NAVAJO NATION OIL & GAS COMPANY Shareholder Representative

Report
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
1
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
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 2013.
• 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
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
NAVAJO NATION OIL & GAS COMPANY
Historical Information
Start-up Achievements
• 1995 - Implemented RIK Marketing Program
• 1995 - Purchased 2 Business Site leases in Window Rock and
Kayenta, Arizona
• 1996 - $500,000 dividend payment to Navajo Nation
• 1996 - Obtained Chevron Brand
• 1997 - 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
• 1999 - 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
NAVAJO NATION OIL & GAS COMPANY
Historical Information
Start-up Achievements
• 1999 - Negotiated Tax Sharing Agreement between Navajo
Nation and State of Arizona in 1999
• 1999 - NN Fuel Excise Tax program started based on this
agreement -- $12 million a year minimum
• 1999 - Negotiated NNOGC Oil and Gas Revenue Fund with
Speaker Ed T. Begay at $3M per year x 5 years
• 2002 - 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
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
• 2012 - 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
NAVAJO NATION OIL & GAS COMPANY
Historical Achievements
Barrels of Oil Per Day
BOPD
4000
3500
3000
2500
2000
BOPD
1500
1000
500
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
8
NAVAJO NATION OIL & GAS COMPANY
REVENUES
180
160
140
120
100
Million $
REVENUES
80
60
40
20
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
9
NAVAJO NATION OIL & GAS COMPANY
INCREASE IN NET ASSETS
60
50
40
Million $ 30
INCREASE IN NET ASSETS
20
10
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
10
NAVAJO NATION OIL & GAS COMPANY
CAPITAL EXPENDITURES
200
180
160
140
120
Million $ 100
CAPITAL EXPENDITURES
80
60
40
20
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
11
NAVAJO NATION OIL & GAS COMPANY
Comparison of Line of Credit
and Outstanding Amount
200
180
160
140
120
BORROWING BASE
Million $ 100
LOAN OUTSTANDING
80
60
40
20
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
12
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
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
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
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
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
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
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
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 cstore 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
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
NAVAJO NATION OIL & GAS COMPANY
Organizational Chart
Navajo Nation
Shareholders
Board of
Directors
President &
CEO
Corporate
NNOGC
Exploration &
Production,
LLC
Running Horse
Pipeline,
LLC
Navajo
Petroleum,
LLC
NNOGC
Holdings, LLC
22
NAVAJO NATION OIL & GAS COMPANY
Board Composition
Member
Representing
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
NAVAJO NATION OIL & GAS COMPANY
Ahéhee’
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