Background and Parties

SM Energy Company, an oil well operator in Howard County, Texas, entered into a surface use and compensation agreement with Buzzard Roost Farms, Inc. and C&L Solutions, Inc., the surface estate owners. The agreement contained a right of first refusal provision stating that "should Operator choose to drill a Saltwater Disposal Well within 5 miles of the Surface Lands, Operator shall give Surface Owner first right of refusal to have said Salt Water Disposal [Well] placed on the Surface Lands or other lands adjacent thereto which are owned by Surface Owner." When SM Energy chose to drill saltwater disposal wells within the five-mile radius but placed them on third-party land it had purchased rather than offering the surface owners the opportunity to host the wells, the surface owners sued for breach of contract. Following a jury trial in the 118th District Court of Howard County, the jury awarded damages to the surface owners, and the trial court entered judgment including attorney's fees.

The Contractual Dispute

The central issue on appeal was whether SM Energy's right of first refusal obligation was triggered by its decision to drill saltwater disposal wells within five miles of the surface lands, or whether the ROFR was instead tied to SM Energy's separate business decision to purchase land from third parties on which to place those wells. SM Energy argued that because the agreement did not explicitly require it to offer to purchase land for the surface owners, it had no obligation to extend the ROFR when it acquired third-party property. The surface owners contended that the plain language of the agreement unambiguously required SM Energy to offer them the opportunity to host any disposal well drilled within the specified radius, regardless of SM Energy's land acquisition decisions. The case also involved disputes over whether the surface owners were ready, willing, and able to accept the wells, and the proper measure of damages including skim oil revenue calculations.

The Court's Analysis

The Eastland Court of Appeals affirmed in part, holding that the agreement unambiguously obligated SM Energy to offer to place on the surface lands, or other land owned by surface owners, any salt water disposal well it chose to drill within five miles of the surface lands. The court emphasized that the right of first refusal addressed the drilling of wells on land owned by the surface estate owners, and that the right was not triggered by the operator's purchase of other property, but rather by its choice to drill wells within the five-mile radius. The court found that the operator's purchase of land from third parties on which it sought to drill salt water disposal wells was not part of the offer which had to be extended to surface owners under the ROFR provision. The court also held that the evidence was sufficient to support the jury's finding that the surface owners were ready, willing, and able to accept placement of the salt water disposal wells on their property, and that the surface owners were entitled to use the operator's own calculations, including its assumptions for revenue from skim oil recovered from produced salt water, to establish the value of the benefit of the bargain. However, the court reversed in part, finding that the evidence did not support the "value of the wells" element of damages awarded to surface owners, and remanded on that issue.