Farmout

AAA

DEFINITION of 'Farmout'

The assignment of part or all of an oil, natural gas or mineral interest to a third party. The interest may be in any agreed-upon form, such as exploration blocks or drilling acerage. The third party, called the "farmee," pays the farmor a sum of money up front for the interest and also commits to spending money to perform a specific activity related to the interest, such as operating oil exploration blocks, funding expenditures, testing or drilling. Income generated from the farmee's activities will partly go to the farmor and partly go to the farmee in percentages determined by the agreement.

BREAKING DOWN 'Farmout'

A company may decide to enter into a farmout agreement with a third party if it wants to maintain its interest but wants to reduce its risk or doesn't have the money to undertake the operations that are desirable for that interest. Farmout agreements give farmees a potential profit opportunity that they would not otherwise have access to. Government approval may be necessary before a farmout deal can be finalized.

RELATED TERMS
  1. Unconventional Oil

    A type of petroleum that is produced or obtained through techniques ...
  2. Commercial Well

    Any oil or gas drilling site that produces enough oil or gas ...
  3. Oil Field

    A tract of land used for extracting petroleum, or crude oil, ...
  4. Oil Refinery

    An industrial plant that refines crude oil into petroleum products ...
  5. Crude Oil

    A naturally occurring, unrefined petroleum product composed of ...
  6. Oil Reserves

    An estimate of the amount of crude oil located in a particular ...
Related Articles
  1. Economics

    J.D. Rockefeller: From Oil Baron To Billionaire

    More than 70 years after his death, this man remains one of the great figures of Wall Street.
  2. Active Trading

    Oil And Gas Industry Primer

    Before jumping into this hot sector, learn how these companies make their money.
  3. Active Trading

    Uncovering Oil And Gas Futures

    Find out how to stay on top of data reports that could cause volatility in oil and gas markets.
  4. Active Trading

    What Determines Oil Prices?

    Changes in the price of oil aren't arbitrary. Read on to find out what moves them and why.
  5. Options & Futures

    A Guide To Investing In Oil Markets

    Find out how to take advantage of this market without having to open a futures account.
  6. Fundamental Analysis

    Accounting For Differences In Oil And Gas Accounting

    How a company accounts for its expenses affects how its net income and cash flow numbers are reported.
  7. Active Trading

    Unearth Profits In Oil Exploration And Production

    Drill down into financial statements to tap into the right companies and let returns flow.
  8. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  9. Investing News

    How The Devaluation of the Yuan Hurts the Russian Economy

    With oil and gas comprising the majority of Russia’s exports and China serving as its largest trading partner, a devalued yuan signals the weakening Chinese economy will demand less energy while ...
  10. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
RELATED FAQS
  1. How much oil must be produced to maintain inventory levels in the United States?

    Domestic energy investors should track the reserve inventory of crude oil for the United States, which is released in a weekly ... Read Full Answer >>
  2. To what extent is the oil and gas sector dominated by a few major companies?

    Oil and gas are two expansive and highly diverse product lines, with active competition domestically and internationally. ... Read Full Answer >>
  3. What factors are the primary drivers of share prices in the oil and gas sector?

    The primary drivers of share prices in the oil and gas sector are energy prices and economic growth. Stock prices in the ... Read Full Answer >>
  4. What impact does the growth in horizontal drilling have in the oil and gas sector?

    It is tough to separate the growth in horizontal drilling from the growth in hydraulic fracturing, or fracking; the two techniques ... Read Full Answer >>
  5. What are the main substitutes for oil and gas energy?

    The main substitutes for oil and gas energy include nuclear power, solar power, ethanol and wind power. Fossil fuels dwarf ... Read Full Answer >>
  6. How much of the United States' energy comes from oil and gas?

    As of 2014, the oil and gas sector accounted for approximately 50% of total U.S. energy needs, with approximately another ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  3. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  4. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  5. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!