BLUE DOLPHIN ENERGY COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis is our analysis of our financial performance, financial condition, and significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See "Important Information Regarding Forward-Looking Statements" for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this Quarterly Report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Overview
Blue Dolphin is an independent downstream energy company operating in theGulf Coast region ofthe United States . Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with more than 1.2 million bbls of petroleum storage tank capacity inNixon, Texas . 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 assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). Blue Dolphin was formed in 1986 as aDelaware corporation and is traded on the OTCQX under the ticker symbol "BDCO". 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 assets and has historically funded 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 1. Financial Statements - Note (3)" for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits. General Trends and Outlook We anticipate that the below key factors will continue to affect our business. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results. COVID-19 Pandemic. InMarch 2020 , the WHO declared the outbreak of COVID-19 a pandemic, and thereafter theU.S. economy experienced pronounced adverse effects as a result of the global outbreak. Considerable progress was made to combat COVID-19 and its multiple variants. While domestic demand and refining margins improved during the first half of 2022,the United States saw a resurgence of COVID-19 cases during the same period, slightly impacting our personnel. The future impact of COVID-19 on our operational and financial performance depends on further developments, including global and domestic vaccination rates, variant outbreaks, antiviral usage, and social distancing. Overall, we expect market volatility associated with COVID-19 to decrease over time as the disease becomes an ongoing part of the world-wide infectious-disease landscape. Russian-Ukrainian Conflict. InFebruary 2022 ,Russia invaded neighboringUkraine . The conflict caused turmoil in global commodity markets, injecting even more uncertainty into a worldwide economy recovering from the effects of COVID-19. AsRussia is a major global producer and exporter of crude oil, sanctions imposed onRussia resulted in global tightening of refined product inventories and crude stocks, which caused refining margins to widen significantly. These conditions contributed to a significant improvement in our refining operating results in the three and six months of 2022 compared to the same periods a year earlier. However, in the long term, the impact of the Russian-Ukrainian conflict on our financial position and results of operations depends, in part, on the duration of the conflict and the duration and complexity of sanctions. Liquidity and Access to Capital Markets. We continue to actively explore additional financing to meet working capital needs or refinance and restructure debt. During the three and six months endedJune 30, 2022 and 2021, we successfully secured an additional$1.5 million and$0.5 million , respectively, in working capital through CARES Act loans. There can be no assurance that we will be able to raise additional capital on acceptable terms, or at all. If we are unable to raise sufficient additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions, such as those related to COVID-19 or the Russian conflict withUkraine , or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing operations.
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Management's Discussion and Analysis
Management determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include defaults under secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing bankruptcy. Business Opportunities. Although we regularly engage in discussions with third parties regarding possible joint ventures, asset sales, mergers, and other potential business combinations, in the near future we anticipate that such activities will likely only relate to renewable energy-related projects. Management 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, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. A 'going concern' opinion may limit our ability to finance our operations through options such as selling equity or incurring additional debt. Our ability to continue as a going concern depends on sustained positive operating margins and working capital, purchase of crude oil and condensate, and payments on long-term debt. If we are unable to meet these requirements, we may have to cease operating or seek bankruptcy protection. Changes in Regulations. Our operations and the operations of our customers have been, and will continue to be, affected by political developments and federal, state, tribal, local, and other laws and regulations that are increasing in number and becoming more stringent and complex. These laws and regulations include, among other things, permitting requirements, environmental protection measures such as limitations on methane and other GHG emissions, and renewable fuels standards. The number and scope of the regulations with which we and our customers must comply has a meaningful impact on our and their businesses, and new or revised regulations, reinterpretations of existing regulations, and permitting delays or denials could adversely affect the profitability of our assets.
Business Strategy and Accomplishments
Our primary business objectives are to improve our financial profile and refining margins by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances:
Optimize · Maintain safe operations and enhance health, safety, and
Existing environmental systems.
Asset Base · Plan and manage turnarounds and downtime.
Improve · Reduce or streamline variable costs incurred in production.
Operational · Increase throughput capacity and optimize product slate.
Efficiencies · Increase tolling and terminaling revenue.
Seize Market · Leverage existing infrastructure to engage in renewable
Opportunities energy projects.
· Take advantage of market opportunities as they arise.
Optimize Existing Asset Base. As reported previously, management delayed the
Nixon facility's spring 2022 maintenance turnaround until fall 2022 in order to
maximize refinery runs in light of favorable refining margins. We also continued
to successfully manage the health and safety of our workforce during a
resurgence in COVID-19 cases.
The refinery experienced more downtime during the three-month period ended June
30, 2022 (6 days) compared to the same period a year earlier (4 days) due to
equipment repairs. The refinery experienced less downtime during the six-month
period ended June 30, 2022 (12 days) compared to the same period a year earlier
(15 days). The six-month period ended June 30, 2021 included 10 days of downtime
related to Winter Storm Uri.
Improve Operational Efficiencies. Despite favorable refining margins, management
continued to tightly manage receivables and payables to conserve cash. Increased
HOBM and naphtha inventory levels as a result of changing market conditions tied
up operating cash flow during the second quarter of 2022. Management carefully
managed product mix to maintain improvements to refinery throughput, production,
and sales during the three and six months ended June 30, 2022 compared to the
same periods in 2021. Refinery capacity utilization rate improved 11% to 88.5%
during the three months ended June 30, 2022 from 77.5% during the three months
ended June 30, 2021 . Refinery capacity utilization rate improved 7% to 86.7%
during the six months ended June 30, 2022 from 79.6% during the six monthsendedJune 30, 2021 . Seize Market Opportunities. As a result of higher commodity prices and increased capacity utilization rate, we experienced a significant improvement in gross profits. Gross profit totaled$16.8 million for the three months endedJune 30 2022 compared to a deficit of$1.0 million for the three months endedJune 30, 2021 . Gross profit totaled$23.4 million for the six months endedJune 30, 2022 compared to a deficit of$1.2 million for the six months endedJune 30, 2021 .
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Management's Discussion and Analysis
InMarch 2021 , we announced plans to leverage our existing infrastructure to establish adjacent lines of business, capture growing market opportunities, and capitalize on green energy growth. Management continues to explore potential commercial partnerships and project-based opportunities with government loans as vehicles to expand our corporate strategy into renewable energy. These efforts will continue throughout 2022 and beyond. While we believe our renewable energy strategy successfully aligns with our long-term growth strategy and financial and operational priorities, they are aspirational and may change. As a result, there is no guarantee that we will achieve our objectives. Successful execution of our business strategy depends on multiple factors. These factors include (i) having adequate working capital to meet operational needs and regulatory requirements, (ii) maintaining safe and reliable operations at theNixon facility, (iii) meeting contractual obligations, (iv) having favorable margins on refined products, and (v) collaborating with new partners to develop and finance clean energy projects. Our business strategy involves risks. Accordingly, we cannot assure investors that our plans will be successful. If we are unsuccessful, 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, negotiating with our creditors to restructure our applicable obligations, or seeking 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.
Downstream Operations
Our refinery operations segment consists of the following assets and operations:
Key Products
Property Handled Operating Subsidiary Location
Nixon facility Crude Oil LE Nixon, Texas
· Crude distillation Refined Products
tower (15,000 bpd)
· Petroleum storage tanks
(operations support)
· Loading and unloading
facilities
· Land (56 acres)
Crude Oil and Condensate Supply. Operation of theNixon 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 Tartan. The volume-based Crude Supply Agreement expires when we receive 24.8 million net bbls of crude oil. After that, the Crude Supply Agreement automatically renews for successive one-year terms (each such term, a renewal term). Either party may provide the other with notice of non-renewal at least 60 days before the expiration of any renewal term. As ofJune 30, 2022 , we received approximately 11.2 million bbls, or 45.0%, of the contracted total volume under the Crude Supply Agreement. Related to the Crude Supply Agreement, Tartan stores crude oil at theNixon facility under a terminal services agreement dated as ofJune 1, 2019 . Under the terminal services agreement, crude oil is stored at theNixon facility at a specified rate per bbl of the storage tank's shell capacity. The terminal services agreement renews on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the Crude Supply Agreement. Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs. Products and Markets. Our market is theGulf Coast region of theU.S. , which is represented by the EIA asPetroleum Administration for PADD 3. We sell our products primarily in theU.S. within PADD 3. Occasionally, we sell refined products to customers that export to other countries, such as low sulfur diesel toMexico .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 ofMarch 31, 2023 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 (theHouston -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.
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Management's Discussion and Analysis
Competition. Many of our competitors are substantially larger than us and are engaged on a national or international level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple "topping unit" refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.
Safety and Downtime. We operate the refinery in a manner that is materially consistent with industry safety practices and standards.EPA ,OSHA , and comparable state and local regulatory agencies provide oversight for personnel safety, process safety management, and risk management to prevent or minimize the accidental release of toxic, reactive, flammable, or explosive chemicals. Most of our storage tanks are equipped with emissions monitoring devices. We also have response and control plans in place for spill prevention and emergencies.The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned turnaround annually to repair, restore, refurbish, or replace refinery equipment. Occasionally, unplanned shutdowns occur. Unplanned downtime can occur for a variety of reasons; however, common reasons for unplanned downtime include repair/replacement of disabled equipment, crude deficiencies associated with cash constraints, high temperatures, and power outages.The Nixon refinery did not incur significant damage due to Winter Storm Uri; however, the facility lost external power for 10 days due to the storm. We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Any scheduled or unscheduled downtime results in lost margin opportunity, reduced refined products inventory, and potential increased maintenance expense, all of which could reduce our ability to meet our payment obligations.
Midstream Operations
Our tolling and terminaling segment consists of the following assets and
operations:
Key
Products Operating Location
Property Handled Subsidiary
Nixon facility Crude LRM, NPS
Refined
· Loading and unloading facilities Products
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 midstream 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 respondto emergencies. Inactive Operations
We own other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets are inactive. We account for these inactive operations in 'corporate and other.' Our pipeline assets have been fully impaired since 2016 and our oil and gas leasehold interests have been fully impaired since 2011. Our pipeline assets and oil and gas leasehold interests had no revenue during the three and six months endedJune 30, 2022 and 2021. See "Part I, Item 1. Financial Statements - Note (15)" related to pipelines and platform decommissioning requirements and related risks. Operating Property Subsidiary Location Freeport facility BDPL Freeport,
· Crude oil and natural gas separation and dehydrationTexas · Natural gas processing, treating, and redelivery · Vapor recovery unit · Two onshore pipelines · Land (162 acres)
Offshore Pipelines (Trunk Line and Lateral Lines) BDPL
Gulf of
Oil and Gas Leasehold Interests BDPC
Gulf of Mexico
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Management's Discussion and Analysis
Pipeline and Facilities Safety.
Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations underOSHA , 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. Results of Operations
A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below and should be in read in conjunction with our financial statements in "Part I, Item 1. Financial Statements". The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but they should not serve as the only criteria for predicting future performance.
Major Influences on Results of Operations. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. When the spread between these commodity prices decreases, our margins are negatively affected. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity. While refining margins improved significantly in the first half of 2022, the general outlook for the oil and natural gas industry for the remainder of the year remains unclear given the impact of COVID-19 and the Russian conflict withUkraine , and we can provide no assurances that refining margins and demand
will remain at current levels. How We Evaluate Our Operations. Management uses certain financial and operating measures to analyze segment performance. These measures are significant factors in assessing our operating results and profitability and include: segment contribution margin (deficit), and refining gross profit (deficit) per bbl, tank rental revenue, operation costs and expenses, refinery throughput and production data, and refinery downtime. Segment contribution margin (deficit) and refining gross profit (deficit) per bbl are non-GAAP measures.
Segment Contribution Margin (Deficit) and Refining Gross Profit (Deficit) per Bbl
We use segment contribution margin (deficit) to evaluate the performance of our downstream and midstream operations. We use refining gross profit (deficit) per bbl as a downstream benchmark. Both measures supplement GAAP financial information presented. Management uses segment contribution margin (deficit) and refining gross profit (deficit) per bbl to analyze our results of operations, assess internal performance against budgeted and forecasted amounts, and evaluate impacts to our financial performance considering potential capital investments. These non-GAAP measures have important limitations as analytical tools. They should not be considered a substitute for GAAP financial measures. We believe these measures may help investors, analysts, lenders, and ratings agencies analyze our results of operations and liquidity in conjunction with our GAAP financial results. See "Non-GAAP Reconciliations" for a reconciliation of Non-GAAP measures toU.S. GAAP.
Tank Rental Revenue
Tolling and terminaling revenue primarily represents tank rental storage fees associated with customer tank rental agreements. As a result, tank rental revenue is one of the measures management uses to evaluate the performance of our tolling and terminaling business segment.
Operation Costs and Expenses
We manage operating costs and expenses in tandem with meeting environmental and safety requirements and objectives and maintaining the integrity of our assets. Operating costs and expenses are comprised primarily of labor expenses, repairs and other maintenance costs, and utility costs. Expenses for refinery operations generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed during that period and the timing of those expenses. Operation costs and expenses for tolling and terminaling operations are relatively fixed.
Refinery Throughput and Production Data
The amount of revenue we generate from the refinery operations business segment primarily depends on the volumes of crude oil that we process into refined products and the volume of refined products sold to customers. These volumes are affected by the supply and demand of, and demand for, crude oil and refined products in the markets served directly or indirectly by our assets, as well as refinery downtime. Refinery Downtime
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Management's Discussion and Analysis
Consolidated Results. Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.
Three Months Ended
Overview. Net income for Q2 2022 totaled$13.4 million , or income of$0.97 per share, compared to a net loss of$4.1 million , or a loss of$0.32 per share, in Q2 2021. The$17.5 million , or$1.29 per share, increase in net income between the periods was the result of favorable refining margins and improved product demand as the impact from COVID-19 lessened. Total Revenue from Operations. Total revenue from operations increased 96% to$136.1 million for Q2 2022 from$69.4 million for Q2 2021. Increased commodity prices primarily drove refinery operations revenue higher in Q2 2022; increased sales volume contributed slightly. Tolling and terminaling revenue was flat between the periods at$0.9 million . Total Cost of Goods Sold. Total cost of goods sold increased approximately 69% to$119.3 million for Q2 2022 from$70.5 million for Q2 2021. The significant increase related to higher crude acquisition costs and slightly higher throughput. Gross Profit (Deficit). Gross profit was$16.8 million for Q2 2022 compared to gross deficit of$1.0 million for Q2 2021. Higher commodity prices positively affected refinery margins in Q2 2022 compared to Q2 2021. Refining gross margin per bbl increased$17.84 per bbl from a gross deficit per bbl of$1.97 in Q2 2021 to a gross profit per bbl of$15.87 in Q2 2022.
General and Administrative Expenses. General and administrative expenses
increased 6% to
Depreciation and Amortization. Depreciation and amortization expenses remained
flat at
Total Other Income (Expense). Total other expense in Q2 2022 was$1.7 million compared to total other expense of$1.6 million in Q2 2021, representing an increase of approximately$0.1 million . Total other expense primarily relates to interest expense associated with third-party and related party secured loan
agreements.
First Half Ended
Overview. Net income for Half 2022 was$16.9 million , or income of$1.27 per share, compared to a net loss of$7.3 million , or a loss of$0.57 per share, in Half 2021. The$24.2 million , or$1.94 per share, increase in net income between the periods was the result of favorable refining margins and improved product demand as the impact from COVID-19 lessened. The net loss in Half 2021 was also due to 15 days of refinery downtime, 10 days of which was associated with Winter Storm Uri.
Total Revenue from Operations. Total revenue from operations increased 92% to
Total Cost of Goods Sold. Total cost of goods sold increased approximately 72%
to
Gross Profit (Deficit). Gross profit was$23.4 million for Half 2022 compared to gross deficit of$1.2 million for Half 2021. Higher commodity prices and improved refinery uptime positively impacted refinery margins in Half 2022 compared to Half 2021. Refining gross margin per bbl increased$12.21 per bbl from a gross deficit per bbl of$1.60 in Half 2021 to a gross profit per bbl of$10.61 in Half 2022.
General and Administrative Expenses. General and administrative expenses were
flat at
Depreciation and Amortization. Depreciation and amortization expenses totaled
approximately
Total Other Income (Expense). Total other expense in Half 2022 totaled
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Management's Discussion and Analysis
Downstream Operations. Our refinery operations business segment is owned by LE. Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land. Refinery operations revenue is derived
from refined product sales. Q2 2022 Versus Q2 2021
Refining Gross Margin (Deficit) per Bbl. Refining gross margin per bbl was$15.87 for Q2 2022 compared to gross deficit per bbl of$1.97 in Q2 2021, representing a significant increase of$17.84 per bbl. The significant increase in Q2 2022 related to higher refining margins, improved product demand as the impact from COVID-19 lessened, and slightly improved throughput. Refining gross deficit per bbl in Q2 2021 was the result of lower margins and market fluctuations associated with the COVID-19 pandemic.
Segment Contribution Margin (Deficit). Segment contribution margin improved dramatically in Q2 2022 compared to Q2 2021 due to higher refining margins.
Refinery Downtime. Refinery downtime increased to 6 days in Q2 2022 compared to
4 days in Q2 2021. Refinery downtime in Q2 2022 primarily related to equipment
repairs while refinery downtime in Q2 2021 primarily related to crude
deficiencies associated with cash constraints.
Three Months Ended
June 30,
2022 2021
(in thousands)
Refined product sales $ 135,208 $ 68,518 Less: Total cost of goods sold (119,309 ) (70,466 ) Gross margin (deficit)
15,899 (1,948 )
Sales (Bbls) 1,002 988
Gross margin (deficit) per bbl
Three Months Ended
June 30,
2022 2021
(in thousands)
Net revenue (1) $ 135,208 $ 68,518
Intercompany fees and sales (675 ) (581 )
Operation costs and expenses (118,736 ) (70,054 )
Segment contribution margin (deficit)
(1) Net revenue excludes intercompany crude sales.
Refining gross profit (deficit) per bbl presents refinery operations revenue less direct operating costs while segment contribution margin (deficit) presents refinery operations revenue less intercompany tolling fees and related costs. Half 2022 Versus Half 2021
Refining Gross Margin (Deficit) per Bbl. Refining gross margin per bbl was$10.61 for Half 2022 compared to gross deficit per bbl of$1.60 in Half 2021, representing a significant increase of$12.21 per bbl. The significant increase in Half 2022 related to higher refining margins, improved product demand as the impact from COVID-19 lessened, and increased refinery uptime. Refining gross deficit per bbl in Half 2021 was the result of lower margins and market fluctuations associated with the COVID-19 pandemic and refinery downtime associated with Winter Storm Uri.
Segment Contribution Margin (Deficit). Segment contribution margin improved dramatically in Half 2022 compared to Half 2021 driven by higher refining margins.
Refinery Downtime. Refinery downtime decreased to 12 days in Half 2022 compared
to 15 days in Half 2021. Refinery downtime in Half 2022 primarily related to
equipment maintenance while refinery downtime in Half 2021 primarily related to
power outages during Winter Storm Uri.
Six Months Ended
June 30,
2022 2021
(in thousands)
Refined product sales $ 244,965 $ 127,001 Less: Total cost of goods sold (223,386 ) (130,089 ) Gross margin (deficit)
21,579 (3,088 )
Sales (Bbls) 2,033 1,935
Gross margin (deficit) per bbl
Six Months Ended
June 30,
2022 2021
(in thousands)
Net revenue (1) $ 244,965 $ 127,001
Intercompany fees and sales (1,328 ) (1,147 )
Operation costs and expenses (222,194 ) (129,343 )
Segment contribution margin (deficit)
(1) Net revenue excludes intercompany crude sales.
Refining gross profit (deficit) per bbl presents refinery operations revenue less direct operating costs while segment contribution margin (deficit) presents refinery operations revenue less intercompany tolling fees and related costs.
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Management's Discussion and Analysis
Midstream Operations. Our tolling and terminaling business segment is owned by LRM and NPS. Assets within this segment include petroleum storage tanks and loading and unloading facilities. Tolling and terminaling revenue is derived from tank storage rental fees, tolling and reservation fees for use of the naphtha stabilizer, and fees collected for ancillary services, such as in-tank blending. Q2 2022 Versus Q2 2021
Net Revenue. Tolling and terminaling net revenue was relatively flat in Q2 2022 compared to Q2 2021.
Intercompany Fees and Sales. Intercompany fees and sales, which reflect processing fees associated with an intercompany tolling agreement tied to naphtha volumes, increased in Q2 2022 compared to Q2 2021. Processed naphtha volumes increased 72% between the two periods.
Segment Contribution Margin. Segment contribution margin in Q2 2022 decreased 7% in Q2 2021. The decrease related to higher intercompany fees and operation
costs
tied to naphtha volumes.
Three Months Ended
June 30,
2022 2021
(in thousands)
Net revenue (1) $ 914 $ 923
Intercompany fees and sales 675 581
Operation costs and expenses (573 ) (412 )
Segment contribution margin $ 1,016 $ 1,092 (1) Net revenue excludes intercompany crude sales.
Half 2022 Versus Half 2021
Net Revenue. Tolling and terminaling net revenue was relatively flat in Half 2022 compared to Half 2021.
Intercompany Fees and Sales. Intercompany fees and sales, which reflect processing fees associated with an intercompany tolling agreement tied to naphtha volumes, increased in Half 2022 compared to Half 2021. Processed naphtha volumes increased 84% between the two periods.
Segment Contribution Margin. Segment contribution margin in Half 2022 decreased
12% to
Six Months Ended
June 30,
2022 2021
(in thousands)
Net revenue (1) $ 1,840 $ 1,853
Intercompany fees and sales 1,328 1,147
Operation costs and expenses (1,192 ) (746 )
Segment contribution margin $ 1,976 $ 2,254 (1) Net revenue excludes intercompany crude sales.
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Management's Discussion and Analysis
Non-GAAP Reconciliations.
Reconciliation of Segment Contribution Margin (Deficit)
Three Months Ended June 30,
2022 2021 2022 2021 2022 2021 2022 2021
Refinery Operations Tolling and Terminaling Corporate and Other Total
(in thousands)
Segment
contribution
margin
(deficit) $ 15,797 $ (2,117 ) $ 1,016 $ 1,092 $ (57 ) $ (50 ) $ 16,756 $ (1,075 )
General and
administrative
expenses(1) (313 ) (265 ) (53 ) (68 ) (498 ) (410 ) (864 ) (743 )
Depreciation
and
amortization (306 ) (302 ) (342 ) (340 ) (51 ) (51 ) (699 ) (693 )
Interest and
other
non-operating
expenses, net (703 ) (708 ) (409 ) (448 ) (556 ) (432 ) (1,668 ) (1,588 )
Income (loss)
before income
taxes 14,475 (3,392 ) 212 236 (1,162 ) (943 ) 13,525 (4,099 ) Income tax expense - - - - (115 ) - (115 ) - Net income
(loss)$ 14,475 $ (3,392 ) $ 212 $ 236 $ (1,277 ) $ (943 ) $ 13,410 $ (4,099 )
(1) General and administrative expenses within refinery operations include the LEH operating fee and accretion of asset retirement obligations.
Six Months Ended June 30,
2022 2021 2022 2021 2022 2021 2022 2021
Refinery Operations Tolling and Terminaling Corporate and Other Total
(in thousands)
Segment
contribution
margin
(deficit) $ 21,443 $ (3,489 ) $ 1,976 $ 2,254 $ (68 ) $ (104 ) $ 23,351 $ (1,339 )
General and
administrative
expenses(1) (595 ) (566 ) (123 ) (136 ) (929 ) (823 ) (1,647 ) (1,525 )
Depreciation
and
amortization (613 ) (604 ) (684 ) (680 ) (103 ) (102 ) (1,400 ) (1,386 )
Interest and
other
non-operating
income
(expenses),
net (1,420 ) (1,306 ) (827 ) (900 ) (1,013 ) (817 ) (3,260 ) (3,023 )
Income (loss)
before income
taxes 18,815 (5,965 ) 342 538 (2,113 ) (1,846 ) 17,044 (7,273 )
Income tax
expense - - - - (156 ) - (156 ) -
Net income
(loss) $ 18,815 $ (5,965 ) $ 342 $ 538 $ (2,269 ) $ (1,846 ) $ 16,888 $ (7,273 ) (1) General and administrative expenses within refinery operations include the LEH operating fee and accretion of asset retirement obligations.
Capital Resources and Liquidity
We currently rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity needs. Due to defaults under our secured loan agreements, substantial current debt, margin volatility, historic net losses, and working capital and equity deficits, we have inadequate liquidity to sustain operations. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate theNixon refinery , (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving theNixon facility through capital expenditures, and (v) meeting regulatory compliance mandates. Our long-term working capital needs are primarily related to repayment of long-term debt obligations. We continue to focus on safe and reliable operations and conserving cash. The Russian conflict withUkraine and the COVID-19 pandemic continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence. Management believes it has made significant progress on bolstering liquidity through efforts including securing additional financing, monitoring discretionary spending and non-essential costs, and, where possible, modifying vendor and contractor payment terms. During the three and six months endedJune 31, 2022 and 2021, we successfully secured an additional$1.5 million and$0.5 million , respectively, in working capital through CARES Act loans. We continue to actively explore additional financing to meet working capital needs or refinance and restructure debt. There can be no assurance that we will be able to raise additional capital on acceptable terms, or at all. If we are unable to raise sufficient additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions, such as from COVID-19, or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing operating.
Table of Contents
Management's Discussion and Analysis
Working Capital
We had$57.9 million and$78.5 million in working capital deficits atJune 30, 2022 andDecember 31, 2021 , respectively. Excluding the current portion of long-term debt, we had$1.2 million and$15.5 million in working capital deficits atJune 30, 2022 andDecember 31, 2021 , respectively. The significant improvement in working capital between the periods was primarily due to favorable refining margins and increased gross profit. Cash and cash equivalents totaled$0.004 million and$0.01 million atJune 30, 2022 andDecember 31, 2021 , respectively. Restricted cash (current portion) totaled$0 and$0.05 million atJune 30, 2022 andDecember 31, 2021 , respectively. Sources and Use of Cash Components of Cash Flows Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (in thousands) (in thousands) Cash Flows Provided By (Used In): Operating activities$ 3,936 $ (3,166 ) $ 4,873 $ (3,666 ) Investing activities (46 ) - (46 ) - Financing activities (3,992 ) 2,654 (4,880 ) 2,612 Increase (Decrease) in Cash and Cash Equivalents$ (102 ) $ (512 ) $ (53 ) $ (1,054 )
Cash Flow Q2 2022 Compared to Q2 2021
We had a cash flow deficit of$0.1 million for Q2 2022 compared to a cash flow deficit of$0.5 million for Q2 2021. The improvement in cash flow from operations between the periods was due to profit from operations, which was offset by a buildup in inventory. The cash flow deficit for Q2 2021 primarily related to loss from operations. We had a cash flow deficit of$0.05 million for Half 2022 compared to a cash flow deficit of$1.1 million for Half 2021. The improvement in cash flow from operations between the periods was due to profit from operations, which was offset by a buildup in inventory and increased accruals. The cash flow deficit for Half 2021 primarily related to loss from operations.
Capital Expenditures
During Q2 2022 and Q2 2021, capital expenditures totaled$0.05 million and$0 , respectively. Capital expenditures in Q2 2022 related to the addition of a portable cooling tower to combat increased summer temperatures. Due to continued uncertainties surrounding commodity pricing and supply related to the COVID-19 pandemic and the Russian conflict withUkraine , we anticipate little, if any, capital expenditures for the remainder of 2022.However, to the extent we are able to capitalize on green energy growth opportunities, capital expenditures may be financed through project-based government loans. We account for our capital expenditures in accordance with GAAP. We also classify capital expenditures as 'maintenance' if the expenditure maintains capacity or throughput or as 'expansion' if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain circumstances the determination is a matter of management judgment and discretion. We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Projects are determined based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses. Remainder of Page Intentionally Left Blank
Table of Contents
Management's Discussion and Analysis
Debt Overview.
The table below summarizes our principal contractual obligations at
Total Debt and Lease Obligations
Between Between
Less than 1 and 3 3 and 5 5 Years
1 Year Years Years and Later Total
(in thousands)
Long-term debt less unamortized debt
issue costs(1)(2)
Third-party $ 43,055 $ 193 $ 142 $ 1,995 $ 45,385
Related-party 13,635 - - - 13,635
Total long-term debt
less debt issue costs 56,690 193 142 1,995 59,020
Lease obligations 226 40 - - 266
$ 56,916 $ 233 $ 142 $ 1,995 $ 59,286
(1)
See "Item 1. Financial Statements - Notes (3) and (10)" for additional disclosures related to third-party and related-party debt.
(2) Long-term debt excludes interest payable; atJune 30, 2022 , interest payable and interest payable, related party was estimated to be 12.6 million (less than 1 year),$0.1 million (between 1 and 3 years),$0.1 million (between 3 and 5 years), and$0.5 million (5 years and later). Net proceeds from the issuance of debt totaled$0 and$0.5 million in Q2 2022 and Q2 2021, respectively. Net proceeds from the issuance of debt totaled$1.5 million and$0.5 million in Half 2022 and Half 2021, respectively. Proceeds in Half 2022 represented the additional principal amount of the BDEC Term Loan Due 2051; proceeds in Half 2021 reflect the original principal amount of the BDEC Term Loan Due 2051. Principal payments on long-term debt totaled approximately$0.01 million and$0.01 million in Half 2022 and Half 2021, respectively.Net activity on debt to related parties (non-cash payments) totaled$2.4 million and$2.1 million in Half 2022 and Half 2021, respectively.
Debt Defaults. Most of our debt is in default.
Third-Party Defaults
· Veritex Loans - Interest and late fee payments to Veritex totaled
million and
payments to Veritex totaled
respectively. As of the filing date of this report, LE and LRM were in
default under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for
failing to make required monthly principal and interest payments and failing
to satisfy financial covenants. In addition, LE was in default under the LE
Term Loan Due 2034 for failing to replenish a
account. In a letter to LE and LRM dated
existing defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034
for failing to make payments of principal and interest when due and demanded
payment of all past due amounts owed. In addition, Veritex reserved all of
its rights and noted that Veritex may, at its discretion, exercise all
remedies available to it, which may include accelerating the loan, requesting
appointment of a receiver, initiating foreclosure proceedings, or filing a
lawsuit against obligors.
· GNCU Loan - For Q2 2022, required interest only payments to GNCU totaled
million. For Half 2022 , required interest only payments to GNCU totaled
million. As of the filing date of this report, NPS was in default under the
NPS Term Loan Due 2031 for failing to satisfy financial covenants.
· Kissick Debt - Under a 2015 subordination agreement,
subordinate his right to payments, as well as any security interest and liens
on the
LE Term Loan Due 2034. To date, LE has made no payments under the
subordinated Kissick Debt. To date,
the non-payment. As of the filing date of this report, there were defaults
under the Kissick Debt related to payment of past due obligations at
maturity.
We can provide no assurance that: (i) our assets or cash flow will be sufficient
to fully repay borrowings under our secured loan agreements, either upon
maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or
restructure the debt, and/or (iii) third parties will provide future default
waivers. Defaults under our secured loan agreements and any exercise by third
parties of their rights and remedies related to such defaults may have a
material adverse effect on our business, the trading prices of our Common Stock,
and on the value of an investment in our Common Stock, and holders of our Common
Stock could lose their investment in our Common Stock in its entirety.
Management maintains ongoing dialogue with lenders regarding defaults and
potential restructuring and refinance opportunities.
Table of Contents
Management's Discussion and Analysis
Related-Party Defaults
· · Notes and Loan Agreement - As of the filing date of this report, Blue
Dolphin was in default concerning past due payment obligations under the
date, BDPL was also in default related to past due payment obligations under
the BDPL-LEH Loan Agreement. 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.
Concentration of Customers Risk. We routinely assess the financial strength of
our customers. To date, we have not experienced significant write-downs in
accounts receivable balances. We believe that our accounts receivable credit
risk exposure is limited.
Portion of
% Total Accounts
Number Significant Revenue from Receivable
Three Months Ended Customers Operations at June 30,
June 30, 2022 2 64 % $ 0
June 30, 2021 3 75 % $ 0
Portion of
% Total Accounts
Number Significant Revenue from Receivable
Six Months Ended Customers Operations at June 30,
June 30, 2022 2 59 % $ 0
June 30, 2021 4 86 % $ 0
One of our significant customers is LEH, an Affiliate. Due to a HUBZone
certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales
Agreement and bids on jet fuel contracts under preferential pricing terms. For
the three months ended June 30, 2022 and 2021, the Affiliate accounted for
approximately 38% and 30% of total revenue from operations, respectively. For
the six months ended June 30, 2022 and 2021, the Affiliate accounted for
approximately 35% and 29% of total revenue from operations, respectively. The
Affiliate represented $0 in accounts receivable at both June 30, 2022 and 2021,
respectively.
See "Item 1. Financial Statements - Notes (3) and (15)" for additional
disclosures related to Affiliate agreements and arrangements, as well as "Part
I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2021 and our subsequent quarterly and periodic filings as
filed with the SEC for additional disclosures related to Affiliate risk.
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)
To cover the various obligations of lessees and rights-of-way holders operating in federal waters of theGulf 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 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, inMarch 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately$4.8 million for five (5) existing pipeline rights-of-way. InJune 2018 , BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. Although the IBLA granted multiple extension requests, theOffice of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor's office signaled that BDPL's adherence to milestones identified in anAugust 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. Decommissioning of these assets was delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur. 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 did not record a liability on our consolidated balance sheets as ofJune 30, 2022 andDecember 31, 2021 . At bothJune 30, 2022 andDecember 31, 2021 , BDPL maintained approximately$0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI Corp. Of the pipeline rights-of-way bonds,$0.7 million was credit-backed and$0.2 million was cash-backed.
Table of Contents
Management's Discussion and Analysis
BSEE Offshore Pipelines and Platform Decommissioning
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. InDecember 2018 , BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE inAugust 2019 to address BDPL's plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform decommissioning permit applications, including a safe boarding plan, byFebruary 2020 . BDPL submitted permit applications to BSEE inFebruary 2020 and the USACOE inMarch 2020 . InApril 2020 , BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL completed the required platform surveys inJune 2020 . Abandonment operations have been on hold due to our cash constraints associated with historical net losses and continued uncertainties surrounding commodity pricing and supply related to the COVID-19 pandemic and the Russian conflict withUkraine . At BSEE's request, BDPL provided BSEE with a status update on platform removal onAugust 3, 2022 . We cannot currently estimate when decommissioning of the pipelines and platform may occur. 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 did not record a liability related to potential penalties on our consolidated balance sheets as ofJune 30, 2022 andDecember 31, 2021 . At bothJune 30, 2022 andDecember 31, 2021 , BDPL maintained$3.5 million in AROs related to abandonment of these assets, which amount does not include potential penalties.
Off-Balance Sheet Arrangements. None.
Accounting Standards.
Critical Accounting Policies and Estimates
Significant Accounting Policies. Our significant accounting policies relate to use of estimates, cash and cash equivalents, restricted cash, accounts receivable and allowance for doubtful accounts, inventory, property and equipment, leases, revenue recognition, income taxes, impairment or disposal of long-lived assets, asset retirement obligations, and computation of earnings per share. Estimates. The nature of our business requires that we make estimates and assumptions in accordance withU.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The ongoing COVID-19 pandemic has impacted these estimates and assumptions and
will continue to do so. The ongoing COVID-19 pandemic and related governmental responses, volatility in commodity prices, and severe weather resulting from climate change have impacted and likely will continue to impact our business. Under earlier state and federal mandates that regulated business closures, our business was deemed as an essential business and, as such, remained open. AsU.S. federal, state, and local officials address surging coronavirus cases and roll out COVID-19 vaccines, we expect to continue operating.
In
We have instituted various initiatives throughout the company as part of our business continuity programs, and we are working to mitigate risk when disruptions occur. The Russian conflict withUkraine and the COVID-19 pandemic continue to evolve. Therefore, uncertainty surrounding refining margins, demand for our refined products, and the general business environment are expected to continue through 2022 and beyond. We assessed certain accounting matters that require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of the Russian conflict withUkraine and COVID-19 as ofJune 30, 2022 and through the filing date of this report. The accounting matters assessed included, but not limited to, our allowance for doubtful accounts, inventory, and related reserves, and the carrying value of long-lived assets.
New Accounting Standards and Disclosures
New Pronouncements Adopted. The FASB issues ASUs to communicate changes to the FASB ASC, including modifications to non-authoritativeSEC content. During the three months endedJune 30, 2022 , we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective.
No new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity.
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Table of Contents Controls and Procedures
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