CHARLES PUMMILL; MARK PARRISH; and CHRIS PARRISH, JR., Plaintiffs/Appellees,
HANCOCK EXPLORATION LLC; YALE OIL ASSOCIATION, INC.; CHEVRON U.S.A., INC.; CIMAREX ENERGY CO.; and CIMAREX ENERGY CO. OF COLORADO, Defendants/Appellants.
Mandate Issued: 06/20/2018
FROM THE DISTRICT COURT OF GRADY COUNTY, OKLAHOMA HONORABLE
RICHARD G. VAN DYCK, TRIAL JUDGE
N. Barnes, Patranell Britten Lewis, BARNES & LEWIS,
L.L.P, Oklahoma City, Oklahoma
Caywood, Angela Caywood Jones, PARK, NELSON, CAYWOOD, JONES,
L.L.P., Chickasha, Oklahoma and Bradley E. Beckworth, Jeffrey
J. Angelovich, Susan Whatley, NIX, PATTERSON & ROACH,
L.L.P., Daingerfield, Texas, for Plaintiffs/Appellees.
Richard B. Noulles, Bradley W. Welsh, GABLEGOTWALS, Tulsa,
E. Brown, McCALLA BROWN PATEL, LLP, Chickasha, Oklahoma and
Nathan K. Davis, SNELL & WILMER, L.L.P., Denver,
Colorado, for Defendants/Appellants.
Kevin Hayes, Pamela S. Anderson, Dawson A. Brotemarkle, HALL,
ESTILL, HARDWICK, GABLE, GOLDEN & NELSON, P.C., Tulsa,
Oklahoma and Craig Rainey, GPA MIDSTREAM ASSOCIATION, Tulsa,
Oklahoma, for Amicus Curiae GPA Midstream Association.
J. Griffin, Jr., L. Mark Walker, Harvey D. Ellis, CROWE &
DUNLEVY, A PROFESSIONAL CORPORATION, Oklahoma City, Oklahoma,
for Amicus Curiae Oklahoma Independent Petroleum Association.
D. Christiansen, McAFEE & TAFT, Oklahoma City, Oklahoma,
for Amicus Curiae Oklahoma Oil & Gas Association.
Sharp, REX A. SHARP, P.A., Prairie Village, KS for Amicus
Curiae Tony R. Whisenant.
L. Stowers, Douglas E. Burns, BURNS & STOWERS, P.C.,
Norman, Oklahoma, for Amicus Curiae Coalition of Oklahoma
Surface and Mineral Owners.
THOMAS THORNBRUGH, VICE-CHIEF JUDGE.
Defendants, Hancock Exploration LLC; Yale Oil Association,
Inc., Chevron U.S.A., Inc., Cimarex Energy Co., and Cimarex
Energy Co. of Colorado, appeal from the district court's
entry of a declaratory judgment, following a bench trial on
remand, in favor of Plaintiffs, Charles Pummill, Mark
Parrish, and Chris Parrish, Jr. The trial court rejected
Defendants' claim that they were allowed to
proportionately charge certain expenses against
Plaintiffs' royalty payments.
The question of consequence on appeal involves
Defendants' challenge to the trial court's
determination of when the natural gas at issue here became a
"marketable product." Finding that the trial
court's decision of this fact-intensive issue is
supported by competent evidence and is in accord with law, we
This is the second time this matter has been before the Court
of Civil Appeals. In the first appeal, Case No. 111, 096, the
Supreme Court vacated an opinion by COCA's Division I,
and affirmed in part and reversed in part the trial
court's summary judgment in Plaintiffs' favor. After
finding that disputed fact issues remained undetermined, the
Court remanded the case for trial. See Pummill v. Hancock
Exploration LLC, 2014 OK 97, 341 P.3d 69 (corrected
order) ("Pummill I").
The record reflects that Plaintiffs, Charles Pummill, Chris
Parrish, Jr., and Mark Parrish (collectively, Lessors or
Plaintiffs), are descendants of the original mineral interest
owners/lessors of two oil and gas leases on 160 acres in the
SE/4 of Section 32, Township 9 North, Range 8 West, in Grady
County (the property). The property now is part of a
640-acre, drilling and spacing unit from which the
Parrish-Novotny No. 1-32 Well (the 1-32 well), has produced
natural gas since 1985. Plaintiffs' interests derive from
leases entered into in 1966 between the original lessors,
Ethel Marie Pummill and Mabel Lee Parrish, and Jules Bloch.
The women each retained royalty interests in production. The
Parrish lease contains a "gross proceeds" royalty
clause, while the Pummill lease contains a "market price
at the well" clause.  Neither party to this litigation
contends the language difference in the royalty clauses makes
a difference when determining the point at which gas produced
under the leases is a "marketable product."
The original lessee, Jules Bloch, assigned leasehold
interests that ultimately were acquired by Defendants
Hancock, Yale, and Chevron, as well as by Bloch's own
company, Bloch Petroleum, LLC, which originally was named as
a defendant in this case.  Each of these companies is a
current lessee and a non-operating working interest owner in
the 1-32 well.
Defendant Cimarex Energy Co. of Colorado has been the
operator of the 1-32 well since 1999.  Cimarex Colorado is
a wholly owned subsidiary of Defendant Cimarex Energy Co.
(collectively, Cimarex). Cimarex does not own an interest in
the 1-32 well, but other wholly-owned subsidiaries of Cimarex
Energy own net revenue interests totaling approximately 40%.
Since June 2005, Cimarex has marketed production from the
1-32 well and also has calculated and distributed royalty
payments to royalty owners, including Plaintiffs.
Plaintiffs filed this action in October 2011, claiming
Defendants had improperly interpreted the leases so as to
negate the implied covenant to market gas. They claimed
Defendants had refused to bear all of the costs necessary to
create a marketable product, and had underpaid Plaintiffs by
improperly charging certain expenses against Plaintiffs'
Defendants denied Plaintiffs' claims and asserted various
affirmative defenses. Cimarex also counterclaimed, disputing
Plaintiffs' interpretation of "marketability"
and arguing that if the court found the lease provisions did
not negate an implied covenant to market, then it should
enter judgment declaring that gas from the 1-32 is
"marketable at the custody transfer meter" located
near the well. The custody transfer meter connects to a
pipeline/gathering system owned by a group of entities
collectively referred to by the parties as
"Enogex/Enable" or "Enogex."
At all times relevant here, Enogex/Enable has gathered and
transported the 1-32 gas to its off-lease processing plants,
where it extracts natural gas liquids (NGLs) and delivers
residue gas for sale into high pressure intra- or interstate
pipelines. Cimarex specifically requested a declaration that
it could proportionately charge Plaintiffs for processing
costs incurred at the Enogex/Enable plants, as well as a
determination that it could charge "any costs incurred
for gas production" from the 1-32 well as long as
"the other requisites for charging such costs to royalty
owners" have been met under Mittelsteadt v. Santa Fe
Minerals, Inc., 1998 OK 7, 954 P.2d 1203. 
Plaintiffs moved for summary judgment. As described in
Pummill I, the trial court granted Plaintiffs'
request and entered a lengthy judgment declaring that (1)
neither the "gross proceeds" nor "market price
at the well" lease language abrogated the "implied
covenant to market" inherent in each lease, and,
consequently, gas royalty payments under each lease were
"free of all costs to create a marketable product";
(2) Defendants' use of a "percentage of
proceeds" (POP) or "percent of index" (POI)
form of gas purchase contract or service agreement with third
parties instead of a "cash fee gathering
agreement," did not change the amount of royalty owed
under the leases; and (3) Defendants owed Plaintiffs royalty
on gas from the 1-32 well "used off the lease or in the
manufacture of products at the gas plant per the terms of the
leases." A fourth issue, concerning interest owed by
Defendants, was not disputed, and also was included in the
Defendants appealed. In June 2014, COCA Division I, finding
the trial court's order adequately explained its
decision, unanimously affirmed pursuant to Okla.Sup.Ct.R.
1.202(d). See Case No. 111, 096 (opinion issued June
27, 2014). Defendants sought certiorari, which the Supreme
Court granted. It thereafter vacated COCA's opinion,
affirmed the trial court's judgment as to statutory
interest, reversed its judgment as to the three other issues,
and remanded, stating:
The appellants [Defendants] identified four issues in their
appeal of the judgment of the district court: Issue 1. The
express language of their leases does not abrogate or negate
the implied covenant to market in any way; Issue 2. The
current or future use of a POP, POI or any other form of
contract, instead of a fee based agreement with Enogex, does
not change the amount of royalties due under the leases;
Issue 3. Appellants are entitled to receive royalties on gas
used off the lease or in the manufacture of products at the
gas plant; and Issue 4. Appellants owe interest on royalties
not timely paid without prior demand from the royalty owners.
The briefs filed and the oral argument held before this Court
on November 5, 2014, reveal that facts which could affect the
resolution of the district court Issues I through III need to
be addressed before the fact-finder, the district court. The
parties at the oral argument affirmed that Issue IV was not
Accordingly, certiorari is granted. The opinion of the Court
of Civil Appeals is vacated. The judgment of the district
court is affirmed in part and reversed in part and remanded
with instructions to hear and decide the disputed fact
Pummill I, 2014 OK 97, 341 P.3d 69 (corrected
On remand, the parties submitted to the trial court a
"Stipulation of Undisputed Facts" (Stipulation), 49
joint exhibits, and numerous other exhibits and evidence.
Both sides submitted proposed findings of fact and
conclusions of law. Trial occurred in October 2015, at which
time the court heard testimony from the parties, expert
witnesses, and representatives of "non-party midstream
companies" testifying on behalf of Defendants.
The trial court found in favor of Plaintiffs on their claims
and against the Cimarex entities on their counterclaim. It
entered a 74-page, multiple-part judgment explaining its
decision and incorporating almost verbatim Plaintiffs'
proposed findings of fact and conclusions of law. Relying
heavily on Oklahoma Supreme Court case law, particularly
Mittelstaedt and Wood v. TXO Production
Corp., 1992 OK 100, 854 P.2d 880, the court held,
inter alia, that:
-- None of the language in either lease abrogated the
"implied covenant to market" long recognized in
Oklahoma, particularly because neither lease describes any
costs that may be charged against the lessor's royalty.
Because each lease had an implied covenant to market, all gas
royalty payments under each lease were "free of costs
[required] to create a marketable product," regardless
of "whether such costs are incurred on or off the
lease." The court noted that, to the extent certain
costs - such as those associated with compression, gathering,
dehydration and processing - are needed to create a
marketable product, if a lessee wants to deduct such costs
from a lessor's royalty, it must say so directly in the
lease. The court pointed to evidence of other leases entered
into by lessees and/or Cimarex "spell[ing] out"
that royalty owners are to share in such costs. Order at
-- Regardless of Defendants' "past, current or
future" use of a POP or POI form of contract with a gas
gatherer or purchaser, such contracts did not and would not
change the amount of royalty due under the leases, as long as
the POP and POI contracts involve performing the same
services necessary to render the gas capable of being sold on
the commercial market. 
-- Defendants owed Plaintiffs royalty on gas from the 1-32
well that was used off the lease by Defendants or
Enogex/Enable in gas gathering systems, gas plants, and
transmission pipelines. The court looked to the "express
terms of the Plaintiffs' leases" in reaching this
conclusion. It also noted that, since at least 2002,
Cimarex's corporate policy was to pay royalty on gas
consumed by Enogex/Enable in its gathering system and
compressors located off the lease. The court rejected
Defendants' claim that they were entitled to deduct
in-kind fuel fees resulting from ...