PURCHASE AND SALE AGREEMENT

Exhibit 2.3

P URCHASE AND S ALE A GREEMENT

B Y AND B ETWEEN

EXCO O PERATING C OMPANY , LP

AS S ELLER

AND

E NCORE O PERATING , LP

AS B UYER

E XECUTED ON J UNE  28, 2009

E FFECTIVE D ATE : A PRIL  1, 2009

TABLE OF CONTENTS

 

 

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APPENDIX, EXHIBITS AND SCHEDULES

 

 

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PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement (this “Agreement”), dated June 28, 2009, is by and between EXCO Operating Company, LP, a Delaware limited partnership (“EXCO Operating” or “Seller”), and Encore Operating, LP, a Texas limited partnership (“Buyer”). Capitalized terms used but not otherwise defined herein shall have the meanings set forth in Appendix A attached hereto.

RECITALS

A. Seller owns and desires to sell all of its interests in certain oil and gas properties located in its Overton and Gladewater areas of East Texas, all as more particularly described in Section 1.2 below.

B. Buyer desires to purchase all of Seller’s interest in the Assets (as defined below) pursuant to the terms of this Agreement.

C. To accomplish the foregoing, the Parties wish to enter into this Agreement.

AGREEMENT

In consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller agree as follows:

ARTICLE 1

PURCHASE AND SALE

1.1 Purchase and Sale . Seller agrees to sell and Buyer agrees to purchase all of Seller’s right, title and interest in the Assets as set forth below, all pursuant to the terms of this Agreement.

1.2 The Assets . As used herein, the term “Assets” refers to all of Seller’s right, title and interest in and to the following, excluding however the Excluded Assets (as defined below):

A. The oil, gas and/or mineral leases and fee mineral interests specifically described in Exhibit A-1 (the “Leases”), including without limitation all leasehold estates and interests, all royalty, overriding royalty, production payment, reversionary, net profit, contractual working interests and other similar rights and estates therein, the lands described in Exhibit A-1 (the “Lands”) and the Hydrocarbons attributable to the Leases or Lands, including all rights in any pooled, unitized or communitized acreage by virtue of the Lands or Leases being a part thereof and all Hydrocarbons produced from the pool or unit allocated to any such Lands or Leases;

B. The buildings, yards, vehicles and equipment described on Exhibit A-2.

 

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C. The wells specifically described in Exhibit B (the “Wells”), together with all other oil and gas wells and all water, injection and disposal wells on the Lands or on lands pooled, communitized or unitized therewith, whether producing, shut-in or temporarily abandoned, and all personal property, equipment, fixtures, improvements, permits, water discharge permits, gathering lines, rights-of-way and easements (including without limitation the rights-of-way and easements described on Exhibit A-3 ) located on the Lands or used in connection with the production, gathering, treatment, processing, storing, transportation, sale or disposal of Hydrocarbons or water produced from the properties and interests described in Section 1.2 A.;

D. The unitization agreements, operating agreements and unit operating agreements and all other such agreements relating to the properties and interests described in Sections 1.2 A. and B. and to the production of Hydrocarbons, if any, specifically attributable to said properties and interests, including those which are listed in Exhibit C (the “Contracts”) but excluding any contracts, agreements or instruments to the extent transfer would result in a violation of applicable law or is subject to a Required Consent that is not waived by Buyer or obtained or otherwise satisfied by Seller;

E. All existing and effective sales, purchase, exchange, gathering, compressor rental and service agreements and other contracts, agreements and instruments which specifically relate, and only insofar as they relate, to the properties and interests listed in Sections 1.2 A. through C., and including those which are described in Exhibit C ;

F. All original files, records and data, including without limitation lease and well files, abstracts, title reports, memoranda and opinions, and environmental records and reports relating to the items described in Sections 1.2 A. through 1.2 E. maintained by Seller, but excluding (i) Seller’s company files, financial records, and tax related records to the extent not relevant to the Assets, and (ii) records and data to the extent transfer thereof is prohibited by unaffiliated third party contractual restrictions on transfer (the “Records”). To the extent that any of the Records contain interpretations of Seller, Buyer agrees to rely on such interpretations at its own risk.

1.3 Excluded Assets . Seller is selling its interest in the Assets, but is not selling and is retaining its interest in and to the Excluded Assets. As used herein, the term “Excluded Assets” refers to all of Seller’s right, title, and interest in and to the following:

A. All company records and files, including tax related records, to the extent not related to the Assets and any copies of the Records that Seller chooses to retain;

B. All deposits, cash, checks, funds and accounts receivable attributable to Seller’s interest in the Assets with respect to any period prior to the Effective Time;

C. All Hydrocarbons produced from or attributable to the Assets with respect to any period prior to the Effective Time and all Hydrocarbons attributable to the Assets which, at the Effective Time, are in storage, within processing plants, in pipelines or otherwise held in inventory and all proceeds associated therewith;

D. All receivables and cash proceeds which were expressly taken into account and for which credit was given in the determination of the adjustments to the Purchase Price pursuant to Section 2.4 and 13.1;

 

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E. Claims of Seller for refund of or loss carry forwards with respect to (i) Taxes attributable to any period prior to the Effective Time and (ii) Taxes attributable to the Excluded Assets;

F. Except as otherwise provided in Section 4.5, all rights, titles, claims and interests of Seller or any affiliate of Seller under any policy or agreement of insurance, any bond or any insurance or condemnation proceeds or awards;

G. Except to the extent currently used solely in operation of the Assets, all computer or communications software or intellectual property (including tapes, data and program documentation and all tangible manifestations and technical information relating thereto) owned, licensed or used by Seller;

H. Any logo, service mark, copyright, trade name or trademark of or associated with Seller or any of its affiliates or any business or division of Seller or any of its affiliates; and

I. Any Asset excluded from this Agreement pursuant to Sections 4.6 A., 4.6 B.1. and 5.2 C. of this Agreement, together with the pro-rata share of all Hydrocarbons associated therewith and all other assets attributable or appurtenant thereto.

1.4 Effective Time . The purchase and sale of the Assets shall be effective as of April 1, 2009, at 7:00 a.m. local time at the location of the Assets (the “Effective Time”).

1.5 1031 Exchange . Seller reserves the right, at or prior to Closing, to assign its rights under this Agreement with respect to all or a portion of the Purchase Price, and that portion of the Assets associated therewith (“1031 Assets”), to a Qualified Intermediary (“QI”) (as that term is defined in Section 1.1031(k)-1(g)(4)(v) of the Treasury Regulations) to accomplish this Transaction, in whole or in part, in a manner that will comply with the requirements of a like-kind exchange (“Like-Kind Exchange”) pursuant to Section 1031 of the Code. Buyer reserves the right, at or prior to Closing, to assign its rights under this Agreement and all or a portion of the 1031 Assets to a QI or an exchange accommodation titleholder (as that term is defined in the IRS Revenue Procedure 2000-37) (“EAT”) to accomplish this transaction, in whole or in part, in a manner that will comply with the requirements of a Like-Kind Exchange. If Seller or Buyer so elects, Seller or Buyer may assign its rights under this Agreement to the applicable 1031 Assets to the QI or to the EAT, as applicable. Each Party hereby (i) consents to the other Party’s assignment of its rights in this Agreement with respect to the applicable 1031 Assets to a QI or to an EAT, as applicable, (ii) if such an assignment is made by Seller, Buyer agrees to pay all or a portion of the Purchase Price into the qualified trust account at Closing as directed in writing by Seller, (iii) if such an assignment is made by Buyer to an EAT, Seller agrees to transfer the applicable 1031 Assets to the EAT at Closing as directed in writing by Buyer and (iv) if such an assignment is made by Buyer to a QI, Seller agrees to accept payment of all or a portion of the Purchase Price from the QI. . Each Party agrees to take all actions reasonably required of it, including, but not limited to, executing and delivering documents, to permit the other Party to effect the exchange described in this Section. The Parties acknowledge and agree that a whole or partial assignment of this Agreement to a QI or to an EAT, as applicable, shall not release either Party from any of its respective liabilities and obligations to the other Party or expand any liabilities or obligations of the other Party under this

 

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Agreement. Neither Party represents to the other that any particular tax treatment will be given to the other Party as a result of the Like-Kind Exchange. Neither Party shall be obligated to pay any additional costs or incur any additional obligations under this Agreement if such costs are the result of the other Party’s Like-Kind Exchange, and each Party shall hold harmless and indemnify the other Party from and against all Losses, if any, resulting from such a Like-Kind Exchange.

ARTICLE 2

PURCHASE PRICE

2.1 Purchase Price . The purchase price for the Assets shall be $165,000,000 (the “Purchase Price”). At Closing, Buyer shall pay Seller the Purchase Price, as adjusted pursuant to Section 2.4.

2.2 Deposit . Contemporaneously with the execution of this Agreement, the Parties and JPMorgan Chase Bank, N.A. (the “Escrow Agent”) have entered into an escrow agreement (the “Escrow Agreement”), attached hereto as Exhibit K , pursuant to which Buyer has deposited in cash $16,500,000 (the “Deposit”) in an escrow account with Escrow Agent (the “Escrow Account”). Under the terms of the Escrow Agreement, the Escrow Agent shall distribute the Deposit as set forth in Articles 11 and 12.

2.3 Allocation of the Purchase Price . Buyer and Seller have allocated the Purchase Price among the Assets as set forth on Exhibit B . The value so allocated to a particular Asset may be referred to as the “Allocated Value” for that Asset. The undeveloped locations specifically described on Exhibit B shall be included in the term “Assets.”

2.4 Adjustments to Purchase Price . All adjustments to the Purchase Price shall be made (i) according to the factors described in this Section, (ii) in accordance with generally accepted accounting principles as consistently applied in the oil and gas industry, and (iii) without duplication.

A. Settlement Statements . The Purchase Price shall be adjusted at Closing pursuant to a “Preliminary Settlement Statement” prepared by Seller, submitted to Buyer on or before five business days prior to Closing, for Buyer’s comment and review. The Preliminary Settlement Statement shall set forth the Closing Amount and all adjustments to the Purchase Price and associated calculations. The term “Closing Amount” means the Purchase Price, adjusted as provided in this Section using reasonable estimates as agreed to by the Parties if actual numbers are not available. If Buyer has any questions or disagreements regarding the Preliminary Settlement Statement, Buyer may contact Seller at least two business days prior to the Closing, and in such case Seller and Buyer shall in good faith attempt to resolve any disagreements, and Seller shall afford Buyer the opportunity to examine the Preliminary Settlement Statement and such supporting schedules, analyses, workpapers, including the audit workpapers and other underlying records or documentation, on which the Preliminary Settlement Statement is based or from which the Preliminary Settlement Statement is derived as are reasonably requested by Buyer. If Buyer and Seller agree on changes to the Closing Amount based on such discussions, then the Purchase Price shall be paid at Closing based on such changes. If Buyer and Seller do not agree on changes to the Closing Amount, then the Purchase Price shall be paid at Closing based on the amounts set forth in the Preliminary Settlement Statement. After Closing, the Purchase Price shall be adjusted pursuant to the Final Settlement Statement delivered pursuant to Section 13.1.

 

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B. Property Expenses . For the purposes of this Agreement, the term “Property Expenses” shall mean all capital expenses, joint interest billings, lease operating expenses, Taxes (as defined and apportioned as of the Effective Time pursuant to Article 9), drilling expenses, workover expenses, geological, geophysical and any other exploration or development expenditures chargeable under applicable operating agreements or other agreements consistent with the standards established by the Council of Petroleum Accountant Societies of North America that are attributable to the maintenance and operation of the Assets during the period in question. If an operating or other agreement is not in place with respect to any Asset for which Seller or its affiliates is acting as operator, then to compensate Seller for administrative overhead expenses associated with conducting operations of any such Asset, an administrative overhead fee of $450.00 per month per operated well that is flowing and $500.00 per month per operated well that is pumping, shall be deemed paid by Seller and shall be charged and allocated to such Asset as “Property Expenses”.

C. Effective Time; Apportionment of Property Expenses and Revenues . Buyer and Seller agree that all revenues, costs and expenses (both operating and capital), including Property Expenses related to the Assets will be apportioned between Buyer and Seller as of the Effective Time. Accordingly, (i) Seller shall be entitled to any production revenues or other amounts realized from and accruing to the Assets before the Effective Time, and shall be liable for the payment of all costs and expenses, including Property Expenses, royalties, overriding royalties, lease rental and maintenance costs and leasehold payments attributable to the Assets before the Effective Time; and (ii) Buyer shall be entitled to any production revenues or other amounts realized from and accruing to the Assets at or after the Effective Time, and shall be liable for the payment of all costs and expenses, including Property Expenses, royalties, overriding royalties, lease rental and maintenance costs and leasehold payments attributable to the Assets at or after the Effective Time.

D. Upward Adjustments . The Purchase Price shall be adjusted upward by the following:

1. An amount equal to all proceeds (net of royalty and Taxes not otherwise accounted for hereunder) received and retained by the Buyer from the sale of all Hydrocarbons produced from or credited to the Assets prior to the Effective Time;

2. An amount equal to all direct and actual expenses attributable to the Assets, including, without limitation, the Property Expenses, incurred and paid by Seller at or after the Effective Time;

3. To the extent not covered in the preceding paragraph, an amount equal to all prepaid expenses attributable to the Assets at or after the Effective Time that were paid by or on behalf of Seller, including without limitation, prepaid drilling and/or completion costs and prepaid utility charges;

 

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4. An amount equal to the value (net of applicable Taxes and royalties) of Seller’s share of all Hydrocarbons in storage tanks above the pipeline interconnect at the Effective Time, to be calculated as follows: The value shall be the product of (i) the volume in each storage tank (attributable to Seller’s net revenue interest) as of the Effective Time as shown by the actual gauging reports, multiplied by (ii) the price actually received for April 2009 production under the applicable marketing contract if the Hydrocarbons in question had been sold; provided, however, that the adjustment contemplated by this subsection shall be made only to the extent that Seller does not receive and retain the proceeds, or portion thereof, attributable to the pre-Effective Time merchantable Hydrocarbons in the storage tanks;

5. Any amount equal to the value of Additional Interest pursuant to subsection 4.2 C.

6. Any other amount agreed to by Buyer and Seller.

E. Downward Adjustments . The Purchase Price shall be adjusted downward by the following:

1. Proceeds received and retained by Seller (net of applicable Taxes and royalties) that are attributable to production from the Assets at or after the Effective Time;

2. The amount of all direct and actual expenses attributable to the Assets, including, without limitation, the Property Expenses, that remain unpaid by Seller, or that have been paid by Buyer, that are attributable to the period prior to the Effective Time;

3. An amount equal to adjustments for Title Defects, Environmental Defects, Casualty Losses and Exclusion Adjustments, and other adjustments as set forth in this Agreement;

4. The amount of the Deposit plus interest earned thereon;

5. The amount of suspended funds Buyer assumes responsibility for pursuant to Section 14.3; and

6. Any other amount agreed to by Buyer and Seller.

F. Gas Imbalances . In addition to the foregoing, the Purchase Price shall be adjusted downward or upward, as appropriate, by an amount equal to $2.00 per MMBtu for the well and pipeline gas imbalances existing as of the Effective Time, as further outlined on Schedule 6.10 . The Purchase Price shall be adjusted in the Preliminary Settlement Statement with respect to the imbalance volumes. If there is a dispute concerning the confirmation and adjustment of the imbalance volumes, the Parties agree to submit such dispute to binding arbitration pursuant to the provisions of Section 14.7.

 

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ARTICLE 3

BUYER’S INSPECTION

3.1 Access to the Records . Prior to Closing and subject to Section 8.3, Seller will make the Records available to Buyer for inspection, copying, and review at Seller’s offices during normal business hours to permit Buyer to perform its due diligence review. Subject to the consent and cooperation of third parties, Seller will assist Buyer in Buyer’s efforts to obtain, at Buyer’s expense, such additional information from such parties as Buyer may reasonably desire. Buyer may inspect the Records and such additional information only to the extent it may do so without violating any obligation of confidence or contractual commitment of Seller to a third party. Nothing in this Agreement shall be construed to permit Buyer or its representatives to have access to any records relating to any bids or offers received by Seller for the sale of the Assets or access to any records protected by the attorney-client privilege (other than title opinions) or that would otherwise violate any legal obligation of Seller and all such bids, offers and legally privileged information shall be the sole property of Seller.

3.2 Disclaimer . Except for the representations contained in this Agreement, Seller makes no representation of any kind as to the Assets (including, without limitation, the Records or any information contained therein). Buyer agrees that any conclusions drawn from the Records shall be the result of its own independent review and judgment.

3.3 Physical Access to the Leases, Lands and Wells . Upon reasonable notice and during reasonable business hours, Seller agrees to grant Buyer physical access to the Leases, Lands and Wells to allow Buyer to conduct, at Buyer’s sole risk and expense, on-site inspections and environmental assessments of the Leases, Lands and Wells. In connection with any such on-site inspections and assessments, Buyer agrees not to interfere with the normal operation of the Leases and Wells and agrees to comply with all operational and safety requirements of the operators of the Wells. If Buyer or its agents prepare an environmental assessment of any Leases, Lands or Wells, Buyer agrees to keep such assessment confidential and to furnish copies thereof to Seller. Such information shall be held confidential but may be disclosed to Buyer or Buyer’s affiliates, attorneys, officers, employees and consultants used in Buyer’s evaluation of Seller’s properties. Furthermore, Buyer’s obligations of confidentiality shall not apply to information (i) required to be disclosed by legal process, order, regulation, or rule, or (ii) generally available to the public through no fault of Buyer, or (iii) acquired from third parties not known by Buyer to have confidentiality obligations to Seller. In connection with granting such access, Buyer represents that it is adequately insured and waives, releases and agrees to indemnify Seller, and its respective directors, officers, shareholders, employees, agents and representatives against all claims for injury to, or death of, persons or for damage to property arising as a result of any act or omission committed by Buyer or its employees, agents, contractors or representatives in conducting Buyer’s on-site inspections and environmental assessments of the Leases, Lands and Wells regardless of any concurrent negligence or strict liability on the part of Seller or its affiliates and regardless of the form of claim whether at common law, strict liability, negligence or under any statute or regulation. This waiver, release and indemnity by Buyer shall survive termination of this Agreement.

3.4 Buyer’s Agents . To the extent that Buyer uses agents to conduct its due diligence activities, either in Seller’s offices or on the Lands, Buyer agrees to (i) make such agents aware of the terms and conditions set forth in this Article 3 and the confidentiality provisions of Article 8, and (ii) ensure that such agents agree to be bound by the terms of this Article 3 and the confidentiality provisions of Article 8.

 

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ARTICLE 4

TITLE MATTERS

4.1 Definitions

A. Defensible Title . The term “Defensible Title” means such title to the Assets that, subject to and except for Permitted Encumbrances: (i) entitles Seller to receive not less than the net revenue interest set forth on Exhibit B for each Well or undeveloped location listed on Exhibit B (“NRI”) and, if the NRI for any Well or undeveloped location is listed as both “BPO” and “APO,” not less than the BPO NRI prior to the applicable payout event, and not less than the APO NRI after the applicable payout event; (ii) obligates Seller to bear costs and expenses relating to the maintenance, development, operation and the production of Hydrocarbons from each Well or undeveloped location in an amount not greater than the working interest set forth in Exhibit B (“WI”); (iii) is not subject to reduction by virtue of the exercise by any third party or automatic effectuation of a reversionary interest, back-in or similar right except as scheduled in Exhibit B ; (iv) is free and clear of mortgages, encumbrances, liens, and delinquent taxes; and (v) defects or conditions that would create an impairment of use or loss of interest in the affected Asset. If a formation in a Well or undeveloped location is not listed on Exhibit B , then the Allocated Value for such formation or undeveloped location is zero.

B. Permitted Encumbrances . The term “Permitted Encumbrances” shall mean:

1. lessors’ royalties, overriding royalties, net profits interests, production payments, reversionary interests and similar burdens (payable or in suspense) if the net cumulative effect of such burdens does not operate to reduce the represented NRI;

2. liens for Taxes, or assessments not yet due and delinquent or, if delinquent, that are being contested in good faith;

3. all rights to consent by, required notices to, filings with, or other actions by federal, state, or local governmental bodies, in connection with the conveyance of the applicable Asset if the same are customarily obtained after such conveyance (“Routine Consents”);

4. rights of reassignment upon the surrender or expiration of any Lease that expires after Closing;

5. the terms and conditions of all contracts and agreements relating to the Assets, including, without limitation, exploration agreements, gas sales contracts, processing agreements, farm-ins, farm-outs, operating agreements, area of mutual interest agreements, and right-of-way agreements to the extent such do not decrease the NRI for the affected Asset or increase the WI for such Asset without a corresponding proportionate increase in the NRI for such Asset;

 

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6. easements, rights-of-way, servitudes, permits, surface leases and other rights with respect to surface operations, on, over or in respect of any of the Assets or any restriction on access thereto so long as the same do not materially interfere with the operation of the affected Asset as has been conducted in the past and do not materially affect the value thereof;

7. undetermined or inchoate liens, materialmen’s, mechanics’, operators’, repairman’s, contractor’s or other similar liens, security interests or charges for liquidated amounts, arising in the ordinary course of business incidental to construction, maintenance, development, production or operation of the Assets that are not delinquent and that will be paid in the ordinary course of business or, if delinquent, that are being contested in good faith;

8. preferential rights to purchase the Assets (“Preferential Rights”);

9. all agreements and obligations set forth on Schedule 6.10 relating to (1) imbalances with respect to the production, gathering, transportation or processing of gas, (2) calls or purchase options on oil, gas or other minerals exercisable at current fair market prices or the posted prices of such purchaser, or (3) processing rights or commitments;

10. any encumbrance, title defect or other matter (whether or not constituting a Title Defect) waived or deemed waived by Buyer; and

11. rights reserved to or vested in any governmental authority to control or regulate any of the Wells or other properties included in the Assets and all applicable laws, rules, regulations and orders of such authorities so long as the same do not decrease the NRI for the affected Asset or increase the WI for such Asset without a corresponding proportionate increase in the NRI for such Asset.

C. Title Defect . The term “Title Defect” means any lien, encumbrance, claim, defect in or objection to real property title, excluding Permitted Encumbrances, that alone or in combination with other defects renders the Seller’s title to the Asset less than Defensible Title, including, but not limited to, Seller’s inability to provide, to Buyer’s reasonable satisfaction, evidence of current payment of proceeds of production from wells listed on Exhibit B, based on the interests shown thereon. Notwithstanding the foregoing, the following shall not be considered Title Defects:

1. defects in the early chain of title that would generally be waived by a prudent purchaser of oil and gas properties in the area, unless Buyer provides reasonable written evidence that such failure or omission has resulted in another party claiming title to the relevant Asset;

2. defects arising out of a lack of survey;

3. defects arising out of a lack of corporate or other entity authorization that would generally be waived by a prudent purchaser of oil and gas properties in the area unless Buyer provides affirmative written evidence that the action may not have been authorized and may result in another party claiming title to the Asset;

 

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4. defects that have been cured by possession under applicable statutes of limitation for adverse possession or for prescription; and

5. defects based on the failure to record Leases issued by any state or federal governmental body, or any assignments of such Leases, in the real property, conveyance or other records of the county or parish in which such property is located.

D. Title Defect Value . “Title Defect Value” means the amount by which the Allocated Value of an Asset has been reduced by a Title Defect. In determining the Title Defect Value, the Parties intend to include only that portion of the Asset affected by the Title Defect. The Title Defect Value may not exceed the Allocated Value of the Asset and shall be determined by the Parties in good faith taking into account all relevant factors, including without limitation, the following:

1. If the Title Defect is a lien or encumbrance on the Asset created by, through or under Seller, the Title Defect Value shall be an amount sufficient to discharge such lien or encumbrance notwithstanding the limitation set forth above.

2. If the Title Defect is an actual reduction in NRI, an increase in the WI without a corresponding increase in the NRI or any other matter that does not fall within the matters described in Subsection 4.1 D.1., then the Buyer will rerun its economic valuation calculation that resulted in the Allocated Value for the affected portion of the Assets using the same economic and engineering criteria except as changed to accommodate the Title Defect to calculate the impact on the Allocated Value for the affected Asset. This revised calculation of the Allocated Value will be presented to Seller and Buyer and Seller will act in good faith to reach mutual agreement as to the diminution effect of this Title Defect and thus the Title Defect Value.

3. If the Title Defect is not effective or does not affect an Asset throughout the entire productive life of such Asset, such fact shall be taken into account in determining the Title Defect Value.

4. The Title Defect Value with respect to any property shall be determined without duplication of any costs or losses included in another Title Defect Value thereunder. For example, but without limitation, if a lien affects more than one property or the curative work with respect to one Title Defect results (or is reasonably expected to result) in the curing of any other Title Defect affecting the same or another property, the amount necessary to discharge such lien or the cost and expense of such curative work shall be allocated among the properties so affected (in the ratios of the respective portions of the Purchase Price allocated to such properties) and the amount so allocated to a property shall be included only once in the Title Defect Value therefor.

 

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5. If a Title Defect affects only a portion of a property (as contrasted with an undivided interest in the entirety of such property) and a portion of the Purchase Price has not been allocated specifically to such portion of a property in the Allocated Value, then for the purposes of computing the Title Defect Value, the portion of the Purchase Price allocated to such property shall be further allocated among the portions of such property in the proportion that the net acreage (or net acre feet, as appropriate) of such property affected by such Title Defect bears to the net acreage (or net acre feet, as appropriate) in the entire property. In the event such property is subject to a unitization agreement, the foregoing allocation shall be made in a manner which is consistent with the allocation of production or productive acreage in such unitization agreement.

4.2 Purchase Price Adjustments for Title Matters .

A. Notices of Title Defects . Buyer shall give Seller a written “Title Defects Notice” as soon as possible but no later than 5:00 p.m. Dallas, Texas, time on July 31, 2009 (the “Title Defect Date”). To be effective, each Title Defect Notice must be in writing and must satisfy the following conditions precedent: (i) name the affected Asset; (ii) describe each Title Defect in reasonable detail; (iii) describe the basis for each Title Defect; (iv) attach Supporting Documentation; (v) state the Allocated Value of the affected Asset; (vi) state Buyer’s good faith estimate of the Title Defect Value; (vii) set forth the computations, upon which Buyer’s estimate is based; and (viii) each Title Defect must be equal to or greater than $50,000.00 in value net to Seller’s interest. Buyer will make reasonable efforts to communicate to Seller Title Defects promptly after they are discovered, but Buyer shall not be precluded from claiming any Title Defects as long as Buyer notifies Seller on or prior to the Title Defect Date.

B. Downward Defect Adjustments .

1. If an Asset is affected by a Title Defect, the Purchase Price will be reduced as set forth below and elsewhere in this Agreement, unless: (i) Seller elects to cure and actually does cure the Title Defect prior to Closing to Buyer’s reasonable satisfaction; (ii) Buyer agrees to waive the relevant Title Defect; (iii) Seller elects on or before Closing to cure such Title Defect no later than 90 days after Closing; (iv) Seller, with Buyer’s consent, which Buyer may withhold in its sole discretion, elects on or before Closing to indemnify Buyer against any Loss (as defined below) attributable to the relevant Title Defect; or (v) Seller elects on or before Closing to exclude the affected portion of the Asset from the Transaction and reduce the Purchase Price accordingly. In the event Seller elects option (v) above as to any portion of the Assets, Buyer may waive the relevant Title Defect in lieu thereof.

2. The Purchase Price shall be adjusted downward for Title Defects only if and to the extent that the sum of (i) the aggregate value of all Title Defects and (ii) the aggregate value of all Environmental Defects exceeds the Defect Deductible (any reduction in the Purchase Price pursuant to this Section shall be in conjunction with the reduction in the Purchase Price in Section 5.2 C. and Buyer shall not be entitled to duplicative reductions to the Purchase Price under either Section). If the sum of (i) the aggregate value of all Title Defects and (ii) the aggregate value of all Environmental Defects does not exceed the Defect Deductible, there shall be no adjustment to the Purchase Price, and Buyer will be deemed to have (i) accepted title to the Assets “AS IS WHERE IS,” and (ii) waived its right to assert any objection to title to the Assets.

 

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3. If Seller elects to cure the relevant Title Defect post-Closing, the Parties shall proceed as provided in this Section. If the Title Defect Value is equal to the Allocated Value of the affected Asset, Seller shall deposit the assignment of the Asset affected by the Title Defect (the “Affected Asset”) in the Escrow Account and Buyer shall deposit the Allocated Value of the Affected Asset in the Escrow Account. If the Title Defect Value is less than the Allocated Value of the affected Asset, Seller shall assign the Asset to Buyer on the Closing Date, Buyer shall deposit the Title Defect Value in the Escrow Account, and the Purchase Price payable by Buyer to Seller on the Closing Date shall be adjusted downward by the Title Defect Value deposited by Buyer into the Escrow Account. If Seller cures the relevant Title Defect to Buyer’s reasonable satisfaction within 90 days after Closing, the Parties shall instruct the Escrow Agent (i) to deliver to Seller the Allocated Value of the Affected Asset, adjusted as set forth in Section 2.4 and, if relevant at that time, Section 13.1, or the Title Defect Value, as applicable, and (ii) the assignment of the affected Asset if the assignment has been deposited into the Escrow Account. If Seller does not cure the relevant Title Defect to Buyer’s reasonable satisfaction, the Purchase Price shall be adjusted as set forth in Section 4.2 B.2., and the Parties shall instruct the Escrow Agent to deliver the Allocated Value or the Defect Value, as applicable, of the Affected Asset to Buyer and, if the Title Defect Value is equal to the Allocated Value of the Affected Asset, to return the assignment of the affected Asset to Seller. Interest accruing on such amount shall be distributed to each of the Parties in proportion to the amount of the Allocated Value distributed to such Party.

C. Upward Defect Adjustments . If Buyer or Seller discover additional interests in the Leases, Wells or undeveloped locations that are listed in Exhibit A and Exhibit B , including any interest that entitles Seller to receive more than the NRI set forth in Exhibit B or obligates Seller to bear costs and expenses in an amount less than the WI set forth in Exhibit B without a corresponding reduction in Seller’s NRI, the discovering party shall promptly notify the other Party of such interest (the “Additional Interest”). The Party who discovers the Additional Interest shall give the other Party written notice of the Additional Interest as soon as possible, but in no event later than the Title Defect Date. This notice shall be in writing and shall include (i) a description of each Additional Interest, (ii) the basis for each Additional Interest, and supporting documentation with respect thereto, (iii) the Allocated Value of the Lease, Well or undeveloped location affected by the Additional Interest, and (iv) the value of the Additional Interest or the amount by which the notifying Party believes the Allocated Value of the Lease, Well or undeveloped location has been increased by the Additional Interest and the computations upon which such Party’s belief is based. The value of the Additional Interest shall be determined by the parties in good faith taking into account all relevant factors. No adjustment to the Purchase Price shall be made for Additional Interests except to the extent they exceed $50,000 individually and an amount equal to the Defect Deductible in the aggregate.

4.3 Title Matters Dispute Resolution . In the event the Parties cannot in good faith resolve a dispute involving title matters, the Parties shall resolve such dispute pursuant to the terms of this Section. The Parties agree to submit all disputes concerning title matters regarding (i) the existence and scope of a Title Defect, (ii) the Title Defect Value of that portion of the Asset affected by a Title Defect or (iii) the adequacy of Seller’s Title Defect curative materials, to binding arbitration in Dallas, Texas, such arbitration to be conducted as follows. The arbitration proceeding shall be submitted to a neutral arbitrator approved by each of the Parties who is an attorney licensed in Texas with at least 15 years experience in preparing oil and gas

 

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title opinions involving properties in the regional area where the Assets are located (the “Title Arbitrator”). The arbitration proceeding shall be conducted by the American Arbitration Association in accordance with its commercial rules, with discovery to be conducted in accordance with the Federal Rules of Civil Procedure. The arbitration shall be governed by Texas law and shall be held in Dallas, Texas. The Parties shall submit written materials to the Title Arbitrator within 10 days of the selection of such arbitrator explaining their position regarding the title dispute. The Title Arbitrator shall conduct a hearing, if necessary, no later than 30 days after the selection of such arbitrator, and the Title Arbitrator shall render a written decision within 15 days of the hearing or, if no hearing is conducted, not later than 45 days after such arbitrator is selected. At the hearing, the Parties shall present such evidence and witnesses as they may choose, with or without counsel. Adherence to formal rules of evidence shall not be required but the Title Arbitrator shall consider any evidence and testimony that such arbitrator determines to be relevant, in accordance with procedures that such arbitrator determines to be appropriate. The final decision shall be binding on the Parties, final and non-appealable, and may be filed in a court of competent jurisdiction and may be enforced by any Party as a final judgment of such court. Each Party shall bear its own costs and expenses of the arbitration, provided, however, that the costs of employing the Title Arbitrator shall be borne 50% by the Seller and 50% by the Buyer.

4.4 No Title Warranty or Representation . Except for the special warranty of title by, through and under Seller that will be contained in the Assignment, Bill of Sale and Conveyance in the form attached as Exhibit F and without limiting Buyer’s right to adjust the Purchase Price as provided in this Article 4, Seller makes no warranty or representation, express or implied, statutory or otherwise, with respect to Seller’s title to any of the Assets and Buyer hereby acknowledges and agrees that Buyer’s sole remedy for any defect of title, including any Title Defect, with respect to any of the Assets shall be pursuant to the procedures and as set forth in this Article 4.

4.5 Casualty Loss . After the Effective Time and prior to Closing, if a portion of the Assets is destroyed by fire or other casualty, or is taken or threatened to be taken in condemnation or under the right of eminent domain, (with such event being a “Casualty Loss”), Buyer shall purchase such Asset at Closing for the Allocated Value of the Asset reduced by the estimated cost to repair or replace such Asset (with equipment of similar utility). Notwithstanding the foregoing, at its sole option, Seller may elect (i) to designate such Asset as an Excluded Asset so long as the Purchase Price is reduced by the Allocated Value of such Asset or (ii) to cure such Casualty Loss. If Seller elects to cure such Casualty Loss, Seller may replace any personal property that is the subject of a Casualty Loss with equipment of similar grade and utility and Seller shall be entitled to keep all associated insurance proceeds, if any. If Seller cures the Casualty Loss to Buyer’s reasonable satisfaction, Buyer shall purchase the affected Asset at Closing for the Allocated Value thereof without any Purchase Price adjustment for such Casualty Loss. In no event shall the watering out of a well, casing collapse, sand infiltration, breakage of equipment or other change in the condition of an Asset through normal depletion constitute a Casualty Loss.

4.6 Preferential Rights and Required Consents . To Seller’s knowledge, other than as set forth on Schedule 4.6 , there are no Preferential Rights and no consents to the assignment thereof that are required to be obtained in connection with the consummation of the Transaction

 

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(“Required Consents”). If there are Preferential Rights or Required Consents, the provisions of this Section shall apply. If either Party discovers Assets affected by Preferential Rights or Required Consents, Seller shall use its commercially reasonable efforts to give the notices required in connection with the Preferential Rights in sufficient time prior to Closing to permit the lapse of the period of time in which to exercise such Preferential Rights prior to Closing and shall use its commercially reasonable efforts to obtain such Required Consents prior to Closing; provided, however, that Seller shall not be obligated to pay any consideration to, or incur any cost or expense for the benefit of, the holder of any Preferential Right or Required Consent in order to obtain the waiver thereof or compliance therewith.

A. Required Consents . If a Required Consent has not been obtained as of the Closing, then (i) the portion of the Assets for which such Required Consent has not been obtained shall not be conveyed at the Closing, (ii) the Allocated Value for that Asset shall not be paid to Seller, and (iii) Seller shall use its reasonable efforts to obtain such Required Consent as promptly as possible following Closing. If a Required Consent has been obtained as of the Final Settlement Date, Seller shall convey the affected Asset to Buyer effective as of the Effective Time and Buyer shall pay Seller the Allocated Value of the affected Asset, reduced by the amount of any net proceeds from the affected Asset attributable to the period of time at or after the Effective Time with Seller retaining such net proceeds attributable to the period of time at or after the Effective Time until the affected Asset is assigned, and with Seller bearing all attendant costs in connection therewith, including Property Expenses, royalties and overriding royalties, lease rental and maintenance costs and leasehold payments for the affected Asset accruing during this period of time. If such Required Consent has not been obtained as of the Final Settlement Date, the affected Asset shall be deemed to be an Excluded Asset and Seller shall retain such Asset and the Purchase Price shall be deemed to be reduced by an amount equal to the Allocated Value of the particular Asset (with such adjustment being an “Exclusion Adjustment”). Buyer shall reasonably cooperate with Seller in obtaining any Required Consent including providing assurances of reasonable financial conditions, but Buyer shall not be required to expend funds or make any other type of financial commitments a condition of obtaining such consent.

B. Preferential Rights .

1. If any Preferential Right affecting any portion of the Assets is exercised and consummated prior to the Closing Date, that portion of the Assets affected by such Preferential Right shall be deemed to be Excluded Assets and the Purchase Price shall be adjusted downward by an amount equal to the Allocated Value of such affected Assets without the requirement for Buyer or Seller to give notice (with such adjustment being an “Exclusion Adjustment”).

2. If by Closing, the time frame for the exercise of such Preferential Rights has not expired and Seller has not received notice of an intent not to exercise or a waiver of the Preferential Right, that portion of the Assets affected by such Preferential Right shall be handled in the same manner as in Section 4.6 A. above.

C. Exclusive Remedy . The remedies set forth in this Section 4.6 are the exclusive remedies under this Agreement for Preferential Rights and Required Consents.

 

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ARTICLE 5

ENVIRONMENTAL MATTERS

The provisions of this Article apply only to the environmental matters associated with the Assets as the result of oil and gas operations on the Lands.

5.1 Environmental Review .

A. Environmental Access . Prior to the expiration of the Environmental Examination Period, subject to the restrictions contained in this Agreement and any required consent or waiver of any third person, Seller shall (i) permit Buyer and representatives of Buyer and its lenders to have reasonable access and at reasonable times in the Seller’s offices, and in a manner so as not to interfere unduly with the business operations of Seller, to Seller’s environmental files and records in Seller’s possession relating to the Assets insofar as Seller may do so without waiving any attorney/client work product or like privilege, and (ii) permit Buyer and the Environmental Consultant to have reasonable access to the Assets for the purpose of allowing Buyer and the Environmental Consultant to inspect and/or audit the Assets for any Environmental Defects (collectively, “Buyer’s Environmental Review”), all at Buyer’s sole risk, cost and expense.

B. Conduct of Review . Prior to conducting Buyer’s Environmental Review, Buyer shall furnish Seller with a written proposed scope of Buyer’s Environmental Review, including a description of the activities to be conducted and the locations of such activities. No third person, other than the Environmental Consultant and Buyer’s employees, may conduct Buyer’s Environmental Review. Buyer shall not commence any activity proposed to be included in Buyer’s Environmental Review unless and until such activity (including the location thereof) has been approved in writing by Seller which approval shall not be unreasonably withheld or delayed; provided, that if Seller declines to approve a proposed activity, Buyer may elect to exclude the affected property from the transaction and the Purchase Price will be adjusted downward accordingly. Seller shall have the right to be present during any inspection (including Buyer’s Environmental Review) of the Assets and shall have the right, at its option and expense, to split samples with Buyer.

C. Buyer’s Responsibility for Review . In connection with Buyer’s Environmental Review, Buyer agrees that Buyer, the Environmental Consultant and Buyer’s employees, agents and contractors shall comply with all laws and shall exercise due care with respect to the Assets and their condition, taking into consideration the characteristics of any wastes or substances found thereon, and in light of all relevant facts and circumstances. Specifically, but without limitation, when handling solid waste or hazardous substances, if any, discovered during the inspection of the Assets, Buyer, the Environmental Consultant and Buyer’s employees, agents and contractors shall handle such waste or substances in accordance with all laws. Any soil or water samples taken by Buyer from the Assets shall become the sole property and possession of Buyer and will be managed consistent with the applicable rules and regulations of the U.S. Environmental Protection Agency and other applicable governmental authorities. Promptly after completing Buyer’s Environmental Review, Buyer shall, at its sole cost and expense, restore the Assets substantially to their original condition, in accordance with good engineering practice, if changed due to Buyer’s Environmental Review. Failure by Buyer to

 

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comply with the requirements of this subsection within a reasonable time period will entitle (but shall not obligate) Seller to take any action deemed necessary or appropriate by Seller to correct such failure, all at Buyer’s expense. Prior to Closing, Buyer shall maintain and shall cause its partners, officers, directors, employees, agents, representatives, contractors, consultants and advisors to maintain all information obtained pursuant to Buyer’s Environmental Review strictly confidential and shall not disclose the same to any third person without the prior written consent of Seller, except to the extent required by law. Buyer shall provide Seller’s counsel with copies of any reports prepared and analytical test results received by Buyer or the Environmental Consultant promptly following Buyer’s or the Environmental Consultant’s preparation or receipt of the same. Buyer does hereby indemnify and hold harmless, release and agree to defend Seller and its officers, directors, employees and agents from and against any and all liabilities arising out of any violation by Buyer, the Environmental Consultant, or Buyer’s or the Environmental Consultant’s officers, directors, employees, agents, representatives, contractors, consultants and advisors of any Environmental Law, the provisions of this Section or, in whole or in part, from Buyer’s or the Environmental Consultant’s inspection or testing of the Assets or handling any substances or samples in connection therewith, regardless of any concurrent negligence or strict liability on the part of Seller and its officers, directors, employees and agents and regardless of the form of claim whether at common law, strict liability, negligence or under any statute or regulation.

5.2 Environmental Liabilities and Obligations .

A. Retained Environmental Liabilities . Upon Closing, if and to the extent the sum of (i) the aggregate value of all Environmental Defects and (ii) the aggregate value of all Title Defects exceeds the Defect Deductible, and subject to subsection 5.3 C. below, Seller shall retain and pay, perform, fulfill and discharge all claims, cost, expenses, liabilities and obligations accruing or relating to and release Buyer from all Losses attributable to and relating to Environmental Defects for which Seller receives a timely Environmental Defect Notice (the “Retained Environmental Liabilities”). The following are conditions precedent to Seller’s obligation to retain liability for Retained Environmental Liabilities: (i) timely receipt of an Environmental Defect Notice, (ii) verification of the cost to remediate by the Environmental Consultant and (iii) the aggregate value of all Environmental Defects plus the aggregate value of all Title Defects must exceed the Defect Deductible.

B. Assumed Environmental Liabilities . If the sum of (i) the aggregate value of all Environmental Defects and (ii) the aggregate value of all Title Defects does not exceed the Defect Deductible, upon Closing Buyer shall assume and pay, perform, fulfill and discharge and release Seller from all Losses relating to environmental conditions in, on or under the Assets attributable to the period of time before and after the Effective Time, including without limitation any and all liability for (i) ground water contamination, (ii) NORM, (iii) man-made material fibers, or (iv) the obligation to plug and abandon all of the wells located on the Lands and reclamation of existing well sites on the Lands (collectively, the “Assumed Environmental Liabilities”). If Buyer fails to timely deliver an Environmental Defect Notice with respect to an Asset, Buyer shall be deemed to (i) accept the environmental condition(s) in, on and under that Asset or the Assets, (ii) have waived its right to claim an Environmental Defect with respect to that particular condition in, on or under the Assets and (iii) include the particular environmental condition(s) as part of the Assumed Environmental Liabilities.

 

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