Summary
The Texas Supreme Court considered how to calculate a production payment reserved in an assignment of four oil and gas leases after two of the leases expired. The court held that the production payment was carved separately from the respective leasehold interests and was proportionately reduced when the Cowden Leases terminated. The court reversed the court of appeals and rendered judgment that McDaniel Partners take nothing.
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Practice areas
Questions Presented
- Whether the unambiguous assignment reserved the production payment jointly from the cumulative interests conveyed under all four leases or separately from the interest attributable to each respective lease.
- Whether expiration of two underlying oil-and-gas leases extinguished the portion of the production payment attributable to those leases and permitted Apache to reduce the fractional production-payment rate from 1/16 of 35/64 of 7/8 to 1/16 of 3/64 of 7/8.
- Whether the production payment's fixed monetary and volumetric termination thresholds required the original fractional payment rate to remain unchanged after expiration of some underlying leases.
Holdings
- The assignment unambiguously reserved the production payment from the respective leasehold interests separately, rather than creating a joint burden on the four leases based on their original cumulative working interest.
- When a production payment is carved from a lessee's working interest, termination of the underlying lease extinguishes the production payment to the extent attributable to that lease, absent express language providing otherwise.
- After the Cowden leases expired, the applicable production-payment calculation was 1/16 of 3/64 of 7/8, not 1/16 of the original 35/64 of 7/8.
Key quotations
“Absent express language in the assignment to the contrary, we apply the general rule that “when an oil and gas lease terminates, the overriding royalty [or similar production payment] created in an assignment of the lease is likewise extinguished.”” (908)
“Applying that rule to the unambiguous language of this assignment, we conclude that the trial court rendered the correct judgment in the case.” (908)
Factual background
In 1953, Hugh W. Ferguson, Jr. assigned four oil-and-gas leases covering portions of two Upton County surveys to L.H. Tyson, reserving a production payment described as 1/16 of 35/64 of 7/8 of production. The assignment also provided that the payment would continue until specified monetary and volumetric amounts had been received. Approximately twenty years later, both Cowden leases expired for lack of production, leaving only the Peterman and Broudy lease interests, totaling 3/64, in effect. Apache, Tyson's successor, acquired additional nonassigned leases in the surveys and calculated the production payment using 1/16 of 3/64 of 7/8; McDaniel claimed the original 35/64 calculation remained applicable.
Procedural history
After two of four assigned oil-and-gas leases expired for lack of production, Apache calculated the reserved production payment using only the surviving 3/64 leasehold interest rather than the original 35/64 cumulative interest. McDaniel sued, and the trial court rendered a take-nothing judgment for McDaniel after concluding that the production payment was reserved separately from each lease and was extinguished to the extent attributable to the expired leases. The court of appeals reversed and remanded for damages and attorney's fees, holding that the assignment did not authorize a proportional reduction. The Supreme Court of Texas reversed the court of appeals and rendered judgment that McDaniel take nothing.