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NAVAJO NATION OIL & GAS COMPANY NAVAJO NATION OIL & GAS COMPANY NAVAJO NATION OIL & GAS COMPANY Presentation to Navajo Nation Council October 15, 2014.

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Presentation on theme: "NAVAJO NATION OIL & GAS COMPANY NAVAJO NATION OIL & GAS COMPANY NAVAJO NATION OIL & GAS COMPANY Presentation to Navajo Nation Council October 15, 2014."— Presentation transcript:

1 NAVAJO NATION OIL & GAS COMPANY NAVAJO NATION OIL & GAS COMPANY NAVAJO NATION OIL & GAS COMPANY Presentation to Navajo Nation Council October 15, 2014 Navajo Nation Council Chambers Window Rock, Arizona Navajo Nation Council Chambers Window Rock, Arizona 1

2 NAVAJO NATION OIL & GAS COMPANY Vision Statement “The premier Native American energy company” Mission Statement “Maximize resources for the benefit of the Navajo Nation with respect for Mother Earth” 2

3 NAVAJO NATION OIL & GAS COMPANY Summary of Presentation The Council has been provided lots of information on the NNOGC governance controversy, much of it disinformation. It is the purpose of this presentation to present the facts, to tell what really happened from a business standpoint. The presentation will cover how the company progressed from humble beginnings to become a multimillion dollar corporation and enjoyed success and stability until new management was installed in You will be made aware of the financial problems that were discovered when the majority Board re-assumed control of the company and the damage that was done to the corporation. Presentation will cover what present management is doing to correct these problems, the tough decisions that were made in the face of a financial crisis, and what the plans are to right the ship and continue the growth of the company. 3

4 NAVAJO NATION OIL & GAS COMPANY Historical Information Formation Created as the Navajo Nation Oil and Gas Co, Inc. in 1993 as the first for-profit tribal corporation – 88 shareholder representatives Navajo Nation Oil and Gas Company was created as a federal corporation under the I.R.A. in 1997 – 11 shareholder representatives As such, NNOGC is not a private corporation but considered the “alter ego” of the Navajo Nation Corporation’s purpose is to engage as a Navajo Nation-owned entity in the oil and gas industry and share in the value creation from oil and gas and other tribal trust resources Initial Board: Louis Denetsosie – Chairman; Mae Gilene Begay, Marjorie Irwin, Raphael Martin, Ben Silversmith, Lew Broadbent, Larry Hansen 4

5 NAVAJO NATION OIL & GAS COMPANY Historical Information Start-up Achievements Implemented RIK Marketing Program Purchased 2 Business Site leases in Window Rock and Kayenta, Arizona $500,000 dividend payment to Navajo Nation Obtained Chevron Brand Collaborated with ONTC to create Fuel Distributor’s Licensing Program 1997 – With fuel distributor’s license from the Navajo Nation, began transporting motor fuel free of State Fuel Excise Tax Purchased fee land from Karigan Estates in St. Michaels for the corporate office – Humble beginnings with two rooms at the Window Rock Motor Inn 5

6 NAVAJO NATION OIL & GAS COMPANY Historical Information Start-up Achievements Negotiated Tax Sharing Agreement between Navajo Nation and State of Arizona in NN Fuel Excise Tax program started based on this agreement -- $12 million a year minimum Negotiated NNOGC Oil and Gas Revenue Fund with Speaker Ed T. Begay at $3M per year x 5 years Used proceeds of Oil and Gas Revenue Fund make the move into the midstream and upstream space 2002 – Purchased Running Horse Pipeline 2004 – Purchased 10% of working interest in the Ratherford Unit of Greater Aneth Field 6

7 NAVAJO NATION OIL & GAS COMPANY Historical Information Growth in Upstream Purchased 10% of Ratherford in 2003 Purchased Texaco’s interest in the GAF in 2004 with Resolute Purchased Exxon’s interest in the GAF in 2006 with Resolute Built Corporate Office in 2005 Opened Denver Office in 2006 to house E&P staff (15 employees in 2013) Obtained CBM Lease for 150,000 acres in the San Juan, Nenahnezad, Fruitland and Burnham Chapters in 2010 Achievements Purchased Denbury and Resolute working interests in GAF bringing production to 3600 BOPD Paid over $24,000,000 in bonuses and rents for the CBM lease to the Navajo Nation Built truckloading facilities at Bisti pipeline terminus in Huerfano Chapter FY 2013 fair market value of company is over $500 million 7

8 NAVAJO NATION OIL & GAS COMPANY Historical Achievements Barrels of Oil Per Day 8

9 NAVAJO NATION OIL & GAS COMPANY 9

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11 NAVAJO NATION OIL & GAS COMPANY 11

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13 NAVAJO NATION OIL & GAS COMPANY What Really Happened Previous slides show that NNOGC was a solid company that continued to grow up until the end of FY 2014 [March 31, 2014]. It took good management and competent staff to bring the company to a value exceeding $500 M. Slides 9 and 10 illustrate that the increase in company earnings in FY 2014 was the result of acquisitions in 2012 (Slide 11). The Board, on regaining control of the company in late June 2014, discovered the following financial problems and instances of mismanagement: Borrowing base reduction from $170 M to $110 M Borrowing base deficiency of $42.75 M Unexplained transfer of $18.4 M to an unauthorized bank in violation of loan agreement Serious cash flow problems arising from an agreement to repay $42.75 M in six months Annual audit hopelessly behind schedule 13

14 NAVAJO NATION OIL & GAS COMPANY What Really Happened It was further discovered that prior management blatantly misused the corporation’s funds by – Wrongfully spending $1.5 M in attorneys and consulting fees for the terminated CEO to unlawfully hold the office. Wrongfully spending over $438,000 for four Shareholder Representatives’ legal representation in Navajo and federal courts. To pay for unsuccessful suits in Navajo courts and an unsuccessful suit to overturn a Navajo Supreme Court opinion in federal court, which threatened Navajo sovereignty. Imposing additional costs on the corporation for necessary professional fees and costs, of which the totality is still being calculated. The action of former management and seven law firms that were hired in an effort to permanently remove the Board of Directors caused serious economic and reputational harm to NNOGC. 14

15 NAVAJO NATION OIL & GAS COMPANY Navajo Nation Oil and Gas Company Current Status – What’s Happening Accomplishments Made 4/6 payments of $7.125 M each to banks Reinstated 4 competent accountants to correct financial deficiencies – Audit, budget, financials Company realized benefits from 2012 acquisitions – $70.5 M cash from operations – $43 M increase in net assets – $154 M total revenues – $49 M operating income Challenges Borrowing Base was reduced from $170 M to $110 M on June 7, 2014 $2.63 Million per year additional interest during the six month period of payback Cost of money to NNOGC has increased due to borrowing base redetermination Financial crisis necessitated cutback in expenditures, including the RIF of 13 employees 15

16 NAVAJO NATION OIL & GAS COMPANY Navajo Nation Oil and Gas Company Current Status – What’s Happening Accomplishments 5 full ride scholarships to Navajo college students – 3 graduating by May 2016 $210,000 total funding for scholarships to Navajo students $51 M in direct payments to the Navajo Nation Challenges Restated Charter of Incorporation if adopted increases the risk of further turmoil and instability In the event of further instability, banks may merely want to liquidate the loan with NNOGC 16

17 NAVAJO NATION OIL & GAS COMPANY NNOGC E&P, LLC - Current Status Accomplishments Total working interest of 36.6% and net revenue interest of 31% in the Greater Aneth Field $400 M investment by Resolute and NNOGC has reversed decline curve in GAF Life of Greater Aneth Field is extended until at least 2030 Proven reserves of 20.7 MMBOE with PV of $460.8M Challenges CBM Lease is economically unfeasible due to 49% royalty and tax burden – Inability to acquire partners to share risk Northern portion of CBM Lease is in the Mancos oil window Management must prove up reserves on CBM Lease or lose development costs 17

18 NAVAJO NATION OIL & GAS COMPANY Immediate and Future Plans Pay off the Borrowing Base Deficiency Working capital loan request to the Navajo Nation Company is working on sale of loss allowances earned by Running Horse Pipeline Repair the relationship with the banks and resume the hedging program Declining oil prices poses a risk to cash flow Renegotiate loan facility and increase borrowing base Prove up reserves on the CBM Lease Navajo Nation Council’s assistance is required Obtain partners for CBM lease and recover development costs 18

19 NAVAJO NATION OIL & GAS COMPANY Immediate and Future Plans Continue to invest in the development of the Greater Aneth Field Hire experienced CEO and Vice-Presidents of upstream and downstream business units Hire geologists, geophysicists, engineers, land managers and technicians Complete exploration of the Desert Creek lease Resume exploration and production activities on lands of the Navajo Nation Build up expertise of operations staff and begin managing and operating own leases 19

20 NAVAJO NATION OIL & GAS COMPANY Immediate and Future Plans Construct administration building for Running Horse Pipeline staff Partner with Navajo Nation Gaming Enterprise to construct a Chevron gas station and c-store at Twin Arrows Lease, design and construct a gas station and c- store in Crownpoint Renovate Pueblo Pintado gas station and store Collaborate on other gas station and c-store developments on the Navajo Nation Continue to partner with other Navajo Nation enterprises 20

21 NAVAJO NATION OIL & GAS COMPANY Future Challenges Profits will be squeezed by increasing interest costs and lease operating costs Profits will be squeezed further by the low cost of crude oil due to increased production in San Juan Basin It will be difficult to obtain lenders who provide low cost of capital Improvements in technology in exploration and drilling technology has made the Navajo Nation’s oil and gas resources, including helium, more valuable Youth of the Navajo Nation face an exciting challenge in deploying the advanced technology to extract more value for the Navajo Nation 21

22 NAVAJO NATION OIL & GAS COMPANY Organizational Chart 22 Navajo Nation Shareholders Board of Directors President & CEO Corporate NNOGC Exploration & Production, LLC Running Horse Pipeline, LLC Navajo Petroleum, LLC NNOGC Holdings, LLC

23 NAVAJO NATION OIL & GAS COMPANY Board Composition MemberRepresenting Lennard Eltsosie Chairperson, Ft. Defiance Agency Diandra Benally Northern Agency Jennifer Hatathlie Secretary, Western Agency Frances Totsoni Presidential Appointee Nelson Toledo Presidential Appointee Mae-Gilene Begay Chinle Agency Young Jeff Tom Eastern Agency 23

24 NAVAJO NATION OIL & GAS COMPANY Ahéhee’ 24


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