The Business Court has granted partial summary judgment to an operator in a dispute over the interpretation of a farmout agreement.
May, et al. v. Ineos USA Oil & Gas, LLC, et al. (2026 Tex. Bus. 14; March 27, 2026) arose from a farmout agreement of oil and gas leases on the Eagle Ford Shale in McMullen County. Plaintiffs agreed to assign two leases to Defendants. The assignments conveyed each Plaintiff’s interest, reserving a reversionary interest in the leases except for assets Defendants “earned” as a result of drilling “earning” wells to “earned” depths. The reversion would occur on cessation of continuous drilling operations. With respect to drilling activities, the agreement required Defendants to provide a legal description of earned acreage prior to drilling an earning well. Upon drilling an earning well, Defendants could earn “earned acreage as to each earning well.” Within 30 days of a well’s completion, Defendants had to file in the deed records a “designation of record” specifying the earned acreage. If they didn’t file the designation, a Plaintiff could elect to file a notice as the acreage earned.
Plaintiffs further reserved an overriding royalty interest, a 25% interest in Defendants’ ownership of the initial test well, and a 30% reversionary back-in interest in Defendants’ ownership of their earned assets. The back-in interest took effect upon “payout,” defined as 7 a.m. on the first day after Defendants recoupled specified costs. Within 60 days of payout, Defendants were required to file a declaration that the reversionary back-in had occurred. Again, if they failed to do so, a Plaintiff could elect to file its own declaration.
Plaintiffs brought suit for breach of contract. Defendants moved for summary judgment on the following questions: “(1) whether the Contracts conveyed the Leases upfront or merely granted the right to earn the property; (2) which event(s) can trigger the Leases’ termination; (3) whether Defendants’ contractual obligations for earning acreage are covenants or conditions; and (4) the method for calculation of Payout, which is the event that triggers Plaintiffs’ reversionary back interest.”
In an opinion by Judge Sharp, the court granted Defendants’ motion in part and denied it in part. First, the parties disagreed on “whether and when the Defendants’ interest in the Leases vested and on whether Defendants’ alleged failure to properly designate the earned assets would automatically trigger reversion of the Lease to Plaintiffs.” The court determined that the parties had executed a “conditional assignment,” in which the contract assigned the interest to Defendants immediately but subject to a later divestment, as opposed to an “agreement to transfer,” in which Defendants obtained their rights after performing prerequisite conditions (citations omitted). The agreement clearly stipulated an “upfront conveyance” at the time of execution. The agreement carved out “assets earned” as an exception to Plaintiffs’ reversionary interest, not an exception to the lease assignment itself. Defendants thus obtained a fee simple determinable (per usual in oil and gas leases) and, consequently, an “immediate, fixed right of present or future enjoyment of the interest[s]” conveyed (citation omitted). The answer to issue (1) was resolved in favor of the Defendants.
Moving to issue (2), which events trigger termination, Defendants argued that only cessation of continous drilling operations could cause termination and reversion of undrilled acreage. The court agreed, citing the contract language. Plaintiffs alleged that Defendants’ failure to properly designate earned wells or acreage would also trigger reversion, but the contract didn’t say that. “Until cessation,” the court concluded, “Defendants are not divested of their fee simple determinable in the Leases—and Plaintiffs maintain their nonpossessory possibility of reverter in any assets that Defendants do not earn.” Issue (2) to Defendants.
As to issue (3), the covenants or conditions question, Defendants asserted that a failure to complete “what Plaintiffs describe as ‘Earning Barriers’ cannot result in forfeiture of their interests.” Plaintiffs claimed “that enforcing the Earning Barriers [was] not a forfeiture at all.” The question came down to whether Defendants’ breach of a condition automatically terminated the lease, or whether the breach did not automatically terminate the estate, in which Plaintiffs may be entitled to money damages. Did the retained acreage provision in the agreement, in clear, precise, and unequivocal language, impose a “special limitation on a general grant” of the interests? Here the court relied on Endeavor Energy Res., L.P. v. Discovery Operating, Inc., 554 S.W.3d 586 (Tex. 2018), the court concluded that the agreement, upon cessation of continuous drilling, terminated Defendants’ interest in the leases “as to all property not retained (or ‘earned’) according to the parties’ agreement.” In that event, termination would be “automatic.”
Once that occurred, the leases reverted to Plaintiffs, with the exception of the earned assets. “The court holds,” Judge Sharp wrote, “that the earned-asset provisions operate as a special limitation as to any assets Defendants fail to earn by the end of the continuous-drilling-operations period” (citing Endeavor at 606). The issue as which assets Defendants may have earned was not before the court, since the parties hadn’t gotten to it yet. The court thus declined “to opine as to which specific events could theoretically affect the scope of the Contracts’ special limitation against Defendants’ interest in the leases.” Issue (3) went to Plaintiffs.
Finally, the court reached issue (4), the calculation of the payout for purposes of Plaintiffs’ 30% reversion interest. Plaintiffs argued that the Payout was “well by well,” meaning that payout would first occur as to an earning well and could later occur as to a neighboring non-earning well on the same earned acreage. The court rejected this argument, observing that the agreement plainly stated that the payout occurred only as to an “earning well,” i.e., a well drilled to a contractually specified depth. “ Any later-drilled well on Earned Acreage,” the court concluded, “is not an Earning Well and cannot trigger Payout under the Contracts.” In other words, the agreement requires payout to be “calculated on an ‘Earning Well by Earning Well’ basis. Plaintiffs attempted to adduce evidence of the parties’ course of performance after execution, but the court spurned this on the basis that the agreement was unambiguous. Issue (4) went to Defendants.
Defendants largely prevailed, leaving unresolved “the issue of whether any specific alleged acts or omissions by Defendants were within the scope of the special limitation on the Leases.”
