April 29, 2015 - 11:13pm EST by
2015 2016
Price: 5.20 EPS 1.51 2
Shares Out. (in M): 10 P/E 3.4 0
Market Cap (in $M): 54 P/FCF 6.4 0
Net Debt (in $M): 10 EBIT 11 0
TEV (in $M): 65 TEV/EBIT 5.9 0

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  • Micro Cap
  • NOLs
  • Oil and Gas
  • Competitive Advantage
  • Personal Account Idea


This is a microcap idea suitable only for (smallish) PAs, but is nonetheless a compelling opportunity.  Blue Dolphin owns an oil refinery in the Eagle Ford Shale that has become a cashcow as a result of cheap feedstock (high API oil and condensate from Eagle Ford Shale wells).  The company trades at 6X trailing FCF (adjusted to ignore changes in working capital) on an enterprise value basis and is likely to be even cheaper on a forward basis. While utilization is difficult to predict for an asset like this, in the curent environment, Blue Dolphin is likely on pace to produce $2 of FCF per share in 2015.

A group led by Jonathan Carroll recognized the opportunity created by shale oil production and bought an old "topping" (a simple distilate tower capable of only dealing with high API crude) refinery in the middle of the best Eagle Ford Shale acreage using the appropriately named Lazarus Energy.  Lazurus was merged into the public Blue Dolphin Energy in 2012 and still owns 80% of the public company - they have yet to sell a share.  The 10K describes the opportunity:

Despite the United States’ current surplus refining capacity, 50% of which is located in PADD 3 (Gulf Coast), the rise in production of light sweet crude oil from unconventional sources such as the Bakken Shale and the Eagle Ford Shale has revitalized some refinery operations that formerly depended on imported light sweet crude oil. As a result, small refineries like the Nixon Facility are more competitive with large refineries that process more widely available, lower quality heavy-sour crude oil. In order to remain competitive, large refineries need significant pricing discounts on light sweet crude oil in order to displace lower quality heavy-sour crude oil. 

This facility has been running at higher crude throughput capacities as improvements are made, while operating costs have been lowered by some minor improvements like switching the boilers to natural gas.  The company has also gotten around new environmental legislation by producing more jet fuel rather than diesel, which along with higher crack spreads has led to increased profitability.

New environmental regulations became effective in June 2014 that require most refineries to produce transportation-related fuels for highway and nonhighway use at 15 ppm sulfur. In order to meet the lower sulfur content requirement for NRLM in the United States, the Nixon Facility will require capital upgrades in excess of approximately $50 million. In order to complete the required capital upgrades, we will have to finance such capital expenditures primarily through the issuance of debt and/or equity, which would result in dilution to existing stockholders and/or subject us to higher debt levels. The Nixon Facility can continue to sell diesel with high sulfur content in the United States to other refineries and blenders as a feedstock and to other countries as a finished petroleum product. There can be no assurance that we can: (i) obtain financing for capital expenditures at rates or at terms acceptable to us, if at all, (ii) sell diesel with a higher sulfur content in the United States to other refineries and blenders as feedstock or overseas as a finished petroleum product, or (iii) sell higher sulfur diesel content at prices that we deem reasonable or at all. 

We are committed to maintaining safe, efficient and reliable refinery operations, improving margins, and focusing on safety and environmental stewardship. Throughout 2014, we advanced our refinery operations business strategy by: (i) continuing to implement programs and procedures at the Nixon Facility to improve safety, (ii) improving product mix through the introduction of oil-based mud blendstock in June 2014 and the increased production of jet fuel, and (iii) upgrading and refurbishing certain components of the Nixon Facility, including the naphtha stabilizer unit, depropanizer unit, and two boilers. We anticipate that completion of these capital improvement projects will: • Naphtha Stabilizer and Depropanizer Units – improve the overall quality of the naphtha that we produce, allow higher recovery of lighter products that can be sold as LPG mix, and increase the amount of throughput that can be processed by the Nixon Facility; and • Boilers – reduce fuel gas usage since the new boilers will be more energy efficient and have the ability to operate using natural gas. This will, in turn, reduce emissions of combustion-related pollutants and potential operational downtime. 

Jet fuel was 22.8% of production in 2014 vs. just 4.9 in 2013.  

SG&A seems reasonable at <$1.5 million per year and the company has a $5.7 million NOL that has yet to be utilized.

The company is likely to pay down the $11 million in highish cost debt (variable rate with a current average cost of 5.75%) it still carries with FCF in 2015.

This company should have a durable competitive advantage vs. other refineries based on its proximity to wells.  Oil can be trucked directly to the Nixon refinery as opposed to selling into a pipeline for transportation (which costs money) to a Gulf Coast refinery.  There is also a local pipeline owned by a Koch entity that could alleviate the need and cost of trucking local oil to the refinery.

As long as the refinery operates at similar levels of utilization to 2014, this stock looks very cheap and is likely to report at least $0.50 in earnings and FCF for Q1.

So far it appears that the control group is operating this company in a responsible and shareholder friendly manner and probably wants to see a much higher share price (it traded over $10 at one point in 2014) to allow for either acquisitions of other assets or share sales by the control group.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Q1 Earnings, debt repurchases

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