Non-operated investments in upstream oil and gas are becoming increasingly attractive to private equity, institutional investors and family offices due to their ability to provide exposure without the operational risks and complexities. Here are more details.
“The asset class offers predictable cash flows, especially in mature basins with established infrastructure,” says Estelle Mangeney, director of energy and utilities at West Monroe.
Operators are focused on capital efficiency and disciplined spending, she explains. “Non-op investments allow operators to monetize portions of their portfolios, reduce capital burdens, and fund higher-priority developments while still benefiting from shared production revenues.”
“Non-op allows investors to diversify their portfolios across multiple operators, basins, and geographies,” Mangeny adds. “That diversification reduces risk and provides exposure to different geological and operational strengths. The wave of consolidation among global majors and large independents has created new opportunities for non-op investors.”
In July Tailwater Capital announced a $250-million commitment from a single limited partner to pursue large-scale joint ventures with top-tier operators, specifically in non-operated positions across North America’s premier shale basins.
Non-op investments are also facilitating larger deals. In May TXO Partners (NYSE: TXO) struck a deal to buy assets in the Williston Basin from a portfolio company of Quantum Capital Group for about $350 million. As part of the deal North Hudson Resource Partners took a 30 percent non-operated interest in the acquired assets. The non-op investment added $125 million to the total transaction value.
“Some large publics have significant inventories, with locations that will not be able to compete for capital,” says Cristina Stellar, managing director at BOK Financial (Nasdaq: BOKF). “That creates an opportunity to partner with management teams that are willing to drill and operate those secondary positions while larger companies participate as non-operators in acreage that otherwise wouldn’t have been developed for years.”
In addition to the transactions made within the industry, non-op is also a good point of entry for investors who may be new to oil and gas. “Absolutely, the advantages of non-op arrangements are ideal for a broad range of investors,” says Stellar. “They don’t need to know a great deal about the industry if they are in the hands of a reputable operator, and they can participate in basins that they would not otherwise be able to access at any price because those positions are locked up by the operators.”
Tailwater has two prior non-operated funds, E&P Opportunity Funds I and II, along with a special purpose vehicle that acquired a large Permian non-operated asset in late 2024. “Fund III is targeted for $300 million, but this very large individual investment will be operated as a parallel vehicle to Fund III, a separately managed account to give us some flexibility” says Doug Prieto, CEO of Tailwater E&P. “That is not a novel structure. Large LPs need more flexibility and we are willing to work with them provided they understand the goals of the fund complex.”
Several factors have contributed to the burgeoning of non-op investments, Prieto explains. “Most notably, the capital intensity of upstream development has grown. A single vertical well used to cost about $3 million. Now multiple horizontal wells from a single pad could cost a hundred times that or more. Operators need knowledgeable partners, not just to defray costs, but to collaborate.”
More broadly, there has been massive consolidation among the public oil and gas companies, “but in many cases they are not getting full value for their development inventory,” Prieto adds. In previous cycles the strategics would often sell under-valued positions, usually to private equity portfolio operators.
However, with improved geological understanding, operators now tend to retain premium acreage,” says Prieto. “Given the limited availability of high-quality inventory and advances in technology that enable identification of additional pay zones, operators are increasingly reluctant to divest these assets.”
Tailwater expects to make the first acquisition with this new capital in August, and hopes to have its first operator joint venture in the same month.