Non-operated working interest owners have long been a feature of oil & gas projects and companies. With the advent of shale and tight rock production, which is more repeatable and predictable than conventional exploration and production, non-op WI owners could be more confident that their investments would succeed. This is simply because the dry-hole risk is virtually non-existent in these resource plays.
Mercer Capital explains non-op WI
ownership as follows:
“A working interest is an interest in an oil and gas
lease, entitling the owner to a percentage of the profits from the oil and gas
extracted within a leasehold area. Working interests bear all costs
corresponding to the amount of working interest held. For this reason, they are
often considered to be like a net profit interest.”
A non-operated working interest
simply means that a working interest owner is not the operator of the well.
They are an investor and do not typically make any decisions regarding the
wells. When operators buy other companies or production, they often take on the
non-op WI owners of that production. Companies also market and sell non-op
interest to buyers to help finance their projects. Some companies like Northern
Oil & Gas are aggregators on non-op WI.
Below, Mercer Capital notes that
the Council of Petroleum Accountants Societies (COPAS) provides guidance for
joint operating agreements (JOAs) involving non-op WI owners.
“In some instances, owners of non-operating working
interests are charged periodically to pay for their share of the overhead costs
incurred by the operator. The rate at which this overhead is charged to the
non-op interest owners will inevitably differ from actual overhead costs, which
are partially variable. One organization that often plays a role in these
contractual relationships between operators and non-operators is the Council of
Petroleum Accountants Societies (“COPAS”). Though it has no statutory authority,
the organization is influential in modeling standard and widely adopted
accounting practices for developing and maintaining joint operating agreements
between parties involved in the oil and gas industry. These practices include
guidance on how operator costs and overhead are allocated between an operator
and a non-op holder.”
They give an example below of how
operator profit and loss can affect non-op WI owners subject to fixed monthly
costs. These capital obligations can result in losses when commodity prices are
low, and the non-op WI owner is still obligated to pay for drilling and
production expenses.
As noted below in Part 2 of Mercer
Capital’s analysis, non-op investors don’t have the same concerns as operators
and can focus mainly on the profitability of their investments.
“Non-op interests can also provide capital to the
industry that is needed for further development. Investors in the non-op
space tend to be economically rational. Profit margins and cash flow
returns are typically the more immediate motive as opposed to numerous other
factors that can come into play for an operator, such as leases on future
acreage, drilling plans, capital budgets, debt lending parameters, and other
factors.”
They note that there are both
non-op funds which function much like royalty investors as well as a few
publicly traded companies that focus exclusively on non-operated working
interest.
“There is a growing trend within the oil and gas space
of developing specific non-op funds to fill an important role in the upstream
capital markets. There is an interesting cross-section of E&P
investors and more passive investors akin to royalty investors who have shown
interest in the niche.”
“There are also a few (mostly small) publicly traded
companies whereby non-operating working interests are a primary focus of their
balance sheets.”
Below, they compare public non-ops to public royalty investors, noting that these royalty aggregators typically trade at higher valuations than public non-ops.
“When done right, non-ops can provide superior returns
and quality valuations. When not done right, non-ops can (in some cases)
be a source of negative cash flow and sub-par valuations.”
Below, Ranger Land & Minerals
compares royalty interest (RI), overriding royalty interest (ORRI), and
operating working interest (OWI). Non-operating working interest (NOWI) is the
fourth type of interest.
Below, they give the benefits and
risks of non-operated working interest investment.
They note that due diligence is
required, including the consideration of commodity pricing, geology, well and play
profitability, cost structure, and well performance. They note that JOAs
involve allocation of revenues and costs, decision-making authority of the
operator, accounting and reporting procedures, rights of audit and inspection
for non-operators, and dispute resolution mechanisms. There are also tax
benefits to non-op investing. These include deduction of intangible drilling
costs, tangible equipment depreciation, and depletion allowance. These factors
can increase investor profitability.
Below, they compare non-op WI
investment to other types of energy investments.
They summarize below what makes a
successful strategy for non-op WI ownership:
“A successful strategy for non operated working
interests requires careful due diligence, diversification, strong operator
selection, and ongoing monitoring. By aligning with trustworthy partners,
leveraging technological advancements, and planning for long-term cycles,
investors can unlock meaningful returns while navigating the complexities of
the energy market.”
Non-Operated Working Interest Portfolio Sales and M&A
Potential
There is a trend in recent times
of non-op WI owners selling their portfolios to operators or to other companies
focused on non-op WI. One recent example is Chord Energy, which just sold its
portfolio of Marcellus non-op WI to South Korea’s Posco International for $550
million. Chord can now focus more exclusively on its oil-weighted portfolio in
the Williston Basin. Its CEO, Danny Brown, noted:
“This highly accretive transaction allows us to further
strengthen our peer-leading balance sheet and focus on creating significant
value from our world-class Williston Basin position. Chord's disciplined
capital allocation, operational efficiency, and financial strength position us
to create value while navigating a volatile macro environment.”
Another example is Northern Oil
& Gas’s purchase of a 25% undivided stake in Canadian Duverney light oil
assets with a long-term joint development agreement with Parallax Energy
Operating, Inc.
NOG’s management commented:
"Quality oil inventory is becoming increasingly
scarce, and NOG's scaled non-operated model positions us to access
opportunities that most in our sector cannot. Our ability to structure
creative, accretive transactions with best-in-class operators is what sets NOG
apart. The Duvernay is one of North America's premier light oil resources —
high-quality, low-cost, long-life inventory with meaningful upside that remains
largely untapped. Parallax is led by a team with a demonstrated track record of
developing Duvernay assets, backed by Carnelian Energy Capital, one of North
America’s leading energy investors. The decision to incorporate equity
consideration aligns mutual interests while enhancing our per-share metrics and
balance sheet. This transaction is the result of disciplined evaluation of the
meaningful opportunities we see in Canada, and a direct reflection of our
ability to identify and convert high-quality assets into long-term value for
shareholders."
It has also been suggested that
public non-ops may become merger and acquisition (M&A) targets, especially
when economics may be most favorable due to commodity prices.
References:
NOG
Announces Strategic Entry Into Canada with Light Oil Duvernay Acquisition;
Takes 25% Undivided Stake in Assets with Long-Term Joint Development Agreement.
Businesswire. May 26, 2026. NOG Announces Strategic Entry into
Canada with Light Oil Duvernay Acquisition; Takes 25% Undivided Stake in Assets
with Long-Term Joint Development Agreement
Non-Operating
Working Interests in Oil & Gas: Part I: Characteristics of Non-Op Working
Interests, the Risks, and the Benefits. Mercer Capital. February 2, 2024. Non-Operating Working Interests in
Oil & Gas-Part I
Non-Operating
Working Interests in Oil & Gas: Part II: Markets and Valuation
Characteristics of Non-Op Working Interests. Mercer Capital. February 19, 2024.
Non-Operating Working Interests in
Oil & Gas-Part II
Non-Operated
Working Interests: Complete Strategy Guide. Ranger Land & Minerals. Last
updated: October 7, 2025. Non-Operated Working Interests:
Complete Strategy Guide
Chord
to sell non-operated Marcellus assets to POSCO for $550mn. IntelliNews. September
17, 2026. Chord
to sell non-operated Marcellus assets to POSCO for $550mn
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