On remand from the Texas Supreme Court, the El Paso Court of Appeals has construed the term “horizontal drilling” in a retained-acreage clause to begin at the point the wellbore deviates from its vertical orientation, regardless of its angle, and to end at the terminus.
MRC Permian Company v. Point Energy Partners Permian LLC, et al. (No. 08-19-00124-CV; December 9, 2025) arose from a dispute over an oil and gas lease. In 2014 lessors executed four identical leases granting MRC an exclusive right to develop and produce oil and gas on 4,000 acres in Loving County. Following a three-year primary term, MRC could maintain the lease by continuous drilling (spudding a new well within 180 days of the prior well). If MRC didn’t spud a well on time, its lease would terminate outside of designated “Production Units” as defined in the retained-acreage clause. This clause allowed MRC to designate on Production Unit for each commercial well subject to certain size limits. It further required MRC to file a copy of its designation in the county where the well was located within 90 days of completion of each well and “promptly” provide lessors with the designation. MRC drilled five horizontal wells during the primary term and did not file a written designation of Production Units within 90 days.
But the next well, drilled after expiration of the primary term, caused the dispute. MRC “mis-calendared” the deadline, and when it discovered the error notified lessors that it was invoking the leases’ force majeure clause, citing “operational issues.” Acting on behalf of the lessors, Point Energy Partners, an operator seeking to replace MRC, responded by demanding proof that the lease had not terminated notwithstanding the force majeure event. MRC reacted by filing suit against the lessors for trespass-to-try title, breach of contract, tortious interference with contract, and declaratory relief. Lessors answered with affirmative defenses, including waiver, estoppel, and release, as well as counterclaims, including accounting and constructive trust. Not to be outbid, MRC asserted its own affirmative defenses, arguing that lessors continued to accept royalty payments, thereby estopping Point Energy from maintaining that the lease had terminated. In 2018 and 2019 MRC filed designations for Production Units containing five wells and claimed 352 acres for each unit.
The parties filed cross-motions for summary judgment. The trial court issued an “omnibus order” holding that: (1) MRC’s lease terminated in May 2017 as to all acreage outside the Production Units, notwithstanding MRC’s force majeure and quasi-estoppel defenses; (2) granted Point Energy summary judgment on MRC’s tortious interference claim; (3) denied MRC summary judgment on Point Energy’s counterclaims and granted its motion on MRC’s repudiation defense; (4) rejected Point Energy’s arguments that MRC waived its right to claim the contested acreate in the Production Units for failure to timely designate them; and (5) rejected Point Energy’s method of determining the size of the Production Units MRC retained. The trial court permitted a permissive interlocutory appeal on three issues: the termination of the lease, the size of the Production Units, and, if the lease did not terminate, whether MRC offered sufficient evidence of tortious interference. The court of appeals accepted the appeal and ruled generally in favor of the lessors but also held that a fact issue remained as to force majeure. On petition for review, SCOTX held that, as a matter of law, the force majeure clause did not apply and rendered partial judgment that the lease terminated in May 2017. It further held that MRC had no tortious interference claim under the lease in its entirety, but might have one regarding retained acreage, and it remanded to the court of appeals the quasi-estoppel and retained-acreage size. Point Energy Partners Permian, LLC v. MRC Permian Co., 669 S.W.3d 796 (Tex. 2023).
On remand, in an opinion by Justice Palafox, the court affirmed in part and remanded for further proceedings. The court first held that the quasi-estoppel issue was included in the trial court’s order on appeal and presented a controlling question of law, determination of which would advance the termination of the litigation (required for a permissive appeal). Next, it excluded Point Energy’s counterclaim for breach of contract (due to MRC’s alleged failure to timely release its interest in the leasehold estate after it ceased drilling) because it wasn’t pertinent to the controlling issues.
Turning to the quasi-estoppel question, the court analyzed MRC’s argument that the lessors continued to accept royalty payments after the lease terminated in May 2017, and it would be “unconscionable” to permit Point Energy to claim “on the one had that the leases terminated while accepting millions of dollars and royalties as if the leases had not” (these are obviously extraordinarily valuable wells). Point Energy responded that MRC paid $900,000 in royalties knowing full well of Point Energy’s assertion of lease termination. The record demonstrated that Point Energy was right that MRC made payments after receiving notice of the lessors’ position that the lease had terminated and that the parties were litigating the issue. But even if Point Energy had accepted the checks while asserting lease termination, MRC “issued the checks while fully aware of the inconsistency.” Moreover, both parties agreed that an accounting was necessary to determine whether MRC overpaid royalties and that claim was pending when all the royalty payments were made (with the understanding that any overpayment would offset anything MRC might owe as a result of the lawsuit). Consequently, the court found no “unconscionability” and no genuine issue of material fact on MRC’s quasi-estoppel defense. It affirmed the trial court order awarding Point Energy summary judgment on this issue.
Moving on to the size of the Production Units, the court examined the leases’ retained-acreage clause. That clause describes two possible sizes: 160 acres (plus a 10% tolerance) or 352 acrfes based on its method of measurement. As a threshold matter, the court determined that MRC’s admitted failure to timely designate Production Units did not result in capping the amount of retained acreage at the minimum size of 160 acres. The court declined to accept Point Energy’s argument that the 90-day designation-and-filing requirement in the leases was a special limitation that partially terminated the lease as to Production Unit sizes. The leases in question contained no clear, specific, and unambiguous language indicating the leases would terminate if the designation-and-filing requirement was not met. Instead, as MRC argued, the requirement was a covenant that did not carry automatic termination for failure to comply with it. Simply filing a designation with the county clerk and promptly notifying the lessors, without more, could not terminate the leases in question.
The court next considered the size of the Production Units. There was no dispute that MRC was entitled to designate Production Units for the five wells drilled during the primary term. The issue was whether MRC properly measured the leases’ requirement that a “Production Unit shall not exceed 160 acres plus 10% tolerance if less than 5000 feet of its wellbore extends horizontally in the producing formation, and shall not exceed 320 acres plus 10% tolerance if more than 5000 feet of its wellbore extends horizontally in the producing formation.” MRC measured the units from the penetration point to the wellbore, which measurements exceeded 5000 feet. Point Energy measured them from the first “take point” to the last “take point,” which rendered a number below 5000. The court agreed with MRC. The lease simply didn’t limit the measurement of the wellbore to only producing segments. It only requires 5000 feet “in the producing formation” and makes no mention of “any specific points in the producing formation, such as penetration points, terminus, end points, or take points …”
Finally, the court rejected Point Energy’s argument that horizontal drilling begins not at the wellbore, but at the point the wellbore turns at a 90-degree angle. Likening horizontal wellbores to highways running generally east-west but must “navigate topography and subsurface geology” that deviate from 90 degrees, the court ruled that the wellbore extends horizontally in the producing formation “after it has deviated or ‘kicked off’ from its vertical orientation and has entered the producing formation, regardless of its angle, and has begun to curve horizontally in its path to the terminus.” MRC was thus entitled to Production Units of 352 acres apiece. The court remanded for an accounting and further proceedings on Point Energy’s breach of contract counterclaim.
