Net Profits Interest

AAA

DEFINITION of 'Net Profits Interest'

A percentage that is paid out of the working interest owner's share of net profits. This is a non-operating interest that may be created when the owner of a property - typically an offshore oil and gas property - leases it out to another party for development and production. A net profits interest may be granted instead of a royalty interest, where the holder receives a share of gross revenues rather than net profits.

The holder of a net profits interest is not liable for paying a proportionate share of losses if the property is unprofitable. However, depending on the stipulations of the lease contract, the working interest owner may recover these losses from future payments of net profit.

INVESTOPEDIA EXPLAINS 'Net Profits Interest'

For example, such an interest may be created when Company A, which owns the rights to explore and develop an oil and gas property, leases it to Company B, in exchange for a 12% share in net profits from the leased property. In a given year, if Company B makes $10 million in net profits after deducting all allowable and applicable expenses from revenue generated from the property, $1.2 million would be payable to Company A as its share of net profits.

In order to avoid legal complications down the road, the exact definition of net profits and the expenses that are allowed to be deducted from revenue to arrive at it should be clearly specified in the lease contract. Accounting transparency is another prerequisite.

RELATED TERMS
  1. Mineral Rights

    A landowner's right to receive a portion of the profits of any ...
  2. Royalty Interest

    In the oil and gas industry this refers to ownership of a portion ...
  3. Working Interests

    Refers to a form of investment in oil and gas drilling operations ...
  4. Property Rights

    Laws created by governments in regards to how individuals can ...
  5. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There ...
  6. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
RELATED FAQS
  1. How does the division of regional and national banks affect investing in the banking ...

    Investors looking at the banking sector have a choice to either invest in large national banks that provide a higher degree ... Read Full Answer >>
  2. How do you calculate shareholder equity?

    Shareholders' equity is listed on a company's balance sheet and measures its net worth. A company's shareholders' equity ... Read Full Answer >>
  3. What is the difference between earnings and profit?

    Earnings, specifically retained earnings, and profit are often used as synonyms in corporate finance, although they are different ... Read Full Answer >>
  4. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  5. How is minimum transfer price calculated?

    A company that transfers goods between multiple divisions needs to establish a transfer price so that each division can track ... Read Full Answer >>
  6. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Oil: A Big Investment With Big Tax Breaks

    Oil and gas investments can provide unmatched deduction potential for accredited investors.
  2. Active Trading

    Oil And Gas Industry Primer

    Before jumping into this hot sector, learn how these companies make their money.
  3. Mutual Funds & ETFs

    Investing In Oil And Gas UITs

    Unit investment trusts provide direct exposure to the energy sector, fueling better returns.
  4. Forex Education

    A Primer On Offshore Drilling

    Learn the important ratios and terms that you'll need to know to get involved in this trading sector.
  5. 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.
  6. Personal Finance

    Financial Tips For People Who Hate Finance

    For people who hate financial planning, there's usually one big problem – which you can fix. Do it now.
  7. Investing

    Seven Investing Books For Your Summer Reading List

    It’s almost 4th of July, the season of summer reading. Picking up a book during your holiday can be a great opportunity to learn more investing.
  8. Fundamental Analysis

    Understanding the Profitability Index

    The profitability index (PI) is a modification of the net present value method of assessing an investment’s attractiveness.
  9. Economics

    Calculating Net Realizable Value

    An asset’s net realizable value is the amount a company should expect to receive once it sells or disposes of that asset, minus costs from its disposal.
  10. Economics

    What is Neoliberalism?

    Neoliberalism is a little-used term to describe an economy where the government has few, if any, controls on economic factors.

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
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!