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Coverting a “Fixed” to a “Floating” NPRI: What (If Anything) Does ConocoPhillips v. Hahn Add to the Conversation?

dormant mineral

 
In ConocoPhillips Co. v. Hahn,12024 Tex. LEXIS 1180. the Supreme Court of Texas addressed whether a “fixed” nonparticipating royalty interest (“NPRI”) was later converted to a “floating” NPRI.2A “fixed” or “fractional” NPRI is a free royalty that conveys a fixed share of production and does not change depending on the royalty set forth in an oil and gas lease. A “floating” or “fraction of” royalty will vary depending on the current or future lease royalty. The court weighed two possible means of this conversion: (i) a lease ratification; and (ii) a stipulation of interest. The Hahn court holds that a properly executed stipulation of interest can (and did) convert an NPRI from fixed to floating.

As the court’s decision reflects, once an NPRI has been properly created or adjudicated as fixed or floating it will generally retain this characteristic for its life. However, the interested parties may later clarify or alter the NPRI calculation by agreement. Although the takeaway is straightforward, this convoluted case has floated (much like its subject NPRI) through the court system since 2016.

I. Background & the Gips Deed

Kenneth Hahn (“Hahn”) owned all of the surface interest and an undivided 1/4 mineral interest in 37.07 acres in Dewitt County, Texas. In 2002, Hahn conveyed all of his right, title, and interest in said 37.07 acres to William and Lucille Gips (the”Gipses”) through a warranty deed (the “Gips Deed”). The Gips Deed reserved to Hahn a term NPRI for a period of fifteen (15) years under the following provision:

SAVE AND EXCEPT [that] there is hereby reserved unto [Hahn], his heirs and assigns, an undivided one-half (1/2) non-participating royalty interest in and to all of the royalty [Kenneth] now owns, (same being an undivided one-half (1/2) of [Hahn’s] one-fourth (1/4) or an undivided one-eighth (1/8) royalty) in and to all of the [oil and gas] royalty. . .32024 Tex. LEXIS 1180, at 3.

In 2010, the Gipses signed an oil and gas lease (the “Gips Lease”) with Burlington Resources Oil & Gas Co., LP (“Burlington”), a subsidiary of ConocoPhillips Co. (“Conoco”). The Gips Lease provided for a one-fourth (1/4) royalty, and gave Burlington the right to pool the Gipses acreage. The Gips Lease also required Burlington to “obtain ratification of [the] lease by all holders of outstanding royalty” prior to pooling. A year later, the Gipses and Hahn ratified the lease.

Presumably based on the “double fraction” language of the NPRI reservation in the Gips Deed, a question arose as to the method of calculating Hahn’s NPRIThere appear to be three possible calculations: (i) a fixed 1/8 NPRI; (ii) a floating 1/2 of future lease royalty; or (iii) a floating 1/8 (1/2 of 1/4) of future lease royalty.4Whether Hahn owed a full 1/8 (1/2 of 1/4) NPRI, or a lesser 1/32 (1/2 of 1/4 of 25%) NPRI was of critical interest to both Burlington/Conoco and the Gipses. A full 1/8 NPRI would be problematic for both the Gipses and Conoco as it would not only absorb the Gipses’ 1/16 landowner royalty, but Conoco would in theory have to account for the <em>additional</em> 1/16 royalty payment out of its net revenue interest (diluted for pooling). In 2011, Conoco approached Hahn with a stipulation of interest (the “2011 Stipulation”) to clarify the interestThe 2011 Stipulation provided that:

For an in consideration of the premises, and other valuable considerations . . . each of the undersigned does hereby acknowledge, stipulate and agree that it was the intent of the parties in the [Gip Deed] that the interest reserved was a one-eighth (1/8) “of royalty” for a term of 15 years from June 9, 2003 (emphasis added).

To effectuate the purposes of this Stipulation of Interest, each of the parties hereto does hereby grant, bargain, sell, convey, quitclaim and deliver unto each of the other respective parties any interest in the Subject Interest (as herein stipulated) necessary to vest in each of said respective parties the interest set opposite their name above . . .52024 Tex. LEXIS 1180, at 7.

Conoco subsequently pooled this acreage into the “Maurer Unit B,” and sent Hahn a division order crediting him with a fixed 1/8th NPRI. A representative of the company later contacted Hahn and told him that the division order was incorrect, and that Conoco did not believe he owned any interest in the pooled acreage. Hahn sued, seeking a declaratory judgment that he owned a 1/8 fixed NPRI. The trial court instead ruled that Hahn owned a floating 1/8 of the landowner’s royalty in any future oil and gas lease based on the 2011 Stipulation, teeing up Hahn’s first appeal. 

II. First Appeal: Hahn v. Gips62018 Tex. App. LEXIS 1098 (Tex. App.—Corpus Christi – Edinburg 2018, pet. denied).

In his first appeal, Hahn argued the trial court erred by giving effect to the 2011 Stipulation, which he regarded as having failed as a conveyance. The court of appeals agreed with Hahn, holding that the Gips Deed unambiguously reserved to Hahn a fixed 1/8 NPRI. The court of appeals also held that the 2011 Stipulation was inadmissible as extrinsic evidence outside the four corners of the Gips Deed. The Supreme Court denied Conoco’s petition for review in this first appeal. 

III. Back in the Trial Court

On return to the trial court, Conoco argued that even if the Gips Deed created a fixed 1/8 NPRI and the 2011 Stipulation was inadmissible, Hahn agreed to convert his fixed NPRI to floating by ratifying the Gips Lease. Central to this novel argument was whether an NPRI owner executing a lease ratification adopts all lease terms, or whether a ratification is generally a consent to pooling only. If the NPRI owner ratifies all provisions — including the royalty provision — Conoco’s position is that the NPRI owner consents to having his interest diluted by the landowner royalty. The trial court agreed with Conoco, once again holding that Hahn had converted his fixed NPRI to a floating NPRI. However, this time the trial court’s reasoning was based on the ratification as opposed to the 2011 Stipulation. Hahn appealed again. 

IV. Second Appeal: Hahn v. ConocoPhillips7698 S.W.3d 274 (Tex. App.—Corpus Christi – Edinburg 2022, pet. filed).

In Hahn’s second appeal, the appellate court again reversed the decision of the trial court, holding that the Gips Lease ratification did not convert Hahn’s NPRI from fixed to floating. The court of appeals also doubled down on its holding that the 2011 Stipulation could not be considered because it violated the four corners rule.

In once again holding that the Gips Deed created a 1/8 fixed NPRI, the court of appeals also underscored the fact that the 2011 Stipulation issue had been presented to and rejected by the Supreme Court when it denied a petition for review in Hahn v. Gips. This time around, the Supreme Court granted Conoco’s petition for review.

V. The Supreme Court Weighs In82024 Tex. LEXIS 1180.

The Supreme Court first “assumed without deciding” that the Gips Deed had reserved a fixed 1/8 NPRI in favor of Hahn. Displaying a degree of skepticism in this calculation, the court noted that “neither party has asked us to disturb this holding or the court of appeals’ judgment in [the First Appeal] as part of our review of its decision in [the Second Appeal].” The original intent of the Gips Deed, however, became a moot point as the Supreme Court then held that the 2011 Stipulation should have been considered, and it created by agreement a floating NPRI equal to 1/8 of future lease royalties.

The Gips Lease Ratification Did Not Convert the NPRI

First, the court held that the ratification of the Gips Lease did not convert Hahn’s NPRI from fixed to floating. In ratifying the Gips Lease, Hahn agreed to have his fixed 1/8 NPRI reduced by the tract participation factor his lands contributed to the Maurer Unit B, but not to have his interest further diminished by the 1/4 landowner royalty.

Pooling in Texas effects a cross-conveyance of interests such that each pooled owner owns an interest in the unitized tract in the proportion their contribution bears to the unitized tract. However, because an NPRI is not leasable (i.e., the NPRI owner has no right to negotiate or execute a lease) Texas law holds that his interest cannot be diluted by pooling absent his consent. This consent can take the form of ratifying the lease, ratifying a pooling agreement, or sometimes from accepting diluted royalties from the pool. Note that when ratifying a lease, an NPRI owner should exercise caution, as any lease provision that can apply to the NPRI may be binding.

The Supreme Court holds here that a lease’s royalty provision generally will not apply to an NPRI based on the different nature of the property interests. An NPRI is a fractional non-possessory interest and not part of the mineral fee itself like a landowner royalty. Therefore, ratifying a lease does not automatically dilute the NPRI by the landowner royalty. The royalty set forth in the Gips Lease does not affect Hahn’s interest. 

The 2011 Stipulation Did Convert the NPRI

Second, the Supreme Court held that the court of appeals erred in excluding the 2011 Stipulation. Although the 2011 Stipulation may have been inadmissible to interpret the “unambiguous” Gips Deed, it stands alone as a new and separate agreement enforceable on its own terms. The 2011 Stipulation included words of present grant, cross-conveyance language, and a recital of new consideration paid. Stipulations of interest, per the court, are akin to settlement agreements — which are highly favored in the law and as a means of amicably resolving doubts and preventing lawsuits.

The court also rejected Hahn’s arguments that the 2011 Stipulation was unenforceable due to insufficient legal descriptions and various other technical issues. It met with the requirements of both the Statute of Conveyances9Tex. Prop. Code § 5.021. and the Statute of Frauds.10Tex. Bus. & Com. Code § 5.021.

VI. Conclusion: This is Why Title Examiners Love Stipulations of Interest

This case serves as a reminder that a properly executed stipulation of interest, with words of present grant, cross-conveyance, and a recital of new consideration paid, is a powerful tool for clearing land and mineral titles. A stipulation executed by all necessary parties can fix or clarify any number of title issues, and even transmogrify an NPRI from fixed to floating. This is the reason that stipulation of interest is a perennial favorite curative requirement among title examiners. With regard to NPRIs specifically, in most cases a stipulation of interest will be the most appropriate vehicle for modifying or clarifying whether it is fixed or floating.

Hahn further illustrates that when an NPRI owner ratifies an oil and gas lease, the general presumption is that he is consenting to pooling only. However, NPRI owners should be cautious about broad blanket ratifications of an oil and gas lease if their intent was only to consent to certain parts. Unusual or custom lease provisions could conceivably alter an NPRI if the ratification is too broad. For example, an NPRI owner who is only consenting to the pooling of his interest might expressly limit his ratification or style it as a “consent to pooling.” Otherwise, it may be argued that that he has conscripted his interest to other lease provisions which may or may not be beneficial and which might include, e.g., the calculation of his interest (as argued in Hahn), provisions regarding the deduction of post-production costs, separate lease or retained acreage provisions, the effect of unsigned division orders, or the timing of royalty payments.11<em>See generally</em>, Christopher S. Kulander, <em>Down Step by Step-Ratification of Oil and Gas Leases by Royalty Interests in Texas</em>, 73 SMU L. REV. 251 (2020).

 

  • 1
    2024 Tex. LEXIS 1180.
  • 2
    A “fixed” or “fractional” NPRI is a free royalty that conveys a fixed share of production and does not change depending on the royalty set forth in an oil and gas lease. A “floating” or “fraction of” royalty will vary depending on the current or future lease royalty.
  • 3
    2024 Tex. LEXIS 1180, at 3.
  • 4
    Whether Hahn owed a full 1/8 (1/2 of 1/4) NPRI, or a lesser 1/32 (1/2 of 1/4 of 25%) NPRI was of critical interest to both Burlington/Conoco and the Gipses. A full 1/8 NPRI would be problematic for both the Gipses and Conoco as it would not only absorb the Gipses’ 1/16 landowner royalty, but Conoco would in theory have to account for the <em>additional</em> 1/16 royalty payment out of its net revenue interest (diluted for pooling).
  • 5
    2024 Tex. LEXIS 1180, at 7.
  • 6
    2018 Tex. App. LEXIS 1098 (Tex. App.—Corpus Christi – Edinburg 2018, pet. denied).
  • 7
    698 S.W.3d 274 (Tex. App.—Corpus Christi – Edinburg 2022, pet. filed).
  • 8
    2024 Tex. LEXIS 1180.
  • 9
    Tex. Prop. Code § 5.021.
  • 10
    Tex. Bus. & Com. Code § 5.021.
  • 11
    <em>See generally</em>, Christopher S. Kulander, <em>Down Step by Step-Ratification of Oil and Gas Leases by Royalty Interests in Texas</em>, 73 SMU L. REV. 251 (2020).
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