A Montgomery, Ala., state-court jury hit Exxon Mobil Corp. with a $3.5 billion judgment for underpaying natural-gas royalties from wells in Gulf Coast waters.

The jury concluded the oil company should pay $87.7 million in actual damages and $3.42 billion in punitive damages to the state of Alabama, which alleged Exxon Mobil tried to cheat it out of $1 billion in royalties from 13 natural-gas wells along the coast. Alabama said its leases with Exxon require the company to pay royalties to the state on the gross proceeds from the gas wells.

Tom Cirigliano, an Exxon spokesman, said the company will appeal the verdict and called the punitive award "meritless." In a statement, Exxon said it tried to comply with its lease and that it believed its interpretation of the lease was proper.

The Irving, Texas, company has 30 days to appeal before the judgment is formally entered. Often such enormous punitive damages are reduced during the appeals process.

In recent years, several big oil companies have paid tens of millions of dollars to settle federal and state allegations of insufficient payment of royalties. But Exxon commonly has fought such suits rather than settle them. In 1999, a California jury found in Exxon's favor in a 13-year-old royalty lawsuit that other oil companies had settled with the state years earlier.

In Alabama, Exxon argued, the leases allowed it to deduct certain processing costs before paying the state royalties. The company also said the Alabama leases don't require royalties to be paid on natural gas used as part of the state's production process.

"They believed they could get away with their scheme because the people of Alabama are too inexperienced to understand they are being cheated," the state's Gov. Don Siegelman said. "I would suspect they won't make the mistake of trying to take advantage of this state again."

The size of the damages are unusual given that individuals weren't hurt. But Alabama juries have a reputation of handing down stiff penalties to large companies. The state's previous record for a civil-damages judgment was set in 1999 by a jury that ordered Whirlpool Financial National Bank, now Transamerica Bank, to pay $581 million to Alabama regarding the purchase of a satellite dish. A judge later reduced the verdict to $300 million.

Exxon has faced large judgments in the past, most notably the $5 billion in punitive damages assessed against the company for the 1989 Valdez oil spill.