The Non-Op Variety

Nonoperators have been prolific in the country’s shale plays since the beginning, but have become focused in the Bakken in recent years. Many opportunities exist at current oil prices.
By Emily Aasand | July 25, 2015

The nonoperator model investment model has been used by several entities focused on the Williston Basin since the early days of the play. Despite low fluctuating oil prices and changes in production scheduling, non-operators are still able to minimize the risk associated with exploration and production. Non-operators purchase small leaseholds with a knowledge that the operator owning the acreage will begin drilling in that particular acreage unit before the lease expires. The non-op participates on particular wells in that unit based on its own working interest percentage it established on an individual well basis.

When an operator such as Hess Corp. or Whiting Petroleum Corp. proposes a well on a drilling unit, that operator is required to send each entity with working interest in that unit a notification or authorization for expenditure, and those lease owners, including nonoperators, have 30 days to consent (participate) or nonconsent (not participate) in that well. If the company chooses to consent to that well, it would be responsible for the percent of the cost to drill and complete that well that agrees too, and in return, would receive the same percent of the proceeds of the oil and gas that’s produced from the well.

No two nonoperators are the same in terms of business models, however, and each approaches how they target leases and how they choose to invest in wells differently.

Non-Op Models
Northern Oil & Gas, a Minnesota-based company, controls just more than 180,000 acres in the Williston Basin, which it believes gives its team a competitive advantage. They’ve participated in roughly 25 percent of all Bakken wells drilled in the basin, which gives the company a large data set and experience level with which to make additional capital investment decisions.

Brandon Elliott, executive vice president of corporate development and strategy for Northern Oil and Gas, says Northern Oil’s corporate strategy and success goes back to the company’s willingness to make smaller deals. With Northern Oil’s financial stability, the company is able to make quick decisions on purchasing a lease or lease from a landowner.

“Because we’ve seen so many wells by so many different operators, we really have, what we think is a proprietary and a competitive advantage when it comes to evaluating new wells to be drilled,” Elliott says. “As a non-operator, we get to choose on a well-by-well basis which wells we want to participate in and which wells meet our investment hurdles. I think it’s an interesting position for us because most people don’t understand the nonconsent process from a nonoperator perspective. If we don’t think a well will bring us our desired returns on investment with today’s commodity prices, we can nonconsent in that well and if they come back in another three months and do some infill wells or drill on an offset well pad, we maintain the opportunity to participate in those wells again.”

Darrell Finneman, executive vice president of land for Northern Oil,  says the current oil price environment can create a unique set of circumstances for all non-ops. In some cases, oil companies that also participate in the funding of wells that don’t want to spend capital on wells that may not meet the company’s rate of return requirements due to oil prices, may have to forfeit interest in wells being proposed by third parties. This situation gives Northern a chance to structure attractive deals with those companies and take over its working interest positions.

Northern Oil is 100 percent Williston Basin-focused, and, in the past year, has added a regional office in Denver, Colorado, headed by Finneman.

Vitesse Oil, Vitesse Energy and Gerrity Bakken, all under the ownership of Bob Gerrity and Brian Cree, are other non-operators who have a primary focus in the Williston Basin. The three companies, Cree explains, all have the same corporate strategy, but operate on different pools of investor money.

Vitesse operates its three companies under one general philosophy, “Denser, deeper, cheaper, better,” a mantra the company developed from past experience with operating wells in the prolific Wattenberg field in Colorado. 

Prior to switching to the nonoperating side of the oil and gas industry, Cree and Gerrity were on the operating side, where they became familiar with the process of operating large numbers of wells and how operators drill and complete wells, which Cree says gives Vitesse a unique advantage in the Bakken.

“Along with our past experience, we also have incredible investors,” says Cree, president and CFO for Vitesse Oil LLC and Vitesse Energy LLC. “When we make an offer to another working interest owner’s position in the Bakken, we have the funds already available and we can close very quickly. When we reach an agreement with a seller, it doesn’t take us long to finish our due diligence and close the transaction. I think that’s kind of been our reputation and gives us an advantage with sellers.”

Flourishing in the Current Price Commodity
For many, the current price of oil is a concern and a reason to firm up capital expenditures. Non-operators believe it will provide opportunities to grow.

There tends to be a misconception that when oil prices decline, there will be opportunities to buy leases, Cree says, but that hasn’t necessarily been the case.

“What happens is that when prices drop so rapidly, there becomes this big divide between what seller’s expectations are and what buyers are willing to pay,” Cree says. “I do believe as oil prices recover more and as that gap between buyer’s and seller’s expectations continues to diminish as oil prices level out, there will be opportunities to acquire more assets in the field. We as a company with a very deep balance sheet, hope to capitalize on those opportunities and leverage our ability to continue to participate in the drilling of wells.”

Vitesse hasn’t seen a big drop in drilling activity in their acreage despite the current price commodity, in fact, they say many rigs have moved back onto their acreage in order to focus on the core of the Bakken shale play.

“Operators have been able to reduce the drilling and completion costs dramatically to the point where operators have done a great job of figuring out how to drill wells for less money and in good areas,” says Cree. “While there aren’t as many total wells being drilled because the number of rigs are down, those rigs focused on the core and the wells being drilled have good economics, not that dissimilar from the rates of return we were seeing a year ago when the price of oil was $100 per barrel.” 

Like Vitesse, Northern Oil sees the current price commodity as a time for potential growth.

“We want to look at the larger packages that are out there,” Elliott says. “Our ability to buy those at what we think is a reasonable price has been limited. There has been other money that has been willing to chase those leases at higher prices, primarily the operators because they are willing to pay, from an economic standpoint, a lot more than we can, and because they know the timing with which they plan to drill the wells on that unit. But with oil prices down where they are, with some of the companies in the basin a little more financially stressed, we hope that we will be able to actually bag one of those larger acreage packages.”

Low Oil Plans
Where active drilling operators find challenges in reducing well costs and discovering best completion models, nonoperators tend to find challenges in the lack of control of operating partners and working through the accounting and land issues with operators.

“From the beginning, Mike Reger, our chairman and CEO, has been very sensitive to the fact that we want to be able to establish quickly a diversified acreage position across operators, so that any one operator’s change in behavior wouldn’t be a problem,” Elliott says. “With a good diversified portfolio across many different operators, you de-risk that lack of individual control.”

Northern Oil also says it’s important for a nonoperator to make sure it has excess liquidity so it can choose which wells to participate in on the company’s terms, and not to be forced to nonconsent a well because it doesn’t have the capital to participate. Northern's recent $200 million debt offering has given it additional liquidity to participate in future deals.

For Vitesse, working through accounting and land issues with the operators proves to be one of the biggest challenges. A challenge, Cree says, that can take a year or more to get everything correct. “It’s a lot of work,” he adds. “You need to have a good infrastructure, good relationships, and enough size to where the operators pay attention and work with you.”

“Operators have a lot of work going on and when nonoperator working interest ownership continues to change hands, it makes their job harder and accurate record keeping difficult,” says Cree. “One of our biggest challenge as a nonoperator, is to simply get all of the proper working interest and net revenue interest that we own recognized by the operators to where we are being billed and paid correctly.”

Outlook
For Northern Oil, the biggest unknown for the remainder of 2015 and through 2016, is the ability to acquire core Bakken acreage.

“We’re certainly trying to look at all the deals out there that need to be done and I think, if the commodity market and some of the companies in the basin continue to be under some financial stress, we hope we can grow that acreage position,” Elliott says. “Outside of additional acreage growth, we’re going to continue to be really focused on making sure that we’re only committing capital to those wells that are going to generate a high rate of return. I think as the rigs and operators consolidate their activity within the core of the play, we’ll be able to see a pick up in activity and inbound authorization for expenditures that we can run through our review process and decide to participate in.”

According to Cree, the second half of the year will provide some very strong acquisitions and opportunities for Vitesse.

“As oil prices have stabilized and hopefully will continue to increase, that gap between buyers and sellers will diminish and a lot of transactions will take place,” Cree says.  “We will be able to continue to make acquisitions and participate in the drilling and completion of some really good wells.”

Author: Emily Aasand
Staff Writer, The Bakken magazine
701-738-4976
eaasand@bbiinternational.com