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.

INVESTOPEDIA EXPLAINS '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 FAQS
  1. If oil producers run out of room to store oil, will the price of gasoline plummet?

    The price of gasoline would plummet if oil producers run out of room to store oil. However, running out of room to store ... Read Full Answer >>
  2. How can traders use contango to take advantage of the storage shortage for crude ...

    Traders with access to physical oil and storage can make substantial profits in a contango market. Other traders may seek ... Read Full Answer >>
  3. How does the price of oil affect Venezuela's economy?

    The price of oil is one of the most heavily watched trends in economics, as it has an effect on the economies of every nation ... Read Full Answer >>
  4. How would a true market economy ensure that the world never runs out of oil

    The physical supply of oil will never run out in an economic system where prices are allowed to fluctuate based on supply ... Read Full Answer >>
  5. What percentage of the global economy is comprised of the oil & gas drilling sector?

    According to market research by IBISWorld, a leading business intelligence firm, the total revenues for the oil and gas drilling ... Read Full Answer >>
  6. What emerging markets are best suited for investing in the oil & gas drilling sector?

    Over the past decade, emerging markets have driven the demand and production for oil and natural gas to new heights. Rising ... Read Full Answer >>
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. Personal Finance

    Weak Oil, Sanctions' Bite, Mean Misery for Russia

    Low oil prices, coupled with crippling sanctions, will mean Russia will suffer declining growth and vicious inflation for at least the next two years.
  9. Forex Education

    For Now, a Future Without Putin Seems Unlikely

    Putin's actions have alienated the West and led to harsh economic sanctions against his country, but his favorability remains high at home.
  10. Stock Analysis

    Top 6 Gas Stocks that Pay Regular Dividends

    A look at the top 6 dividend paying gas stocks.

You May Also Like

Hot Definitions
  1. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  3. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  4. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  5. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
Trading Center