The wave of Permian corporate consolidations has continued unabated as spring turned into summer with public company buyouts of two private EnCap-funded Delaware Basin operators: Forge Energy, which was bought by Vital Energy for $540 million, and Novo Oil & Gas, which was bought by Earthstone Energy for $1.5 billion. While the theme hasn’t changed, the deal financing includes an intriguing new element: Northern Oil & Gas, which invests primarily in non-operating minority interests, partially financed the acquisitions by agreeing to take 30% and 33% of interests in the assets of purchasers Vital Energy and Earthstone Energy, respectively. In today’s RBN blog, we review the emergence of three non-operations-focused public E&Ps: Northern Oil & Gas, Granite Ridge Energy and Vitesse Energy, and their recent evolution from consolidators of asset packages to partners in trust of acquisition-focused operators.
First, some background. Undeveloped oil and gas interests are interests in oil and gas leases that do not involve the day-to-day management of wells. While most E&Ps have accumulated non-operating interests in the normal course of building their portfolios, many of these interests are typically held by investors who want to share in the profits of oil and gas wells without having to assume the responsibilities and costs associated with operating the lease. Owners of non-operating interests also have the right to decide to participate (or not) in any individual well proposed by the operator, which provides capital investment flexibility. The downside is that the operator decides whether to continue developing the lease, sets the schedule for any development, and controls the costs of drilling, completing and operating the wells. Leveraging non-operating investment requires a careful evaluation of the quality of the acreage involved, the predictability of well results, and an assessment of the operator’s financial strength, investment strategy, and operating experience.
Non-operating investments were primarily traded through brokers or private equity-backed entities that provided some level of asset valuation and accounting services. A single public entity, Northern Oil & Gas (NOG), was founded in 2006 to focus on non-operated interests in the Williston Basin and went public on the former US Stock Exchange (now known as NYSE American) in 2008. The company thrived. during the start of the shale boom in 2011-14, but its market valuation reached just $54 million after the 2014-15 price crash. But a timely infusion of cash by a private equity firm, TPG Sixth Street Partners, in early 2018 triggered an aggressive acquisition program aimed at Williston Basin interest holders who could not or would not they wanted to respond to calls for capital from operators raising their Bakken Shale. drilling programs. This effort, which the company called the “Ground Game Strategy,” focused on a rigorous evaluation of assets to identify those that would return the purchase price in three years or less.
