It’s surprising how many court cases—Supreme Court cases, even—that literally turn on “a word.” The end of June, the Texas Supreme Court came out with a ruling that might impact thousands, if not tens of thousands, of royalty deeds in Texas and beyond. The case is U.S. Shale Energy II, LLC v. Laborde Properties, L.P., S.W.3d, No. 17-011,2018 WL 3189552 (Tex. June 28, 2018). Conrad Hester and Alix Allison of Thompson & Knight LLP wrote an article entitled, “We All Float Down Here: New Texas Supreme Court Opinion Finds Floating, Not Fixed, Royalty” about the ruling, for Oil and Gas Update, an internet blog.
This ruling certainly impacts the work of every division order analyst. That includes future work as well as past work, it seems. Authors Hester and Allison point out that this ruling changes how a royalty deed using the fraction “1/16” might not mean 1/16. It could mean a full one-half of whatever royalty rate is contained in the lease covering the interest, whether that be 1/8th or more than 1/8.
According to the article, the royalty deed granting clause language at issue states plainly that the grantor reserves an undivided one-half interest in the royalty on production from the lands described in the deed. That initial statement is followed by a comma, after which one last statement is made: “the same being equal to one-sixteenth (1/16) of the production” (C. Hester and A. Allison, Oil and Gas Update, August 3, 2018).
Hester and Allison explain the court’s reasoning: basically, the inclusion of the fraction 1/16 in the granting clause did not limit the reservation to 1/16, but rather, represented only the understanding that, at the time, the lease contained a 1/8 royalty clause. Future leases containing a royalty rate higher than 1/8 would be subject to a floating reservation equal to one-half of whatever is contained in the lease.
It’s unknown whether this ruling will affect current, ongoing royalty payments to owners being paid based on a years-old deed containing the same, or similar language. Until the division order analyst’s employer says differently, the distribution of revenues will continue in the manner currently being paid. In all likelihood, it will be up to the individual owners to become aware of this ruling, recognize its effect on their payments specifically, and bringing it to the attention of the company paying them.