Keep the Well: Financing the Drilling Instead of Giving Away Most of It
By MercFinancial · Published 2026-10-20 · Updated 2026-10-21
Most small and mid-sized operators raise drilling capital from investors and keep 30% to 50% of each well. Financing exists for operators, and it costs interest, not most of the production. One well, two ways, with the numbers.
Financing for oil and gas operators exists, and it costs interest, not most of your production. Most small and mid-sized operators fund new wells the same way: raise the drilling capital from individual investors and hand them 50% to 70% of the well in return, for as long as it produces. A lender funds the same well, is repaid once from the well's own cash flow, and the production after that is yours. On the illustrative well below, the capital costs $1.37M of production under the investor promote and $146K of interest under a loan. That is strategic leverage to enhance returns and further mitigate and further minimize risk, and it is the trade this guide walks through.
What follows covers the promote most operators live with, one $2,000,000 well funded both ways with every figure shown, what changes for the operator who finances instead, the structures energy lenders actually offer, and what to have in hand before the first conversation. The example is hypothetical and illustrative; the structures are real.
"I had drilled eleven wells and owned forty percent of every one of them. The twelfth was the first one I kept, and it changed how I looked at the other eleven."
The Trade Most Operators Make
The structure is familiar. The operator has the lease, the geology and the ability to drill, but not the $2,000,000 the well costs. Accredited investors fund 100% of the cost in exchange for 60% of the working interest; the operator is carried for the other 40%. Investors get a pro rata share of their 60%: an investor who puts up half the raise owns half of 60%, or 30% of the well. Nobody writes a check back to anyone. The well pays everyone out of production for as long as it produces.
The promote is not a bad structure. It funds wells that would not otherwise be drilled, and it puts the drilling risk on investors who chose to take it. But across a program of ten or a hundred wells it is, by a wide margin, the most expensive capital an operator will ever use, because the investors' share never ends. Operators use it for one of two reasons: they do not have the capital themselves, or they do not know that commercial financing exists for what they do. The second reason is fixable in one conversation.
One Well, Two Ways
Take a single $2,000,000 well. Under the promote, investors fund it for 60% and the operator keeps 40%. Under a loan, a lender funds it at an illustrative 12%, and all of the well's cash flow goes to the lender until the loan is retired. The well produces the same $5,621,981 of net cash flow over ten years either way, and the $2,000,000 of capital is returned out of that cash flow either way: to the investors inside their 60%, or to the lender as principal. The difference is what the capital costs.
| Raise it from investors | Finance it through a lender | |
|---|---|---|
| Working interest you keep | 40% of the well | 100% of the well |
| The $2,000,000 | Investors fund it; it comes back to them out of their 60% | The lender funds it; the well repays it by month 16 |
| What the capital costs you | 60% of net cash flow for the life of the well: $1,373,189 above the $2,000,000 returned | Interest of $145,809, then nothing |
| Ten years, one well | Investors receive $3,373,189; you keep $2,248,792 | Lender receives $2,145,809; you keep $3,476,172 |
| What comes with it | A private offering, subscription documents, distributions, K-1s and investor calls, every well, every year | One lender, one statement, one payoff |
The gap in what the operator keeps, $1,227,379, is exactly the difference between the two costs of capital: the investors' $1,373,189 of profit against $145,809 of interest. The promote costs roughly 9.4 times what the loan does, on one well. Multiply by the program.
One modeled well on stated assumptions: drilling and completion cost $2,000,000; initial rate 175 barrels of oil per day declining hyperbolically (b = 1.0, 100% nominal initial decline), 153,166 barrels over ten years; realized oil $65 per barrel held flat, gas excluded; 75% net revenue interest; lease operating expense $7,500 per month plus $3.00 per barrel; severance and ad valorem taxes 6.5% of revenue; well-level payout month 15. Lender case: $2,000,000 at 12% with all well cash flow applied to the loan until retired. Actual production, prices, costs, timing and cash flow vary widely and may be materially lower; a well may fail to produce; borrowed funds must be repaid with interest regardless of well performance. Advance rates depend on production, collateral and operator history, and many programs blend a facility with equity.
What Changes When You Finance the Drilling
- You keep the well. A loan is repaid once. A promote pays out for twenty years.
- Cheaper capital by a wide margin. On the illustrative well, $146K of interest replaces $1.37M of production handed to investors above their capital.
- A program you can scale. Each well you keep adds proved producing reserves, and proved production is what lenders advance against for the next well. The borrowing base grows with the program instead of being given away with it.
- Tax efficiency stays with you. Deductions for intangible drilling costs and depletion follow the working interest you keep, and the interest you pay is generally deductible. Eligibility and limits depend on your circumstances; confirm with your tax adviser.
- Fewer investor obligations. No private placement, no investor reporting, no partners to manage on every well, no fundraising calendar between the lease and the rig.
- Investors where you choose them. Many operators blend a facility with a smaller raise on selected wells and still keep far more of the program. The trade-offs between a partner and debt are laid out in joint venture partner or debt.
The Structures Energy Lenders Offer
None of these is exotic. They are the standard tools of energy credit, placed with commercial banks and private energy lenders, and most small operators have simply never been shown them.
| Structure | What it does | Best fit |
|---|---|---|
| Reserve-based loan | A borrowing base against proved producing reserves, redetermined as production grows | Operators with existing production to lend against |
| Drilling and development facility | Capital committed to a program, drawn well by well as AFEs are approved | A defined program with strong offset results |
| Well-secured advance or AFE financing | Funding for one well or completion, repaid from that well's production | A single well or completion with a clear payout case |
| Acquisition financing | Debt for producing properties and leasehold, underwritten on the acquired cash flow | Buying production rather than drilling it |
| Equipment, water and midstream | Rigs, compressors, tank batteries, disposal wells and gathering, by loan or lease | Infrastructure the program needs |
| Working capital and JIB factoring | Lines of credit, and joint interest billings turned into cash while partners pay | Operators carrying slow-paying non-operators |
How the first two work in detail, and what a borrowing base will and will not credit, is covered in how reserve-based lending works and drilling and completion financing for small operators. Operators buying production rather than drilling it should read financing an acquisition of producing wells; operators carrying partners can convert billings to cash through JIB factoring.
What a Lender Needs to See
An operator with producing wells is a reserve story: the lender advances against proved developed producing reserves, and the drilling program is funded from the facility as the base grows. An operator with little or no production is a development story: the lender underwrites the program, the offset results and the operator's history, and advances on each well as its AFE is approved. Knowing which story you are telling before the first call saves weeks.
Either way the file looks similar: the drilling program or AFE, production history and lease operating statements on existing wells, a reserve report if one exists, the operator's track record on offset wells including how actual costs compared with AFEs, hedging position, a sources-and-uses budget, and entity and personal financials. The full list is in what oil and gas lenders look for. An operator who assembles that file once can respond to the next lease, the next AFE and the next acquisition in days.
Lenders rarely fund 100% of a first well for an operator with no production. The realistic structure for a young program is often a facility sized to what the lender will advance, with a smaller investor raise covering the balance. Even then the operator keeps far more of the program than a 60/40 promote on every well, and each well that pays out moves the next one further toward the lender.
Where MercFinancial Fits
MercFinancial is a commercial funding brokerage in Houston, Texas, with an oil and gas funding desk. We are a broker, not a lender, and we do not promise approval or terms. On an operator request we establish first whether the file is a reserve story or a development story, then place it across the energy lenders in our network of more than 160 wholesale sources, including the commercial banks and private energy lenders that most operators never reach. A thirty-minute call with a funding specialist tells you plainly what lenders will advance against today, what they would need to see to advance more, and which structure fits the program. If the answer is a blend of lender capital and a smaller raise, we say so.
Our oil and gas funding page outlines the programs we place. We do not give legal or tax advice; questions about securities, investor agreements or the tax treatment of your interests belong with your attorney and your tax adviser.
Frequently Asked Questions
Can a small oil and gas operator get a loan to drill a well?
Often, yes. An operator with producing reserves can usually fund drilling from a reserve-based facility as the borrowing base grows. An operator with little production is underwritten as a development program on the offset results and the operator's history, and may be offered a facility that funds part of each well, with equity covering the rest. Every request is subject to the lender's underwriting and credit approval.
How much does an investor promote really cost an operator?
Whatever share of the well the investors receive above the return of their capital, for the life of the well. On the illustrative $2,000,000 well, investors funding 100% of cost for 60% receive $3,373,189 over ten years, of which $1,373,189 is profit above their capital. A loan on the same well costs $145,809 of interest. The figures are hypothetical, but the shape of the comparison is the same on any producing well.
What is strategic leverage for an oil and gas operator?
Using lender capital, repaid once from the well's own cash flow, in place of investor capital that takes a permanent share of production. It enhances returns because the operator keeps the well, and it reduces risk to the program because each well kept adds proved production to borrow against, with fewer investor obligations to carry. The loan is still an obligation that must be repaid whether or not the well produces, so it has to fit the program's cash flow.
Does financing the drilling change the tax treatment?
The deductions for intangible drilling costs and depletion follow the working interest, so the operator who keeps 100% of the well keeps the deductions that a promote would have passed to investors, and interest paid is generally deductible. Eligibility, limits and timing depend on the operator's circumstances and current law; confirm with your tax adviser.
Can an operator use both a lender and investors?
Yes, and many do. A facility sized to what the lender will advance, with a smaller raise on selected wells, keeps far more of the program than a promote on every well. The right mix depends on existing production, the lender's advance rate and how much of the program the operator is prepared to share.
What should an operator bring to a first funding conversation?
The drilling program or AFE, production history on existing wells, a reserve report if one exists, the operator's history on offset wells, hedging position, a sources-and-uses budget and entity and personal financials. With that in hand a specialist can usually say within one conversation which structures typically fit.
Find out what your program qualifies for. Operators drilling one well or planning a hundred. A funding specialist reads the program, the production and the operator history together and matches the request across 160+ wholesale lenders, including the energy lenders most banks do not offer. Stephanie, our AI lending assistant, pre-qualifies in 2-3 minutes with a soft credit pull that won't affect your score, or book a free 30-minute call with a funding specialist at (830) 587-5022.
Get Pre-Qualified with Stephanie Book a Free 30-Minute CallMercFinancial is a commercial funding brokerage in Houston, Texas. MercFinancial is a broker, not a lender: every loan is made by a third-party lender, every request is subject to that lender's underwriting and credit approval, and advance rates, amounts, interest rates, terms, fees, collateral and guaranty requirements vary by lender and borrower and are not guaranteed. Nothing here is a commitment to lend or an offer of credit. Financing is for business purposes only. The well example is hypothetical and illustrative, built on the stated assumptions; actual production, prices, costs, timing and cash flow vary widely and may be materially lower, a well may fail to produce, and borrowed funds must be repaid with interest regardless of well performance. Tax treatment of drilling costs, depletion and interest depends on the operator's circumstances and on current law, which may change. This article is educational only and is not legal, tax, accounting or investment advice.