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Bridge Under Troubled Waters: Payette County Natural Gas Company Faces Uncertain Future

Drilling into the company that hopes to bring the natural gas industry to Idaho

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Being first has its challenges. Consider Bridge Resources, the first company poised to drill and produce commercial natural gas in Idaho. Its stock has practically bottomed out, trading for pennies, and its recent financial statements portray a company swimming in red ink. Bridge is in debt to a foreign bank for more than $44 million; it has hundreds of thousands of dollars invested in its Idaho operations while the state still hasn't formally adopted new rules for the industry; and its top three executives--CEO Edward Davies, Vice President Thomas Stewart and Exploration Manager Kim Parsons--resigned, effective immediately, on Sept. 20.

"I probably would have managed this differently," said Suzanne Budge, executive director of the newly formed Idaho Petroleum Council, an organization of gas industry representatives. "But they're on the tip of the spear."

A Canadian company with offices in Colorado, Bridge has been Idaho's 21st century pioneer in natural-gas exploration, with successful efforts at seven of 11 Payette County wellheads. But the company's success in the rural fields of western Idaho has not been matched by any recent fortunes in the boardroom. In fact, in the past 12 months, shares of Bridge Resources stock have lost as much as 94 percent of their value on the Toronto Stock Exchange.

"At March 31, 2011, the company had a net loss of $77,514,977 and cash flows used in operating activities of $7,102,731. As a result of losses, the company has a deficit of $170,149,607 at March 31, 2011," according to the company's fiscal year-end statement. "[Bridge] has a working capital deficiency of $57,655,587 and total liabilities currently exceed total assets."

Numerous calls to Bridge officials seeking comment were not returned by press time, although John Foster of Strategies 360, a consultant to the IPC, said Bridge's new management is hopeful for change.

"There is definitely a recognition by the new management at Bridge that this could have been done differently," Foster said.

Chief among Bridge's worries has been its inability to pay its debts. On March 31, Bridge Resources had an outstanding loan balance of more than $44.2 million, with a lending syndicate led by the Royal Bank of Scotland, and was in default on certain operating covenants of the loan.

"These matters cast substantial doubt on the company's ability to continue as a growing concern," stated a July 29 audited financial statement from KPMG, LLP, one of the world's largest and most reputable auditing firms.

Simply put, the company was in default, and upon default, the loan became payable on demand by the Bank of Scotland.

That may be news to the hundreds of Idahoans who have signed land leases with Bridge, through its broker Energy West. More than 260 agreements allow Bridge to explore, and possibly drill, for gas on tens of thousands of acres of private land, primarily in Payette County. But what the landowners may not know is that the Royal Bank of Scotland is a secured party on the leases, and the foreign bank's grip could tighten at anytime.

Through the course of our investigation, BW found that Bridge's misfortunes date back to 2008, only two years after the company began publicly trading on the Toronto Stock Exchange.

Lost At Sea

In November 2008, Bridge began producing natural gas from its Durango Field in the North Sea, off the coast of the United Kingdom. But almost from the beginning, there were problems.

According to Bridge statements, the company's high volume of gas production at Durango caused back-pressure at some of its competitors' wells, in effect limiting the competitors' production. Bridge shut down its well and was obliged to compensate its competitors for their production losses. By the time Bridge resumed its Durango production in February 2010, its well was pushing out an inexplicably high level of water with its gas, exceeding pipeline limit specifications and forcing another closure of the well.

Meanwhile, Bridge executives were spending more time in Idaho, eyeing the potential for substantial natural gas production in Payette County. Deciding to shift its focus almost entirely to Idaho, Bridge sold its North Sea assets after striking a deal to sell its wholly-owned U.K. subsidiary Bridge North Sea Ltd., including the Durango Field to Perenco UK.

Even though Bridge was exiting the North Sea, its new business associate had its own share of challenges in the region.

A July 6 investigation by The Guardian, a British newspaper, revealed through data obtained under the Freedom of Information Act, that Perenco UK experienced seven gas leaks in 2009-2010 at its North Sea rigs. Three of the leaks were deemed significant, including one 40-kilogram leak, equivalent to 88 pounds of gas flooding into the sea.

Perenco acquired the Durango well for $8.9 million, but when word of the sale reached investors, Bridge's financial status deteriorated.

Bridge Falls Down

On Dec. 8, 2010, investors woke to a jaw-dropping headline on hotstocked.com: "Lack of Strategic Alternatives Ruins Bridge Resources Corp."

"Bridge Resources Corp. announced in a press release that the proposed cash component for the divestiture of its wholly-owned subsidiary Bridge North Sea Limited will not allow full repayment of BUK's outstanding debt, and that the management is looking for other better alternatives," read the analysis.

An accompanying stock-performance chart was even more bleak. On Nov. 15, 2010, Bridge Resources shares had traded at 49 cents. By Dec. 7, 2010, its value had dropped to 7 cents a share. The stock continued to drop through much of 2011.

"Within a few days, the stock had collapsed," Ekaterina Zelenkova, author of the analysis, told BW from her office in Bulgaria. "And up until now, it has yet to recover from this huge plunge."

Zelenkova, who headed the internal audit department at Populiarna Kasa 95 before joining Hotstocked as a financial columnist, regularly reviews investments in small-to-medium companies in the North American market.

"If I were to explain their situation in a more simple way, it's like a painter who, due to illness, had his right hand cut off," said Zelenkova. "This was the case with Bridge. Huge debts continue to be one of the main reasons for skepticism among investors."

Bridge's stock value continued to bleed. As of Oct. 4 Bridge shares were trading at 2 cents on the Toronto Stock Exchange.

"They should have been informing investors on what their next steps were going to be," said Zelenkova. "Although Durango and the company's North Sea assets were sold, the funds they received simply weren't enough to cover their debts. And according to the loan with the Royal Bank of Scotland, the syndicate has the right to require immediate return of funds. They need to restructure and they need more cash. Not one or the other. They need both."

An Aug. 2 corporate update from Bridge's Canadian office confirmed Zelenkova's analysis.

"Bridge does not currently possess the financial resources to satisfy principal and interest payments due on its existing debt facilities in 2011," read the statement. "The Company expects any restructuring options will be subject to review of the submitted Field Development Plan to produce the Idaho reserves, joint venture participation, as well as other considerations. Bridge anticipates furthering negotiations with the Senior Lending Syndicate (Royal Bank of Scotland) during this calendar quarter, however, there can be no assurances of continued financial support from the Senior Lending Syndicate."

Zelenkova said renegotiating its debt could provide some relief to Bridge, but the immediate need was simpler.

"Cash is the turning point," she said. "The company definitely needs cash to further operate."

As for restructuring Bridge's management, Zelenkova said she wasn't surprised at all on Sept. 20, when the company's top three executives handed in their resignations. When Davies, Stewart and Parsons announced that they were no longer a part of Bridge's future plans, the big question was, who was in charge?

In the Nick of Time

No one BW spoke to knew much about Nick Clayton but that will probably change quickly. Clayton is the new face and voice for Bridge Resources. In the same press release stating that Davies, Stewart and Parsons had resigned, Bridge announced that Clayton would act as interim CEO.

Clayton, 48, joined Bridge as its non-executive chairman of the board in December 2010 and has a resume packed with energy and finance experience. After graduating in 1985 from Portsmouth Polytechnic in Hampshire, England, Clayton began his career at British Petroleum. He went on to work for German investment bank Dresdner Kleinwort Wasserstein and Canadian investment firm Canaccord Adams. He has been a self-employed corporate finance consultant since January 2007, serving on the boards of Sterling Energy in London and Bridge Resources.

"It's not in our industry's interest to have fly-by-night people coming and going," said Idaho Petroleum Council's Budge when asked about Bridge's change at the top.

"They're going to need to get a new team in place, and I assume that's what they're going to be doing," said Michael Christian, attorney with the Boise law firm of Marcus, Christian and Hardee.

Christian represents Snake River Oil and Gas, another company with hopes of producing natural gas in the Idaho basin. Snake River is a subsidiary of Weiser-Brown Oil Company, which has been drilling and producing oil and gas in Arkansas, Louisiana and Texas for nearly 50 years. The principal owners are Richard Brown--who owns a home in Sun Valley--and his cousin Chris Weiser. For the better part of a year, Snake River has been signing leases with private landowners in Payette and Washington counties, not unlike Bridge.

"I think Snake River has a significant amount of acreage already leased," said Christian. "But certainly not as much as Bridge, which has more than 100,000 acres."

Christian said he expects Idahoans to hear a lot more about Snake River in the near future.

"My understanding is that their intent is to be drilling within the next year," he said. "My clients aren't here as a hobby. They're not going anywhere."

Though his clients would be direct competitors with Bridge, Christian said there was no reason to kick Bridge while it was down.

"We were certainly aware that they faced certain challenges," said Christian. "Was I aware that the specific chain of events was going to occur? No."

Budge, whose organization's members include both Bridge and Snake River, echoed Christian.

"Members of the industry, although they're competitors, are very much in Bridge's camp, wanting them to be successful. It is in the industry's interest for Bridge to succeed."

Creating a positive first appearance is key for the natural gas industry.

"Bridge was the first Idaho mover in this industry," said Christian. "And for the industry to develop and become healthier, it's far better off having your first participant being better than not."

But through the course of Budge's conversation with BW, she said on several occasions that she would have advised Bridge differently.

"My view of it is that Bridge could have done a better job," she said. "I would have done it differently if I was advising them as to how to come into a community and work through the process--with local officials, with regulators and with neighbors. It's easy to handicap from a distance, but yes, I would have had a different approach than they did."

A Failure to Communicate

Justin Hayes, program director of the Idaho Conservation League, hasn't had the most effective communications with Bridge.

Hayes recalled his first contact with Bridge officials when he called its Colorado office in January.

"I spoke to their [then] vice president Tom Stewart," said Hayes. "I said, 'Hey, we would like to hear more about your company and what your plans are for Idaho.' But it was kind of a stilted conversation. He told me that I needed to talk to their consultants. I asked him if that's what he really wanted--for our relationship to be with consultants as opposed to with his company directly, and he said 'Yes.' I thought that was an inauspicious beginning to what has turned out to be a not very good relationship."

For the past 15 months, BW hasn't had much luck making direct contact with Bridge officials either, but it's not for a lack of effort. In July 2010, BW asked then-CEO Ed Davies about his company's Idaho operations.

"I can only refer you to our press releases," Davies told BW. "These are very carefully edited, and that's all I can say."

During the past year, BW made more than a dozen requests for interviews with then-Exploration Manager Kim Parsons but to no avail. BW also made repeated requests to talk with any new company spokesperson since the Sept. 20 resignations of Davies, Parsons and Stewart. As of press time, Bridge officials were unavailable for comment.

It's not that Bridge officials have been absent from Idaho--they have regularly attended meetings of the Payette County Planning and Zoning Commission and meetings of the Idaho Oil and Gas Conservation Commission in Boise.

The Oil and Gas Commission--comprised of Idaho's five statewide elected officers--hadn't met in nearly 20 years before convening in March. The ever-increasing interest in Bridge's operations prompted a standing-room-only gathering. The first order of business was simple: get some rules on the books to oversee natural-gas exploration, with particular emphasis on treatments such as fracking, the controversial method of injecting high-pressured liquids and solids into wells to enhance gas flows. The commission ordered a detailed rule-making process to begin at once (see "Political Positioning," Page 15). In the meantime, the commission adopted temporary rules, using Wyoming's regulations as a base model. The commission also approved Bridge's request to drill more in less space. Idaho code had previously restricted one well per 640 acres, but by unanimous vote, the commission agreed to permit one well per 160 acres, or approximately four wells per square mile.

When the meeting adjourned, Gov. C.L. "Butch" Otter, the commission's chairman, approached Hayes.

"The governor came up to me, shook my hand and said 'We need you to keep an eye on these guys.'"

But while Bridge's competitors aren't publicly anxious to throw the troubled company under the bus, Hayes isn't convinced that they're not Bridge's biggest fans either.

"My sense is that the Idaho Petroleum Council was created by entities that had concerns for their industry," he said. "I'm not sure that they necessarily felt that it was a good thing to have Bridge be the face of their industry right now." :

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