Carried Interest vs Working Interest: Oil & Gas Explained
The most important distinction in oil & gas investing. Carried interests reduce capital requirements by 50-90% while maintaining full upside exposure. Complete guide with real Namibia examples showing how explorers leverage carried positions for asymmetric returns.
If you're evaluating oil & gas investments, understanding carried interest vs working interest is critical. These two ownership structures determine:
- How much capital you need to deploy
- When you pay (upfront vs over time)
- Your risk-adjusted returns
- Dilution potential
In Namibia's offshore boom, where supermajors are spending $100M-300M per exploration well, carried interests allow smaller companies to participate without massive capital outlays.
Stamper Oil & Gas: 3 Carried Interests, Zero Dilution
Stamper holds carried interests on PEL 98, 102, and 106 in Namibia—exposure to basin-opening wells without proportionate capital burden. See how this structure creates asymmetric upside for investors. Read the complete guide.
GET OFFSHORE NAMIBIA INVESTOR INFORMATION →Working Interest: The Traditional Model
What is Working Interest?
Working interest = ownership percentage in an oil & gas project where you pay your proportionate share of all costs (exploration, development, operating expenses) and receive your proportionate share of revenue.
Example:
You own 20% working interest in a Namibia block. Operator drills a well costing $150M. Your share: $30M. If successful, you get 20% of production revenue (before royalties/taxes).
Working Interest: Pros & Cons
✅ Pros
- • Full control: Vote on drilling decisions, budgets, operations
- • Higher ultimate returns: No carry costs to pay back
- • Operator potential: Can become operator if expertise allows
- • Asset value: Working interest is bankable collateral
❌ Cons
- • Massive capital requirements: $10M-100M+ per well
- • Cash calls: Operator demands payment on tight timelines
- • Dilution risk: If you can't pay, interest is diluted or forfeited
- • High failure risk: Dry hole = 100% loss of capital deployed
Real-World Example: Working Interest in Namibia
Scenario: Orange Basin Exploration Well
If Discovery (2B barrels):
Your 32.9% = 658M barrels. At $10/bbl in-ground value = $6.58B potential asset value
ROI if successful: 133x
Carried Interest: The Asymmetric Model
What is Carried Interest?
Carried interest = ownership percentage where another party (the "carry provider") pays your share of costs through a defined stage (e.g., through exploration, through FID, through first production). You contribute zero or reduced capital but retain ownership and upside.
Example:
You own 5% carried interest on a Namibia block. Operator drills a well costing $150M. Your share: $0 (operator carries you). If successful, you get 5% of production revenue, but must typically pay back the carry from your share of revenue.
How Carried Interest Works: The Mechanics
Carried Interest Lifecycle
- Exploration Phase: Operator funds 100% of seismic, drilling, testing. You pay $0.
- Discovery: Well finds commercial oil/gas. Your carried interest is intact—you still own 5%.
- Development Phase:
- Option A: Carry continues (rare) - operator funds development too
- Option B: Carry ends - you pay your 5% share of development costs
- Option C: You convert to smaller carried % through production
- Production: You receive 5% of net revenue. Operator typically recoups carry costs (with interest) from your share over time.
💡 Key Insight: Even if you repay the carry with interest, your ROI is infinite on exploration phase because you invested $0 upfront.
Carried Interest: Pros & Cons
✅ Pros
- • Zero/minimal capital: No upfront cash required
- • No dilution risk: Can't be diluted out for non-payment
- • Full upside exposure: Benefit from discoveries without risk capital
- • Portfolio diversification: Spread risk across multiple blocks
- • Asymmetric returns: Infinite ROI if successful (spent $0)
❌ Cons
- • No control: Operator makes all decisions
- • Carry payback: Must repay carry costs from future revenue
- • Lower ultimate %: Typically smaller ownership stake
- • Less bankable: Harder to use as collateral vs working interest
- • Timing risk: Operator controls drilling timeline
Real-World Example: Carried Interest in Namibia
Scenario: Walvis Basin Carried Position
If Discovery (1.7B barrels):
Your 5% = 85M barrels. At $10/bbl in-ground value = $850M potential asset value
ROI if successful: Infinite (invested $0)
*Note: Must eventually repay carry costs from production revenue, but exploration phase ROI remains infinite
Side-by-Side Comparison: Carried vs Working Interest
| Factor | Working Interest | Carried Interest |
|---|---|---|
| Upfront Capital | High ($10M-100M+) | Zero or minimal |
| Dilution Risk | High (if can't pay cash calls) | None |
| Control/Voting | Yes (proportionate) | No (operator decides) |
| Typical Ownership % | 10-50% | 5-20% |
| Exploration Phase ROI | ~100-200x if major discovery | Infinite (invested $0) |
| Best For | Well-funded companies, operators | Junior explorers, portfolio plays |
| Risk Level | Very high (capital at risk) | Low (no capital at risk) |
| Ultimate Returns | Higher % of revenue | Lower % (after carry payback) |
Why Carried Interests Make Sense in Namibia
Namibia's offshore is deepwater, frontier exploration with well costs of $100M-300M each. Here's why carried interests are the optimal structure:
1. Capital Preservation
Junior explorers can participate in basin-opening wells without raising $50M-100M per well. Avoids massive dilution from equity financings.
2. Portfolio Diversification
With $0 capital per block, companies can hold carried interests across 3-5 blocks vs 1 working interest block. Spreads geological risk.
3. Supermajor Partnerships
Supermajors (Shell, TotalEnergies, Chevron) have the technical expertise and balance sheets to drill. Carried partners benefit from their capabilities without matching capital.
4. De-Risking Through Proximity
Nearby discoveries (Venus, Graff, Mopane) de-risk adjacent blocks. Carried interests allow exposure to this upside without the downside risk of $100M+ dry holes.
Hybrid Models: Best of Both Worlds
Smart Namibia explorers use a portfolio approach:
Optimal Namibia Portfolio Structure
Orange Basin (High Confidence):
• 32.9% working interest - High ownership where geological confidence is proven (Venus, Graff discoveries adjacent)
• Strategy: Farm out for carried interest through exploration, retain 5-10% through production
Walvis Basin (Emerging):
• 5% carried interests x 2 blocks - Zero capital while Chevron/partners drill 2026-2027
• Upside: If discovery, convert to production carry or pay in from cashflow
Luderitz Basin (Frontier):
• 20% carried interest - Larger % because frontier risk is higher
• Adjacent operators (BW Energy) drilling = free de-risking
Result: Exposure to 5 blocks across 3 basins with manageable capital requirements
The Math: Why Carried Interests Win for Junior Explorers
Scenario: $10M Market Cap Explorer
Option A: 100% Working Interest Model
- • Company holds 32.9% WI on 1 Orange Basin block
- • Needs to raise $50M for exploration well
- • Massive dilution: Issues 500M shares at $0.10 = 5x dilution
- • Single well risk: If dry, company worth $0
- • If discovery: 32.9% of 2B barrels = 658M barrels = $6.58B value
- • But existing shareholders diluted 83% (own only 17% post-raise)
Option B: Carried Interest Portfolio
- • Company holds 5% CI on 3 Walvis blocks + 20% CI on 1 Luderitz block
- • Capital requirement: $0 for exploration phase
- • No dilution: Existing shareholders own 100%
- • Diversified risk: 4 wells across 3 basins (not just 1)
- • If 1 discovery: 5% of 1.7B barrels = 85M barrels = $850M value
- • Existing shareholders own 100% = $850M / 100M shares = $8.50/share
- • vs Option A: $6.58B x 17% ownership = $1.12B / 600M shares = $1.87/share
Winner: Carried Interest (4.5x better per-share value + zero capital risk)
When to Choose Working Interest vs Carried Interest
Choose Working Interest When:
- ✅ You have strong balance sheet ($50M+ cash)
- ✅ You want operator control
- ✅ Block is highly de-risked (offsetting discoveries)
- ✅ You're in production phase (not exploration)
- ✅ You can absorb a $50M-100M dry hole
- ✅ You want maximum long-term economics
Choose Carried Interest When:
- ✅ You're a junior explorer (market cap <$50M)
- ✅ You want to avoid dilution
- ✅ Block is frontier/high-risk
- ✅ You're in exploration phase
- ✅ Partner is reputable operator (supermajor)
- ✅ You want portfolio diversification
Common Mistakes Investors Make
❌ Mistake #1: Assuming Working Interest = Better Returns
Many investors assume working interest is always superior because you own a larger percentage. But in frontier basins like Namibia:
- • A 32.9% working interest requiring $50M capital may deliver WORSE per-share returns than...
- • A 5% carried interest requiring $0 capital (due to dilution from equity raises)
The fix: Calculate per-share NAV after dilution, not just gross resource ownership.
❌ Mistake #2: Ignoring Carry Payback Terms
Not all carried interests are equal. Key terms to check:
- • Through what stage? (exploration only? through FID? through first production?)
- • Payback rate: Simple carry vs. carry + interest (typically 10-15% IRR)
- • Conversion terms: Does your carried % stay constant or reduce post-payback?
Example: A "5% carried through exploration" that converts to 2% after payback is very different from a "5% carried through production" at full percentage.
❌ Mistake #3: Overweighting Single Working Interest Position
Putting 100% of your Namibia allocation into one company with one working interest block = single-well risk. If that well is dry, you're done.
Better approach: Split allocation 50/50 between:
- • 1-2 working interest plays (high upside, concentrated positions)
- • 2-3 carried interest portfolio plays (diversified, lower risk)
❌ Mistake #4: Not Understanding Operator Quality
With carried interests, you have ZERO control. Your entire investment depends on operator competence.
Operator red flags:
- • Operator is also a junior explorer (not a supermajor)
- • No previous deepwater drilling experience
- • Underfunded (may delay drilling or farm out further)
- • Poor track record (check previous discoveries/dry holes)
Carried Interest Tax Implications
⚠️ Important: This is NOT tax advice. Consult a qualified accountant before investing.
U.S. Investors (IRS Rules)
- • Carried interests are generally treated as ordinary income when production begins
- • May qualify for long-term capital gains treatment if held 3+ years
- • Production revenue is passive income (may trigger passive loss limitations)
- • Foreign tax credits available if Namibia withholds taxes
Canadian Investors (CRA Rules)
- • Carried interest production income treated as business income (not capital gains)
- • May qualify for resource allowance deductions
- • Flow-through shares NOT available for foreign properties
- • Foreign tax credit available for Namibian withholding taxes
Key Takeaway
Carried interests can have complex tax treatment. The "infinite ROI" on exploration phase is real, but once production starts, expect ordinary income tax rates (not capital gains) in most jurisdictions.
FAQ: Carried Interest vs Working Interest
Q: Can you convert carried interest to working interest?
A: Yes, but only if the carry agreement allows it and you have capital. Example: You hold 5% CI. Operator drills successful well. You can often "pay to play" by covering your share of development costs to maintain your 5% as a working interest. If you don't pay, you typically stay carried but may convert to a smaller % (e.g., 5% → 2%) after carry payback.
Q: Which is more valuable: 5% carried interest or 2% working interest?
A: Depends on the stage. In exploration phase, 5% CI is more valuable (you invest $0 vs $2M-6M for 2% WI). In production phase, 2% WI is more valuable (you keep more net revenue after operating costs). Rule of thumb: CI is 2-3x more valuable than WI during exploration. WI is 1.5-2x more valuable than CI during production.
Q: What happens if the operator goes bankrupt?
A: With working interest, you're a direct licenseepartner - you can take over operatorship or bring in a new operator. With carried interest, you're at risk. If operator can't fund drilling, your CI may lapse or the block may be abandoned unless another partner steps up. This is why operator quality matters 10x more for CI holders.
Q: Can you sell carried interest?
A: Yes, but valuations are tricky. Pre-discovery, carried interests trade at low multiples (often 0.1-0.5x NPV). Post-discovery, CI can trade at 0.5-1.0x NPV. The lack of control and future carry payback obligations depress valuations vs working interest. However, CI in blocks adjacent to major discoveries can still fetch strong prices due to de-risking.
Key Takeaways: Carried vs Working Interest
- ✅ Working interest = pay your share, get your share. High capital, high control.
- ✅ Carried interest = partner pays, you get exposure. Zero capital, no control.
- ✅ Namibia context: $100M-300M wells make carried interests optimal for juniors
- ✅ ROI: Working interest = 100-200x if successful. Carried = infinite (invested $0).
- ✅ Best strategy: Hybrid portfolio - working interest where confident, carried where frontier
- ✅ Dilution: Working interest requires massive equity raises. Carried = no dilution.
- ✅ Risk: Working interest = lose $50M+ if dry. Carried = lose $0.
Continue Reading
Carried Interest Exposure to Namibia's Offshore Boom
Stamper Oil & Gas (TSX-V: STMP, OTC: STMGF) holds carried interests on PEL 98, 102, and 106 across Walvis and Luderitz Basins—zero capital obligation during exploration phase while maintaining full upside exposure to partner-funded drilling programs. Learn how to invest in STMP stock.
GET OFFSHORE NAMIBIA INVESTOR INFORMATION →