Background and Business Context

This appeal arises from a royalty dispute in San Augustine and Nacogdoches counties involving oil and gas leases executed by Lud R. Davis III and Charlotte Davis in 2008 and 2009. Aethon Energy Operating LLC and its affiliated entities (collectively "AUBR") acquired the prior lessee's interest in 2016 and subsequently expended significant sums of money to expand oil and gas production in the area. Over the years, AUBR paid the Davises millions of dollars in royalties. Critically, the Davises' leases differed from approximately 80% of area royalty owners: their lease terms required them to share a portion of post-production costs to market the gas produced on their property, including a fee that affiliate Scona LLC charged AUBR for marketing services.

The Accounting Dispute

The controversy centered on how AUBR accounted for and disclosed the Scona transportation fee. For at least 2020, each check stub sent to the Davises itemized the fee as a "transportation charge" but identified the expense as "$0.00." This led the Davises to suspect that AUBR was underpaying royalties by embedding the fee in the total price of gas sold. Without any itemized amount other than "0.00" for the fee deduction on the 2020 check stubs, coupled with the fact that the Davises shared post-production costs, the Davises surmised that Scona and AUBR kept production profits to which they were not entitled and concealed their malfeasance by fabricating the amount of the fee, including it as a reduction in the total sales price, and disguising the actual cost through AUBR's accounting methods.

AUBR's Response and Accounting Change

Lud Davis contacted AUBR about the fee, and its general counsel Monty Ward responded in a November 2020 email explaining the basis for the transportation fee. Unsatisfied with this explanation, the Davises concluded AUBR along with its affiliates and Scona schemed to improperly inflate and artificially create the costs and expenses that AUBR deducts for gathering, treating, and marketing gas from their properties in violation of the terms in their leases. The Davises filed suit in March 2021.

Also in March 2021, AUBR altered its accounting practices and began to itemize dollar amounts on each check stub for the transportation fee. AUBR explained at trial that it adjusted its internal accounting of the transportation charge, moving it from a reduction in the total sales price to a separate itemized deduction. According to AUBR, this change had nothing to do with the Davises. Instead, AUBR claimed it made the change to better account for its cost-free royalty owners, because during the period in which the charge was embedded within total revenue, it was more difficult to remove that charge for royalty owners who did not bear post-production costs.

The Court's Decision

The trial court entered a take-nothing judgment in favor of AUBR. On appeal, the Davises raised a sole issue challenging the sufficiency of the evidence to support the judgment. The Tyler Court of Appeals affirmed, finding sufficient evidence to support the trial court's judgment in favor of AUBR and its affiliated entities.