Endeavor Energy Res., L.P. v. Energen Res. Corp., No. 11-17-00028-CV, 2018; Tex. App. LEXIS 8705 (Tex.App.—Eastland Oct. 25, 2018, pet. filed)
The Eastland Court of Appeals recently issued its opinion in Endeavor v. Energen adopting a limited interpretation of an “accumulation” clause within a continuous development provision. The Court held that the clause only allowed the lessee to extend the “next” 150-day term, not to be accumulated and used on any well.
The lease at issue included a 150-day continuous development provision and the following “accumulation clause” (sometimes called a “banking” provision):
Lessee shall have the right to accumulate unused days in any 150-day term during the continuous development program in order to extend the next allowed 150-day term between the completion of one well and the drilling of a subsequent well.
The lessee drilled 12 timely wells under the continuous development
provision. However, the lessee waited 321 days to spud the thirteenth well. The lessee asserted that its thirteenth well was drilled timely because it had accumulated enough unused days in all of its previous wells (227 days) that it was permitted to wait 377 days to commence operations on the thirteenth well (150 + 227). The lessee analogized the accumulation provision to accumulating “pennies in a jar to be used whenever it chose to use them.”
Shortly before the lessee drilled its thirteenth well, the lessor executed a new lease in favor of a new lessee, Energen. Energen filed suit alleging that the prior lessee’s thirteenth well was not drilled on time and, as a result, partially terminated. Energen argued that the accumulation provision only allowed the prior lessee to accumulate days to extend the 150-day term for drilling the next well. Energen argued that, as a result, the prior lessee only had 186 days to spud the thirteenth well—not 377.
The Eastland Court of Appeals focused on the phrase “next allowed” in the accumulation clause, and held that it reflected the parties’ intent to limit the use of unused days to extend the 150- day term applicable to the “next” well. The Court also found that the phrase “150-day term” had significance, rather than merely serving as a label for the continuous development term.
The prior lessee asserted that Energen’s interpretation rendered the word “accumulate” meaningless, and that it required the Court to rewrite the lease to say that unused days are lost if not used. The Court disagreed, indicating that the prior lessee’s interpretation allowed it to “accumulate” unused days only to extend the “next” well’s period.
The prior lessee also argued that its interpretation promoted efficient development by providing the lessee flexibility in development decisions. However, the court of appeals took the opposite view, holding that an interpretation that would permit the lessee to cease drilling for over a year would be in conflict with the purpose of a continuous-development clause, which is to promote full development of leased acreage.
Disclosure: McGinnis Lochridge represents Endeavor Energy in this case.