NOG’s Banner 2Q: Biggest M&A Deals, New Basins, Record Production

The second quarter was one for the record books for Northern Oil & Gas (NOG).

The Minneapolis-based non-operated specialist’s cash flow and production are at record levels.

NOG achieved its highest-ever quarterly production of 123,342 boe/d (57% oil), up 3% sequentially and 36% year over year. The company saw record quarterly volumes in the Permian and Appalachian basins.

The second quarter also saw NOG ink its largest transaction in the company’s history: a joint acquisition of Utah oil producer XCL Resources with SM Energy for $510 million net to NOG.

And NOG notably kicked off the third quarter with another large-scale acquisition: a joint bid with operator Vital Energy to acquire Delaware Basin assets from Point Energy Partners for a combined $1.1 billion.

The June XCL Resources deal opens up a new basin for NOG: Utah’s Uinta Basin. While it might be less well-known than the other marquee shale plays in the Lower 48, it’s been one of the fastest-growing oil plays in recent years, said NOG CEO Nick O’Grady.

“I won’t mince words when I say that, personally, I have never been more excited about a transaction during my tenure here at NOG,” O’Grady said during the company’s July 31 earnings call with analysts. “The benefits of this asset will pay huge dividends for our investors over the next decade.”

The XCL acquisition will deliver 97.6 net underwritten undeveloped locations in the Uinta oil play, primarily located in Duchesne and Uintah counties, Utah.

It’s a multi-stacked pay asset where well production is like those drilled in the prolific Delaware Basin, according to data from Enverus Intelligence Research.

But unlike in the Permian Basin, much of the future Uinta exploration was not allocated value in the XCL acquisition, giving further upside to investors, O’Grady said.

“When planning with SM, we put forth very conservative cost, spacing and pricing assumptions,” he said.

After closing, NOG expects average net production of around 10,000 boe/d (2-stream, >85% oil) and approximately $45 million in capex in the Uinta Basin.

SM is expected to turn in line an average of 7 wells to 9 wells net to NOG per year, sustaining production at the approximately 10,000 boe/d level.

Compared to other oil basins, takeaway constraints are still a challenge for Uinta waxy crude producers.

Significant volumes of Uinta waxy crude move out of the basin by rail, which drives takeaway costs higher— “the one knock on the play,” O’Grady admitted.

The majority of XCL’s crude is transported by BNSF and Union Pacific by rail; some crude volumes are also trucked to refineries in Salt Lake City.

However, the Uinta’s economics, even with the takeaway challenges, still favorably compete for capital with anything else in NOG’s multi-basin portfolio.

And NOG executives expect that transport costs for Uinta waxy crude will come down as projects come online over time.

Waxy crude offtake used to be limited to a handful of local Salt Lake City refiners, due to the transportation issues. But today, XCL moves Uinta crude volumes to multiple destinations including the Gulf Coast, the Rockies and the crude storage hub in Cushing, Oklahoma.

In Gulf Coast markets, SM expects the Uinta waxy crude to command premium pricing compared to WTI due to its high demand as a feedstock for motor oil and lubricants.

“There is now expandable rail capacity to take oil away from the basin to the Gulf Coast, where the crude is in high demand,” O’Grady said.

The U.S. Supreme Court is taking up a case concerning a proposed 80-mile rail line connecting the Uinta Basin to the Union Pacific Railroad in Kyune, Utah. From there, rail connections would deliver the oil to either refineries in Wyoming or along the Gulf Coast, according to an analysis by East Daley Analytics (EDA).

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Altamont update

In late June, before the co-acquisition by SM and NOG was made public, XCL was already working to close a smaller acquisition of fellow Uinta producer Altamont Energy.

XCL, backed by private equity firm EnCap Investments LP, was required to U.S. Federal Trade Commission for permission to acquire Altamont, which owned assets near XCL’s own properties in the basin.

Under requirements stemming from a previous EnCap acquisition, XCL and EnCap were compelled to seek FTC approval before buying any other waxy crude oil producer with an output of over 2,000 bbl/d in certain Utah counties.

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That unique requirement stems from an FTC settlement regarding EnCap’s 2022 acquisition of EP Energy Corp., a producer with properties in the Uinta and in South Texas. Under terms of the settlement, EnCap was required to divest EP’s Utah business and assets to Crescent Energy Co.

According to O’Grady, the FTC has now granted approval to XCL’s acquisition of Altamont. SM and NOG now have the right, but not the obligation, to acquire the Altamont assets as part of the broader XCL deal, according to regulatory filings.

SM has the right to acquire 80% of the Altamont assets; NOG, the remaining 20%.

“We are currently doing our analysis and review of those assets,” O’Grady said. “What I will say is we’re very encouraged about what we see.”

NOG President Adam Dirlam said the focus is on a handful of Altamont’s drilling spacing units (DSU) directly offsetting XCL’s acreage.

Hart Energy has reached out to XCL Resources for more information on closing the Altamont transaction.

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M&A mayhem

NOG might be coming off the largest acquisition in its company history, but the non-op specialist shows no signs of slowing the roll soon.

The company partnered with Vital, which is acquiring 80% of Point Energy’s assets for $880 million. NOG will pick up the remaining 20% for $220 million, the companies announced on July 28.

It’s the second Delaware deal Vital and NOG have teamed up on after completing a $540 million joint acquisition of Forge Energy II last year.

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The Point Energy Partners deal adds assets toward the southern portion of the Delaware Basin, primarily in Ward, Winkler and Loving counties, Texas.

NOG likes doing non-operated transactions alongside a credible operating partner like Vital, or like Permian Resources, O’Grady said (NOG partnered with Earthstone Energy last year to acquire the Delaware assets of Novo Oil & Gas; Earthstone was subsequently acquired by Permian Resources for $4.5 billion just days after closing the Novo deal).

“We’ve seen huge synergies from the Vitals and from the Permian Resources,” O’Grady said. “As they’ve taken possession of these assets, they’ve become much superior operators. They’ve cut costs and drilled better wells.”

Outside of large-scale M&A, NOG continues to make strides in its ground game strategy. The company spent $25 million on ground game deals during the second quarter, about $11 million of which was acquisition capital for 6.1 net wells and 1,800 net acres.

NOG anticipates future dealmaking on the horizon.

“The overall landscape continues to be robust and we see another wave of divestitures coming on the back end of the large-scale M&A that has transpired over the past 18 months,” Dirlam said.

Overall, NOG sees itself at the forefront of the growing niche that is the non-operated oil and gas space.

O’Grady highlighted Appalachia producer EQT Corp.’s recent non-op divestiture: 40% of its non-op Marcellus assets in northeast Pennsylvania. Under terms of the transaction, Equinor sold 100% of its interests in operated Marcellus and Utica assets and paid a cash consideration of $500 million. EQT, in exchange, provided 40% of its non-op interest in the northeast Pennsylvania assets.

EQT’s non-op sale “implies a three-to-five-times” value for what NOG purchased in the Marcellus just a few years ago, he said.

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