Face Challenges Confidently

465 Eagle Oil & Gas Co. v. TRO-X, L.P

Thursday, September 3rd, 2015

Richard F. Brown

The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
Eagle Oil & Gas Co. v. TRO-X, L.P.   construed a joint development agreement and the obligation “to consult” prior to sales of interests to third parties.  Eagle Oil & Gas Co. (“Eagle Oil”) and TRO‑X, L.P. (“TRO‑X”) entered into a joint development agreement under which Eagle Oil would acquire acreage within a certain area of mutual interest (“AMI”) in Pecos County at its expense, and TRO‑X would take the lead in marketing that acreage to others at its expense.  The agreement contained provisions for the recovery of some of those out-of-pocket expenses and multiple provisions for the allocation of benefits from successful acquisitions and dispositions of interests in the AMI.    Eagle Oil acquired leases, but sales were slow.  Eventually, Eagle Oil entered into negotiations with EnCap Investments (“EnCap”).  Eagle Oil and EnCap formed a new entity, Eagle Oil & Gas Partners, LLC (“Eagle Partners”).  Eagle Oil managed Eagle Partners for a monthly management fee of $150,000.  Eagle Oil sold a 50% interest in a part of the AMI to Eagle Partners.  Eagle Oil and Eagle Partners sold 85% of their interest in one part of the AMI to Chesapeake, and Eagle Oil sold 100% of another part of the AMI to Chesapeake.  In each sale, Chesapeake paid cash and gave up an overriding royalty with a back-in working interest.  There was no production and most of the leases expired.    The dispute in the lawsuit involved the exercise of rights to retain interests once acquired and the distribution of proceeds from sales.
Section I of the agreement contained the agreement of the parties with respect to acquisitions.    Section II was entitled, “DISPOSITION OF INTERESTS AND DISTRIBUTION OF PROCEEDS.”    Section II.A was entitled “Retention of Unpromoted Working Interests” and provided in part that “TRO‑X may retain an unpromoted working interest of up to [35%] (‘TRO‑X New Prospect Interest’), and Eagle may retain an unpromoted working interest of up to [65%] (‘Eagle New Prospect Interest’) in the New Prospects and Interests acquired therein under the terms of any exploration agreement and operating agreement negotiated with the working interest owners prior to initial drilling (‘Prospect Agreements’).”    The unpromoted working interests were to be “chosen by the Parties prior to the sale of all working interests to third parties on a promoted basis.”    Section II.B was entitled “Sale of Working Interests to Third Parties” and provided in part that “[a]ll working interests in the New Prospects not acquired by TRO‑X and Eagle under Section [II.A] shall be sold to one or more third party working interest owners through joint sales efforts of the Parties on a promoted basis under terms acceptable to Eagle after consultation with TRO‑X.”    Section II.C contained a formula for the distribution of cash sale proceeds and Section II.D contained a formula for the distribution of non-cash sale proceeds.    TRO‑X never designated any participation percentage.
TRO‑X contended that it was entitled to consultation and an opportunity to elect to retain a percentage interest up to its 35% cap prior to each sale.  Eagle contended that the obligation to consult only applied to sales and TRO‑X’s right to elect to retain up to 35% only applied to the interests not sold.    The parties and the court agreed that the agreement was not ambiguous.
The court used a “plain meaning” analysis to hold that the construction of the agreement as argued by Eagle Oil was correct.    Eagle Oil could sell to anyone after consulting with TRO‑X.  The court held “consult” did mean more than “notify.”  To consult means “to have regard to; consider; to ask the advice or opinion of; [or] to refer to.”    The consultation requirement only applied to sales.    The retention provision in Section II.A applied “prior to the sale of all working interests to third parties on a promoted basis.”    The sale to Eagle Partners was not a sale of all of the working interest, but only 50%, and TRO‑X could still have elected to retain up to 35%.    The dissent would hold that the agreement was ambiguous and remand to the fact finder.
The opinion appears to be limited to the construction of this particular joint development agreement, but it offers some definition as to the meaning of “consultation” generally and the usage of “promote” and “unpromoted” as used in this specific agreement.