Navajo Nation Oil and Gas Company’s (NNOGC) quest to refinance a loan that already matured last month has taken an unusual turn. The company told prospective lenders that it’s willing to waive its sovereign immunity, a hallmark legal designation that prevents tribes from being forced into bankruptcy court by creditors after a default, the sources said.
Furthermore, the St. Michaels, Arizona-based E&P is flexible in selecting a jurisdiction for governing law, such as New York or Texas, the sources said.
The company enlisted KeyBanc Capital Markets to explore refinancing options it failed to pay back the fully tapped USD 83m syndicated RBL, for which Wells Fargo serves as agent, the sources said. Before the maturity, NNOGC had already run afoul of the loan agreement, breaching covenants and then obtaining a waiver, they added.
The company also wants to use proceeds from the new loan to acquire an additional 10% working interest in the Aneth field from Resolute Energy, they added.
Wells has indicated that lenders to the facility are unlikely to extend the RBL maturity unless the company reduces borrowings to USD 65m-USD 47m, depending on the hedging program, they said. The company has USD 6.4m of cash on hand.
Though tribal-owned E&P credits are rare, the gaming industry provides a glimpse of how tribal restructurings typically play out absent the bankruptcy court option on the table. Tribal gaming entities including Mashantucket Western Pequot Tribal Gaming Authority (Foxwoods), Tunica-Biloxi Gaming Authority, Inn of the Mountain Gods and Buffalo Thunder have all undergone drawn-out restructuring processes centered around exchange offers and maturity extensions. Debtholders are not eligible to take control of the equity owned by the tribes, which are sovereign nations.
NNOGC’s willingness to waive sovereign immunity could eventually put its equity in play. However, the Navajo tribe that owns the equity has a BBB+ rating and a balance sheet with cash on hand, according to a source familiar with the matter.
NNOGC is a non-operator with assets primarily in Utah’s Greater Aneth field. The company also runs a pipeline to transport crude from the field and has gas stations under Navajo Petroleum and Chevron brands, according to its website.
“The lenders are trying to get this back to the non-bank market,” said the first source.
Key is aiming for price talk of below Libor+ 1000bps, using Rex Energy’s recent refinancing deal (L+ 875bps) provided by Angelo, Gordon & Co as a reference point, the sources said. However, some potential lenders balked at the minimal premium over Rex’s loan, considering that Rex is a larger public company, more liquid with more levers to pull, the sources said.
Of the targeted USD 105m refi deal, NNOGC intends to use USD 85m of the proceeds to refinance its RBL and around USD 20m to acquire the additional 10% Aneth interest from Resolute, the sources said. NNOGC holds a 36% minority stake in the field under a joint venture with Resolute, and its option to increase its stake is exercisable until 29 August, or ten days after the fair value is determined, according to Resolute’s 2Q17 filings.
Since Resolute is trying to find a buyer for its Aneth assets and NNOGC is a non-operating player, the company ultimately operating those assets is still up in the air, the second source said.
And like many of its peers, NNGOC’s cash flow and asset value took a beating during the commodities slump. Previous management had failed to hedge and missed payments to Wells Fargo, which altogether caused the loan’s borrowing base to decline by about USD 58m in 2015 alone, according to a legislative summary of NNOGC’s request for emergency funding.
The company is about 4.6x-5x levered as of March, both sources said, implying LTM EBITDA of around USD 18m. Its PV-10 was valued at around USD 170m, with PDP valued at USD 136m, the sources said. However, the second source said PDP value could be closer to USD 85m as NNOGC stalled development of its oil and gas properties.
Meanwhile, NNOGC is grappling with management shakeup and a higher cost structure compared to other non-operating players, sources said.
Its general and administrative (G&A) expenses budget is about double what’s typical of non-operators, one of the sources said.
NNOGC’s CEO and president Louis Denetsosie took the helm after CEO Robert Joe and CFO Reuben Mike were ousted in mid-2014. The company’s board of directors also halved in size after The Navajo Nation Council committee proposed more stringent requirements in 2015, such as substantial knowledge and operational experience in the oil and gas industry.
The tribal council had rebuffed several of NNOGC’s requests for help. When Wells Fargo requested NNOGC to pay back USD 37.5m by mid-2016, the council denied a request to provide a USD 4.9m loan from the tribe’s undesignated unreserved fund, according to a legislative summary.
Calls to Navajo and KeyBanc were not returned. Wells Fargo declined to comment.