A farmout agreement is a contract in which the owner of an oil and gas lease (the farmor) lets another party (the farmee) earn an assignment of some or all of the leasehold by drilling a well or meeting other obligations, while the farmor typically keeps a retained interest — most often an overriding royalty and sometimes an option to convert it to a working interest after payout.
A lease has a clock — it must be drilled within the primary term or it expires. An owner who holds a lease but cannot or does not want to drill it can use a farmout: they let someone else drill the well and, in exchange, assign that party an interest in the lease. The owner "farms out" the acreage; the driller "farms in."
The party giving up the acreage is the farmor; the party earning it by drilling is the farmee. The farmee spends the capital and takes the drilling risk; the farmor gets a well drilled on its lease — preserving the lease and creating production — without funding it.
The farmee earns an assignment of some or all of the working interest in the lease (often just the acreage around the well it drills, sometimes more) by fulfilling the drilling obligation. In return, the farmor usually keeps a retained interest — most commonly an overriding royalty carved out of the working interest, and frequently a back-in option to convert that override into a share of the working interest after the well reaches payout (once the farmee has recovered its costs).
The exact split — how much acreage is earned, the size of the override, whether and when the farmor can back in — is the heart of the negotiation and is spelled out precisely in the agreement.
Farmouts solve several problems at once. They let a farmor hold a lease it could not otherwise drill in time, keep acreage alive, and gain production with no capital outlay. They let a farmee acquire drilling opportunities and acreage without buying leases outright. And they spread risk: the farmee bears the cost and dry-hole risk of the well it drills.
For these reasons farmouts are a routine tool of the business, especially near lease-expiration deadlines and in plays where one company holds acreage and another has the rig time or the geologic conviction to drill it.
If you are the mineral owner (the lessor), a farmout happens a level above you — it is between working-interest parties on the leasehold, not a change to your lease or your royalty. Your lease terms and your royalty stay the same; what changes is who drills and operates. Often a farmout is good news for a mineral owner, because it means a well is going to get drilled on acreage that might otherwise have sat idle until the lease expired.
Farmouts also create overriding royalties and fractional working interests that later trade in the market. Buckhead Energy evaluates and buys overrides and working interests created by farmouts alongside minerals and royalties. This is educational information, not legal advice.
Oil & Gas Encyclopedia — all terms
Educational information only — not legal, tax, or investment advice. Consult a qualified attorney, CPA, or landman about your specific situation.
A contract in which a lease owner (the farmor) lets another party (the farmee) earn an assignment of the leasehold by drilling a well, while the farmor usually keeps a retained interest — most often an overriding royalty and sometimes an option to back in to a working interest after payout.
The farmor is the party that owns the lease and farms out the acreage. The farmee is the party that earns an interest in it by drilling the well and taking the drilling cost and risk.
Typically a retained interest — most commonly an overriding royalty carved out of the working interest, and often a "back-in" option to convert that override into a share of the working interest after the well reaches payout (once the farmee recovers its costs).
To get a well drilled on a lease the owner cannot or will not drill in time — preserving the lease and gaining production with no capital outlay — while the farmee acquires a drilling opportunity and takes on the cost and risk. They are common near lease-expiration deadlines.
No. A farmout is between working-interest parties on the leasehold; it does not change your lease terms or your royalty. What changes is who drills and operates — often good news, since it means a well is likely to be drilled on your acreage.
Yes — Buckhead Energy is a direct buyer of mineral, royalty, NPRI, and ORRI interests across the United States, producing or non-producing. Buckhead Energy makes a free written offer, pays the title and closing costs, and charges no broker commission.
Buckhead Energy buys mineral and royalty interests across all 50 states and has completed acquisitions in 33 states. Buckhead Energy is a direct buyer, not a broker — we purchase mineral and royalty interests with our own capital. Buckhead Energy has been buying mineral and royalty interests since 2006. Buckhead Energy holds an A+ rating with the Better Business Bureau.
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