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483 McDaniel Partners v. Apache Deepwater

Monday, February 1st, 2016

Richard F. Brown

 

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

McDaniel Partners v. Apache Deepwater

Facts:

  1. McDaniel succeeded to a production payment reserved in a 1953 assignment of four oil and gas leases.
  2. Two of the leases expired in 1994. Apache Deepwater, LLC acquired the Assignment in 2009 or 2010.
  3. The expired leases represent 32/64 of the mineral estate of the covered land, with the remaining leases contributing 3/64.
  4. Apache contended McDaniel owned 1/16 of 3/64 (production from the mineral estate stemming from the remaining leases) of 7/8, while McDaniel contended it was entitled to 1/16 of 35/64 (production from the described land) of 7/8.
  5. The trial court agreed with Apache that the production payment must be proportionately reduced when leases expire, McDaniel appealed, and the El Paso Court of Appeals reversed and rendered.

Issues:

  1. Did the King/Hooks rule governing fraction of interest vs. fractional interest in reservations govern the assignment?
  2. If not, without an express provision concerning proportionate reduction, would the expiration of some leases require a production payment to be proportionately reduced?

Holdings:

  1. No. The present assignment contained an exact description of the reserved interest with a precise equation to measure the production payment. Because there was no need to go outside the reservation clause, the King/Hooks rule did not apply.
  2. No. The appeals court declined to proportionately reduce the production payment in the absence of express language to the contrary.

Significance:

The significance of this case is that it places the burden on the payor to establish that a production payment interest does not proportionately expire with a particular lease where multiple leases are involved unless the agreement contains language holding to the contrary.