Hyder Makes an Appearance in the Eagle Ford Shale

By Christopher M. Hogan, Trial Attorney & Founding Partner, Hogan Thompson Schuelke LLP 

11/07/24 — In the Texas Supreme Court’s postproduction cost jurisprudence, Chesapeake Exploration, L.L.C. v. Hyder, 483 S.W.3d 870 (Tex. 2016) has often stood out. In its opinion, the Court focused on “‘a perpetual, cost-free (except its portion of production taxes) overriding royalty of five percent (5.0%) of gross production obtained’ from directional wells drilled on the lease but bottomed on nearby land.” Id. at 872. The appellant in Hyder claimed that the “cost-free” language was merely language emphasizing that an overriding royalty interest is free of production costs but had nothing to do with postproduction costs. The Texas Supreme Court disagreed, finding that the “cost-free” language included postproduction costs. Much of the Hyder discussion focused on the lease’s language on production taxes and how that undercut the appellant’s argument: 

Chesapeake argues that “cost-free overriding royalty” is merely a synonym for overriding royalty, and a number of lease provisions discussed in other cases support that view. The exception for production taxes, which we have said are postproduction expenses, cuts against Chesapeake’s argument. It would make no sense to state that the royalty is free of production costs, except for postproduction taxes (no dogs allowed, except for cats). The exception for taxes might be taken to indicate that “cost-free” refers only to postproduction costs. But a taxes exception to freedom from production costs is not uncommon in leases, suggesting only that lease drafters are not always driven by logic. 

Id. at 874. 

Hyder differs from later decisions like Burlington Resources Oil & Gas Co. LP v. Texas Crude Energy, LLC, 573 S.W.3d 198 (Tex. 2019), BlueStone Natural Resources II, LLC v. Randle, 620 S.W.3d 380 (Tex. 2021), Nettye Engler Energy, LP v. BlueStone Natural Resources II, LLC, 639 S.W.3d 682 (Tex. 2022), and Carl v. Hilcorp Energy Co., 689 S.W.3d 894 (Tex. 2024). These later decisions did not have similar “cost-free” language at issue and thus generally ignored or limited Hyder. Some of these later decisions (like BlueStone and Carl) also focused on the concept of a royalty “yardstick” and valuation point (or location) for measuring that yardstick, a concept not addressed in Hyder. And while Hyder was a close 5-4 decision, each of the later Texas Supreme Court decisions was unanimous.

Indeed, Texas appellate courts have sometimes been confused by Hyder. The Fort Worth Court of Appeals went so far as to say that the analysis in the Hyder decision was not clearly described. See Shirlaine W. Properties Ltd. v. Jamestown Res., L.L.C., No. 02-18-00424-CV, 2021 WL 5367849, at *7 (Tex. App.—Fort Worth Nov. 18, 2021, pet. denied) (stating of Hyder, “[a]lthough the Court held that the overriding royalty created by this language was free of postproduction costs, its rationale was never clearly explained”). In light of these Texas cases, many practitioners I have spoken with have declared Hyder to either be dead or irrelevant when it comes to royalty jurisprudence. 

But perhaps not anymore. Just last week, the San Antonio Court of Appeals (which covers disputes over many of the top-producing Eagle Ford Shale counties such as Karnes, McMullen, La Salle, and Webb) relied heavily on Hyder in reaching a decision. In the case, Fasken Oil and Ranch Ltd. v. Puig, No. 04-23-00106-CV, 2024 WL 4608591, at *1 (Tex. App.—San Antonio Oct. 30, 2024, no pet. h.), the Court of Appeals looked at the Plaintiffs’ non-participating royalty interest (“NPRI”) created by a deed with a royalty clause using “free of cost” language: 

There is SAVED, EXCEPTED AND RESERVED, in favor of the undersigned, B.A. Puig, Jr., out of the above described property, an undivided one-sixteenth (1/16) of all the oil, gas and other minerals, except coal, in, to and under or that may be produced from the above described acreage, to be paid or delivered to Grantor, B.A. Puig, Jr., as his own property free of cost forever. Said interest hereby reserved is Non-Participating Royalty. 

Id. at *2. 

Like the appellant in Hyder, Fasken argued that this “free of cost” language “refers to production costs and not postproduction costs” and that Hyder did not apply. Id. at *3. Fasken noted that “the Hyder court relied on the parenthetical exception for ‘production taxes’ because production taxes are postproduction expenses,” and that “[b]ecause there is no comparable language excepting a postproduction cost from the royalty clause [at issue],” Hyder was inapplicable. But the Court of Appeals disagreed. It read Hyder as “acknowledge[ing] the taxes exception in that case could be read to indicate that the cost-free nature of the royalty must refer to postproduction costs because taxes are always postproduction costs.” Id. at *4. But it noted that the Texas Supreme Court also “acknowledged that the language could simply be the result of poor draftsmanship.” Id. Instead, it found that the Hyder decision was “based on the plain reading of the clause,” rather than the discussion of production taxes.

This reading of Hyder is arguably in conflict with the Fort Worth Court of Appeals’ decision in BlueStone Natural Resources II, LLC v. Nettye Engler Energy, LP, 640 S.W.3d 237 (Tex. App.—Fort Worth 2020), aff’d, 639 S.W.3d 682 (Tex. 2022). In that case, the Court of Appeals looked at a deed that created an NPRI “delivered to Grantor's credit, free of cost in the pipe line, if any, otherwise free of cost at the mouth of the well or mine.” Id. at 239. The appellee argued that the language in Hyder was “all but identical,” but the Court of Appeals disagreed based on the absence of language like the exception for production taxes: 

The [Hyder] court reasoned that although the use of the term “‘cost-free’ may simply emphasize that the overriding royalty is free of production costs,” in the case of the Hyder provision, that could not be the case because “cost-free” had the parenthetical expressing a postproduction cost. As the Hyder court stated, “The parenthetical exception for production taxes, which we have said are postproduction expenses, cuts against Chesapeake's argument. It would make no sense to state that the royalty is free of production costs, except for postproduction taxes (no dogs allowed, except for cats). The [applicable deed’s] granting language, on the other hand, has no “except for cats” exception language. In other words, unlike the granting provisions involved in Hyder, the granting clause in the [deed at issue] does not specifically except any postproduction costs. 

Id. at 245 (cleaned up). 

One way to square the two decisions is using the valuation point at issue. In Nettye Engler Energy, the granting language of “in the pipe line” or “at the mouth of the well” both call for a wellhead valuation point. In Fasken Oil, however, the Court of Appeals found that the deed at issue “does not contain a valuation point,” like an at-the-wellhead lease. Id. at *5. And without a valuation point, the court held that to “give effect to the ‘free of cost forever’ language,” the deed had to be read to cover postproduction costs. 

What should Eagle Ford operators do about this case? One key would be to pay attention to the writ history and maybe even keep any eye out for a motion for rehearing. The 2024 election has dramatically changed the composition of the San Antonio Court of Appeals, flipping it from a 5-2 Democratic majority to a 4-3 Republican majority. And even if the Court of Appeals does not change its decision, the Texas Supreme Court may be eager to reexamine Hyder and limit (or reverse) its impact. But until that happens, operators should keep an eye out for leases with “cost free” or “free of cost” language. Many operators have read Hyder the way that the court in Nettye Engler Energy read the case—as requiring something more than just “free of cost” or “cost free” language to make a royalty free of postproduction costs. In light of the Fasken Oil decision, those operators (particularly in the Eagle Ford) should be aware that such a reading—however common it might be in the industry—may not prevail in litigation. 

Christopher M. Hogan Trial Attorney & Founding Partner chogan@hoganthompson.com | 713.671.5642 

Chris Hogan focuses his litigation practice on resolving complicated disputes for corporate and individual clients, particularly those in the energy industry. Chris has substantial first-chair experience in federal court, state court, and arbitration proceedings. is honored to represent as lead counsel major energy companies such as Apache, BPX, Chevron, ConocoPhillips, Devon, EOG, Marathon Oil, Mewbourne, and Ovintiv.