Judice v. Mewbourne Oil Co.

• Decision Date: 25 April 1996
• Docket Number: No. 95-0115,95-0115
• Citation: 939 S.W.2d 133
• Parties: 39 Tex. Sup. Ct. J. 533 Samuel Joe JUDICE and Kathryn Tandy Thompson, Petitioners, v. MEWBOURNE OIL COMPANY, et al., Respondents.
• Court: Texas Supreme Court

Page 133

939 S.W.2d 133

39 Tex. Sup. Ct. J. 533

Samuel Joe JUDICE and Kathryn Tandy Thompson, Petitioners, v. MEWBOURNE OIL COMPANY, et al., Respondents.

No. 95-0115.

Supreme Court of Texas.

April 25, 1996.

Appeal from Amarillo Court of Appeals, Seventh Judicial District; H. Bryan Poff, Jr., Justice.

D. Patrick Long, Brad Rockwell, Dallas, for Petitioners.

Thomas R. Dixon, Jr., Kevin P. Parker, Amarillo, for Respondents.

OWEN, Justice, delivered the opinion of the Court, in which PHILLIPS, Chief Justice, HECHT, CORNYN, ENOCH, SPECTOR and BAKER, Justices, join.

The question in this case is whether post-production compression costs can be allocated to royalty owners under the terms of certain oil and gas leases and division orders. We hold that the royalty provisions in the leases and one of the division orders at issue in this case are unambiguous and that the royalty owners are required to bear their proportionate share of post-production compression costs. Accordingly, the judgment of the court of appeals is reversed in part. 890 S.W.2d 180.

Samuel Joe Judice and Kathryn Tandy Thompson (the "Judices") are royalty owners under three oil and gas leases. Mewbourne Oil Company and others (collectively, "Mewbourne") hold the working interest under these leases. The Judices brought suit for damages, asserting among other claims that Mewbourne had improperly paid royalties on gas by deducting the Judices' pro rata share of post-production compression costs from the proceeds from the sale of the gas. The Judices also requested a declaratory judgment that the leases had terminated as to a certain formation because of cessation of production.

Following a jury trial, the trial court awarded the Judices the compression costs that Mewbourne had deducted. The trial court found in favor of Mewbourne, however, on the termination issue, concluding that as a matter of law, the leases had not terminated. The Judices appealed and Mewbourne asserted cross-points of error. The court of appeals affirmed the judgment of the trial court in all respects, and all parties have sought review in this court.

From 1983 until the Judices filed suit in 1989, the parties agree that division orders governed the payment of royalty. The Judices do not contend that the division orders were ineffective to the extent they conflicted with the leases. Nor do they seek to hold Mewbourne liable for any benefit it retained when it paid royalties based on the division orders, rather than the leases. See Gavenda v. Strata Energy, Inc., 705 S.W.2d 690, 692-93 (Tex.1986). Accordingly, we look only to the division orders to determine Mewbourne's royalty obligations prior to the time suit was filed. The parties agree that the filing of suit revoked the division orders and that the royalty provisions in the leases govern from that time forward. See Exxon Corp. v. Triphene Middleton, 613 S.W.2d 240, 249-51 (Tex.1981).

We turn first to a construction of the leases. The royalty clause in one of the leases differs materially from the other two, and Mewbourne concedes that under that lease, it may not deduct post-production compression charges. ¹ The remaining two leases contain the following royalty provision:

In consideration of the premises the said Lessee covenants and agrees:

* * * * * *

2. To deliver to the credit of Lessor ... three thirty-seconds (3/32) ... of the market value at the well of all gas produced, and saved from said leased premises.

The trial court and the court of appeals concluded this provision was ambiguous. The jury found that the parties intended that royalties were to be based on the price received by Mewbourne without a deduction for compression charges. We hold that the provision is unambiguous and the jury's finding regarding the parties' intent should be disregarded as to these two leases.

The royalty is to be determined based on "market value at the well." This phrase means value at the well, net of any value added by compressing the gas after it leaves the wellhead. See Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118, 126-27 (Tex.1996), decided today. See also Texas Oil & Gas Corp. v. Hagen, 683 S.W.2d 24, 28-29 (Tex.App.--Texarkana 1984), writ dism'd as moot, 760 S.W.2d 960 (Tex.1988). Mewbourne is entitled to allocate to the Judices their proportionate share of the reasonable cost of post-production compression under these leases. ²

A more complicated question is presented by the division orders. There are three at issue. The division orders covering the Judice # 1 well and the Judice # 2 well provided in pertinent part:

2. Settlement for gas sold shall be based on the gross proceeds realized at the well by you [the Judices]. For gas used off the leases, settlement shall be based on market value at the well.

The division order covering the Judice # 3 well was a typed document with handwritten deletions in the royalty clause. The language deleted is shown in brackets, as follows:

2. Settlement for gas sold shall be based on the net proceeds realized at the well by you, [after deducting any costs incurred in compressing, treating, transporting and/or dehydrating the gas for delivery. If the gas is processed in or near the field where produced, settlement shall be based on the net proceeds realized at the well, as determined by the agreement between the producer and processor, or, in the absence of such an agreement, the same basis as settlement with other producers of gas of like kind and quality processed at the same plant. For gas used off the lease, settlement shall be based on market value at the well.]

The gas produced under each of the leases was sold off the leased premises to a third party purchaser, with the exception of relatively small volumes used off the lease as compressor fuel.

Mewbourne contends that the division orders expressly allowed it to deduct compression costs. In the trial court, Mewbourne contended in the alternative that the division orders are ambiguous. However, in this Court, Mewbourne no longer asserts any ambiguity. Mewbourne affirmatively contends that the division orders are unambiguous and argues that since there was no finding in the trial court that Mewbourne breached the division orders, the trial court erred in entering judgment for the Judices on this issue.

We conclude that the division orders covering the Judice # 1 and # 2 wells are ambiguous with regard to gas sold. The term "gross proceeds" means that the royalty is to be based on the gross price received by Mewbourne. The use of the term "at the well" indicates just the opposite, that the royalty is to be based on its value "at the well." See generally Martin v. Glass, 571 F.Supp. 1406, 1411-15 (N.D.Tex.1983), aff'd, 736 F.2d 1524 (5th Cir.1984) (the phrase "net proceeds" contemplates deductions). As discussed above, value at the well means the value of the gas before it has been compressed and before other value is added in preparing and transporting the gas to market. See Heritage Resources, 939 S.W.2d at 126-27. There is an inherent conflict in the use of the two terms that renders the clause ambiguous. However, the division orders are not ambiguous with regard to gas used off the leases. The royalty is to be based on "market value at the well."

The Judices obtained jury findings that Mewbourne "accepted the division orders executed by the Judice family as setting forth the basis upon which royalties were to be paid." The trial court's judgment recites that this finding supports a judgment in favor of the Judices for the value of the compression charges that were deducted. Mewbourne concedes that one element of the Judices' claim was submitted and that this would otherwise support the judgment under Texas Rule of Civil Procedure 279. ³ However Mewbourne argues that the finding is not "necessarily referable" to the deduction of compression costs because it also supports a recovery by the Judices of the market value of gas used off the lease as compressor fuel. This contention is without merit. Regardless of the effect of this jury finding, other findings support the trial court's judgment. In response to broadly worded issues, the...