Non-Operators Emerge as Key Players in Upstream Oil & Gas Investment

Non-Ops Playing Crucial Role In Upstream Operations

The American Oil & Gas Reporter

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.

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