PNP Petroleum I, LP and PNP Management, Inc. v. Edna Earnest Taylor and Elizabeth Earnest Herbst., 438 S.W.3d 723

Background

PNP Petroleum (lessee) and Taylor/Herbst (lessors) executed a one-year oil & gas lease (primary term ending June 1, 2010) with a “SHUT‑IN ROYALTY (Saving)” clause allowing lessee to pay $20 per proration acre to extend the lease for up to two years if, at expiration, wells "not producing oil/gas in paying quantities" were located on the premises.
Thirteen nonproducing wells existed on the property at the lease’s execution; PNP sent the shut‑in royalty payment and notice on May 12, 2010; lessors returned the payment and asserted the lease would expire.
PNP sued for declaratory judgment that its payment extended the lease; lessors moved for summary judgment that the payment did not extend the lease because no wells were "capable of producing in paying quantities." U.S. Enercorp intervened as a top‑lessee.
After summary judgment for lessors, PNP and later-intervenors filed motions to reconsider and offered additional evidence (affidavits, draft leases showing deletion of the phrase "capable of"). The trial court sustained objections and struck that evidence; it denied reconsideration and severed the lease validity claims.
On appeal, the court reviewed whether the trial court abused its discretion in excluding negotiation drafts and whether the lease should be construed to require wells to be "capable of producing" before a shut‑in payment can preserve the lease.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether trial court abused discretion by sustaining objections and striking negotiation drafts/affidavits	PNP/Zaccaria/Cibolo: drafts and negotiation evidence are admissible surrounding circumstances and show parties removed "capable of" from clause	Taylor/Herbst/U.S. Enercorp: parol evidence, hearsay, and relevancy bars admission of drafts and affidavit	Trial court abused discretion: drafts/admissions were admissible as surrounding circumstances; hearsay objection failed because offered to show what was said, not truth; relevance satisfied
Whether Zaccaria/Cibolo (later‑joined parties) were entitled to have their post‑judgment evidence considered	They had due process right to be heard; trial court could not refuse to consider their evidence because they were not initial parties	Appellees: same exclusion standard should apply to all motions to reconsider	Court: due process required consideration of their evidence; trial court erred in refusing to consider it
Whether the term "shut‑in royalty" in this lease incorporates industry meaning requiring well to be "capable of producing in paying quantities"	PNP: the negotiated deletion of "capable of" shows parties rejected the industry‑imposed requirement	Lessors: industry definition of "shut‑in royalty" generally requires capacity to produce; that meaning should be applied	Court: considering negotiation drafts, parties removed "capable of" and thus did not intend to import the industry meaning; payment extended the lease as a matter of law
Remedy on appeal	PNP sought reversal and declaration lease extended	Lessors sought affirmation that lease expired	Court reversed trial court and rendered judgment that PNP’s May 12, 2010 payment extended the lease

Key Cases Cited

Anglo-Dutch Petroleum Int’l, Inc. v. Greenberg Peden, P.C., 352 S.W.3d 445 (Tex. 2011) (parol evidence may be considered only to provide context for interpreting an ambiguous contract; extrinsic evidence cannot alter plain written terms)
Houston Exploration Co. v. Wellington Underwriting Agencies, Ltd., 352 S.W.3d 462 (Tex. 2011) (deletions in a negotiated form can indicate parties’ intent and surrounding circumstances may inform contract construction)
BP Am. Prod. Co. v. Zaffirini, 419 S.W.3d 495 (Tex. App.—San Antonio 2013) (surrounding negotiations may be considered as construction aid for leases under Houston Exploration)
Hydrocarbon Mgmt., Inc. v. Tracker Exp., Inc., 861 S.W.2d 427 (Tex. App.—Amarillo 1993) (industry rule: shut‑in royalty maintains lease only when the well is capable of producing in paying quantities)
Kidd v. Hoggett, 331 S.W.2d 515 (Tex. Civ. App.—San Antonio 1959) (recognition of capacity requirement for shut‑in royalty preservation)