Note 1 - Organization

12 Months Ended

Dec. 31, 2023

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Notes to Consolidated Financial Statements

(1)

Organization

Company Overview

Blue Dolphin was formed in 1986 as a Delaware corporation. The company is an independent downstream energy company operating in the Gulf Coast region of the U.S. Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.25 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”

Assets are organized into two business segments: ‘refinery operations’ (owned by LE) and ‘tolling and terminaling services’ (owned by LRM and NPS). ‘Corporate and other’ includes Blue Dolphin subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” for more information about our business segments.

Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours” refer to Blue Dolphin, one or more of its consolidated subsidiaries, or all of them taken as a whole.

Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and is a significant customer of our refined products. Blue Dolphin and certain subsidiaries are currently parties to various agreements with Affiliates. See “Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.

Going Concern Assessment
Certain conditions and events were noted that initially caused management to evaluate our ability to continue as a going concern. These conditions and events include significant debt either in default or under a forbearance agreement that expired on March 29, 2024 and classified within the current portion of long-term debt on our consolidated balance sheet at December 31, 2023 and current and historical working capital deficits at December 31, 2023. Our current assets totaled $49.3 million, and our current liabilities, excluding the current portion of long-term debt, totaled $16.0 million as of December 31, 2023. Management believes that we have sufficient liquidity to meet our obligations as they become due through the generation of cash flows from operations and liquidation of current working capital amounts for a reasonable period (defined as one year from the issuance of these financial statements). To bolster working capital reserves, management continues efforts to restructure debt obligations and reduce cash requirements. Management acknowledges that uncertainty remains related to future operating margins. However, management has a reasonable expectation of Blue Dolphin's ability to generate adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on our long-term debt. Our audited consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

Our significant current debt resulted from certain third-party loan agreements being classified within the current portion of long-term debt on our consolidated balance sheets at December 31, 2023 and 2022 due to being in default/forbearance. Excluding accrued interest, we had current debt of $39.4 million and $47.4 million as of December 31, 2023 and 2022, respectively. Our significant current debt at December 31, 2023 consisted of bank debt to Veritex and GNCU.

Forbearance Agreements and Default

Kissick Forbearance Agreement. Pursuant to the Kissick Forbearance Agreement, Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the Kissick Debt. Under the terms of the Kissick Forbearance Agreement, LE agreed to make monthly principal and interest payments totaling $0.5 million beginning in April 2023, continuing on the first of each month through February 2025, with a final payment of $0.4 million to Kissick Noteholder on March 1, 2025. LE paid Kissick Noteholder $4.5 million for the twelve months ended December 31, 2023. As of the filing date of this report, the Kissick Debt was in forbearance related to past defaults prior to April 2023.

LEH Forbearance Agreement. Pursuant to the LEH Forbearance Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement. Under the terms of the LEH Forbearance Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement, including the interest-only payment period. BDPL paid LEH approximately $3.4 million for the twelve months ended December 31, 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to past defaults prior to May 2023.

Defaults. As of December 31, 2023 and the filing date of this report, we were in default under the NPS Term Loan Due 2031 due to covenant violations. As of December 31, 2023 and through March 29, 2024, we were in forbearance under the LE Term Loan Due 2034 and LRM Term Loan Due 2034; as of the filing date of this report, we were in default under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 due to covenant violations. Defaults may permit lenders to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available.

Refining Margins

Our results of operations and liquidity are highly dependent upon the margins 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. The general outlook for the oil and natural gas industry for 2024 remains unclear given uncertainties surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and COV-19.

Net income for the twelve months ended December 31, 2023 totaled $31.0 million, or $2.08 per share, compared to net income of $32.9 million, or $2.34 per share, for the twelve months ended December 31, 2022. The $1.9 million, or $0.26 per share, decrease in net income between the periods resulted from lower refining margins. We cannot assure investors that refining margins and demand will remain at current levels.

Working Capital Improvements

We continue to actively explore additional funding to refinance and restructure debt and further improve working capital. During 2023, we entered into the Veritex First Amended Forbearance Agreement, Veritex Second Amended Forbearance Agreement, Kissick Forbearance Agreement, and LEH Forbearance Agreement. During 2022, we secured $1.5 million in working capital through CARES Act loans and entered into the initial forbearance agreement with Veritex. We had $6.1 million and $45.2 million in working capital deficits at December 31, 2023 and 2022, respectively, representing a $39.1 million improvement. Excluding the current portion of long-term debt, we had $33.3 million and $2.1 million in working capital at December 31, 2023 and 2022, respectively, representing a $31.2 million increase. The significant increase in working capital over the previous twelve months was due to decreases in the current portion of long-term debt, accounts payable, and accrued interest payable. The improvement was also due to a significant increase in cash from operations, accounts receivable, and inventory, as well as a 3 contractual settlements related to Pilot.

Operating Risks

Successful execution of our business strategy depends on several critical factors, including having adequate working capital, favorable refining margins, and consistent operations at the Nixon refinery.

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Working Capital – As noted above, we have historically had working capital deficits primarily due to having significant current debt. Sufficient working capital is necessary to meet contractual, operational, regulatory, and safety needs. Our short-term working capital needs are primarily related to (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Third Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to the repayment of long-term debt obligations. To avoid business disruptions and manage cash flow, we optimize receivables and payables by prioritizing payments, optimize inventory levels based on demand, monitor discretionary spending, and carefully manage capital expenditures.

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Refining Margins – 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. Crude oil refining is primarily a margin-based business. To improve margins, we must maximize yields of higher-value finished petroleum products and minimize costs of feedstocks and operating expenses. Our margins are negatively affected when the spread between these commodity prices decreases. 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. To remain competitive in a volatile commodity price environment, we adjust throughput and production based on market conditions and our product slate based on commodities pricing.

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Nixon Refinery Operation – We maintain relationships with suppliers that source and repair key components of the Nixon refinery. We expect our suppliers to maintain an adequate supply of component products and, when components are sent out for repair, to timely deliver components. However, in some cases, increases in demand or supply chain disruptions have led to part and component constraints. We use several suppliers and monitor supplier financial viability to mitigate supply-based risks that could cause a business disruption.

General macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and COVID-19 continue to evolve, and the extent to which these factors impact our working capital, commodity prices, refined product demand, supply chain, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of confidence. We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we can obtain additional financing on commercially reasonable terms or at all, or margins on our refined products will be favorable. Further, if third parties exercise their rights and remedies under secured loan agreements that are in default, our business, financial condition, and results of operations will be materially adversely affected.