Cimarex Energy Co. v. Anadarko Petroleum Corp.

• Decision Date: 13 March 2019
• Docket Number: No. 08-16-00353-CV,08-16-00353-CV
• Citation: 574 S.W.3d 73
• Parties: CIMAREX ENERGY CO., Appellant, v. ANADARKO PETROLEUM CORP., Appellee.
• Court: Texas Court of Appeals

574 S.W.3d 73

CIMAREX ENERGY CO., Appellant,

v.ANADARKO PETROLEUM CORP., Appellee.

No. 08-16-00353-CV

Court of Appeals of Texas, El Paso.

March 13, 2019

(ATTORNEY FOR APPELLANT): Hon. Joe T. Sanders II, Sanders Bajwa LLP, 919 Congress Ave. Ste 750, Austin, TX 78701.

(ATTORNEY FOR APPELLEE): Hon. Guy S. Lipe, Vinson & Elkins L.L.P., 1001 Fannin Street, Ste. 2300, Houston, TX 77002-6760.

Before McClure, C.J., Rodriguez, and Palafox, JJ.

OPINION

GINA M. PALAFOX, Justice

Appellant, Cimarex Energy Co. (Cimarex) and Appellee, Anadarko Petroleum Corp. (Anadarko), were co-tenants on certain property located in Ward County, both of whom held leases giving each of them undivided fractional mineral interests on the same property. After Anadarko successfully completed drilling operations on two producing wells on the property, Cimarex sued Anadarko alleging it had failed to account for Cimarex’s share of the production. In June 2013, the parties entered into a settlement agreement requiring Anadarko to make a settlement payment for production from the two wells through May 2013, and to account to Cimarex monthly thereafter for its share of production. In August 2015, Cimarex filed the underlying lawsuit contending that Anadarko breached the Settlement Agreement when it failed to account monthly for Cimarex’s share of production. Both parties moved for summary judgment, with Cimarex contending that Anadarko breached the agreement as a matter of law, while Anadarko claimed that its obligation to make payments ceased because Cimarex’s lease had expired, and because Cimarex was therefore no longer a co-tenant with any interest in the property. The trial court granted Anadarko’s motion for summary judgment, but denied Cimarex’s cross-motion, and this appeal followed. We affirm.

BACKGROUND

Cimarex’s Interests

In December of 2009, Cimarex leased a fractional undivided 1/6th mineral interest in approximately 440 acres in Ward County, Texas, (the subject property) from the Estate of F. Kirk Johnson, III (the Cimarex lease).¹ The Cimarex lease contained a habendum clause, which provided for a primary term of five years, and a secondary term, stating that the lease remained in force after the primary term "as long thereafter as oil or gas is produced from said land or from land with which said land is pooled."² The lease was considered "paid-up" for the primary term, meaning that Cimarex was not required to commence drilling operations during that period of time, and was not required to pay any delay rentals to the lessor during the five years, regardless of whether it commenced operations or not.³ See generally ConocoPhillips Co. v. Koopmann, 547 S.W.3d 858, 874 (Tex. 2018) (recognizing that a "paid-up" lease is one under which all delay rentals bargained for are paid in advance, which maintains the lease during the primary term regardless of production). The Cimarex lease, however, specified that despite the fact that the five-year primary term was paid-up, this did not relieve Cimarex of "the obligation to pay royalties on actual production" during that time.⁴ It is undisputed that Cimarex did not drill a well or commence operations for drilling a well on the subject property during the primary term of the Cimarex lease, i.e., from December of 2009 until December of 2014.

Anadarko’s Interests

In the meantime, between 2007 and 2010, Anadarko acquired the balance of the mineral estate in the subject property from various prior lessees, ultimately obtaining the remaining undivided 5/6th fractional mineral interest in the subject property. In addition, Anadarko obtained an entire 6/6ths leasehold mineral interest in the 200-acre remainder of the same tract of land also owned by the Johnson Estate, immediately south of the subject property (the "Southern property").

In 2011 and 2012, the Texas Railroad Commission issued permits for Anadarko to commence drilling operations on two wells on the subject property: Murjo 1 and Murjo 2 (the Murjo Wells). The parties agree that no later than February 2012, cumulative sales from the Murjo 1 Well exceeded its cumulative drilling and operations costs, and the well continued to produce in paying quantities since that time. The parties also agreed that not later than December 2012, cumulative sales from Murjo 2 exceeded its cumulative drilling and operations costs, and the well continued to produce in paying quantities since that time.

In February 2012, Anadarko also commenced drilling operations on a third well on the Southern property, located near its southern border. Due to its proximity to the subject property, Anadarko sent Cimarex a Rule 37 notice of its intention to drill along the border of the property, but Cimarex did not object to the third well’s location.⁵ That well became fully operational on May 3, 2012.

In early 2011, F. Kirk Johnson, IV and Marsland Johnson succeeded the interests of the Johnson estate and became the new lessors of the Cimarex lease ("the lessors"). In August 2011, the lessors granted Petro-Land Group, Inc., two top leases covering the subject property.⁶ In June 2012, Anadarko succeeded the interests of Petro-Land Group by assignment and obtained its interest in both top leases.

The Property Dispute

On September 14, 2012, the lessors, having learned that drilling had begun on the subject property, sent an email to Cimarex demanding that it pay them for Cimarex’s proportionate share of royalties on the production. Thereafter, on September 21, 2012, Cimarex sent Anadarko a letter stating that it was aware that Anadarko had drilled and completed the three wells, without seeking its participation. In the letter, Cimarex indicated that it had previously asked Anadarko to "afford Cimarex the opportunity to join in the participation of the subject wells from inception," and that it was formally making that request, as well as requesting that the parties enter into a joint operating agreement for each of the subject wells. In addition, Cimarex, identifying itself as a "co-tenant with a carried working interest ... in the subject wells[,]" requested an immediate accounting of the "costs and revenues associated with each of the subject wells[.]"

It appears that Anadarko did not immediately provide accounting information to Cimarex, and in correspondence dated December 4, 2012, Cimarex made a second formal request for this information, noting that its lessors were being "inconvenienced" as Cimarex could not determine its proportionate share of the royalties it owed to them, without obtaining such information. In response, on January 2, 2013, Anadarko sent Cimarex a letter in which it recognized that Cimarex had a 1/6th interest in the minerals located on the subject property, describing Cimarex as a "non-participating co-tenant," and acknowledging that Cimarex was entitled to its "net share of proceeds after payout." Anadarko also provided Cimarex with information pertaining to the current payout status of each well, together with information regarding payment statements from the date of first sales for the second Murjo Well.

The First Lawsuit

On February 12, 2013, apparently after payments were not forthcoming, Cimarex filed its first lawsuit against Anadarko, alleging that the two parties were "tenants-in-common" on the subject property, with Cimarex owning an undivided 1/6th leasehold mineral interest, and Anadarko owning the remaining 5/6th leasehold mineral interest. In the lawsuit, Cimarex alleged that Anadarko had drilled two wells on the property, without Cimarex’s consent, and had refused Cimarex’s offer to participate in the cost of the drilling. Cimarex requested an accounting of the proceeds from the two wells in excess of the reasonable and necessary costs of production. Cimarex further estimated, based on sales statements, that Anadarko owed it approximately $3.5 million for the net proceeds from the first well, and an undetermined amount for the second well.

Attempts to Pool the Third Well

In the meantime, in December of 2012, Cimarex sent Anadarko a letter acknowledging that the third well was not located on the subject property but noting that it was drilled approximately one foot from the Cimarex lease line. Cimarex proposed the idea of pooling certain portions of the companies' respective leaseholds to form a pooled unit around the third well, referred to as the "Proposed Unit." Cimarex then made a "Voluntary Pooling Offer," suggesting that the two parties voluntarily pool all of their mineral interests within the boundaries of the Proposed Unit, sharing both "production and the costs" of the well. In response, Anadarko sent Cimarex a letter dated January 3, 2013, rejecting the offer, reminding Cimarex that it had previously provided it with a Rule 37 notice regarding the well’s location, and that Cimarex did not object to the location.

On February 6, 2013, Cimarex filed an application with the Texas Railroad Commission, seeking to force Anadarko to form a pooled unit around the third well, pursuant to the Texas Mineral Interest Pooling Act.⁷ In its application, Cimarex contended that the third well was "draining hydrocarbons from beneath Cimarex’s leasehold," and that in the absence of compulsory pooling, Cimarex would not be compensated for the drainage. Cimarex further alleged that it would be required to drill unnecessary wells in order to recover the same hydrocarbons, and that it would therefore be in the interests of both parties to create a pooling unit, so that each party could receive its respective fair share of hydrocarbons from the field.

The Settlement Agreement

In June 2013, Cimarex and Anadarko signed a confidential settlement agreement to resolve Cimarex’s first lawsuit and the forced pooling application (the Settlement Agreement). Under the terms of the Settlement Agreement, Anadarko agreed to an accounting for Cimarex’s share of production from the two wells on the subject property, with Anadarko agreeing to pay Cimarex for its 1/6th ...