Hardin-Simmons University v. Hunt Cimarron Limited Partnership D/B/A Cimarron Exploration Company

In The
Court of Appeals
Seventh District of Texas at Amarillo
________________________

No. 07-15-00303-CV
________________________

HARDIN-SIMMONS UNIVERSITY, WEST TEXAS REHABILITATION CENTER,
CYRUS S. FROST, CHRISTOPHER FROST WHIDDON, NANCY SEABERRY FROST
ARTS ENDOWMENT, BULLOCK MANAGEMENT PARTNERSHIP, LTD., JAMES S.
FROST, INDIVIDUALLY AND AS INDEPENDENT EXECUTOR OF THE ESTATE OF
MARY LOU FROST PERKINS, DECEASED, CAROLYN FROST HIZA, JULIE FROST
COCHRAN, LYNN ETHERIDGE MORRIS, GAIL ETHERIDGE BRAY, BEVIN SPRING
ETHERIDGE, ALLEN LESLIE, AND ELENE D. WILSON, TRUSTEE OF THE RALPH
W. AND ELENE D. WILSON REVOCABLE TRUST, APPELLANTS

V.

HUNT CIMARRON LIMITED PARTNERSHIP D/B/A
CIMARRON EXPLORATION COMPANY, APPELLEE

On Appeal from the 286th District Court
Cochran County, Texas
Trial Court No. 12-04-4268; Honorable Pat Phelan, Presiding

July 25, 2017

MEMORANDUM OPINION
Before QUINN, C.J., and HANCOCK and PIRTLE, JJ.1

1
Justice Mackey K. Hancock, retired, not participating.
 By this appeal, we are asked to construe certain provisions of an oil and gas

lease in order to determine whether, and to what extent, it remained in effect after

expiration of its primary term due to a lack of production in paying quantities.

Appellants, Hardin-Simmons University, West Texas Rehabilitation Center, Cyrus S.

Frost, Christopher Frost Whiddon, Nancy Seaberry Frost Arts Endowment, Bullock

Management Partnership, Ltd., James S. Frost, Individually and as Independent

Executor of the Estate of Mary Lou Frost Perkins, Deceased, Carolyn Frost Hiza, Julie

Frost Cochran, Lynn Etheridge Morris, Gail Etheridge Bray, Bevin Spring Etheridge,

Allen Leslie, and Elene D. Wilson, Trustee of the Ralph W. and Elene D. Wilson

Revocable Trust (collectively “Hardin-Simmons”) are the lessors, or successors-in-

interest to a lessor, in an oil and gas lease (the “subject lease”) covering seven and

three-quarter sections of land (approximately 4,960 acres) in Cochran County, Texas.

Appellee, Hunt Cimarron Limited Partnership, d/b/a Cimarron Exploration Company, is

the lessee. Hardin-Simmons sued Hunt for (1) breach of the express covenant to

explore and develop the leased premises for oil and gas and (2) breach of the implied

covenant to (a) drill initial wells, (b) develop the premises, (c) protect the premises from

drainage, and/or (d) market the oil or gas produced. Hardin-Simmons also sought a

declaratory judgment concerning Hunt’s failure to file a written release describing the

mineral interests no longer held by production.

The claims being asserted by Hardin-Simmons were presented to a Cochran

County jury in April of 2015. Upon return of a verdict in favor of Hunt, the trial court

entered a take-nothing judgment as to those claims. By four issues, Hardin-Simmons

asserts the trial court erred in (1) denying its motion for judgment because, as a matter

2
of law, the subject lease expired at the end of the primary term as to all non-productive

acreage, (2) denying its motion for new trial because the jury’s failure to find that Hunt

breached certain lease covenants is against the great weight and preponderance of the

evidence, (3) denying its motion for new trial because the jury’s failure to find that Hunt

breached the subject lease by not executing a release was against the great weight and

preponderance of the evidence, and (4) denying its motion for new trial because the

jury’s finding that certain wells at issue were producing in paying quantities was against

the great weight and preponderance of the evidence. We reverse the judgment of the

trial court and render judgment declaring the subject lease has terminated, in part; and,

we remand the cause to the trial court for further proceedings consistent with this

opinion.

BACKGROUND

As stated above, the Hardin-Simmons parties are the lessors, or successors-in-

interest to a lessor, in the subject lease, executed August 1, 2006, covering

approximately 4,960 acres in Cochran County, Texas (the “Frost property”). In the late

1950s, several producing wells were drilled on the Frost property in the San Andres

formation; however, production had significantly dropped-off by the mid-1960s. In 1967,

the Buckshot Unit was created and operated as a “waterflood” project.2 The Buckshot

Unit consisted of approximately 13,000 acres comprised of the Frost property and

adjacent property to both the east and west. In the late 1990s, the original operator of

the lease on the Frost property, Santa Fe Exploration, ceased production altogether and
2
A “waterflood” is a method of secondary recovery in which water is injected into the reservoir
formation through an “injection well” in order to displace residual oil. The water from the injection wells
physically sweeps the displaced oil to adjacent production wells. See Schlumberger Oilfield Glossary,
http://www.glossary.oilfield.slb.com/Terms/w/waterflood.aspx (last visited July 20, 2017).

3
the Frost property fell out of the Buckshot Unit. The owners of the Frost property then

entered into a new lease with Moriah Energy Corporation which was later assigned to

United Oil and Gas. After United’s primary term expired, it released most of the original

acreage, leaving approximately 700 acres under that lease. Eventually, Hunt became

the sole owner of United’s remaining interest. At the time, Hunt also held the leases on

the adjacent properties that previously comprised the Buckshot Unit.

Hunt then entered into negotiations for a new lease covering the entire Frost

property (including the acreage already held by production). Following those

negotiations, the necessary parties executed the subject lease on August 1, 2006. The

lease provided for a primary term of five years, ending on July 31, 2011, and it was

vertically limited from the surface to 100 feet below the base of the San Andres oil and

gas formation. The new lease also contained a “Pugh clause”3 and a “retained acreage

clause”4 such that, unless otherwise provided, at the end of the primary term, the lease

expired as to non-productive acreage. The Pugh clause, found at paragraph 12.a.,

provided as follows:

3
A “Pugh clause,” sometimes known as a “Freestone Rider,” is a covenant in an oil and gas
lease created “to protect the lessor from the anomaly of having the entire property held under a lease by
production from a very small portion.” Sandefer Oil & Gas, Inc. v. Duhon, 961 F.2d 1207, 1209 (5th Cir.
1992) (discussing the origin and purpose of a Pugh clause). A Pugh clause operates to sever producing
lands or strata from non-producing property according to some defined criteria and it places additional
burdens on the lessee to take certain steps in order to maintain the lease beyond the primary term as to
the non-producing property. Id. Pugh clauses are thus designed to benefit the lessor by encouraging
diligent development of the leased premises and discouraging the idle retention of undeveloped lands.
Id. While all Pugh clauses share the same basic purpose, they may differ in the requirements imposed
on the lessee in order to continue the lease beyond its primary term. Id. at 1210.
4
A “retained acreage clause” is a covenant that excludes certain acreage from the automatic
termination and reversion provisions contained in an oil and gas lease. See XOG Operating, LLC v.
Chesapeake Expl. L.P., 480 S.W.3d 22, 28 (Tex. App.—Amarillo 2015, pet. ref’d). Retained acreage
clauses typically provide that at the end of the primary term, each producing well will hold a specified
number of acres, with all other (non-producing) acreage being released. Sutton v. SM Energy Co., 421
S.W.3d 153, 159 (Tex. App.—San Antonio 2013, no pet.).

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 12.a. At the end of the primary term and subject to the other terms hereof,
this lease shall continue as to, and only as to, land included in a
“production unit”, as said term is hereinafter defined in paragraph 12.b.
This lease shall terminate as to all other acreage. Lessee shall have the
option, but not the obligation to continue this lease in force as to all
acreage covered hereby by commencing a well within 150 days prior to
the end of said primary term and drilling and completing said well in a
workmanlike manner to a depth sufficient to penetrate and test the San
Andres formation. Thereafter, Lessee shall have the option of maintaining
this lease in effect as to all acreage then covered by the commencement
of drilling operations on successive wells each of which shall be
commenced within 150 days after the completion of the prior well. Such
drilling shall constitute a “continuous development program” by which
Lessee may keep this lease in force and effect as to all lands and depths
then covered hereby and thereby postpone the partial termination date
provided below in paragraph 12.b. until the expiration of 150 days after the
completion of a well without there being the commencement of another
well. Upon the expiration of such time without the commencement of
another well, there shall be a “cessation of the continuous development
program” at which time the provisions of paragraph 12.b. shall become
operative.

This clause gave Hunt the right to maintain the entire lease by engaging in a

“continuous development program” prior to the end of the primary term.

The retained acreage clause, found at paragraph 12.b., provided as follows:

12.b. At the later of the end of the primary term or the cessation of the
continuous development program for which provision is above made
(herein called the “partial termination date”) this lease shall terminate as to
all lands and depths covered hereby, save and except as to the acreage
and depths included in a production unit which said unit is defined as
being: (i) a Unitized Tract formed under the Unitization Statute (which
Unitized Tract shall be subject to the Agreement as referenced and
described above in paragraph 5); (ii) 40 acres around each producing oil
well which is not in a Unitized Tract; (iii) 40 acres around each well from
which make-up water for secondary recovery operations is being taken for
use on a Unitized Tract; (iv) 40 acres around any disposal well used for
the disposal of water from, and only from, the land covered by this lease;
(v) 80 acres around each producing or shut-in gas well.

As to any acreage which is not included in a Unitized Tract, this lease
shall continue down to and not below the shallower of the total depth
covered by this lease or 100 feet below the deepest depth theretofore

5
 drilled on the respective production units. The area of production units is
subject to adjustment as provided in paragraph 12.c. hereof.

After the partial termination date, the acreage and depths assigned to
each production unit, including that within a Unitized Tract, shall be
deemed to be covered by a separate lease containing the terms and:
provisions hereof as to, and only as to, the acreage and depths of that
unit, to the end that thereafter there shall be a separate lease as to each
production unit that can be kept in force and effect only by actual or
constructive production from, or operations upon, that particular
production unit without regard to production or operations upon the other
production units retained under the terms hereof.

As an appurtenance to the land which remains covered by this lease after
the partial termination date, Lessee shall continue to have necessary
rights and easements for the purposes hereof in, on and across the
acreage as to which this Lease has terminated. Such rights shall include
the right to use any injection well or a well from which make-up water is
obtained for so long as such wells are used for said purpose. Lessee shall
designate of record the production units for which provision is herein
made. Such designation shall be made in regular rectangular tracts as
fractions of quarter sections so as not to impede the future development
for oil and gas. The acreage allocated to each production unit in
accordance with the terms of this paragraph shall be described in a written
designation and partial release executed by Lessee and recorded in the
official real property records of Cochran County, Texas a copy of each
such filing, as recorded, shall be furnished to Lessor within 30 days after
the partial termination date. lf such designation is not received by Lessor
within 30 days after Lessor has given Lessee notice of Lessee's failure to
file and furnish the designation and partial release, Lessor may file an
affidavit designating production units for existing producing wells defining
the acreages and depths as to which the lease continues to be operative
and that as to which it has terminated. Acreage which is then in a Unitized
Tract previously shown of record in Cochran County, Texas may be
designated by reference to such previously recorded document.

This clause gave Hunt the right to maintain the lease as to certain acreage and depths

included in a “production unit,” as defined therein, by exempting that acreage from the

automatic termination provisions of paragraph 12.b.

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 Relevant to the dispute in this case, the lease further provided a means of

avoiding partial termination through a “reworking clause” contained in paragraph 6. The

reworking clause provided, in part, as follows:

[i]f at the expiration of the primary term, oil or gas is not being produced
from the land and depths subject to this lease but Lessee is then engaged
in . . . the reworking of any well on said land, this lease shall remain in
force in accordance with its terms so long as . . . reworking operations are
prosecuted (whether on the same or different wells) with no cessation of
more than one hundred twenty (120) consecutive days . . . .

Similar to the “continuous development clause,” this clause permitted Hunt to maintain

the lease, “in accordance with its terms,” past the primary term by engaging in

“reworking operations” prior to that date. Construction of this clause is at issue in this

case.

Finally, the subject lease provided that Hunt was required to file a written

document releasing all non-productive acreage within thirty days following the end of

the primary term. Specifically, paragraph 12.h. provided as follows:

[u]pon the partial or total termination of this lease, either as to depth or
area, the Lessee shall within thirty (30) days after any such termination file
a written release in the public records of the county in which the land is
located describing the area or depth no longer subject to this lease. A
copy thereof shall be furnished to Lessor.

Accordingly, absent a savings provision such as the “continuous development clause”

or the “reworking clause,” the lease required Hunt to file a written document releasing all

non-productive acreage within thirty days following the end of the primary term.

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 At the same time they executed the subject lease, the parties entered into a side

agreement regarding unitization, the purpose of which was to facilitate the reconstitution

of the Buckshot Unit. Despite this side agreement, Hunt did not file a unitization

application with the Texas Railroad Commission during the primary term of the lease.

Evidence presented at trial showed that, during the primary term of the subject

lease, Hunt did not commence drilling on any new wells,5 convert any of the legacy

wells (wells that were in existence prior to execution of the subject lease) into injection

wells, nor recomplete any of those legacy wells in a new production zone. Evidence

further showed that, in July 2011, shortly before the end of the primary term, Hunt did

commence reworking operations on ten legacy wells.

On October 21, 2011, Hunt received a letter from counsel for Hardin-Simmons

stating that the lease had terminated due to non-production. In that letter, Hardin-

Simmons’s counsel enclosed a Release of Oil and Gas Lease form that covered the

entire acreage as to both horizontal area and vertical depth, and he requested that Hunt

execute and return that release no later than November 14, 2011.

Hunt did not sign the release and instead claimed that the entire lease remained

in effect pursuant to the “reworking clause” found in paragraph 6. Hunt reasoned that

because it had commenced reworking operations prior to the expiration of the primary

term and there had never been a period of more than 120 days when they were not

engaged in those reworking operations, the lease remained in full force and effect as to

all acreage and all depths. In its response to Hardin-Simmons’s request, Hunt noted

5
Prior to the execution of the lease, during the period covered by the Moriah lease, Hunt did drill
twelve wells on the Frost property.

8
that “considerable effort and resources towards” re-unitization had already been

committed, that it was “engaged in a continuing program of reworking wells and

returning abandoned wells to production” and that “the Frost lease [had been] fully

maintained under the terms of paragraph 6 of our lease.” Unsatisfied with Hunt’s

position, Hardin-Simmons filed suit in April 2012 and the case was tried before a jury in

April 2015. Contrary to Hunt’s position, Hardin-Simmons maintained that, as a matter of

law, the lease expired at the end of the primary term as to all non-productive acreage.

As relevant to this appeal, the jury answered the following questions:

Question No. 1

Did [Hunt] fail to drill additional wells on the lease that a reasonably
prudent operator would have drilled?

Answer: No
***

Question No. 3

Did [Hunt] fail to execute a written release describing the areas or depths
no longer subject to the lease?

***

Answer: No

Question No. 5

Were the following wells producing in paying quantities on August 1,
2011?

Well 107 Yes
Well 109 Yes
Well 147 Yes
Well 266 Yes
Well 285 Yes
Well 287 Yes
Well 343 Yes

9
 Well 349 Yes
Well 383 Yes
Well 385 Yes

The court’s charge did not define the term “in paying quantities.”

Following the jury’s verdict, the trial court requested both parties to file a motion

for entry of judgment. Hardin-Simmons’s motion requested the trial court to disregard

the jury’s answer to Question Number 3 (pertaining to the execution of a written release)

and it also challenged the jury’s answers to Question Number 5 (pertaining to the

question of whether ten specific wells were producing in paying quantities at the end of

the primary term). Hardin-Simmons’s motion requested the trial court enter a judgment

describing that portion of the mineral estate (both horizontal acreage and vertical depth)

held by the subject lease, as well as any portion no longer held by that lease. Hardin-

Simmons also requested that the trial court require Hunt to execute a release as to any

non-productive acreage in accordance with the terms and provisions of the subject

lease. Hunt’s motion simply recited that the jury’s answers were supported by

competent evidence. On May 8, 2015, following a hearing on the respective motions of

the parties, the trial court entered its Final Judgment providing that Hardin-Simmons

“take nothing” from Hunt.

APPLICABLE STANDARD OF REVIEW

According to Hardin-Simmons, our construction of the lease agreement is

determinative of the disposition of this case. Specifically, we construe Hardin-

Simmons’s first issue as turning on two disputes, both of which concern the intent of the

parties: (1) whether the “reworking clause” applied to legacy wells, and, if so, (2)

10
whether it exempted from termination the entire lease or only that acreage included in a

“production unit.” While Hardin-Simmons does not succinctly set-out the applicable

standard of review to be applied, we construe issue one as a legal sufficiency

challenge—asserting the trial court erred, as a matter of law, by failing to declare the

subject lease expired at the end of the primary term as to all non-productive acreage.

Furthermore, we construe issues two, three, and four as factual sufficiency challenges

pertaining to the jury’s answer to Question Number 1 (lessor’s duty to adequately

develop the leased property), Question Number 3 (lessor’s duty to execute a release as

to non-productive properties), and Question Number 5 (whether certain wells were

producing in paying quantities).

In reviewing a legal sufficiency issue, we may sustain the challenge only when

(a) there is a complete absence of evidence of a vital fact, (b) the court is barred by

rules of law or of evidence from giving weight to the only evidence offered to prove a

vital fact, (c) the evidence offered to prove a vital fact is no more than a mere scintilla of

evidence, or (d) the evidence conclusively establishes the opposite of the vital fact in

question. King Ranch, Inc. v. Chapman, 118 S.W.3d 742, 751 (Tex. 2003), cert.

denied, 541 U.S. 1030, 124 S. Ct. 2097, 158 L. Ed. 2d 711 (2004). In determining

whether there is legally sufficient evidence to support the finding under review, a

reviewing court must view the evidence in a light most favorable to the judgment,

indulging every reasonable inference that supports it, but the court may not disregard

evidence that allows only one inference. City of Keller v. Wilson, 168 S.W.3d 802, 822

(Tex. 2005). The final test for legal sufficiency must always be whether the evidence at

trial would enable reasonable and fair-minded people to reach the verdict under review.

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Id. at 827. As applied to the facts of this case, Hardin-Simmons contends that, under a

proper construction of the subject lease, the evidence establishes, as a matter of law,

the absence of any facts that would extend the primary term of that lease, as to any

non-productive acreage.

An assertion that the evidence is factually insufficient to support a fact finding

means that the evidence supporting the finding is so weak or the evidence to the

contrary is so overwhelming that the answer should be set aside and a new trial

ordered. Garza v. Alviar, 395 S.W.2d 821, 823 (Tex. 1965). Where a party with the

burden of proof at trial challenges the factual sufficiency of the evidence to support the

trial court’s judgment, that party must demonstrate that the verdict is against the great

weight and preponderance of the evidence. Dow Chem. Co. v. Francis, 46 S.W.3d 237,

242 (Tex. 2001). In reviewing factual sufficiency, the reviewing court must consider,

examine, and weigh all of the evidence in the record. Maritime Overseas Corp. v. Ellis,

971 S.W.2d 402, 406-07 (Tex. 1998), cert. denied, 525 U.S. 1017, 119 S. Ct. 541, 142

L. Ed. 2d 450 (1998). In doing so, the court no longer considers the evidence in the

light most favorable to the finding; instead, the court considers and weighs all the

evidence, and sets aside the disputed finding only if it is so contrary to the great weight

and preponderance of the evidence as to be clearly wrong and unjust. Id. at 407.

APPLICABLE LAW —LEASE CONSTRUCTION

An oil and gas lease is a contract conveying an interest in real property. Petro

Pro, Ltd. v. Upland Res., Inc., 279 S.W.3d 743, 750 (Tex. App.—Amarillo 2007, pet.

denied) (citing Cherokee Water Co. v. Forderhause, 641 S.W.2d 522, 525 (Tex. 1982)).

As such, an oil and gas lease must be construed and interpreted in accordance with the

12
same rules of construction as any other contract. See Tittizer v. Union Gas Corp., 171

S.W.3d 857, 860 (Tex. 2005); Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550,

554 (Tex. 2002). The construction of a contractual agreement is a question of law

which we review de novo. BP Am. Prod. Co. v. Red Deer Res., LLC, __ S.W.3d __, No.

15-0569, 2017 Tex. LEXIS 410, at *7 (Tex. April 28, 2017). In construing an

unambiguous oil and gas lease, such as the one at issue here, the court’s primary duty

is to ascertain and give effect to the intent of the parties as expressed within the four

corners of the lease. Id.; XOG Operating, LLC v. Chesapeake Expl. L.P., 480 S.W.3d

22, 26 (Tex. App.—Amarillo 2015, pet. denied). In determining the intent of the parties,

we consider the entire agreement, attempting to harmonize all of its parts, even if

different parts appear contradictory or inconsistent and we presume that the parties

intended every clause to have some effect. Red Deer Res., 2017 Tex. LEXIS 410, at

*7. In doing so we give the language used its plain meaning, unless doing so would

clearly defeat the intent of the parties. Id.

APPLICABLE LAW —LEASE TERMINATION

In Texas, a typical oil and gas lease grants a fee simple determinable estate,

thereby establishing in the grantor a possibility of reverter, with the determinable

condition typically being the absence of oil or gas production. BP Am. Prod. v. Laddex,

Ltd., 513 S.W.3d 476, 481 (Tex. 2017); Anadarko Petroleum Corp., 94 S.W.3d at 554

(citing Texas Co. v. Davis, 113 Tex. 321, 254 S.W. 304, 309 (Tex. 1923)). As such, the

mineral estate continues indefinitely, as long as the lessee uses the property for its

intended purpose according to the determinable condition. Red Deer Res., 2017 Tex.

LEXIS 410, at *8 (citing Anadarko Petroleum Corp., 94 S.W.3d at 554). If the

13
determinable condition occurs, an automatic termination of the mineral estate takes

place in accordance with the agreement of the parties. Id. Whether a determinable

condition has occurred and the lease has terminated under a given set of conditions “is

always a question of resolving the intention of the parties from the entire instrument.”

Id.

The habendum clause of an oil and gas lease defines the duration of the mineral

estate. Id. A typical habendum clause provides that the lease will remain in force for a

short fixed term of years (the primary term) and “as long thereafter as oil, gas or other

minerals is produced” (the secondary term). Id. The word “produced,” as used in the

typical habendum clause, means “actual production in paying quantities.” Anadarko

Petroleum Corp., 94 S.W.3d at 554. As such, the word “produce” is “synonymous with

the phrase ‘producing in paying quantities.’” Red Deer Res., 2017 Tex. LEXIS 410, at

*8 (quoting Hydrocarbon Mgmt., Inc. v. Tracker Expl., Inc., 861 S.W.2d 427, 432 n.4

(Tex. App.—Amarillo 1993, no writ)). “‘Production in paying quantities’ means ‘the

production is sufficient to pay the lessee a profit, even small, over the operating and

marketing expenses, although the cost of drilling the well may never be repaid.’” Id.

Whether a marginally productive well has ceased to “produce in paying quantities” is a

question of fact for the jury, and the burden is on the lessor to prove a lack of such

production in order to terminate the lease. Laddex, Ltd., 513 S.W.3d at 482. To assist

courts in answering this question, the Texas Supreme Court has spelled out a two-

pronged analysis, holding that whether a well has ceased to produce in paying

quantities depends on (1) whether the well shows a profit, even small, over operating

expenses, and (2) if not, whether, under all the relevant circumstances a reasonably

14
prudent operator would, for purpose of making a profit and not merely for speculation,

continue to operate that well as it has been operated. Id. at 482-83.

In any “production-in-paying-quantities” analysis, the profitability of a given well

must be measured over a reasonable period of time according to the facts and

circumstances surrounding that particular well. Id. (citing Clifton v. Koontz, 325 S.W.2d

684, 690 (Tex. 1959)) (stating that, unless the lease agreement defines the period for

which production in paying quantities is measured, “there can be no limit as to time,

whether it be days, weeks, or months, to be taken into consideration in determining the

question of whether paying production from the lease has ceased”). Furthermore, in

conducting this analysis, we review the surrounding circumstances according to a

presumption that the well must be capable of producing in paying quantities without

additional equipment or repairs. Anadarko Petroleum Corp., 94 S.W.3d at 558.

Although a habendum clause generally controls the lease’s duration, other

clauses may extend the term of the lease. Id. at 554. The category of clauses that

might extend the duration of an oil and gas lease beyond a determinable condition,

generally known as “savings clauses,” include, among others, the “drilling operations

clause,” “continuous operations clause,” or “reworking clause.” Hydrocarbon Mgmt.,

861 S.W.2d at 432 n.4. Under this type of clause, even in the absence of production in

paying quantities, a lease remains in effect during the secondary term if the lessee

conducts certain specified operations within a fixed number of days of a given condition.

Samano v. Sun Oil Co., 621 S.W.2d 580, 580-81 (Tex. 1981) (finding an oil and gas

lease terminated because the lessors failed to produce, drill, or re-work their operations

within the specified time period).

15
 In a typical reworking clause, reworking operations include “any and all actual

acts, work or operations in which an ordinarily competent operator, under the same or

similar circumstances, would engage in a good faith effort to cause a well or wells to

produce oil or gas in paying quantities.” Cox v. Stowers, 786 S.W.2d 102, 105 (Tex.

App.—Amarillo 1990, no writ). As such, “operations” necessary to maintain a lease

include “activities that [are] calculated to obtain production.” Ridge Oil Co. v. Guinn

Invs., Inc., 148 S.W.3d 143, 160 (Tex. 2004).

ANALYSIS

Hardin-Simmons contends that, under a proper construction of the lease, the

evidence establishes, as a matter of law, the absence of any facts that would extend the

term of the lease beyond the primary term, as to any non-productive acreage.

Specifically, it contends undisputed facts establish the absence of any production as to

the entire acreage, including all zones, save and except the acreage and depths

included in a “production unit” as defined by paragraph 12.a. of the lease. Therefore,

according to its construction, the lease terminated at the end of the primary term on July

31, 2011, as to the non-producing acreage. Taking a contrary position, Hunt contends

the lease remained in full force and effect as to the entire acreage because the term of

the lease was extended by the “reworking clause” contained in paragraph 6.

Here, the habendum clause contained in paragraph 2 of the lease provided,

“[s]ubject to other provisions herein contained, this lease shall remain in force for a term

of five (5) years from this date (called the “primary term”), and as long thereafter as oil

or gas, either or both, is produced from said land.” Therefore, because it was

undisputed that the lease provided for a primary term of five years, ending on July 31,

16
2011, the lease would have terminated, as a matter of law, on that date, unless “other

provisions herein contained” provided otherwise. While both parties agree the

“reworking clause” contained in paragraph 6 is a provision “providing otherwise,” they

disagree concerning both the construction of that paragraph and whether the facts of

this case fall within its provisions.

First, Hardin-Simmons contends that none of the factual preconditions set forth in

paragraph 6 exist. Those preconditions include the drilling and abandonment of a dry

hole prior to the discovery of oil or gas or the cessation of production at some time

thereafter. Hardin-Simmons reasons that because Hunt did not drill any new wells

pursuant to the subject lease agreement, there are no wells which it could “rework.”

This argument finds little support in the record because (1) the lease agreement does

not specify that legacy wells are excluded from the potential inventory of wells to be

reworked and (2) testimony established that prior to July 31, 2011, producing wells had

been drilled on the leased property and Hunt was engaged in reworking operations, as

to those particular wells, prior to the expiration of the primary term of the lease.

Therefore, Hardin-Simmons’s argument fails as to the non-applicability of the reworking

clause found in paragraph 6.

Secondly, and more critically, Hardin-Simmons contends that, even if paragraph

6 did apply, it did not extend the primary term of the lease—but, instead, only extended

the overall term of the lease as it pertained to “producing acreage” relevant to the well

being reworked. It contends that because paragraph 6 merely provides that, in the

event of reworking operations, “this lease shall remain in force in accordance with its

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terms,” then the continuation of the lease was still controlled by “its terms”—specifically

including the Pugh clause and retained acreage clause. We agree.

Hunt’s argument that the entire lease was extended by operations in accordance

with the reworking clause is undermined by a comparison of the provisions of the

reworking clause with the provisions of the continuous development and retained

acreage clauses. While both the reworking and continuous development clauses would

have the effect of continuing the term of the lease, notwithstanding the absence of

production, there are significant differences between the two. First, the reworking

clause provides that in the event of reworking operations “this lease shall remain in

force in accordance with its terms so long as . . . reworking operations are

prosecuted . . . .” (Emphasis added).

By way of contrast, the continuous development clause specifically provides that,

in the event of a continuous development program, the lease will be kept “in force and

effect as to all lands and all depths” covered by the lease agreement. The language “as

to all lands and all depths” is, therefore, significantly different from the provisions of the

reworking clause. Furthermore, “in accordance with its terms” specifically incorporates

the terms of the lease agreement—including the Pugh clause and retained acreage

clause. The retained acreage clause, found in paragraph 12.b., defined the “partial

termination date” as the “end of the primary term or the cessation of the continuous

development program,” not the “reworking program,” indicating differential treatment of

the two savings provisions. Therefore, according to the express terms of the Pugh

clause and retained acreage clause, at the end of the primary term, the lease continued

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only as to acreage included within a defined “production unit,” including wells being

reworked.

The retained acreage clause found at paragraph 12.b. of the lease agreement

defined the acreage exempted from automatic termination by specifying five categories

of acreage: (1) unitized tracts, (2) producing oil wells, (3) “make-up” water wells, (4)

disposal wells, and (5) gas wells. The record established that no acreage had been

unitized or otherwise assigned to a waterflood plan and that none of the wells were

classified as gas wells. The record further established that there were 35 producing

wells and three disposal wells.6 Based on this record, Hardin Simmons contends Hunt

only retained 40 acres around each oil well that was producing in paying quantities and

each water disposal well that was active as of the end of the primary term. Because

Hardin-Simmons met its burden of showing the occurrence of the determinable

condition, i.e., the absence of production as to all other acreage; and, Hunt failed to

meet its burden of establishing the application of a savings provision obviating the

application of the termination provisions of paragraph 12.a. as to those acres, the

subject lease expired, as a matter of law, at the end of the primary term as to those non-

productive acres. Accordingly, Hardin Simmons’s first issue is sustained.

ISSUE TWO

By its second issue, Hardin-Simmons presents a factual sufficiency issue

contending the trial court erred by denying its motion for new trial because the jury’s

finding that Hunt did not breach an implied covenant to reasonably develop the Frost

6
Those wells were designated as: 107, 109, 147, 169, 209, 226A, 247, 248W, 249, 265, 266,
267, 285, 287, 303, 304, 305, 306, 307, 308, 309, 323, 324, 325, 326W, 328W, 343, 348, 349, 363, 367,
369, 382, 383, 385, 388, 404, and 408. The location of each well was depicted on PX-51.

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property was against the great weight and preponderance of the evidence. We

disagree.

Texas courts have recognized an implied covenant to reasonably develop and

protect the leased premises once production has been obtained. Amoco Production

Co. v. Alexander, 622 S.W.2d 563, 567 (Tex. 1981); Grayson v. Crescendo Resources,

104 S.W.3d 736, 739 (Tex. App.—Amarillo 2003, pet. denied). A lessee’s duty under

this covenant is to act as a reasonably prudent operator under the same or similar

circumstances. Amoco Production Co., 622 S.W.2d at 567-68. The covenant to

develop is only implicated after production is secured and requires the lessee to act with

reasonable diligence so that the operations result in a profit to both lessor and lessee.

Koontz, 325 S.W.2d at 693.

Here, the question regarding reasonable development was presented to the jury

in the form of Question Number 1, which provided as follows:

Did [Hunt] fail to drill additional wells on the lease that a reasonably
prudent operator would have drilled?

The question was accompanied by the following instruction:

You are instructed that [Hunt] has a duty to drill all wells that a reasonable
and prudent operator would drill under the same or similar circumstances,
with a reasonable expectation of profit. This duty to drill extends from the
surface to the base of the San Andres Formation.

The jury unanimously answered the question: “No.”

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 Hardin-Simmons contends that evidence supporting a finding of breach of the

implied covenant was provided by Hunt’s own engineering reports. Whether that

argument is correct is of little moment given the jury’s answer to Question Number 1

and the appropriate standard by which we must review that finding. Hunt contends, and

we agree, the record contains substantial evidence that it was in the process of

developing the full 4,960 acres as a waterflood unit. The evidence of production and

development is sufficient to defeat any contention that the jury’s answer to Question

Number 1 is against the great weight and preponderance of the evidence. Issue two is

overruled.

ISSUE THREE

Hardin-Simmons’s third issue contends the jury’s finding that Hunt did not fail to

execute a written release describing the areas or depths no longer subject to the lease

is also against the great weight and preponderance of the evidence. Based on our

discussion of its first issue, we agree. Accordingly, we hereby sustain issue three, set

aside the jury’s answer to Question Number 3, and render a finding that Hunt failed to

execute a written release describing the areas or depths no longer held by the subject

lease.

ISSUE FOUR

By its fourth and final issue, Hardin-Simmons contends the jury’s finding that ten

particular wells were producing in paying quantities was also against the great weight

and preponderance of the evidence. Discussing each well seriatim, Hardin-Simmons

contends Hunt failed to present evidence of any revenue from those wells and,

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therefore, the jury had no factual basis upon which it could determine those wells were

producing in paying quantities.

As stated above, whether a well is producing in paying quantities is a question of

fact for the jury, and the burden is on the lessor to prove a lack of production in order to

terminate the lease. Laddex, Ltd., 513 S.W.3d at 482. Here, Hardin-Simmons did not

offer any evidence that the particular wells were not profitable over a reasonable period

of time. Instead, it argues that Hunt’s evidence established that each well was not

operational at the end of the primary term. That argument begs the question. It does

not matter whether an individual well was actually operational on the last day of the

primary term; what is critical is whether the well can be considered as profitable over a

reasonable period of time according to the facts and circumstances surrounding that

particular well. Id. at 482 (citing Koontz, 325 S.W.2d at 690) (stating that, unless the

lease agreement defines the period for which production in paying quantities is

measured, “there can be no limit as to time, whether it be days, weeks, or months, to be

taken into consideration in determining the question of whether paying production from

the lease has ceased”). Because Hardin-Simmons failed to meet its burden of showing

that the jury’s finding was against the great weight and preponderance of the evidence,

its fourth issue is overruled.

CONCLUSION

The trial court’s take-nothing judgment in favor of Hunt Cimarron Limited

Partnership d/b/a Cimarron Exploration Company is reversed and judgment is hereby

rendered declaring the subject lease to have terminated as to the entire acreage, save

and except a 40-acre tract associated with each of the following wells: the 107, 109,

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147, 169, 209, 226A, 247, 248W, 249, 265, 266, 267, 285, 287, 303, 304, 305, 306,

307, 308, 309, 323, 324, 325, 326W, 328W, 343, 348, 349, 363, 367, 369, 382, 383,

385, 388, 404, and 408. Because the trial court has not addressed Hardin-Simmons’s

prayer for recovery of attorney’s fees pursuant to the disposition, this matter is

otherwise remanded to the trial court for further proceedings and entry of a new

judgment in accordance with this opinion.

Patrick A. Pirtle
Justice

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