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Farmout Agreement

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FARMOUT AGREEMENT

(Providing for Multiple Wells with Production Required to Earn an Assignment)

FARMOR: (Name and Address)

FARMEE: (Name and Address)

NAME OF AREA/PROSPECT:

This Farmout Agreement ("Agreement") is between Farmor and Farmee, shall be effective on the date it is executed by Farmee as provided in Section 9.

1. EXHIBITS.

The following exhibits, if checked, are attached and shall be considered part of this Agreement:

Exhibit A - General Terms and Conditions, which shall apply to this Agreement except to the extent they are in conflict with the body of this Agreement.

Exhibit B-1 - Descriptions of lands covered by this Agreement ("Farmout Lands").

Exhibit B-2 - Lease Schedule describing oil and gas leases subject to this Agreement.

Exhibit C - Accounting Procedures, used in calculating payout of the Earning Well provided in Section 2.

Exhibit D - Tax Partnership Agreement.

Exhibit E - Operating Agreement.

Exhibit F - Geological Requirements.

Exhibit G - (Other Exhibits)

2. INITIAL EARNING WELL.

2.1 Well Specifications. Farmee shall drill a well, (the "Initial Earning Well"), strictly in compliance with the following specifications:

(a) Location:

(b) Spudding Deadline:

(c) Required Depth:

(d) Completion/Plugging Deadline:

2.2 Earned Assignment. As soon as practicable after Farmor is satisfied Farmee has complied with all obligations under this Agreement...

A drillsite acreage assignment as described in Section 2.3.

An additional acreage assignment as described in Section 2.4.

2.3 Drillsite Acreage Assignment. If a drillsite acreage assignment is earned under Section 2.2 above, the assignment shall cover:

all    an undivided %

Area Limited to the "drilling unit" for the Initial Earning Well as defined in paragraph 3.2 of Exhibit A; or

Limited to the following area:

Depth Limited to the interval between the surface of the ground and 100 feet below the stratigraphic equivalent of the total depth drilled in the Initial Earning Well; or

Limited to the following interval:

2.4 Additional Acreage Assignment. If an additional acreage assignment is earned under Section 2.2 above, the assignment shall cover:

all    an undivided %

Area No area limitation.

Limited to the following area:

Depth Limited to the interval between the surface of the ground and 100 feet below the stratigraphic equivalent of the total depth drilled in the Initial Earning Well; or

Limited to the following interval:

3. ADDITIONAL EARNING WELLS

3.1 Farmee's Option. If the Initial Earning Well is completed as a producer of oil and/or gas in paying quantities but Farmee does not earn all of the Farmout Lands, or as a dry hole, Farmee shall have the additional right but not the obligation to (check appropriate alternative):

Drill one Additional Earning Well.

Drill one or more Additional Earning Wells as a continuous optional drilling program.

3.2 Well Specifications. Farmee shall drill each Additional Earning Well strictly in accordance with the following well specifications:

(a) Location:

(b) Spudding Deadline:

(c) Required Depth:

(d) Completion/Plugging Deadline:

4. RESERVED OVERRIDING ROYALTY INTEREST.

4.1 Reservation. In each drillsite acreage assignment by Farmor, Farmor shall reserve an overriding royalty interest in production from the appropriate Earning Well equal to (check appropriate alternative):

% of production if the Earning Well is an oil well, and % of production if the Earning Well is a gas well, reduced in proportion to the assigned interest and calculated in the manner provided in Exhibit A; or

the amount by which % of production, reduced in proportion to the assigned interest, exceeds the sum of all royalties, overriding royalties and other payments out of production which burden the assigned interest at the time the drillsite acreage assignment is made.

4.2 Conversion. Check appropriate alternative:

Upon "payout" of each Earning Well, as defined in paragraph 4.3 of Exhibit A, Farmor's reserved overriding royalty interest shall be convertible, at Farmor's election, to an undivided working interest equal to % of the working interest covered by the appropriate drillsite acreage assignment; or

Farmor's reserved overriding royalty interest shall not be convertible to a working interest.

5. OPERATING AGREEMENT.

If an Operating Agreement is attached as Exhibit E to this Agreement, it shall be executed at the time this Agreement is executed and shall become effective if and when Farmor and Farmee become co-owners of working interest in any of the Farmout Lands.

6. DELAY RENTALS.

Farmee shall reimburse Farmor for % of the delay rentals paid by Farmor. After assignment, responsibility for paying rentals shall belong to:

Farmor    Farmee

subject to % reimbursement by the other party.

7. NOTICES AND WELL INFORMATION.

7.1 General. All well data, information and notices to be given to Farmor as provided in this Agreement shall be given as follows:

Farmor: (Name and Address)

Farmee: (Name and Address)

8. AGREEMENTS AFFECTING FARMOUT LANDS.

8.1 Farmee Bound. Except as may be otherwise provided in this Agreement, Farmee shall be bound by any agreement which affects the Farmout Lands at the time of assignment to Farmee.

8.2 Other Agreements. Subject to the disclaimer of liability contained in Section 8.1 above, Farmor believes in good faith that the only other agreements affecting any interest to be assigned to Farmee are the oil and gas leases described in Exhibit B and the following agreements:

9. EXECUTION. Duplicate originals of this Agreement are being signed. This Agreement shall be null and void at Farmor's option if one of the duplicate originals of this Agreement is not signed by Farmee and returned to Farmor within days after the date shown below Farmor's signature.

FARMOR

By:

Title:

Date:

FARMEE

By:

Title:

Date:

EXHIBIT B-1
TO FARMOUT AGREEMENT
DESCRIPTION OF FARMOUT LANDS

Area:

All lands covered by the oil and gas leases described on Exhibit B-2.

Limited to the following area:

Depth:

All depths.

Limited to the following interval:

EXHIBIT B-2
TO FARMOUT AGREEMENT
LEASE SCHEDULE

Lease No:

County:

State:

Lessor:

Lessee:

Lands Covered:

Recording Information:

Lease No:

County:

State:

Lessor:

Lessee:

Lands Covered:

Recording Information:

Lease No:

County:

State:

Lessor:

Lessee:

Lands Covered:

Recording Information:

EXHIBIT C
TO FARMOUT AGREEMENT
ACCOUNTING PROCEDURES

The Accounting Procedure used in calculating payout of an Earning Well under the Farmout Agreement shall be the same Accounting Procedure attached as Exhibit "C" to the Operating Agreement, which is attached as Exhibit "E" to this Farmout Agreement.

EXHIBIT D
TO FARMOUT AGREEMENT
TAX PARTNERSHIP AGREEMENT

EXHIBIT E
TO FARMOUT AGREEMENT
OPERATING AGREEMENT

EXHIBIT F
TO FARMOUT AGREEMENT
GEOLOGICAL REQUIREMENTS

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What a Farmout Agreement Is and when it applies

A Farmout Agreement is a written contract used in upstream oil and gas transactions where the owner of mineral rights (the farmor) assigns exploration, development, or production rights to another party (the farmee) in exchange for agreed performance, reimbursement, or a working interest. Typical uses include earning provisions tied to drilling or production milestones, transfer of specific acreage or leases, and conditions governing operations, cost sharing, and allocation of revenues. The document clarifies who conducts operations, who bears costs, and how title and lease obligations transfer following completion of the earning requirements.

Why a clear Farmout Agreement matters to parties

A well-drafted Farmout Agreement allocates operational risk, preserves royalty and title priorities, and defines precise earning requirements and timelines. It reduces ambiguity about who performs work, who pays, and how production or records are shared, helping avoid cost disputes and title defects that can delay development or impair revenue collection.

Why a clear Farmout Agreement matters to parties

Who typically prepares, reviews, and signs a Farmout Agreement

Collaboration among legal, land, and operations stakeholders ensures enforceable commitments and reduces downstream title or regulatory problems.

  • Operator teams and land managers handling drilling, permitting, and operations.
  • In-house or outside counsel reviewing title, assignment language, and risk allocation.
  • Lessors, royalty owners, and title examiners monitoring conveyances and recording.

Primary signatories and their typical roles

Farmor — Mineral Owner

The party conveying earning or development rights. Typically a corporate landholder or private lessor; responsible for disclosing existing lease burdens, title exceptions, and any prior royalty interests that affect the transferred rights.

Farmee — Working Interest Holder

The party accepting obligations to drill, pay costs, or otherwise earn an interest. Often an operator or joint venture participant that will perform operations and reimburse agreed costs under the earning schedule and other contract terms.

Core provisions to include in a professional Farmout Agreement

A complete Farmout Agreement contains clear sections on scope, earning conditions, payments, title and conveyance mechanics, operational control, and dispute resolution.

Scope

Describe the exact lease(s), acreage, depths, and mineral interests involved, including legal land descriptions and any exclusions or preexisting burdens on title that remain with the farmor.

Earning Requirements

Detail the specific performance or expenditure obligations the farmee must satisfy to earn the stated interest — for example, drill a well to a target formation within X months, or achieve production rates described in measured units.

Consideration and Payments

State cash payments, cost reimbursements, carried interest arrangements, or study and data reimbursements; include timing, method of payment, and consequences of late or missed payments.

Title and Conveyance

Specify how and when the assignment or conveyance occurs after earning, the form of deed or assignment, any required trustee or escrow mechanisms, and obligations to cure title defects.

Operations and Control

Allocate operator status, budgeting and joint operating procedures, insurance, indemnity, health and safety, and who may approve budgets or surface access and drilling programs.

Default and Remedies

Define events of default, cure periods, remedies such as reversion of interest, liquidated damages, or dispute resolution via arbitration or litigation, including governing law and venue.

Essential information fields to collect

Parties: Full legal names
Legal Description: Township & section
Effective Date: MM/DD/YYYY
Earning Tests: Drill/production metrics
Consideration: Dollar or carried interest
Governing Law: Selected state

Step-by-step: completing and executing a Farmout Agreement

Follow these sequential steps to prepare, review, and finalize a Farmout Agreement with clarity and legal protection.

  • 01
    Assemble data: Gather lease abstracts, title reports, and maps.
  • 02
    Draft terms: Write clear earning tests, payments, and conveyance language.
  • 03
    Legal review: Have counsel review title and allocation provisions.
  • 04
    Execute & record: Sign, notarize if required, and record assignment where necessary.

Setting up a digital workflow for Farmout Agreement approvals

Configure your document routing to match approval roles and required authentication levels.

Field Configuration
Signer Order Sequential or parallel routing
Authentication Level Email link, SMS code, or KBA
Required Attachments Title report, maps, resolutions
Retention Policy Export signed PDF to secure storage

Technical considerations for electronic completion and distribution

Ensure the chosen workflow preserves a complete audit trail and supports secure long-term storage for title and transaction records.

  • File formats: PDF, DOCX, or scanned TIFF
  • Integrations: NetSuite, Salesforce, Box
  • Security: AES-256 at rest

Typical e-signing flow for a Farmout Agreement

The digital signing process follows predictable steps that preserve intent, attribution, and retention requirements mandated by U.S. law.

  • Upload document: Prepare final PDF with exhibits attached.
  • Place fields: Add signature, initial, and date tags.
  • Send to signers: Use email or secure link with defined order.
  • Capture audit trail: Record IP, timestamp, and actions.

Common time-sensitive dates to track in a Farmout Agreement

Identify and calendar every date that affects performance, recording, or financial obligations to avoid forfeiture or penalties.

Effective Date and Term:

Date obligations start and overall agreement duration.

Drilling Commencement Deadline:

Date by which the farmee must spud a well to earn interest.

Production Test Window:

Period to demonstrate production metrics for earning.

Assignment Recording Deadline:

Timeframe to record assignment to preserve priority.

Notice and Cure Periods:

Deadlines for notices, remedies, and dispute escalation.

Key milestones from negotiation to recording

A milestone timeline clarifies who must act and when across negotiation, performance, and conveyance stages.

01

Negotiation and Signing

Finalize terms, secure signatures, and collect authority documents.

02

Operations Start

Farmee begins drilling or other agreed work as specified.

03

Earning Completion

Milestones met that trigger the conveyance obligation.

04

Record Assignment

Execute assignment instruments and record to protect priority.

Common legal and commercial risks to avoid

Title Defects: Undetected exceptions may void assignment
Recording Delay: Loss of priority or lien exposure
Ambiguous Earning Tests: Disputes over completion or measurement
Improper Authority: Signatures without corporate power
Tax Misclassification: Unexpected withholding or reporting
Insurance Gaps: Liability exposures during operations

Frequent document preparation mistakes

  • Using imprecise milestone language like 'commercially viable' without measurable metrics causes interpretation disputes and litigation risk.
  • Failing to attach current title commitments and exhibits leads to hidden encumbrances that can impair the conveyed interest.
  • Omitting corporate authority documentation for entity signers causes recording rejections or challenges to assignment validity.
  • Not specifying recording mechanics and costs can result in disagreements over who bears recording fees and priority preservation.

Comparing eSignature vendors for Farmout Agreement workflows

Basic vendor feature comparisons focus on price, trial availability, bulk sending, audit trail, HIPAA support, and envelope or session caps.

signNow DocuSign Adobe Sign PandaDoc HelloSign
Starting Price $8/user/mo $15/user/mo $14/user/mo $19/user/mo $15/user/mo
Free Trial 7-day trial No No Yes, limited Yes, limited
Bulk Send Yes Yes Yes Yes No
Audit Trail Yes Yes Yes Yes Yes
HIPAA Compliant Yes Yes Yes No No

Frequently asked questions about Farmout Agreements and e-signing

Answers to common execution, recording, signature, and compliance questions for Farmout Agreements.


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