### I N THE UNI TED STATES COURT OF APPEALS FOR THE FI F TH CI RCUI T

No. 13-30049 Summary Calendar

CIMAREX ENERGY COMPANY, Plaintiff - Appellee

v. HAROLD P. CHASTANT, J R., Individually and as Trustee, on behalf of Harold P. Chastant, Jr. Trust, Defendant - Appellant

------------------------------------------------------------------------------- HAROLD P. CHASTANT, JR., Individually and as Trustee, on b ehalf o f Harold P. Chastant, Jr. Trust, Plaintiff - Appellant

v. CIMAREX ENERGY COMPANY, Defendant - Appellee

Appeal from the United States District Court for the Western District of Louisiana USDC No. 6:11-CV-1713 USDC No. 6:11-CV-2146

Before HIGGINBOTHAM, OWEN, and SOUTHWICK, Circuit Judges. U n i t e d S t a te s C o u rt o f A p p e al s

F i f t h C i rc u i t 

### F I L E D Aug ust 2, 2013 Ly l e W . Cay ce Clerk Case: 13-30049 Document: 00512330312 Page: 1 Date Filed: 08/02/2013No. 13-30049

PER CURIAM: * This appeal c oncerns a dispute between the lessor and l essee of an oil, gas, and mineral lease on Louisiana lands. Harold P. C h astant, Jr., the lessor, argues that Cimarex Energy Company, as lessee, owes additional royalty under the lease a s a result o f financial transac t i o ns that allowed it to hedge its risk against fluctuations in prices on production. The district court granted summary judgment in favor of Cimarex. We AFFIRM. FACTS On October 1 5, 2002, Chastant, individually and a s trustee of th e Harold P. Chastant, Jr. Trust, executed an oil, gas, and mineral lease in favor of Cash River Exploration, Inc. The lease was later assign e d t o Cimarex. The lease provided that C h a stant would b e paid a royalty of 1/8 of the value of the production of oil, gas, and other minerals from the leased property, which is calculated according to language in the lease quoted below. Cimarex engages in hedge transactions on a portion of its oil and gas production. For that portion, at times the price r eceived f or the m inerals has been higher than that on which the royalty to Chastant is calculated, and apparently o n some occasions the price has been lower. The royalty paid C hastant has never been adjusted b ased on a different price realized through hedging. Cimarex’s brief explains the relevant transactions this way: Cimare x e n g aged in commodities futures trading of v arious types a s a way of hedging against the p rice fluctuations in oil and gas. Hedging is generally defined as “[a] risk m anagement strategy used in limiting or offsetting probability or loss from f luctuations in

* Purs uant to 5 T H C I R

. R. 47. 5, the court has d eterm ined that this op inion s houldnot be p ublis hed and is not p reced ent excep t und er the lim ited circum s tances s et f orth in 5 T H C I R

. R. 47. 5. 4. 2 Case: 13-30049 Document: 00512330312 Page: 2 Date Filed: 08/02/2013No. 13-30049

the p rices o f commodities, currencies, or securities.” Specifically, to “hedge” against price risk, one enters the f utures market and buys a futures contract under which he obtains a c o nt r a c t position that minimizes risk against price fluctuations. The most i mportant point about this hedging, as it relates to this lawsuit, i s that it was a p u rely financial activity. Generally, parties engaged in financial hedging are not actually buying or selling n atural gas or crude oil. Instead, they are simply buying or selling f i n a n c ial positions called “derivatives,” i.e. , “ a financial instrument whose v alue d e r iv e s from the value of an underlying asset, reference rate, or index.” 1 Chastant made written demand on Cimarex that it p ay r oyalties based on the prices it received through entering these transactions. In a filing with the Securities and E xchange Commission that a p p e a r s in the record, Cimarex reported that it had “executed cash flow effective hedges c overing approximately 24% of [its] overall 2 007 gas production a nd 11% of [its] 2008 gas volumes.

. . .” During a six month period in 2009, C imarex executed derivative contracts that “cover approximately 40% of our anticipated 2 010 oil and g a s p r o duction volumes.” Cimarex f

i l e d a declaratory judgment action in September 2011, in the United States District Court for the W estern District of Louisiana. It sought a judicial declaration that the hedge price Cimarex received was not part of the market value on which royalty paid to Chastant was calculated under the terms of the lease. In response, Chastant filed suit in state court to recover a royalty based on what Cimarex received from its hedging operations. The state suit was removed t o district court on D ecember 13, 2011. Upon consolidation of

1 Thes e exp lanations from the Cim arex brief cite various s econd ary authorities , but w e have om itted the sources . 3 Case: 13-30049 Document: 00512330312 Page: 3 Date Filed: 08/02/2013No. 13-30049

Chastant’s suit and Cimarex’s motion f or declaratory judgment, both parties filed cross motions for summary judgment; Cimarex’s motion was granted, and Chastant’s was denied. Chastant appeals from the court’s final judgment, filed December 20, 2012, dismissing the matter with prejudice. DISCUSSION A district c ourt’s grant of s ummary judgment is reviewed de novo . E.g. , Ballard v. Devon Energy Prod. Co. , L.P. , 678 F .3d 360, 365 (5th Cir. 2012). “The court shall grant summary judgment if the movant show s t h a t there is no genuine dispute as to any material fact a nd the movant is entitled to judgment

as a matter of law.” Fed. R. Civ. P. 56(a). S ummary judgment is proper when, after considering all facts and ev i d e n c e in the light most favorable to the nonmovant, a reasonable jury could not find f or the non-movant. Ballard , 678 F.3d at 365. The district court’s interpretation of the parties’ mineral lease is reviewed de novo . E.g. , Travelers Ins. Co. v. L iljeberg Enters., I nc. , 7 F .3d 1203, 1206 (5th Cir. 1993). At issue is whether the lease between C imarex and Chastant obligates Cimarex to pay royalties on amounts it generated through separa t e f i nancial transactions in addition to the royalties it pays already on the market value of the oil o r gas produced from the property subject t o the lease. The district court properly applied Louisiana law to make this determination. Under Louisiana’s mineral code, “[a] mineral lease is a c ontract b y which the lessee is granted the right to explore for and produce minerals.” LA

. R E V
. S TA T
. § 31:114. The mineral code defines “royalty” under oil and gas leases as any i nterest in production, or its v alue, from or attributable to land subject t o a m ineral l ease, that i s deliverable or payable to the lessor or others entitled to share therein. Such interests in production or

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its value are “royalty,” whether created by the lease or by separate instrument, if they comprise a part of the negotiated agreement resulting in execution of the lease. LA

. R E V
. S TA T . § 31:213(5). The parties ’ c o n t ractual agreement as to what constitutes royalties is derived from the l anguage of the mineral lease itself, a s “the lease contract is the law between the parties, defining their respective legal rights and obligations.” Frey v. Amoco Prod. Co. , 603 So. 2d 166, 172 (La. 1992); s ee also LA

. C I V
. C O D E art. 1983 (stating contracts have effect of law for p arties). With respect to crude oil, the royalty provision of the lease between Chastant and Cimarex provides: “(a) On oil

. . . one-eighth (1/8) of that p roduced and saved from the land

. . . . Lessee may sell Lessor’s such oil at the best market price obtainable an d pay Lessor the price received f.o.b. [“free o n board”] t h e l e a s ed property, less any
severance of production t ax imposed thereon.” A s to n atural gas, the lease provides: (b) On gas produced f

rom or attributable t o said land a n d s o ld

. . . one-eighth (1/8) of the market value at th e mouth of the well of th e gas so sold

. . . . The price to be used in c o mputing the market value at the mouth o f the well shall b e the price received by Lessee under an arms’ length gas sales contract prudently negotiated in the light of the facts and circumstances existing at the time of consummation of such contract . . . . Chastant first relies o n the Louisiana statute requiring the lessee in a mineral leas e “to develop and operate the property leased

. . . for the mutual benefit of himself and his lessor.” LA

. R E V
. S TA T
. § 31:122. Chastant then argues that the lea s e p r o vides for a fractional royalty with “no clear provision against a fractional division of gross revenue s , ” meaning in effect that some royalty would be paid as a fraction of one value a nd the other receive the benefit

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of the d erivative trading. C hastant’s argument is simple: Cimarex owes royalty on the total amounts it received related to production from this well. The central difficulty for Chastant’s argument is that Cimarex’s hedging operations d o n o t a f

f e ct the m arket value of those items at the well or on the lease. That i s a c ritical fact because the lease provides that royalties are to be paid on the best m arket price of the gas at the mouth of the well or the oil on the leased p r operty. Consequently, the gains or losses on derivative trading, which do not affect the price at the wellhead or on t h e lease, are not subject to the lease’s royalty provision. This conclusion is supported i n general t e rms b y long-standing L ouisiana law. For example, the lease in one case p rovided that the l e ssee “should pay oneeighth of the ‘value of such gas’ calculated at the ‘market price,’ which means the market price at the w ell o r in the field and not the price which it would bring in

a distant market.” Wall v . U n i t e d G as Pub. Serv. C o. , 152 S o. 561, 564 (La. 1934). The Louisiana Suprem e C o u r t h eld “that the right of the owner o f a royalty interest is restricted to a share in production if and when it i s obtained.” U n i o n Oil Co. of C

al. v. Touchet , 8 6 So. 2 d 50, 53 (La. 1956). In a simil a r context, the Louisiana Court of Appeals c o n c l uded post-production costs were deductible from royalty payments because royalty p ayment was determined “at th e m outh of the well.” Merritt v. Sw. Elec. Power Co. , 499 So. 2d 210, 214-15 (La. Ct. App. 1986). It relied on our holding that “Louisiana law arrives at the value of the gas at the moment it seeks t o escape from the w e llhead.” Freeland v. Sun Oil Co. , 277 F.2d 159 (5th Cir. 1960). We apply these legal concepts to the relevant contractual l anguage. The lease provides that the market value, 1/8 of which is then owed Chastant, is to

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be computed “ at the mouth of the w ell” or “f.o.b. [free on board] the leased property.” The provision f or gas i s q u i t e s p e cific: “The price to be used in computing the market v alue at the mouth of the well shall be the p rice received by Lessee under an arms’ length gas s ales contract prudently negotiated in the light of the facts and circumstances existing at the time of consummation of such contract

. . . .” There is no room in such a computation for factoring in financial transactions entered i nto w ith the intent, but perhaps not always the effect, of softening the effect of drops in those market p r i ces. The value of oil is more simply pu t , b u t w e s ee no distinction relevant here: “the b est market price obtainable and pay Lessor the price received f.o.b. the leased p roperty, less any severance of production tax imposed thereon.” The hedging activities are u sed t o minimize the risk of m arket f luc tu ati o n s in the price of the oil o r gas. Because the transactions are purely financial and do not affect the market value of the oil or ga s a t the well or on the leased property, the p rofits or losses resulting from these transactions are not subject to the royalty provisions in the lease. Chastant seeks to override such a uthority by arguing that a more recent Louisiana case supports that the hedgi n g transactions are part of the market value subject to the lease’s r o y a l t y provision. See Frey , 603 So. 2 d 1 66 (La. 1992). In that c ase, royalties were due as a result of the lessee’s sale of gas to a third party under a take-or-pay provision. Id. at 169-79. A take-or-pay provision in a contract requires a “purchaser to take, or failing to t ake, to pay f o r t h e minimum annual contract volume of gas which the p r oducer-seller has available for delivery.” 8 H O WAR D R. W I L L I AM S & C H A R L E S J. M E Y E R S , O I LA N D GA S LAW 1038 ( 2012). The district court correctl y e xplained that this decision is

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inapplicable, stating that “the Freycourt specifically held that the take-or-pay paymen t s w e r e part of the ‘amount realized’ under the terms of the lease at issue, and reaffirmed the well-settled principle that ‘the right of the owner of a royalty interest is r estricted to a share in production if a nd when it i s obtained.’” Frey p rovides no legal basis f or C hastant’s p osition. Take-or-pay is, for these
purposes, an alternat iv e to actual p r oduction, o r effectively a minimum production for purposes o f rights under the lease. Hedging transactions do not serve that purpose. They are supplements to production, not substitutes. The mineral lease is clear as t o how royalties are t o b e paid. Royalties on oil are to be paid on “the best market pr i c e o btainable” for the price received “f.o.b. the leased p roperty,” while royalties o n gas are to be paid on “the market price at the mouth of the well.” That clarity stops a court from i nterpreting the agreement beyond its plain language. “When the words of a contract are clear and explicit and lead to no absurd consequences, no further i nterpretation m ay be made in search of the parties’ intent.” LA

. C I V
. C O D E art. 2046. In summary, the mineral lease between Cimarex and Chastant does not require Cimarex to pay royalties on amounts generated through it s separate financial activities. What is owed i s cal c u l a ted on the market value at the mouth of the well or leased property. AFFIRMED.

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