Working Interests

A working interest pays a bigger share of production than a royalty, but the costs come out before you ever see a check.

A working interest is ownership in the actual operation of a well, carrying both the right to a share of production and the obligation to pay a proportional share of drilling, completion, and ongoing operating costs. It's the interest an operator or investor holds, distinct from the royalty interest a landowner typically retains when leasing to that operator.

Because a working interest comes with real cost exposure alongside its upside, it gets valued using a fundamentally different lens than a royalty interest, and the worth question has to account for net income after expenses rather than gross production.

Why net, not gross, is the right way to think about it

A working interest owner typically receives a larger share of gross production than a royalty owner on the same well, often 7/8 of production after the landowner's royalty is carved off, but that share comes with a proportional obligation to pay operating costs, and often the working interest owner's share of drilling and completion costs upfront as well.

Valuing a working interest means projecting gross revenue, subtracting the working interest owner's share of lease operating expenses, and then applying decline curve and discount rate assumptions to that net figure, not the gross. Two working interests with identical gross production can be worth very different amounts if one well has meaningfully higher operating costs than the other.

Drilling risk on non-producing working interests

A working interest in a well that hasn't been drilled yet carries the sharpest risk profile of any mineral interest type, since the owner is typically obligated to fund a share of drilling costs with no guarantee the well will be commercially productive. This is fundamentally different from a royalty owner, who risks nothing financially if a well comes up dry.

Because of this, non-producing or pre-drill working interests are priced with heavy discounting for dry-hole risk, cost overrun risk, and the simple fact that a meaningful share of exploratory wells in any play don't perform as projected. This is speculative by nature, and anyone evaluating a working interest offering should weigh that risk seriously rather than focusing only on potential upside.

Producing working interest valuation in practice

For a producing working interest, the valuation leans on actual lease operating statements showing both revenue and expenses, applied against a decline curve for the remaining productive life of the well or wells. Aging wells with rising operating costs relative to declining production (sometimes reaching the point of being uneconomic to keep running) are valued conservatively, since the net income stream can shrink faster than gross production alone would suggest.

Operator quality matters more here than for royalty interests, since the operator's cost discipline directly affects the working interest owner's net income as much as it affects the pace of development.

It's also worth checking whether the interest is operated or non-operated. An operated working interest means the owner, or a company they control, runs day-to-day decisions on the well; a non-operated working interest means someone else runs the well and the owner simply receives their share of net proceeds. Non-operated positions are generally more common among individual investors and easier to value, since there's less judgment involved in projecting future operating decisions.