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NAVAJO NATION OIL & GAS COMPANY

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NAVAJO NATION OIL & GAS COMPANYPresentation to Navajo Nation Council

October 15, 2014

Navajo Nation Council ChambersWindow Rock, Arizona


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Vision Statement

“The premier Native American energy company”

Mission Statement

“Maximize resources for the benefit of the Navajo Nation with respect for

Mother Earth”


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


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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


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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


Historical InformationStart-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

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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


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Historical AchievementsBarrels of Oil Per Day

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

500

1000

1500

2000

2500

3000

3500

4000

BOPD

BOPD


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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

20

40

60

80

100

120

140

160

180

REVENUES

REVENUES

Million $


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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

INCREASE IN NET ASSETS

INCREASE IN NET ASSETS

Million $


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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

20

40

60

80

100

120

140

160

180

200

CAPITAL EXPENDITURES

CAPITAL EXPENDITURES

Million $


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2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

20

40

60

80

100

120

140

160

180

200

Comparison of Line of Creditand Outstanding Amount

BORROWING BASELOAN OUTSTANDING

Million $


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

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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.


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Navajo Nation Oil and Gas CompanyCurrent 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


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Navajo Nation Oil and Gas CompanyCurrent 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


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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


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

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• 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

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• 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


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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


Organizational Chart

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Navajo NationShareholders

Board of Directors

President & CEO

Corporate

NNOGC

Exploration

& Production, LLC

Running Horse

Pipeline,LLC

Navajo Petroleum,LLC

NNOGC Holdings, LLC


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Board Composition

Member RepresentingLennard 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


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Ahéhee’

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