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PURCHASE AND SALE AGREEMENT

Oil Gas Purchase Sale Agreement

PURCHASE AND SALE AGREEMENT | Document Parties: DUNE ENERGY INC | DUNE ENERGY, INC | DUNE PROPERTIES, INC | PIONEER NATURAL RESOURCES USA, INC You are currently viewing:
This Oil Gas Purchase Sale Agreement involves

DUNE ENERGY INC | DUNE ENERGY, INC | DUNE PROPERTIES, INC | PIONEER NATURAL RESOURCES USA, INC

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Title: PURCHASE AND SALE AGREEMENT
Governing Law: Texas     Date: 7/7/2008
Industry: Oil and Gas Operations     Law Firm: Andrews Kurth     Sector: Energy

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Exhibit 99.1

PURCHASE AND SALE AGREEMENT

by and between

DUNE ENERGY, INC.,

DUNE PROPERTIES, INC.

(collectively as Seller)

and

PIONEER NATURAL RESOURCES USA, INC.

(Buyer)

Dated as of June 30, 2008

 


TABLE OF CONTENTS

 

AGREEMENT:

   1

1.

  

Property to be Sold and Purchased.

   1

2.

  

Effective Date.

   3

3.

  

Purchase Price and Performance Deposit.

   3

4.

  

Allocation of Base Purchase Price.

   4

5.

  

Representations of Seller.

   4

6.

  

Representations of Buyer.

   9

7.

  

Certain Covenants of Seller Pending Closing.

   10

8.

  

Due Diligence Reviews.

   12

9.

  

Certain Price Adjustments.

   15

10.

  

Conditions Precedent to the Obligations of Buyer.

   20

11.

  

Conditions Precedent to the Obligations of Seller.

   21

12.

  

The Closing.

   22

13.

  

Certain Accounting Adjustments.

   24

14.

  

Assumption and Indemnification.

   25

15.

  

Disclaimer of Warranties.

   29

16.

  

Commissions.

   30

17.

  

Notices.

   30

18.

  

Survival of Provisions. Certain Limitations on Liability.

   31

19.

  

Miscellaneous Matters.

   31

20.

  

Notification of Breaches; Supplementing Disclosure Schedules

   35

 

-i-

 


List of Exhibits:
Exhibit A    -      Oil and Gas Properties
Exhibit A-1    -      List of Maps
Exhibit B    -      Contracts
Exhibit 1-E    -      Excluded Assets
Exhibit D    -      Allocated Values & WI/NRI
Exhibit 3(b)         Escrow Agreement
Exhibit 5(d)    -      Scheduled Consents
Exhibit 5(f)    -      Actions
Exhibit 5(g)    -      Liens
Exhibit 5(i)    -      Tax Matters
Exhibit 5(k)    -      Permits
Exhibit 5(n)    -      Preferential Purchase Rights
Exhibit 5(o)         Extraordinary Agreements
Exhibit 5(p)         Defaults
Exhibit 5(q)         Drilling and Development
Exhibit 7(b)    -      Certain Existing Commitments
Exhibit 9(f)    -      Outstanding Interests
Exhibit E    -      Conveyance
Exhibit 12(a)(8)    -      Seller’s Non-Foreign Affidavit
Exhibit 12(a)(13)    -      Transition Services Agreement
Exhibit 14(a)    -      Additional Assumed Obligations

 

-ii-

 


PURCHASE AND SALE AGREEMENT

THIS AGREEMENT (“ Agreement ”) dated as of June 30, 2008 by and between DUNE ENERGY, INC. (“ DEI ”) and DUNE PROPERTIES, INC. (“ DPI ”) (DEI and DPI are collectively referred to herein as “ Sellers ”, and individually as a “ Seller ”) and PIONEER NATURAL RESOURCES USA, INC. (herein called “ Buyer ”) (Seller and Buyer are sometimes referred to collectively as the “Parties” and each a “Party”);

WITNESSETH:

Sellers desire to sell and assign to Buyer, and Buyer desires to purchase and acquire from Sellers, all of Sellers’ rights, titles and interests in the Properties, as hereinafter defined), in accordance with the terms and provisions of this Agreement.

AGREEMENT:

For the mutual benefits and obligations set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1. Property to be Sold and Purchased .

Sellers agree to sell and Buyer agrees to purchase, for the consideration hereinafter set forth, and subject to the terms and provisions herein contained, the following described properties, rights and interests (except to the extent any of the same constitute any Excluded Assets, as defined below):

(a) The respective undivided Working Interests (as hereinafter defined) and Net Revenue Interests (as hereinafter defined) in and to, together with all of Sellers’ other rights, titles and interests in and to, the oil, gas and/or mineral leases or leasehold interests described in Exhibit A hereto and all lands covered by said leases and leasehold interests, mineral and surface fee interests, royalty and overriding royalty interests, and any rights and interests attributable to any of the foregoing interests by virtue of any pooling, unitization, communitization, operating or other agreements, and in and to any ratifications and/or amendments to such leases, all being subject to any reservations, depth limitations, or other restrictions in or under the same (collectively the “ !Oil and Gas Properties ”); and

(b) All rights, titles and interests of Sellers in and to all contracts and agreements relating to the Oil and Gas Properties including but not limited to production sales contracts, operating agreements, unit agreements, processing agreements, transportation agreements, farmout agreements, development agreements, and tax partnerships, and any other contracts and agreements that are listed on Exhibit B hereto which relate to any of the Oil and Gas Properties, to the extent and only to the extent , such rights, titles and interests are attributable to the Oil and Gas Properties (collectively the “ Contracts ”); and

 

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(c) All of Sellers’ rights, titles and interests in and to, all wells (including oil and gas wells and wellbores), materials, supplies, machinery, equipment, improvements and other personal property and fixtures (including but not limited to all casing, pipelines, wells, wellhead equipment, pumping units, flowlines, tanks, buildings, injection facilities, saltwater disposal facilities, compression facilities, gathering systems, and other inventory and equipment) located on the Oil and Gas Properties and used in connection with the exploration, development, operation or maintenance thereof, to the extent, and only to the extent , such rights, titles and interests are attributable to the Oil and Gas Properties (collectively the “ Personal Property ”); and

(d) All rights, titles and interests of Sellers in and to all rights of way, easements, surface leases, and other rights of surface use which relate to any of the Oil and Gas Properties or Personal Property, to the extent and only to the extent , such rights, titles and interests are attributable to the Oil and Gas Properties (collectively the “ Surface Interests ”); and

(e) All rights, titles and interests of Sellers in and to all natural gas, casinghead gas, drip gasoline, natural gasoline, natural gas liquids, condensate, products, crude oil and all other liquid or gaseous hydrocarbons produced from or otherwise allocable to the Oil and Gas Properties or the Personal Property on and after the Effective Date (as defined below) (collectively the “ Hydrocarbons ”) and all the proceeds therefrom or attributable thereto; and

(f) All right, title and interests of Sellers in and to Sellers’ files, records, documents, correspondence and data to the extent and only to the extent , pertaining to the interests described in subsections (a), (b), (c), (d), (e), (f) and (g) of this Section 1 including but not limited to lease files, land files, well files, contract files, division order files, title opinions, engineering files, geological, geophysical and seismic records, plats, surveys, maps, cross-sections, production records, electric logs, cuttings, cores, core data, pressure data, decline and production curves, well files and all related matters, but excluding any interpretive information pertaining to economic or reserve forecasts and excluding any third-party data or information that can not be conveyed without penalty (collectively the “ Records ”) and

(g) Subject to any limitation on assignment thereof, all of Sellers’ rights, titles and interests, if any, in and to the benefit of, and full power and right of substitution and subrogation for, 1) all warranties (including title warranties) and indemnities provided by third parties in favor of either of Sellers or its predecessors, pertaining to the Oil and Gas Properties, Contracts, Personal Property, Surface Interests, Hydrocarbons, and Records after the Effective Date and before the Effective Date) and 2) all other intangible rights, properties or interests of or pertaining to the Oil and Gas Properties, Contracts, Personal Property, Surface Interests, Hydrocarbons and Records, to the extent and only to the extent , such rights, titles and interests are attributable to the Oil and Gas Properties (except that as to the period before the Effective Date to the extent either of Sellers is indemnifying Buyer hereunder Sellers shall be deemed to have retained the concurrent benefit of such indemnities and warranties) (collectively, the “ Tangible and Intangible Rights ”).

 

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The Oil and Gas Properties, Contracts, Personal Property, Surface Interests, Hydrocarbons, Records and Tangible and Intangible Rights are herein sometimes collectively called the “ Properties ” and each is a “ Property ;” provided , however , that those assets, interests and claims described on Exhibit 1-E attached hereto, or otherwise expressly excluded from the Properties pursuant to Section 8 or Section 9 of this Agreement and listed on a mutually agreed amended Exhibit 1-E to be delivered by Sellers at Closing, are excluded from the transactions contemplated herein and shall not be deemed to be part of the Properties (collectively the “ Excluded Assets ”), and Buyer, its successors and assigns, shall have no liability, obligation or responsibility with regard to the Excluded Assets. For purposes hereof, the terms (x) “ Net Revenue Interest ” (or “ NRI ”) means the undivided interest in the Hydrocarbons after deducting all royalties, overriding royalties, production payments, and other burdens on the Hydrocarbons, expressed as a percentage or a decimal; and (y) “ Working Interest ” (or “ WI ”) means that undivided interest in the Hydrocarbons which is burdened by a share of the costs, expenses, burdens, and obligations of any type or nature attributable to the production and/or recovery of the Hydrocarbons, expressed as a percentage or a decimal. “ Affiliate ” or “ affiliates ” means, as to any Party, each other Person that directly or indirectly (through one or more intermediaries or otherwise) controls, is controlled by, or is under common control or ownership with, such Person. “Person” means an individual, corporation, partnership, association, joint stock company, trust or trustee thereof, estate or executor thereof, unincorporated organization or joint venture, court or other governmental unit or other agency or subdivision thereof, or any other legally recognizable entity.

2. Effective Date .

The sale of the Properties shall be effective as of 7 a.m. Central Time on May 1, 2008 (the “ Effective Date ”).

3. Purchase Price and Performance Deposit .

(a) The purchase price for the Properties shall be Forty-one Million Five Hundred Thousand and 00/100 Dollars ($41,500,000.00) (the “ Base Purchase Price ”), as adjusted pursuant to this Agreement.

(b) Contemporaneous with the execution and delivery of this Agreement, the Sellers and Buyer shall execute and deliver an escrow agreement in substantially the form attached hereto as Exhibit 3(b) (the “ Escrow Agreement ”). As evidence of its good faith intention to consummate the transactions contemplated hereby, within the later to occur of one business day after the execution of this Agreement or the appointment of the Escrow Agent (as defined in the Escrow Agreement), and in accordance with the Escrow Agreement, Buyer has tendered (or immediately shall tender) a cash performance deposit with the Escrow Agent under the Escrow Agreement, in the amount of five percent (5%) of the Base Purchase Price, said amount being Two Million Seventy-Five Thousand and 00/100 Dollars U.S. ($2,075,000) (the “ Performance Deposit ”). The Performance Deposit shall be retained by said Escrow Agent until released by agreement of the Parties in accordance with terms hereof and the terms of the Escrow Agreement. In the event the Agreement is terminated prior to Closing, the Parties’ respective rights to the Performance Deposit shall be as set forth in Section 19(n) below. In the event the transactions contemplated herein close, the Performance Deposit shall be retained by Sellers and credited against the Purchase Price payable by Buyer hereunder.

 

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4. Allocation of Base Purchase Price .

Buyer has allocated the Base Purchase Price among the Properties as set forth on Exhibit D attached hereto for the purpose of (1) establishing a basis for certain taxes, and (2) determining the value of a Defect (defined hereinbelow) for purposes of adjusting the Base Purchase Price. The allocated amounts are referred to herein as the “ Allocated Values .” Buyer and Seller agree that the Allocated Values, as adjusted, shall be used by Sellers and Buyer as the basis for reporting asset values and other items for purposes of all federal, state, and local tax returns. Sellers and Buyer each agree that the Properties subject to this Agreement do not constitute an “applicable asset acquisition” as described under the Internal Revenue Code section 1060 and the regulations thereunder, and do not constitute a trade or business in the ordinary sense of the term. Sellers and Buyer each agree to report the federal, state and local income and other tax consequences of the transactions contemplated herein, and in particular to report the information consistent with the terms of this Agreement and shall not take any position inconsistent therewith upon examination of any tax return, in any refund claim, in any litigation, investigation or otherwise unless required to do so by applicable Law after notice to the other Party, or with such other Party’s prior consent. Sellers and Buyer shall confer and cooperate on any revisions to the allocation of the Purchase Price, including reporting any matters that require updating (including adjustments to the Purchase Price) to be consistent with the agreed allocation. Should the Internal Revenue Service (or any other taxing authority) determine that the Properties constitute an “applicable asset acquisition”, and the Parties agree with this determination, then Sellers and Buyer agree to the necessary and timely exchange of information required to complete and timely file, consistent with the above allocations, a Form 8594, and any other form required by the Internal Revenue Service (or any other taxing authority).

5. Representations of Seller .

For purposes of this Section 5 , references to “Sellers’ knowledge” “to the best of Sellers’ knowledge or similar phrases shall mean the facts actually known or that should have reasonably been known by the executive management, the President, CEO, CFO or the COO of the Seller, respectively, without further investigation or inquiry. Seller represents to Buyer that:

(a) Organization; Qualification . DEI is a corporation duly incorporated and legally existing and in good standing under the laws of the State of Delaware and is duly qualified to own its Properties and to carry on its business as now being conducted. DPI is a corporation duly incorporated and legally existing and in good standing under the laws of the State of Texas and is duly qualified to own its Properties and to carry on its business as now being conducted.

(b) Authority . Each Seller has full power and authority to enter into and perform its obligations under this Agreement, and has taken all proper action to authorize such Seller to enter into this Agreement and perform its obligations hereunder.

 

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(c) No Breach or Violation . Other than (1) requirements (if any) that there be obtained consents to assignments from third parties (which will be treated as provided in Section 7(d)) and (2) approvals (“ Routine Governmental Approvals ”) required to be obtained from governmental entities which are customarily obtained post closing, neither the execution and delivery of this Agreement by Sellers nor the consummation by Sellers of the transactions contemplated hereby, nor the compliance by Sellers with the terms hereof, will result in any (i) default under any Contract or any other agreement or instrument to which a Seller is a party or by which Sellers’ interest in the Properties is bound, or violate any order, writ, injunction, decree, statute, rule or regulation applicable to such Seller or to Sellers’ interest in the Properties, (ii) conflict with or result in a breach of the regulations, charter, articles of formation or partnership or other organization documents of Sellers or any other governing documents of Sellers, (iii) violation of, conflict with, or constitute a default under, or result in the creation or imposition of any security interest, lien, or encumbrance upon any of the Properties or other property or assets of Sellers under any mortgage, indenture, or agreement to which it is a party or by which any of the Properties are bound, or (iv) violation of any statute or law or any judgment, decree, order, writ, injunction, regulation, or rule of any court or governmental authority.

(d) Consents . Except for the consents and approvals listed in Exhibit 5(d) (the “ Scheduled Consents ”), no consent or approval on the part of Sellers or any other party, person, party or governmental authority is required to authorize the execution and delivery of this Agreement by Sellers, the sale and transfer of the Properties, or the consummation of the other transactions contemplated hereby.

(e) Enforceable . This Agreement constitutes (and the Conveyance provided for herein to be delivered at Closing will, when executed and delivered, constitute) the legal, valid and binding obligation of Sellers, enforceable in accordance with its terms, except as limited by bankruptcy or other laws applicable generally to creditor’s rights and as limited by general equitable principles.

(f) Actions . Except as shown on Exhibit 5(f) , there are no pending, or to the best of Sellers’ knowledge, threatened, suits, actions, or other proceedings (including condemnation or similar proceedings) or claims which affect Sellers’ interest in the Properties (including, without limitation, any actions challenging or pertaining to Sellers’ title to its interest in any of the Properties) in any material respect, or affect the execution and delivery of this Agreement by Sellers, or the consummation by Sellers of the transactions contemplated hereby, or which could have a material adverse affect on the use, value or operation of the Properties.

(g) Special Warranty of Title . Sellers will warrant and defend title to the interest in the Oil and Gas Properties stated on Exhibit A hereto against the claims and demands of all parties claiming or to claim the same by, through, or under Seller, but not otherwise, subject to the following (collectively, “ Permitted Encumbrances ”): (i) liens for taxes or assessments not yet due or delinquent or, if delinquent, that are being contested in good faith in the normal course of business; (ii) conventional rights of reassignment; (iii) easements, permits, rights-of-way, and other rights in the Oil and Gas

 

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Properties for the purpose of surface operations, roads, railways, pipelines or other lines, removal of timber, grazing, ditches, reservoirs, and other like purposes, or for the joint or common use of real estate; (iv) vendors, carriers, warehousemen’s, repairmen’s, mechanics, workmen’s, materialmen’s, construction liens or other like liens arising by operation of law in the ordinary course of business or incident to the construction or improvement of any property in respect of obligations which are not yet due or which are being contested in good faith by appropriate proceedings by or on behalf of Seller, and if contested are listed on Exhibit 5(g) attached hereto; (v) inchoate liens created under leases constituting the Oil and Gas Properties, operating agreements, or by operation of law in respect of obligations that are not yet due or that are being contested in good faith by appropriate proceedings by or on behalf of Seller, and if contested are listed on Exhibit 5(g) attached hereto; provided that none of the foregoing subparts (i)-(v) above individually or in the aggregate materially interfere with the operation or use of any of the Oil and Gas Properties (as currently owned and operated), or reduce the Net Revenue Interest of Seller in any well, or lease to an amount less than the Net Revenue Interest set forth on Exhibit D therefor (or increase the Working Interest without a corresponding increase in the Net Revenue Interest), (vi) other inchoate liens listed on Exhibit 5(g) , (vii) encumbrances and rights set forth in any of those Contracts identified in Exhibit B or in Schedule 5(o) , and (viii) liens to be released at or in connection with the Closing (however, such liens shall only be considered “Permitted Encumbrances” to the extent such liens are, in fact, released in connection with of prior to Closing); and (ix) any Defects waived by Buyer.

(h) No Brokers’ Fees . Seller has incurred no liability, contingent, or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which Buyer or its successors or assigns shall have any responsibility whatsoever.

(i) Tax Matters . Seller is not a “foreign person” as defined in Section 1445 of the Internal Revenue Code of 1986 and in any regulations promulgated thereunder. Seller has paid or caused to be paid all state and local taxes, rates and like assessments for periods prior to the Effective Date that have become due and payable which, if not so paid, could result in a lien or encumbrance upon any of the Properties, including, without limitation, excise, property, ad valorem, franchise, severance and production taxes; but not including (i) taxes, rates and like assessments which are being contested in good faith, and are shown on Exhibit 5(i) , (ii) taxes not yet due and payable, and (iii) taxes which are the responsibility of Buyer.

(j) Compliance with Laws . To Seller’s knowledge, neither Seller, nor the operator of those Properties operated by third parties, has violated any laws, statutes, regulations, or orders applicable to any of the Properties or the operation thereof which violation (i) would have a material adverse affect on the value or operation of the affected Properties, or (ii) has not been remedied, excluding, for purposes of this Section 5 any Environmental Laws (as defined in Section 14(e)) , as issues relating to Environmental Laws are addressed in Defect procedures set forth in Sections 8 and 9 and in Section 14 . and in Section 5(s) .

 

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(k) Permits . Except as set forth in Exhibit 5(k) , to the best of Seller’s knowledge, all material franchises, licenses, permits, approvals, consents, certificates and other authorizations and other rights granted by governmental entities, and all certificates of necessity and other similar rights that relate to the Properties, or the ownership, operation, or use thereof (collectively, the “ Permits ”) affecting or required with respect to the Properties (i) have been obtained and maintained (and no material violation exists in respect thereof), (ii) have been, or at least ten (10) days prior to Closing will be, made available for Buyer’s review, and (iii) are being transferred to Buyer in this transaction, to the extent transferable.

(l) No Calls on Production or Take or Pay. There are no calls or hedges on production applicable to the Properties or the production therefrom, and to the knowledge of Seller, there are no prepayment arrangements under any contract for the sale of hydrocarbons containing a “take or pay” or similar provision or a production payment or any arrangement to deliver Hydrocarbons produced from the Properties at some future time without then receiving full payment therefor; and, Seller has not produced a share of gas from the Properties greater than Seller’s ownership percentage and is under no obligation, and no oil or gas imbalance exists, to reduce Seller’s (or Buyer’s on or after Closing, with regard to any existing imbalances) share of present or future production under any oil or gas balancing agreement or similar contract or arrangement or otherwise to bring under-produced parties into balance.

(m) Royalties Paid. To the best of Sellers’ knowledge, all royalties, rentals and other payment due with regard to the Properties or the production therefrom have been properly and timely paid.

(n) Preferential Rights to Purchase. Except as set forth in Exhibit 5(n) , there are no rights of first refusal or preferential purchase rights that are applicable to the Properties or any of them that are applicable to Seller or the transactions contemplated by this Agreement.

(o) Agreements . Except as set forth in any contract or agreement described in Exhibit B or in Exhibit 5(o) , there is no provision or obligation contained in any contract or agreement affecting the Properties which is to be assumed by Buyer and which (i) is not substantially customary to currently accepted oil and gas industry standards, (ii) requires an extraordinary and unusual expenditure in connection with the operation of the Properties or (ii) would otherwise have a material adverse affect on Buyer’s ownership and/or operation of any of the Properties. Except with regard to that would otherwise constitute a Permitted Encumbrance (as defined in Section 5(g) above), there is no provision or obligation affecting the Properties contained in any contract or agreement which (1) requires Buyer to bear a greater share of the costs and expenses relating to the operation of a Property than the decimal Working Interest therein, as set forth in Exhibit D attached hereto or (2) would, with respect to a Property, diminish the Net Revenue Interest (or increase the Working Interest without a corresponding increase in the Net Revenue Interest) therein as set forth in Exhibit D attached hereto, except as such matters are noted in the “Comments” column of Exhibit D , and except to the extent resulting from elections made after Closing under customary “non-consent” or “sole risk”

 

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provisions of joint operating agreements or joint exploration agreements or other agreements scheduled in Exhibit B or in Exhibit 5(o) . Exhibit B attached hereto sets forth a true and complete list of all Contracts to which Seller, any of Seller’s affiliates (including any contracts or agreement between or among Seller and any of its affiliates), or any of the Properties are otherwise bound. True, correct and complete copies of all material Contracts (and all amendments or supplements thereto) have been, or at least fifteen (15) days prior to the end of the Diligence Period will be, provided to Buyer. Except as set forth in Exhibit B and Exhibit 5(o) , none of the Contracts or other Properties would subject Buyer to any covenant not to compete, area of mutual interest, or similar restriction

(p) No Default; Terms . Except as set forth in Exhibit (5)(p) , each of the Oil and Gas Properties and all leases related thereto and all other Contracts (including, without limitation, those contracts described in Exhibit B ) are in full force and effect (except as limited by bankruptcy or other laws applicable generally to creditor’s rights and as limited by general equitable principles) and neither Seller nor, to the best of Sellers’ knowledge, any other party thereto is in default thereunder or in material breach thereof

(q) Drilling and Development . The items set forth on Exhibit 5(q) , in the aggregate, constitute a true, correct and complete list and description of (i) all obligations that Sellers may have to drill wells on any of the Properties necessary to prevent such Properties from becoming subject to forfeiture, loss, release, or the obligation to re-assign any acreage, lands, leases (or portions thereof) affecting such a Property prior to the commencement of any continuous drilling obligation or similar drilling obligation, and (ii) a description of any clauses in leases affecting the Properties requiring continuous drilling activity; SAVE AND EXCEPT , however, that Exhibit 5(q) does not include any reference to, and no representation is made in this Section 5(q) with regard to, any lease habendum clauses requiring production in paying quantities beyond the primary terms of leases to which the Properties are subject.

(r) Entirety of Sellers’ Interest . Except as expressly stated otherwise in this Agreement or in Exhibit 1-E attached hereto, Sellers are not retaining any interest in the oil, gas and/or mineral leases or the production or proceeds comprising the Oil and Gas Properties.

(s) Environmental. To Sellers’ knowledge and only to the extent the same would have constituted a “Defect” if discovered and asserted prior to Closing under Sections 8 and 9 , there is no existing environmental contamination of the surface or subsurface of the land underlying the Oil and Gas Properties or the surface water or groundwater or soil resulting or related to the activities on the Oil and Gas Properties which requires or will require with the passage of time remediation under Environmental Laws by Buyer as of the Closing Date; provided, however, that excluded from this representation is any matter that is either asserted by Buyer, or actually known by an executive of the Buyer who is a manager-level executive or above, on or prior to the date specified in Section 8(a) below (being the date to submit any Asserted Defects (as defined therein)).

 

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(t) Insolvency . Neither of Sellers is insolvent and is not contemplating filing for bankruptcy protection and no petition for bankruptcy or involuntary bankruptcy for Sellers have been filed in any court, or to Sellers’ knowledge, threatened.

(u) No Liens. Except as set forth on Exhibit 5(g) and except for Permitted Encumbrances (as defined in Section 5(g) above), none of the Properties are subject to any liens, security interests or other encumbrances of any kind.

6. Representations of Buyer .

Buyer Represents to Sellers that:

(a) Organization . Buyer is a corporation duly organized and legally existing under the laws of the State of Delaware and is qualified to do business and in good standing in Texas.

(b) Authority . Buyer has full power to enter into and perform its obligations under this Agreement and has taken all proper action to authorize entering into this Agreement and performance of its obligations hereunder.

(c) No Violation . Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, nor the compliance with the terms hereof, will result in any default under any agreement or instrument to which Buyer is a party, or violate any order, writ, injunction, decree, statute, rule or regulation applicable to Buyer.

(d) Enforceable . This Agreement constitutes (and the Conveyance provided for herein to be delivered at Closing will, when executed and delivered, constitute) the legal, valid and binding obligation of Buyer, enforceable in accordance with its terms, except as limited by bankruptcy or other laws applicable generally to creditor’s rights and as limited by general equitable principles.

(e) Actions . There are no pending suits, actions, or other proceedings in which Buyer is a party which affect the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

(f) Securities . Buyer is a knowledgeable purchaser, owner and operator of oil and gas properties, has the ability to evaluate (and in fact has evaluated) the Properties for purchase, and is acquiring the Properties for its own account or that of an affiliate and not with the intent to make a distribution thereof in violation of the Securities Act of 1933 as amended (and the rules and regulations pertaining thereto), or in violation of any other applicable securities laws. Buyer has made its own independent investigation of the Properties.

(g) No Brokers . Buyer has incurred no liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which Seller shall have any responsibility whatsoever.

 

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7. Certain Covenants of Seller Pending Closing .

Between the date of this Agreement and the Closing Date:

(a) Access . To the extent Sellers is in possession, custody or control of the Properties and Records, Seller will give Buyer and its attorneys and other representatives access at all reasonable times to the Properties and the Records, including, without limitation, (i) all title opinions curative materials related to the Properties which are in its possession or reasonably available to Sellers, (ii) all assignments in its possession or reasonably available to Sellers tracing its interest in the Properties, and (iii) all joint operating agreements, farmout agreements, gas contracts, oil and condensate purchasing agreements, division orders, transportation agreements and other agreements to which it is a party, which relate to the Properties, and which are not “ Confidential Materials ” (herein so called) as identified on Exhibit 7(a) . Without limitation of the foregoing, prior to fifteen (15) days before the end of the Diligence Period, Seller shall furnish copies of all agreements listed on Exhibit B , whether or not the same are currently in possession of Sellers. Buyer may make copies of such items, but shall, if Sellers so request, return all copies so made if the Closing does not occur. Buyer recognizes and agrees that, except as otherwise provided in this Agreement or the agreements and instruments provided in connection herewith at Closing, all materials made available to it (whether pursuant to this Section or otherwise) in connection with the transaction contemplated hereby are made available to it as an accommodation, and without representation or warranty of any kind as to the accuracy and completeness of such materials.

(b) Pre-Closing Operations . From the date of this Agreement and continuing until the Closing, Sellers shall cause the Properties to be operated and maintained in a good and workmanlike manner, consistent with past practices and consistent with good industry practices of a prudent operator in the oil and gas industry and in accordance with all applicable laws and rules, keep its books and records true and correct in accordance with past practices, maintain all of its existing insurance coverage and pay all of its trade payables and other obligations on a timely basis. Sellers also will pay, or cause to be paid, on or before the time the same are due, all drilling, completion, operating, transportation, facility, pipeline and workover expenditures which are properly billed to it, except for bills which will not become due prior to Closing and bills being contested in good faith. It is recognized that, subject to the terms hereof, expenditures incurred in connection with the Properties after the Effective Date shall be the responsibility of Buyer if Closing occurs. If operations or other commitments are proposed by third parties and the effect of an election not to participate in the same would be the loss (either for a period of time or permanently) of an interest in the Properties (such operations or commitments being herein called “ Certain Commitments ”), Sellers will confer with Buyer as to the appropriate response and if Buyer and Seller agree upon a response, Sellers will respond as agreed. Notwithstanding anything stated herein to the contrary, until the Closing Date, (i) Sellers shall not sell, remove or otherwise dispose of any of the Properties, or (ii) except as necessary in the reasonable opinion of Sellers in emergency situations to preserve life or prevent material damage to property, Sellers shall not, without Buyer’s written consent, (u) authorize or make a capital expenditure, voluntarily incur any liability or enter into any commitment or agreement with respect to the

 

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Properties which will cost (or which could involve the payment of amounts) in excess of $50,000 , in the aggregate, with respect to an individual project or series of related projects (provided that such consent shall not be unreasonably withheld or delayed), (v) cancel or terminate any contract, (w) amend any Contract if such amendment may reasonably be expected to have any adverse effect on the financial condition or value of any of the Properties, (x) extend the term of any Contract for a period longer than sixty (60) days, (y) enter into any additional hedging, forward sales or similar agreements with respect to production from the Properties, or (z) enter into any transaction, or take any action, which may reasonably be expected to have a material adverse effect on the financial condition or value of any of the Properties. Notwithstanding the above, Sellers shall not be required to obtain the approval for, and Buyer acknowledges, those existing obligations or liabilities of Sellers described on Exhibit 7(b) , which will constitute part of the Assumed Obligations contemplated under Section 14 below, however, before executing any joint operating agreement or any other agreement with Highland Oil & Gas, LLC or it affiliates, Sellers shall consult with Buyer and provide Buyer copies of the proposed agreements and allow Buyer a reasonable amount of time to comment on suggested changes to such agreements which suggestions Seller shall reasonably consider for inclusion in said agreements.

(c) Casualty Loss . For purposes hereof, the term “ Casualty Loss ” shall mean, with respect to all or any portion of the Properties, any destruction by fire, blowout, storm, or other casualty, or is taken in condemnation or under right of eminent domain or proceedings for such purposes are pending or threatened, between the date of this Agreement and Closing. Seller shall promptly notify Buyer of any Casualty Loss of which Sellers becomes aware. If any Casualty Loss occurs prior to Closing to any of the Properties and such Casualty Loss may be repaired prior to Closing and, when repaired, the value of such Properties shall not be materially diminished, then Sellers may repair such Casualty Loss prior to Closing at Sellers’ cost and shall notify Buyer of such election. If Sellers (i) elects to repair such Casualty Loss and such repair is not completed prior to Closing or the repair completed by Sellers does not cause the value of such Properties to be substantially the same as such value prior to the Casualty Loss, or (ii) is unable or unwilling to repair the Casualty Loss, then (x) Buyer may elect to proceed to Closing and accept the Properties affected by the Casualty Loss with no adjustment to the Base Purchase Price (in which case, Sellers shall pay to Buyer all amounts and sums paid or payable to Sellers (or its respective affiliates) by third parties or insurers by reason of the Casualty Loss), or (y) if Buyer refuses to waive the claimed Casualty Loss, the subject Properties affected by the Casualty Loss shall become Excluded Assets and the Base Purchase Price shall be reduced by the Allocated Value (or the repair or replacement cost in the case of Personal Property) for such Properties.

(d) Consents/Notices . Sellers shall promptly (and in no case later than five (5) business days following execution and delivery of this Agreement) give notices to all third parties holding any Scheduled Consents, preferential rights to purchase, or other consents identified to Sellers by Buyer prior to Closing, and Buyer shall be provided the form of the consent/notices prior to distribution to the consent or holders of preferential rights holders in order to provide input on the form, which shall be reasonably considered by Seller (provided, however, that any obligation of Seller to provide notice above shall

 

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be deferred to the extent Buyer fails to timely respond to Sellers’ proposed form of consent). Sellers shall use all commercially reasonable efforts, but without obligation to incur any unreasonable cost or expense, to obtain such consents. Upon a Seller’s request, Buyer will provide such information regarding Buyer, its operations and financial condition as Sellers reasonably believe to be necessary or appropriate in order to obtain such consents. Unless waived by Buyer, if a Scheduled Consent or any other consents identified to Sellers by Buyer prior to Closing is not obtained prior to Closing, such Property shall become an Excluded Asset and Buyer’s sole remedy therefor shall be a reduction in the Base Purchase Price by the Allocated Value of the affected Property. Notwithstanding the foregoing, Buyer may, with respect to any such consent not obtained by Sellers prior to Closing, elect to waive the requirement that Seller obtain such consent prior to Closing and proceed to close on the affected Property and pay Sellers the Allocated Value for such Property; provided , however , that if Sellers is unable to obtain such consent prior to the Post-Closing adjustment provided for in Section 13(c) hereof, then such Property shall be deemed an Excluded Asset and the provisions of Section 9(b) hereof shall apply.

(e) Closing Capability . Subject to the terms of this Agreement and the responsibilities of each Party thereunder, each of Sellers and Buyer shall use commercially reasonable efforts to (i) take or cause to be taken all such actions as may be necessary or advisable to consummate and make effective the sale and purchase of the Properties and the transactions contemplated by this Agreement, and (ii) ensure that as of the Closing Date it will not be under any material partnership, legal, or contractual restriction that would prohibit or delay the timely consummation of such transactions.

8. Due Diligence Reviews .

(a) Buyer may, to the extent it deems appropriate, conduct, at its sole cost, such title examination or investigation, and other examinations and investigations, including environmental or physical, as it may choose to conduct with respect to the Properties; provided , however , that it is acknowledged that Seller cannot guarantee access to those Properties operated by third parties. Buyer must notify Sellers of any impending field investigation at least forty-eight (48) hours prior to such investigation. Sellers or its designees shall have the right to accompany Buyer and Buyer’s representatives whenever they are on site on the Properties. In the event that Buyer elects to conduct a Phase I environmental property assessment, and such Phase I identifies actual or potential “recognized environmental concerns,” then Buyer must obtain Sellers’ prior written approval, in Sellers’ sole discretion, prior to conducting any such additional Phase II environmental property assessments. To the extent that Sellers refuse to permit such additional environmental assessment be conducted by Buyer, then, at Buyer’s written election to Sellers prior to Closing, Buyer may elect to have the affected Properties become Excluded Assets for purposes of this Agreement and the Base Purchase Price shall be reduced by the Allocated Value for such Properties. Should, as a result of such examinations and investigations, or otherwise, matters come to Buyer’s attention which would constitute “ Defects ” (as below defined), and should there be one or more of such Defects with regard to any of the Properties which Buyer is unwilling to waive, Buyer shall notify Sellers in writing of such Defects no later than the date that is

 

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the earlier to occur of (x) thirty (30) days following execution and delivery of this Agreement, or (ii) five (5) business days prior to Closing (the “ Diligence Period ”). Such Defects of which Buyer so provides notice are herein called “ Asserted Defects .” All Defects with respect to which Buyer fails to so give Seller notice will be deemed waived for all purposes of this Section 8 (provided, however, that this shall in no way waive or release any claims that Buyer may have with respect thereto for a breach of any of Sellers’ representations, warranties or covenants provided in this Agreement or in the Conveyance or to the extent otherwise covered by an indemnity from Sellers). In the event that Buyer notifies Sellers of Asserted Defects, Sellers shall have the right (but not the obligation) to attempt to cure, prior to Closing, such Asserted Defects. Buyer agrees to promptly provide Sellers, but in no less than five (5) business days after receipt or creation, copies of all final reports and test results, prepared by or for the benefit of Buyer with regard to its review and diligence of the Properties.

(b) Defects . The term “ Defect ” as used in this Section shall mean the following:

(1) Sellers’ ownership of the Properties is such that, with respect to a well, lease or other Property or Properties listed on Exhibit D hereto it would (A) cause Buyer to receive a decimal share of the oil, gas and other hydrocarbons produced from, or allocated to, such well which is less than the decimal share set forth on Exhibit D in connection with such well, lease or other Property in the column headed “Seller’s Net Revenue Interest” or (B) cause Buyer to be obligated to bear a decimal share of the cost of operation of such well greater than the decimal share set forth on Exhibit D in connection with such well in the column headed “Sellers Working Interest” (unless the Sellers Net Revenue Interest for such well, lease or other Property or Properties listed in Exhibit D is proportionately increased), or (C) cause Buyer to not receive the net or gross mineral acres, on a unit basis, set forth on Exhibit D ; or

(2) Sellers’ ownership of any well, lease or any of the other Properties is subject to a lien, security interest, pledge, charge or other encumbrance (including, without limitation, with respect to the Oil and Gas Properties, any back-in, reversionary interest, or similar claims that reduce Seller’s Net Revenue Interest therein or increase Sellers’ Working Interest therein), other than any Permitted Encumbrances (as defined in Section 5(g) above); or

(3) Sellers’ ownership of an Oil and Gas Property is subject to a requirement that consent to assignment of such Property be obtained, unless (A) a waiver of such right has been obtained with respect to the transaction contemplated hereby or (B) such consent has been obtained; or

(4) One or more Oil and Gas Property has any condition in the air, land, soil, surface water, ground water or sediment which causes such Properties or the Sellers (or the operator, if a Seller is not the operator thereof) to be either subject to a legal obligation (or with the passage of time would be under such obligation) of remediation, removal, reclamation or restoration under, or in non-compliance

 

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with, any Environmental Laws (as defined in Section 14(e) ) or pertaining to the (A) the discharge or spill of hydrocarbons or substances produced in association therewith attributable to the Oil and Gas Properties which require current remedial activity or remediation offsite (or with the passage of time would be under such obligation) under applicable laws, or (B) offsite or onsite disposal of hazardous wastes or other hazardous materials regulated under Environmental laws insofar as the same are attributable to the Oil and Gas Properties.

(5) Any error in the location or dimensions of the leases reflected on the maps listed in Exhibit A-1 such that:

(A) the acreage of the Sellers’ leases identified in such Exhibit A-1 is more than the actual acreage in such Sellers’ leases constituting a portion of the Oil and Gas Properti


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