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Disappointing Drills



Remember last year when those guys were driving and helicoptering all over the Eel River Valley with dynamite and cables to test the geologic underworld for its natural gas potential? And how they were telling people -- Eel River Valley people whose property they wanted to do the seismic testing on, or whose mineral rights they'd leased, and, more importantly, prospective investors -- that this one was gonna be big? Big gas play. Big gas pay!

As we noted in our story March 2007 on gas exploration companies in the valley ("Boom or Bluff," March 1), a trade website had touted the one doing the seismic testing, Foothills Resources, Inc., as "an absolute blockbuster" whose shallow wells looked fabulous but whose future wells plumbing the deep, deep layers of the earth "could turn this cash flow machine into a bonanza gas company overnight."

Well, Foothills has had a bit of a setback since then. It's in default with its creditors. And, this week, the company was under deadline to produce a restructuring plan.

In an August news release, Foothills explained the cause of its default: "Principally because of higher than expected drilling costs and poorer than anticipated results from the Company's activities in the Eel River Basin of California, the Company was not in compliance with the asset coverage and leverage ratio covenants ..."

Foothills, which also has oil and gas projects in Texas and Oklahoma, in 2006 financed its Eel River Valley explorations and drilling through Goldman Sachs. Then, in December 2007, the company refinanced the loan through Wells Fargo and Regiment Capital, "taking Goldman Sachs out," said Foothills President John Moran last week by phone from his office in Bakersfield. (According to the company's SEC 10K filings, Goldman Sachs remains a major shareholder in Foothills.)

Foothills' current financing includes a $50 million term loan and $50 million in revolving credit. The company is in default on all of the term loan and almost half of the revolving loan, which are secured by its oil and gas reserves.

Moran said Foothills needed to prove its value to its lenders with the new wells it drilled in the valley last year and this year, which meant it needed to hit gas reserves enough to pay off its debt. Foothills drilled two wells next to old wells that had shown some promise back in the early 1960s when Zephyr Oil had come around prospecting. One of those wells had tested at 5 million cubic feet of gas a day back in 1963, and the other had tested at 2.5 million cubic feet of gas a day in 1964. But this time around, the new wells, drilled deeper, came up with very little gas -- not enough to be considered commercial.

"Very disappointing," said Moran.

A third well, completed earlier this year, is still being tested, he said. It had nearly blown out in an earlier attempt, and ended up swallowing a drill pipe whole. The second attempt, with a pipe "sidetracked" into the well, has produced merely 500,000 cubic feet of gas, and not consistently. A fourth well, meanwhile, also completed earlier this year, came up a mix of water and gas -- it's been hooked up to PG&E's pipeline, Moran said, but produces just small volumes of gas.

The only solid commercially producing well, so far, is the Christiansen well, drilled in 2006. It taps into shallow sandstones already proven to produce gas elsewhere in the region, and was averaging about 340 million cubic feet a day in early 2008, according to Foothill's website.

Moran said its financial troubles won't affect the company's operations in the Eel River Valley. The people who leased their mineral rights to Foothills will still get their annual lease payments, he said. Those lucky few who sit on top the Christiansen well are still getting their royalties. And the company is still planning to explore the rest of the valley where that seismic study drummed up potential prospects.

"We're trying to get back in compliance [with the loan]," Moran said. "We're putting together a plan. And we'll probably bring in a partner to pursue some of those prospects."

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