McCurdy v. Harry L. Edwards Drilling Co. - 198 S.W.2d 609 (Tex. Civ. App. 1946)

Rule:

A reservation of production to pay a sum may be an "oil-payment." An oil-payment consists of "profit" to issue from the land and, in contemplation of law, is land. An oil-payment is not a debt, nor interest bearing.

Facts:

The drilling company agreed to drill a well of a specified depth at a specified cost per foot on one of the lease owners' leases. After the well was drilled to a certain depth, the parties superseded their contract with new contracts, under which wells were to be completed on each lease. Under the new contracts, the company's compensation for performance was an undivided one-third interest in the mineral estates held by the lease owners less an oil payment reserved by the lease owners out of a one-third interest. The production from the interest in the leasehold, which was transferred to the company, was reserved to the lease owners until they were fully reimbursed for the drilling costs. During the operation of the leases, the operation costs exceeded the value of the production. It was the theory of the lease owners’ suit that the terms of the reservation of the oil-payment were such as to make the oil-payment bear interest at the legal rate. It was further the theory of their suit that the drilling company was personally liable to the lease owners, who paid the $ 24,420.54 deficit, for one-third of said sum, and for interest thereon at the legal rate; and that the lease owners were entitled also to a lien on drilling company’s interest in the leases, to enforce the payment thereof. The trial held that under the lease owners' drilling contracts with the drilling company, the lease owners were entitled to reimbursement of the drilling costs out of the production from the one-third interest in the mineral estate of the leases conveyed by the owners to the company, but not interest.

Issue:

Did the trial court err in denying the lease owners interest on the reservation in the contract with the drilling company?

Answer:

No.

Conclusion:

The court held that the trial court properly denied the lease owners interest on the reservation in the contract with the drilling company, which was an "oil-payment." The court further held that the lease owners' expenditure of the costs to restore production were speculative and, therefore, were the lease owners' obligation until there was sufficient gross production for the leases to absorb them.