Non-operators have always been the unsung heroes of oil and gas, providing critical investment dollars to fund exploration, drilling, production, and acquisitions. With public capital and private equity markets continuing to present plusses as well as minuses—particularly for smaller operators with limited borrowing capacities—non-ops are increasingly becoming funding partners of choice.
By definition, a non-operated working interest is just that: an interest owner that is not involved in the day-to-day operational decision making for a given property or project. But that, too, is changing. While operating companies are still the “parents” of exploration and production, many of their non-op partners are like doting uncles.
Notably, significant public and private capital is flowing into non-ops, and they are deploying it to support both organic growth as well as mergers and acquisitions. Non-op opportunities are even attracting investment from large operators such as Equinor, which in late October signed its second agreement with EQT Corp. to acquire additional non-operated interests in the northern Marcellus Shale in Pennsylvania for $1.25 billion.
With this transaction, Equinor is increasing its average working interest in the northern Marcellus from 25.7% to 40.7%, acquiring 100% of EQT’s remaining working interest in the gas assets, which are primarily operated by Expand Energy. The deal represent 350 million cubic feet a day of forecasted 2025 net production and is expected to close at the end of the year.
It follows a previous agreement that closed at the end of May in which the two companies swapped Equinor’s operated position in the Marcellus and Utica in Ohio for a stake in EQT’s non-operated interest in the northern Marcellus.
Changing Definition
So reading the tea leaves, are more deals like those both between oil and gas companies on the horizon? Most assuredly, responds Doug Prieto, chief executive officer of Tailwater E&P, which is an integrated business of Tailwater Capital.
“The definition of non-operator has changed rather significantly. As recently as the 2010s horizontal drilling, well spacing, and drainage were not as well understood as they are today,” Prieto states, adding that the scientific know-how extends to both operators and non-operators alike. “On the business side, capital discipline is much stronger and capital efficiency is much higher. Dividends are larger, and there is less net debt.”
Given that it can cost $500 million to fully develop a single drilling and spacing unit, non-operator interest positions are an invaluable source of capital input and expertise to help get projects done. “Even for the largest operators, that can be a significant amount of money. The operators do not want to increase debt, so the non-op is in a position to provide both capital and expertise. We can sculpt the drilling project together,” he says.
That ability to understand what is happening in the field works both ways: the non-op can better decide whether it wants to participate well to well, and then can offer insights and support to the operator, he notes.
“We actively discuss benches and landing targets,” Prieto relates. “That is very different from back in the day when a non-op would take a 3% interest in a vertical well that would cost $1 million. We buy balanced production, work in progress, and inventory.”
Technical expertise extends to geology as well, Prieto points out. “We have a meaningful focus on research, technology, and aggregation of data, especially digital optimization. We have a data warehouse where a lot of information goes into our visualization tool and mapping system. That includes proprietary daily production data.”
Operators are perfecting different frac designs and systems, Prieto adds. “Operators are targeting new benches, frac designs and increased lateral lengths. We have not underwritten everything—sometimes it’s good to be a follower—but all of that information is incredibly useful.”
Private equity is also seeing interest in non-ops from new types of investors. “We have long had the usual mix of pension funds, endowments and long-dated investors as well as family offices,” Prieto explains. “We are starting to see value-oriented investors as well as generalists who are new to energy. Overall markets are seeing capital go in the other direction, away from conventional energy, but people who have been in oil and gas a long time are gobbling this up at today’s multiples.”
Largest Public Non-Op
Northern Oil & Gas is by far the largest public non-op, with a market capitalization of more than $4 billion. Based in Minneapolis, the company had a busy year with several major transactions.
In October, Northern closed its largest deal ever, the acquisition of Uinta Basin assets from XCL Resources, including assets previously owned by Altamont Energy. It jointly acquired the assets with Denver-based SM Energy, which will become the operator of substantially all the assets under cooperation and long-term joint development agreements with Northern. The combined unadjusted purchase price was $2.55 billion in cash, of which Northern paid $511.2 million.
In announcing the deal, Northern said the assets offer “more than a decade of Tier 1 inventory across 15,800 net acres in the Uinta Basin, with 116 net underwritten undeveloped locations and additional exploration upside potential.”
The comes off another transaction Northern closed in September: a $205 million acquisition of Delaware Basin assets from Point Energy Partners, a Vortus Investments company. In this case, Northern jointly acquired the assets with Tulsa-headquartered Vital Energy, which will become the operator of substantially all the assets under joint development and operating agreements.
In addition to acquiring assets, Northern has been repurchasing shares, to the tune of nearly 1.5 million shares during the first half of the year, with $150 million allocated at mid-year for further buybacks.
Non-Op Discounts
AOGR sat down with Conrad Gibbins, co-head of upstream for Jefferies, to get a market update on the current environment for non-operated assets and key players in the space. Jefferies has been active in the non-op market for many years, both as an adviser and principal.
The firm advised on two recent transactions involving Northern Oil & Gas (NYSE: NOG); including Northern’s recent acquisition partnerships with SM Energy Company (NYSE: SM) and Vital Energy, Inc. (NYSE: VTLE) to acquire assets in the Uinta Basin and Delaware Basin, respectively.
“Nick has aligned his business alongside strong operating partners, and has become the premier non-op financing source in the industry,” Gibbins comments, referring to Nicholas O’Grady, Northern’s chief executive officer. “Northern has a differentiated business model and an enormous, multibasin opportunity set, which is unique amongst public upstream companies.”
“Non-op interests historically traded at a discount,” Gibbins explains. “In recent years, the non-op discount has been shrinking, and the non-op market is broader and deeper than ever today. The non-op market has a lower barrier to entry than the operated asset market, and scale is increasingly important from a buyer perspective as more capital forms around the strategy.”
Quantum Capital Solutions recently closed a multi-billion dollar fund focused on non-op and drilling joint venture opportunities. Sixth Street has been very active in both non-op and minerals, making several large-scale acquisitions. NGP, Oaktree, Wincoram, Westlawn, Riverbend and Tailwater, among others, have also been active. Other new entrants to the non-op market include family offices, commodity trading houses and Asian buyers for larger-scale natural gas opportunities.
In addition to Northern, other public companies are pursuing non-op strategies, including Vitesse (NYSE: VTS), Granite Ridge Resources Inc. (NYSE: GRNT) and Epsilon Energy Ltd. (NASDAQ: EPSN). Vitesse went public in January 2023 as part of a spin-off from Jefferies, as the investment bank was looking to become a more focused financial services firm. Jefferies shareholders received one share of Vitesse common stock for every 8.5 shares of Jefferies common stock held. Vitesse holds non-op positions across the Rockies in the Williston Basin, Denver-Julesburg Basin and Powder River Basin.
“The M&A market is in part being driven by more bullish views of long-term prices relative to the forward curve,” Gibbins assesses. “The futures market is a seller’s over market at the long end of the curve, with more natural sellers than buyers. The forward curve lacks liquidity for contracts three+ years out and is not particularly instructive of long-term price expectations or industry sentiment.
“Said another way, equity markets and M&A buyers are clearly underwriting higher prices than the long-end of the forward curve today; most somewhere in the $65-$75/bbl range,” he concludes.
Significant Opportunities
Brian Cree, president of Vitesse, says 80% of the company’s assets are undeveloped, which makes it very different from a company with significant proved developed, producing reserves on its ledger.
“We work with more than 30 different operators. They send us their authorization for expenditure and we decide if we want to invest in that particular well,” he explains. “There are also significant opportunities in buying and selling AFEs among other non-operated working interest owners and operators.”
About 90%-95% of Vitesse’s current holdings are in the Bakken, with much smaller presences in the D-J and Powder River basins. “We focus on oil basins and continually look at the Permian and the Eagle Ford,” Cree says. “We are actually a contract operator for Jefferies for some assets in the Eagle Ford.”
Across the more than 7,000 wells in which Vitesse holds an interest, the average stake is only 3%. “We prefer not to hold large working interests; we want lots of small interests,” he offers. “In the non-op model, you have to be careful of what you acquire, because you cannot directly affect the operations. That is the whole point of non-op. So data is essential. You need good information.”
Good data begets more good data and even better analysis. “There is a lot of public well data,” Cree acknowledges. “The North Dakota Industrial Commission has a great website. But it is the proprietary data that is very important, including costs that you can only get if you hold a working interest.”
Granular data also provides insight to particular operators, Cree goes on. “Too many people rely heavily on the AFE as an indication of what it is going to cost to drill and complete a given well. But operators do not always update that information as often as they could.”
By way of illustration, Cree elaborates, “We have worked with many of our operating partners for a long time. We learn that one operator tends to put their AFEs at about 2.5% above the actual cost, while another operator tends to put the AFE at 7% below the actual number as a general rule.
“Neither of those is necessary better or worse but having the proprietary cost information helps us manage our capital allocation and decision making to understand how operators tend to behave,” Cree continues. “It also helps us help our operators. For example, we are big believers in recompletions. We feel really good about refracs. So when that is an option, we have a lot of expertise and support to offer.”
In the third quarter, Vitesse’s oil and natural gas production averaged 13,009 barrels of oil equivalent per day. Oil represented 68% of production and 96% of total oil and natural gas revenue of $59.7 million, including the effects of realized hedges.
Vitesse’s average realized prices before hedging were $69.43/bbl for oil and $0.90/Mcf for gas, during the third quarter. The company had hedges on 63% of its oil production and its realized oil price with hedging was $71.20/bbl.
Controlling Capital
Dallas-based Granite Ridge Resources closed multiple transactions during the third quarter, adding 15.9 net future drilling locations for a total acquisition cost of $30.9 million, including $600,000 of expected future drilling carries.
In its third-quarter release, Granite Ridge President and CEO Luke Brandenberg stated, “Controlled capital is increasingly central to our strategy, and we are thrilled with its progress. Unlike the traditional non-operated model, controlled capital gives us control over capital expenditure timing and cash flows while adhering to our rigorous underwriting standards.”
The company’s quarterly production averaged 25,177 boe/d, with 50% oil and 50% gas. “Early results from our Delaware Basin partnership have been encouraging,” Brandenberg said. “In 2024, we plan to spud nine net controlled-capital wells, with significant production impacts expected starting in the first quarter of 2025. Our Midland Basin partner is also actively expanding its inventory, positioning us to advance that asset base in 2025.”
Last spring, Elk Range Royalties, also headquartered in Dallas, made its first acquisition of mineral and royalty interests in the Appalachian Basin from an undisclosed private seller. Elk Range funded the acquisition utilizing equity commitments from funds managed by NGP Energy Capital Management.
“We have substantial dry powder and are poised to continue acquiring in the Appalachian Basin,” Elk Range CEO Charlie Shufeldt said in announcing the deal. “We look forward to growing our presence there.”
The acquisition included 8,000 net royalty acres across West Virginia, Pennsylvania, and Ohio, including 194 producing gross locations and approximately 0.67 net wells operated by EQT, Antero, CNX, Southwestern, and Range among others.