The Corpus Christi/Edinburg Court of Appeals has denied the parties’ motions for rehearing in a case in which the court reversed a sizable judgment against an oil and gas producer. But the court issued a supplemental opinion “to fully address issues raised by the parties regarding the valuation method.”
Devon Energy Production Company, L.P., Devon Energy Corporation, BPX Operating Company, and BPX Production Company v. Robert Leon Oliver, et al. (No. 13-25-00131-CV; February 26, 2026; rehearing denied October 15, 2026) arose from a dispute over the interpretation of oil and gas leases. Devon’s predecessor-in-interest and Plaintiff royalty owners entered into two leases involving 110 wells on over 3,700 acres of land in DeWitt County. Plaintiffs sued Defendants for underpayment of royalties. The trial court granted Plaintiffs’ motion for summary judgment, finding that (1) Plaintiffs’ royalty interest is not valued “at the well,” (2) the correct formula for the royalty calculation is “one-fifth of market value … on the day of sale,” and (3) Devon breached the parties’ leases to the extent that they paid royalties under a different formula. After a trial on damages, the jury was instructed on the trial court’s summary judgment findings and awarded damages of $15,800,937, $9,915,188 against Devon and $6,857,896 against BPX. Defendants appealed.
In an opinion by Justice West, the court of appeals reversed and remanded. The first issue involved the valuation point under the leases. As SCOTX held in Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996), if “the royalty valuation point is ‘at the well,’ a post-production clause did not require that the royalty bear post-production costs that would be incurred downstream from the valuation point.” 939 S.W.2d at 123, 131. Consequently, a lease that values the royalty at “market value at the well” renders a post-production clause “surplusage as a matter of law.” On the other hand, “leases based on ‘gross amounts received’ (e.g., gross proceeds) mean that royalties are paid based on the amount paid to the producer at the point of sale without (1) deducting post-production costs incurred by the producer pre-sale (such as processing and transportation costs) or (2) crediting post-production costs that will be incurred by downstream purchasers. Devon Energy Prod. Co., L.P. v. Sheppard, 668 S.W.3d 332, 341 (Tex. 2023). The issue in this case was which kind of leases the parties executed.
Defendants argued that the leases provided a valuation point “at the wells as of the day it is run to the pipe[]line or storage tanks.” Plaintiffs didn’t dispute that the leases said that but argued that the actual valuation point was a fact issue for the jury to decide. At trial Plaintiffs argued that the valuation point was the Magellan East Houston Terminal and that the royalty should be paid at the downstream point where all post-production costs had been incurred. They based this argument on an ambiguity they alleged was created by addenda to the original leases. But the court of appeals found no such ambiguity. The addenda didn’t expressly provide a valuation point. Instead, they superseded the post-production cost language in the original lease to specify which costs would not burden the royalty. “The lease establishes the royalty fraction, yardstick, and valuation point,” the court stated, “the average posted market price of such 1/5th part of such oil at the wells as of the day it is run to the pipe line or storage tanks.” Applying the Heritage rule, therefore, the court concluded that the addenda’s description of post-production costs was “mere surplusage” because “there are not post-production costs borne ‘at the well’ over which the language could govern.” And “unlike in Sheppard, the lease at issue does not specify another payment model to be remitted in addition to the royalty payment specified ‘at the well ….’”
The court held that the trial court erred in granting summary judgment to Plaintiffs based on the downstream valuation point, which “allowed the jury to assess damages based on the price at the Houston Ship Channel—a valuation point where the crude oil has incurred all post-production costs and is the most valuable according to the parties ….” That error was far from harmless and probably caused the rendition of an improper judgment. The court thus reversed and remanded for further proceedings.
Justice West penned the supplemental opinion as well. As explained above, the addendum to the leases reserved the lessor’s right “to take, receive and market Lessor’s royalty share of all oil, in kind, to be delivered by Lessee to Lessor at the wells into facilities provided by Lessee, or at the direction of Lessor, into pipelines connected therewith, free and clear of all costs and expenses.” In order to trigger this provision, Lessor had to give 30 days’ written notice to Lessee. “Pending such notice,” the addendum continued, “Lessee shall purchase or market Lessor’s oil at a cash price equal to the market value on the day of sale.”
The question boiled down to the interpretation of “pending.” Devon argued that “pending” meant “during” on the basis that “during” gave effect to all provisions of the leases and the addenda “in that [Devon] may choose to remit royalties in-kind or according to the ‘average posted market price’ until [royalty owners] provide a writing making an in-kind royalty election ….” Devon argued further that it would owe an in-kind royalty only at the end of the 30 day notice period (i.e., not during the period). Royalty owners argued, conversely, that “pending” meant “until,” meaning that the producers would buy their oil “at a cash price equal to the market value on the day of the sale,” through the end of the 30-day period.
The court sided with Devon. Though the “parties’ positions [were] founded on reasonable constructions of the term ‘pending,’” the court reasoned, “to accept [royalty owners’] position, we would have to conclude that, at the time of contracting, the parties intended no meaning or effect ever be given to the language in the Royalty Clause.” Reading the leases this way produced the court’s holding that “‘market value on the day of sale’ only applies during the thirty-day notice period.” Consequently, “the jury should have been instructed that the valuation method was ‘average posted market price.’ Because the jury assessed damages based on market value, we find there was harm meriting reversal.” The court remanded to the trial court.
