PART I
Overview
Blue
Dolphin is an independent downstream energy company operating in
the Gulf Coast region of the United States. Our subsidiaries
operate a light sweet-crude, 15,000-bpd crude distillation tower
with approximately 1.2 million bbls of petroleum storage tank
capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a
Delaware corporation and is traded on the OTCQX under the ticker
symbol “BDCO”.
Our
assets are primarily organized in two segments: refinery operations
(owned by LE) and tolling and terminaling services (owned by LRM
and NPS). Subsidiaries that are reflected in corporate and other
include BDPL (inactive pipeline and facilities assets), BDPC
(inactive leasehold interests in oil and gas wells), and BDSC
(administrative services). See "Item 1.,” “Item
2.,” and “Note (4)” to our consolidated financial
statements for more information related to our business segments
and properties.
Affiliates
Affiliates
control approximately 82% of the voting power of our
Common Stock. An Affiliate operates and manages all Blue Dolphin
properties and funds working capital requirements during periods of
working capital deficits, and an Affiliate is a significant
customer of our refined products. Blue Dolphin and certain of its
subsidiaries are currently parties to a variety of agreements with
Affiliates. See “Item 1A.” and “Note (3)”
to our consolidated financial statements for additional disclosures
related to Affiliate risk factors, Affiliate agreements and
arrangements, and risks associated with working capital
deficits.
Going Concern
See
“Item 1A.” and “Note (1)” to our
consolidated financial statements regarding going concern factors
and associated risks.
Operating Risks
See
“Note (1)” to our consolidated financial statements
regarding factors that have negatively
impacted our business plan execution.
Refinery Operations
Our
refinery operations segment consists of the following assets and
operations:
Property
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Key
Products
Handled
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Operating
Subsidiary
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Location
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Nixon
facility
● Crude
distillation tower (15,000 bpd)
● Petroleum
storage tanks
● Loading
and unloading facilities
● Land
(56 acres)
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Crude
Oil
Refined
Products
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LE
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Nixon,
Texas
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See
below under “Refinery Operations Process Summary” for
an overview diagram of our refinery operations.
Capital Improvement Expansion Project. Since 2015, the Nixon
facility has been undergoing a capital improvement expansion
project. Refinery operations capital improvements have primarily
related to construction of new petroleum storage tanks. However,
smaller efficiency improvements have been made as well. In the
short-term, increased petroleum storage capacity has helped with
de-bottlenecking the refinery. In the long-term, additional
petroleum storage capacity will allow for increased refinery
throughput of up to approximately 30,000 bpd.
Crude Oil and Condensate Supply. Operation of the
Nixon refinery depends on our ability to purchase adequate amounts
of crude oil and condensate. We have a long-term crude supply
agreement in place with Pilot. Under the initial term of the crude
supply agreement, Pilot will sell us approximately 24.8 million net
bbls of crude oil. Thereafter, the crude supply agreement will
continue on a one-year evergreen basis. Pilot may terminate the
crude supply agreement at any time by providing us 60 days prior
written notice. We may terminate the agreement upon the expiration
of the initial term or at any time during a renewal term by giving
Pilot 60 days prior written notice.
Pilot also stores crude oil at the Nixon facility under a terminal
services agreement. Under the terminal services agreement, Pilot
stores crude oil at the Nixon facility at a specified rate per bbl
of the storage tank’s shell capacity. The terminal services
agreement has an initial term that expires April 30, 2020.
Thereafter, the terminal services agreement will continue on a
one-year evergreen basis. Either party may terminate the terminal
services agreement by providing the other party 60 days prior
written notice. However, the terminal services agreement will
automatically terminate upon expiration or termination of the crude
supply agreement.
Our
financial health could be adversely affected by defaults under our
secured loan agreements, historic net losses, and working capital
deficits, which could impact our ability to acquire crude oil and
condensate. A failure to acquire crude oil and condensate when
needed will have a material effect on our business results and
operations. See “Item 1A.” for risks associated with
crude supply.
Refinery Operations Process Summary. The Nixon refinery is
considered a “topping unit” because it is primarily
comprised of a crude oil distillation tower or unit, the first
stage of the crude oil refining process. The crude distillation
tower separates crude oil and condensate into finished and
intermediate petroleum products. The below diagram represents a
high-level overview of the current crude oil and condensate
refining process at the Nixon refinery.
Example represents a simplified outut of refined
products.
A
regional electric cooperative supplies electrical power to our
facility in Nixon, Texas. Fuel gas is produced as a by-product at
the Nixon refinery and is primarily used as fuel within the
refinery. In addition, small amounts of propane are occasionally
acquired for use in starting-up the Nixon refinery.
Products and Markets. Our market is the Gulf Coast region of
the U.S., which is represented by the EIA as Petroleum
Administration for PADD 3. We sell our products primarily in
the U.S. within PADD 3. Occasionally we sell refined products to
customers that export to Mexico.
The
Nixon refinery’s product slate is moderately adjusted based
on market demand. We currently produce a single finished product
– jet fuel – and several intermediate products,
including naphtha, HOBM, and AGO. Our jet fuel is sold to an
Affiliate, which is HUBZone certified. Our intermediate products
are primarily sold in nearby markets to wholesalers and refiners as
a feedstock for further blending and processing. See “Note
(3)” and “Note (16)” to our consolidated
financial statements for additional disclosures related to
Affiliates arrangements and transactions.
Customers. Customers
for our refined products include distributors, wholesalers and
refineries primarily in the lower portion of the Texas Triangle
(the Houston - San Antonio - Dallas/Fort Worth area). We have bulk
term contracts in place with most of our customers, including
month-to-month, six months, and up to one-year terms. Certain of
our contracts require our customers to prepay and us to sell fixed
quantities and/or minimum quantities of finished and intermediate
petroleum products. Many of these arrangements are subject to
periodic renegotiation on a forward-looking basis, which could
result in higher or lower relative prices on future sales of our
refined products. See “Item 1A.” and “Note
(5)” to our consolidated financial statements for disclosures
related to concentration of risk associated with significant
customers.
Competition. Many of our competitors are
substantially larger than us and are engaged on a national or
international level in many segments of the oil and gas industry,
including exploration and production, gathering and transportation,
and marketing. These competitors may have greater flexibility in
responding to or absorbing market changes occurring in one or more
of these business segments. We compete primarily based on cost. Due
to the low complexity of our simple “topping unit”
refinery, we can be relatively nimble in adjusting our refined
products slate because of changing commodity prices, market demand,
and refinery operating costs.
Safety and Downtime. Our
refinery operations are operated in a manner consistent with
industry safe practices and standards. These operations are subject
to regulations under OSHA, the EPA, and comparable state and local
requirements. Together, these regulations are designed for
personnel safety, process safety management, and risk management,
as well as to prevent or minimize the probability and consequences
of an accidental release of toxic, reactive, flammable, or
explosive chemicals. Storage tanks used for refinery
operations are designed for crude oil and condensate and refined
products, and most are equipped with appropriate controls that
minimize emissions and promote safety. Our refinery operations have
response and control plans, spill prevention and other programs to
respond to emergencies. See “Government Regulations”
below for specific federal, state and local regulations for which
our refinery operations are subject.
The Nixon refinery periodically experiences planned and unplanned
temporary shutdowns. Unplanned shutdowns can occur for a variety of
reasons, including voluntary regulatory compliance measures,
cessation or suspension by regulatory authorities, or disabled
equipment. However, in Texas the most typically reason is excessive
heat or power outages from high winds and thunderstorms. Planned
turnarounds are used to repair, restore, refurbish, or
replace refinery equipment. Refineries typically undergo a major
turnaround every three to five years. Since the Nixon refinery was
placed back in service in 2012 (commonly referred to as
“recommissioning”), turnarounds are needed more
frequently for unanticipated maintenance or repairs.
We are particularly vulnerable to disruptions in our operations
because all our refining operations are conducted at a single
facility. Any scheduled or unscheduled downtime will result in lost
margin opportunity, potential increased maintenance expense, and a
reduction of refined products inventory, which could reduce our
ability to meet our payment obligations. See “Item 1A.”
for risks sociated with Nixon refinery downtime.
Tolling and Terminaling Operations
Our
tolling and terminaling segment consists of the following assets
and operations:
Property
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Key
Products
Handled
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Operating
Subsidiary
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Location
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Nixon
facility
● Petroleum
storage tanks
● Loading
and unloading facilities
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Crude
Oil
Refined
Products
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LRM,
NPS
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Nixon,
Texas
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Capital Improvement Expansion Project. As previously noted,
the Nixon facility has been undergoing a capital improvement
expansion project since 2015. Tolling and terminaling capital
improvements have primarily related to construction of new
petroleum storage tanks to significantly increase petroleum storage
capacity. Increased petroleum storage capacity will provide an
opportunity to generate additional tolling and terminaling
revenue.
Products and Customers. The
Nixon facility’s petroleum storage tanks and infrastructure
are primarily suited for crude oil and condensate and refined
products, such as naphtha, jet fuel, diesel and fuel oil. Storage
customers are typically refiners in the lower portion of the
Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth
area). Shipments are received and redelivered from within the Nixon
facility via pipeline or from third parties via truck. Contract
terms range from month-to-month to three years.
Operations Safety. Our tolling and terminal operations are
operated in a manner consistent with industry safe practices and
standards. These operations are subject to regulations under OSHA
and comparable state and local regulations. Storage tanks used for
terminal operations are designed for crude oil and condensate and
refined products, and most are equipped with appropriate controls
that minimize emissions and promote safety. Our terminal operations
have response and control plans, spill prevention and other
programs to respond to emergencies. See “Government
Regulations” below for specific federal, state and local
regulations for which our tolling and terminaling operations are
subject.
Inactive Operations
We own
certain other pipeline and facilities assets and have leasehold
interests in oil and gas properties. These assets, which are shown
below and included in corporate and other, are not operational and
are fully impaired.
Property
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Operating
Subsidiary
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Location
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Freeport
facility
● Crude
oil and natural gas separation and dehydration
● Natural
gas processing, treating, and redelivery
● Vapor
recovery unit
● Two
onshore pipelines
● Land
(162 acres)
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BDPL
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Freeport,
Texas
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Offshore
Pipelines (Trunk Line and Lateral Lines)
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BDPL
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Gulf of
Mexico
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Oil and
Gas Leasehold Interests
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BDPC
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Gulf of
Mexico
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We
fully impaired our pipeline assets at December 31, 2016 and our oil
and gas properties at December 31, 2011. Our pipeline and oil and
gas properties had no revenue during the years ended December 31,
2019 and 2018. See “Item 1A.” and “Note
(16)” to our consolidated financial statements related to
idle iron decommissioning requirements and related
risks.
Pipeline and Facilities Safety.
Although
our pipeline and facility assets are inactive, they require upkeep
and maintenance and are subject to safety regulations under OSHA,
PHMSA, BOEM, BSEE, and comparable state and local regulations. We
have response and control plans, spill prevention and other
programs to respond to emergencies related to these assets. See
“Government Regulations” below for specific federal,
state and local regulations for which our pipeline and facilities
assets are subject.
Personnel
We have
no employees. We rely on an Affiliate to manage our facilities
pursuant to the Amended and Restated Operating Agreement. Services
under the Amended and Restated Operating Agreement include
personnel serving in a variety of capacities, including, but not
limited to corporate executives, operations and maintenance,
environmental, health and safety, and administrative and
professional services. At December 31, 2019, the Affiliate had a
total of 216 employees, 165 full-time and 51 part-time. No
personnel were covered by collective bargaining agreements. See
“Note (3)” to our consolidated financial statements for
additional disclosures related to Affiliate
arrangements.
Insurance and Risk Management
Our
operations are subject to significant hazards and risks inherent in
crude oil and condensate refining operations, as well as the
transportation and storage of crude oil and condensate and refined
products. We have property damage and business interruption
coverage at the Nixon facility. Business interruption coverage is
for 24 months from the date of the loss, subject to a deductible
with a 45-day waiting period. Our property damage insurance has
deductibles ranging from $5,000 to $500,000. In addition, we have a
full suite of insurance policies covering workers’
compensation, general liability, directors’ and
officers’ liability, environmental liability, and other
business risks. These coverages are supported by safety and other
risk management programs.
Intellectual Property
We rely
on intellectual property laws to protect our brand, as well as
those of our subsidiaries. “Blue Dolphin Energy
Company” is a registered trademark in the U.S. in name and
logo form. “Petroport, Inc.” is a registered trademark
in the U.S. in name form. In addition,
“www.blue-dolphin-energy.com” is a registered domain
name.
Website Access to Reports and Other Information
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and other public filings with the SEC
are available, free of charge, on our website (http://www.blue-dolphin-energy.com)
as soon as reasonably practical after we file them with, or furnish
them to, the SEC. Information contained on our website is not part
of this report. You may also access these reports on the
SEC’s website at http://www.sec.gov.
Government Regulations
General. Our operations are subject to extensive and
frequently changing federal, state, and local laws, regulations,
permits, and ordinances relating to the protection of the
environment. Among other things, these laws and regulations govern
obtaining and maintaining construction and operating permits, the
emission and discharge of pollutants into or onto the land, air,
and water, the handling and disposal of solid, liquid, and
hazardous wastes and the remediation of contamination. Compliance
with existing and anticipated environmental laws and regulations
increases our overall cost of business, including our capital costs
to construct, maintain, operate and upgrade equipment and
facilities. Failure to comply with these laws and regulations may
trigger a variety of administrative, civil, and criminal
enforcement measures, including the assessment of monetary
penalties. Certain environmental statutes impose strict, joint and
several liability for costs required to clean up and restore sites
where hazardous substances, hydrocarbons or wastes have been
disposed or otherwise released. Moreover, it is not uncommon for
neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release
of hazardous substances, hydrocarbons, or other waste products into
the environment. These requirements may also significantly affect
our customers’ operations and may have an indirect effect on
our business, financial condition and results of operations.
However, we do not expect such effects will have a material impact
on our financial position, results of operations, or
liquidity.
Air Emissions and Climate Change Regulations. Our operations are
subject to the Clean Air Act and comparable state and local
statutes. Under these laws, we are required to obtain permits, as
well as test, monitor, report, and implement control requirements.
If regulations become more stringent, additional emission control
technologies may be required to be installed at the Nixon facility
and certain emission sources located offshore, and our ability to
secure future permits may become less certain. Any such future
obligations could require us to incur significant additional
capital or operating costs.
The EPA
has undertaken significant regulatory initiatives under authority
of the Clean Air Act’s NSR/PSD program to further reduce
emissions of volatile organic compounds, nitrogen oxides, sulfur
dioxide, and particulate matter. These regulatory initiatives have
been targeted at industries with large manufacturing facilities
that are significant sources of emissions, such as refining, paper
and pulp, and electric power generating industries. The basic
premise of these initiatives is the EPA’s assertion that many
of these industrial establishments have modified or expanded their
operations over time without complying with NSR/PSD regulations
adopted by the EPA that require permits and new emission controls
in connection with any significant facility modifications or
expansions that can result in emission increases above certain
thresholds. As part of this ongoing NSR/PSD regulatory initiative,
the EPA has consent decrees with several refiners that require
refiners to make significant capital expenditures to install
emissions control equipment at selected facilities. We have not
been selected by the EPA to enter a consent decree. If selected, as
a small refiner we do not expect any additional requirements to
have a material impact on our financial position, results of
operations, or liquidity.
The EPA
strengthened the NAAQS for ground-level ozone to 70 parts per
billion in 2015 from the 75-parts per billion level set in 2008. To
implement the revised ozone NAAQS, all states will need to review
their existing air quality management infrastructure State
Implementation Plan for ozone and ensure it is appropriate and
adequate. Where areas remain in ozone non-attainment, or come into
ozone non-attainment as a result of the revised NAAQS, it is likely
that additional planning and control obligations will be required.
States may impose additional emissions control requirements on
stationary sources, changes in fuels specifications, and changes in
fuels mix and mobile source emissions controls. The ongoing and
potential future requirements imposed by states to meet the ozone
NAAQS could have direct impacts on terminaling facilities through
additional requirements and increased permitting costs and could
have indirect impacts through changing or decreasing fuel
demand.
The
Energy Independence and Security Act of 2007 created RFS2 requiring
the total volume of renewable transportation fuels (including
ethanol and advanced biofuels) sold or introduced in the U.S. to
reach 36.0 billion gallons by 2022. We applied for an extension of
the temporary exemption afforded small refineries through December
31, 2010. The EPA granted the Nixon refinery a small refinery
exemption from RFS2 requirements for 2013 and 2014. Since 2014, the
Nixon refinery has solely produced HOBM, a non-transportation
lubricant blend product that does not fall under RFS2.
Currently,
multiple legislative and regulatory measures to address greenhouse
gas emissions are in various phases of discussion or
implementation. These include actions to develop national, state,
or regional programs, each of which would require reductions in our
greenhouse gas emissions or those of our customers. In 2015, the
EPA amended the Petroleum and Natural Gas Systems source category
(Subpart W) of the Greenhouse Gas Reporting Program, to include
among other things a new Onshore Petroleum and Natural Gas
Gathering and Boosting segment that encompasses greenhouse gas
emissions from equipment and sources within the petroleum and
natural gas gathering boosting systems. In 2016, the EPA
promulgated regulations regarding performance standards for methane
emissions from new and modified oil and gas production and natural
gas processing and transmission facilities, and in September 2018,
proposed targeted improvements to these standards to streamline
implementation of the rules. These and other legislative regulatory
measures will impose additional burdens on our business and those
of our customers.
Hazardous Substances and Waste Regulations. The CERCLA imposes strict, joint and
several liability on a broad group of potentially responsible
parties for response actions necessary to address a release of
hazardous substances into the environment. The law authorizes
two kinds of response actions: (i) short-term removals, where
actions may be taken to address releases or threatened releases
requiring prompt response, and (ii) long-term remedial response
actions, that permanently and significantly reduce the dangers
associated with releases or threats of releases of hazardous
substances that are serious, but not immediately life threatening.
Neither we nor any of our predecessors have been designated as a
potentially responsible party under CERCLA or a similar state
statute.
We
generate petroleum product wastes, solid wastes, and ordinary
industrial wastes, such as from paints and solvents, that are
regulated under RCRA and comparable state statues. We are not
currently required to comply with a substantial portion of the RCRA
requirements because we are considered small quantity generators of
hazardous wastes by the EPA and state regulations. However, it is
possible that additional wastes, which could include wastes
currently generated during operations, will in the future be
designated as hazardous wastes. Hazardous wastes are subject to
more rigorous and costly disposal requirements than are
non-hazardous wastes. The Hazardous Waste Generator Improvement
Rule of the EPA provides some additional flexibility for small
generators but also increases certain recordkeeping and
administrative burdens. Several states are now in the process of
adopting this rule. Any additional changes in the regulations could
increase our capital and operating costs.
We
currently own properties where crude oil, refined petroleum
hydrocarbons, and fuel additives have been handled for many years
by previous owners. At some facilities, hydrocarbons or other waste
may have been disposed of or released on or under the properties
owned by us or on or under other locations where these wastes have
been taken for disposal. Although prior owners and operators may
have used operating and waste disposal practices that were standard
in the industry at the time, these properties and wastes disposed
thereon are now subject to CERCLA, RCRA and analogous state laws.
Under these laws, we could be required to remove or remediate
previously disposed or released wastes (including wastes disposed
of or released by prior owners or operators), to clean up
contaminated property (including impacted groundwater), or to
perform remedial operations to prevent future contamination to the
extent we are not indemnified for such matters.
Water Pollution Regulations. Our operations can result in the
discharge of pollutants, including chemical components of crude oil
and refined products, into federal and state waters. The CWA prohibits the discharge of pollutants into
U.S. waters except as authorized by the terms of a permit issued by
the EPA or a state agency with delegated authority. The
transportation and storage of crude oil and refined products over
and adjacent to water involves risks and subjects us to the
provisions of the CWA, OPA 90, and related state
requirements.
Spill
prevention, control, and countermeasure requirements mandate the
use of structures, such as berms and other secondary containment,
to prevent hydrocarbons or other pollutants from reaching a
jurisdictional body of water in the event of a spill or leak. These
requirements prevent pollutant releases and minimize potential
impacts should a release occur. We have federally certified OSROs
available to respond to a spill and, in the case of our offshore
pipelines, we maintain the statutory $35.0 million coverage
required proof of financial responsibility. In the event of an oil
spill into navigable waters, we can be subject to strict, joint,
and potentially unlimited liability for removal costs and other
consequences.
Wastewater
is subject to restrictions and strict controls under the CWA.
Federal and state regulatory agencies can impose administrative,
civil, and criminal penalties for non-compliance with discharge
permits. Process wastewater from the
Nixon refinery is tested and discharged to a nearby municipal
treatment facility pursuant to applicable process wastewater
permits. Wastewater from our offshore facilities, including our oil
and natural gas pipelines and anchor platform, is tested and
discharged pursuant to applicable produced water permits.
Stormwater at the Nixon facility is tested and discharged pursuant
to applicable stormwater permits.
Offshore “Idle Iron” Decommissioning
Regulations. In
2018 BSEE updated its earlier 2010 guidance and regulations on
decommissioning that mandates lessees and rights-of-way holders
permanently abandon and/or remove platforms and other structures
when no longer useful for operations. To cover the various
obligations of lessees and rights-of-way holders operating in
federal waters of the Gulf of Mexico, BOEM evaluates an
operator’s financial ability to carry out present and future
obligations to determine whether the operator must provide
additional security beyond the minimum bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning and removing platforms and pipelines at the end of
production or service activities. Once plugging and abandonment
work has been completed, the collateral backing the financial
assurance is released by BOEM.
We are
required by BOEM to: (i) maintain acceptable financial assurance
(pipeline bonds) for the decommissioning of our assets offshore in
federal waters and (ii) decommission these assets following a
certain period of inactivity. As of December 31, 2019, we
maintained approximately $0.9 million in credit and cash-backed
pipeline rights-of-way bonds issued to the BOEM. As of December 31,
2019, we maintained $2.6 million in AROs related to abandonment of
these assets. See “Item 1A.,” “Note (12),”
and “Note (16)” to our consolidated financial
statements for additional disclosures related to idle iron
decommissioning requirements for our pipelines and facilities
assets and related risks.
Health, Safety and Maintenance
We are
subject to the requirements of OSHA and other federal and state
agencies that address employee health and safety. In general, we
believe current expenditures are fulfilling the OSHA requirements
and protecting the health and safety of our employees. Based on new
regulatory developments, we may increase expenditures in the future
to comply with higher industry and regulatory safety standards.
However, such increases in our expenditures, and the extent to
which they might be offset, cannot be estimated at this
time.
BSEE
also requires offshore operators to employ a SEMS
plan. SEMS are designed to reduce human and
organizational errors as root causes of work-related accidents and
offshore spills, develop protocols as to who at the facility has
the ultimate operational safety and decision-making authority, and
establish procedures to provide all personnel with “stop
work” authority. We have a SEMS program in
place.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, in
addition to the other information contained in this document.
Realization of any of the following risks could have a material
adverse effect on our business, financial condition, cash flows and
results of operations.
A.
Risks Related to Our Business and Industry
A1.
Management has determined that there is, and the report of our
independent registered public accounting firm expresses,
substantial doubt about our ability to continue as a going
concern.
Management
has determined that conditions exist that raise substantial doubt
about our ability to continue as a going concern due to defaults
under our secured loan agreements, historic net losses, and working
capital deficits. A ‘going concern’ opinion could
impair our ability to finance our operations through the sale of
equity, incurring debt, or other financing alternatives. Our
ability to continue as a going concern will depend on sustained
positive operating margins and working capital to sustain
operations, including the purchase of crude oil and condensate and
payments on long-term debt. If we are unable to achieve these
goals, our business would be jeopardized, and we may not be able to
continue. If we are unable to make required debt payments, we would
likely have to consider other options, such as selling assets,
raising additional debt or equity capital, cutting costs or
otherwise reducing our cash requirements, or negotiating with our
creditors to restructure our applicable obligations.
A2.
Inadequate liquidity to sustain operations due to defaults under
our secured loan agreements, historic net losses, and working
capital deficits, any of which could have a material adverse effect
on us.
We
currently rely on revenue from operations, Affiliates, and
borrowings under bank facilities to meet our liquidity needs. Our
short-term working capital needs are primarily related to
acquisition of crude oil and condensate to operate the Nixon
refinery, repayment of short-term debt obligations, and capital
expenditures for maintenance, upgrades, and refurbishment of
equipment at the Nixon facility. Our long-term working capital
needs are primarily related to repayment of long-term debt
obligations. In addition, we continue to utilize capital to reduce
operational, safety and environmental risks. We may incur
substantial compliance costs relating to any new environmental,
health and safety regulations. The Amended Pilot Line of Credit
will mature in May 2020. Our liquidity will affect our ability to
satisfy any of these needs.
We had
a working capital deficit of $59.4 million and $71.9 million at
December 31, 2019 and 2018, respectively. Excluding the current
portion of long-term debt, we had a working capital deficit of
$19.6 million and $30.0 million at December 31, 2019 and 2018,
respectively. We had cash and cash equivalents and restricted cash
(current portion) of $0.07 million and $0.05 million, respectively,
at December 31, 2019. Comparatively, we had cash and cash
equivalents and restricted cash (current portion) of $0.01 million
and $0.05 million, respectively, at December 31, 2018.
While
we believe that we can fund our operations through revenue from
operations and Affiliate financing, we may not be able to, among
other things, (i) maintain our current general and administrative
spending levels; (ii) fund certain obligations as they become due;
and (iii) respond to competitive pressures or unanticipated capital
requirements. We cannot provide any assurance that financing will
be available to us in the future on acceptable terms.
A3.
Defaults under our secured loan agreements could have a material
adverse effect on our business, financial condition, and results of
operations and materially adversely affect the value of an
investment in our common stock.
As
described elsewhere in this report, we are in default under our
secured loan agreements. Defaults include events of default and
financial covenant violations. Defaults under our secured loan
agreements permit Veritex to declare the amounts owed under these
loan agreements immediately due and payable, exercise its rights
with respect to collateral securing obligors’ obligations
under these loan agreements, and/or exercise any other rights and
remedies available. The debt associated with these loans was
classified within the current portion of long-term debt on our
consolidated balance sheets at December 31, 2019 and
2018.
In
September 2017, Veritex notified obligors of events of default,
including, but not limited to, the occurrence of the GEL Final
Arbitration Award, associated material adverse effect conditions,
failure by LE to replenish a $1.0 million payment reserve account,
and the occurrence of events of default by obligors under our other
secured loan agreements with Veritex, all of which constituted
events of default under our secured loan agreements. Further,
Veritex informed obligors that it would consider a final
confirmation of the GEL Final Arbitration Award to be a material
event of default under the loan agreements. Veritex did not
accelerate or call due our secured loan agreements considering
these factors. Instead, Veritex expressly reserved all its rights,
privileges and remedies related to events of default.
In
April 2019, obligors were notified by Veritex that the bank agreed
to waive certain covenant defaults and forbear from enforcing its
remedies under our secured loan agreements subject to: (i) the
agreement and concurrence of the USDA and (ii) the replenishment of
the payment reserve account on or before August 31, 2019. Following
the GEL Settlement, the associated mutual releases became effective
and GEL filed a stipulation of dismissal of claims against LE. As
of the date of this report, LE had not replenished the payment
reserve account and obligors were still in default under our
secured loan agreements with Veritex.
At
December 31, 2019, LE and LRM were in violation of the debt service
coverage ratio, current ratio, and debt to net worth ratio
financial covenants under our secured loan agreements with
Veritex.
Any
exercise by Veritex of its rights and remedies under our secured
loan agreements would have a material adverse effect on our
business operations, including crude oil and condensate procurement
and our customer relationships; financial condition; and results of
operations. In such a case, the trading price of our common stock
and the value of an investment in our common stock could
significantly decrease, which could lead to holders of our common
stock losing their investment in our common stock in its
entirety.
We can
provide no assurance that: (i) our assets or cash flow will be
sufficient to fully repay borrowings under outstanding long-term
debt, either upon maturity or if accelerated, (ii) LE and LRM will
be able to refinance or restructure the payments on the long-term
debt, and/or (iii) Veritex, as first lien holder, will provide
future default waivers. Defaults under our secured loan agreements
and any exercise by Veritex of its rights and remedies related to
such defaults may have a material adverse effect on the trading
prices of our common stock and on the value of an investment in our
common stock, and holders of our common stock could lose their
investment in our common stock in its entirety.
A4.
We
will need to repay or refinance borrowings under the Amended Pilot
Line of Credit.
The
Amended Pilot Line of Credit is scheduled to mature in May 2020. We
will need to repay, refinance, replace or otherwise extend the
maturity of this line of credit. Our ability to repay, refinance,
replace or extend this facility by its maturity date will be
dependent on, among other things, business conditions, our
financial performance and the general condition of the financial
markets. If a financial disruption were to occur at the time that
we are required to repay this indebtedness, we could be forced to
undertake alternate financings, including a sale of additional
common stock, negotiate for an extension of the maturity or sell
assets and delay capital expenditures in order to generate proceeds
that could be used to repay such indebtedness. We cannot provide
any assurance that we will be able to consummate any such
transaction on terms that are commercially reasonable, on terms
acceptable to us or at all.
A5.
Our substantial current debt, which is included in the current
portion of long-term debt (in default), the current portion of
long-term debt, related party (in default), and line of credit
payable, could adversely affect our financial health and make us
more vulnerable to adverse economic conditions.
As of
December 31, 2019 and 2018, we had current debt of $51.3 million
and $41.9 million, respectively, consisting of bank debt, related
party debt, and a line of credit payable. Blue Dolphin, as parent
company, has guaranteed the indebtedness of certain subsidiaries.
In addition, Affiliates have guaranteed the indebtedness of Blue
Dolphin and certain of its subsidiaries. This level of debt in
current liabilities and the cross guarantee agreements could have
important consequences, such as: (i) limiting our ability to obtain
additional financing to fund our working capital, capital
expenditures, debt service requirements or potential growth, or for
other purposes; (ii) increasing the cost of future borrowings;
(iii) limiting our ability to use operating cash flow in other
areas of our business because we must dedicate a substantial
portion of these funds to make payments on our debt; (iv) placing
us at a competitive disadvantage compared to competitors with less
debt; and (v) increasing our vulnerability to adverse economic and
industry conditions.
As of
the filing date of this report, we were current with the monthly
payments required under our bank debt and line of credit payable.
Our ability to service our debt is dependent upon, among other
things, business conditions, our financial and operating
performance, our ability to raise capital, and regulatory and other
factors, many of which are beyond our control. If our working
capital is not sufficient to service our debt, and any future
indebtedness that we incur, our business, financial condition, and
results of operations will be materially adversely
affected.
A6.
Our business, financial condition and operating results may be
adversely affected by increased costs of capital or a reduction in
the availability of credit.
Adverse
changes to the availability, terms and cost of capital, interest
rates or our credit ratings (which would have a corresponding
impact on the credit ratings of our subsidiaries that are party to
any cross-guarantee agreements) could cause our cost of doing
business to increase by limiting our access to capital, including
our ability to refinance maturing or accelerated existing
indebtedness on similar terms. As a result, we cannot provide any
assurance that any financing will be available to us in the future
on acceptable terms or at all. Any such financing could be dilutive
to our existing stockholders. If we cannot raise required funds on
acceptable terms, we may further reduce our expenses and we may not
be able to, among other things, (i) maintain our general and
administrative expenses at current levels; (ii) successfully
implement our business strategy; (iii) fund certain obligations as
they become due; (iv) respond to competitive pressures or
unanticipated capital requirements; or (v) repay our indebtedness.
Based on the historical negative cash flows and the continued
limited cash inflows in the period subsequent to year end there is
substantial doubt about our ability to continue as a going
concern.
A7.
Affiliates hold a significant ownership interest in us and exert
significant influence over us, and their interests may conflict
with the interests of our other stockholders; Affiliate
transactions may cause conflicts of interest that may adversely
affect us.
Affiliates control
approximately 82% of the voting power of our Common Stock
and, by virtue of such stock ownership, can control or exert
substantial influence over us, including:
●
Election and
appointment of directors;
●
Business strategy
and policies;
●
Mergers and other
business combinations;
●
Acquisition or
disposition of assets;
●
Future issuances of
Common Stock or other securities; and
●
Incurrence of debt
or obtaining other sources of financing.
The
existence of a controlling stockholder may have the effect of
making it difficult for, or may discourage or delay, a third party
from seeking to acquire a majority of our outstanding Common Stock,
which may adversely affect the market price of our Common
Stock.
Affiliate interest
may not always be consistent with our interests or with the
interests of our other stockholders. Affiliates may also pursue
acquisitions or business opportunities in industries in which we
compete, and there is no requirement that any additional business
opportunities be presented to us. We also have and may in the
future enter transactions to purchase goods or services with
Affiliates. To the extent that conflicts of interest may arise
between us and Affiliates, those conflicts may be resolved in a
manner adverse to us or its other stockholders.
These
relationships could create, or appear to create, potential
conflicts of interest when our Board is faced with decisions that
could have different implications for us and Affiliates. The
appearance of conflicts, even if such conflicts do not materialize,
might adversely affect the public’s perception of us, as well
as our relationship with other companies and our ability to enter
new relationships in the future, which may have a material adverse
effect on our ability to do business.
A8.
The dangers inherent in oil and gas operations could expose us to
potentially significant losses, costs or liabilities and reduce our
liquidity.
Oil and
gas operations are inherently subject to significant hazards and
risks. These hazards and risks include, but are not limited to,
fires, explosions, ruptures, blowouts, spills, third-party
interference and equipment failure, any of which could result in
interruption or termination of operations, pollution, personal
injury and death, or damage to our assets and the property of
others. These risks could result in substantial losses to us from
injury and loss of life, damage to and destruction of property and
equipment, pollution and other environmental damage and suspension
of operations. Offshore operations are also subject to a variety of
operating risks peculiar to the marine environment, such as
hurricanes or other adverse weather conditions and more extensive
governmental regulation. These regulations may, in certain
circumstances, impose strict liability for pollution damage or
result in the interruption or termination of operations. These
risks could harm our reputation and business, result in claims
against us, and have a material adverse effect on our results of
operations and financial condition.
A9.
The geographic concentration of our assets creates a significant
exposure to the risks of the regional economy and other regional
adverse conditions.
Our
primary operating assets are in Nixon, Texas in the Eagle Ford
Shale, and we market our refined products in a single, relatively
limited geographic area. In addition, we have facilities and
related onshore pipeline assets in Freeport, Texas, and offshore
pipelines and oil and gas properties are in the Gulf of Mexico. As
a result, our operations are more susceptible to regional economic
conditions than our more geographically diversified competitors.
Any changes in market conditions, unforeseen circumstances, or
other events affecting the area in which our assets are located
could have a material adverse effect on our business, financial
condition, and results of operations. These factors include, among
other things, changes in the economy, weather conditions,
demographics, and population.
A10.
Competition from companies having greater financial and other
resources could materially and adversely affect our business and
results of operations.
The
refining industry is highly competitive. Our refining
operations compete with domestic refiners and marketers in PADD 3
(Gulf Coast), domestic refiners in other PADD regions, and foreign
refiners that import products into the U.S. Certain of our
competitors have larger, more complex refineries and may be able to
realize higher margins per barrel of product produced. Several of
our principal competitors are integrated national or international
oil companies that are larger and have substantially greater
resources than we do and have access to proprietary sources of
controlled crude oil production. Unlike these competitors, we
obtain all our feedstocks from a single supplier. Because of their
integrated operations and larger capitalization, larger, more
complex refineries may be more flexible in responding to volatile
industry or market conditions, such as crude oil and other
feedstocks supply shortages or commodity price
fluctuations. If we are unable to compete effectively,
we may lose existing customers or fail to acquire new
customers.
A11.
Environmental laws and regulations could require us to make
substantial capital expenditures to remain in compliance or to
remediate current or future contamination that could give rise to
material liabilities.
Our
operations are subject to a variety of federal, state and local
environmental laws and regulations relating to the protection of
the environment and natural resources, including those governing
the emission or discharge of pollutants into the environment,
product specifications and the generation, treatment, storage,
transportation, disposal and remediation of solid and hazardous
wastes. Violations of these laws and regulations or permit
conditions can result in substantial penalties, injunctive orders
compelling installation of additional controls, civil and criminal
sanctions, permit revocations and/or facility
shutdowns.
In
addition, new environmental laws and regulations, new
interpretations of existing laws and regulations, increased
governmental enforcement of laws and regulations, or other
developments could require us to make additional unforeseen
expenditures. Many of these laws and regulations are becoming
increasingly stringent, and the cost of compliance with these
requirements can be expected to increase over time. The
requirements to be met, as well as the technology and length of
time available to meet those requirements, continue to develop and
change. Expenditures or costs for environmental compliance could
have a material adverse effect on our results of operations,
financial condition, and profitability.
The
Nixon facility operates under several federal and state permits,
licenses, and approvals with terms and conditions that contain a
significant number of prescriptive limits and performance
standards. These permits, licenses, approvals, limits, and
standards require a significant amount of monitoring, record
keeping and reporting to demonstrate compliance with the underlying
permit, license, approval, limit or standard. Non-compliance or
incomplete documentation of our compliance status may result in the
imposition of fines, penalties and injunctive relief. Additionally,
there may be times when we are unable to meet the standards and
terms and conditions of our permits, licenses and approvals due to
operational upsets or malfunctions, which may lead to the
imposition of fines and penalties or operating restrictions that
may have a material adverse effect on our ability to operate our
facilities, and accordingly our financial performance.
A12.
We are subject to strict laws and regulations regarding personnel
and process safety, and failure to comply with these laws and
regulations could have a material adverse effect on our results of
operations, financial condition and profitability.
We are
subject to the requirements of OSHA, SEMS, and comparable state
statutes that regulate the protection, health, and safety of
workers, and the proper design, operation and maintenance of our
equipment. In addition, OSHA and certain other environmental
regulations require that we maintain information about hazardous
materials used or produced in our operations and that we provide
this information to personnel and state and local governmental
authorities. Failure to comply with these requirements, including
general industry standards, record keeping requirements and
monitoring and control of occupational exposure to regulated
substances, may result in significant fines or compliance costs,
which could have a material adverse effect on our results of
operations, financial condition and cash flows.
A13.
Our insurance policies do not cover all losses, costs, or
liabilities that we may experience, and insurance companies that
currently insure companies in the energy industry may cease to do
so or substantially increase premiums.
Our
insurance program may not cover all operational risks and costs and
may not provide sufficient coverage in the event of a claim. We do
not maintain insurance coverage against all potential losses and
could suffer losses for uninsurable or uninsured risks or in
amounts in excess of existing insurance coverage. Losses in excess
of our insurance coverage could have a material adverse effect on
our business, financial condition, and results of
operations.
Changes
in the insurance markets subsequent to certain hurricanes and
natural disasters have made it more difficult and more expensive to
obtain certain types of coverage. The occurrence of an event that
is not fully covered by insurance, or failure by one or more of our
insurers to honor its coverage commitments for an insured event,
could have a material adverse effect on our business, financial
condition, and results of operations. Insurance companies may
reduce the insurance capacity they are willing to offer or may
demand significantly higher premiums or deductibles to cover our
assets. If significant changes in the number or financial solvency
of insurance underwriters for the energy industry occur, we may be
unable to obtain and maintain adequate insurance at a reasonable
cost. There is no assurance that our insurers will renew their
insurance coverage on acceptable terms, if at all, or that we will
be able to arrange for adequate alternative coverage in the event
of non-renewal. The unavailability of full insurance coverage to
cover events in which we suffer significant losses could have a
material adverse effect on our business, financial condition and
results of operations.
A14.
Our ability to use NOL carryforwards to offset future taxable
income for U.S. federal income tax purposes is subject to
limitation.
Under
IRC Section 382, a corporation that undergoes an “ownership
change” is subject to limitations on its ability to utilize
its pre-change NOL carryforwards to offset future taxable income.
Within the meaning of IRC Section 382, an “ownership
change” occurs when the aggregate stock ownership of certain
stockholders (generally 5% shareholders, applying certain
look-through rules) increases by more than 50 percentage points
over such stockholders' lowest percentage ownership during the
testing period (generally three years).
Blue
Dolphin experienced ownership changes in 2005 because of a series
of private placements, and in 2012 because of a reverse
acquisition. The 2012 ownership change limits our ability to
utilize NOLs following the 2005 ownership change that were not
previously subject to limitation. Limitations imposed on our
ability to use NOLs to offset future taxable income could cause
U.S. federal income taxes to be paid earlier than otherwise would
be paid if such limitations were not in effect, and could cause
such NOLs to expire unused, in each case reducing or eliminating
the benefit of such NOLs. Similar rules and limitations may apply
for state income tax purposes. NOLs generated after the 2012
ownership change are not subject to limitation. If the IRS were to
challenge our NOLs in an audit, we cannot assure that we would
prevail against such challenge. If the IRS were successful in
challenging our NOLs, all or some portion of our NOLs would not be
available to offset any future consolidated income, which would
negatively impact our results of operations and cash flows. Certain
provisions of the Tax Cuts and Jobs Act, enacted in 2017, may also
limit our ability to utilize our net operating tax loss
carryforwards.
At
December 31, 2019 and 2018, management determined that cumulative
losses incurred over the prior three-year period provided
significant objective evidence that limited the ability to consider
other subjective evidence, such as projections for future growth.
Based on this evaluation, we recorded a full valuation allowance
against the deferred tax assets as of December 31, 2019 and
2018.
A15.
We may not be able to keep pace with technological developments in
our industry.
The oil
and natural gas industry is characterized by rapid and significant
technological advancements and introductions of new products and
services using new technologies. As others use or development new
technologies, we may be placed at a competitive disadvantage or may
be forced by competitive pressures to implement those new
technologies at substantial costs. We may not be able to respond do
these competitive pressures or implement new technologies on a
timely basis or at an acceptable cost. If one or more of the
technologies we use now or in the future were to become obsolete,
our business, financial condition or results of operations could be
materially and adversely affected.
A16.
A terrorist attack or armed conflict could harm our
business.
Terrorist
activities, anti-terrorist efforts and other armed conflicts
involving the United States or other countries may adversely affect
the United States and global economies and could prevent us from
meeting our financial and other obligations. If any of these events
occur, the resulting political instability and societal disruption
could reduce overall demand for oil and natural gas, potentially
putting downward pressure on demand for our production and causing
a reduction in our revenues. Oil and natural gas related facilities
could be direct targets of terrorist attacks, and our operations
could be adversely impacted if infrastructure integral to our
customers’ operations is destroyed or damaged. Costs for
insurance and other security may increase as a result of these
threats, and some insurance coverage may become more difficult to
obtain, if available at all.
A17.
Our business could be negatively affected by security
threats.
A
cyberattack or similar incident could occur and result in
information theft, data corruption, operational disruption, damage
to our reputation or financial loss. Our industry has become
increasingly dependent on digital technologies to conduct certain
exploration, development, production, processing and financial
activities. Our technologies, systems, networks, or other
proprietary information, and those of our vendors, suppliers and
other business partners, may become the target of cyberattacks or
information security breaches that could result in the unauthorized
release, gathering, monitoring, misuse, loss or destruction of
proprietary and other information, or could otherwise lead to the
disruption of our business operations. Cyberattacks are becoming
more sophisticated and certain cyber incidents, such as
surveillance, may remain undetected for an extended period and
could lead to disruptions in critical systems or the unauthorized
release of confidential or otherwise protected information. These
events could lead to financial loss from remedial actions, loss of
business, disruption of operations, damage to our reputation or
potential liability. Also, computers control nearly all the oil and
gas distribution systems in the United States and abroad, which are
necessary to transportation our production to market. A cyberattack
directed at oil and gas distribution systems could damage critical
distribution and storage assets or the environment, delay or
prevent delivery of production to markets and make it difficult or
impossible to accurately account for production and settle
transactions. Cyber incidents have increased, and the United States
government has issued warnings indicating that energy assets may be
specific targets of cybersecurity threats. Our systems and
insurance coverage for protecting against cybersecurity risks may
not be sufficient. Further, as cyberattacks continue to evolve, we
may be required to expend significant additional resources to
continue to modify or enhance our protective measures or to
investigate and remediate any vulnerability to
cyberattacks.
A18.
We face various risks associated with increase activism against oil
and natural gas exploration and development
activities.
Opposition toward
oil and natural gas drilling and development activity has been
growing globally and is particularly pronounced in the United
States. Companies in the oil and natural gas industry are often the
target of activist efforts from both individuals and
non-governmental organizations regarding safety, human rights,
environmental matters, sustainability, and business practices.
Anti-development activists are working to, among other things,
reduce access to federal and state government lands and delay or
cancel certain operations such as drilling and
development.
A19.
The outbreak of COVID-19, or an outbreak of another highly
infectious or contagious disease, could adversely affect the
combined company’s business, financial condition, and results
of operations.
Our
business will be dependent upon the willingness and ability of our
customers to conduct transactions. The spread of a highly
infectious or contagious disease, such as COVID-19, could cause
severe disruptions in the worldwide economy, which could in turn
disrupt our business, activities, and operations, as well as that
of our customers. Moreover, since the beginning of January 2020,
the COVID-19 outbreak has caused significant disruption in the
financial markets both globally and in the United States. The
spread of COVID-19, or an outbreak of another highly infectious or
contagious disease, may result in a significant decrease in
business and/or cause customers to be unable to meet existing
payment or other obligations. A spread of COVID-19, or an outbreak
of another contagious disease, could also negatively impact the
availability of key personnel necessary to conduct our business.
Such a spread or outbreak could also negatively impact the business
and operations of third-party providers who perform critical
services for our business. If COVID-19, or another highly
infectious or contagious disease, spreads or the response to
contain COVID-19 is unsuccessful, we could experience a material
adverse effect on our business, financial condition, and results of
operations.
B.
Risks Related to Our Operations
B1.
Refining margins are volatile, and a reduction in refining margins
will adversely affect the amount of cash we will have available for
working capital.
Historically,
refining margins have been volatile, and they are likely to
continue to be volatile in the future. Our financial results are
primarily affected by the relationship, or margin, between our
refined product sales prices and our crude oil and condensate
costs. Our crude oil and condensate acquisition costs and the
prices at which we can ultimately sell our refined products depend
upon numerous factors beyond our control. The prices at which we
sell refined products are strongly influenced by the commodity
price of crude oil. If crude oil prices increase, our
‘refinery operations’ business segment margins will
fall unless we can pass along these price increases to our
wholesale customers. Increases in the selling prices for refined
products typically trail the rising cost of crude oil and may be
difficult to implement when crude oil costs increase dramatically
over a short period.
B2.
The price volatility of crude oil, other feedstocks, refined
products, and fuel and utility services may have a material adverse
effect on our earnings, cash flows and liquidity.
Our
refining earnings, cash flows and liquidity from operations depend
primarily on the margin above operating expenses (including the
cost of refinery feedstocks, such as crude oil and condensate that
are processed and blended into refined products) at which we can
sell refined products. Crude oil refining is primarily a
margin-based business. To improve margins, it is important for a
crude oil refinery to maximize the yields of high value finished
petroleum produces and to minimize the costs of feedstocks and
operating expenses. When the margin between refined product prices
and crude oil and other feedstock costs decreases, our margins are
negatively affected. Crude oil refining margins have historically
been volatile, and are likely to continue to be volatile, because
of a variety of factors, including fluctuations in the prices of
crude oil, other feedstocks, refined products, and fuel and utility
services. Although an increase or decrease in the price for crude
oil generally results in a similar increase or decrease in prices
for refined products, typically there is a time lag between the
comparable increase or decrease in prices for refined products. The
effect of changes in crude oil and condensate prices on our
refining margins therefore depends, in part, on how quickly and how
fully refined product prices adjust to reflect these
changes.
Prices
of crude oil, other feedstocks and refined products depend on
numerous factors beyond our control, including the supply of and
demand for crude oil, other feedstocks, and refined products. Such
supply and demand are affected by, among other things:
●
|
changes
in foreign, domestic, and local economic conditions;
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|
foreign
and domestic demand for fuel products;
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worldwide
political conditions, particularly in significant oil producing
regions;
|
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|
foreign
and domestic production levels of crude oil, other feedstocks, and
refined products and the volume of crude oil, feedstocks, and
refined products imported into the U.S.;
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●
|
availability
of and access to transportation infrastructure;
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●
|
capacity
utilization rates of refineries in the U.S.;
|
●
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Organization
of Petroleum Exporting Countries’ influence on oil
prices;
|
●
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development
and marketing of alternative and competing fuels;
|
●
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commodities
speculation;
|
●
|
natural
disasters (such as hurricanes and tornadoes), accidents,
interruptions in transportation, inclement weather or other events
that can cause unscheduled shutdowns or otherwise adversely affect
our refineries;
|
●
|
federal
and state governmental regulations and taxes; and
|
●
|
local
factors, including market conditions, weather conditions and the
level of operations of other refineries and pipelines in our
markets.
|
B3.
Our future success depends on our ability to acquire sufficient
levels of crude oil on favorable terms to operate the Nixon
refinery.
Operation of the
Nixon refinery depends on our ability to purchase adequate amounts
of crude oil and condensate. We have a long-term crude supply
agreement in place with Pilot. Under the initial term of the crude
supply agreement, Pilot will sell us approximately 24.8 million net
bbls of crude oil. Thereafter, the crude supply agreement will
continue on a one-year evergreen basis. Pilot may terminate the
crude supply agreement at any time by providing us 60 days prior
written notice. We may terminate the agreement upon the expiration
of the initial term or at any time during a renewal term by giving
Pilot 60 days prior written notice.
Pilot also stores
crude oil at the Nixon facility under a terminal services
agreement. Under the terminal services agreement, Pilot stores
crude oil at the Nixon facility at a specified rate per bbl of the
storage tank’s shell capacity. The terminal services
agreement has an initial term that expires April 30, 2020.
Thereafter, the terminal services agreement will continue on a
one-year evergreen basis. Either party may terminate the terminal
services agreement by providing the other party 60 days prior
written notice. However, the terminal services agreement will
automatically terminate upon expiration or termination of the crude
supply agreement.
Our
financial health could be adversely affected by defaults under our
secured loan agreements, historic net losses, and working capital
deficits, which could impact our ability to acquire crude oil and
condensate. A failure to acquire crude oil and condensate when
needed will have a material effect on our business results and
operations.
B4.
Downtime at the Nixon refinery could result in lost margin
opportunity, increased maintenance expense, increased inventory,
and a reduction in cash available for payment of our
obligations.
The
Nixon refinery periodically experiences planned and unplanned
temporary shutdowns. Unplanned shutdowns can occur for a variety of
reasons, including voluntary regulatory compliance measures,
cessation or suspension by regulatory authorities, or disabled
equipment. However, in Texas the most typically reason is excessive
heat or power outages from high winds and thunderstorms. Planned
turnarounds are used to repair, restore, refurbish, or replace
refinery equipment. Refineries typically undergo a major turnaround
every three to five years. Since the Nixon refinery is still in the
recommissioning phase, turnarounds are needed more frequently for
unanticipated maintenance or repairs.
We are
particularly vulnerable to disruptions in our operations because
all our refining operations are conducted at a single facility.
Refinery downtime in 2019 totaled 21 days compared to 30 days in
2018, an improvement of 9 days. Refinery downtime in 2019 related
to a maintenance turnaround (March 2019) and intermittent crude
heater issues while refinery downtime in 2018 was for repair and
maintenance of the naphtha stabilizer unit and two maintenance
turnarounds (January and March 2018). Any scheduled or unscheduled
downtime will result in lost margin opportunity, potential
increased maintenance expense, and a reduction of refined products
inventory, which could reduce our ability to meet our payment
obligations.
B5.
We may have capital needs for which our internally generated cash
flows and other sources of liquidity may not be adequate. Further,
Affiliates may, but are not required to, fund our working capital
requirements in the event our internally generated cash flows and
other sources of liquidity are inadequate.
If we
are unable to generate sufficient cash flows or otherwise secure
sufficient liquidity to support our short-term and long-term
capital requirements, we may not be able to meet our payment
obligations or pursue our business strategies, any of which could
have a material adverse effect on our results of operations or
liquidity. We currently rely on revenue from operations, including
sales of refined products and rental of petroleum storage tanks,
Affiliates, and borrowings under bank facilities to meet our
liquidity needs. At December 31, 2019 and 2018, accounts payable,
related party totaled $0.1 million and $1.5 million, respectively.
At December 31, 2019 and 2018, long-term debt and accrued interest,
related party was $8.2 and $8.6 million, respectively.
In the
event our working capital requirements are inadequate, or we are
otherwise unable to secure sufficient liquidity to support our
short term and/or long-term capital requirements, we may not be
able to meet our payment obligations, comply with certain deadlines
related to environmental regulations and standards, or pursue our
business strategies, any of which may have a material adverse
effect on our results of operations or liquidity. Our short-term
working capital needs are primarily related to acquisition of crude
oil and condensate to operate the Nixon refinery, repayment of debt
obligations, and capital expenditures for maintenance, upgrades,
and refurbishment of equipment at the Nixon facility. Our long-term
working capital needs are primarily related to repayment of
long-term debt obligations. Our liquidity will affect our ability
to satisfy all these needs.
B6.
Our business may suffer if any of the executive officers or other
key personnel discontinue employment with us. Furthermore, a
shortage of skilled labor or disruptions in our labor force may
make it difficult for us to maintain productivity.
Our
future success depends on the services of the executive officers
and other key personnel and on our continuing ability to recruit,
train and retain highly qualified personnel in all areas of our
operations. Furthermore, our operations require skilled and
experienced personnel with proficiency in multiple tasks.
Competition for skilled personnel with industry-specific experience
is intense, and the loss of these executives or personnel could
harm our business. If any of these executives or other key
personnel resign or become unable to continue in their present
roles and are not adequately replaced, our business could be
materially adversely affected.
B7.
Loss of market share by a key customer, one of which is an
Affiliate, or consolidation among our customer base could harm our
operating results.
One of
our significant customers is an Affiliate. The Affiliate purchases
our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel
contracts under preferential pricing terms due to a HUBZone
certification. The Affiliate accounted for 31.3% and 28.9% of total
revenue from operations in 2019 and 2018, respectively. The
Affiliate represented approximately $1.4 million and $0 in accounts
receivable at December 31, 2019 and 2018, respectively. The amounts
will be paid under normal business terms. Amounts outstanding
relating to the Jet Fuel Sales Agreement can vary significantly
period to period based on the timing of the related sales and
payments received. Amounts we owed to LEH under various long-term
debt, related-party agreements totaled $6.2 million and $6.1
million at December 31, 2019 and 2018, respectively.
|
Number
Significant
Customers
|
% Total Revenue
from Operations
|
Portion of
Accounts Receivable
December
31,
|
|
|
|
|
2019
|
4
|
96.5%
|
$1.7
million
|
|
|
|
|
2018
|
4
|
90.3%
|
$0.1
million
|
Our
customers have a variety of suppliers to choose from and therefore
can make substantial demands on us, including demands on product
pricing and on contractual terms, which often results in the
allocation of risk to us as the supplier. Our ability to maintain
strong relationships with our principal customers is essential to
our future performance. Our operating results could be harmed if a
key customer is lost, reduces their order quantity, requires us to
reduce our prices, is acquired by a competitor, or suffers
financial hardship.
Additionally, our
profitability could be adversely affected if there is consolidation
among our customer base and our customers command increased
leverage in negotiating prices and other terms of sale. We could
decide not to sell our refined products to a certain customer if,
because of increased leverage, the customer pressures us to reduce
our pricing such that our gross profits are diminished, which could
result in a decrease in our revenue. Consolidation may also lead to
reduced demand for our products, replacement of our products by the
combined entity with those of our competitors, and cancellations of
orders, each of which could harm our operating
results.
B8.
The sale of refined products to the wholesale market is our primary
business, and if we fail to maintain and grow the market share of
our refined products, our operating results could
suffer.
Our
success in the wholesale market depends in large part on our
ability to maintain and grow our image and reputation as a reliable
operator and to expand into and gain market acceptance of our
refined products. Adverse perceptions of product quality, whether
justified, or allegations of product quality issues, even if false
or unfounded, could tarnish our reputation and cause our wholesale
customers to choose refined products offered by our
competitors.
B9.
We are dependent on third parties for the transportation of crude
oil and condensate into and refined products out of our Nixon
facility, and if these third parties become unavailable to us, our
ability to process crude oil and condensate and sell refined
products to wholesale markets could be materially and adversely
affected.
We rely
on trucks for the receipt of crude oil and condensate into and the
sale of refined products out of our Nixon facility. Since we do not
own or operate any of these trucks, their continuing operation is
not within our control. If any of the third-party trucking
companies that we use, or the trucking industry in general, become
unavailable to transport crude oil, condensate, and/or our refined
products because of acts of God, accidents, government regulation,
terrorism or other events, our revenue and net income would be
materially and adversely affected.
B10.
We will continue to pursue acquisitions in the future.
Although we
regularly engage in discussions with, and submit proposals to,
acquisition candidates, suitable acquisitions may not be available
in the future on reasonable terms. If we do identify an appropriate
acquisition candidate, we may be unable to successfully negotiate
the terms of an acquisition, finance the acquisition, or, if the
acquisition occurs, effectively integrate the acquired business
into our existing businesses. Negotiations of potential
acquisitions and the integration of acquired business operations
may require a disproportionate amount of management’s
attention and our resources. Even if we complete additional
acquisitions, continued acquisition financing may not be available
or available on reasonable terms, any new businesses may not
generate the anticipated level of revenues, the anticipated cost
efficiencies, or synergies may not be realized, and these
businesses may not be integrated successfully or operated
profitably. Our inability to successfully identify, execute, or
effectively integrate future acquisitions may negatively affect our
results of operations.
B11.
Our suppliers source a substantial amount, if not all, of our crude
oil and condensate from the Eagle Ford Shale and may experience
interruptions of supply from that region.
Our
suppliers source a substantial amount, if not all, of our crude oil
and condensate from the Eagle Ford Shale. Consequently, we may be
disproportionately exposed to the impact of delays or interruptions
of supply from that region caused by transportation capacity
constraints, curtailment of production, unavailability of
equipment, facilities, personnel or services, significant
governmental regulation, natural disasters, adverse weather
conditions, plant closures for scheduled maintenance or
interruption of transportation of oil or natural gas produced from
the wells in that area.
B12.
Our refining operations and customers are primarily located within
the Eagle Ford Shale and changes in the supply/demand balance in
this region could result in lower refining margins.
Our
primary operating assets are in Nixon, Texas in the Eagle Ford
Shale, and we market our refined products in a single, relatively
limited geographic area. Therefore, we are more susceptible to
regional economic conditions than our more geographically
diversified competitors. Should the supply/demand balance shift in
our region due to changes in the local economy, an increase in
refining capacity or other reasons, resulting in supply in the PADD
3 (Gulf Coast) region to exceed demand, we would have to deliver
refined products to customers outside of our current operating
region and thus incur considerably higher transportation costs,
resulting in lower refining margins.
B13.
Climate change and related legislation or regulation reducing
emissions of greenhouse gases could require us to incur significant
costs or could result in a decrease in demand for our refined
products, which could adversely affect our business.
Currently, various
legislative and regulatory measures to address reporting or
reduction of greenhouse gas emissions have been adopted or are in
various phases of discussion or implementation. Requiring
reductions in greenhouse gas emissions could cause us to incur
substantial costs to: (i) operate and maintain the Nixon facility,
(ii) install new emission controls at the Nixon facility, and (iii)
administer and manage any greenhouse gas emissions programs,
including the acquisition or maintenance of emission credits or
allowances. These requirements may also adversely affect our
suppliers and customers, leading to an indirect adverse effect on
our business, financial condition and results of our
operations.
Requiring a
reduction in greenhouse gas emissions and the increased use of
renewable fuels could decrease demand for refined products, which
could have an indirect, but material, adverse effect on our
business, financial condition and results of operations. For
example, the EPA has promulgated rules establishing greenhouse gas
emission standards for new-model passenger cars, light-duty trucks
and medium duty passenger vehicles. Concerns over climate change
and related greenhouse gas emissions could affect demand for
petroleum products as well as new energy technologies including
electric vehicles, fuel cells and battery storage systems and
transportation alternatives. Any of these developments, or new
taxes or fees imposed on crude oil, natural gas or refined products
to fund clean energy initiatives at the state or federal level,
could have an indirect adverse effect on our business due to
reduced demand for refined products.
Scientific studies
have indicated that increasing concentrations of greenhouse gases
in the atmosphere can produce changes in climate with significant
physical effects, including increased frequency and severity of
storms, floods and other extreme weather events that could affect
our operations. Increased concern over the effects of climate
change may also affect our customers’ energy strategies,
consumer consumption patterns, and government and private sector
alternative energy initiatives, any of which could adversely affect
demand for petroleum products and have a material adverse effect on
our business, financial condition and results of
operations.
C.
Risks Related to Pipeline and Facilities Assets, as well as our
Pipelines and Oil and Gas Properties
C1.
Assessment of civil penalties by BOEM for failure to satisfy orders
to increase supplemental pipeline bonds and by BSEE for failure to
decommission platform and pipeline assets within the time period
prescribed could significantly impact our operations, liquidity,
and financial condition.
We have
pipelines and facilities assets that are subject to BSEE’s
idle iron regulations. BSEE mandates lessees and rights-of-way
holders to permanently abandon and/or remove platforms and other
structures when they are no longer useful for operations. To cover
the various obligations of lessees and rights-of-way holders
operating in federal waters of the Gulf of Mexico, BOEM evaluates
an operator’s financial ability to carry out present and
future obligations to determine whether the operator must provide
additional security beyond the minimum bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning and removing platforms and pipelines at the end of
production or service activities. Once plugging and abandonment
work has been completed, the collateral backing the financial
assurance is released by BOEM.
BDPL
has historically maintained $0.9 million in financial assurance to
BOEM for the decommissioning of its trunk pipeline offshore in
federal waters. Following an agency restructuring of the financial
assurance program, in March 2018 BOEM ordered BDPL to provide
supplemental pipeline bonds totaling $4.8 million for five (5)
existing pipeline rights-of-way within sixty (60) calendar days. In
June 2018, BOEM issued BDPL INCs for each right-of-way that failed
to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted
multiple extension requests that extended BDPL’s deadline for
filing a statement of reasons for the appeal with the IBLA. In
December 2018, BSEE issued an INC to BDPL for failure to flush and
fill Pipeline Segment No. 13101.
On
August 9, 2019, BDPL timely filed its statement of reasons for the
appeal with the IBLA. Management met with the BOEM and BSEE on
August 15, 2019. BSEE proposed that Blue Dolphin submit permit
applications for decommissioning and removal of its offshore assets
within six (6) months (no later than February 15, 2020), and
develop and implement a safe boarding plan for submission with such
permit applications. BDPL timely submitted permit applications for
decommissioning and removal of the subject offshore assets on
February 11, 2020. Further, BSEE proposed that Blue Dolphin conduct
approved, permitted work in a safe manner within 12 months (no
later than August 15, 2020). Considering BDPL’s August 2019
meeting with BOEM and BSEE, BDPL requested a stay in the IBLA
matter until August 2020. The Office of the Solicitor of the U.S.
Department of the Interior was agreeable to a 10-day extension
while it conferred with BOEM on BDPL’s stay request. In late
October 2019, BDPL filed a motion to request the 10-day extension,
which motion was subsequently granted by the IBLA. The
solicitor’s office consented to an additional 14-day
extension for BDPL to file its reply, and BDPL filed a motion to
request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in the
August 15, 2019 meeting may help in future discussions with BOEM
related to the INCs.
BDPL
reasonably expects that successful completion of its
decommissioning obligations prior to BSEE’s August 2020
deadline will significantly reduce or eliminate the amount of
financial assurance required by BOEM, which may serve to partially
or fully resolve the INCs. BDPL expects to complete approved,
permitted decommission work by the BSEE August 2020 deadline. If
decommissioning of the assets is not completed by the allowable
deadline, BDPL will be subject to vigorous regulatory oversight and
enforcement, including but not limited to failure to correct an
INC, civil penalties, and revocation of BDPL’s operator
designation, which may have a material adverse effect on our
earnings, cash flows and liquidity.
BDPL’s
pending appeal of the INCs does not relieve BDPL of its obligations
to provide additional financial assurance or of BOEM’s
authority to impose financial penalties. If BDPL is required by
BOEM to provide significant additional financial assurance or is
assessed significant penalties under the INCs, we will experience a
significant and material adverse effect on our operations,
liquidity, and financial condition. We are currently unable to
predict the outcome of the INCs. Accordingly, we have not recorded
a liability on our consolidated balance sheet as of December 31,
2019.
At
December 31, 2019 and 2018, BDPL maintained approximately $0.9
million in credit and cash-backed pipeline rights-of-way bonds
issued to BOEM. As of December 31, 2019, we maintained $2.6 million
in AROs related to abandonment of these assets.
D.
Risks Related to Our Common Stock
D1.
Our stock price may decline due to sales of shares by
Affiliates.
Affiliates sales of
substantial amounts of our Common Stock, or the perception that
these sales may occur, may adversely affect the price of our Common
Stock and impede our ability to raise capital through the issuance
of equity securities in the future. Affiliates could elect in the
future to request that we file a registration statement to them to
sell shares of our Common Stock. If Affiliates were to sell a large
number of shares into the public markets, Affiliates could cause
the price of our Common Stock to decline.
D2.
We are authorized to issue up to a total of 20 million shares of
our Common Stock and 2.5 million shares of preferred stock,
potentially diluting equity ownership of current holders and the
share price of our Common Stock.
We
believe that it is necessary to maintain a sufficient number of
available authorized shares of our Common Stock and Preferred Stock
to provide us with the flexibility to issue Common Stock or
Preferred Stock for business purposes that may arise as deemed
advisable by our Board. These purposes could include, among other
things, (i) future stock dividends or stock splits, which may
increase the liquidity of our shares; (ii) the sale of stock to
obtain additional capital or to acquire other companies or
businesses, which could enhance our growth strategy or allow us to
reduce debt if needed; and (iii) for other bona fide purposes. Our
Board may authorize us to issue the available authorized shares of
Common Stock or Preferred Stock without notice to, or further
action by, our stockholders, unless stockholder approval is
required by law or the rules of the OTCQX. The issuance of
additional shares of Common Stock or Preferred Stock may
significantly dilute the equity ownership of the current holders of
our Common Stock.
Remainder
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Properties and Legal Proceedings
|
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
An
Affiliate operates and manages all our properties under the Amended
and Restated Operating Agreement. Our owned facilities have been
constructed or acquired over a period of years and vary in age and
operating efficiency. We believe that all our properties and
facilities are adequate for our operations and that are facilities
are adequately maintained. At our corporate headquarters, BDSC
leases 7,675 square feet of office space in Houston, Texas. The
location and general description of our other properties are
described within the refinery operations, tolling and terminaling,
and inactive operations discussions in “Item
1.”
See
“Item 1.,” “Note (4),” “Note
(10),” “Note (12),” “Note (13),” and
“Note (16)” to our consolidated financial statements
for additional disclosures related to our properties, leases,
decommissioning obligations, and assets pledged as
collateral.
ITEM 3. LEGAL PROCEEDINGS
Resolved - GEL Settlement
As
previously disclosed, GEL was awarded the GEL Final Arbitration
Award in the aggregate amount of $31.3 million. In July 2018, the
Lazarus Parties and GEL entered into the GEL Settlement Agreement.
The GEL Settlement Agreement was subsequently amended five (5)
times to extend the GEL Settlement Payment Date and/or modify
certain terms related to the GEL Interim Payments or the GEL
Settlement Payment. During the period September 2017 to August
2019, GEL received the following amounts from the Lazarus Parties
to reduce the outstanding balance of the GEL Final Arbitration
Award:
|
|
|
|
Initial payment
(September 2017)
|
$3.7
|
GEL Interim
Payments (July 2018 to April 2019)
|
8.0
|
Settlement Payment
(Multiple Payments May 7 to 10, 2019)
|
10.0
|
Deferred Interim
Installment Payments (June 2019 to August 2019)
|
0.5
|
|
|
|
$22.2
|
The GEL
Settlement Effective Date occurred on August 23, 2019. As a result
of the GEL Settlement: (i) the mutual releases became effective,
(ii) GEL filed a stipulation of dismissal of claims against LE, and
(iii) Blue Dolphin recognized a $9.1 million gain on the
extinguishment of debt on its consolidated statements of operations
in the third quarter of 2019. Until the GEL Settlement occurred,
the debt was reflected on Blue Dolphin’s consolidated balance
sheets as accrued arbitration award payable. At December 31, 2019
and 2018, accrued arbitration award payable was $0 and
$21.1million, respectively.
Other Legal Matters
We are
involved in lawsuits, claims, and proceedings incidental to the
conduct of our business, including mechanic’s liens,
contract-related disputes, administrative proceedings, and
financial assurance (bonding) requirements with regulatory bodies.
Management is in discussion with all concerned parties and does not
believe that such matters will have a material adverse effect on
our financial position, earnings, or cash flows. However, there can
be no assurance that such discussions will result in a manageable
outcome or that we will be able to meet financial assurance
(bonding) requirements. If Veritex exercises its rights and
remedies due to defaults under our secured loan agreements, our
business, financial condition, and results of operations will be
materially adversely affected.
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
Remainder
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Market for Equity, Stockholder Matters and Purchases of Equity
Securities
|