Oil and Gas Plus Fractions Equal a Mess

Originally published by Barry Barnett.

Using a fraction of a fraction instead of a simple number can cost an oil and gas fortune.

The lesson came in Hyshaw v. Dawkins, No. 14-0984 (Tex. Jan. 29, 2016), a family fight over a will. It shows what a mess can result from the fondness of oil and gas people for a particular kind of fraction — the sort with an eight in the denominator.

Fractions as shorthand

Oil and gas people say “8/8ths” when they mean “all”.

For a long time, until the 1970s, the “usual” or “customary” royalty for the land/mineral owner meant one of those eighths (with the oil and gas company paying all costs for the other 7/8ths).

Indeed, “many landowners erroneously believed the landowner’s royalty could be no greater than 1/8″. Hyshaw v. Dawkins, slip op. at 1 (emphasis added).

The case

Hyshaw v. Dawkins arose from the 1947 will of Ethel Hyshaw.

At her death in 1949, Ms. Hyshaw owned the surface of and minerals under 1415 acres southeast of San Antonio. She bequeathed the property to her son and two daughters in three separate, and unequal, parcels but granted “each of my children . . . an undivided one-third (1/3) of an undivided one-eighth (1/8) of all oil, gas or other minerals in or under or that may be produced from any of said lands”. Id. at 4.

A later passage stated that, in the event she sold a royalty interest during her lifetime, the son and daughters “shall each receive one-third of the remainder of the unsold royalty.” Id. (Emphasis added).

The matriarch thus treated her offspring differently vis-a-vis inheritance of the 1415 acres in fee simple but the same with respect to the same with respect to the royalty payable upon lease of the lands.

Or did she?

Successors to the interests of Ms. Hyshaw’s children got in a fight over what “one-third (1/3) of an undivided one-eighth (1/8)” meant. One group urged that it simply equaled .04167, or 4.167 percent. The other claimed that “undivided one-eighth (1/8)” referred to whatever royalty the lessee agreed to — which since the 1970s has generally exceeded one-eighth (.125, or 12.5 percent), often by a factor of two (.25, or 25 percent).

The fight thus concerned whether the successors to the parcels could retain the benefit of the higher royalty rates in more recent leases or whether they instead had to share it with the others.

Ruling

The Supreme Court ruled 9-0 in favor of sharing. As Justice Eva Guzman explained:

The third royalty clause demonstrates that Ethel intended the royalty devise to be equal and that re-equalization would be required if an inter vivos event diminished the available royalty. If Ethel had truly intended the fee-owning child to benefit exclusively from any excess royalty, as Inez’s successors argue, equalization following a royalty-diminishing transaction would produce a paradoxical result. The only plausible construction supported by a holistic reading of the will is that Ethel used “one-eighth royalty” as shorthand for the entire royalty interest a lessor could retain under a mineral lease, anticipated the siblings would share that royalty equally, and intended proportional equalization of any royalty remaining following an inter vivos transaction. We therefore hold that Ethel’s will devised to each child 1/3 of any and all royalty interest on all the devised land tracts.

Id. at 22-23 (footnotes omitted).

Impact

The outcome of Hyshaw v. Dawkins means uncertainty around conveyances of royalty interests that express the grant in fraction-of-1/8 terms.

In disputes over interpretation of both wills and inter vivos transfers, courts in Texas will treat a conveyance of a 1/8 royalty interest as suggesting, but not proving, an intent to part with a “floating” interest, which will vary depending on the royalty rate that the land/mineral owner negotiates with the lessee/exploration and production company. Other language in the will or deed must ordinarily buttress the inference of a wish to create a royalty interest that varies rather than one that always equals the product of multiplying the fractions.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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