If beauty is in the eye of the beholder, the Greater Aneth Field divested by Chevron Corp. in November 2004 was exquisite the moment it landed in the hands of Denver-based Resolute Natural Resources Co. and Navajo Nation Oil and Gas Co. (NNOG). Discovered in the late 1950s, the southeastern Utah field was huge in its time, producing 100,000 barrels of oil per day at its peak. When Resolute and NNOG began looking at the field, it was a shadow of its former self, with production down to 10,000 barrels per day. The output limited the field's importance to a major oil like Chevron, but to Resolute and NNOG, the asset was full of company-making potential. The Greater Aneth Field, in the Paradox Basin in San Juan County, Utah, encompasses approximately 48,000 acres. Since its discovery, it has produced in excess of 430 million barrels of high-gravity, sweet crude oil. Last fall, at the time of the acquisition, Chevron's interest represented about 25 million barrels equivalent of proved reserves, 66% developed producing and 98% oil. Net production was averaging about 3,000 barrels per day. The field's location on Navajo Nation lands made it of interest to NNOG. "We were focused on acquiring additional interests within the Navajo Nation with a primary focus on the Greater Aneth Field," says Wilson Groen, NNOG president and chief executive. "But, it was a very big project, so finding the right partner and arranging financing were critical to allowing us to go forward. We're a small, but growing, company, so for us to step to the plate for a 100% interest and move into full operations would have been a major struggle." Resolute was also looking at the field. The company was formed in early 2004 by former HS Resources executives, who sold HS to Kerr-McGee Corp. in 2001 for $1.8 billion. Resolute had private-equity backing from Natural Gas Partners but no substantial assets. In looking at the Greater Aneth Field as its first major acquisition, Resolute saw working with NNOG as an advantage-it did not have to acquire the whole asset alone. "It occurred to us that the Navajos would have a strong interest in what went on in the field so we thought it would be appropriate to talk with them first," says Nick Sutton, Resolute chairman and chief executive. Resolute received clearance from Chevron to talk with the Navajos and was introduced to Wilson through mutual associates. "We talked about our respective interests in the field and it became very clear to us that there was a good, mutual fit. In short order we worked through the outline of a potential relationship." The partnership gave NNOG the ability to acquire a piece of the field and allowed Resolute to come to the already-competitive bidding table-crowded with a rumored 30 companies-with a stronger position in terms of its ability to operate the field, increase reserves and production, and expedite closing. The prospect of selling mineral rights on Navajo lands to a Navajo Nation company didn't hurt the pair's chances, either. "Chevron was aware of the Navajos' interest in the field. Certainly, Chevron goes for the superior economic transaction, but the Navajos' participation, plus our demonstrated ability to reach efficient closure, might have been that little extra consideration that tipped the scales," says Sutton. Financing As a company backed by Natural Gas Partners and proven management, Resolute had little difficulty putting together a bank syndicate co-led by Citigroup and Wachovia. While NNOG's 100% ownership by the Navajo Nation helped it raise its share of acquisition funds, this relationship also presented complicated governance and legal issues. "The financing put together for NNOG reflected that there were some good banks that took the time to understand Wilson and what NNOG was trying to do, and the legal issues associated with financing on Indian land. It was quite a professional effort," says Sutton. Groen and his team worked with U.S. Bank in Denver and Union Bank of California to put together a traditional reserves-based lending facility. The company also hedged some of its production to secure a bigger borrowing base. "Understanding sovereign immunity issues and that sort of thing is no small task," says Manuel Morgan, NNOG chairman. "We have all the same sovereign immunity issues applied to our company as are applied to the Navajo Nation by the nature of our federal charter." NNOG's charter allows the company to do a limited waiver of sovereign immunity to enter into a reserves-based loan transaction. "The attorneys from the banking group and our attorneys worked closely to help everyone understand and work with these considerations." The partnership Though in many respects Resolute and NNOG have forged a partnership through this transaction, the deal is a joint purchase of the assets, says Rick Betz, vice president of business development for Resolute and formerly a managing director with JPMorgan Chase. NNOG bought a 25% undivided interest in the Chevron assets, while Resolute bought 75%. "They own title to theirs, we own title to ours, and we each financed our acquisition independently," Betz says. "It is, however, a partnership in a more informal sense in the way we work together on a day-to-day basis as we try to improve production." Many of the Native American tribes that own land with producing fields collect monthly royalty checks while someone else operates and owns the field. NNOG, which operates as a wholly owned entity of the Navajo Nation and whose staff is 90% Navajo, is a groundbreaking concept to many Native American tribes. "What this represents is the evolution of an Indian nation from a traditional royalty owner to a real operator," says Betz. "They've recently gone through an evolution to a company that owns and finances its own assets. Ultimately it intends to operate its assets." The deal is also a partnership in a mentoring sense. "We undertook at the outset of this transaction to work closely with NNOG, to help it develop the operational and financial capability to one day be the operator of a larger set of producing assets on Navajo lands," says Betz. Resolute gains a lot from the informal partnership, as well. "We look to NNOG to help us work through Navajo regulatory considerations and the Navajo Nation governance infrastructure, and help us better understand Navajo cultural and social issues," says Betz. Production hurdles The Aneth Unit was a legacy property that Chevron gained from its merger with Texaco. By 2004, Chevron had devoted limited resources to the field. "At this point in the field's life, it just didn't rank very high on Chevron's priority list," says Betz. "It was steady, but complicated, production." The field had been under waterflood since the 1960s. Infrastructure is more than 50 years old and the discovery of the field predates 3-D seismic and computers. Sutton says the challenges Resolute and NNOG have faced have not been surprising-they're consistent with working in a field that has not received attention for many years. Well files had to be examined page by page with data culled and entered into modern geoscience systems. "We've gone through all of the records, pulled and checked data, and created a 3-D model of the unit. In addition, we're running several types of tests to better understand into which wells and formations the water is being injected and the nature of the oil-flow patterns to the producing wells. "We're also looking at every piece of hardware in the field to minimize downtime. Given the age of the field, this is a very large and complicated task," Sutton says. For companies as small as Resolute and NNOG, increased production can pay off in a big way. "If we can increase production in the Aneth Unit by 1,000 barrels per day, that's huge from our perspective," says Betz. "From Chevron's perspective, that production is lost in a rounding error somewhere. As the Greater Aneth Field starts to turn around and NNOG gains its footing in the oil and gas business, other Native American tribes around the nation are taking notice. Sutton says, "We get calls from other tribes saying, 'We know what you've done with the Navajo Nation. Can we discuss whether there's a way for us to work together in a similar manner?' These inquiries represent possibilities that we find intriguing. Our primary focus, though, is working with the very large resource that we already own and continuing to work with NNOG and the Navajo Nation."