The Hidden Risk of Unprofitable Working Interests in Legacy Portfolios

Why Visibility, Documentation, and Fiduciary Discipline Matter

Working interests are often misunderstood, even by experienced mineral owners. Unlike royalty interests, which generate income without ongoing responsibility, working interests come with both upside and obligation. Owners receive revenue from production, but they also share in the operating expenses of the well.

When production is strong, working interests can perform well. Over time, however, natural decline changes the equation. As wells age, production typically decreases while operating costs remain constant or increase. Eventually, some working interests become unprofitable, generating more expense than revenue.

Understanding this dynamic, and responding to it appropriately, is a critical responsibility for owners and fiduciaries alike.

The Difference Between Royalty and Working Interests

Royalty and Overriding interests are often compared to music and other types of royalties. Once a song is written and played, the royalty owner should receive income without further involvement. Working interests are different.

Owners of a working interest receive revenue from production, but they are also responsible for their share of operating expenses. These can include labor, electricity, transportation, equipment maintenance, and other costs required to keep the well operating based on the terms of the Lease.

This structure can work well early in a well’s life, but as production declines, expenses can begin to outweigh revenue.

How Unprofitable Working Interests Go Unaddressed

Many unprofitable working interests remain in portfolios longer than they should. In many cases, owners are aware that the asset is losing money, but they do not take action. Sometimes the losses appear manageable in isolation. Other times, the complexity of the asset discourages deeper review.

A common challenge is visibility. Revenue arrives as a royalty check, but expenses arrive separately as a joint interest billing invoice, or JIB, issued by the operator. These invoices are itemized and detailed, but without a system that ties expenses directly to the specific asset, it is difficult to evaluate performance accurately.

As a result, revenue and expenses are often processed independently. The relationship between the two is not always analyzed in a single view, leaving the true performance of the asset unclear.

“A lot of times the owners know the working interest is losing money, but they do not take action on it. They just keep hanging on,” added Walt Lotspeich, President, OG Trust Services.

Why Centralized Reporting Changes the Conversation

When revenue and expenses are brought together and tied to the underlying asset, the picture becomes much clearer. Centralized reporting allows owners and fiduciaries to see, in one place, which working interests are profitable and which are not.

This visibility is especially important for trusts and fiduciary accounts. Annual review processes that summarize revenue, expenses, and net performance can flag unprofitable working interests and bring them into focus. Revealing unprofitable working interests quickly provides more options for addressing them.

Identifying an unprofitable asset does not always mean it can be eliminated. Some working interests are difficult to sell. Others have limited market interest due to age, size, or declining production. Still, awareness is essential. Knowing what is happening allows fiduciaries to document oversight, evaluate options, and demonstrate prudent management.

When Selling Is Not Straightforward

Unprofitable working interests are often difficult to sell, especially if they have been unprofitable for long periods of time. Few buyers are interested in acquiring assets that consistently lose money. In many cases, the only party that may have interest is the operator of the well.

Operators may be willing to absorb a small working interest because increased ownership can improve their operational efficiency and economies of scale. In some situations, conveying the interest back to the operator may not generate proceeds, but it can stop ongoing expense exposure.

For fiduciaries, this step can be significant. Acting in the best interest of beneficiaries sometimes means reducing losses rather than pursuing unlikely gains. Even when an attempt to exit is unsuccessful, documenting that effort is an important part of fiduciary responsibility.

“A lot of these working interests are like a timeshare. You cannot always just get out of them, even when they stop making sense,” added Lotspeich.

The Fiduciary Perspective

Fiduciaries are not expected to control market outcomes. They are expected to demonstrate informed decision making, reasonable oversight, and documentation of actions taken.

Unprofitable working interests highlight the importance of performance tools that clearly show revenue, expenses, and net results. Without this visibility, fiduciaries risk appearing inattentive, even when losses were unavoidable.

Annual reviews, consolidated reporting, and clear documentation help ensure that decisions can be explained and defended over time. This discipline protects both beneficiaries and fiduciaries.

Shining a Light on What Is Owned

Unprofitable working interests are not uncommon, especially in older portfolios. By identifying these assets, understanding their impact, and documenting efforts to address them, owners and fiduciaries move from passive awareness to active stewardship. That shift is essential to responsible mineral management.