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.

BREAKING DOWN '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. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
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. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  7. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  8. Economics

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  9. Fundamental Analysis

    Is India the Next Emerging Markets Superstar?

    With a shift towards manufacturing and services, India could be the next emerging market superstar. Here, we provide a detailed breakdown of its GDP.
  10. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
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. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  3. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  4. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  2. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  3. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  4. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  5. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  6. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
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!