion of management, reflect all adjustments necessary to present a
fair statement of operations, financial position and cash flows. The
Company follows the full cost method of accounting for oil and gas
properties, wherein costs incurred in the acquisition, exploration and
development of oil and gas reserves are capitalized. The Company
believes that the disclosures are adequate and the information
presented is not misleading, although certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 988,222 $ 1,756,294
Trade accounts receivable 1,433,163 861,740
Crude oil inventory 9,550 7,570
Prepaid expenses 140,240 87,268
------------ ------------
Total Current Assets 2,571,175 2,712,872
Property and Equipment, at cost, using full cost
method for oil and gas properties. Includes
$976,779 and $992,293 of leases held for sale
at June 30, 1998 and December 31, 1997, respectively 24,162,758 23,811,679
Accumulated depletion, depreciation
and amortization (4,991,484) (4,841,211)
------------ ------------
19,171,274 18,970,468
Land 1,133,333 1,133,333
Other Assets 2,301,508 2,110,590
------------ ------------
Total Assets $ 25,177,290 $ 24,927,263
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 820,337 $ 700,315
Current portion of accrued abandonment costs 231,000 231,000
Accrued interest payable 103,935 105,957
Accrued income taxes payable 65,375 50,267
------------ ------------
Total Current Liabilities 1,220,647 1,087,539
Long-Term Debt, less current portion 2,060,600 2,060,600
Accrued Abandonment Costs, less current portion 79,985 51,876
Deferred Income Taxes 1,123,227 1,103,921
Common Stock 44,918 44,918
Additional Paid-in Capital 17,669,515 17,669,515
Accumulated Earnings since January 1, 1990 2,978,398 2,908,894
------------ ------------
Total Liabilities and
Stockholders' Equity $ 25,177,290 $ 24,927,263
============ ============
3
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months
Ended June 30,
1998 1997
----------- -----------
Revenue from operations:
Pipeline operations $ 741,539 $ 1,021,663
Oil and gas sales and operating fees 198,512 187,034
----------- -----------
REVENUE FROM OPERATIONS 940,051 1,208,697
Cost of operations:
Pipeline operating expenses 198,829 205,813
Lease operating expenses 152,142 178,635
Repair and maintenance costs 62,862 65,137
Depletion, depreciation, and amortization 99,903 81,628
----------- -----------
COST OF OPERATIONS 513,736 531,213
----------- -----------
INCOME FROM OPERATIONS 426,315 677,484
Other income (expense):
General and administrative (358,210) (342,737)
Interest expense (54,399) (54,497)
Interest and other income 32,962 20,978
----------- -----------
INCOME BEFORE INCOME TAXES 46,668 301,228
Provision for income taxes (22,005) (112,594)
----------- -----------
Net Income $ 24,663 $ 188,634
=========== ===========
Earnings per share:
Basic $ 0.01 $ 0.04
=========== ===========
Diluted $ 0.01 $ 0.04
=========== ===========
Weighted average number of common shares outstanding
and dilutive potential common shares:
Basic 4,491,847 4,454,808
=========== ===========
Diluted 4,501,226 4,489,981
=========== ===========
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Six Months
Ended June 30,
1998 1997
----------- -----------
Revenue from operations:
Pipeline operations $ 1,538,195 $ 1,932,692
Oil and gas sales and operating fees 399,893 434,825
----------- -----------
REVENUE FROM OPERATIONS 1,938,088 2,367,517
Cost of operations:
Pipeline operating expenses 394,563 418,303
Lease operating expenses 295,959 324,521
Repair and maintenance costs 157,412 218,919
Depletion, depreciation, and amortization 197,254 186,677
----------- -----------
COST OF OPERATIONS 1,045,188 1,148,420
----------- -----------
INCOME FROM OPERATIONS 892,900 1,219,097
Other income (expense):
General and administrative (722,000) (667,759)
Interest expense (106,113) (110,930)
Interest and other income 66,622 48,318
----------- -----------
INCOME BEFORE INCOME TAXES 131,409 488,726
Provision for income taxes (61,905) (185,748)
----------- -----------
Net income $ 69,504 $ 302,978
=========== ===========
Earnings per share:
Basic $ 0.02 $ 0.07
=========== ===========
Diluted $ 0.02 $ 0.07
=========== ===========
Weighted average number of common shares outstanding
and dilutive potential common shares:
Basic 4,491,847 4,454,477
=========== ===========
Diluted 4,505,787 4,503,514
=========== ===========
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Six Months
Ended June 30,
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net income $ 69,504 $ 302,978
Adjustments to reconcile net income to net cash provided by
operating activities:
Depletion, depreciation and amortization 197,254 186,677
Deferred income taxes 19,306 155,080
Changes in operating assets and liabilities:
Decrease (Increase) in trade accounts receivable (571,423) 7,425
(Increase) in crude oil inventory and prepaid expenses (54,952) (32,952)
Increase (Decrease) in accounts payable and
other current liabilities 133,108 (379,364)
NET CASH PROVIDED BY (USED IN) ---------- ----------
OPERATING ACTIVITIES (207,203) 239,844
INVESTING ACTIVITIES
Oil and gas prospect generation costs (87,974) (160,750)
Purchases of property and equipment (48,481) (107,470)
Increase in other assets (448,723) (37,930)
Funds escrowed for abandonment costs (342,115) (291,636)
Reduction of escrowed abandonment fund 593,830 0
Abandonment of oil and gas properties 0 (98,634)
Exploration and development costs (227,406) (4,880)
NET CASH (USED IN) ---------- ----------
INVESTING ACTIVITIES (560,869) (701,300)
FINANCING ACTIVITIES
Net proceeds from the exercise of stock options 0 7,397
NET CASH PROVIDED BY ---------- ----------
FINANCING ACTIVITIES 0 7,397
(DECREASE) IN CASH (768,072) (454,059)
CASH AT BEGINNING OF YEAR 1,756,294 1,207,323
---------- ----------
CASH AT JUNE 30 $ 988,222 $ 753,264
========== ==========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 108,137 $ 6,741
========== ==========
Income taxes paid (refunded) $ (109,639) $ 39,660
========== ==========
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
JUNE 30, 1998
EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128
(Statement 128), Earnings per Share. Statement 128 replaces the
presentation of primary earnings per share (EPS) with the presentation
of basic EPS, which excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number
of shares of common stock outstanding for the period. Statement 128
also 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 Company
adopted Statement 128 in December 1997.
The following table provides a reconciliation between basic and
diluted earnings per share:
<CAPTION
Weighted
average
common shares
outstanding
and dilutive Per
Net potential share
income common shares amount
--------- ------------- ------
Six Months ended June 30, 1998:
Basic earnings per share $ 69,504 4,491,847 $ 0.02
Effect of dilutive stock
options 0 13,940 0
--------- ------------- ------
Diluted earnings per share $ 69,504 4,505,787 $ 0.02
========= ============= ======
Six Months ended June 30, 1997:
Basic earnings per share $ 302,978 4,454,477 $ 0.07
Effect of dilutive stock
options 0 49,037 0
--------- ------------- ------
Diluted earnings per share $ 302,978 4,503,514 $ 0.07
========= ============= ======
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
LEASES
The Company entered into a new office lease with an effective date of
September 1, 1998.
The following is a schedule of future minimum lease payments required
under long-term noncancelable operating leases:
YEARS ENDING FUTURE MINIMUM
DECEMBER 31, LEASE PAYMENTS
------------ --------------
1998 $ 45,437
1999 136,310
2000 136,310
2001 136,310
2002 136,310
Thereafter 595,723
------------
$ 1,186,400
============
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130 regarding reporting comprehensive income, which
establishes standards for reporting and display of comprehensive
income and its components. Adoption by the Company of SFAS No. 130
effective January 1, 1998, has had no impact to the Company's
financial statements presented herein.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS), was issued by
the Financial Accounting Standard Board in June 1998. SFAS 133
standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. The
Company will adopt SFAS 133 beginning in calendar year 2000. The
Company has not determined the impact that SFAS 133 will have on its
financial statements and believes that such determination will not be
meaningful until closer to the date of initial adoption.
YEAR 2000
The Company has conducted a review of its computer software to
identify the systems that could be affected by the "year 2000" issue.
The year 2000 issue results from computer programs being written using
two digits (rather than four) to define the applicable year. As a
result, certain of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than
the year 2000. This calculation could result in a major system
failure or miscalculations.
In connection with its assessment of year 2000 compliance, the Company
has reviewed its business application software and is not aware of any
matters at this time that would result in material adverse
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
consequences to the Company. The Company is implementing procedures
to confirm year 2000 compliance with all third parties with which it
has material relationships.
As of June 30, 1998, the Company has incurred minimal costs in
connection with year 2000 compliance, and intends to complete its year
2000 compliance projects by July 1999.
9
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a review of certain aspects of the financial
condition and results of operations of the Company and should be read
in conjunction with the Condensed Consolidated Financial Statements
included in Item 1. of this report.
Certain of the statements included below, including those regarding
future financial performance or results, or that are not historical
facts, are or contain "forward-looking" information as that term is
defined in the Securities Act of 1933, as amended. The words
"expect," "believe," "anticipate," "project," "estimate," and similar
expressions are intended to identify forward-looking statements. The
Company cautions readers that any such statements are not guarantees
of future performance or events and such statements involve risks,
uncertainties and assumptions, including but not limited to industry
conditions, prices of crude oil and natural gas, regulatory changes,
general economic conditions, interest rates, competition, and other
factors discussed below. Should one or more of these risks or
uncertainties materialize or should the underlying assumptions prove
incorrect, actual results and outcomes may differ materially from
those indicated in the forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
FINANCIAL CONDITION
At June 30, 1998, the Company's working capital (current assets less
current liabilities) was $1,350,528, representing a decrease of
$274,805 as compared with working capital of $1,625,333 at December
31, 1997. Pursuant to the rules of the full cost method of accounting
for oil and gas properties, $976,779 and $992,293 of lease acquisition
costs associated with the Company's oil and gas prospect generation
activities, which costs the Company expects to recover in 1998 through
sale of prospects, are excluded from working capital at June 30, 1998
and December 31, 1997, respectively.
The Company maintains a $10,000,000 reducing revolving credit facility
with Bank One, Texas, N.A. On September 1, 1997, the borrowing base
was adjusted to $900,000, reducing by $90,000 per month beginning
October 1, 1997, and is currently being redetermined. The borrowing
base and reducing amount are redetermined semi-annually. The maturity
date is January 14, 2000, when the then outstanding principal balance,
if any, is due and payable. The current outstanding balance under the
credit facility is $10,000.
Offshore activity in the vicinity of the Blue Dolphin Pipeline System
remains active. In February 1998, an existing producer / shipper
completed a new well. Additional throughput from this well resulted
in a 17% increase in daily gas volumes transported in the first half
1998 compared to the first half 1997. A new producer / shipper has
recently committed to transport its production through the Blue Dolphin
Pipeline. Production from this discovery is expected to commence in
September 1998.
Future utilization of the Company's pipelines and related facilities
will depend upon the success of drilling programs in the pipeline
corridors, and attraction and retention of producer / shippers to the
systems.
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Minerals Management Service conducts an annual inspection of the
Buccaneer Field production platforms and facilities. As a result, the
MMS is requiring the Company to remove an inactive satellite platform.
Removal of the satellite platform and site clearance is expected to
take place in the second half of 1998, at an estimated cost of
approximately $231,000.
In July 1998, the Company re-negotiated the terms of its supplemental
surety bonds that provide for certain of its estimated future
abandonment obligations associated with the Buccaneer Field. The
supplemental surety bonds total $1,300,000. The previous terms
required the escrowing of $10,000 per month until the bonds were fully
funded. Under the new terms, the Company is no longer required to
escrow funds. In July 1998, approximately $593,000 of escrowed funds
were released to the Company.
The Company currently holds interests in two lease blocks prospective
for oil and gas in the High Island Area of the Gulf of Mexico. The
lease blocks were acquired in January 1996. Approximately $825,000
was invested to acquire the two leases, in addition to approximately
$86,000 for lease rentals and $65,000 associated with technical
development of the prospects. A 43.75% interest in each of these
prospective lease blocks has been sold. Efforts to sell the remaining
56.25% interest in each lease block are ongoing. An exploratory well
is currently being drilled on a third lease block that the Company
sold in July 1997.
In September 1997, the Company entered into an agreement with industry
participants, whereby in exchange for certain participation rights,
these companies partially funded the costs associated with the
Company's 1997/1998 offshore prospect generation program. The
remaining program costs are reimbursed to the Company as prospects are
developed and leases acquired. The program focus area includes
approximately 2,000,000 acres in Federal waters in the western Gulf of
Mexico covered by 3-D seismic data. The Company had previously
entered into a multi-year 3-D seismic data acquisition and licensing
agreement, whereby a minimum of $1,500,000 has been committed over a 5
year period to acquire 3-D seismic data. Under the agreement the
Company has access to over 2,000,000 acres of 3-D seismic data,
primarily in the western Gulf of Mexico, and over 200,000 line miles
of close grid 2-D seismic data. Additionally, in March 1998, the
program participants agreed to expand the program area with a focus in
Texas State waters along the Gulf Coast. The participants reimbursed
the Company upfront for additional 3-D seismic costs. The federal
lease sale for the primary program focus area is August 26, 1998, and
the state lease sale for the expanded focus area is October 6, 1998.
Following these lease sales the initial program with these partners
will terminate.
In order to enhance the productivity of the prospect generation
program, the Company is transitioning from use of consulting
geologists and geophysicists to a 100% in house effort. A highly
experienced team of geologists and geophysicists with state of the art
work stations is now being assembled. Additionally, funding is being
sought which would permit the Company to directly participate as a
working interest owner in and be designated operator for prospects
generated. The Company believes the necessary funding can be in place
by year end. The Company currently is also seeking participants for
available interests in its 1998/1999 program.
In the first quarter 1998, the Company drilled an unsuccessful well
on its Embar Field acreage in west Texas. The Company has terminated
the farmin and lease option agreement covering the acreage following
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
reevaluation of the risks of future drilling in light of the outcome
of the initial well. Drilling and workover costs incurred to the
Company's interest were approximately $275,000.
Development of the Petroport deepwater terminal and offshore storage
facility continues to proceed as anticipated. The conceptual design,
engineering and costing study, and facility commercial evaluation are
in progress and are expected to be completed in the third quarter
1998.
The facility design, engineering and costing study is based on the
premise that the Petroport primary facility would be a major factor in
the western Gulf of Mexico infrastructure for receipt (by both vessel
and pipeline), storage (both short and long-term), and delivery to
shore for: (1) long and intermediate-haul imported crude oil
deliveries from the Middle East and Atlantic Basin, (2) short-haul
Caribbean Basin deliveries, and (3) oil and condensate produced on the
U.S. Outer Continental Shelf. The commercial evaluation encompasses
both current conditions and conditions expected to prevail through the
year 2020.
In addition to the Company's successful efforts addressing the impact
of the Oil Pollution Act of 1990 on the proposed facility, and passage
of the Deepwater Port Modernization Act in 1996, the Company is
working with the U.S. Coast Guard and others to revise the
regulations, through a "rule-making" process, to implement the
Deepwater Port Modernization Act.
The Company expects to submit the Petroport deepwater port license
application and associated permit requests in 1999, with operations
expected to commence in the year 2002.
In general, the Company believes that it has or can obtain adequate
capital resources and liquidity to continue to finance and otherwise
meet its anticipated business requirements. The availability of
capital resources may, however, affect the Company's timing for major
pipeline acquisitions, further development of the Buccaneer Field,
growth in oil and gas prospect generation activities and the Petroport
project.
RESULTS OF OPERATIONS
The Company reported net income for the six months ended June 30,
1998, ("current period") of $69,504, compared to net income of
$302,978 reported for the first half 1997 ("previous period").
REVENUES:
Revenues for the current period decreased by $429,429 or 18% to
$1,938,088 compared to revenues of $2,367,517 reported for the
previous period.
First half 1998 revenues from pipeline operations decreased by
$394,497 or 20% from the previous period due to a decrease in oil
transportation revenues of $674,203, primarily due to the loss of a
producer/shipper in October 1997. The decrease in oil transportation
revenues was offset in part by an increase in gas transportation
revenues of $279,706, due to new wells tied into the pipeline system
during 1997 and 1998.
Revenues from oil and gas sales, and operating fees for the current
period decreased by $34,932 from those of the previous period. Oil
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
and gas sales, and operating fees declined $14,112 and $20,820,
respectively, due primarily to normal production declines.
COSTS AND EXPENSES:
First half 1998 pipeline operating expenses decreased $23,739 or 6%
from those of the previous period. The decrease is due to cost
reductions associated with decreased oil volumes transported in the
current period.
First half 1998 lease operating expenses decreased $28,562 or 9% from
those of the previous period. The decrease is due primarily to lower
insurance costs.
Repair and maintenance costs for the current period decreased by
$61,507 due primarily to nonrecurring repairs and modifications to the
Buccaneer Field production platforms and facilities of approximately
$65,000 incurred in the previous period.
General and administrative expenses for the current period increased
$54,241, or 8% from the previous period principally due to an increase
in staff costs and consulting fees associated with potential asset
acquisitions of approximately $45,000.
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) Exhibits - None
B) Form 8-K - None
14
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: 08/14/98 /s/ Michael J. Jacobson
Michael J. Jacobson
President and Chief Executive Officer
/s/ G. Brian Lloyd
G. Brian Lloyd
Vice President, Treasurer
15