A farmout agreement is a contract in which the owner of an oil and gas lease (the farmor) agrees to assign some or all of that leasehold to another company (the farmee) that earns the assignment by drilling one or more wells, while the farmor usually keeps a retained interest such as an overriding royalty and the right to get the acreage back if the well is not drilled.
In oil and gas, to farm out acreage is to let someone else drill it. A company that holds a lease but does not want to drill it now, or cannot drill it before the lease runs out, agrees to transfer part of its interest to a company that will drill. The company giving up acreage is the farmor; the company earning it is the farmee. From the farmee's side the same deal is a farm-in.
The Supreme Court of Texas described the arrangement in Barrow-Shaver Resources Co. v. Carrizo Oil & Gas, Inc. (2019) as a contract between a working-interest owner (the farmor) and a drilling operator (the farmee) that has no interest in the minerals until it completes its obligations under the farmout. Quoting a standard oil and gas dictionary, the court called it a very common agreement between operators in which a lease owner that does not want to drill at the time agrees to assign the lease, or part of it, to an operator that does, and said the defining feature is the farmee's obligation to drill one or more wells before the transfer is complete.
The parties in that case called theirs a drill-to-earn farmout: the farmee would earn a partial assignment of the farmor's interest in the lease in exchange for drilling a producing well. The assignment was conditional; drilling alone did not earn it.
Every farmout is negotiated, so the details vary. Most follow the same arc, and the terms below are the ones worth reading closely.
An oil and gas lease lasts for its primary term and then continues only if the lease terms are met, usually by production. A company holding acreage it will not drill in time can lose the lease. A farmout lets it keep value from that acreage: someone else pays for and drills the well, the lease is kept alive by the new production, and the farmor keeps a share of the result without paying the drilling cost.
That is the setting of Barrow-Shaver. The farmor's lease would expire unless a producing well was established under it, so the farmor farmed the acreage out, and the farmee drilled a well before the lease expired.
For the farmee the attraction is access: it gets a drilling location and the chance to earn a working interest without buying a lease outright, and it takes on the cost and the risk of the well. A farmout moves drilling risk from the farmor to the farmee; it does not remove it.
A farmout is one of several ways a working interest changes hands. The differences come down to who pays for drilling and when the transfer becomes final.
| Arrangement | Who pays to drill | What the original owner keeps | When the transfer is complete |
|---|---|---|---|
| Farmout | The farmee | Usually a retained override, sometimes a later back-in, and a reversion if the well is not drilled | When the farmee meets the drilling obligation |
| Outright assignment for cash | Whoever owns the lease afterwards | Only what it reserves in the assignment | At closing |
| Oil and gas lease | The lessee (the operator) | Depends on state law and the lease. In Texas, Coastal Oil & Gas v. Garza (2008) says a mineral lessor has only a royalty interest and the possibility of reverter if the lease ends, with no right to possess, explore for or produce the minerals | When the lease is signed and delivered |
| Joint participation in a well | Each working-interest owner, in proportion | Its own working-interest share | No transfer; the owners share costs under an operating agreement |
After the farmee in Barrow-Shaver drilled its well, a third company offered to buy the farmee's rights under the farmout. The farmout said the farmee's rights could not be assigned without the farmor's express written consent. An earlier draft had added that consent "shall not be unreasonably withheld"; the farmor struck that phrase before signing, and the farmee signed the version without it. The farmor did not consent, the sale fell through, and the farmee sued.
The Supreme Court of Texas held on June 28, 2019 that the plain language of the signed agreement let the farmor withhold consent, so the farmor could not have breached the contract. It also held that the farmee could not justifiably rely on oral assurances about consent when the written contract addressed the subject.
The lesson for anyone signing a farmout, or buying an interest created by one, is that small words in the assignment and consent clauses decide who can sell what, and when. The court gave effect to the signed agreement, not to earlier drafts or oral assurances.
Farmouts are common enough that state statutes name them. West Virginia's horizontal-well unitization statute, for example, lists a farmout alongside ownership, lease, assignment and contract as ways an applicant may have obtained the operator interests it needs before the state oil and gas conservation commission will unitize tracts for a horizontal well. The agreement that moves the working interest is, in other words, part of how a drilling unit gets assembled.
If you are the mineral owner who signed the lease (the lessor), a farmout takes place between working-interest companies above you. It moves the lessee's interest, in whole or in part, to another company; it is not a new lease with you. Your lease stays the contract that sets your royalty, and its assignment clause governs what the lessee may transfer. What usually changes in practice is who drills and operates, and later who sends your division order and checks.
Often a farmout is a sign of activity. It means a company has committed to drill acreage that might otherwise have sat idle until the lease expired.
If you own an override created by a farmout, your interest is defined by the assignment that created it: its size, the depths and acreage it covers, and whether it survives a later lease extension or renewal. Oklahoma's Production Revenue Standards Act has a name for this kind of interest: a "subsequently created interest," meaning an interest carved from a working interest other than a royalty interest. Because these interests turn on assignment wording, a title examiner reads every link in the chain before an operator pays on one.
This page is general information, not legal advice. Have a qualified oil and gas attorney review any farmout, assignment or division order before you sign or rely on it.
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 farmout is an agreement in which a company that holds an oil and gas lease (the farmor) lets another company (the farmee) earn an assignment of some or all of that lease by drilling one or more wells. The farmor usually keeps a retained interest, most often an overriding royalty, and the acreage reverts if the farmee does not drill as agreed.
To farm out acreage is to let another company drill it in exchange for an assignment of part of your leasehold. The company giving up the acreage farms out; the company earning it farms in.
They are the same transaction seen from opposite sides. The farmor grants a farmout; the farmee takes a farm-in.
The farmor is the working-interest owner that holds the lease and gives up acreage. The farmee is the operator that earns an interest by drilling. The Supreme Court of Texas described the farmee as having no interest in the minerals until it completes its obligations under the farmout.
Usually an overriding royalty carved from the assigned working interest, sometimes an option to convert that override to a working interest later, and the right to have the acreage revert if the farmee fails to drill. The exact terms are negotiated in each agreement.
A farmout in which the farmee earns its assignment only by drilling, for example by drilling a producing well on the lease. The parties in Barrow-Shaver v. Carrizo (Tex. 2019) described their agreement this way.
It does not earn the assignment, and the interest returns to the farmor under the agreement. In Barrow-Shaver the farmor held a possibility of reverter in the tract if the farmee failed to drill a producing well.
Only as the agreement allows. Many farmouts require the farmor's written consent. In Barrow-Shaver the Texas Supreme Court held that a clause requiring express written consent, with no reasonableness limit, let the farmor refuse consent.
No. A lease is between a mineral owner and a lessee and creates the leasehold. A farmout is between a working-interest owner (the farmor) and a drilling operator (the farmee) that has no interest until it completes its drilling obligation, and it moves part of an existing leasehold to that operator.
A farmout transfers the lessee's interest; it is not a new lease with you, so your lease remains the contract that sets your royalty. What usually changes is who drills, operates and pays. Have an oil and gas attorney review the lease and any new division order.
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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