American Oil and Gas Reporter - December 2024 - 48

SpecialReport: Financial Perspectives
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.
" The M&A market is in part being driven by more bullish
" The M&A market is in part being driven by more
bullish views of long-term prices relative to the forward
curve. 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. "
Conrad Gibbins
Co-Head of Upstream
Jefferies
" 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.
48 THE AMERICAN OIL & GAS REPORTER
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
American Oil and Gas Reporter - December 2024

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