PART I
The following section of this Annual Report on Form 10-K generally
refers to business developments during the twelve months ended
December 31, 2020. Discussion of or references to prior period
business developments that are not included in this Form 10-K can
be found in “Part I, Item 1. Business” of our
Annual
Report on Form 10-K for the year ended December 31,
2019.
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). For more information related to our
business segments and properties, see “Part I. Item 1.
Business—Refinery Operations, —Tolling and Terminaling
Operations, and —Inactive Operations” and “Part
I. Item 2. Properties” in this report.
Affiliates
Affiliates
controlled approximately 82% of the voting power of our
Common Stock as of the filing date of this report. 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 “Part I, Item
1A. Risk Factors” and “Part II, Item 8. Financial
Statements and Supplementary Data, Note (3)” for additional
disclosures related to Affiliate agreements, arrangements, and
risks associated with working capital deficits.
Going Concern
Management has determined that certain factors raise substantial
doubt about our ability to continue as a going concern. As
discussed more fully below, these factors include inadequate
liquidity to sustain operations due to defaults under our secured
loan agreements, margin
deterioration and volatility, and historic net losses and working
capital deficits. Our consolidated financial statements assume we
will continue as a going concern and do not include any adjustments
that might result from the outcome of this uncertainty. Our ability
to continue as a going concern depends on sustained positive
operating margins and having working capital for, amongst other
requirements, purchasing crude oil and condensate and making
payments on long-term debt. Without positive operating margins and
working capital, our business will 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,
including a potential bankruptcy filing.
Defaults Under Secured Loan Agreements. We are
currently in default under certain of our secured loan agreements
with third parties and related parties. As a result, the debt
associated with these obligations was classified within the current
portion of long-term debt on our consolidated balance sheets at
December 31, 2020 and 2019. See “Part II, Item 8. Financial
Statements and Supplementary Data, Notes (1), (3), (10), and
(11)” for additional disclosures related to third-party and
related-party debt, defaults on such debt, and the potential
effects of such defaults on our business, financial condition, and
results of operations.
Third-Party Defaults
●
Veritex Loans
– Defaults under the LE Term Loan Due 2034 and LRM Term Loan
Due 2034 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. 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. Veritex exercising its rights
would also adversely impact the trading price of our common stock
and the value of an investment in our common stock, which could
lead to holders of our common stock losing their investment in its
entirety. We can provide no assurance that: (i) our assets or cash
flow will be sufficient to fully repay borrowings under our secured
loan agreements with Veritex, either upon maturity or if
accelerated, (ii) LE and LRM will be able to refinance or
restructure the payments of the debt, and/or (iii) Veritex, as
first lien holder, will provide future default waivers. The
borrowers continue in active dialogue with Veritex. As of the
filing date of this report, payments under the Veritex loans were
current, but other defaults remained outstanding.
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Blue Dolphin Energy
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December
31, 2020
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●
Amended Pilot Line
of Credit – Upon maturity of the Pilot Line of Credit in May
2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue
Dolphin, each a guarantor and collectively guarantors, a notice
demanding the immediate payment of the unpaid principal amount and
all interest accrued and unpaid, and all other amounts owing or
payable (the “Obligations”). Pursuant to the Amended
Pilot Line of Credit, commencing on May 4, 2020, the Obligations
began to accrue interest at a default rate of fourteen percent
(14%) per annum. Failure of the borrower or any guarantor of paying
the past due Obligations constituted an event of default. Pilot
expressly retained and reserved all its rights and remedies
available to it at any time, including without limitation, the
right to exercise all rights and remedies available to Pilot under
the Amended Pilot Line of Credit or applicable law or
equity.
Pursuant to a June
1, 2020 notice, Pilot began applying Pilot’s payment
obligations to NPS under each of (a) the Terminal Services
Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as
of May 2019, between NPS and Pilot, and (b) the Terminal Services
Agreement (covering Tank No. 56), dated as of June 1, 2019, between
NPS and Pilot, against NPS’ payment obligations to Pilot
under the Amended Pilot Line of Credit. Such tank lease setoff
amounts only partially satisfy NPS’ obligations under the
Amended Pilot Line of Credit, and Pilot expressly retained and
reserved all its rights and remedies available to it at any time,
including, without limitation, the right to exercise all rights and
remedies available to Pilot under the Amended Pilot Line of Credit
or applicable law or equity. For the twelve-month periods ended
December 31, 2020 and 2019, the tank lease setoff amounts totaled
$1.3 million and $0, respectively. For the twelve-month periods
ended December 31, 2020 and 2019, the amount of interest NPS
incurred under the Amended Pilot line of credit totaled $1.0
million and $0, respectively.
On November 23,
2020, NPS and guarantors received notice from Pilot that the entry
into the SBA EIDLs was a breach of the Amended Pilot Line of Credit
and Pilot demanded full repayment of the Obligations, including
through use of the proceeds of the SBA EIDLs. Pilot also notified
the SBA that the liens securing the SBA EIDLs are junior to those
securing the Obligations. While the SBA acknowledged this point and
indicated a willingness to subordinate the SBA EIDLs, no further
action has been taken by Pilot as of the filing date of this
report.
Any
exercise by Pilot of its rights and remedies under the Amended
Pilot Line of Credit 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. NPS and guarantors continue in active dialogue with
Pilot to reach a negotiated settlement, and we believe that Pilot
hopes to continue working with NPS to settle the Obligations. NPS
and guarantors are also working on the possible refinance of
amounts owing and payable under the Amended Pilot Line of Credit.
However, progress with potential lenders has been slow due to the
ongoing COVID-19 pandemic. NPS’s ability to repay, refinance,
replace or otherwise extend this credit facility is dependent on,
among other things, business conditions, our financial performance,
and the general condition of the financial markets. Given the
current financial markets, 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 can provide no 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. If new debt or other liabilities are added to the
Company’s current consolidated debt levels, the related risks
that it now faces could intensify. In the event we are unsuccessful
in such endeavors, NPS may be unable to pay the amounts outstanding
under the Amended Pilot Line of Credit, which may require us to
seek protection under bankruptcy laws. 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.
●
Notre Dame Debt
– Pursuant to a 2015 subordination agreement, the holder of
the Notre Dame Debt agreed to subordinate their right to payments,
as well as any security interest and liens on the Nixon
facility’s business assets, in favor of Veritex as holder of
the LE Term Loan Due 2034. To date, no payments have been made
under the subordinated Notre Dame Debt and
the holder of the Notre Dame Debt has taken no action as a result
of the non-payment.
Our
financial health could be materially and adversely affected by
defaults in our secured loan agreements, margin deterioration and
volatility, historic net losses and working capital deficits, as
well as termination of the crude supply agreement or terminal
services agreement with Pilot, which could impact our ability to
acquire crude oil and condensate. In addition, sustained periods of
low crude oil prices due to market volatility associated with the
COVID-19 pandemic has resulted in significant financial constraints
on producers, which in turn has resulted in long term crude oil
supply constraints and increased transportation costs. A failure to
acquire crude oil and condensate when needed will have a material
effect on our business results and operations. During the
twelve-month period ended December 31, 2020, our refinery
experienced downtime as a result of lack of crude due to cash
constraints.
Related-Party Defaults
Affiliates
controlled approximately 82% of the voting power of our Common
Stock as of the filing date of this report, an Affiliate operates
and manages all Blue Dolphin properties, an Affiliate is a
significant customer of our refined products, and we borrow from
Affiliates during periods of working capital deficits.
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Blue Dolphin Energy
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December 31,
2020
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Margin Deterioration and Volatility. Our refining margins generally improve in an
environment of higher crude oil and refined product prices, and
where the spread between crude oil prices and refined product
prices widen. Steps taken early on to address the COVID-19
pandemic globally and nationally, including government-imposed
temporary business closures and voluntary shelter-at-home
directives, caused oil prices to decline sharply in 2020. In
addition, actions by members of the OPEC and other producer
countries with respect to oil production and pricing significantly
impacted supply and demand in global oil and gas markets.
In response
to margin deterioration and volatility, we adjust throughput and
production at the Nixon refinery based on prevailing market
conditions. Although federal, state, and
local governments and health officials have made strides to contain
the virus, treat its effects, and implement vaccine programs
and OPEC
has since agreed to certain production cuts, oil prices have
remained depressed and oversupply and lack of demand in the market
persists. Oil and refined product prices and demand are
expected to remain volatile for the foreseeable future, and we
cannot predict when prices and demand will improve and stabilize.
As of the
date of this report the Nixon refinery is still operating at
reduced throughput levels and we expect it to continue to do so
until market conditions substantially improve. We are
currently unable to estimate the impact these events will have on
our future financial position and results of operations.
Accordingly, we expect that these events will continue to have a
material adverse effect on our financial position or results of
operations.
Historic Net Losses and Working Capital Deficits.
Net Losses
Net
loss for the twelve months ended December 31, 2020 was $14.5
million, or a loss of $1.15 per share, compared to net income of
$7.4 million, or income of $0.66 per share, for the twelve months
ended December 31, 2019. The significant increase in net loss
during the twelve months ended December 31, 2020 was the result of:
(1) lower refining margins associated with commodity price
volatility, as noted above, and (2) lower throughput volumes and
barrels sold. Net income for the twelve months ended December 31,
2019 included a $9.1 million gain on the extinguishment of debt
related to the GEL Settlement.
Working Capital Deficits
We had
a working capital deficit of $72.3 million and $59.4 million at
December 31, 2020 and 2019, respectively. Excluding the current
portion of long-term debt, we had a working capital deficit of
$22.9 million and $19.6 million at December 31, 2020 and 2019,
respectively. Cash and cash equivalents, restricted cash (current
portion), and restricted cash, noncurrent were as
follow:
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|
|
|
|
|
|
|
|
|
|
|
|
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Cash
and cash equivalents
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$549
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$72
|
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Restricted
cash (current portion)
|
48
|
49
|
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Restricted
cash, noncurrent
|
514
|
547
|
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Total
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$1,111
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$668
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See
“Part I, Item 1A. Risk Factors” and “Part II,
Item 8. Financial Statements and Supplementary Data, Note
(1)” regarding going concern factors and associated
risks.
Operating Risks
Successful
execution of our business strategy depends on several key factors,
including, having adequate working capital to meet operational
needs and regulatory requirements, maintaining safe and reliable
operations at the Nixon facility, meeting contractual obligations,
and having favorable margins on refined products. As discussed
under “Part I, Item 1. Business —Going Concern”
and throughout this report, we are currently unable to estimate the
impact the COVID-19 pandemic will have on our future financial
position and results of operations. Under earlier state and federal
mandates that regulated business closures, our business was deemed
as an essential business and, as such, remained open. As U.S.
federal, state, and local officials address surging coronavirus
cases and roll out COVID-19 vaccines, we expect to continue
operating. Governmental mandates, while necessary to address the
virus, will result in further business and operational disruptions,
including demand destruction, liquidity strains, supply chain
challenges, travel restrictions, controls on in-person gathering,
and workforce availability.
Despite
this, management believes that it has taken all prudent steps to
mitigate risk, avoid business disruptions, manage cash flow, and
remain competitive in a low oil price environment. We are managing
cash flow by optimizing receivables and payables by prioritizing
payments, managing inventory to avoid buildup, monitoring
discretionary spending, and delaying capital expenditures. At the
Nixon facility, we adjust throughput and
production based on prevailing market conditions.
Facility-dependent personnel, including those needed to maintain
the Nixon facility, report to the facility under strict protocols
that are designed to ensure personnel health and safety. We are
also supporting non-facility-dependent personnel through remote
work and virtual meeting technology, and we are encouraging all
personnel to follow local guidance. All non-essential business
travel and attendance at conferences, trainings, and other
gatherings have been suspended.
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Blue Dolphin Energy
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December 31,
2020
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There
can be no assurance that our business strategy will be successful,
that Affiliates will continue to fund our working capital needs
when we experience working capital deficits, that we will meet
regulatory requirements to provide additional financial assurance
(supplemental pipeline bonds) and decommission offshore pipelines
and platform assets, that we will be able to obtain additional
financing on commercially reasonable terms or at all, or that
margins on our refined products will be favorable. Further, if
Veritex and/or Pilot exercise their rights and remedies under our
secured loan agreements, our business, financial condition, and
results of operations will be materially adversely
affected.
Refinery Operations
Our
refinery operations segment consists of the following assets and
operations:
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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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Capital Improvement Expansion Project. During 2020, we
safely completed a 5-year capital improvement expansion project of
the Nixon facility. The expansion project involved the construction
of nearly 1.0 million bbls of new petroleum storage tanks, smaller
efficiency improvements to the refinery, and acquisition of
refurbished refinery equipment for future deployment. The increase
in petroleum storage capacity has helped with de-bottlenecking the
Nixon refinery. Additional petroleum storage capacity will allow
for increased refinery throughput of up to approximately 30,000 bpd
while deployment of various refurbished refinery equipment will
help improve processing capacity and increase the Nixon
refinery’s complexity. The total cost of the project, which
was funded through the Veritex loans, was approximately $32.5
million.
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. Effective
March 1, 2020, Pilot assigned its rights, title, interest, and
obligations in the crude supply agreement to Tartan Oil LLC, a
Pilot affiliate. Either party may terminate the crude supply
agreement by providing the other party 60 days prior written
notice. Pilot also stores crude oil at the Nixon facility under two
terminal services agreements. Under the terminal services
agreements, Pilot stores crude oil at the Nixon facility at a
specified rate per bbl of the storage tank’s shell capacity.
Although the initial term of the terminal services agreement
expired April 30, 2020, the agreement renewed 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. In addition, sustained periods of low crude oil prices
due to market volatility associated with the COVID-19 pandemic has
resulted in significant financial constraints on producers, which
in turn has resulted in long term crude oil supply constraints and
increased transportation costs. A failure to acquire crude oil and
condensate when needed will have a material effect on our business
results and operations. During the twelve-month period ended
December 31, 2020, our refinery experienced downtime as a result of
lack of crude due to cash constraints.
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. The product sales agreement
with the Affiliate has a 1-year term expiring the earliest to occur
of March 31, 2022 plus 30-day carryover or delivery of the maximum
quantity of jet fuel. Our intermediate products are primarily sold
in nearby markets to wholesalers and refiners as a feedstock for
further blending and processing.
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.
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.
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Blue Dolphin Energy
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December 31,
2020
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Safety and Downtime. Our
refinery operations are operated in a manner materially 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.
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, disabled
equipment, or lack of crude due to cash constraints. However, in
Texas the most typical reason is excessive heat or power outages
from high winds and thunderstorms. The Nixon refinery did
not incur significant damage related to freezing temperatures in
February 2021. However, the plant was down for approximately 8 days
as a result of lost external power. 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.
Tolling and Terminaling Operations
Our
tolling and terminaling segment consists of the following assets
and operations:
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Property
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Key Products
Handled
|
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Operating Subsidiary
|
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Location
|
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|
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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,
we completed a 5-year capital improvement expansion project of the
Nixon facility during 2020. Tolling and terminaling capital
improvements 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 materially 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.
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Blue Dolphin Energy
Company
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December 31,
2020
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11
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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. We fully impaired our pipeline assets in 2016
and our oil and gas leasehold interests in 2011. Our pipeline
assets and oil and gas leasehold interests had no revenue during
the twelve months ended December 31, 2020 and 2019. See “Part
II, Item 8. Financial Statements and Supplementary Data, Note
(16)” related to pipelines and platform decommissioning
requirements and related risks.
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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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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.
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, 2020, the Affiliate had a
total of 199 employees, 161 full-time and 38 part-time. No
personnel were covered by collective bargaining agreements. See
“Part II, Item 8. Financial Statements and Supplementary
Data, Note (3)” 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.
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Blue Dolphin Energy
Company
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December 31,
2020
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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.
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Blue Dolphin Energy
Company
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December 31,
2020
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13
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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, 2020, we
maintained approximately $0.9 million in credit and cash-backed
pipeline rights-of-way bonds issued to the BOEM. As of December 31,
2020, we maintained $2.6 million in AROs related to abandonment of
these assets. See “Part I, Item 1A. Risk Factors” and
“Part II, Item 8. Financial Statements and Supplementary
Data, Notes (12) and (16)” 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.
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
14
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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 the COVID-19 Pandemic
A1.
The outbreak of the COVID-19 pandemic significantly affected our
liquidity, business, financial condition, and results of operations
in 2020 and may continue to do so thereafter. There can be no
assurance that our liquidity, business, financial condition, and
results of operations will revert to pre-2020 levels once the
impacts of COVID-19 pandemic cease.
The
outbreak of the COVID-19 pandemic negatively impacted worldwide
economic and commercial activity and financial markets, as well as
global demand for petroleum products in 2020 and is expected to
continue in 2021. The COVID-19 pandemic also created simultaneous
shocks in oil supply, demand, and pricing resulting in an economic
challenge to our industry which has not occurred since our
formation. The COVID-19 pandemic and related governmental
responses, as well as developments in the global oil markets,
resulted in significant business and operational disruptions,
including business closures, supply chain disruptions, travel
restrictions, stay-at-home orders, and limitations on the
availability of workforces. As a result of commodity price
volatility and decreased demand for our products, our business
results and cash flows were significantly adversely impacted by the
COVID-19 pandemic. Specifically, Blue Dolphin’s income and
cash flow from operations reflected a loss of $7.9 million and use
of cash of $3.9 million, respectively, for the twelve months ended
December 31, 2020 compared to income of $5.5 million and use of
cash of $8.2 million, respectively, for the twelve months ended
December 31, 2019. We expect the combination of abnormal volatility
in commodity prices and significant decreased demand for our
refined products to continue for the foreseeable
future.
The
duration of the impact of the COVID-19 pandemic and the related
market developments is unknown. The continued negative impact of
these events on our business and operations will depend on the
ongoing severity, location and duration of the effects and spread
of COVID-19, the effectiveness of vaccine programs, other actions
undertaken by federal, state, and local governments and health
officials to contain the virus or treat its effects, and how
quickly and to what extent economic conditions improve and normal
business and operating conditions resume in 2021 or thereafter. We
continue to take measures to lessen the impact of the pandemic on
our operations and limit the spread of the virus among personnel.
For example, we operated the Nixon facility at reduced rates in
2020 based on market conditions and staffing levels, and we expect
to continue adjusting the facility’s operating rate until
market and other conditions substantially improve. We have
carefully evaluated projects and, as a result, have limited or
postponed projects and other non-essential work. We have planned a
level of capital expenditures we believe will allow us to satisfy
and comply with all required safety, environmental, and planned
regulatory capital commitments and other regulatory requirements,
although there are no assurances that we will be able to continue
to do so. Non-compliance with applicable environmental and safety
requirements, including as a result of reduced staff due to an
outbreak of the virus at one of our locations, may impair our
operations, subject us to fines or penalties assessed by
governmental authorities, and/or result in an environmental or
safety incident. We may also be subject to liability as a result of
claims against us by impacted workers or third
parties.
Continued
disruptions to our business as a result of the COVID-19 pandemic
could result in a material adverse effect on our business, result
of operations, financial condition, cash flows, and our ability to
service our indebtedness and other obligations. There can also be
no assurance that our liquidity, business, financial condition, and
results of operations will revert to pre-2020 levels once the
impacts of the COVID-19 pandemic cease. To the extent the COVID-19
pandemic continues to adversely affect our business, financial
condition, results of operations and liquidity, it may also have
the effect of heightening many of the other risks associated with
our company, our business, and our industry, as those risk factors
are amended or supplemented by reports and documents that we file
with the SEC after the date of this Form 10-K.
A2.
The persistence or worsening of market conditions related to the
COVID-19 pandemic may require us to raise additional capital to
operate our business or refinance existing debt on
terms that are not acceptable to us or not at
all.
Our
primary cash requirements relate to: (i) purchasing crude oil and
condensate for the operation of the Nixon refinery, (ii)
reimbursing LEH for direct operating expenses and paying the LEH
operating fee under the Amended and Restated Operating Agreement
and (iii) servicing debt. In instances where we experience a
working capital deficit, we have historically relied on Affiliates
to meet our liquidity needs. We are actively exploring additional
financing; however, we currently have no arrangements for
additional capital and no assurances can be given that we will be
able to raise sufficient capital when needed, on acceptable terms,
or at all.
The
effects of the COVID-19 pandemic on macroeconomic conditions and
the capital markets make it more challenging to raise capital.
Adverse effects include a
global tightening of credit and liquidity, reduced availability,
increased cost of credit, and a slow down the decision-making of
financial institutions. These factors could materially and
negatively affect the availability, timing, and cost for which we
may obtain any additional funding for working capital purposes or
to refinance existing debt. If we are unable to raise
sufficient additional capital in the very near term, we may further
default on our payment obligations under certain of our existing
debt obligations. Without additional financing, it
remains unclear whether we will have or can obtain sufficient
liquidity to withstand COVID-19 disruptions to our
business.
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Blue Dolphin Energy
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December 31,
2020
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A3.
Continued or further deterioration in demand for our refined
products could negatively affect our operations and financial
condition.
Business closings
and layoffs in the markets we operate have adversely affected
demand for our refined products. Sustained deterioration of general
economic conditions or weak demand levels persisting in 2021 could
require additional actions on our part, such as temporarily or
permanently ceasing to operate the Nixon facility to lower our
operating costs or reconfigure the Nixon facility to increase
flexibility to be responsive to evolving market conditions,
including potentially pivoting to renewable fuels. There may be
significant incremental costs or impairment charges associated with
such actions. Continued or further deterioration of economic
conditions may harm our liquidity and ability to repay our
outstanding debt and the trading price of Blue Dolphin’s
Common Stock.
A4.
Potential
impairment in the carrying value of long-lived assets could
negatively affect our
operating results.
We have a significant amount of long-lived assets
on our consolidated balance sheet. Under generally accepted
accounting principles, long-lived assets are required to be
reviewed for impairment annually or whenever adverse events or
changes in circumstances indicate a possible impairment. If
business conditions or other factors cause the undiscounted
estimated pretax cash flows for long-lived assets to fall below
their carrying value, we may be required to record non-cash
impairment charges. Events and conditions that could result in
impairment in the value of our long-lived assets include
lower realized refining
margins, decreased refinery production, other factors leading to a reduction in expected
long-term sales or profitability, or significant
changes in the manner of use for the assets or the overall business
strategy.
In this
challenging business environment, we continuously monitor our
assets for impairment, as well as optimization opportunities.
We evaluated our refinery and
facilities assets for impairment as of June 30, September 30, and
December 31, 2020. Although no indicators of asset impairment were
identified as of each reporting period indicated, an impairment may
be required in the future as the long-term impact of the crisis
becomes clearer, losses continue to be material, or as new
opportunities arise, such as reconfiguration of the Nixon refinery into a
renewable fuels facility.
Significant
management judgment is required in the forecasting of future
operating results that are used in the preparation of projected
cash flows. As a result, there can be no assurance that the
estimates and assumptions made for purposes of our impairment
analysis will prove to be an accurate prediction of the future.
Should our assumptions significantly change in future periods, it
is possible we may later determine the carrying values of our
refinery and facilities assets exceed the undiscounted estimated
pretax cash flows, which would result in a future impairment
charge.
B.
Risks Related to Our Business and Industry
B1.
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,
margin deterioration and volatility, and historic net losses and
working capital deficits. Our consolidated financial
statements assume we will continue as a going concern and do not
include any adjustments that might result from the outcome of this
uncertainty.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
depends on sustained positive operating margins and having working
capital for, amongst other requirements, purchasing crude oil and
condensate and making payments on long-term debt. Without
positive operating margins and working capital, our business will
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, including potentially filing for
bankruptcy.
B2.
We have inadequate liquidity to sustain operations due to defaults
under our secured loan agreements, margin deterioration and
volatility, and 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, including sales of
refined products and rental of petroleum storage tanks, and
Affiliates 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. Our liquidity will
affect our ability to satisfy any of these needs.
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
16
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We had
a working capital deficit of $72.3 million and $59.4 million at
December 31, 2020 and 2019, respectively. Excluding the current
portion of long-term debt, we had a working capital deficit of
$22.9 million and $19.6 million at December 31, 2020 and 2019,
respectively. Cash and cash equivalents, restricted cash (current
portion), and restricted cash (noncurrent) were as
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$549
|
$72
|
|
Restricted
cash (current portion)
|
48
|
49
|
|
Restricted
cash, noncurrent
|
514
|
547
|
|
Total
|
$1,111
|
$668
|
In
instances where we experience a working capital deficit, we have
historically relied on Affiliates to meet our liquidity needs. We
are actively exploring additional financing; however, we currently
have no arrangements for additional capital and no assurances can
be given that we will be able to raise sufficient capital when
needed, on acceptable terms, or at all. If we are unable to raise
sufficient additional capital in the very near term, we may further
default on our payment obligations under certain of our existing
debt obligations. Without additional financing, it
remains unclear whether we will have or can obtain sufficient
liquidity to withstand COVID-19 disruptions to our
business. If
we do not have sufficient liquidity, 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, including potentially filing for
bankruptcy.
B3.
Our substantial current debt, which is included in the current
portion of long-term debt (in default), long-term debt, related
party (in default), and line of credit payable (in default), could
adversely affect our financial health and make us more vulnerable
to adverse economic conditions.
As of
December 31, 2020 and 2019, we had current debt of $57.7 million
and $51.3 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; however, partial payments
are being made monthly to the line of credit payable as a tank
lease setoff using amounts NPS is due from Pilot under two tank
lease agreements. 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.
B4.
Our ability to regain compliance with the terms of our outstanding
indebtedness depends on us generating sufficient cash flow to meet
debt service obligations or refinancing or restructuring the
debt.
As
described elsewhere in this report, we are in default under our
secured loan agreements with third parties and related parties.
Defaults include events of default and financial covenant
violations, as follow:
●
Veritex
– At December 31, 2020, 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. As of the filing date of this report, payments under the
Veritex loans were current, but other defaults remained
outstanding.
●
Pilot
– The Amended Pilot Line of Credit matured in May 2020.
Pursuant to a June 1, 2020 notice, Pilot began applying
Pilot’s payment obligations to NPS under each of (a) the
Terminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77,
and 78), dated as of May 2019, between NPS and Pilot, and (b) the
Terminal Services Agreement (covering Tank No. 56), dated as of
June 1, 2019, between NPS and Pilot, against NPS’ payment
obligations to Pilot under the Amended Pilot Line of Credit. The
tank lease setoff amounts only partially satisfy NPS’
obligations to Pilot, and Pilot expressly retained and reserved all
its rights and remedies available to it at any time, including,
without limitation, the right to exercise all rights and remedies
available to Pilot under the Amended Pilot Line of Credit or
applicable law or equity. For the twelve-month periods ended
December 31, 2020 and 2019, the tank lease setoff amounts totaled
$1.3 million and $0, respectively. For the twelve-month periods
ended December 31, 2020 and 2019, the amount of interest NPS
incurred under the Amended Pilot line of credit totaled $1.0
million and $0, respectively. On November 23,
2020, NPS and guarantors received notice from Pilot that the entry
into the SBA EIDLs was a breach of the Amended Pilot Line of Credit
and Pilot demanded full repayment of the Obligations, including
through use of the proceeds of the SBA EIDLs. Pilot also notified
the SBA that the liens securing the SBA EIDLs are junior to those
securing the Obligations. While the SBA acknowledged this point and
indicated a willingness to subordinate the SBA EIDLs, no further
action has been taken by Pilot as of the filing date of this
report.
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Blue Dolphin Energy
Company
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December 31,
2020
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●
Notre
Dame Debt – Pursuant to a 2015 subordination agreement, the
holder of the Notre Dame Debt agreed to subordinate their right to
payments from LE, as well as any security interest and liens on the
Nixon facility’s business assets, in favor of Veritex as
holder of the LE Term Loan Due 2034. To date, no payments have been
made under the subordinated Notre Dame Debt and the holder of the
Notre Dame Debt has taken no action as a result of the
non-payment.
●
Related
Party Debt – Affiliates controlled approximately 82% of the
voting power of our Common Stock as of the filing date of this
report, an Affiliate operates and manages all Blue Dolphin
properties, an Affiliate is a significant customer of our refined
products, and we borrow from Affiliates during periods of working
capital deficits. Replated party debt, which is currently in
default, represents such working capital borrowings.
Defaults under our
secured loan agreements with third parties permit Veritex and Pilot
to declare the amounts owed under these loan agreements immediately
due and payable, exercise their 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 secured loan agreements with third parties and
related parties was classified within the current portion of
long-term debt (in default), long-term debt, related party (in
default), and line of credit payable (in default) on our
consolidated balance sheets at December 31, 2020 and
2019.
Our
ability to regain compliance with the terms of our outstanding
indebtedness depends on our ability to generate sufficient cash
flow to meet debt service obligations or refinance or restructure
the debt. This is dependent on, among other things, business
conditions, our financial performance, and the general condition of
the financial markets. We can provide no assurance that our assets
or cash flow will be sufficient to fully repay borrowings under our
secured loan agreements. Continued
disruptions to our business as a result of the COVID-19 pandemic
could result in a material adverse effect on our business, result
of operations, financial condition, cash flows, and our ability to
service our indebtedness and other obligations. There can also be
no assurance that our liquidity, business, financial condition, and
results of operations will revert to pre-2020 levels once the
impacts of the COVID-19 pandemic cease. Given the current
financial markets, we can provide no assurance that we can
successfully generate sufficient cash from operations to repay our
outstanding debt or otherwise restructure or refinance the debt. 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
can provide no 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. If new debt or other liabilities
are added to the Company’s current consolidated debt levels,
the related risks that it now faces could intensify. If new debt or
other liabilities are added to the Company’s current
consolidated debt levels, the related risks that it now faces could
intensify. In the event we are unsuccessful in such endeavors, we
may be unable to pay the amounts outstanding, which may require us
to seek protection under bankruptcy laws. 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.
B5.
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.
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B6.
Restrictive covenants in our debt
instruments may limit our ability to undertake certain types of
transactions, which could adversely affect our business, financial
condition, results of operations, and our ability to service our
indebtedness.
Various covenants in our debt instruments may
restrict our financial flexibility in a number of ways. Our current
indebtedness subjects us to significant financial and other
restrictive covenants, including restrictions on our ability to
incur additional indebtedness, place liens upon assets, pay
dividends or make certain other restricted payments and
investments, consummate certain asset sales or asset swaps, conduct
businesses other than our current businesses, or sell, assign,
transfer, lease, convey or otherwise dispose of all or
substantially all of our assets. Some of our debt instruments also
require us to satisfy or maintain certain financial condition tests
in certain circumstances. Our ability to meet these financial
condition tests can be affected by events beyond our control and we
may not meet such tests. In addition, a failure to comply with the
provisions of our existing debt could result in a further event of
default that could enable our lenders, subject to the terms and
conditions of such debt, to declare the outstanding principal,
together with accrued interest, to be immediately due and payable.
Events beyond our control, including the impact of the COVID-19
pandemic and related governmental responses, volatility in
commodity prices, and extreme weather resulting from climate
change may affect our ability to
comply with our covenants. If we are unable to repay the
accelerated amounts, our lenders could proceed against the
collateral granted to them to secure such debt. If the payment of
our debt is accelerated, defaults under our other debt instruments,
if any, may be triggered, and our assets may be insufficient to
repay such debt in full.
During
the twelve-month period ended December 31, 2020, we received two
small loans totaling $0.3 million in the aggregate under federal or
other governmental programs to support our operations as a result
of the COVID-19 pandemic. Loans provided or guaranteed by the U.S.
government, including pursuant to the Coronavirus Aid, Relief and
Economic Security Act, signed into law on March 27, 2020, subject
us to additional restrictions on our operations, including
limitations on personnel headcount and compensation reductions and
other cost reduction activities that could adversely affect
us.
B7.
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
controlled approximately 82% of the voting power of our
Common Stock as of the filing date of this report 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.
B8.
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 severe 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.
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B9.
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 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, demographics, and
population.
B10.
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.
B11.
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. For example, President
Biden has issued an executive order seeking to adopt new
regulations and policies to address climate change and to consider
suspending, revising, or rescinding prior agency actions that are
identified as conflicting with the Biden Administration’s
climate policies. The current administration may take further
actions that could restrict or limit operations as currently
conducted at the Nixon Facility.
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.
B12.
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.
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B13.
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 other
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.
B14.
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, 2020 and 2019, 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, 2020 and
2019.
B15.
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.
B16.
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.
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B17.
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.
B18.
We face various risks associated with increased activism against
oil and natural gas companies.
Opposition toward
oil and natural gas companies 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. Any
restrictions or limitations on our business or operations resulting
from such opposition could have a material adverse effect on our
financial condition and results of operations.
B19.
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.
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C.
Risks Related to Our Operations
C1.
Refining margins, which are affected by commodity prices and
refined product demand, 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 between our crude oil and
condensate acquisition costs, the prices at which we ultimately
sell our refined products, and the volume of refined products that
we sell, all of which depend upon numerous factors beyond our
control. The prices at which we sell our 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. Sharp decreases in
refined product market demand, such as the record low demand that
has occurred because of widespread COVID-19 related travel
restrictions, can adversely affect our refining
margins.
C2.
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;
●
foreign
and domestic demand for fuel products;
●
worldwide
political conditions, particularly in significant oil producing
regions;
●
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.;
●
availability
of and access to transportation infrastructure;
●
capacity
utilization rates of refineries in the U.S.;
●
Organization
of Petroleum Exporting Countries’ influence on oil
prices;
●
development
and marketing of alternative and competing fuels;
●
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, and the level of
operations of other refineries and pipelines in our
markets.
C3.
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. Although we have no crude oil reserves
and are not engaged in the exploration or production of crude oil,
we believe that will be able to obtain adequate crude oil and other
feedstocks at generally competitive prices for the foreseeable
future. We have a long-term crude supply agreement in place with
Pilot. In April 2020, the crude supply agreement renewed 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 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. In April 2020, the
terminal services agreement renewed on a one-year evergreen basis.
Either party may terminate the terminal services agreement by
providing the other party 60 days prior written notice. The
terminal services agreement will automatically terminate upon
expiration or termination of the crude supply
agreement.
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Our
financial health could be adversely affected by defaults under our
secured loan agreements, margin deterioration and volatility, and
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. During the
twelve-month period ended December 31, 2020, our refinery
experienced downtime as a result of lack of crude due to cash
constraints.
C4.
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, disabled
equipment, or lack of crude due to cash constraints. However, in
Texas the most typically reason is excessive heat or power outages
from high winds and thunderstorms. The Nixon refinery did not incur
significant damage related to freezing temperatures in February
2021. However, the plant was down for approximately 8 days as a
result of lost external power. 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 2020 totaled 42 days compared to 21 days in
2019. Refinery downtime in 2020 primarily related to lack of crude
due to cash restraints, a maintenance turnaround, and equipment
repairs while refinery downtime in 2019 primarily related to a
maintenance turnaround and equipment repairs. Significant refinery
downtime in 2020 negatively impacted refinery throughput, refinery
production, and capacity utilization rate. 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.
C5.
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,
and Affiliates to meet our liquidity needs. At December 31, 2020
and 2019, accounts payable, related party totaled $0.2 million and
$0.1 million, respectively. At December 31, 2020 and 2019,
long-term debt and accrued interest, related party combined totaled
$18.5 million and $8.2 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.
C6.
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.
C7.
Loss of business from, or the bankruptcy or insolvency of, one or
more of our significant customers, one of which is an Affiliate,
could have a material adverse effect on our financial condition,
results of operations, liquidity, and cash flows.
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.
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Our
customers have a variety of suppliers to choose from. As a result,
they can make substantial demands on us, including demands for more
favorable product pricing or contractual terms. 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. Loss of business from, or
the bankruptcy or insolvency of, one or more of our major customers
could similarly affect our financial condition, results of
operations, liquidity, and cash flows.
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 28.7% and 31.3% of total
revenue from operations in 2020 and 2019, respectively. The
Affiliate represented approximately $0 and $1.4 million in accounts
receivable at December 31, 2020 and 2019, respectively. The amounts
will be paid under normal business terms. Amounts outstanding
relating to the Jet Fuel Sales Agreement can significantly vary
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 $9.1 million and $6.2
million at December 31, 2020 and 2019, respectively.
|
|
Number
Significant
Customers
|
% Total Revenue
from Operations
|
Portion of
Accounts Receivable
December
31,
|
|
|
|
|
|
|
2020
|
3
|
70.8%
|
$0
|
|
|
|
|
|
|
2019
|
4
|
96.5%
|
$1.7
million
|
C8.
We are dependent on third parties for the transportation of crude
oil and condensate into and refined products out of our Nixon
facility; 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.
C9.
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, severe weather, plant closures for
scheduled maintenance, or the interruption of oil or natural gas
being transported from wells in that area.
C10.
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.
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C11.
Severe weather or other events affecting our facilities, or those
of our vendors, suppliers, or customers could have a material
adverse effect on our liquidity, business, financial condition, and
results of operations.
Our operations are subject to all of the risks and operational
hazards inherent in receiving, handling, storing, and transferring
crude oil and petroleum products, including: damages to facilities,
related equipment and surrounding properties caused by severe
weather (such as cold temperatures, hurricanes, floods, and other
natural disasters) or other events (such as equipment malfunctions,
mechanical or structural failures, explosions, fires, spills, or
acts of terrorism) at our facilities or at third-party facilities
on which our operations are dependent could result in severe damage
or destruction to our assets or the temporary or permanent
shut-down of our operations. If we are unable to operate, our
liquidity, business, financial condition, and results of operations
could be materially affected.
C12.
Regulatory changes, as well as proposed measures that are
reasonably likely to be enacted, to reduce greenhouse gas emissions
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.
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.
Both
houses of Congress have actively considered legislation to reduce
emissions of greenhouse gases, such as carbon dioxide and methane,
including proposals to: (i) establish a Cap-and-Trade system,
(ii) create a federal renewable energy or “clean”
energy standard requiring electric utilities to provide a certain
percentage of power from such sources, and (iii) create
enhanced incentives for use of renewable energy and increased
efficiency in energy supply and use. In addition, the EPA is taking
steps to regulate greenhouse gases under the existing federal CAA.
The EPA has already adopted regulations limiting emissions of
greenhouse gases from motor vehicles, addressing the permitting of
greenhouse gas emissions from stationary sources, and requiring the
reporting of greenhouse gas emissions from specified large
greenhouse gas emission sources, including refineries. Various
states, individually as well as in some cases on a regional basis,
have taken steps to control greenhouse gas emissions, including
adoption of greenhouse gas reporting requirements, Cap-and-Trade
systems, and renewable portfolio standards. This has also
been a focus of the Biden Administration in its first few months.
These and similar regulations could require us to incur costs to
monitor and report greenhouse gas emissions or reduce emissions of
greenhouse gases associated with our operations.
Requirements
to reduce greenhouse gas emissions could result in increased costs
to operate and maintain the Nixon facility as well as implement and
manage new emission controls and programs. For example, some states
have passed regulations, such as Cap-and-Trade and the Low Carbon
Fuel Standard, to achieve greenhouse gas emission reductions below
set targets by 2030 and beyond. Cap-and-Trade places a cap on
greenhouse gases and refiners are required to acquire a sufficient
number of credits to cover emissions from their refinery and
in-state sales of gasoline and diesel. The Low Carbon Fuel Standard
requires an established percentage reduction in the carbon
intensity of gasoline and diesel by a specified time
period. Compliance with the Low Carbon Fuel Standard is
achieved through blending lower carbon intensity biofuels into
gasoline and diesel or by purchasing credits. Compliance with each
of these programs is facilitated through a market-based credit
system. If sufficient credits are unavailable for purchase or
refiners are unable to pass through costs to their customers, they
must pay a higher price for credits. It is currently uncertain how
the current presidential administration or future administrations
will address greenhouse gas emissions. In the event we do incur
increased costs as a result of increased efforts to control
greenhouse gas emissions, we may not be able to pass on any of
these costs to our customers. Regulatory requirements also could
adversely affect demand for the refined petroleum products that we
produce. Any increased costs or reduced demand could materially and
adversely affect our business and results of
operations.
C13.
We may not be successful in integrating or pursuing 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. Even 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.
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D.
Risks Related to Pipeline and Facilities Assets, as well as our
Pipelines and Oil and Gas Properties
D1.
Assessment of civil penalties by BOEM for our failure to satisfy
orders to provide additional financial assurance (supplemental
pipeline bonds) within the time period prescribed.
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 statutory bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning pipelines and platforms 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
additional financial assurance totaling approximately $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. On August 9, 2019, BDPL timely filed
its statement of reasons for the appeal with the IBLA. 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 an
August 15, 2019 meeting between management and BSEE may help in
future discussions with BOEM related to the INCs. Decommissioning
of these assets will significantly reduce or eliminate the amount
of financial assurance required by BOEM, which may serve to
partially or fully resolve the INCs. Although we planned to
decommission the offshore pipelines and platform assets in the
third quarter of 2020, decommissioning of these assets has been
delayed due to cash constraints associated with the ongoing impact
of COVID-19 and winter being the offseason for dive operations in
the U.S. Gulf of Mexico. We cannot currently estimate when
decommissioning may occur. In the interim, BDPL provides BOEM and
BSEE with updates regarding the project’s
status.
BDPL’s
pending appeal of the BOEM INCs does not relieve BDPL of its
obligations to provide additional financial assurance or of
BOEM’s authority to impose financial penalties. There can be
no assurance that we will be able to meet additional financial
assurance (supplemental pipeline bond) requirements. If BDPL is
required by BOEM to provide significant additional financial
assurance (supplemental pipeline bonds) 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 BOEM INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of December 31, 2020. At both December 31, 2020
and 2019, BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to
BOEM.
D2.
Assessment of civil penalties by BSEE for our failure to
decommission pipeline and platform assets within the time periods
prescribed.
BDPL
has pipelines and platform assets that are subject to BSEE’s
idle iron regulations. Idle iron regulations mandate lessees and
rights-of-way holders to permanently abandon and/or remove
platforms and other structures when they are no longer useful for
operations. Until such structures are abandoned or removed, lessees
and rights-of-way holders are required to inspect and maintain the
assets in accordance with regulatory requirements.
In
December 2018, BSEE issued an INC to BDPL for failure to flush and
fill Pipeline Segment No. 13101. Management met with BSEE on August
15, 2019 to address BDPL’s plans with respect to
decommissioning its offshore pipelines and platform assets. BSEE
proposed that BDPL re-submit permit applications for pipeline and
platform decommissioning, along with a safe boarding plan for the
platform, within six (6) months (no later than February 15, 2020),
and develop and implement a safe boarding plan for submission with
such permit applications. Further, BSEE proposed that BDPL complete
approved, permitted work within twelve (12) months (no later than
August 15, 2020). BDPL timely submitted permit applications for
decommissioning of the subject offshore pipelines and platform
assets to BSEE on February 11, 2020 and the USACOE on March 25,
2020. In April 2020, BSEE issued another INC to BDPL for failure to
perform the required structural surveys for the GA-288C Platform.
BDPL requested an extension to the INC related to the structural
platform surveys, and BSEE approved BDPL’s extension request.
The required platform surveys were completed, and the INC was
resolved in June 2020. Although we planned to decommission the
offshore pipelines and platform assets in the third quarter of
2020, decommissioning of these assets has been delayed due to cash
constraints associated with the ongoing impact of COVID-19 and
winter being the offseason for dive operations in the U.S. Gulf of
Mexico. We cannot currently estimate when decommissioning may
occur. In the interim, BDPL provides BSEE with updates regarding
the project’s status.
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Lack of
permit approvals does not relieve BDPL of its obligations to remedy
the BSEE INCs or of BSEE’s authority to impose financial
penalties. If BDPL fails to complete decommissioning of the
offshore pipelines and platform assets and/or remedy the INCs
within a timeframe determined to be prudent by BSEE, BDPL could be
subject to regulatory oversight and enforcement, including but not
limited to failure to correct an INC, civil penalties, and
revocation of BDPL’s operator designation, which could have a
material adverse effect on our earnings, cash flows and
liquidity.
We are
currently unable to predict the outcome of the BSEE INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of December 31, 2020. At December 31, 2020 and
2019, BDPL maintained $2.4 million and $2.6 million, respectively,
in AROs related to abandonment of these assets.
E.
Risks Related to Our Common Stock
E1.
Our stock price has experienced price fluctuations and may continue
to do so, resulting in a substantial loss in your
investment.
The
market for our common stock has been characterized by volatile
prices. As a result, investors in our common stock may experience a
decrease in the value of their securities, including decreases
unrelated to our operating performance or prospects. The market
price of our common stock is likely to be highly unpredictable and
subject to wide fluctuations in response to various factors, many
of which are beyond our control. These factors
include:
●
Quarterly
variations in our operating results and achievement of key business
metrics.
●
Changes in the
global economy and the local economies in which we
operate.
●
Our ability to
obtain working capital financing.
●
Changes in the
federal, state, and local laws and regulations to which we are
subject.
●
Market reaction to
any acquisitions, joint ventures or strategic investments announced
by us or our competitors.
●
The departure of
any of our key executive officers and directors.
●
Future sales of our
securities.
E2.
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.
E3.
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;
issuance of additional shares would further dilute the equity
ownership of current holders and potentially dilute the share price
of our Common Stock.
We
periodically issue Common Stock to non-employee directors for
services rendered to the Board and to Jonathan Carroll pursuant to
the Guaranty Fee Agreements. In the past, we have also issued
Common Stock, Preferred Stock, convertible securities (such as
convertible notes), and warrants in order to raise capital. 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 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 new shares of
Preferred Stock, convertible securities, and/or warrants may
significantly dilute the equity ownership of the current holders of
our Common Stock, affect the rights of our stockholders, or could
reduce the market price of our common stock. In addition, the
issuance or sale of large amounts of our Common Stock, or the
potential for issuance or sale even if they do not actually occur,
may have the effect of depressing the market price of our Common
Stock.
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E4.
Shares eligible for future sale pursuant to Rule 144 may adversely
affect the market.
From
time to time, certain of our stockholders may be eligible to sell
all or some of their shares of Common Stock by means of ordinary
brokerage transactions in the open market pursuant to Rule 144
promulgated under the Securities Act, subject to certain
limitations. In general, pursuant to Rule 144, stockholders who
have been non-affiliates for the preceding three months may sell
shares of our Common Stock freely after six months subject only to
the current public information requirement. Affiliates may sell
shares of our Common Stock after six months subject to the Rule 144
volume, manner of sale, current public information, and notice
requirements. Any substantial sales of our Common Stock pursuant to
Rule 144 may have a material adverse effect on the market price of
our common stock.
E5.
We do not expect to pay cash dividends in the foreseeable future
and therefore investors should not anticipate cash dividends on
their investment.
Under
certain of our secured loan agreements, we are restricted from
declaring or paying any dividend on our Common Stock without the
prior written consent of the lender. We have historically not
declared any dividends on our Common Stock and
there can be no assurance that cash dividends will ever be paid on
our common stock.
E6.
Failure to maintain effective internal controls in accordance with
Section 404(a) of the Sarbanes-Oxley Act could have a material
adverse effect on our business and stock price.
As
a publicly traded company, we are required to comply with the
SEC’s rules implementing Sections 302 and 404(a) of the
Sarbanes-Oxley Act, which requires management to certify financial
and other information in our quarterly and annual reports and
provide an annual management report on the effectiveness of
controls over financial reporting.
There
are inherent limitations in the effectiveness of any control
system, including the potential for human error and the possible
circumvention or overriding of controls and procedures.
Additionally, judgments in decision-making can be faulty and
breakdowns can occur because of a simple error or mistake. An
effective control system can provide only reasonable, not absolute,
assurance that the control objectives of the system are adequately
met. Accordingly, management does not expect that the control
system can prevent or detect all errors or fraud. Further,
projections of any evaluation or assessment of effectiveness of a
control system to future periods are subject to the risks that,
over time, controls may become inadequate because of changes in an
entity’s operating environment or deterioration in the degree
of compliance with policies or procedures.
Management’s
evaluation of our internal controls over financial reporting for
the twelve months ended December 31, 2020 determined they were
ineffective. There is currently not a process in place for formal
review of manual journal entries. In addition, we currently lack
resources to handle complex accounting transactions. This can
result in errors related to the recording, disclosure, and
presentation of consolidated financial information in quarterly,
annual, and other filings. Prior year audit procedures resulted in
significant adjustments related to the accounting for a certain
stock issuance in payment of related party debt, as well as
deferred revenue relating to consideration received from a
supplier. Management has taken steps to address these matters,
however, efforts have been affected by remote work arrangements,
reduced personnel, business disruption, and a diversion of
resources due to the impact of the COVID-19 pandemic. We cannot at
this time estimate how long it will take to fully remedy the
identified weakness and deficiency, and our initiatives may not
prove to be successful in fully remediating the identified weakness
and deficiency. Full remediation requires one or more additional
period-end financial reporting periods to evaluate effectiveness.
Because we are unable to resolve internal control deficiencies in a
timely manner, investors could lose confidence in the accuracy and
completeness of our financial reports and the market price of our
common stock could be negatively affected.
Remainder of Page Intentionally Left Blank
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Properties and Legal Proceedings
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|
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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 “Part I, Item 1.
Business”.
BDSC Office Lease Default
Pursuant
to a letter dated March 29, 2021, TR 801 Travis LLC, a Delaware
limited partnership (“Landlord”), informed BDSC that it
was in default under its office lease. BDSC’s failure to pay
past due obligations, including rent installments and other
charges, constituted an event of default. Landlord is entitled to,
and is fully prepared to, immediately exercise any or all of its
rights and remedies, without giving BDSC any further notice or
demand. Landlord expressly retained and reserved all its rights and
remedies available to it at any time, including without limitation,
the right to exercise all rights and remedies available to Landlord
under the office lease or applicable law or equity.
See
“Part I, Item 1. Business” and “Part II, Item 8.
Financial Statements and Supplementary Data, Notes (4), (10), (12),
and (13)” for additional disclosures related to our
properties, leases, decommissioning obligations, and assets pledged
as collateral.
ITEM 3. LEGAL PROCEEDINGS
BOEM Additional Financial Assurance (Supplemental Pipeline
Bonds)
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 statutory bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning pipelines and platforms 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
additional financial assurance totaling approximately $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. On August 9, 2019, BDPL timely filed
its statement of reasons for the appeal with the IBLA. 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 an
August 15, 2019 meeting between management and BSEE may help in
future discussions with BOEM related to the INCs. Decommissioning
of these assets will significantly reduce or eliminate the amount
of financial assurance required by BOEM, which may serve to
partially or fully resolve the INCs. Although we planned to
decommission the offshore pipelines and platform assets in the
third quarter of 2020, decommissioning of these assets has been
delayed due to cash constraints associated with the ongoing impact
of COVID-19 and winter being the offseason for dive operations in
the U.S. Gulf of Mexico. We cannot currently estimate when
decommissioning may occur. In the interim, BDPL provides BOEM and
BSEE with updates regarding the project’s
status.
BDPL’s
pending appeal of the BOEM INCs does not relieve BDPL of its
obligations to provide additional financial assurance or of
BOEM’s authority to impose financial penalties. There can be
no assurance that we will be able to meet additional financial
assurance (supplemental pipeline bond) requirements. If BDPL is
required by BOEM to provide significant additional financial
assurance (supplemental pipeline bonds) 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 BOEM INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of December 31, 2020. At both December 31, 2020
and 2019, BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to
BOEM.
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Properties and Legal Proceedings
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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
|
In
August 2019, the GEL Final Arbitration Award was resolved as a
result of the GEL Settlement. Under the GEL Settlement: (i) the
mutual releases between the parties 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 both December 31, 2020 and
2019, accrued arbitration award payable was $0.
Other Legal Matters
From
time to time, we are involved in legal matters incidental to the
routine operation of our business. Such legal matters include
mechanic’s liens, contract-related disputes, and
administrative proceedings. As of the filing date of this report,
we were involved in a contract-related dispute with a counterparty.
Management is working to resolve the dispute amicably, however, the
potential outcome is unknown. Management does not believe that the
contract-related dispute or other matters will have a material
adverse effect on our financial position, earnings, or cash flows.
However, there can be no assurance that management's efforts will
result in a manageable outcome. If Veritex and/or Pilot exercise
their 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
of Page Intentionally Left Blank
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Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
31
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Market for Equity, Stockholder Matters and Purchases of Equity
Securities
|
|
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