Title Opinion Analysis

1. Title Opinion Analysis By Marsha Breazeale, CDOA, CPLTA HAPL Educational Event April 5, 2012 Houston, Texas

2. Types of Opinions By Purpose Common opinions include: • Lease/Leasehold Title Opinion • Drilling Title Opinion • Unit Tract Title Opinion • Division Order Title Opinion Special-purpose opinions include: • Acquisition Opinion • Lender/Investor Opinion

3. Types of Leasehold Ownership Interests • Working Interest • Lease Royalty • Overriding Royalties (including term & VORI) • Convertible Overriding Royalty • Production Payment Interest • Net Profits Interest

4. Standard Opinion Contents • Date that this title opinion was issued • Name and address of recipient • Legal description or well/unit name (DOTO & Unit Tract TO) • Date through which title is certified • List of materials examined • Ownership of all surface, mineral rights, leasehold interests • Tabulation of leases • Tabulation of assignments • Easements, encumbrances, taxes • Recapitulation of prior opinions’ title requirements & status • New title requirements

5. Occasional Contents • Opinion comments • Comments on unrecorded contracts such as farmouts, operating agreements, joint venture agreements and area-of-mutual-interest agreements

6. Effect of Requirements on Contents and Calculations • Title Objections and Requirements affect title opinion contents. Review Objections and Requirements before reviewing ownership listings. • Examiner explains what title decision he/she made relative to an objection when setting out owners and interest calculations in the opinion. Does that decision conflict with company policy? • Any title decision involves financial risk. • The client (recipient) can chose to waive requirement (accept the title as set out) or cure (submitting documentation for a supplemental opinion). • The company Landman and D/O Analyst and/or Lease Analyst should communicate fully when making waive/cure decisions.

7. Example: Title Objections and Requirements OBJECTION NO. 10: We find a Conveyance dated December 15, 2003, recorded in Book 1016, page 357 of the Lea County Records, wherein Ralph Cramden and Alice Cramden, d/b/a Ralph Cramden Transport, LLC, assigned all of their interest in Lea County, New Mexico, among other lands, to River West Operating, LLC. We have not examined the documentation whereby Ralph Cramden and Alice Cramden, d/b/a Ralph Cramden Transport, LLC, acquired an interest in any lands covered by this opinion (captioned land). REQUIREMENT: If Ralph Cramden and Alice Cramden, d/b/a Ralph Cramden Transport, LLC, claim to own an interest in the captioned land, submit for examination the documentation evidencing the manner in which they acquired such interest. [Business decision: Waive this requirement (assume risk) or send broker back to courthouse to search for missing documentation?]

8. Example: Title Objections and Requirements OBJECTION NO. 12: By Assignment dated July 7, 2004, Blackacre Oil Company conveyed a 5.73206%mineral interest to Whiteacre Resources, Inc, reserving a royalty interest equal to 1/4 of 5.73206% of the oil and gas produced and saved from said lands from the surface down to 100 feet below the total depth drilled in the Gia Gusher #1 Unit. Based on record title, we believe that the Assignors herein owned an undivided 5.89583% mineral interest in the captioned lands. We have treated this assignment as conveying the entire 5.89583% interest in the minerals in captioned land to Whiteacre Resources, subject to the royalty reservation therein. [To do otherwise would leave a tiny PMI interest in Blackacre, clearly not the intent of the parties.] REQUIREMENT: Assignment No. 33 should be corrected so that Assignors therein convey an undivided 5.89583% interest in the minerals in captioned land to Whiteacre Corporation, reserving to the Assignors a royalty interest equal to 1/4 of 5.89583% in captioned land, from the surface down to 100’ feet below the total depth drilled in the Gia Gusher #1 Unit. [Whiteacre is the Operator and you work for Whiteacre.] [Business decision: Waive this requirement (assume risk) or require a correction. What if Blackacre no longer exists as a company?]

9. The “Ideal” Title Opinion Date • Reference to this opinion in future opinions requires that this opinion be identified by date. • Proper land and land administration title records identify this opinion by date.

10. The “Ideal” Title Opinion Name and Address of Recipient • The title examiner typically will certify title with any form of warranty only for the recipient to whom the opinion is addressed. • The analyst should be aware that reliance on this title information by others creates risk; copies provided to partners often are disclaimed, to protect the recipient company.

11. The “Ideal” Title Opinion Opinion Title Denotes Type & Purpose: • Lease or Leasehold Title Opinion • Drilling Title Opinion • Original Division Order Title Opinion • Supplemental Division Order Title Opinion • Corrected Division Order Title Opinion

12. The “Ideal” Title Opinion Legal Description The title attorney certifies title to the lands from the date specified in the opinion through to the cut-off date also specified in the opinion, as to the lands covered by the opinion.

13. The “Ideal” Title Opinion Date through which title is certified • Should state the beginning date and ending date of the deed records documents examined. • The end date is the date upon which the title set out in the opinion is certified as being true, correct, and complete based on deed records and materials examined. • For a Division Order Title Opinion, the date of first production must be on or before the certification date for the opinion to be accurate to distribute production and revenues.

14. The “Ideal” Title Opinion List of materials examined might include*: • Prior title opinions • Probate records • Trust agreements • Administrative orders (spacing, forced pooling) • Unrecorded agreements (farmouts, JOA, etc.) • LisPendens records *If applicable

15. The “Ideal” Title Opinion Ownership of Interests • Include surface ownership • Include fractional text to identify each legal document or group of documents used to calculate the interest set out, regardless of interest type. • Footnotes or other means of correlating ORI’s and other post-lease burdens with a WI owner. • Owners identified with leases tabulated in the opinion.

16. The “Ideal” Title Opinion Owners Identified With Leases • The lease royalty rate is one important number used in calculating most owners’ interests in the Division Order Title Opinion. • The Oklahoma PPI calculation and Arkansas Blanchard royalty distribution system requires coordinating working interests to specific lease royalty rates.

17. The “Ideal” Title Opinion Fractional Text Each number used in an interest calculation derives from a title document or group of documents and the equation built from the documents must yield the decimal credited to the owner.

18. The “Ideal” DOTO Tabulation of leases • Date • Recording information • Full names of Lessor and Lessee • Full legal description of land covered by the lease • Amount of mineral estate credited to the lease • Primary term • Royalty rate • Special terms: shut-in terms, delay rentals, pooling, escalating royalties, pugh clauses, etc. • Full explanation of any lease jeopardy clauses • Full identification & effect of each Amendment

19. The “Ideal” DOTO Tabulation of Assignments • Chronological format: mixed into the Lease Tabulation to reflect progressive lease ownership. • Chain of Title format: listed as a separate section or exhibit to the opinion, either chronologically or presented in a “family tree” type format to show progression of leasehold title between the title dates under examination. • May or may not be presented in the same tabulation format as the leases, but should contain all data necessary to verify decimal credited to owners.

20. The “Ideal” Title Opinion Easements, encumbrances, and taxes • Opinion might state that it does not cover any or all of these items, which means they were not considered when concluding ownership. • Opinion might state the examiner was not provided with any information or documentation to analyze for affect on ownership. • If opinion describes any of these items, the statement(s) should include an opinion of their impact on ownership. A business decision might be required.

21. The “Ideal” Title Opinion Recapitulation of prior opinions’ title requirements & status • Can the documentation satisfying the requirement be found in the Company files? It may have been secured but never submitted to the attorney for his/her file. • Was the requirement previously waived, or can/should it be waived now?

22. Example: Opinion Comments “The New Mexico Supreme Court has repealed the ‘Four Corners’ Doctrine in New Mexico. It has declared that parties to documents affecting title to real property which are otherwise unambiguous on their face, may nevertheless introduce unrecorded and unreferenced instruments and oral testimony as evidence to prove the intent of a title document and any documents expressly referenced therein.” [Comment appearing in NM opinion dated 12/3/2007]

23. Comments on Unrecorded Contracts • Statement that the examiner relied upon a copy held forth to be the final written agreement. • Statement that the examiner relied upon verbal information or written confirmation of well participation subject to change after the fact.

24. DOTO Calculations Common defective fractional text: WI Owner Net Revenue: (Gross WI) x (Mineral Interest) x (Net Lease*) x (Gross Acs contributed / Pooled Acs) [*Net Lease: 100% lease minus total burdens] Problem: Unless the lease royalty rate is 28%, using a “net lease” decimal such as 72% fails to identify the lease royalty burden and overriding royalty burdens separately. A higher level of expertise by the D/O analyst is required in order to verify this % as correct in order to verify final decimal credited to this owner.

25. DOTO Calculations Common defective fractional text: Overrides (Gross WI) x (Mineral Interest) x (Gross ORRI) x (Gross Acs / Pooled Acs) Leases 1,2,4,12 Problem: If the overrides derived from all four leases were not created simultaneously using the same assignment or set of assignments, any one or more of the components of the fractional text will be a pre-calculated number. Again, a much higher level of expertise by the D/O analyst is required to verify this owner’s interest, as well as time.

26. “Ideal” DOTO Calculations Example: 50% x 14/144 x 13/16 x 80/640 Lse A less 50% x 14/144 x 2% x 80/640 or WI NRI

27. “Ideal” DOTO Calculations Example: 1.9820% x (0.0390625 x 0.0625) plus 1.9820% x (0.0171875 x 0.0500) orORRI 1.982% is this ORRI owner’s share of 100% of the ORRI originally created 0.0390625 is the Gross WI owned by Assignor, and this is the sum of all WI of partners burdened by this ORI. 0.0625 is the original ORRI created

28. “Ideal” DOTO Calculations Example: (Oklahoma DOTO) Proportionate Net Lease Unit Royalty Lease Name Tract Acres Royalty Royalty Share No. Jessica Rabbitt 2 2.50000 .1875 .00073023 .00781250 4 Formula: (Lease Royalty) x (Net Acres / Unit Acres) = (Unit Revenue) (0.1875) x (2.50000 / 641.92) = 0.00073023 Footnote: [0.00073023 / 0.00781250 = 0.09346944 TUR]

29. References IRS Manual Chapter 17. Legal Reference Guide for Revenue officers. 5.17.2.3.1 (12-14-2007). Retrieved from: http://www.irs.gov/irm/part5/irm_05-017-002.html Hogwood, T. E. (2011). The myth of the cured title opinion. Landman, 56(6), 23-40. Lowe, J. S. (2003) Oil and gas law in a nutshell. St. Paul, MN: West Group. Snell, G. A. III, Marsland-Griffith, A.M. (2011). Legal descriptions: A little background and a few new issues, part 1 of 2. Landman, 56(5), 65-90.

30. Questions?