Deal Musings
Quick numbers: Elevation received $400 million in equity funding at inception. Back-of-the-envelope math, using development assumptions from the economics section, suggests cumulative operating cash flow of ~$500 million on total capex in the $800–900 million range.
In other words: cash flow plus equity roughly equals capex — with any credit facility draws likely covering working capital, G&A, and potentially distributions to Pine Brook. It’s not a blowout, but the lights stayed on and a bit of PDP+PUD value was created.
What does Elevation get out of this?
More than a decade in, Pine Brook is likely well past their return horizon. Elevation’s only real options are to monetize or drill their way out — and no lean asset team wants to spend the next two years on a treadmill to eke out value. Their credit facility is probably already well-utilized, and there’s little appetite to throw fresh equity at a concentrated, mature position.
That’s where IOG comes in. The DrillCo structure gives Elevation a lifeline — a way to keep production flat(ish), cover G&A for a bit longer, and preserve optionality. I’d guess IOG negotiated some kind of tag-along right in the event of a future sale. They don’t have to commit new capital, but they still get to participate in any upside. I’ve heard this deal being silently-marketed at various times over the years, so my bet is they are trying to keep production up in the event the market opens up for them.
I don’t know the exact terms of this deal — but I can take a pretty good guess. IOG typically writes modest-sized checks and does plenty of wellbore-only JVs. My assumption is that this deal follows that playbook.
Most likely, it’s structured as a 100% cash flow sweep to IOG until an IRR target is hit, with a reversion to Elevation afterward. Classic DrillCo mechanics: limited risk for the capital provider, limited commitment for the operator, and just enough alignment to make it work — assuming the wells do.
That said, I’ve never been a fan of wellbore-only deals. We looked at a bunch back when “alternative financing” was hot, but I could never get comfortable with the structure. Here’s why:
- It’s rare to find a cash flow forecast for an individual well that, at the end of the day, outperformed actuals.
- None of these PE shops made real money on selling production streams. The wins came from selling acreage optionality — not cash flow. Owning a piece of the land is what enabled liquidity. I’m not convinced there’s much of a market today to offload just mature production streams into the lower middle market.
- These structures leave you fully exposed to well failure or sidetracks. One mechanical issue, and the whole program is underwater — with no acreage value to bail you out.
- There’s also the risk of getting offset by aggressive downspacing. We tried to mitigate that in past deals by adding stipulations — no well within X feet until post-reversion — but silly money often came in and outbid us regardless. You can paper it all you want, but you can’t outspend someone chasing inventory math.
- Alignment is always tough. The better the operator, the deeper into sub-tier inventory they’re willing to hand over. That leaves the most “attractive” DrillCo opportunities with balance-sheet-stressed companies — or assets that are otherwise stuck in limbo.
- In other words: if the rock’s great, they don’t need your money. And if they need your money, the rock probably isn’t great.
To be fair, the Elevation deal seems to check a few of the right boxes — concentrated position, proven results, and a reasonable shot at solid wells. But I’m still not sold on the structure.
If anyone has seen a final fund multiple or net IRR from a wellbore-only DrillCo that actually cleared the bar — shoot me a message. Genuinely curious.
Asset Position
Elevation was first to go after this play in the basin, so they were able to build a pretty large consolidated position in southern Andrews. The Barnett in general exists across the entire Permian, and is being tested in both the Midland and Delaware, but some of the characteristics of the platform do make it interesting.
Primarily, because the Platform is uplifted, the Barnett exists somewhere between 1,000-2,000 ft shallower than the Midland side at least, which can help to control costs, though all of the shallow injection may pose a drilling hazard.
After taking down the acreage around 2013, the company started off developing the Devonian (a mainstay of horizontal CBP), before pivoting to the Barnett in 2017. One key advantage to this early Devonian development was the ability to measure Barnett formation properties and gather cuttings. I imagine it looked quite strong every time they drilled through it.
Drilling has ramped aggressively this decade
One has to wonder why there hasn’t been much expansion beyond this initial position. $400 million in initial financing as well as eventually some bit of credit facility probably could have provided the ability to expand…. if the opportunity existed. So, story time…
In a past life, my team looked at funding a company to acquire Barnett acreage after seeing some of Elevation’s early results. Given the limited offset development, we brought in an external firm to run a petrophysical study over the Andrews/Ector area. The idea was to identify where we could still piece together a position.
Long story short: the analysis showed a clear hot spot centered around Elevation’s acreage — but performance dropped off quickly outside of it, only picking up again further south on what’s now Diamondback’s Limelight position (which, for whatever reason, wasn’t well received by the market when they announced plans to develop it). Most of the ground we thought was prospective was already locked up.
I’m sure there’s been more evaluation since, and things may look different now. But it was a lightbulb moment for me. And it gave me a deep appreciation for the team at Elevation — not just for having the rock, but for recognizing it.
Soapbox moment: Whatever criticisms people might have about the asset or its economics, I’ve got nothing but respect for what Elevation pulled off here. They saw an overlooked opportunity, did the science, proved the concept, and created a play from scratch. That’s the essence of what makes Independent operators so vital to the system — and efforts like this deserve credit.
Despite the strength of this asset, it is isolated and not large enough to fit into anyone’s portfolio as a core asset. So basically the market is small-to-mid caps that may have designs on expanding the play.
Production had slowly built to nearly 14 mboe/d (6:1) in 2024 before coming off a bit towards the end of the year.
Well Design
Since 2019, the company has largely stuck to 2-milers at just over 2,000 lb/ft of proppant.
Elevation uses a 3-string design where Intermediate is set below the top of Strawn. Intermediate Casing has moved from 9-5/8” to 8-5/8” in the last couple of years. Mud Weights in the lateral section tend to run just above 11#.
| Surface |
~1600 ft |
17.5 in |
13.375 in 54.5# J-55 BTC |
| Intermediate |
~9,920 ft |
10.625 in |
8.625 in 32# HCL-80 BTC |
| Production |
TD |
7.875 in |
5.5 in 20# HCP-110 GBCD |
| Tubing |
~10,200 ft |
|
2.875 in |
Pricing
Oil
API gravity is somewhere in the 45-47 range for most of these wells.
Elevation tends to get WTI less ~$1 for crude/condensate.
Gas
Elevation is compensated for the liquid-rich portion of its gas stream via BTU uplift rather than receiving a separate NGL barrel price. Over the past 12 months, realized gas price (net of marketing costs) has averaged approximately 76% of Henry Hub. This implies a gross heating value around 1,400 BTU/scf, assuming a marketing deduction of $1.60/mcf.
Cost Benchmarking
In general prices have risen from their Covid lows as inflation began to take hold. There was some relief in Q1 2024, which has probably continued a bit, so expect prices to be somewhere in the $1,000-1,100/ft range.
Going from 1-mile to 2-mile results in >30% savings in cost-per-ft.
Productivity
There does appear to be a definitive core on the east side of the acreage, while productivity on the edges has declined the further you stray from there (Ignore that plotting artifact to the north). It will be interesting to see where the IOG wells are spotted. Productivity outside of well control has been zero’d out so it does not necessarily mean that some of the productivity will definitively drop, though it’s telling that there aren’t too many wells outside of this position.
Well productivity from 2021 to 2024 has remained relatively consistent year-to-year — but unfortunately, it’s tracked well below the performance trend seen in earlier vintages. That said, there are isolated pockets of stronger results, suggesting performance is highly dependent on acreage location.
One big advantage of the Barnett over core Permian is far less water production.
Post-2021, well tests have largely shown somewhere in the 1.4-range for Water-Oil Ratio, which is what we will use in the economic model.
Gas-Oil-Ratio generally starts around 2 and then increases to the 7 range over time.
Economics
Table: Assumptions Used in Elevation Economic Model. These inputs represent half-cycle assumptions unless otherwise noted.
| NRI |
% |
80 |
| WTI |
$/bbl |
60 |
| Henry Hub |
$/mcf |
3.7 |
| Fixed Monthly Opex |
$ |
10,000 |
| Variable Expense Oil |
$/bbl |
0.5 |
| Variable Expense Gas |
$/mcf |
0.1 |
| Variable Expense Water |
$/bbl |
1 |
| Oil Differential |
$/bbl |
-1 |
| Gas Differential |
% HH |
140 |
| Gas Marketing |
$/produced mcf |
-1.6 |
| Drill Capex |
$000s |
4,000 |
| Complete Capex |
$000s |
4,450 |
| Facilities Capex |
$000s |
500 |
| Tax |
% revenue |
4.6% oil/7.5% gas/2% Ad Val |
| WOR |
bbl/bbl |
1.4 |
| GOR |
mcf/bbl |
2 rising to 7 |
Obviously these assumptions can change, and given Elevation is private, it is difficult to get actuals, though I doubt it’s too far off from here.
The mean well on the acreage will generate roughly a 25% IRR at $60 WTI/3.3 Henry Hub, though there is a pretty decent range of results. Obviously this is location-dependent, and as was pointed out earlier, IOG hopefully was able to negotiate some control over the locations chosen. Looking at the productivity map above, a 16 value (orange and above), roughly translates to a 20% IRR.
Conclusion
Elevation deserves credit. They built a play from scratch in an overlooked part of the basin, applied solid geoscience, and proved commerciality where few were even looking. It wasn’t flashy — but it worked.
That said, over a decade in, they’ve run into the same wall that many sub-scale private equity stories do: a stranded core asset, solid but not scalable, and no obvious buyer at current market conditions. The IOG DrillCo likely isn’t a bet on growth — it’s a way to hold flat, cover G&A, and create just enough runway for a potential exit if/when the market reopens.
From IOG’s side, it’s a classic wellbore-only deployment: modest check, limited risk, and exposure to a niche area of proven rock. But as I’ve said, these structures rarely generate big returns unless the rock is exceptional — and the alignment is airtight.
Ultimately, this deal says more about the state of capital than the rock. Dollars are still looking for deployment — but the best positions are held tight, and what’s left often comes with hair. In that light, Elevation’s Barnett is a decent place to put money to work.
Just don’t confuse lifeline capital with growth capital.
