Continental agrees to unique settlement in royalty lawsuit

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OKLAHOMA CITY – Oil and gas royalty owners agreed to an unusual settlement in a class-action lawsuit against a large local driller. Continental Resources Inc. agreed it won’t make some deductions from payments to mineral owners in the future unless they’re specified in the contract. The company also agreed to pay at least $61 million.

Rick Howell, Oklahoma chapter president for the National Association of Royalty Owners, said the multimillion-dollar settlement is important for those who are a part of the class, but the settlement doesn’t establish legal precedent. He said he’s waiting to see if other operators will follow suit when it comes to the core issue in the case to avoid the potential for litigation.

Royalty owners sued Continental, alleging the company had improperly deducted from royalty checks by charging those mineral owners to transport the oil from the wellhead to market. It affects about 32,000 mineral owners who own royalties in about 1,600 Continental wells drilled in three periods: from 1995 to 2015; from 2015 to the end of the settlement adjustment period, estimated in mid-2019; and all future Oklahoma wells it drills. Plaintiff Billy Strack, the trustee for Patricia Strack’s mineral estate, alleged the company unjustly enriched itself by charging fees to gather, transport and process oil and gas, including paying some of Continental’s subsidiaries for those services.

Deduction lawsuits are common in oil-producing states, with royalty owners arguing that operators charged too much or took improper deductions for moving the commodity from the production point to the sale point. At dispute is when oil or gas becomes marketable. Operators typically argue that the commodities can’t be sold directly from the wellhead and require some processing before the sale occurs.

Continental agreed not to make deductions for gathering in the future unless there’s an express clause in the lease contract. It also agreed not to deduct processing or transportation charges if the lease has an express no-deduction clause prohibiting it. Howell said that’s a big deal to royalty owners.

“Going forward, they’ve agreed that those deductions are no longer going to be deducted for gathering and transportation to make it marketable,” he said. “That’s an implied covenant in the contract.”

Terry Stowers, an attorney with Burns & Stowers who represented the plaintiffs, declined to comment and referred to the settlement website, StrackVsContinental.com. He discussed the settlement at a NARO meeting in early May and told the organization’s members that Continental made a huge concession by agreeing to the future deduction part of the settlement.

“Frankly, we think that is as valuable as the cash payment,” Stowers told the audience.

It could take a year to 18 months to implement the settlement because there are so many royalty owners, Stowers said. Continental agreed to pay 9-percent simple interest on the deduction refunds. He told NARO members the total value of the settlement will be more than $100 million because the agreement is in perpetuity.

“This is different than any settlement I have seen before,” Stowers said at the conference. “I have been pleased they agreed to change their (deduction) procedures on a go-forward basis.”

Continental spokeswoman Kristin Thomas wrote in a text message to The Journal Record that the company does not comment on litigation. The driller previously disclosed in regulatory filings that it would be difficult to estimate the total damages for the lawsuit. It increased the damages from $57 million at the end of the year to $60.6 million at the end of March, to reflect additional settlement obligations from the passage of time, according to regulatory documents.

NARO Executive Director Jerry Simmons declined to discuss the Strack settlement but said that in general, members across the nation face different challenges when it comes to lease agreements and deduction charges. Some royalty owners in Pennsylvania receive negative checks for their mineral payments, though companies don’t ask a royalty owner to pay the operator.

“We had a dairy farmer in Pennsylvania who had 3 (billion cubic feet) of gas come off his lease in three months and had a negative royalty,” Simmons said. “When it is a negative check, that is an absurd deduction.”

Pennsylvania has a statute requiring a minimum 12.5-percent royalty be paid to the mineral owner. But there’s not enough clarity in the statute to establish whether that is net or gross, Simmons said. It underscores the need for mineral owners to be fully informed when they lease their minerals, he said. Howell agreed. Often royalty owners focus on the bonuses and don’t pay enough attention to the details and definitions in the lease contracts.

“Post-production deductions are very complex and too often, I see some simple things people haven’t paid attention to,” Howell said. “They’re tough to define, that’s why we’re having these cases on them.”

The opt-out period for the class was May 17. A fairness hearing is scheduled for June 1. The final settlement date is set for June 11.