By: Megan R. Knell
On a number of occasions, courts have emphasized that words matter. The court in Jones Energy, Inc., et al. v. Pima Oil & Gas, L.L.C. took it a step further. While the Amarillo Court of Appeals took into account the words used, its analysis focused more specifically on the basic grammatical construction of such words for purposes of interpreting an assignment of an overriding royalty interest.
Prior to 1998, Spring Resources, Inc. (“Spring”) and Pima Oil & Gas, L.L.C. (“Pima”) entered into a Retainer Agreement by which Pima agreed to conduct geologic evaluations on Section 117, Block 41, H&TC Ry. Co. Survey, Hemphill County, Texas, as requested by Spring for acquisition purposes (the “Retainer Agreement”). The Retainer Agreement provided that Spring would assign to Pima an overriding royalty interest in exchange for its work under the terms of the Retainer Agreement. At the time the Retainer Agreement was executed, there were two existing vertical wells in Section 117: (i) the Charles H. Wright 1-117 well, which was producing from the A interval of the Granite Wash formation, and (ii) the Gracie 117-1 well, which was producing from various intervals in the Big Timber Creed Douglas Sand formation.
By Assignment of Overriding Royalty Interest dated June 9, 1999 (the “Assignment”), Spring assigned to Pima a 2.50% overriding royalty interest in and to certain leases, including a 1980 lease covering the existing vertical wells in Section 117 (the “ORRI”). Further, the Assignment provided that the ORRI would burden the assignor’s interest in “1) the Wright 117 unit well(s) producing on the lands described above at the time of acquisition by the Assignor, save and except the intervals of the formation(s) open to production in, and only in, the wellbore of the aforementioned well(s) [emphasis added]. . . .” Jones Energy, Inc. (“Jones”) subsequently acquired Spring’s interest in the leases and wells subject to the Retainer Agreement.
In 2011, a new horizontal well was drilled (the Gracie 117-1H well), which was completed in the Granite Wash formation underlying a portion of Section 117. In 2015, Pima demanded payment of overriding royalties allegedly owed to it on production from the Gracie 117-1H well pursuant to the terms of the Assignment. Pima argued that the exception language in the Assignment was limited to the two vertical wells in existence as of the date of the Retainer Agreement (the Charles H. Wright 1-117 and Gracie 117-1 wells), insofar only as to the formations from which they were producing on the date the parties entered into the Retainer Agreement, and thus it was entitled to an overriding royalty interest in production from the Gracie 117-1H well. Jones, however, argued that the exception language in the Assignment excluded all intervals from which the Charles H. Wright 1-117 well and the Gracie 117-1 well were producing as of the date of the Retainer Agreement, and the exception was not limited to production from the existing wells in those intervals. In other words, Pima argued that production from a certain wellbore was excluded, while Jones argued that production from a certain interval of a formation was excluded.
The court ultimately agreed with Jones and concluded that the Assignment excluded production from all intervals from which the wells in existence were producing as of the date of the Retainer Agreement. In reaching this conclusion, the court first recognized that the Assignment was made subject to the Retainer Agreement, and the Retainer Agreement would control in the event of a conflict between the Retainer Agreement and the Assignment. The Retainer Agreement provided that Pima would be assigned an ORRI on any properties acquired by Spring, “exclusive of producing zone(s) in the wellbore(s) of the then existing wells . . . .” The court explained that the word “zone” in the preceding sentence is a noun, and the phrase “in the wellbore” is a prepositional phrase modifying the words “producing zone.” As a result, the reference to the wellbore is simply the means by which to identify the excluded producing zones. Thus, the court remanded the case back to the trial court to determine the intervals of the formation that were open to production in the Charles H. Wright 1-117 and Gracie 117-1 wells at the time the parties entered into the Retainer Agreement. If the Gracie 117-1H well was producing from a formation from which the Charles H. Wright 1-117 and Gracie 117-1 wells were producing as of the date of the Retainer Agreement, Pima would not be entitled to an overriding royalty interest in production from the Gracie 117-1H well.
Parties to a conveyance are often laser-focused on the specific words being used. Jones Energy, Inc., et al. v. Pima Oil & Gas, L.L.C. is an important reminder that parties should not only pay attention to the words they use but also to the order in which they use them.