Chesapeake Exploration, L.L.C. v. Hyder

Chesapeake Exploration, L.L.C v. Hyder, Texas Supreme Court, January 29, 2016 Tex. LEXIS 94.

The Texas Supreme Court reissued its majority opinion, keeping the troubling dicta on “proceeds” leases.

The Texas Supreme Court issued its much awaited opinion on rehearing. Unfortunately, the majority opinion did not change. We say unfortunately because of dicta in the majority opinion relating to the royalty on gas production. The lease provides for a royalty of 25% “of the price actually received by Lessee” for all gas produced from the leased premises. The lease adds language that exempts the royalty from “all production and post-production costs and expenses.”

The troubling language in the opinion states: “The gas royalty in the lease does not bear postproduction costs because it is based on the price Chesapeake actually receives for the gas through its affiliate, Marketing, after postproduction costs have been paid. Often referred to as a ‘proceeds lease,’ the price-received basis for payment in the lease is sufficient in itself to excuse the lessors from bearing postproduction costs.” The Court then cites the provision stating that the gas royalty is to bear no post-production costs, which the Court states “has no effect on the meaning of the provision.”

We consider such dicta to be troubling since the Court appears to be stating that the words “price [or proceeds] actually received,” without more, means that no post-production costs cannot be deducted. As you will remember “market value at the well” has been interpreted by the Court in Heritage Resources, Inc. v. NationsBank, 936 S.W.2d 118 (Tex. 1996), to specifically allow such deductions. The Court specifically affirmed Heritage. We are concerned that this means that where the term proceeds is used without a definition of the location, no deduction of post-production costs will be allowed. In reading the dissent, which agreed with the majority on this point, the opinion holds that the language taken as a whole means, essentially “gross proceeds.” We have spoken to one lawyer who represents royalty interests and he believes a spate of royalty owner suits will be forthcoming.

We have successfully defended our first case in which royalty owners have claimed that Hyder prevents the deduction of post-production costs where the lease provides for “proceeds” – without further refining it to either gross proceeds or net proceeds. The trial court decision is being appealed to the 14th Court of Appeals.