Barnett Shale

Devon Energy seeks appeal on royalty class-action ruling

Devon, a big player in the Barnett Shale natural gas field, is being accused of underpaying tens of millions of dollars in royalties.
Devon, a big player in the Barnett Shale natural gas field, is being accused of underpaying tens of millions of dollars in royalties. Star-Telegram archives

Devon Energy contends that a Dallas federal judge ignored state law when he allowed a class-action lawsuit to go forward accusing it of using sham transactions to underpay thousands of property owners in North Texas tens of millions of dollars in royalties.

In January, U.S. District Judge Ed Kinkeade granted class-action certification to a lawsuit brought by four individuals with leases in Denton County who had their gas processed at a Bridgeport plant. By certifying the class, Kinkeade said they represent the interests of thousands of landowners with common legal issues.

The Devon case echoes accusations brought against Chesapeake Energy that it sold natural gas from its Barnett Shale wells to an affiliate and pocketed the profits when it was sold on the open market.

In a filing with the 5th Circuit Court of Appeals in New Orleans, Devon says Kinkeade’s ruling would force the Oklahoma City company to face a fundamentally unfair situation of defending thousands of claims in one trial or be forced to purse a settlement worth tens of millions of dollars.

Devon accuses Kinkeade of “abuse of discretion” in granting certification without examining the 4,143 leases involved.

“In certifying a class, the district court failed to conduct the mandatory rigorous analysis” and “made clearly erroneous findings of fact, and failed to properly apply Texas law,” according to court documents filed in late January. The court’s ruling exposes Devon “to potentially ruinous liability.”

Attorneys representing the landowners earlier this month fired back that Kinkeade’s ruling is anchored in Texas Supreme Court rulings and presents no “novel or unsettled issues,” court records show. They also said the case is not “ruinous” when Devon has $26.8 billion in assets and $4.2 billion in quarterly earnings.

David Drez, one of the attorneys for the plaintiffs, declined to comment. John Porretto, a spokesman for Devon, said the company doesn’t comment on pending litigation.

In their lawsuit, the landowners allege Devon Energy’s production arm sold the natural gas at a low well head price to an affiliate, Devon Gas Services, which then processed the gas through its Bridgeport plant and deducted an “unreasonable and lucrative 17.5 percent processing fee” from the royalty checks.

The lawsuit refers to these transactions as a sham, made worse by the fact that once the gas left the plant, Devon and its affiliates sold the residue gas to third parties for a profit but didn’t pass those proceeds on. The lawsuit covers gas sales from 2008 to 2014, when Devon owned the Bridgeport plant.

The Texas Oil and Gas Association, a trade group representing more than 5,000 energy industry members, filed documents supporting Devon’s position, saying that Kinkeade’s decision runs counter to jurisprudence and “unquestionably creates settlement pressure” when “the merits of individual claims are in doubt.” Allowing the Devon case to go to trial will “encourage comparable class actions,” court records state.

Max B. Baker: 817-390-7714, @MaxbakerBB

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