Private equity firm Tailwater Capital is steadily expanding its footprint in the Permian Basin.
Tailwater E&P, the firm’s upstream investment platform, is leaning into non-operated working interests and mineral and royalty investments as competition for operated Permian assets intensifies.
Tailwater’s latest acquisition in the northern Delaware Basin adds greater scale, inventory visibility and exposure to some of the basin’s most active operators. The deal includes 35,000 gross acres and exposure to over 900 wells in Lea and Eddy counties, New Mexico.
It’s part of the Delaware Basin’s northern reaches, an area that has seen rising activity in recent years as producers search for new inventory. That’s a big change from just a few years ago, when the area was largely seen as single-bench Bone Spring territory, said Tailwater Capital Partner Doug Prieto.
Operators on Tailwater’s acquired Delaware asset include Devon Energy, Coterra Energy, Matador Resources and Mewbourne Oil Co. On Feb. 2, Devon and Coterra announced plans to merge into a Delaware-focused producer with a $58 billion market value.
Tailwater’s latest upstream deal comes alongside a flurry of activity across the firm’s upstream and infrastructure portfolio.
Japan Petroleum Exploration Co. Ltd. (Japex) is acquiring Denver-Julesburg (D-J) Basin assets from Verdad Resources, a Tailwater portfolio company, for $1.3 billion. The D-J Basin assets will be managed by U.S. E&P Peoria Resources and produce about 35,000 boe/d net (70% light crude oil and NGL).
Tailwater last year raised a $1.1 billion continuation vehicle (CV) for Producers Midstream II LLC, a midstream operator spanning multiple basins and anchored in the New Mexico Delaware. The CV included $500 million in equity commitments, including from Secondaries at Goldman Sachs Alternatives, and $600 million from an upsized senior credit facility.
Prieto spoke with Hart Energy to discuss Tailwater’s recent activity, why the northern Delaware continues to gain attention and where the firm sees opportunity across the Lower 48.
This interview has been edited for length and clarity.
Chris Mathews, Hart Energy: Catch us up on Tailwater’s non-op and minerals M&A activity over the past few years.
Doug Prieto, Tailwater: I’m incredibly thankful to stand on the shoulders of what the partners at Tailwater Capital have built since inception in 2013, including two legacy non-op funds. Within the firm today, we have built a bespoke in-house team of almost 20 individuals who are focused on nothing but E&P, in addition to the infrastructure team.
As we sit here today, we have interests in more than 3,000 wells with production of over 18,000 boe/d. But what really gets me excited is the momentum in the Permian alone; we’ve got 25 rigs and nine frac crews active on our footprint. Our royalty funds own about 8,500 net royalty acres and we’ll likely finish the first quarter north of 10,000 net royalty acres. On a net leasehold basis in our non-op funds, we’re sitting at about 6,500 net leasehold acres in the Permian alone and we expect that to growth roughly to 7,500 to 8,000 net leasehold acres by the first half of the year, if not more.
The depth and quality of our backlog and deal flow is truly differentiated, and it’s driven by the strong relationships we’ve built across the industry over more than two decades. Today, we’re active in the Permian, Haynesville and Eagle Ford, illustrating that we have a real presence across key Lower 48 basins in both our mineral and non-op portfolios.
CM: Tailwater recently made a deal for assets in the northern Delaware Basin. What was included?
DP: The most recent Delaware deal is a diversified, non-operated acquisition under premier Permian operators. There are four rigs and four frac crews active on the footprint today, and the inventory is highly economic. And importantly, a meaningful portion of the volumes produced from that acreage also flows into the Producers Midstream II system, which is a Tailwater portfolio company.
We are really excited to be able to provide operators with a midstream solution, but also to invest capital alongside them to help them drill wells and/or buy royalties. In a lot of ways, we think of ourselves as an operator-solutions firm and a trusted capital partner.
CM: Operators on the asset include Coterra, Mewbourne, Devon and Matador. What makes this part of the Permian Basin so active?
DP: We continue to get more and more excited about the northern Delaware Basin. When Coterra Energy acquired Avant Natural Resources last year, that really put a spotlight on the area.
The operators you mentioned continue to drill great wells, test additional zones and delineate more inventory. We’re looking at a true multi-bench story that continues to get better over time—which I think is true over the entirety of the Permian Basin.
Many times, throughout my career, I’ve heard people say, “Oh, we think we’re out of inventory in the Permian. It’s almost done.” And then, new technology and the grit of smart people in our industry continue to show that there’s more to do.
By the way: The Permian is becoming more economic, even at lower prices, which I think was a key theme for a lot of the public companies over the last two quarters.
CM: Are we seeing an expansion of Delaware Basin inventory pushing further north into New Mexico?
DP: We describe it in two ways. One is vertical expansion—adding inventory by developing additional zones. The other is aerial expansion—extending the footprint into new acreage. And the good news is we’re seeing success on both fronts.
Operators are now starting to further delineate the Avalon. The Producers Midstream II system is currently installing an acid gas injection well that will help to address any H2S that may emerge out of that zone. It will help make the Avalon zone commercial in Northern New Mexico, so we’re excited about that.
We’re also now seeing development across all three Bone Spring benches and in some areas, even the Bone Spring carbonate. Operators are also starting to delineate portions of the Wolfcamp in that same area. I think conventional wisdom, five years ago, would have said it was single-bench territory.
These are well-known public and private operators who are running a lot of rigs and putting a lot of dollars into the area. We are not typically the group that’s going to step out first and take exploration risk. We’re fast followers. Once the play is proven and it sets up for repeatable, manufacturing-style development at a lower risk profile, that’s usually when we get involved.
CM: Where are you biggest outside of the Permian, and where do you see opportunity for growth?
DP: I think the next biggest areas of focus behind the Permian are going to be the Haynesville and the Eagle Ford. We continue to look at opportunities in the Williston, as well. Those are our primary areas of focus, and that’s where you’ll see us continue to invest.
It’s also where we have the deepest relationships and the longest track record of activity. We’ve got portfolio companies on the infrastructure side in those basins as well. And because we’ve been investing in those basins for more than a decade, we’ve accumulated a significant amount of data, which we’ve centralized in a data lake and an AI-supported GIS platform to sharpen our understanding of emerging trends, enhance our underwriting clarity and improve accuracy.