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Happiness is Setting Clear Boundaries — Especially in Overriding Royalty Assignments

AUTHOR(s)

dormant mineral

 
Assignments of interests in oil and gas leases often incorporate by reference outside agreements. This can be a helpful shortcut to avoid including every lengthy and confidential provision that was drafted during negotiations (such as those in a purchase and sale or letter agreement), and can help resolve issues of intent should a dispute arise. However, when incorporating outside documents by reference, it helps to know what those documents actually say. Rock River Minerals, LP (“Rock River”) and Craddick Partners, Ltd. (“Craddick”) undoubtedly wish that this advice has been heeded by their predecessors in Rock River Mins., LP v. Pioneer Nat. Res. USA Inc.12024 Tex. App. LEXIS 7464 (Tex. App.—El Paso 2024, no pet.).

Rock River involved a disagreement over the meaning of the phrase “geographic boundaries” in Exhibit A to an assignment. Exhibit A referenced a separate unit agreement that only covered the Spraberry Formation. The specific issue in Rock River was whether this language coupled with the unit agreement limited the assignment to only the unitized formation. According to the El Paso Court of Appeals, the assignment covered all depths.

I. Background & the Cass Assignment

Michael A. Cass (“Cass”) owned a 2.125% overriding royalty interest as to all depths within the boundaries of the North Pembrook Spraberry Unit (the “Pembrook Unit”). The Pembrook Unit was subject to a Unit Agreement that unitized the Spraberry Formation only. In 1996, Cass executed an assignment of his overriding royalty interest in the Pembrook Unit (the “Cass Assignment”) to Parker & Parsley Development, L.P., which later became Pioneer Natural Resources USA, Inc. (“Pioneer”). The Cass Assignment included the following granting language:

“All right, title and interest of Seller in, to and under the Oil, Gas and Mineral Leases described on Exhibit A, including . . . [the] overriding royalty interest, and other interests in the lands which are described on Exhibit A . . .”

The description of the lands and leases in Exhibit A then stated:

Included herein are all lands from the surface of the earth to all depths located within the geographic boundaries of the [Pembrook Unit] as identified in the [Pembrook Unit Agreement] and Unit Operating Agreement . . . This conveyance covers and includes all oil and gas leases, royalty interests and mineral interests included within the above Unit, as to the lands included within such Unit, from the surface of the earth to all depths. . .” (emphasis added)

The Pembrook Unit Agreement in turn contained a map of the “Unit Area,” and defined the “Unitized Formation” as “that subsurface portion of the Unit Area commonly known as the Spraberry Formation, which is that source of supply designated by the Railroad Commission of Texas as the Spraberry Trend Area Field.” In 2016, Cass sold a portion of his override in the deeper Wolfcamp Formation to Rock River and Craddick.

After 12 Wolfcamp wells were drilled on the Pembrook Unit lands, a dispute arose as to whether the Cass Assignment had only conveyed the override in the unitized Spraberry depths, or as to all depths within the geographic boundary of the Pembrook Unit. If the Cass Assignment covered all depths, then Cass, Rock River, and Craddick would not be entitled to any production from the 12 Wolfcamp wells. The trial court found that the Cass Assignment had conveyed an interest in all depths, and Cass, et al. appealed.

II. Piranha Principles and the Law of Exhibits

The El Paso Court of Appeals looked to the notable Texas Supreme Court case Piranha Partners v. Neuhoff2596 S.W.3d 740 (Tex. 2020). for the applicable principles of contract interpretation. First, the court affirmed the axiom that an unambiguous deed should be read to determine the parties’ intent as expressed within its four corners, harmonizing all provisions. This four corners analysis may also include outside documents that are incorporated by reference — such as the Pembrook Unit Agreement.

A four corners analysis also includes any exhibits to an assignment. It is well-settled that an exhibit can, and often does, describe, define, and/or limit the interest conveyed. In Piranha, the exhibit attached to an assignment included information about the land, an associated well, and a lease. The court held that the assignment conveyed an overriding royalty interest under the entire lease, and the information about the land and well as included merely to “more clearly identify the lease under which the overriding royalty existed.”3Id. at 754.

III. Applying Piranha to the Cass Assignment

Exhibit “A” to the Cass Assignment limited the conveyance to the interests within the geographic boundaries of the unit. The parties disagree as to whether these “geographic boundaries” also limited the Cass Assignment to the “Unitized Formation” in the Pembrook Unit Agreement (i.e., the Spraberry Formation). After all, Cass argued, the Unit Agreement only covers and applies to said Formation.

The Rock River court instead held that the Unit Agreement was only incorporated to determine the boundaries of the surface of the land. Incorporating an outside agreement by reference does not mean that every provision is relevant to or limits the conveyance. The Unit Agreement was included only to clearly identify the property and use of the phrase “geographic boundaries” was not intended to limit the assignment to the Spraberry Formation.

In reaching its conclusion, the court adopted the Merriam-Webster definition of “geography,” being “a science that deals with the description. . .[and] features of the earth’s surface.”4https://www.merriam-webster.com/dictionary/geography (last visited Jan. 16, 2025). It follows that the term “geographic boundaries” means surface boundaries. The Cass Assignment therefore conveyed all of the Assignor’s right, title, and interest within the unit boundaries, as to all depths. Moreover, the Cass Assignment itself included “all depths” within the geographic boundaries of the Pembrook Unit.

IV. Yet Another Cautionary Drafting Tale

Like many cases before it and many yet to come, the Rock River dispute could have been prevented by careful drafting. Instead of trying to incorporate by reference the Pembrook Unit Agreement and “backdoor” a depth limitation, the parties could have expressly limited the Cass Assignment to the Spraberry Formation along with the geographic boundaries of the Unit. Words have meaning, and here the court found that the parties’ choice of words broadly conveyed the Cass override as to all depths.

When incorporating another instrument by reference or using a phrase like “geographic boundaries,” make sure that, in the immortal words of Inigo Montoya, it “means what you think it means.”5The Princess Bride (1987). Otherwise, the results might be inconceivable. No petition for review of the appellate court’s decision was filed with the Supreme Court.

 

  • 1
    2024 Tex. App. LEXIS 7464 (Tex. App.—El Paso 2024, no pet.).
  • 2
    596 S.W.3d 740 (Tex. 2020).
  • 3
    Id. at 754.
  • 4
    https://www.merriam-webster.com/dictionary/geography (last visited Jan. 16, 2025).
  • 5
    The Princess Bride (1987).

Brad represents clients in connection with upstream energy transactions, complex mineral titles, pooling issues, lease analysis, joint operating agreements, surface use issues, title curative and general oil and gas business matters.

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