Peironnet v. Matador Res. Co.

• Decision Date: 01 August 2012
• Docket Number: No. 47,190–CA.,47,190–CA.
• Citation: 103 So.3d 445
• Parties: Cynthia Fry PEIRONNET and Elizabeth Fry Franklin, Plaintiffs–Appellants v. MATADOR RESOURCES COMPANY, Defendant–Appellee.
• Court: Court of Appeal of Louisiana — District of US

103 So.3d 445

Cynthia Fry PEIRONNET and Elizabeth Fry Franklin, Plaintiffs–Appellants

v.MATADOR RESOURCES COMPANY, Defendant–Appellee.

No. 47,190–CA.

Court of Appeal of Louisiana, Second Circuit.

Aug. 1, 2012.

Davidson, Jones & Summers by Randall S. Davidson, Allison A. Jones, Grant E. Summers, Shreveport, LA, Wm. Lake Hearne Jr., for Cynthia Fry Peironnet, Elizabeth Fry Franklin, Eleanor Baugnies de St. Marceaux, Cynthia F. Peironnet Family, L.L.C., and Small Fry, L.L.C., Plaintiffs/Appellants.

Phelps Dunbar LLP, Baton Rouge, LA, by H. Alston Johnson III, Daina Bray, Porter & Hedges by Eugene M. Nettles, M. Harris Stamey, Ottinger Hebert, L.L.C., Lafayette, LA, by Patrick S. Ottinger, David K. McCrory, for Petrohawk Properties, L.P. and Petrohawk Operating Company, Intervenors/Appellants.

Wiener, Weiss & Madison by John M. Madison Jr., Shreveport, LA, Charles E. Tabor, for Appellees, Prestige Exploration, Inc., Coastal Land Services, Inc. and Matador Resources Company.

Liskow & Lewis by Lawrence P. Simon, Jr., Lafayette, LA, Robert L. Theriot, Patton Boggs, LLP by D. Patrick Long, for Appellee, Matador Resources Company.

Jones, Walker, Waechter, Poitevent, Carrère & Denègre by Michael B. Donald, Nicole Duarte, for Appellees, Chesapeake Operating, Inc. and Chesapeake Louisiana, LP.

Before STEWART, CARAWAY and MOORE, JJ.

CARAWAY, J.

[2 Cir. 1]This case involves a large oil and gas lease affecting 1805.34 acres in the southern part of Caddo Parish. The lessors and lessee entered into an 18–month extension agreement in 2007, months prior to the announcement of the Haynesville Shale discovery. The extension of the 3–year primary term of the lease from 3 years to 4 1/2 years occurred at a time when a large portion of the lease was already developed by production in units for depths above the Haynesville Shale with only 168.95 acres of the lease experiencing no production activities in 2007 as the original primary term was ending. The lease contained a horizontal and vertical Pugh clause prompting the lessee's need for an extension of the primary term. The extension agreement which was executed described its application to the “full description of the lands covered” in the original lease. In the spring of 2008, plaintiffs sued the lessee to reform the extension agreement making it applicable only to the 168.95 acres and not to the deep rights below the unitized production for the remaining acreage of the original lease. Following certain preliminary partial summary judgment rulings by the trial court, some of which are now contested in this appeal, a jury decided the issue of reformation of the parties' act of extension, finding in favor of the lessee for the extension of the entire 1805.34 acres of the lease. For the following reasons, we affirm the judgment of the trial court in part and reverse in part, and remand the case for further proceedings.

[2 Cir. 2]Facts

The Plaintiffs,¹ Cynthia Fry Peironnet (“Peironnet”), Elizabeth Fry Franklin (“Franklin”) and Eleanor Baugnies de St. Marceaux (“Marceaux”) (hereinafter collectively the “Plaintiffs”), are owners of an undivided 5/6ths interest in large tracts of land in Caddo Parish. One co-owner with the Plaintiffs, Pamela Jeter Comegys (“Comegys”), who owns the remaining 1/6th interest, is not a plaintiff. On June 22, 2004, Plaintiffs and Comegys executed an oil and gas lease (hereinafter the “Lease”) to Prestige Exploration, Inc. (“Prestige”). The Lease was for a 3–year primary term and covered 1805.34 acres of land, comprising various tracts in the Elm Grove/Caspiana Field. The initial bonus for the Lease was calculated on a total acreage basis for $100 per acre. The Lease contained a Pugh clause in paragraph 7, which operated at the end of the primary term or thereafter, as set forth and discussed in detail below.

The ownership of two of the Plaintiffs, Peironnet and Franklin, comprising a two-thirds interest in the property, was managed by Regions Bank, whose representative acted on their behalf in the negotiations for the Lease. Prestige, which is an independent landman group, acquired the Lease on behalf of Matador Resources Company (“Matador”). On September 24, 2004, Prestige assigned the Lease to Matador.

The various tracts of the Lease extended into eight governmental sections of land. During the primary term of the Lease, Matador [2 Cir. 3]successfully explored and developed the Cotton Valley formation in five of the eight sections. The Cotton Valley formation was unitized by the Office of Conservation for sectional units, and the unit orders for the field reveal that the formation is described as extending generally to depths of approximately 10,300 feet.

Therefore, in the late spring of 2007 as the Lease approached the end of its primary term, the producing Cotton Valley wells were providing production royalties to Plaintiffs for their acreage in the five units. Yet, the Plaintiffs' tracts in three other nearby sections, Section 35, Township 15 North, Range 12 West, and Sections 31 and 29 in Township 15 North, Range 11 West (hereinafter “Sections 35, 31 and 29” respectively), were not yet developed by a Cotton Valley well in a unit for each of those sections. Matador desired to explore those undeveloped Cotton Valley units, but the operation of the Pugh clause presented an obstacle to its maintenance of the Lease in those sections. Since operations on the Plaintiffs' acreage in Section 29 did begin in June 2007, immediately prior to the end of the primary term, the 168.95 acres (hereinafter “the 168.95 Acres”) in Sections 35 and 31 was the only acreage where Cotton Valley operations had not occurred by June 22, 2007. This dispute concerns Matador's negotiations with Plaintiffs in the spring and summer of 2007 to extend its rights under the Lease by the execution of a lease extension agreement.

The Lease contains the typical habendum clause providing that at the end of the primary term on June 22, 2007, the Lease shall extend and be maintained “for so long thereafter as oil and/or gas is produced in paying [2 Cir. 4]quantities from the leased premises, or land pooled therewith as herein permitted.” Nevertheless, modifying this extended term of the habendum clause and providing for lease division after the primary term, the Pugh clause (paragraph 7) of the Lease provides, in pertinent part, as follows:

7. After the expiration of the primary term hereof, this lease shall remain in force and effect as to all of the lands covered thereby so long and only so long as Lessee shall conduct continuous drilling operations on the leased premises or on land pooled therewith as hereinafter provided. The term “continuous drilling operations” shall mean not more than ninety (90) days shall expire between the completion as a producer or the abandonment as a dry hole of a preceding well and the commencement of actual drilling operations for the next well.

If Lessee fails to conduct continuous drilling operations on the leased premises or on land pooled therewith, this lease shall thereupon terminate as to all of the leased premises, except as follows:

a) If Lessee has completed a well (or wells) on the leased premises or on land pooled therewith that is producing or capable of producing oil or gas in paying quantities and is included within a pooled unit (or units), then this lease shall continue in effect as to the lands covered hereby that is within the bounds of such unit (or units), but only to the depth specified herein;

* * * * * *

d) In each such above case the acreage around such oil or gas well so held is to be limited from the surface to the depth of 100 feet below the stratigraphic equivalent of the deepest depth drilled; provided, however, that if any governmental rule or authority prescribes or permits a spacing pattern for the orderly development of the field or allocates a producing allowable based in whole or in part on acreage per well, then any acreage retained hereunder may include as much additional acreage as may be so prescribed, permitted or allocated, but only to the depth herein specified;

* * * * * *

f) It is the intention of the parties hereto that upon the cessation of continuous drilling operations by Lessee upon the leased premises pursuant to this Paragraph 7, each such area containing a well producing or capable of producing oil or gas in paying quantities shall be treated as constituting a separate lease, and neither production from nor operations on any such area shall maintain this lease in force as to any other area.

[2 Cir. 5]Additionally, with the Pugh clause definition of “continuous drilling operations” employing the term “actual drilling operations,” an additional definition of “actual drilling operations” is provided in paragraph 8 of the Lease, as follows:

8. Whenever used in this lease, the words “drilling operations” or “operations” shall mean operations for and any of the following: actual pad construction, drilling, testing, completing, reworking, recompleting, deepening, side-tracking, plugging back or repairing of a well in search for or in an endeavor to obtain production of oil or gas. The words “actual drilling operations” shall mean having the bit in the ground and rotating same.

In May 2007, Matador began negotiations with Plaintiffs to extend the Lease beyond the primary term of June 22, 2007. At that time, the undeveloped Lease acreage in Sections 35, 31 and 29 would possibly be affected by the division of the Lease described in the Pugh clause, causing Matador to lose its lease rights for those sections. Furthermore, upon the occurrence of the condition triggering the Pugh clause, the undeveloped depths below the Cotton Valley formation in the producing sectional units (hereinafter the “Deep Rights”) would be released from the coverage of the Lease in accordance with subsection (d) of the Pugh clause.

The development facts which ultimately occurred for those three sections in 2007 were as follows:

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