Exhibit 10.1
 
 
CONTRIBUTION AGREEMENT
 
BY AND AMONG
 
FLATONIA ENERGY, LLC
 
PARALLEL RESOURCE PARTNERS, LLC
 
AND
 
SABINE RIVER ENERGY, LLC
 
OAK VALLEY OPERATING, LLC
 
OAK VALLEY RESOURCES, LLC
 
AND
 
EARTHSTONE ENERGY, INC.
 
__________________________________________
 
 
EXECUTION DATE: October 16, 2014
 
__________________________________________
 

 
 

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TABLE OF CONTENTS
 

    Page
ARTICLE 1 DEFINITIONS AND INTERPRETATION
  2
Section 1.1
Defined Terms
 
2
Section 1.2
References and Rules of Construction
 
2
       
ARTICLE 2 THE CONTRIBUTION
  3
Section 2.1
The Contribution
 
3
Section 2.2
Assets
 
3
Section 2.3
Excluded Assets
 
4
Section 2.4
Effective Time; Proration of Costs and Revenues
 
4
Section 2.5
Procedures
 
5
     
ARTICLE 3 ISSUANCE OF EARTHSTONE CONTRIBUTION SHARES
  6
Section 3.1
Consideration for the Contribution
 
6
Section 3.2
Issuance by Earthstone of the Earthstone Contribution Shares to Flatonia.
 
6
Section 3.3
Allocation of Contribution Consideration.
 
7
Section 3.4
Cash Settlement to Reflect Effective Time
 
7
     
ARTICLE 4 CONSENTS AND PREFERENTIAL RIGHTS TO PURCHASE
  9
Section 4.1
Consents to Assignment and Preferential Rights to Purchase
 
9
Section 4.2
Casualty Loss or Condemnation
 
10
     
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PRP
  10
Section 5.1
Generally.
 
10
Section 5.2
Existence and Qualification
 
10
Section 5.3
Authorization and Enforceability
 
10
Section 5.4
No Conflicts
 
11
Section 5.5
Liability for Brokers’ Fees
 
11
Section 5.6
Litigation
 
11
Section 5.7
Consents, Approvals or Waivers
 
11
Section 5.8
Bankruptcy
 
11
     
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF FLATONIA
  12
Section 6.1
Generally.
 
12
Section 6.2
Existence and Qualification
 
12
Section 6.3
Authorization and Enforceability
 
12
Section 6.4
No Conflicts
 
12
Section 6.5
Liability for Brokers’ Fees
 
13
Section 6.6
Litigation
 
13
Section 6.7
Taxes and Assessments
 
13
Section 6.8
Material Contracts
 
14
Section 6.9
Bonds and Letters of Credit
 
14
Section 6.10
Bankruptcy
 
15

 
 
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Section 6.11 No Plan or Intention to Dispose   15 
Section 6.12
Securities Law Investment Representation
 
15
Section 6.13
Defensible Title
 
15
Section 6.14
Certain Disclaimers
 
15
     
ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF SABINE, OAK VALLEY AND  OAK VALLEY
OPERATOR
  16
Section 7.1
Generally.
 
16
Section 7.2
Existence and Qualification
 
17
Section 7.3
Authorization and Enforceability; Ownership of Sabine and Oak Valley Operator
 
17
Section 7.4
No Conflicts
 
17
Section 7.5
Liability for Brokers’ Fees
 
18
Section 7.6
Litigation
 
18
Section 7.7
Securities Law Compliance
 
18
Section 7.8
Independent Evaluation
 
18
Section 7.9
Consents, Approvals or Waivers
 
18
Section 7.10
Bankruptcy
 
19
Section 7.11
Exchange Agreement Representations
 
19
Section 7.12
Limitation
 
19
     
ARTICLE 8 REPRESENTATIONS AND WARRANTIES OF EARTHSTONE
  19
Section 8.1
Generally.
 
19
Section 8.2
Existence and Qualification
 
20
Section 8.3
Authorization and Enforceability
 
20
Section 8.4
Capitalization of Earthstone.
 
20
Section 8.5
No Conflicts
 
21
Section 8.6
Liability for Brokers’ Fees
 
21
Section 8.7
Litigation
 
21
Section 8.8
Governmental Approvals
 
21
Section 8.9
Securities Laws
 
22
Section 8.10
Earthstone Rights Agreement
 
22
Section 8.11
Exchange Agreement Representations
 
22
     
ARTICLE 9 COVENANTS OF THE PARTIES
  22
Section 9.1
Access
 
22
Section 9.2
Government Reviews
 
23
Section 9.3
Public Announcements; Confidentiality
 
24
Section 9.4
Operation of Business
 
25
Section 9.5
Further Assurances
 
25
Section 9.6
Operating Agreement
 
25
Section 9.7
Proxy Statement; Earthstone Stockholder Meeting; Exchange Agreement
 
25
Section 9.8
Registration Rights
 
26
Section 9.9
Listing of the Earthstone Contribution Shares
 
26
Section 9.10
Flatonia’s Right to Designate a Board Member
 
26
Section 9.11
Notice Required by Rule 14f-1 under Exchange Act
 
27
Section 9.12
Section 16 Matters
 
27

 
 
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Section 9.13
Tax Treatment of the Transaction
 
27
Section 9.14
Post-Closing Actions of Sabine
 
27
Section 9.15
Earthstone Voting Agreement.
 
27
     
ARTICLE 10 CONDITIONS TO CLOSING
  28
Section 10.1
Mutual Conditions to Closing
 
28
Section 10.2
Flatonia’s and PRP’s Conditions to Closing
 
28
Section 10.3
Oak Valley Entities’ Conditions to Closing
 
29
Section 10.4
Earthstone’s Conditions to Closing
 
30
Section 10.5
Frustration of Closing Conditions
 
31
     
ARTICLE 11 CLOSING
  31
Section 11.1
Time and Place of Closing
 
31
Section 11.2
Obligations of PRP and Flatonia at Closing
 
31
Section 11.3
Obligations of the Oak Valley Entities at Closing
 
32
Section 11.4
Obligations of Earthstone at Closing
 
33
Section 11.5
Closing and Post-Closing Cash Settlement
 
33
     
ARTICLE 12 TERMINATION
  35
Section 12.1
Termination
 
35
Section 12.2
Ability to Terminate
 
36
Section 12.3
Effect of Termination
 
36
     
ARTICLE 13 ASSUMPTION; INDEMNIFICATION
  36
Section 13.1
Assumption by Sabine
 
36
Section 13.2
Indemnification
 
36
Section 13.3
Indemnification Actions
 
37
Section 13.4
Limitation on Actions
 
39
     
ARTICLE 14 TAX MATTERS
  40
Section 14.1
Responsibility for Tax Filings and Payment
 
40
Section 14.2
Apportionment of Property Taxes
 
40
Section 14.3
Refunds
 
41
Section 14.4
Audits
 
41
Section 14.5
Transfer Taxes, Recording Fees & Transaction Fees
 
41
     
ARTICLE 15 MISCELLANEOUS
  42
Section 15.1
Counterparts
 
42
Section 15.2
Notices
 
42
Section 15.3
Certain Fees
 
44
Section 15.4
Governing Law; Jurisdiction
 
44
Section 15.5
Waivers
 
45
Section 15.6
Assignment
 
45
Section 15.7
Entire Agreement
 
45
Section 15.8
Amendment
 
45
Section 15.9
No Third Party Beneficiaries
 
45
Section 15.10
Construction
 
45

 
 
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Section 15.11
Limitation on Damages
 
45
Section 15.12
Recording
 
46
Section 15.13
Conspicuous
 
46
Section 15.14
Time of Essence
 
46
Section 15.15
Severability
 
46
Section 15.16
Specific Performance
 
46

 
APPENDICES:
 

  Appendix A  - Definitions   Appendix B  - SBE-Ramshorn Assignments   Appendix
C - OV Assignments

 
EXHIBITS:
 

  Exhibit A-1  - Leases   Exhibit A-2   - Wells   Exhibit A-3 - Certain Excluded
Assets   Exhibit B     - Form of Conveyance   Exhibit C-1   - Form of Amended
Operating Agreement   Exhibit C-2    - Form of Memorandum of Operating Agreement
  Exhibit D  - Form of Registration Rights Agreement

 
SCHEDULES:
 
Flatonia Disclosure Schedule
 

  Section 5.1 - PRP Knowledge Persons   Section 6.1 - Flatonia Knowledge Persons
  Section 6.4 - Conflicts and Approvals   Section 6.6  - Litigation   Section
6.7 - Taxes   Section 6.8 - Material Contracts   Section 6.9 - Flatonia
Financial Assurances   Section 9.4 - Interim Operating Actions

 
Oak Valley Disclosure Schedule
 

  Section 3.3 - Allocation of Contribution Consideration   Section 7.1  - Oak
Valley Knowledge Persons   Section 7.4 - No Conflicts   Section 7.9   -
Consents, Approvals and Waivers   Section 7.11 - Exchange Agreement
Representations

 
 
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Earthstone Disclosure Schedule
 

  Section 8.1 - Earthstone Knowledge Persons   Section 8.4  - Issuable
Earthstone Shares   Section 8.5  - Conflicts and Approvals   Section 8.11 -
Exchange Agreement Representations

 
 
 
 
 
 
 
 
 
 
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CONTRIBUTION AGREEMENT
 
This Contribution Agreement (this “Agreement”) is dated as of October 16, 2014
(the “Execution Date”), by and among Flatonia Energy, LLC, a Delaware limited
liability company (“Flatonia”), Parallel Resource Partners, LLC, a Delaware
limited liability company (“PRP”), Sabine River Energy, LLC, a Texas limited
liability company (“Sabine”), Oak Valley Operating, LLC, a Texas limited
liability company (“Oak Valley Operator”), Oak Valley Resources, LLC, a Delaware
limited liability company (“Oak Valley”) and Earthstone Energy, Inc., a Delaware
corporation (“Earthstone”).  Each of Flatonia, PRP, Sabine, Oak Valley Operator,
Oak Valley and Earthstone is sometimes referred to herein individually as a
“Party” and collectively, they are referred to herein as the “Parties.”
 
RECITALS:
 
WHEREAS, Oak Valley Operator, Sabine, Flatonia and PRP are parties to that
certain Participation Agreement dated July 3, 2013 (the “Participation
Agreement”);
 
WHEREAS, Oak Valley Operator, Sabine and Flatonia are parties to that certain
Operating Agreement dated July 19, 2013 (the “Operating Agreement”);
 
WHEREAS, the Participation Agreement and Operating Agreement relate to the joint
ownership by Flatonia and Sabine of certain oil and gas properties (the
“Jointly-Owned Properties”) located in Fayette and Gonzales Counties, Texas;
 
WHEREAS, Flatonia currently holds a 70% undivided ownership interest (on an
8/8ths basis) in the Jointly-Owned Properties, and Sabine currently holds a 30%
undivided ownership interest (on an 8/8ths basis) in the Jointly-Owned
Properties;
 
WHEREAS, shares of common stock, par value $0.001 per share, of Earthstone
(“Earthstone Common Stock”) are listed for trading on the NYSE MKT;
 
WHEREAS, Earthstone and Oak Valley have entered into that certain Exchange
Agreement dated as of May 15, 2014, as amended on September 26, 2014, (the
“Exchange Agreement”), pursuant to which Oak Valley will contribute to
Earthstone all of Oak Valley’s interests in Oak Valley Operator, EF Non-Op, LLC
and Sabine in consideration for the issuance by Earthstone to Oak Valley of
9,124,452 fully paid and non-assessable shares of Earthstone Common Stock;
 
WHEREAS, Section 5.2(b)(ii) of the Exchange Agreement permits Oak Valley, during
the period between the signing and closing of the transactions contemplated by
the Exchange Agreement, to enter into agreements with other parties to acquire
additional assets in consideration for the issuance by Earthstone of additional
shares of Earthstone Common Stock, on the terms and subject to the conditions
set forth in Section 5.2(b)(ii) of the Exchange Agreement;
 
WHEREAS, in accordance with Section 5.2(b)(ii) of the Exchange Agreement,
Flatonia desires to contribute to Sabine, as a wholly-owned subsidiary of
Earthstone immediately following the consummation of the transactions
contemplated by the Exchange Agreement, the interest in the Jointly-Owned
Properties described below and referred to as the “Assets,” in consideration for
the issuance by Earthstone to Flatonia of the Earthstone Contribution Shares (as
defined below) and the assumption by Sabine of the Assumed Sabine Obligations
(as defined below) in the manner and upon the terms and conditions hereinafter
set forth;
 
 
 

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WHEREAS, it is the intent of the parties that, after the consummation of the
transactions contemplated by the Exchange Agreement, the contribution of the
Assets to Sabine by Flatonia (the “Contribution”) and the issuance of the
Earthstone Contribution Shares to Flatonia, (w) Flatonia will continue to hold a
50% undivided ownership interest (on an 8/8ths basis) in the Jointly-Owned
Properties, (x) Sabine will hold a 50% undivided ownership interest (on an
8/8ths basis) in the Jointly-Owned Properties, (y) Oak Valley Operator will
continue as operator of the Jointly-Owned Properties under the Operating
Agreement and (z) Oak Valley and Flatonia will control Earthstone immediately
after the transactions by owning, in a manner consistent with Section 351 of the
Internal Revenue Code of 1986, as amended, at least 80% of the Earthstone Common
Stock, on an as-converted, as-exercised basis.
 
NOW, THEREFORE, in consideration of the premises and mutual promises,
representations, warranties, covenants, conditions and agreements contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties, intending to be
legally bound by the terms hereof, agree as follows:
 
ARTICLE 1
 
DEFINITIONS AND INTERPRETATION
 
Section 1.1 Defined Terms.  In addition to the terms defined in the introductory
paragraph and the Recitals of this Agreement, for purposes hereof, capitalized
terms used herein and not otherwise defined shall have the meanings set forth in
Appendix A.
 
Section 1.2 References and Rules of Construction.  All references in this
Agreement to Exhibits, Schedules, Appendices, Articles, Sections, subsections,
clauses and other subdivisions refer to the corresponding Exhibits, Schedules,
Appendices, Articles, Sections, subsections, clauses and other subdivisions of
or to this Agreement unless expressly provided otherwise.  Titles appearing at
the beginning of any Exhibits, Schedules, Appendices, Articles, Sections,
subsections, clauses and other subdivisions of this Agreement are for
convenience only, do not constitute any part of this Agreement and shall be
disregarded in construing the language hereof.  The words “this Agreement,”
“herein,” “hereby,” “hereunder” and “hereof,” and words of similar import, refer
to this Agreement as a whole and not to any particular Article, Section,
subsection, clause or other subdivision unless expressly so limited.  The words
“this Article,” “this Section,” “this subsection,” “this clause” and words of
similar import refer only to the Article, Section, subsection and clause hereof
in which such words occur.  The words “including” and “includes” (in their
various forms) means “including without limitation” and corresponding derivative
expressions.  The words “shall” and “will” are used interchangeably and have the
same meaning.  All references to “$” or “dollars” shall be deemed references to
United States dollars.  Each accounting term not defined herein will have the
meaning given to it under GAAP as interpreted as of the date of this
Agreement.  Unless expressly provided to the contrary, the word “or” is not
exclusive.  Pronouns in masculine, feminine or neuter genders shall be construed
to state and include any other gender, and words, terms and titles (including
 
 
2

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terms defined herein) in the singular form shall be construed to include the
plural and vice versa, unless the context otherwise requires.  Appendices,
Exhibits and Schedules referred to herein are attached to and by this reference
incorporated herein for all purposes.  Reference herein to any federal, state,
local or foreign Law shall be deemed to also refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise, and reference
herein to any agreement, instrument or Law means such agreement, instrument or
Law as from time to time amended, modified or supplemented, including, in the
case of agreements or instruments, by waiver or consent and, in the case of
Laws, by succession of comparable successor Laws.  References to a Person are
also to its permitted successors and permitted assigns.
 
ARTICLE 2
 
THE CONTRIBUTION
 
Section 2.1 The Contribution.  At the Closing, upon the terms and subject to the
conditions of this Agreement, Flatonia shall contribute, convey, assign,
transfer and deliver the Assets to Sabine, substantially in the form of the
Conveyance, and Sabine’s acquisition and acceptance of the Assets in
consideration for Earthstone’s issuance of the Earthstone Contribution Shares
and Sabine’s assumption of the Assumed Sabine Obligations (together, the
“Contribution Consideration”).  It is the intent of Flatonia and Sabine that, as
a result of the Conveyance delivered by Flatonia to Sabine pursuant to this
Agreement, from and after the Effective Time, the total amount of right, title
and interest owned by Flatonia and Sabine in the Assets shall be owned 50% by
Flatonia and 50% by Sabine.
 
Section 2.2 Assets.  As used herein, the term “Assets” means, subject to the
terms and conditions of this Agreement, an undivided 28.57142857% of all of
Flatonia’s right, title and interest in and to the following (but excepting and
excluding, in all such instances, the Excluded Assets):
 
(a) The oil and gas leases; subleases and other leaseholds; interests in fee;
carried interests; reversionary interests; net profits interests; royalty
interests; overriding royalty interests; forced pooled interests; farmout
rights; options; mineral interests and other properties and interests described
on Exhibit A-1, subject to the depth limitations and other restrictions as may
be set forth in such Exhibit A-1 or in documents of record affecting same
(collectively, the “Leases”);
 
(b) All oil, gas, water or injection wells located on the lands covered by the
Leases or lands pooled therewith (collectively, the “Lands”), whether producing,
shut-in, or temporarily abandoned, including the wells shown on Exhibit A-2
attached hereto (collectively, the “Wells”);
 
(c) All leasehold interests of Flatonia in or to any currently existing pooled
units covering any of the Lands or all or a part of any Leases, or which include
any Wells, including those pooled units related to the properties and associated
with the Wells shown on Exhibit A-2 (the “Units”; the Units, together with the
Leases, Lands and Wells, being hereinafter referred to as the “Properties”);
 
 
3

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(d) all contracts, agreements and instruments by which the Properties are bound
or subject, or that relate to or are otherwise applicable to the Properties, but
only to the extent applicable to the Properties (rather than Flatonia’s or any
of its Affiliates’ other properties), including operating agreements,
unitization, pooling and communitization agreements, declarations and orders,
joint venture agreements, farmin and farmout agreements, exploration agreements,
participation agreements, area of mutual interest agreements, exchange
agreements, transportation or gathering agreements, and agreements for the sale
and purchase of oil, gas or casinghead gas and processing agreements, to the
extent applicable to the Properties or the production of Hydrocarbons produced
in association therewith from the Properties (collectively, the “Contracts”),
but excluding any contracts, agreements and instruments to the extent transfer
would result in a violation of applicable Law, or is restricted by a Third Party
agreement, and provided that “Contracts” shall not include the instruments
constituting the Leases;
 
(e) All easements (including subsurface easements), permits, licenses,
servitudes, rights-of-way, surface leases and other surface rights
(collectively, the “Surface Agreements”) appurtenant to, and used or held for
use in connection with, the Properties, whether part of the premises covered by
the Leases or Units or otherwise, but excluding any permits and other rights to
the extent transfer would result in a violation of applicable Law, or is
restricted by a Third Party agreement;
 
(f) All treatment and processing plants and equipment, machinery, fixtures and
other tangible personal property and improvements located on the Properties or
used or held for use in connection with the operation of the Properties (the
“Equipment”);
 
(g) All flowlines, pipelines, gathering systems and appurtenances thereto
located on the Properties or used or held for use in connection with the
operation of the Properties;
 
(h) All Hydrocarbons produced from or attributable to the Leases, Lands, Wells
and Units from and after the Effective Time, together with and subject to
Imbalances associated with the Properties; and
 
(i) To the extent transferable, and subject to payment by Sabine of all Third
Party transfer and license fees, all geological and geophysical data (including
all seismic data, as well as reprocessed data) related exclusively to the
Properties.
 
Section 2.3 Excluded Assets.  Notwithstanding anything to the contrary, the
Assets shall not include, and there is excepted, reserved and excluded from this
transaction, the Excluded Assets.  In the event Sabine comes into possession of
any Excluded Assets, it shall deliver such Excluded Assets, as promptly as
possible, to or as directed by Flatonia.
 
Section 2.4 Effective Time; Proration of Costs and Revenues.
 
(a) Sabine shall be entitled to (i) all production of Hydrocarbons from or
attributable to the Assets after 7:01 a.m., Central Time, on July 1, 2014 (the
“Effective Time”), and all products and proceeds attributable thereto and (ii)
all other income, proceeds, receipts and
 
 
4

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credits earned with respect to the Assets after the Effective Time, and Sabine
shall be responsible for all Property Costs incurred or attributable to the
period after the Effective Time.
 
(b) Flatonia shall be entitled to (i) all production of Hydrocarbons from or
attributable to the Assets prior to and at the Effective Time, and all products
and proceeds attributable thereto and (ii) all other income, proceeds, receipts
and credits earned with respect to the Assets prior to and at the Effective
Time, and Flatonia shall be responsible for, and entitled to any refunds with
respect or attributable to (including, for the avoidance of doubt, any Tax
benefit (including refunds, credits or rebates), any reduction in severance
Taxes that may be realized after the Effective Time but that results from
payments or production for periods prior to and at the Effective Time), and all
Property Costs incurred or attributable to the period prior to and at the
Effective Time.
 
(c) Should Sabine receive after the Closing any proceeds or other income to
which Flatonia is entitled under Section 2.4(b), Sabine shall fully disclose,
account for and promptly remit the same to Flatonia.  If, after the Closing,
Flatonia receives any proceeds or other income with respect to the Assets to
which Sabine is entitled under Section 2.4(a), Flatonia shall fully disclose,
account for, and promptly remit same to Sabine.
 
(d) Should Sabine pay after the Closing any Property Costs for which Flatonia is
responsible under Section 2.4(b), Flatonia shall reimburse Sabine promptly after
receipt from Sabine of an invoice, accompanied by copies of the relevant vendor
or other invoice and proof of payment, with respect to such Property
Costs.  Should Flatonia pay after the Closing any Property Costs for which
Sabine is responsible under Section 2.4(a), Sabine shall reimburse Flatonia
promptly after receipt from Flatonia of an invoice, accompanied by copies of the
relevant vendor or other invoice and proof of payment, with respect to such
Property Costs.
 
(e) Notwithstanding the foregoing, Flatonia shall have no further entitlement to
amounts earned from the sale of Hydrocarbons produced from or attributable to
the Assets and other income earned with respect to the Assets and no further
responsibility for Property Costs (other than Property Taxes specifically
allocated to Flatonia as provided in Article 14) incurred with respect to the
Assets following the final determination and payment of the Cash Settlement in
accordance with Section 11.5(b).
 
(f) Right-of-way fees, insurance premiums and other Property Costs (other than
Property Taxes) that are paid periodically shall be prorated based on the number
of days in the applicable period falling before and the number of days in the
applicable period falling on or after the day of the Effective Time.  Property
Taxes shall be prorated as set forth in Section 14.2.  In each case, Sabine
shall be responsible for the portion allocated to the period after the Effective
Time, and Flatonia shall be responsible for the portion allocated to the period
before the Effective Time.
 
Section 2.5 Procedures.
 
(a) For purposes of allocating production and accounts receivable with respect
thereto under Section 2.4, (i) liquid Hydrocarbons shall be deemed to be “from
or attributable to” the Properties when they pass through the inlet flange of
the pipeline connecting into the storage
 
 
5

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facilities into which they are run or, if there are no such storage facilities,
when they pass through the LACT meters or similar meters at the point of entry
into the pipelines through which they are transported from the field and
(ii) gaseous Hydrocarbons shall be deemed to be “from or attributable to” the
Properties when they pass through the delivery point sales meters on the
pipelines through which they are transported (or whichever meter is closest to
the well).  Sabine shall utilize reasonable interpolative procedures to arrive
at an allocation of production when exact meter readings or gauging and
strapping data is not available.  Sabine shall provide to Flatonia evidence of
all meter readings and all gauging and strapping procedures conducted on or
about the Effective Time in connection with the Assets, together with all data
necessary to support any estimated allocation, for purposes of establishing the
Cash Settlement pursuant to Section 3.4.  The terms “earned” and “incurred”
shall be interpreted in accordance with GAAP and Council of Petroleum
Accountants Society (“COPAS”) standards, and expenditures which are incurred
pursuant to an operating agreement, unit agreement or similar agreement shall be
deemed incurred when expended by the operator of the applicable Property in
accordance with such operator’s practice as of the time before the Execution
Date.
 
(b) Sabine shall handle all joint interest audits and other audits of Property
Costs covering the period for which Sabine or Flatonia is in whole or in part
responsible under Section 2.4, except that any Tax Audits shall be handled as
provided in Article 14; provided, however, that, except with respect to any Tax
Audits that are handled as provided in Article 14, Sabine shall not agree to any
adjustments to previously assessed costs for which Flatonia is liable, or any
compromise of any audit claims to which Flatonia would be entitled, without the
prior written consent of Sabine, which consent shall not be unreasonably
withheld.  Each Party shall provide the other Party with a copy of all
applicable audit reports and written audit agreements received by such Party or
its Affiliates and relating to periods for which any such Party is partially
responsible.
 
ARTICLE 3
 
ISSUANCE OF EARTHSTONE CONTRIBUTION SHARES
 
Section 3.1 Consideration for the Contribution.  Immediately following the
consummation of the transactions contemplated by the Exchange Agreement and
prior to the consummation of the Contribution, Sabine will be a single member
limited liability company that is wholly owned by Earthstone.  In consideration
for the Contribution, (x) Earthstone shall issue the Earthstone Contribution
Shares to Flatonia in accordance with Section 3.2, and (y) Sabine shall assume
the Assumed Sabine Obligations.  The parties intend for the transfer of the
Assets by Flatonia to Sabine to be a transfer to Earthstone for U.S. federal
income tax purposes (and for purposes of any state or local taxes that follow
the federal treatment), in light of the treatment of Sabine as disregarded as an
entity separate from Earthstone under Treasury Regulations Section
301.7701-3(b).
 
Section 3.2 Issuance by Earthstone of the Earthstone Contribution Shares to
Flatonia.  At the Closing, in partial consideration for Flatonia’s contribution
of the Assets to Sabine, Earthstone will issue to Flatonia a number of fully
paid and non-assessable shares of Earthstone Common Stock equal to the
Earthstone Share Amount (the “Earthstone Contribution Shares”).  The “Earthstone
Share Amount” is such that, after giving effect to the transactions contemplated
by the Exchange Agreement and after giving effect to the issuance by Earthstone
to Flatonia of
 
 
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the Earthstone Contribution Shares, Flatonia will own, beneficially and of
record, 21.4% of the Earthstone Common Stock, on an as-converted, as-exercised
basis (rounded to the nearest whole share).
 
Section 3.3 Allocation of Contribution Consideration.
 
(a) The “Allocated Value” for any Asset equals the value allocated to such Asset
on Section 3.3 of the Oak Valley Disclosure Schedule.  Notwithstanding anything
to the contrary in this Agreement, Flatonia has accepted such Allocated Values
for purposes of this Agreement and the transactions contemplated hereby but
makes no representation or warranty as to the accuracy of such values.
 
(b) For U.S. federal income Tax purposes (and for purposes of any state or local
taxes that follow the federal treatment), Earthstone and Flatonia agree that the
Post-Closing Payment, if any, paid by Sabine to Flatonia will be allocated among
the Assets transferred to Sabine in accordance with the principles of Revenue
Ruling 68-55, 1968-1 C.B. 140, and in a manner reasonably consistent with the
Allocated Values.  Such allocation will be set forth in a separate schedule
delivered by Flatonia to Sabine within 90 days after the Closing (the “Tax
Allocations”).  Earthstone and Flatonia agree that (i) the Tax Allocations, as
may be subsequently adjusted by Flatonia to reflect any additional payment
obligations of the Parties hereunder or as otherwise determined appropriate by
agreement of the Parties, shall be used by Flatonia and Earthstone as the basis
for reporting asset values and other items for purposes of all federal, state
and local Tax returns and (ii) they will not take positions inconsistent with
such Tax Allocations in filing Tax Returns, notices to Governmental Bodies,
audit or other proceedings with respect to Taxes or in other documents or
notices relating to the transactions contemplated by this Agreement, except as
otherwise required by applicable Laws following a final determination by the
relevant Governmental Body.
 
Section 3.4 Cash Settlement to Reflect Effective Time.  In addition to the
issuance of the Earthstone Contribution Shares to Flatonia and the assumption by
Sabine of the Assumed Sabine Obligations, Flatonia or Sabine shall make a cash
settlement to the other (the “Cash Settlement”) (x) in accordance with the terms
of this Agreement and, to the extent not inconsistent with this Agreement, in
accordance with GAAP and COPAS as consistently applied in the oil and gas
industry in Texas and (y) as set forth in Section 3.4(a) and Section 3.4(b), for
amounts identified on or before the 180th day after the Closing (the “Cut-off
Date”).  If the amount calculated in Section 3.4(a) exceeds the amount
calculated in Section 3.4(b), Sabine shall make a payment to Flatonia in the
amount of such excess in accordance with Section 11.5.  If the amount calculated
in Section 3.4(b) exceeds the amount calculated in Section 3.4(a), Flatonia
shall make a payment to Sabine in the amount of such excess in accordance with
Section 11.5.
 
(a) In connection with the calculation of the Cash Settlement, the amount
described in this Section 3.4(a) shall be equal to the sum of the following
amounts, without duplication:
 
(i) an amount equal to all Property Costs and other costs attributable to the
Assets, or the production of Hydrocarbons therefrom, incurred or attributable to
the period after the Effective Time (or apportioned to Sabine or Earthstone
pursuant to
 
 
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Article 14) but paid by Flatonia, as is consistent with Section 2.4(a) and
Section 2.4(b), but excluding any amounts previously reimbursed to Flatonia
pursuant to Section 2.4(d);
 
(ii) an amount equal to all proceeds to which Flatonia is entitled pursuant to
Section 2.4(b), to the extent that such proceeds have been received by Sabine
and not remitted or paid to Flatonia;
 
(iii) an amount equal to all Property Costs and other expenses attributable to
the Assets and incurred after the Effective Time (or apportioned to Sabine or
Earthstone pursuant to Article 14), and which have been paid by Flatonia,
including  bonuses, rentals, cash calls and advances to Third Party operators,
in each case for expenses not yet incurred but paid by Flatonia, and an amount
equal to any Tax benefit (including refunds, credits or rebates) as of the
Cut-off Date agreed by the Parties to be attributable to any reduction in
severance Taxes that may be realized after the Effective Time but that results
from payments or production for periods prior to or at the Effective Time;
 
(iv) to the extent that proceeds for the associated production prior to and at
the Effective Time have not been received by or remitted to Flatonia, an amount
equal to the aggregate volumes of Hydrocarbons stored in stock tanks, pipelines,
line fill or other storage as of the Effective Time and the volume of
Hydrocarbons contained in gathering lines associated with production from the
Properties and applicable pipelines (including any line fill) as of the
Effective Time, in each case, from or attributable to the Assets or the
production of Hydrocarbons therefrom multiplied by the applicable contract price
for such volumes at the Effective Time;
 
(v) without duplication of Section 3.4(a)(iii), an amount equal to 28.57142857%
of the total amount of all outstanding Prepayments as of the Closing Date; and
 
(vi) any other amount provided for elsewhere in this Agreement or otherwise
agreed upon in writing by the Parties as an increase in the amount due to
Flatonia in connection with the Cash Settlement.
 
(b) In connection with the calculation of the Cash Settlement, the amount
described in this Section 3.4(b) shall be equal to the sum of the following
amounts, without duplication:
 
(i) an amount equal to all Property Costs and other costs attributable to the
Assets or the production of Hydrocarbons therefrom that are incurred or
attributable to the period prior to and at the Effective Time (or apportioned to
Flatonia pursuant to Article 14) but paid by Sabine, as is consistent with
Section 2.4(a) and Section 2.4(b), but excluding any amounts previously
reimbursed to Sabine pursuant to Section 2.4(d);
 
(ii) an amount equal to all proceeds to which Sabine is entitled pursuant to
Section 2.4(a), to the extent that such amounts have been received by Flatonia
and not remitted or paid to Sabine;
 
 
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(iii) the amount of (a) any reduction in value of the Assets caused by Casualty
Losses, as set forth in Section 4.2(a) or (b) the Allocated Value for any
portion of the Assets taken in condemnation or under right of eminent domain, as
set forth in Section 4.2(b);
 
(iv) an amount equal to the Allocated Value, if any, of any Assets excluded from
this transaction pursuant to Section 4.1; and
 
(v) any other amount provided for elsewhere in this Agreement or otherwise
agreed upon in writing by the Parties as an increase in the amount due to Sabine
in connection with the Cash Settlement.
 
ARTICLE 4
 
CONSENTS AND PREFERENTIAL RIGHTS TO PURCHASE
 
Section 4.1 Consents to Assignment and Preferential Rights to Purchase.  Sabine
will, at the earliest practicable date, use reasonable efforts, consistent with
industry practices in transactions of this type, to identify, with respect to
all Properties, (a) all preferential rights to purchase (“Preferential Rights”)
and requirements that consents to assignment (“Consents”) be obtained that would
be applicable to the assignment of the Assets to Sabine and (b) the names and
addresses of parties holding such rights (“Sabine Consent Parties”), and provide
a list of same to Flatonia.  Likewise, Flatonia will, at the earliest
practicable date, use reasonable efforts, consistent with industry practices in
transactions of this type, to identify, with respect to all Properties, (i) all
Preferential Rights and requirements that Consents be obtained that would be
applicable to the transactions contemplated hereby under contracts or agreements
to which Sabine or any of its Affiliates are not a party and (ii) the names and
addresses of parties holding such rights (“Flatonia Consent Parties”), and
provide a list of same to Sabine.  In attempting to identify such Preferential
Rights and Consents, and the names and addresses of such parties holding the
same, Sabine and Flatonia shall in no event be obligated to go beyond their
respective records.  Sabine will promptly request from the Sabine Consent
Parties, and Flatonia will promptly request from the Flatonia Consent Parties,
in each case, in accordance with the documents creating such rights, execution
of the Consents and/or waivers of Preferential Rights so identified, and Sabine
and Flatonia shall provide copies of such requests to the other, as applicable;
provided, however, that neither Sabine nor Flatonia shall have an obligation to
ensure that such Consents or waivers of Preferential Rights are obtained.  If a
party from whom a waiver of a Preferential Right is requested exercises its
Preferential Right, Sabine or Flatonia, as applicable, shall so notify the
other, and Flatonia will tender to such party the required interest in the
Property at a price equal to its Allocated Value, proportionately reduced if
less than the entire Property must be tendered (the “PR Value”), and if such
interest in such Property is actually sold to such party so exercising such
right, such interest in such Property will be excluded from the transaction
contemplated hereby and the amount calculated under Section 3.4(b) will be
increased by such Allocated Value or PR Value, as applicable.  Except for
Consents in documents that state that such Consent cannot be unreasonably
withheld (or words similar thereto), if a Person from whom a Consent is
requested refuses to give such Consent, unless otherwise agreed by the Parties,
the interest in the Property affected by such Consent will be excluded from the
transaction contemplated hereby and the amount calculated under Section 3.4(b)
will be increased by the Allocated Value of such excluded interest.
 
 
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Section 4.2 Casualty Loss or Condemnation.
 
(a) If prior to the Closing Date any portion of the Properties is destroyed or
taken as a result of a Casualty (a “Casualty Loss”), Sabine will nevertheless be
required to complete the transactions contemplated hereby, and such Casualty
Loss shall be treated as an increase in the amount calculated under Section
3.4(b) equal to the lesser of: (i) the Allocated Value of the Property affected
by such Casualty and (ii) the amount of such Casualty Loss.  Flatonia will not
voluntarily compromise, settle or adjust any Casualty Loss without prior
consultation with Sabine.  In such event, all rights to insurance proceeds and
claims against third parties related to such Casualty Loss shall belong to
Flatonia.
 
(b) If after the Execution Date, but prior to the Closing Date, any portion of
the Assets is taken in condemnation or under right of eminent domain by any
Governmental Body, (i) the affected Asset shall be excluded from the Assets
conveyed at Closing and shall be deemed an Excluded Asset and (ii) the amount
calculated under Section 3.4(b) shall be increased by the Allocated Value for
such Asset, if any.  If any action for condemnation or taking under right of
eminent domain is pending or threatened with respect to any portion of the
Assets after the Execution Date, but no taking of such Asset occurs prior to the
Closing Date, Flatonia shall, at the Closing, sell, assign and convey to Sabine
or subrogate Sabine to Flatonia’s right, title and interest (if any) in such
taking, including any insurance claims, unpaid awards and other rights against
Third Parties (other than Persons within the Flatonia Group) arising out of the
taking, insofar as they are attributable to the Assets (or portions thereof)
threatened to be taken.
 
ARTICLE 5
 
REPRESENTATIONS AND WARRANTIES OF PRP
 
Section 5.1 Generally.
 
(a) Any representation or warranty qualified to “PRP’s Knowledge” or with any
similar knowledge qualification is limited to matters within the Actual
Knowledge of the individuals listed in Section 5.1 of the Flatonia Disclosure
Schedule.
 
(b) Subject to the foregoing provisions of this Section 5.1, the disclaimers and
waivers contained in this Agreement and the other terms and conditions of this
Agreement, PRP represents and warrants as of the Execution Date the matters set
out in Section 5.2 through Section 5.7.
 
Section 5.2 Existence and Qualification.  PRP is a limited liability company,
validly existing and in good standing under the Laws of its jurisdiction of
organization and is duly qualified to do business in, and is in good standing
in, the jurisdictions in which the conduct or nature of its business or the
ownership, leasing, holding or operating of its properties makes such
qualification necessary, except such jurisdictions where the failure to be so
qualified or in good standing, individually or in the aggregate, would not have
a Flatonia Material Adverse Effect.
 
Section 5.3 Authorization and Enforceability.  PRP has the requisite limited
liability company power, authority and capacity to execute and deliver this
Agreement and the other instruments and agreements to be executed and delivered
by it as contemplated hereby and to consummate the transactions contemplated
hereby and thereby.  The execution, delivery and
 
 
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performance of this Agreement and all documents required to be executed and
delivered by PRP at the Closing, and the performance of the transactions
contemplated hereby and thereby, have been duly and validly authorized by all
necessary limited liability company action on the part of PRP.  This Agreement
has been duly executed and delivered by PRP (and all documents required
hereunder to be executed and delivered by PRP at the Closing will be duly
executed and delivered by PRP) and this Agreement constitutes, and at the
Closing such documents will constitute, the valid and binding obligations of
PRP, enforceable in accordance with their terms, subject to any bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other Laws, now
or hereafter in effect, relating to or limiting creditors’ rights generally and
to general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at Law).
 
Section 5.4 No Conflicts.  The execution, delivery and performance of this
Agreement by PRP, and consummation of the transactions contemplated by this
Agreement, will not (a) violate any provision of the organizational documents of
PRP, (b) conflict with or result in a violation of any provision of, or
constitute (with or without the giving of notice or the passage of time or both)
a default under, or give rise (with or without the giving of notice or the
passage of time or both) to any right of termination, cancellation or
acceleration under, any bond, debenture, note, mortgage, indenture, lease,
contract, agreement or other instrument or obligation to which PRP is a party or
by which PRP or any of its properties may be bound, (c) violate any Law
applicable to PRP or (d) result in the creation or imposition of any claims,
liens, mortgages, security interests and deeds of trust upon the properties of
PRP, except any matters described in clauses (b), (c) or (d) of this Section 5.4
that, individually or in the aggregate, would not have or reasonably be expected
to have a Flatonia Material Adverse Effect.
 
Section 5.5 Liability for Brokers’ Fees.  No Party other than PRP or Flatonia
shall directly or indirectly have any responsibility, liability or expense, as a
result of undertakings or agreements of PRP entered into in connection with this
Agreement, for brokerage fees, finder’s fees, agent’s commissions or other
similar forms of compensation in connection with this Agreement or any agreement
or transaction contemplated hereby.
 
Section 5.6 Litigation.  There are no actions, suits or proceedings that are
pending, or to PRP’s Knowledge, threatened in writing, before any Governmental
Body against PRP that would not have or reasonably be expected to have a
Flatonia Material Adverse Effect.
 
Section 5.7 Consents, Approvals or Waivers.  PRP’s execution, delivery and
performance of this Agreement (and any document required to be executed and
delivered by PRP at the Closing) is not and will not be subject to any consent,
approval, or waiver from any Governmental Body or other Third Party.
 
Section 5.8 Bankruptcy.  There are no bankruptcy, insolvency, reorganization or
receivership proceedings pending against, being contemplated by, or to PRP’s
Knowledge, threatened against PRP.
 
 
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ARTICLE 6
 
REPRESENTATIONS AND WARRANTIES OF FLATONIA
 
Section 6.1 Generally.
 
(a) Any representation or warranty qualified to “Flatonia’s Knowledge” or with
any similar knowledge qualification is limited to matters within the Actual
Knowledge of the individuals listed in Section 6.1 of the Flatonia Disclosure
Schedule.
 
(b) Subject to the foregoing provisions of this Section 6.1, the disclaimers and
waivers contained in this Agreement and the other terms and conditions of this
Agreement, Flatonia represents and warrants as of the Execution Date the matters
set out in Section 6.2 through Section 6.12.
 
Section 6.2 Existence and Qualification.  Flatonia (a) is a limited liability
company, validly existing and in good standing under the Laws of its
jurisdiction of organization and is duly qualified to do business in, and is in
good standing in, the jurisdictions in which the conduct or nature of its
business or the ownership, leasing, holding or operating of its properties makes
such qualification necessary, except such jurisdictions where the failure to be
so qualified or in good standing, individually or in the aggregate, would not
have a Material Adverse Effect on Flatonia and (b) has all requisite corporate
power and authority to own, lease, operate and use the assets and properties
currently owned, leased, operated and owned by it, including the Assets.
 
Section 6.3 Authorization and Enforceability.  Flatonia has the requisite
limited liability company power, authority and capacity to execute and deliver
this Agreement and the other instruments and agreements to be executed and
delivered by it as contemplated hereby and to consummate the transactions
contemplated hereby and thereby.  The execution, delivery and performance of
this Agreement and all documents required to be executed and delivered by
Flatonia at the Closing, and the performance of the transactions contemplated
hereby and thereby, have been duly and validly authorized by all necessary
limited liability company action on the part of Flatonia.  This Agreement has
been duly executed and delivered by Flatonia (and all documents required
hereunder to be executed and delivered by Flatonia at the Closing will be duly
executed and delivered by Flatonia) and this Agreement constitutes, and at the
Closing such documents will constitute, the valid and binding obligations of
Flatonia, enforceable in accordance with their terms, subject to any bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other Laws, now
or hereafter in effect, relating to or limiting creditors’ rights generally and
to general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at Law).
 
Section 6.4 No Conflicts.  Except as set forth on Section 6.4 of the Flatonia
Disclosure Schedule, the execution, delivery and performance of this Agreement
by Flatonia, and the consummation of the transactions contemplated by this
Agreement, will not (a) violate any provision of the organizational documents of
Flatonia, (b) conflict with or result in a violation of any provision of, or
constitute (with or without the giving of notice or the passage of time or both)
a default under, or give rise (with or without the giving of notice or the
passage of time or both) to any right of termination, cancellation or
acceleration under, any bond, debenture, note, mortgage, indenture, lease,
contract, agreement or other instrument or obligation to which
 
 
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Flatonia is a party or by which Flatonia or any of the Assets may be bound,
(c) violate any Law applicable to Flatonia or any of the Assets or (d) result in
the creation or imposition of any claims, liens, mortgages, security interests
and deeds of trust upon the Assets other than a Permitted Encumbrance, except
any matters described in clause (b), (c) or (d) of this Section 6.4 that,
individually or in the aggregate, would not have or reasonably be expected to
have a Flatonia Material Adverse Effect.
 
Section 6.5 Liability for Brokers’ Fees.  No Party other than PRP or Flatonia
shall directly or indirectly have any responsibility, liability or expense, as a
result of undertakings or agreements of Flatonia entered into in connection with
this Agreement, for brokerage fees, finder’s fees, agent’s commissions or other
similar forms of compensation in connection with this Agreement or any agreement
or transaction contemplated hereby.
 
Section 6.6 Litigation.  Except as disclosed on Section 6.6 of the Flatonia
Disclosure Schedule, there are no actions, suits or proceedings pending, or to
Flatonia’s Knowledge, threatened in writing, before any Governmental Body that
would have or reasonably be expected to have a Flatonia Material Adverse Effect.
 
Section 6.7 Taxes and Assessments.  Except as disclosed on Section 6.7 of the
Flatonia Disclosure Schedule; provided, however, to the extent any of the
following representations are made with respect to Property Taxes, such
representations are made to Flatonia’s Knowledge:
 
(a) Flatonia has paid all Taxes due and payable by it that could give rise to a
lien (other than a Permitted Encumbrance) on any of the Assets;
 
(b) Flatonia has timely filed all Tax Returns required to be filed by it as a
result of the ownership of the Assets or the production of Hydrocarbons
therefrom, and all such Tax Returns are true, correct and complete in all
material respects;
 
(c) there is no action, suit, proceeding or audit currently pending (or
threatened in writing) with respect to any such Taxes or any such Tax Returns;
 
(d) Flatonia has not agreed to extend the statute of limitations for assessment
of any such Taxes;
 
(e) none of the Assets is properly reportable as owned by a partnership subject
to Subchapter K of the Code for U.S. federal income tax purposes; and
 
(f) Flatonia is not a “foreign person” as defined in Section 1445(f)(3) of the
Code.
 
 
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Section 6.8 Material Contracts.
 
(a) Section 6.8 of the Flatonia Disclosure Schedule sets forth a list of the
following Contracts affecting or relating to Flatonia’s interest in the
Properties and to which Sabine, or an Affiliate of Sabine, is not a party or is
not bound (the “Material Contracts”):
 
(i) Any Contract that can be reasonably expected to result in aggregate payments
or receipts of revenue by Flatonia of more than $1,000,000 during the current or
any subsequent year, including any transportation and processing or similar
contract or Hydrocarbon sales contract, in each case, that is not terminable
without penalty on 60 days’ or less notice (but specifically excluding customary
joint operating agreements);
 
(ii) Any mortgage, deed of trust or security interest encumbering any Asset
(other than Permitted Encumbrances) that will not be terminated at or prior to
the Closing;
 
(iii) Any Contracts with Affiliates of Flatonia that will be binding on the
Assets or Sabine after the Closing;
 
(iv) Any hedges, swaps or other derivatives Contracts that will be binding on
the Assets or Sabine after the Closing; and
 
(v) Any Contract that constitutes an area of mutual interest agreement or any
other agreement that purports to restrict, limit or prohibit the manner in
which, or the locations in which, Flatonia conducts business within or adjacent
to the Properties that will be binding on the Assets or Sabine after the
Closing.
 
(b) Except as disclosed on Section 6.8 of the Flatonia Disclosure Schedule, each
Material Contract set forth (or required to be set forth) on Section 6.8 of the
Flatonia Disclosure Schedule is a legal, valid and binding obligation against
Flatonia and, to the knowledge of Flatonia, each other party thereto, is
enforceable in accordance with its terms against Flatonia, and to the Knowledge
of Flatonia, each other party thereto and is in full force and effect, subject
to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer
or other Laws, now or hereafter in effect, relating to or limiting creditors’
rights generally and to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at Law).  Neither
Flatonia nor, to the Knowledge of Flatonia, any other party thereto, is in
default under any Material Contract, and no event, occurrence, condition or act
has occurred that, with the giving of notice, the lapse of time or the happening
of any other event or condition, would become a default or event of default by
Flatonia or, to the Knowledge of Flatonia, any other party thereto, that in each
case would have or  reasonably be expected to have, individually or in the
aggregate, a Flatonia Material Adverse Effect.
 
Section 6.9 Bonds and Letters of Credit.  Section 6.9 of the Flatonia Disclosure
Schedule lists all bonds, letters of credit, guarantees and other similar
commitments held by Flatonia that are required by Third Parties in order for
Flatonia to own the Assets (the “Flatonia Financial Assurances”), excluding,
however, any bonds, letters of credit, guarantees and other
 
 
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similar commitments required by any Governmental Bodies in order for Flatonia or
its Affiliates to own or operate the Assets.
 
Section 6.10 Bankruptcy.  There are no bankruptcy, insolvency, reorganization or
receivership proceedings pending against, being contemplated by, or to
Flatonia’s Knowledge, threatened against Flatonia.
 
Section 6.11 No Plan or Intention to Dispose.  Flatonia has no present plan or
intention to dispose of the Earthstone Contribution Shares.
 
Section 6.12 Securities Law Investment Representation.  Flatonia is acquiring
the securities representing the Earthstone Contribution Shares for its own
account for investment purposes only and not with a view to the distribution
thereof.  Flatonia is an accredited investor as that term is defined in
Regulation D promulgated by the SEC under the Securities Act.  Flatonia
understands and agrees that the Earthstone Contribution Shares have not been
registered under the Securities Act or any state securities Laws, and that
accordingly, they will not be fully transferable except as permitted under
various exemptions contained in the Securities Act and applicable state
securities Laws, or upon satisfaction of the registration and prospectus
delivery requirements of the Securities Act and applicable state securities
Laws.  Flatonia acknowledges that it must bear the economic risk of its
investment in the Earthstone Contribution Shares for an indefinite period of
time (subject, however, to the terms and conditions of the Registration Rights
Agreement) since they have not been registered under the Securities Act and
applicable state securities Laws and therefore cannot be sold unless they are
subsequently registered or an exemption from registration is available. Absent
an effective registration statement under the Securities Act and applicable
state securities Laws covering the disposition of the Earthstone Contribution
Shares, Flatonia will not sell, transfer, assign, pledge, hypothecate or
otherwise dispose of any or all of the Earthstone Contribution Shares, absent a
valid exemption from the registration and prospectus delivery requirements of
the Securities Act and the registration or qualification requirements of any
applicable state securities Laws.  Flatonia acknowledges that a legend setting
forth the foregoing restrictions will be included on each of the certificates
evidencing the Earthstone Contribution Shares.
 
Section 6.13 Defensible Title.  The Assets are free and clear of any liens,
encumbrances, burdens, claims and other defects arising by, through or under
Flatonia that would cause Flatonia not to have Defensible Title to the Assets.
 
Section 6.14 Certain Disclaimers
 
(a) .  THE EXPRESS REPRESENTATIONS AND WARRANTIES OF FLATONIA CONTAINED ABOVE IN
THIS ARTICLE 6 (OR IN ANY CONVEYANCE EXECUTED PURSUANT TO THIS AGREEMENT) ARE
EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS,
IMPLIED, STATUTORY OR OTHERWISE, AND FLATONIA EXPRESSLY DISCLAIMS ANY AND ALL
SUCH OTHER REPRESENTATIONS AND WARRANTIES.  WITHOUT LIMITATION OF THE FOREGOING,
THE ASSETS SHALL BE CONVEYED PURSUANT HERETO WITHOUT ANY WARRANTY OR
REPRESENTATION, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, RELATING TO
TITLE TO THE ASSETS (EXCEPT AS SET FORTH IN THE CONVEYANCE EXECUTED PURSUANT TO
THIS AGREEMENT) OR RELATING TO THE CONDITION, QUANTITY, QUALITY,
 
 
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FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY TO THE MODELS OR SAMPLES OF
MATERIALS OR MERCHANTABILITY OF ANY EQUIPMENT OR ITS FITNESS FOR ANY PURPOSE,
AND, EXCEPT AS PROVIDED OTHERWISE IN THE FIRST SENTENCE OF THIS PARAGRAPH,
WITHOUT ANY OTHER EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR
REPRESENTATION WHATSOEVER.  SABINE SHALL HAVE INSPECTED, OR WAIVED (AND UPON
CLOSING SHALL BE DEEMED TO HAVE WAIVED WITH RESPECT TO THE ASSETS CONVEYED TO
SABINE IN SUCH CLOSING) ITS RIGHT TO INSPECT THE ASSETS FOR ALL PURPOSES AND
SATISFIED ITSELF AS TO THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE
AND SUBSURFACE, INCLUDING CONDITIONS SPECIFICALLY RELATED TO THE PRESENCE,
RELEASE OR DISPOSAL OF HAZARDOUS SUBSTANCES, SOLID WASTES, ASBESTOS AND OTHER
MAN MADE FIBERS, OR NORM.  EXCEPT AS PROVIDED OTHERWISE IN THE FIRST SENTENCE OF
THIS PARAGRAPH, SABINE IS RELYING SOLELY UPON ITS OWN INSPECTION OF THE ASSETS,
AND SABINE SHALL ACCEPT ALL OF THE SAME IN THEIR “AS IS, WHERE IS”
CONDITION.  ALSO WITHOUT LIMITATION OF THE FOREGOING, FLATONIA MAKES NO WARRANTY
OR REPRESENTATION, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AS TO THE ACCURACY
OR COMPLETENESS OF ANY DATA, REPORTS, RECORDS, PROJECTIONS, INFORMATION OR
MATERIALS NOW, HERETOFORE OR HEREAFTER FURNISHED OR MADE AVAILABLE TO SABINE OR
ANY OTHER PERSON IN CONNECTION WITH THIS AGREEMENT INCLUDING RELATIVE TO PRICING
ASSUMPTIONS, OR QUALITY OR QUANTITY OF HYDROCARBON RESERVES (IF ANY)
ATTRIBUTABLE TO THE ASSETS OR THE ABILITY OR POTENTIAL OF THE ASSETS TO PRODUCE
HYDROCARBONS OR THE ENVIRONMENTAL CONDITION OF THE ASSETS OR ANY OTHER MATTERS
CONTAINED IN ANY MATERIALS FURNISHED OR MADE AVAILABLE TO SABINE OR ANY OTHER
PERSON BY FLATONIA OR BY FLATONIA’S AGENTS OR REPRESENTATIVES.  ANY AND ALL SUCH
DATA, RECORDS, REPORTS, PROJECTIONS, INFORMATION AND OTHER MATERIALS (WRITTEN OR
ORAL) FURNISHED BY FLATONIA OR OTHERWISE MADE AVAILABLE OR DISCLOSED TO SABINE
OR ANY OTHER PERSON ARE PROVIDED TO SABINE AS A CONVENIENCE AND SHALL NOT CREATE
OR GIVE RISE TO ANY LIABILITY OF OR AGAINST FLATONIA AND ANY RELIANCE ON OR USE
OF THE SAME SHALL BE AT SABINE’S SOLE RISK TO THE MAXIMUM EXTENT PERMITTED BY
LAW.
 
ARTICLE 7
 
REPRESENTATIONS AND WARRANTIES OF SABINE, OAK VALLEY AND
 
OAK VALLEY OPERATOR
 
Section 7.1 Generally.
 
(a) Any representation or warranty qualified to the “knowledge of the Oak Valley
Entities” or with any similar knowledge qualification is limited to matters
within the Actual Knowledge of the individuals listed in Section 7.1 of the Oak
Valley Disclosure Schedule.
 
(b) Subject to the foregoing provisions of this Section 7.1, the disclaimers and
waivers contained in this Agreement and the other terms and conditions of this
Agreement, each of Oak Valley Entity hereby jointly and severally represents and
warrants as of the Execution Date the matters set out in Section 7.2 through
Section 7.12.
 
 
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Section 7.2 Existence and Qualification.  Each Oak Valley Entity is a limited
liability company, validly existing and in good standing under the Laws of the
state of its formation and is duly qualified to do business in, and is in good
standing in, the jurisdictions in which the conduct or nature of its business or
the ownership, leasing, holding or operating of its properties makes such
qualification necessary, except such jurisdictions where the failure to be so
qualified or in good standing, individually or in the aggregate, would not have
a Material Adverse Effect on such Oak Valley Entity.
 
Section 7.3 Authorization and Enforceability; Ownership of Sabine and Oak Valley
Operator.
 
(a) Each Oak Valley Entity has the requisite limited liability company power,
authority and capacity to execute and deliver this Agreement and the other
instruments and agreements to be executed and delivered by it as contemplated
hereby and to consummate the transactions contemplated hereby and thereby.  The
execution, delivery and performance of this Agreement and all documents required
to be executed and delivered by each Oak Valley Entity at the Closing, and the
performance of the transactions contemplated hereby and thereby, have been duly
and validly authorized by all necessary limited liability company action on the
part of such Oak Valley Entity.  This Agreement has been duly executed and
delivered by each Oak Valley Entity (and all documents required hereunder to be
executed and delivered by such Oak Valley Entity at the Closing will be duly
executed and delivered by such Oak Valley Entity) and this Agreement
constitutes, and at the Closing such documents will constitute, the valid and
binding obligations of each Oak Valley Entity, enforceable in accordance with
their respective terms, subject to any bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other Laws, now or hereafter in effect,
relating to or limiting creditors’ rights generally and to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at Law).
 
(b) All of the issued and outstanding limited liability company interests of
each of Sabine and Oak Valley Operator are held beneficially and of record by
Oak Valley.  The limited liability company agreement of each of Sabine and Oak
Valley Operator has been duly authorized, executed and delivered by Oak Valley
and is, and will be at the Closing, a valid and legally binding agreement,
enforceable against Sabine or Oak Valley Operator, as applicable, and its sole
member in accordance with its terms.
 
Section 7.4 No Conflicts.  Except as disclosed on Section 7.4 of the Oak Valley
Disclosure Schedule, the execution, delivery and performance of this Agreement
by each Oak Valley Entity, and the transactions contemplated by this Agreement,
will not (a) violate any provision of the organizational documents of any Oak
Valley Entity, (b) conflict with or result in a violation of any provision of,
or constitute (with or without the giving of notice or the passage of time or
both) a default under, or give rise (with or without the giving of notice or the
passage of time or both) to any right of termination, cancellation or
acceleration under, any bond, debenture, note, mortgage, indenture, lease,
contract, agreement or other instrument or obligation to which any Oak Valley
Entity is a party or by which any Oak Valley Entity or any of its properties may
be bound, (c) violate any Law applicable to such Oak Valley Entity or (d) result
in the creation or imposition of any claims, liens, mortgages, security
interests and deeds of trust upon the properties of each Oak Valley Entity,
except any matters described in clause (b), (c) or
 
 
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 (d) of this Section 7.4 that, individually or in the aggregate, would not have
or reasonably be expected to have a Material Adverse Effect on any Oak Valley
Entity.
 
Section 7.5 Liability for Brokers’ Fees.  No Party other than one or more Oak
Valley Entities shall directly or indirectly have any responsibility, liability
or expense, as a result of undertakings or agreements of any Oak Valley Entity,
for brokerage fees, finder’s fees, agent’s commissions or other similar forms of
compensation in connection with this Agreement or any agreement or transaction
contemplated hereby.
 
Section 7.6 Litigation.  There are no actions, suits or proceedings pending, or
to the knowledge of the Oak Valley Entities, threatened in writing, before any
Governmental Body that would have or reasonably be expected to have a Material
Adverse Effect on any Oak Valley Entity.
 
Section 7.7 Securities Law Compliance.  Sabine is acquiring the Assets for
investment and not with a view toward, or for sale in connection with, any
distribution thereof, nor with any present intention of distributing or selling
such Assets within the meaning of the Securities Act and applicable state
securities Laws.
 
Section 7.8 Independent Evaluation.
 
(a) Sabine is knowledgeable of the oil and gas business (including the
exploration and production and gathering segments thereof) and of the usual and
customary practices of Persons involved in such business, including those in the
areas where the Assets are located.  Sabine is capable of making such
investigation, inspection, review and evaluation of the Assets as a prudent
purchaser would deem appropriate under the circumstances including with respect
to all matters relating to the Assets, their value, operation and suitability
for investment.  Sabine has conducted its own investigation, inspection, review
and evaluation of the Assets and acknowledges that as a result of its current
partial ownership of the Assets, Sabine has full access to the Assets and to the
appropriate personnel, premises and records for such purpose to its
satisfaction.
 
(b) In making the decision to enter into this Agreement and to consummate the
transactions contemplated hereby, each Oak Valley Entity acknowledges that it
(i) has not relied upon any statements, representations (whether oral or
written), or any information provided by PRP or Flatonia, (ii) has relied solely
on the basis of its own independent due diligence investigation of the Assets
and the terms and conditions of this Agreement, except to the limited extent of
the representations,  warranties and covenants of PRP and Flatonia set forth in
Article 5 and Article 6, respectively, and in each other document required to be
executed and delivered by PRP and Flatonia at the Closing.
 
Section 7.9 Consents, Approvals or Waivers.  Except for Customary Post-Closing
Consents and as set forth on Section 7.9 of the Oak Valley Disclosure Schedule,
the execution, delivery and performance of this Agreement by each Oak Valley
Entity (and any document required to be executed and delivered by any Oak Valley
Entity at the Closing) is not and will not be subject to any consent, approval,
or waiver from any Governmental Body or other Third Party.
 
 
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Section 7.10 Bankruptcy.  There are no bankruptcy, insolvency, reorganization or
receivership proceedings pending against, being contemplated by, or to the
knowledge of the Oak Valley Entities, threatened against any Oak Valley Entity.
 
Section 7.11 Exchange Agreement Representations.  Except as disclosed on Section
7.11 of the Oak Valley Disclosure Schedule: (a) the representations and
warranties made by Oak Valley in Sections 4.1, 4.2 and 4.3 of the Exchange
Agreement are true and correct and (b) all other representations and warranties
made by Oak Valley in the Exchange Agreement are true and correct in all
material respects.
 
Section 7.12 No Plan or Intention to Dispose.  Oak Valley has no present plan or
intention to dispose of the Earthstone Common Stock received pursuant to the
Exchange Agreement.
 
Section 7.13 Limitation.  Each Oak Valley Entity acknowledges the following: THE
ASSETS HAVE BEEN USED FOR EXPLORATION, DEVELOPMENT AND PRODUCTION OF
HYDROCARBONS, AND THERE MAY BE PETROLEUM, PRODUCED WATER, WASTE, OR HAZARDOUS
SUBSTANCES OR MATERIALS LOCATED IN, ON OR UNDER THE PROPERTIES OR ASSOCIATED
WITH THE ASSETS.  EQUIPMENT AND SITES INCLUDED IN THE ASSETS MAY CONTAIN
ASBESTOS, NORM OR OTHER HAZARDOUS SUBSTANCES.  NORM MAY AFFIX OR ATTACH ITSELF
TO THE INSIDE OF WELLS, MATERIALS AND EQUIPMENT AS SCALE, OR IN OTHER
FORMS.  THE WELLS, MATERIALS AND EQUIPMENT LOCATED ON THE PROPERTIES OR INCLUDED
IN THE ASSETS MAY CONTAIN NORM AND OTHER WASTES OR HAZARDOUS SUBSTANCES.  NORM
CONTAINING MATERIAL AND/OR OTHER WASTES OR HAZARDOUS SUBSTANCES MAY HAVE COME IN
CONTACT WITH VARIOUS ENVIRONMENTAL MEDIA, INCLUDING WATER, SOILS OR
SEDIMENT.  SPECIAL PROCEDURES MAY BE REQUIRED FOR THE ASSESSMENT, REMEDIATION,
REMOVAL, TRANSPORTATION OR DISPOSAL OF ENVIRONMENTAL MEDIA, WASTES, ASBESTOS,
NORM AND OTHER HAZARDOUS SUBSTANCES FROM THE ASSETS.
 
ARTICLE 8
 
REPRESENTATIONS AND WARRANTIES OF EARTHSTONE
 
Section 8.1 Generally.
 
(a) Any representation or warranty qualified to “Earthstone’s Knowledge” or with
any similar knowledge qualification is limited to matters within the Actual
Knowledge of the individuals listed in Section 8.1 of the Earthstone Disclosure
Schedule.
 
(b) Subject to the foregoing provisions of this Section 8.1, the disclaimers and
waivers contained in this Agreement and the other terms and conditions of this
Agreement, Earthstone represents and warrants as of the Execution Date the
matters set out in Section 8.2 through Section 8.11.
 
 
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Section 8.2 Existence and Qualification.  Earthstone is a corporation, validly
existing and in good standing under the Laws of the State of Delaware and is
duly qualified to do business in, and is in good standing in, the jurisdictions
in which the conduct or nature of its business or the ownership, leasing,
holding or operating of its properties makes such qualification necessary,
except such jurisdictions where the failure to be so qualified or in good
standing, individually or in the aggregate, would not have a Material Adverse
Effect on Earthstone.
 
Section 8.3 Authorization and Enforceability.  Subject to the receipt of the
Earthstone Stockholder Approval, (a) Earthstone has the requisite corporate
power, authority and capacity to execute and deliver this Agreement and the
other instruments and agreements to be executed and delivered by it as
contemplated hereby and to consummate the transactions contemplated hereby and
thereby; (b) the execution, delivery and performance of this Agreement and all
documents required to be executed and delivered by Earthstone at the Closing,
and the performance of the transactions contemplated hereby and thereby, have
been duly and validly authorized by all necessary corporate action on the part
of Earthstone; and (c) this Agreement has been duly executed and delivered by
Earthstone (and all documents required hereunder to be executed and delivered by
Earthstone at the Closing will be duly executed and delivered by Earthstone) and
this Agreement constitutes, and at the Closing such documents will constitute,
the valid and binding obligations of Earthstone, enforceable in accordance with
their terms, subject to any bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or other Laws, now or hereafter in effect, relating to or
limiting creditors’ rights generally and to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at Law).
 
Section 8.4 Capitalization of Earthstone.
 
(a) All of the outstanding shares of Earthstone Common Stock have been duly
authorized and validly issued in accordance with the Certificate of
Incorporation, are fully paid and nonassessable, and, as of the respective dates
of the SEC Filings and Earthstone Financial Statements (in each case, as defined
in the Exchange Agreement, but determined as of the Execution Date), were issued
and held as described therein.  On the date hereof, there are 1,737,420 issued
and outstanding shares of Earthstone Common Stock. On the date hereof,
Earthstone has no preferred stock or other equity securities issued or
outstanding.
 
(b) Subject to the receipt of the Earthstone Stockholder Approval, the shares of
Earthstone Common Stock to be issued pursuant to this Agreement will be duly
authorized in accordance with the Certificate of Incorporation, and, when issued
and delivered pursuant to this Agreement in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable and will be issued free and
clear of any lien, claim or encumbrance.
 
(c) Except for the shares of Earthstone Common Stock constituting the Earthstone
Contribution Shares and outstanding options, warrants or other rights to
purchase Earthstone Common Stock set forth in the Earthstone Annual Report (as
defined in the Exchange Agreement) or as provided in the Earthstone Rights
Agreement or the Exchange Agreement, there are no preemptive rights or other
rights to subscribe for or to purchase any shares of Earthstone Common
Stock.  Except for the shares of Earthstone Common Stock to be issued
 
 
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pursuant to this Agreement or the Exchange Agreement (as set forth on Section
8.4 of the Earthstone Disclosure Schedule), as of the date hereof, there are no
shares of Earthstone Common Stock or shares of Earthstone preferred stock held
in the treasury of Earthstone, there are no outstanding options, warrants or
other rights to purchase, agreements or other obligations to issue, or rights to
convert any obligations into or exchange any securities for, shares of
Earthstone Common Stock or other securities of Earthstone.
 
(d) Subject to the receipt of the Earthstone Stockholder Approval, Earthstone
has all requisite power and authority to issue, exchange and deliver the
Earthstone Contribution Shares in accordance with and upon the terms and
conditions set forth in this Agreement.  As of the Closing Date, all corporate
action for the authorization, issuance, exchange and delivery of the Earthstone
Contribution Shares shall have been validly taken, and no other authorization by
any of such parties is required therefor.
 
Section 8.5 No Conflicts
 
(a) .  Except for the receipt of the Earthstone Stockholder Approval, the
required approval of NYSE MKT and as otherwise indicated on Section 8.5 of the
Earthstone Disclosure Schedule, the execution, delivery and performance by
Earthstone of this Agreement and the consummation by Earthstone of the
transactions contemplated hereby do not and will not (a) conflict with or result
in a violation of any provision of its Certificate of Incorporation or bylaws,
(b) conflict with or result in a violation of any provision of, or constitute
(with or without the giving of notice or the passage of time or both) a default
under, or give rise (with or without the giving of notice or the passage of time
or both) to any right of termination, cancellation or acceleration under, any
bond, debenture, note, mortgage, indenture, lease, contract, agreement or other
instrument or obligation to which Earthstone is a party or by which Earthstone
or any of its properties may be bound, (c) violate any Law applicable to
Earthstone or (d) result in the creation or imposition of any claims, liens,
mortgages, security interests and deeds of trust upon the properties of
Earthstone, except any matters described in clause (b), (c) or (d) of this
Section 8.5 that, individually or in the aggregate, would not have or reasonably
be expected to have a Material Adverse Effect on Earthstone.
 
Section 8.6 Liability for Brokers’ Fees
 
(a) .  No Party other than Earthstone shall directly or indirectly have any
responsibility, liability or expense, as a result of undertakings or agreements
of Earthstone, for brokerage fees, finder’s fees, agent’s commissions or other
similar forms of compensation in connection with this Agreement or any agreement
or transaction contemplated hereby.
 
Section 8.7 Litigation.  There are no actions, suits or proceedings pending, or
to Earthstone’s Knowledge, threatened in writing, before any Governmental Body
that would have or reasonably be expected to have a Material Adverse Effect on
Earthstone.
 
Section 8.8 Governmental Approvals.  To the Knowledge of Earthstone, no material
consent, approval, order or authorization of, or declaration, filing or
registration with, any Governmental Body is required to be obtained or made by
Earthstone in connection with the execution, delivery or performance by
Earthstone of this Agreement or the consummation by it of the transactions
contemplated hereby, other than (a) compliance with any applicable federal or
state securities or takeover Laws, including the filing of the Proxy Statement,
as well as the filing of such other forms, notices and other documents as
required under federal securities and state
 
 
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blue sky Laws and (b) filings with Governmental Bodies to occur in the ordinary
course following the consummation of the transactions contemplated hereby.
 
Section 8.9 Securities Laws.  Assuming the representations of Flatonia contained
in Section 6.11 of this Agreement are true and correct, the offer and sale of
the shares comprising the Earthstone Contribution Shares (a) are and will be
exempt from the registration and prospectus delivery requirements of the
Securities Act, (b) have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws, and (c) are and will be
accomplished in conformity with all other federal and applicable state
securities Laws.
 
Section 8.10 Earthstone Rights Agreement.  Other than under the Earthstone
Rights Agreement, Earthstone does not have any outstanding rights or “poison
pills” other than any such rights or “poison pills” that will expire or
terminate (without payment of any consideration by any Party) prior to the
Closing Date.  In furtherance of the foregoing, the Earthstone Board has taken
appropriate action such that in connection with the consummation of the
transactions contemplated by this Agreement (a) none of Oak Valley and any of
its “Affiliates” or “Associates” (as each such term is defined in the Earthstone
Rights Agreement) and PRP and Flatonia and any of their respective “Affiliates”
or “Associates” are “Beneficial Owners” (as defined in the Earthstone Rights
Agreement), (b) none of Oak Valley and any of its “Affiliates” or “Associates”
and PRP and Flatonia and any of their respective “Affiliates” or “Associates”
are “Acquiring Persons” (as defined in the Earthstone Rights Agreement”); (c) no
“Distribution Date” or “Shares Acquisition Date” (each as defined in the
Earthstone Rights Agreement) will be triggered as a result of the execution of
this Agreement or the consummation pursuant to this Agreement of the acquisition
of the Assets and the issuance of the Earthstone Contribution Shares and the
other transactions contemplated by this Agreement pursuant to the terms hereof;
and (d) the Earthstone Rights Agreement has been amended to exempt this
Agreement and the transactions contemplated hereby and thereby from the
application of the Earthstone Rights Agreement.
 
Section 8.11 Exchange Agreement Representations
 
Section 8.12 .  Except as disclosed on Section 8.11 of the Earthstone Disclosure
Schedule: (a) the representations and warranties made by Earthstone in Sections
3.1, 3.2, 3.3 and 3.34 of the Exchange Agreement are true and correct and (b)
all other representations and warranties made by Earthstone in the Exchange
Agreement are true and correct in all material respects.
 
ARTICLE 9
 
COVENANTS OF THE PARTIES
 
Section 9.1 Access
 
(a) From and after the Execution Date until the Closing, upon reasonable notice
and subject to applicable Laws relating to the exchange of information, each
Party shall, and shall cause each of its Subsidiaries to afford to the other
Parties and their respective Representatives reasonable access during normal
business hours (and, with respect to books and records, the right to copy) to
all of its and its Subsidiaries’ properties, commitments, books, contracts,
records and correspondence (in each case, whether in physical or electronic
form),
 
 
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officers, employees, accountants, counsel, financial advisors and other
Representatives, in each case, to the extent reasonably related to the
transactions contemplated by this Agreement.  Each Party shall furnish promptly
to each other Party (i) a copy of each report, schedule and other document filed
or submitted by it pursuant to the requirements of federal or state securities
laws and a copy of any communication (including “comment letters”) received by
such Party from the SEC concerning compliance with securities Laws and (ii) all
other information concerning its and its Subsidiaries’ business, properties and
personnel as the other Parties may reasonably request.  Except for disclosures
permitted by the terms of this Agreement, each Party and its Representatives
shall hold information received from each other Party pursuant to this
Section 9.1 in confidence in accordance with the terms of Section 9.3(b).
 
(b) This Section 9.1 shall not require any Party to permit any access, or to
disclose any information, that in the reasonable, good faith judgment of such
Party would reasonably be expected to result in (i) any violation of any
contract or applicable Law to which such Party or its Subsidiaries is a party or
is subject or cause any privilege (including attorney-client privilege) that
such Party or any of its Subsidiaries would be entitled to assert to be
undermined with respect to such information and such undermining of such
privilege could in such Party’s good faith judgment adversely affect in any
material respect such Party’s position in any pending or, what such Party
believes in good faith could be, future litigation or (ii) if such Party or any
of its Subsidiaries, on the one hand, and any of the other Parties or any of
their Subsidiaries, on the other hand, are adverse parties in a litigation, such
information being reasonably pertinent thereto; provided, however, that, in the
case of clause (i), the Parties shall cooperate in seeking to find a way to
allow disclosure of such information (including by entering into a joint-defense
or similar agreement) to the extent doing so (1) would not (in the good faith
belief of the Party being requested to disclose the information) reasonably be
likely to result in the violation of any such contract or applicable Law or
reasonably be likely to cause such privilege to be undermined with respect to
such information or (2) could reasonably (in the good faith belief of the Party
being requested to disclose the information) be managed through the use of
customary “clean-room” arrangements pursuant to which appropriately designated
Representatives of the other Parties shall be provided access to such
information; provided, further that the Party being requested to disclose the
information shall (x) notify the other Parties that such disclosures are
reasonably likely to violate its or its Subsidiaries’ obligations under any such
contract or applicable Law or are reasonably likely to cause such privilege to
be undermined, (y) communicate to the other Parties in reasonable detail the
facts giving rise to such notification and the subject matter of such
information (to the extent it is able to do so in accordance with the first
proviso in this Section 9.1(b)) and (z) in the case where such disclosures are
reasonably likely to violate its or its Subsidiaries’ obligations under any
contract, use reasonable commercial efforts to seek consent from the applicable
third party to any such contract with respect to the disclosures prohibited
thereby (to the extent not otherwise expressly prohibited by the terms of such
contract).
 
(c) No investigation, or information received, pursuant to this Section 9.1 will
modify any of the representations and warranties of the Parties.
 
Section 9.2 Government Reviews.  In a timely manner, the Parties shall (a) make
all required filings, prepare all required applications and conduct negotiations
with each Governmental Body as to which such filings, applications or
negotiations are necessary or
 
 
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appropriate in the consummation of the transactions contemplated hereby and
(b) provide such information as each may reasonably request to make such
filings, prepare such applications and conduct such negotiations.  Each Party
shall reasonably cooperate with and use reasonable efforts to assist the other
with respect to such filings, applications, and negotiations.
 
Section 9.3 Public Announcements; Confidentiality.
 
(a) The initial press release with respect to the execution of this Agreement
shall be a joint press release to be reasonably agreed upon by the
Parties.  Thereafter, no Party shall issue or cause the publication of any press
release or other public announcement (to the extent previously issued or made in
accordance with this Agreement) with respect to this Agreement or the
transactions contemplated hereby without the prior consent of the other Parties
(which consent shall not be unreasonably withheld or delayed), except as may be
required by applicable Law or by any applicable listing agreement with the NYSE
MKT as determined in the good faith judgment of Earthstone (in which case
Earthstone shall not issue or cause the publication of such press release or
other public announcement without prior consultation with the other Parties);
provided, however, that Earthstone shall not be required by this Section 9.3(a)
to consult with any other Party with respect to a public announcement in
connection with the receipt and existence of an Alternative Proposal (as defined
in the Exchange Agreement) that the Earthstone Board believes is bona fide and
matters related thereto or an Adverse Recommendation Change (as defined in the
Exchange Agreement) but nothing in this proviso shall limit any obligation of
Earthstone under Section 5.3(c) of the Exchange Agreement to advise and inform
Oak Valley or under Section 9.3(c) to advise and inform PRP; provided further,
that each Party and their respective controlled affiliates may make statements
that are consistent with statements made in previous press releases, public
disclosures or public statements made by the Parties in compliance with this
Section 9.3(a).
 
(b) Notwithstanding anything in Section 9.3(a) to the contrary, the Parties
shall keep all information and data relating to this Agreement and the
transactions contemplated hereby strictly confidential except for disclosures to
Representatives of the Parties and any disclosures required to perform this
Agreement; provided, however, that the foregoing shall not restrict disclosures
that (i) are necessary for a Party to perform this Agreement (including such
disclosure to Governmental Bodies or Third Parties holding Preferential Rights,
rights of consent or other rights that may be applicable to the transactions
contemplated by this Agreement as is reasonably necessary to provide notices,
seek waivers, amendments or termination of such rights, or seek such consents);
(ii) are required (upon advice of counsel) by applicable securities or other
Laws or the applicable rules of any stock exchange having jurisdiction over the
Parties or their respective Affiliates; or (iii) are otherwise subject to an
undertaking of confidentiality from each Person receiving such information in
form reasonably acceptable to the non-disclosing Parties.
 
(c) Earthstone and Oak Valley shall promptly advise PRP, orally and in writing,
and in no event later than three (3) business days after receipt, if any
proposal, offer, inquiry is received by or any discussions or negotiations are
sought to be initiated with, Earthstone in respect of any Alternative Proposal
and shall, in any such notice to PRP, indicate the identity of the Person making
such proposal, offer or inquiry and the terms and conditions of any proposals or
offers or the nature of any inquiries, and thereafter shall promptly keep PRP
reasonably informed of all material developments affecting the status and terms
of any such
 
 
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proposals, offers, inquiries or requests and of the status of any such
discussions or negotiations; provided, however, that no such notice shall be
required in the event that such proposal, offer or inquiry does not and could
not reasonably be expected to adversely affect Flatonia or PRP or to delay or
impair the consummation of the transactions contemplated by this Agreement.
 
Section 9.4 Operation of Business.  Except as to (a) the matters set forth on
Section 9.4 of the Flatonia Disclosure Schedule and (b) any other matters
approved by the Oak Valley Entities, from the Execution Date until the Closing
Date, Flatonia:
 
(i) will conduct its business related to the Assets in the ordinary course
consistent with recent practices;
 
(ii) will not voluntarily terminate, materially amend, execute or extend any
Material Contract;
 
(iii) will not transfer, sell, swap, hypothecate, encumber or otherwise dispose
of any Assets, except for sales and dispositions of Hydrocarbon production in
the ordinary course of business consistent with recent practices;
 
(iv) will pay, when due, expenses, taxes, revenues, and other obligations with
respect to the Assets, and will not waive any rights of substantial value with
respect to any of the Assets; and
 
(v) will not enter into an agreement with respect to any of the foregoing.
 
Section 9.5 Further Assurances.  After Closing, the Parties agree to take such
further actions and to execute, acknowledge and deliver all such further
documents as are reasonably requested by any other Party for carrying out the
purposes of this Agreement or of any document delivered pursuant to this
Agreement.
 
Section 9.6 Operating Agreement.  At Closing, Sabine, Oak Valley Operator and
Flatonia shall execute the form of Joint Operating Agreement attached hereto as
Exhibit C-1 (the “Amended Operating Agreement”) and the form of Memorandum of
Operating Agreement attached hereto as Exhibit C-2 (the “Memorandum of Operating
Agreement”).
 
Section 9.7 Proxy Statement; Earthstone Stockholder Meeting; Exchange
Agreement.  Subject to Section 5.3 of the Exchange Agreement, Earthstone and Oak
Valley agree to comply with the provisions of Section 5.1 of the Exchange
Agreement and, in connection therewith, will include in the Proxy Statement (as
defined in the Exchange Agreement) (x) the solicitation of proxies from
Earthstone’s stockholders of the stockholder approval required under applicable
Law in connection with the issuance of the Earthstone Contribution Shares
hereunder and (y) the Earthstone Board’s unanimous recommendation that
Earthstone’s stockholders vote in favor of granting such stockholder approval
(the “Earthstone Contribution Board Recommendation”).  In the event of an
Adverse Recommendation Change (as defined in the Exchange Agreement), the
Earthstone Board may withdraw, modify or qualify, or propose publicly to
withdraw, modify or qualify, the Earthstone Contribution Board
Recommendation.  Earthstone and Oak Valley agree that they will not amend,
modify or waive any provision under the Exchange Agreement in a
 
 
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manner that would, or could be reasonably expected to, adversely affect PRP or
Flatonia or delay or impair the consummation of the transactions contemplated by
this Agreement without the prior written consent of PRP, and each reference in
this Agreement to the Exchange Agreement (and any document the form of which is
specified as an attachment to the Exchange Agreement) shall refer to the
Exchange Agreement (and any such other document in the form attached to the
Exchange Agreement) executed on May 15, 2014, as amended on September 26, 2014.
 
Section 9.8 Registration Rights.  At the Closing, Earthstone, Flatonia, PRP and
Oak Valley will execute and deliver a Registration Rights Agreement relating to
the Earthstone Contribution Shares substantially in the form attached hereto as
Exhibit D (the “Registration Rights Agreement”).
 
Section 9.9 Listing of the Earthstone Contribution Shares.  Earthstone shall use
its reasonable best efforts to cause the Earthstone Contribution Shares to be
approved for listing on the NYSE MKT prior to the Closing, subject to official
notice of issuance.
 
Section 9.10 Flatonia’s Right to Designate a Board Member and Board Observer
Rights.
 
(a) From and after the Closing Date, Earthstone and Oak Valley shall, upon the
request of Flatonia, take all required action to (a) increase the size of the
Earthstone Board to at least 8 directors and (b) appoint one individual
designated in writing by the Flatonia Board of Managers to serve as a member of
the Earthstone Board, which director will be designated as a Class III director
of Earthstone (the “Flatonia Designee”).  Subject to the provisions of the last
sentence of this Section 9.10(a), the Board of Managers of Flatonia will
continue to have the right to designate a Flatonia Designee to serve as a
director of Earthstone, and Earthstone and the Earthstone Board will cause each
such Flatonia Designee to be nominated to serve as a director and will recommend
that Earthstone’s stockholders vote in favor of the election of such Flatonia
Designee.  If the Flatonia Designee ceases to serve as a member of the
Earthstone Board for any reason, then Flatonia shall have the right to designate
a successor in accordance with this Section 9.10(a).   Any voting securities of
Earthstone held by Oak Valley or any of its Affiliates will be voted (which term
will include the execution of a written consent of stockholders) in favor of the
election of the Flatonia Designee and will not be voted in favor of any action
that is inconsistent with the rights set forth in this
Section 9.10(a).  Flatonia (and any assignee permitted under this sentence) will
have the right to assign all, but not less than all, of its rights under this
Section 9.10(a) to PRP or to any Affiliate of PRP.  Notwithstanding the
foregoing provisions of this Section 9.10(a), Flatonia’s rights under this
Section 9.10(a) shall be extinguished if at any time PRP and its Affiliates
collectively own less than 7.5% of the issued and outstanding shares of
Earthstone Common Stock.
 
(b) During any period in which Flatonia has the right to designate a Flatonia
Designee to the Earthstone Board as set forth in Section 9.10(a) but (x) a
Flatonia Designee is not serving on the Earthstone Board and (y) Flatonia has
elected not to designate a Flatonia Designee, Flatonia may designate one
individual who will not be a member of the Earthstone Board, but who may attend
and act as an observer (the “Flatonia Observer”) at any meeting (whether in
person, telephonic, electronic or otherwise) of the Earthstone Board.  The
Flatonia Observer will not count as a member of the Earthstone Board for any
purpose, including, without
 
 
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limitation, for voting purposes or for purposes of determining whether a quorum
exists.  The Flatonia Observer will execute a confidentiality agreement on a
mutually agreeable form with Earthstone as a condition to being permitted to
attend such meetings.  Earthstone shall give the Flatonia Observer at least two
days’ prior written notice of each such meeting.
 
Section 9.11 Notice Required by Rule 14f-1 under Exchange Act.  Any notice
required under Rule 14f-1 under the Exchange Act concerning the changes in the
composition of the Earthstone Board as herein provided shall be made on a timely
basis.
 
Section 9.12 Section 16 Matters.  Prior to the Closing Date, Earthstone, Oak
Valley, PRP and Flatonia shall take all such steps as may be required (to the
extent permitted under applicable Law) to cause any acquisitions of Earthstone
Contribution Shares resulting from the transactions contemplated by this
Agreement by each person who is subject to the reporting requirements of Section
16(a) of the Exchange Act, or will become subject to such reporting
requirements, with respect to Earthstone, to be exempt under Rule 16b-3
promulgated under the Exchange Act.
 
Section 9.13 Tax Treatment of the Transaction.  For U.S. federal income tax
purposes (and for purposes of any state or local taxes that follow the federal
treatment), the Parties hereto shall, and shall cause their Affiliates to, treat
the following as a single integrated transaction qualifying (in whole or in
part) for nonrecognition of gain or loss pursuant to Section 351 of the Code:
(a) the Contribution and any Post-Closing Payment or other payment payable by
Flatonia to Sabine pursuant to Section 11.5, Article 13 or Article 14 in
exchange for the Earthstone Contribution Shares and (b) the “Exchange” (as
defined and set forth in the Exchange Agreement) by Oak Valley of the membership
interests of Oak Valley Operator, EF Non-Op, LLC and Sabine to Earthstone in
exchange for Earthstone Common Stock.  The Parties (or their respective members
or stockholders) shall not take any position inconsistent with such treatment on
any Tax Return unless otherwise required by Law following a final determination
as defined in Section 1313 of the Code.  Any Post-Closing Payment or other
payment payable by Sabine to Flatonia in cash pursuant to Section 11.5, Article
13 or Article 14 shall be treated as money received by Flatonia in such
transaction as described in Section 351(b) of the Code.
 
Section 9.14 Post-Closing Actions of Sabine.  From and after the closing of the
transactions contemplated by the Exchange Agreement, Earthstone shall cause
Sabine to comply with its covenants, agreements and obligations under this
Agreement and any document delivered in connection with the Closing pursuant to
this Agreement.
 
Section 9.15 Earthstone Voting Agreement.  Contemporaneously with the execution
of this Agreement, Ray Singleton and Flatonia will enter into an amended and
restated voting agreement pursuant to which Ray Singleton, as a stockholder of
Earthstone Common Stock, will vote his shares of Earthstone Common Stock in
favor of the transactions contemplated by the Exchange Agreement and this
Agreement, including the issuance of the Earthstone Contribution Shares to
Flatonia.
 
 
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ARTICLE 10
 
CONDITIONS TO CLOSING
 
Section 10.1 Mutual Conditions to Closing.  The obligations of each Party to
consummate the transactions contemplated by this Agreement are subject to the
satisfaction (or waiver by such Party) on or prior to the Closing of each of the
following conditions precedent:
 
(a) No Injunction.  On the Closing Date, no Order restraining, enjoining or
otherwise prohibiting the consummation of the transactions contemplated by this
Agreement shall have been issued and remain in force, and no suit, action or
other proceeding by any Governmental Body seeking to restrain, enjoin or
otherwise prohibit the consummation of the transactions contemplated by this
Agreement shall be pending before any Governmental Body;
 
(b) Governmental Consents.  All material consents and approvals of any
Governmental Body required for the consummation of the transactions contemplated
under this Agreement, except Customary Post-Closing Consents, shall have been
granted, or the necessary waiting period shall have expired, or early
termination of the waiting period shall have been granted;
 
(c) Closing of the Transactions Contemplated by the Exchange Agreement.  The
transactions contemplated by the Exchange Agreement shall have been consummated
in accordance with the Exchange Agreement without any waiver or modification
thereof except as permitted pursuant to Section 9.7.
 
(d) Earthstone Stockholder Approval of Earthstone Contribution Shares.  The
Earthstone Stockholder Approval shall have been obtained in accordance with the
General Corporation Law of the State of Delaware, the Certificate of
Incorporation and the Bylaws of Earthstone; and
 
(e) Listing of Earthstone Contribution Shares.  The Earthstone Contribution
Shares deliverable to Flatonia as contemplated by this Agreement shall have been
approved for listing on the NYSE MKT, subject to official notice of issuance.
 
Section 10.2 Flatonia’s and PRP’s Conditions to Closing.  In addition to the
conditions set forth in Section 10.1, the obligations of PRP and Flatonia to
consummate the transactions contemplated by this Agreement are subject to the
satisfaction (or waiver by PRP and Flatonia) on or prior to the Closing of each
of the following conditions precedent:
 
(a) Representations.
 
(i) (A) The representations and warranties of the Oak Valley Entities set forth
in Section 7.2 and Section 7.3, shall be true and correct in all respects, in
each case both when made and at and as of the Closing Date, as if made at and as
of such time (except to the extent expressly made as of an earlier date, in
which case as of such date); and (B) all other representations and warranties of
the Oak Valley Entities set forth herein shall be true and correct both when
made and at and as of the Closing Date, as if made at and as of such time
(except to the extent expressly made as of an earlier date, in which case as of
such date), except, in the case of this clause (B), where the failure of such
 
 
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representations and warranties to be so true and correct (without giving effect
to any limitation as to “materiality” or “Material Adverse Effect” set forth in
any individual such representation and warranty) does not have, and would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect; and
 
(ii) (A) the representations and warranties of Earthstone set forth in Section
8.2, Section 8.3 and Section 8.4 of this Agreement shall be true and correct in
all respects, in each case both when made and at and as of the Closing Date as
though made on and as of such time (other than representations and warranties
that refer to a specified date which need only be true and correct on and as of
such specified date) and (B) all other representations and warranties of
Earthstone set forth herein shall be true and correct both when made and at and
as of the Closing Date, as if made at and as of such time (except to the extent
expressly made as of an earlier date, in which case as of such date), except, in
the case of this clause (B), where the failure of such representations and
warranties to be so true and correct (without giving effect to any limitation as
to “materiality” or “Material Adverse Effect” set forth in any individual such
representation and warranty) does not have, and would not reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect; and
 
(b) Performance of Covenants.
 
(i) The Oak Valley Entities shall have performed and observed, in all material
respects, all covenants and agreements to be performed or observed by them under
this Agreement prior to or on the Closing Date; and
 
(ii) Earthstone shall have performed and observed, in all material respects, all
covenants and agreements to be performed or observed by it under this Agreement
prior to or on the Closing Date.
 
Section 10.3 Oak Valley Entities’ Conditions to Closing.  In addition to the
conditions set forth in Section 10.1, the obligations of the Oak Valley Entities
to consummate the transactions contemplated by this Agreement are subject to the
satisfaction (or waiver by the Oak Valley Entities) on or prior to the Closing
of each of the following conditions precedent:
 
(a) Representations.
 
(i) (A) The representations and warranties of PRP and Flatonia set forth in
Sections 5.2 and 5.3 and Sections 6.2 and 6.3, respectively, shall be true and
correct in all respects, in each case both when made and at and as of the
Closing Date, as if made at and as of such time; and (B) all other
representations and warranties of PRP and Flatonia set forth herein shall be
true and correct both when made and at and as of the Closing Date, as if made at
and as of such time (except to the extent expressly made as of an earlier date,
in which case as of such date), except, in the case of this clause (B), where
the failure of such representations and warranties to be so true and correct
(without giving effect to any limitation as to “materiality” or “Material
Adverse Effect” set forth in any individual such representation and warranty)
does not have, and would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect; and
 
 
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(ii) (A) the representations and warranties of Earthstone set forth in Section
8.2, Section 8.3 and Section 8.4 shall be true and correct in all respects, in
each case both when made and at and as of the Closing Date, as if made at and as
of such time; and (B) all other representations and warranties of Earthstone set
forth herein shall be true and correct both when made and at and as of the
Closing Date, as if made at and as of such time (except to the extent expressly
made as of an earlier date, in which case as of such date), except, in the case
of this clause (B), where the failure of such representations and warranties to
be so true and correct (without giving effect to any limitation as to
“materiality” or “Material Adverse Effect” set forth in any individual such
representation and warranty) does not have, and would not reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect; and
 
(b) Performance.
 
(i) PRP and Flatonia shall have performed and observed, in all material
respects, all covenants and agreements to be performed or observed by them under
this Agreement prior to or on the Closing Date; and
 
(ii) Earthstone shall have performed and observed, in all material respects, all
covenants and agreements to be performed or observed by it under this Agreement
prior to or on the Closing Date.
 
Section 10.4 Earthstone’s Conditions to Closing.  In addition to the conditions
set forth in Section 10.1, the obligations of Earthstone to consummate the
transactions contemplated by this Agreement are subject to the satisfaction (or
waiver by Earthstone) on or prior to the Closing of each of the following
conditions precedent:
 
(a) Representations.
 
(i) (A) The representations and warranties of PRP and Flatonia set forth in
Sections 5.2 and 5.3 and Sections 6.2 and 6.3, respectively, shall be true and
correct in all respects, in each case both when made and at and as of the
Closing Date, as if made at and as of such time; and (B) all other
representations and warranties of PRP and Flatonia set forth herein shall be
true and correct both when made and at and as of the Closing Date, as if made at
and as of such time (except to the extent expressly made as of an earlier date,
in which case as of such date), except, in the case of this clause (B), where
the failure of such representations and warranties to be so true and correct
(without giving effect to any limitation as to “materiality” or “Material
Adverse Effect” set forth in any individual such representation and warranty)
does not have, and would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect; and
 
(ii) (A) the representations and warranties of the Oak Valley Entities set forth
in Section 7.2 and Section 7.3, shall be true and correct in all respects, in
each case both when made and at and as of the Closing Date, as if made at and as
of such time (except to the extent expressly made as of an earlier date, in
which case as of such date); and (B) all other representations and warranties of
the Oak Valley Entities set forth herein shall be true and correct both when
made and at and as of the Closing Date, as if made at
 
 
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and as of such time (except to the extent expressly made as of an earlier date,
in which case as of such date), except, in the case of this clause (B), where
the failure of such representations and warranties to be so true and correct
(without giving effect to any limitation as to “materiality” or “Material
Adverse Effect” set forth in any individual such representation and warranty)
does not have, and would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect; and
 
(b) Performance.
 
(i) PRP and Flatonia shall have performed and observed, in all material
respects, all covenants and agreements to be performed or observed by them under
this Agreement prior to or on the Closing Date; and
 
(ii) the Oak Valley Entities shall have performed and observed, in all material
respects, all covenants and agreements to be performed or observed by it under
this Agreement prior to or on the Closing Date.
 
Section 10.5 Frustration of Closing Conditions.  No Party hereto may rely on the
failure of any condition set forth in Section 10.1, 10.2, 10.3 or 10.4, as the
case may be, to be satisfied if the failure of such condition to be satisfied
was caused by such Party’s failure to use its reasonable best efforts to
consummate the transactions contemplated hereby, or other breach of or
noncompliance with this Agreement.
 
ARTICLE 11
 
CLOSING
 
Section 11.1 Time and Place of Closing.  Consummation of the contribution
transaction as contemplated by this Agreement (the “Closing”), shall, unless
otherwise agreed to in writing by the Parties, take place at the offices of
Davis Graham & Stubbs, LLP, 1550 Seventeenth Street, Suite 500, Denver, Colorado
80202, immediately following closing of the Exchange Agreement, or if all
conditions in Article 10 to be satisfied prior to the Closing have not yet been
satisfied or waived by such date, within five Business Days of such conditions
having been satisfied or waived (in each case, excluding any conditions that by
their nature are to be satisfied at the Closing, but subject to the fulfillment
or waiver of such conditions), subject to the Parties’ rights to terminate this
Agreement under Article 12.  The date on which the Closing occurs is herein
referred to as the “Closing Date.”
 
Section 11.2 Obligations of PRP and Flatonia at Closing.  At the Closing, upon
the terms and subject to the conditions of this Agreement, and subject to the
simultaneous performance by the other Parties of their respective obligations
pursuant to Section 11.3 and Section 11.4, PRP and Flatonia shall deliver or
cause to be delivered:
 
(a) to Sabine, counterparts of the Conveyance, in sufficient duplicate originals
to allow recording in all appropriate jurisdictions and offices, duly executed
by Flatonia and acknowledged before a notary public;
 
(b) to Sabine and Oak Valley Operator, counterparts of the Amended Operating
Agreement, duly executed by Flatonia and acknowledged before a notary public;
 
 
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(c) to Sabine and Oak Valley Operator, counterparts of the Memorandum of
Operating Agreement, duly executed by Flatonia and acknowledged before a notary
public;
 
(d) to Earthstone and Oak Valley, counterparts of the Flatonia Registration
Rights Agreement, duly executed by Flatonia;
 
(e) to the Oak Valley Parties, a certificate duly executed by an authorized
executive officer of PRP and an authorized executive officer of Flatonia, dated
as of the Closing Date, certifying on behalf of PRP and Flatonia that the
conditions set forth in Sections 10.3(a)(i) and 10.3(b)(i) have been fulfilled;
 
(f) to Earthstone, a certificate duly executed by an authorized executive
officer of PRP and an authorized executive officer of Flatonia, dated as of the
Closing Date, certifying on behalf of PRP and Flatonia that the conditions set
forth in Sections 10.4(a)(i) and 10.4(b)(i) have been fulfilled;
 
(g) to Sabine, an executed statement described in Treasury Regulation
§ 1.1445-2(b)(2) certifying that Flatonia is not a “foreign person” within the
meaning of Section 1445(f)(3) of the Code;
 
(h) to the Oak Valley Parties and Earthstone, with respect to any approvals
received by PRP or Flatonia pursuant to a filing or application under
Section 9.2, copies of those approvals;
 
(i) if applicable, to Sabine, a wire transfer in immediately available funds of
the Closing Payment to the account designated by Sabine, which designation shall
be furnished to Flatonia no later than two days prior to the Closing Date;
 
(j) to Sabine, a partial release of liens, mortgages, security interests,
pledges, restrictions or any other type of burden or encumbrance (i) covering
the interest in the Assets being assigned by Flatonia in the Conveyance, and
(ii) arising under or created pursuant to the WF Deed of Trust, in a form
reasonably satisfactory to Sabine; and
 
(k) all other instruments, documents and other items reasonably necessary to
effectuate the terms of this Agreement as may be reasonably requested by the
other Parties.
 
Section 11.3 Obligations of the Oak Valley Entities at Closing.  At the Closing,
upon the terms and subject to the conditions of this Agreement, and subject to
the simultaneous performance by the other Parties of their respective
obligations pursuant to Section 11.2 and Section 11.4, the Oak Valley Entities
shall deliver or cause to be delivered:
 
(a) if applicable, to Flatonia, a wire transfer in immediately available funds
of the Closing Payment to the account designated by Flatonia, which designation
shall be furnished to Sabine no later than two days prior to the Closing Date;
 
(b) to Flatonia, counterparts of the Conveyance, in sufficient duplicate
originals to allow recording in all appropriate jurisdictions and offices, duly
executed by Sabine and acknowledged before a notary public;
 
 
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(c) to Flatonia, counterparts of the Amended Operating Agreement, duly executed
by Sabine and Oak Valley Operator and acknowledged before a notary public;
 
(d) to Flatonia, counterparts of the Memorandum of Operating Agreement, duly
executed by Sabine and Oak Valley Operator and acknowledged before a notary
public;
 
(e) to Earthstone and Flatonia, counterparts of the Flatonia Registration Rights
Agreement, duly executed by Oak Valley;
 
(f) to PRP and Flatonia, a certificate duly executed by an authorized executive
officer of each Oak Valley Entity, dated as of the Closing Date, certifying on
behalf of such Oak Valley Entity that the conditions set forth in
Section 10.2(a)(i) and 10.2(b)(i) have been fulfilled;
 
(g) to Earthstone, a certificate duly executed by an authorized executive
officer of each Oak Valley Entity, dated as of the Closing Date, certifying on
behalf of such Oak Valley Entity that the conditions set forth in Section
10.4(a)(ii) and 10.4(b)(ii) have been fulfilled;
 
(h) to the other Parties, with respect to any approvals received by Earthstone
pursuant to a filing or application under Section 9.2, copies of those
approvals; and
 
(i) all other instruments, documents and other items reasonably necessary to
effectuate the terms of this Agreement as may be reasonably requested by the
other Parties.
 
Section 11.4 Obligations of Earthstone at Closing.  At the Closing, upon the
terms and subject to the conditions of this Agreement, and subject to the
simultaneous performance by the other Parties of their respective obligations
pursuant to Section 11.2 and Section 11.3, Earthstone shall deliver or cause to
be delivered:
 
(a) to Flatonia, the Earthstone Contribution Shares;
 
(b) to Flatonia and Oak Valley, counterparts of the Flatonia Registration Rights
Agreement, duly executed by Earthstone;
 
(c) to PRP and Flatonia, a certificate duly executed by an authorized executive
officer of Earthstone, dated as of the Closing Date, certifying on behalf of
Earthstone that the conditions set forth in Section 10.2(a)(ii) and 10.2(b)(ii)
have been fulfilled;
 
(d) to the Oak Valley Entities, a certificate duly executed by an authorized
executive officer of Earthstone, dated as of the Closing Date, certifying on
behalf of Earthstone that the conditions set forth in Section 10.3(a)(ii) and
10.3(b)(ii) have been fulfilled;
 
(e) to the other Parties, with respect to any approvals received by Earthstone
pursuant to a filing or application under Section 9.2, copies of those
approvals; and
 
(f) all other instruments, documents and other items reasonably necessary to
effectuate the terms of this Agreement as may be reasonably requested by the
other Parties.
 
 
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Section 11.5 Closing and Post-Closing Cash Settlement.
 
(a) Not later than five Business Days prior to the Closing Date, Sabine shall
prepare and deliver to Flatonia, using the best information available to Sabine
and Oak Valley Operator, a preliminary settlement statement estimating the
initial amount of the Cash Settlement as set forth in Section 3.4.  Such
preliminary settlement statement shall set forth the initial amounts calculated
pursuant to Section 3.4(a) and pursuant to Section 3.4(b), and shall net such
amounts to reflect the total positive amount due by Flatonia to Sabine, or by
Sabine to Flatonia, as applicable (in either case, the “Closing Payment”).
 
(b) As soon as reasonably practicable after the Closing but not later than the
180th day following the Closing Date, Sabine shall prepare and deliver to
Flatonia a statement setting forth the final calculation of the amounts
described in Section 3.4(a) and Section 3.4(b), showing the calculation of each
amount, based, to the extent possible, on actual credits, charges, receipts and
other items before and after the Effective Time.  Sabine shall, at Flatonia’s
request, supply documentation in reasonable detail available to support any
credit, charge, receipt or other item.  As soon as reasonably practicable but
not later than the 30th day following receipt of Sabine’s statement hereunder,
Flatonia shall deliver to Sabine a written report containing any changes that
Flatonia proposes be made to such statement.  Sabine may deliver a written
report to Flatonia during this same period reflecting any changes that Sabine
proposes to be made to such statement as a result of additional information
received after the statement was prepared, and if Sabine delivers such a report,
Flatonia shall have an additional 30 days following receipt of such report to
propose any changes to the initial statement or such subsequent report.  The
Parties shall undertake to agree on the final statement of the Cash Settlement
no later than 240 days after the Closing Date.  In the event that the Parties
cannot reach agreement within such period of time, either Party may refer the
remaining matters in dispute to the Houston, Texas office of Ernst & Young LLP
for review and final determination by arbitration.  The accounting firm shall
conduct the arbitration proceedings in Houston, Texas in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, to the
extent such rules do not conflict with the terms of this Section 11.5.  The
Parties shall instruct the accounting firm to deliver to the Parties a written
determination within 30 days after submission of the matters in dispute, which
shall be final and binding on both Parties, without right of appeal.  In
determining the proper amount of any item in the Cash Settlement, the accounting
firm shall not increase the amounts proposed by Flatonia or Sabine, as
applicable.  The accounting firm shall act as an independent neutral expert for
the limited purpose of determining the specific disputed matters submitted by
the Parties and may not award Damages, interest or penalties to the Parties with
respect to any matter.  Flatonia and Sabine shall each bear its own legal fees
and other costs of presenting its case.  Flatonia shall bear one-half and Sabine
shall bear one-half of the costs and expenses of the accounting firm.  Within
ten days after the earlier of (i) the expiration of Flatonia’s 30-day review
period without delivery of any written report by Flatonia and (ii) the date on
which the Parties finally determine the Cash Settlement or the accounting firm
finally determines the disputed matters submitted to it, as applicable, Flatonia
shall net (1) the final amount owing to Flatonia with the final amount owing to
Sabine (the “Final Netted Amount”), and (2) the Final Netted Amount with the
Closing Payment, taking into account, in each case, the Party owing and the
Party entitled to each such amount (such final netted amount, the “Post-Closing
Payment”), and the Party owing the Post-Closing Payment shall pay the other
Party such
 
 
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amount.  Any Post-Closing Payment owing pursuant to this Section 11.5(b) shall
bear interest from the Closing Date to the date of payment at the Prime Rate.
 
(c) Flatonia shall assist Sabine in the preparation of the final statement of
the Cash Settlement under Section 11.5(b) by furnishing invoices, receipts and
such other assistance as may be reasonably requested by Sabine to facilitate
such process post-Closing.
 
(d) All payments made or to be made under this Agreement to Flatonia shall be
made by electronic transfer of immediately available funds to the account
designated by Flatonia.  All payments made or to be made hereunder to Sabine
shall be made by electronic transfer of immediately available funds to the
account designated by Sabine.
 
ARTICLE 12
 
TERMINATION
 
Section 12.1 Termination.  This Agreement may be terminated at any time prior to
the Closing:
 
(a) by the mutual written consent of Flatonia, Sabine and Earthstone;
 
(b) by any Party if the Closing has not occurred on or before February 28, 2015
or such later date as shall be mutually agreed; provided, however, that no Party
shall be entitled to terminate this Agreement under this clause (b) if the
Closing has failed to occur because such Party negligently or willfully failed
to perform or observe in any material respect its covenants or agreements
hereunder;
 
(c) by any Party, if the Exchange Agreement is terminated pursuant to
Section 7.1 of the Exchange Agreement;
 
(d) by PRP and Flatonia, upon delivery of written notice to the other Parties at
any time prior to the Closing in the event that any Party other than PRP and
Flatonia has breached in any material respect any representation, warranty or
covenant contained in this Agreement such that any of the conditions to closing
in Sections 10.1 or 10.2 would not be satisfied, PRP and Flatonia have notified
the other Parties of the breach in writing, and the breach has continued without
cure for a period of 30 days after the written notice of breach;
 
(e) by the Oak Valley Entities, upon delivery of written notice to the other
Parties at any time prior to the Closing in the event that any Party other than
the Oak Valley Entities has breached in any material respect any representation,
warranty or covenant contained in this Agreement such that any of the conditions
to closing in Sections 10.1 or 10.3 would not be satisfied, the Oak Valley
Entities have notified the other Parties of the breach in writing, and the
breach has continued without cure for a period of 30 days after the written
notice of breach; and
 
(f) by Earthstone, upon delivery of written notice to the other Parties at any
time prior to the Closing in the event that any other Party has breached in any
material respect any representation, warranty or covenant contained in this
Agreement such that any of the conditions to closing in Sections 10.1 or 10.4
would not be satisfied, Earthstone has notified the
 
 
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other Parties of the breach in writing, and the breach has continued without
cure for a period of 30 days after the written notice of breach.
 
Section 12.2 Ability to Terminate
 
(a) .  No Party shall be entitled to terminate this Agreement under Section 12.1
if the Closing has failed to occur because such Party negligently or willfully
failed to perform or observe in any material respect its covenants or agreements
hereunder; provided that this Section 12.2 shall not limit in any manner the
ability of Earthstone or Oak Valley to terminate this Agreement without fault
pursuant to Section 12.1(c) following the termination of the Exchange Agreement
pursuant to Section 7.1(b)(iii), 7.1(c)(i) or 7.1(d)(i) thereof.
 
Section 12.3 Effect of Termination.  If this Agreement is terminated pursuant to
Section 12.1, this Agreement shall become void and of no further force or
effect, except for the provisions of Section 9.3, this Article 12, Article 15
and Appendix A, which shall continue in full force and effect, and Flatonia
shall be free immediately to enjoy all rights of ownership of the Assets and to
sell, transfer, encumber or otherwise dispose of the Assets to any Person
without any restriction under this Agreement.  Notwithstanding anything to the
contrary in this Agreement, the termination of this Agreement under Section 12.1
shall not relieve either Party, subject to Section 15.11, from liability for any
prior willful or deliberate failure to perform or observe in any material
respect any of its agreements or covenants contained herein that are to be
performed or observed at or prior to the Closing; provided that Earthstone shall
have no liability under this Agreement pursuant to this Section 12.3 or
otherwise in the event this Agreement is terminated pursuant to Section 12.1(c)
following the termination of the Exchange Agreement pursuant to Section
7.1(b)(iii), 7.1(c)(i) or 7.1(d)(i) thereof.
 
ARTICLE 13
 
ASSUMPTION; INDEMNIFICATION
 
Section 13.1 Assumption by Sabine.           Without limiting the Oak Valley
Entities’ rights to indemnity under Section 13.2, Sabine shall assume and hereby
agrees to fulfill, perform, pay and discharge (or cause to be timely fulfilled,
performed, paid or discharged) all of the Assumed Sabine Obligations.
 
Section 13.2 Indemnification.
 
(a) From and after the Closing, Earthstone shall indemnify, defend and hold
harmless the Flatonia Group from and against all Damages incurred, suffered by
or asserted against such Persons caused by or arising out of or resulting from
the Assumed Sabine Obligations (including, for purposes of certainty,
Environmental Liabilities under CERCLA and other Environmental Laws), EVEN IF
SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE,
JOINT OR CONCURRENT), STRICT LIABILITY OR OTHER LEGAL FAULT OF THE FLATONIA
GROUP.
 
(b) From and after the Closing, Flatonia shall indemnify, defend and hold
harmless Earthstone and Sabine from and against all Damages incurred, suffered
by or asserted against such Persons caused by or arising out of or resulting
from the Retained Flatonia Obligations, EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE
OR IN PART BY
 
 
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THE NEGLIGENCE (WHETHER SOLE, JOINT OR CONCURRENT), STRICT LIABILITY OR OTHER
LEGAL FAULT OF EARTHSTONE.
 
(c) Except for the Conveyance or the remedies set forth in Section 13.2(a),
13.2(b), 12.3 and 15.16, notwithstanding anything to the contrary contained in
this Agreement, this Section 13.2 contains the Parties’ exclusive remedies
against each other for any reason arising under this Agreement, including with
respect to breaches of the representations, warranties of the Parties in
Article 5, Article 6, Article 7 and Article 8 and the covenants and agreements
of the Parties in this Agreement and the affirmations of such representations,
warranties, covenants and agreements contained in the certificate delivered by
each Party at the Closing.  Except for the Conveyance or the remedies set forth
in Section 13.2(a), 13.2(b), 12.3 and 15.16, if the Closing occurs, EACH PARTY
RELEASES, REMISES AND FOREVER DISCHARGES THE OTHER PARTIES AND THEIR RESPECTIVE
AFFILIATES AND ALL SUCH PARTIES’ OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ADVISORS AND OTHER REPRESENTATIVES FROM ANY AND ALL SUITS, LEGAL OR
ADMINISTRATIVE PROCEEDINGS, CLAIMS, DEMANDS, DAMAGES, LOSSES, COSTS,
LIABILITIES, INTEREST, OR CAUSES OF ACTION WHATSOEVER, IN LAW OR IN EQUITY,
KNOWN OR UNKNOWN, WHICH SUCH PARTIES MIGHT NOW OR SUBSEQUENTLY MAY HAVE, BASED
ON, RELATING TO OR ARISING OUT OF (i) THIS AGREEMENT, (ii) FLATONIA’S OWNERSHIP,
USE OR OPERATION OF THE ASSETS, (iii) THE CONDITION, QUALITY, STATUS OR NATURE
OF THE ASSETS, INCLUDING RIGHTS TO CONTRIBUTION UNDER CERCLA OR ANY OTHER
ENVIRONMENTAL LAW, (iv) BREACHES OF STATUTORY OR IMPLIED WARRANTIES,
(v) NUISANCE OR OTHER TORT ACTIONS, (vi) RIGHTS TO PUNITIVE DAMAGES AND COMMON
LAW RIGHTS OF CONTRIBUTION AND (vii) RIGHTS UNDER INSURANCE MAINTAINED BY
FLATONIA OR ANY PERSON WHO IS AN AFFILIATE OF FLATONIA, EVEN IF CAUSED IN WHOLE
OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT OR CONCURRENT), STRICT
LIABILITY OR OTHER LEGAL FAULT OF ANY RELEASED PERSON.
 
(d) The indemnity of each Party provided in this Section 13.2 shall be for the
benefit of and extend to each Person included in the Flatonia Group and the
Earthstone Group, as applicable; provided, however, that any claim for indemnity
under this Section 13.2 by any such Person must be brought and administered by a
Party to this Agreement.  No Indemnified Person shall have any rights against
any Party under the terms of this Section 13.2 except as may be exercised on its
behalf by a Party, as applicable, pursuant to this Section 13.2(d).  Each Party
may elect to exercise or not exercise indemnification rights under this
Section 13.2 on behalf of the other Indemnified Persons affiliated with it in
its sole discretion and shall have no liability to any such other Indemnified
Persons for any action or inaction under this Section 13.2.
 
Section 13.3 Indemnification Actions.  Except as provided in Article 14, all
claims for indemnification under Section 13.2 shall be asserted and resolved as
follows:
 
(a) For purposes hereof, (i) the term “Indemnifying Person” when used in
connection with particular Damages means the Party having an obligation to
indemnify another Person or Persons with respect to such Damages pursuant to
this Article 13 and (ii) the term
 
 
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“Indemnified Person” when used in connection with particular Damages means the
Person or Persons having the right to be indemnified with respect to such
Damages by another Person or Persons pursuant to this Article 13.
 
(b) To make a claim for indemnification under Section 13.2, an Indemnified
Person shall notify the Indemnifying Person of its claim under this
Section 13.3, including the specific details of and specific basis under this
Agreement for its claim (the “Claim Notice”).  In the event that the claim for
indemnification is based upon a claim by a Third Party against the Indemnified
Person (a “Third Person Claim”), the Indemnified Person shall provide its Claim
Notice promptly after the Indemnified Person has actual knowledge of the Third
Person Claim and shall enclose a copy of all papers (if any) served with respect
to the Third Person Claim; provided, however, that the failure of any
Indemnified Person to give notice of a Third Person Claim as provided in this
Section 13.3 shall not relieve the Indemnifying Person of its obligations under
Section 13.2 except to the extent such failure results in insufficient time
being available to permit the Indemnifying Person to effectively defend against
the Third Person Claim or otherwise prejudices the Indemnifying Person’s ability
to defend against the Third Person Claim.  In the event that the claim for
indemnification is based upon an inaccuracy or breach of a representation,
warranty, covenant or agreement, the Claim Notice shall specify the
representation, warranty, covenant or agreement which was inaccurate or
breached.
 
(c) In the case of a claim for indemnification based upon a Third Person Claim,
the Indemnifying Person shall have 30 days (or such lesser time as is required
to respond to such Third Person Claim) from its receipt of the Claim Notice to
notify the Indemnified Person whether it intends to assume the defense of such
Third Person Claim under this Article 13.  If the Indemnifying Person does not
notify the Indemnified Person within such 30-day (or lesser) period whether the
Indemnifying Person intends to assume the defense of such Third Person Claim, it
shall be conclusively deemed to have declined the right to assume the defense of
such Third Person Claim.  The Indemnified Person is authorized, prior to and
during such 30-day (or lesser) period, to file any motion, answer or other
pleading that it shall deem necessary or appropriate to protect its interests or
those of the Indemnifying Person and that is not prejudicial to the Indemnifying
Person.
 
(d) If the Indemnifying Person so timely elects to assume the defense under
Section 13.3(c), it shall have the right and obligation to diligently defend at
its sole cost and expense the Indemnified Person against the Third Person
Claim.  The Indemnifying Person shall have full control of such defense and
proceedings, including any compromise or settlement thereof.  If requested by
the Indemnifying Person, the Indemnified Person agrees to cooperate in
contesting any Third Person Claim which the Indemnifying Person elects to
contest; provided, however, that the Indemnified Person shall not be required to
bring any counterclaim or cross-complaint against any Person.  The Indemnified
Person may at its own expense participate in, but not control, any defense or
settlement of any Third Person Claim controlled by the Indemnifying Person
pursuant to this Section 13.3(d).  An Indemnifying Person shall not, without the
written consent of the Indemnified Person, compromise or settle any Third Person
Claim or consent to the entry of any judgment with respect thereto that (i) does
not result in a final resolution of the Indemnified Person’s liability with
respect to the Third Person Claim, including in the case of a settlement an
unconditional written release of the Indemnified Person
 
 
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or (ii) may materially and adversely affect the Indemnified Person other than as
a result of money Damages covered by the indemnity.
 
(e) If the Indemnifying Person does not assume the defense of such Third Person
Claim, or following such assumption, fails to diligently defend, prosecute or
settle the Third Person Claim, then the Indemnified Person shall have the right
to defend against the Third Person Claim, at the sole cost and expense of the
Indemnifying Person, if the Indemnified Person is entitled to indemnification
hereunder, with counsel of the Indemnified Person’s choosing, subject to the
right of the Indemnifying Person to indemnify against the applicable Third
Person Claim at any time prior to settlement or final determination thereof.  If
the Indemnifying Person has not yet admitted its obligation to provide
indemnification with respect to a Third Person Claim, the defense of which has
been assumed by the Indemnified Person, the Indemnified Person shall send
written notice to the Indemnifying Person of any proposed settlement and the
Indemnifying Person shall have the option for 10 days following receipt of such
notice to (i) admit in writing its obligation to provide indemnification with
respect to the Third Person Claim and (ii) if its obligation is so admitted,
consent to or reject, in its reasonable judgment, the proposed settlement.  If
the Indemnified Person settles any Third Person Claim over the objection of the
Indemnifying Person after the Indemnifying Person has timely admitted its
obligation in writing in accordance with this clause (e) and assumed the defense
of a Third Person Claim, the Indemnified Person shall be deemed to have waived
any right to indemnity therefor.  Failure by the Indemnifying Person to timely
respond to such notice shall be deemed a consent to the settlement, but not an
admission of its obligation to provide indemnification.
 
(f) In the case of a claim for indemnification not based upon a Third Person
Claim, the Indemnifying Person shall have 30 days from its receipt of the Claim
Notice to (i) cure the Damages complained of, (ii) admit its obligation to
provide indemnification with respect to such Damages or (iii) dispute the claim
for such indemnification.  If the Indemnifying Person does not notify the
Indemnified Person within such 30-day period that it has cured the Damages or
that it disputes the claim for such indemnification, the Indemnifying Person
shall be conclusively deemed obligated to provide such indemnification
hereunder.
 
Section 13.4 Limitation on Actions.
 
(a) The representations, warranties, covenants and agreements in this Agreement
shall terminate at the Closing or, except as otherwise provided in Section 12.3,
upon the termination of this Agreement pursuant to Section 12.1, as the case may
be, except that the covenants and agreements set forth in Section 9.5, 9.14 and
Article 13 and any other agreement in this Agreement that contemplates
performance after the Closing shall survive the Closing, the covenants and
agreements in Sections 3.3(b) and 9.13 shall survive the Closing until 30 days
after the expiration of the applicable statute of limitations, and those set
forth in Section 9.3, Article 12, this Article 13, Article 15 and Appendix A
shall survive termination of this Agreement.
 
(b) The amount of any Damages for which an Indemnified Person is entitled to
indemnity under this Article 13 shall be reduced by the amount of insurance
proceeds or Tax benefits, if any, actually realized by the Indemnified Person or
its Affiliates with respect to such Damages within 12 months after the Closing
Date, net of any collection costs and excluding the
 
 
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 proceeds of any insurance policy issued or underwritten by the Indemnified
Person or its Affiliates.
 
(c) Earthstone and Sabine shall not be entitled to indemnification or any other
remedy under this Agreement with respect to any Damages or other liability,
loss, cost, expense, claim, award or judgment attributable to or arising out of
the actions of Oak Valley Operator as operator of any of the Properties.
 
(d) Notwithstanding anything herein to the contrary, in no event will Flatonia
Group or Earthstone Group be entitled to duplicate recovery under this
Article 13 with respect to any adjustments to the Cash Settlement pursuant to
Section 3.4 or Section 11.5.
 
ARTICLE 14
 
TAX MATTERS
 
Section 14.1 Responsibility for Tax Filings and Payment.  After the Closing
Date, Sabine and Earthstone shall be responsible for paying any and all Property
Taxes due with respect to the ownership and operation of the Assets or the
production of Hydrocarbons therefrom and shall file with the appropriate
Governmental Body any and all Tax Returns required to be filed with respect to
such Property Taxes.  To the extent a Tax Return for which Sabine or Earthstone
is responsible hereunder relates to a Tax period that ends before or includes
the Effective Time, Sabine or Earthstone shall prepare such Tax Return in a
manner consistent with Flatonia’s past practice except as otherwise required by
applicable Laws, and shall submit such Tax Return to Flatonia for its review and
comment no fewer than 30 days prior to the due date therefor.  Earthstone shall
cause such Tax Return to be timely filed, incorporating any reasonable comments
received from Flatonia prior to the due date therefor.
 
Section 14.2 Apportionment of Property Taxes.  For purposes of this Agreement,
Property Taxes due with respect to the ownership and operation of the Assets or
the production of Hydrocarbons therefrom, but excluding Property Taxes that are
based on the quantity or value of production of Hydrocarbons, shall be
apportioned between Flatonia, on the one hand, and Sabine and Earthstone, on the
other hand, as of the Effective Time with (a) Flatonia being responsible for all
such Property Taxes for Tax periods ending prior to the Effective Time and a
proportionate share of the actual amount of such Taxes for a Tax period in which
the Effective Time occurs (a “Current Tax Period”) determined by multiplying
such actual Taxes by a fraction, the numerator of which is the number of days in
the Current Tax Period prior to the day that includes the Effective Time and the
denominator of which is the total number of days in the Current Tax Period and
(b) Sabine and Earthstone being responsible for all such Property Taxes for Tax
periods beginning on or after the day that includes the Effective Time and a
proportionate share of the actual amount of such Taxes for a Current Tax Period
determined by multiplying such actual Taxes by a fraction, the numerator of
which is the number of days in the Current Tax Period on and after the day that
includes the Effective Time and the denominator of which is the total number of
days in the Current Tax Period.  Property Taxes that are based on the quantity
of or the value of production of Hydrocarbons shall be apportioned between
Flatonia, on the one hand, and Sabine and Earthstone, on the other hand, based
on the number of units or value of production actually produced, as applicable,
before and at, with regards to Flatonia, or after, with regards to Sabine and
Earthstone, the Effective Time.
 
 
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Section 14.3 Refunds.  Sabine and Earthstone agree to pay to Flatonia the amount
of any refund, credit against Tax or other Tax benefit (including any refunds,
credits or rebates) together with any interest thereon received from a
Governmental Body after the Closing by Sabine, Earthstone or their Affiliates in
respect of any Property Taxes due with respect to the ownership and operation of
the Assets, or the production of Hydrocarbons therefrom (including, for the
avoidance of doubt, any Tax benefit or amount attributable to a reduction in
severance Taxes that may be realized after the Effective Time but that results
from payments or production for periods prior to or at the Effective Time),
prior to or at the Effective Time (determined in the manner described in Section
14.2) to the extent not otherwise taken into account under Section 2.4 or as a
Post-Closing Payment under Section 11.5, within five days after such refund,
credit or other benefit is actually received or realized by Sabine, Earthstone
or their Affiliates. Payments to Flatonia under this Section 14.3 shall be net
of (1) any reasonable out-of-pocket costs associated in obtaining such refund,
credit against Tax or other Tax benefit, (2) any Tax required to be withheld on
such payment, and (3) any Taxes imposed on Sabine, Earthstone or any of their
Affiliates as a result of such refunds (net of any Tax benefit resulting from
such payment).  If there is a subsequent reduction by a Governmental Body (or by
virtue of a change in applicable Tax law), of any amounts with respect to which
a payment has been made to Flatonia pursuant to this Section 14.3, then Flatonia
shall pay Earthstone an amount equal to such reduction plus any interest or
penalties imposed by a Governmental Body with respect to such
reduction.  Notwithstanding anything to the contrary in this Section 14.3,
Sabine, Earthstone and their Affiliates shall be entitled to any Property Tax
refund, credit or benefit arising as a result of the carryback of a Tax
attribute from a taxable period (or portion thereof) that begins after the
Effective Time.
 
Section 14.4 Audits.  From and after the Closing, each of Sabine and Earthstone,
on the one hand, and Flatonia, on the other hand (the “Tax Indemnified Person”),
shall notify the other Party in writing within 15 days of receipt by the Tax
Indemnified Person of written notice of any pending or threatened audits,
adjustments, claims, examinations, assessments or other proceedings with respect
to any Taxes that are likely to affect the liability of such other Party under
this Agreement (a “Tax Audit”). If the Tax Indemnified Person fails to give such
timely notice to the other Party, it shall not be entitled to indemnification or
reimbursement for any Taxes arising in connection with such Tax Audit to the
extent such failure to give notice actually and materially adversely affects the
other Party. If such Tax Audit relates to Taxes for which Flatonia is
responsible (in whole or in part) hereunder, Flatonia shall be entitled to
conduct and control the defense and settlement of such Tax Audit, but (a) Sabine
and Earthstone shall be entitled to participate in any such Tax Audit relating
to Taxes for which they may be responsible hereunder at their own expense and
(b) Flatonia shall not settle, compromise or concede any portion of any Tax
Audit that is reasonably likely to adversely affect the Tax liability of Sabine
or Earthstone without the consent of Sabine or Earthstone, which consent shall
not be unreasonably withheld, delayed or conditioned.
 
Section 14.5 Transfer Taxes, Recording Fees & Transaction Fees.  Sabine and
Earthstone shall bear any sales, use, excise, real property transfer or gain,
gross receipts, goods and services, registration, recording fees, capital,
documentary, stamp or similar Taxes (including any penalties, interest or
additional amounts which may be imposed with respect thereto but not including
any income or franchise taxes) (collectively, “Transfer Taxes”) imposed upon, or
with respect to, the transfer of the Assets or other transactions contemplated
 
 
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hereby, including any fees or payments to lessors with respect to such transfers
or other transactions under the Leases (if any).  Sabine, Earthstone and
Flatonia shall cooperate in good faith to minimize the incurrence of any such
Transfer Taxes, fees or payments, including the filing or submission of an
appropriate certificate or other evidence of exemption by Sabine or
Earthstone.  Except as otherwise provided herein, all costs and expenses
(including legal and financial advisory fees and expenses) incurred in
connection with, or in anticipation of, this Agreement and the transactions
contemplated hereby shall be paid by the Party incurring such expenses.
 
ARTICLE 15
 
MISCELLANEOUS
 
Section 15.1 Counterparts.  This Agreement may be executed in counterparts, each
of which shall be deemed an original instrument, but all such counterparts
together shall constitute but one agreement.  Any Party’s delivery of an
executed counterpart signature page by facsimile or email is as effective as
executing and delivering this Agreement in the presence of the other Party.  No
Party shall be bound until such time as all of the Parties have executed
counterparts of this Agreement.
 
Section 15.2 Notices.  All notices and other communications that are required or
may be given pursuant to this Agreement must be given in writing, in English and
delivered personally, by courier, by facsimile or email or by registered or
certified mail, postage prepaid, as follows:
 
If to Flatonia or PRP:
 
Parallel Resource Partners, LLC
700 Louisiana St., 50th Floor
Houston, TX 77002
Attn:  John K. Howie
Facsimile:  (713) 238-9501
Email:  JHowie@ParallelResourcePartners.com
 
And
 
Parallel Resource Partners, LLC
200 Crescent Court, Suite 200
Dallas, TX 75201
Attn:  Jonathan Siegler
Facsimile:  (682) 626-1335
Email:  JSiegler@ParallelResourcePartners.com
 
With a copy(which shall not constitute notice) to:
 
 
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Sidley Austin LLP
1000 Louisiana St., Suite 6000
Houston, TX 77002
Attn:  J. Mark Metts
Facsimile:  (713) 495-7799
Email:  mmetts@sidley.com
 
And
 
Baker & McKenzie LLP
700 Louisiana St., Suite 3000
Houston, TX 77002
Attn:  Louis Davis
Facsimile: (713) 427-5099
Email:  Louis.Davis@bakermckenzie.com
 
If to an Oak Valley Entity:
 
Oak Valley Resources, LLC
110 Cypress Station Drive, Suite 220
Houston, Texas 77090
Attn: Frank A. Lodzinski
Facsimile: (281) 298-4272
Email:  frank@oakvalleyllc.com
 
With a copy (which shall not constitute notice) to:
 
Jones & Keller, P.C.
1999 Broadway, Suite 3150
Denver, Colorado 80202
Attn: Reid A. Godbolt
Facsimile: (303) 573-8133
Email:  rgodbolt@joneskeller.com
 
If to Earthstone:
 
Earthstone Energy, Inc.
633 Seventeenth Street, Suite 2320
Denver, Colorado 80202
Attn:  Ray Singleton
Facsimile:  (303) 773-8099
Email:  rsingleton@earthstoneenergy.com
 
With a copy (which shall not constitute notice) to:
 
 
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Davis Graham & Stubbs LLP
1550 Seventeenth Street, Suite 500
Denver, Colorado 80202
Attn:  Brian Boonstra
Facsimile:  (303) 893-1379
Email:  brian.boonstra@dgslaw.com
 
Any Party may change its address for notice by providing notice to the other
Parties in the manner set forth above.  All notices shall be deemed to have been
duly given and the receiving Party charged with notice (a) if personally
delivered, when received, (b) if sent by facsimile during normal business hours
of the recipient, upon confirmation of transmission, or if sent by facsimile
after normal business hours of the recipient, on the next Business Day, (c) if
sent by email during normal business hours of the recipient, upon having
obtained electronic delivery confirmation thereof, or if sent by email after
normal business hours of the recipient, on the next Business Day, (d) if mailed,
two Business Days after the date of mailing to the address below or (e) if sent
by overnight courier, one day after sending.
 
Section 15.3 Certain Fees.  Except as otherwise provided herein, all costs and
expenses (including legal and financial advisory fees and expenses) incurred in
connection with, or in anticipation of, this Agreement and the transactions
contemplated hereby shall be paid by the Party incurring such expenses.
 
Section 15.4 Governing Law; Jurisdiction.
 
(a) THIS AGREEMENT AND THE LEGAL RELATIONS BETWEEN THE PARTIES SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW WHICH WOULD PERMIT OR REQUIRE THE
APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
 
(b) THE PARTIES HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE
FEDERAL COURTS OF THE UNITED STATES OF AMERICA OR THE CIVIL DISTRICT COURTS OF
THE STATE OF TEXAS LOCATED IN HARRIS COUNTY, TEXAS AND APPROPRIATE APPELLATE
COURTS THEREFROM, AND EACH PARTY HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF ANY DISPUTE, CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR ANY DOCUMENT DELIVERED IN CONNECTION HEREWITH MAY BE HEARD AND
DETERMINED IN SUCH COURTS.  THE PARTIES HEREBY IRREVOCABLY WAIVE, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAWS, ANY OBJECTION WHICH THEY MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH DISPUTE, CONTROVERSY OR CLAIM
BROUGHT IN ANY SUCH COURT OR ANY DEFENSE OF INCONVENIENT FORUM FOR THE
MAINTENANCE OF SUCH DISPUTE, CONTROVERSY OR CLAIM.  EACH PARTY AGREES THAT A
JUDGMENT IN ANY SUCH DISPUTE MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON
THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY APPLICABLE LAW.
 
 
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(c) EACH OF THE PARTIES HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ALL RIGHT
TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR ANY DOCUMENT DELIVERED IN CONNECTION
HEREWITH.  EACH PARTY ACKNOWLEDGES THAT IT HAS HAD AN OPPORTUNITY TO CONSULT
WITH INDEPENDENT COUNSEL AND THAT IT HAS KNOWINGLY AND VOLUNTARILY AGREED TO
THIS WAIVER OF ITS RIGHT TO TRIAL BY JURY.
 
Section 15.5 Waivers.  Any failure by any Party to comply with any of its
obligations, agreements or conditions herein contained may be waived by the
Party to whom such compliance is owed by an instrument signed by such Party and
expressly identified as a waiver, but not in any other manner.  No waiver of, or
consent to a change in, any of the provisions of this Agreement shall be deemed
or shall constitute a waiver of, or consent to a change in, other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
 
Section 15.6 Assignment.  No Party shall assign all or any part of this
Agreement, nor shall any Party assign or delegate any of its rights or duties
hereunder, without the prior written consent of the other Parties, which consent
may be withheld for any reason, and any assignment or delegation made without
such consent shall be void.  Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the Parties and their respective
successors and permitted assigns.
 
Section 15.7 Entire Agreement.  This Agreement (including, for purposes of
certainty, the Appendices, Exhibits and Schedules attached hereto), the
documents to be executed hereunder and the Conveyances constitute the entire
agreement among the Parties pertaining to the subject matter hereof, and
supersede all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the Parties pertaining to the subject matter hereof.
 
Section 15.8 Amendment.  This Agreement may be amended or modified only by an
agreement in writing executed by all Parties and expressly identified as an
amendment or modification.
 
Section 15.9 No Third Party Beneficiaries.  Nothing in this Agreement shall
entitle any Person other than a Party to any claim, cause of action, remedy or
right of any kind, except the rights expressly provided in Section 13.2 to the
Persons described therein.
 
Section 15.10 Construction.  The Parties acknowledge that (a) each Party has had
the opportunity to exercise business discretion in relation to the negotiation
of the details of the transaction contemplated hereby, (b) this Agreement is the
result of arms-length negotiations from equal bargaining positions and (c) each
Party and its counsel participated in the preparation and negotiation of this
Agreement.  Any rule of construction that a contract be construed against the
drafter shall not apply to the interpretation or construction of this Agreement.
 
Section 15.11 Limitation on Damages.  NOTWITHSTANDING ANYTHING TO THE CONTRARY,
EXCEPT IN CONNECTION WITH ANY DAMAGES INCURRED BY THIRD PARTIES FOR WHICH
INDEMNIFICATION IS SOUGHT UNDER THE
 
 
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TERMS OF THIS AGREEMENT, NONE OF THE PARTIES AND ANY MEMBER OF THE FLATONIA
GROUP, THE OAK VALLEY GROUP OR THE EARTHSTONE GROUP SHALL BE ENTITLED TO
CONSEQUENTIAL, SPECIAL, INDIRECT, PUNITIVE OR EXEMPLARY DAMAGES OR DAMAGES FOR
LOST PROFITS IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
HEREBY AND, EXCEPT AS OTHERWISE PROVIDED IN THIS SENTENCE, EACH OF THE PARTIES,
FOR ITSELF AND ON BEHALF OF THE MEMBERS OF THE FLATONIA GROUP, OAK VALLEY GROUP
AND EARTHSTONE GROUP, AS APPLICABLE, HEREBY EXPRESSLY WAIVES ANY RIGHT TO
CONSEQUENTIAL, SPECIAL, INDIRECT, PUNITIVE OR EXEMPLARY DAMAGES OR DAMAGES FOR
LOST PROFITS IN CONNECTION WITH OR WITH RESPECT TO THIS AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED HEREBY.
 
Section 15.12 Recording.  As soon as practicable after the Closing, Sabine shall
record the Conveyances and the Memorandum of Operating Agreement delivered at
the Closing in the appropriate counties as well as with any appropriate
Governmental Bodies, and Sabine shall provide Flatonia with copies of all
recorded or approved instruments.
 
Section 15.13 Conspicuous.  THE PARTIES AGREE THAT, TO THE EXTENT REQUIRED BY
APPLICABLE LAW TO BE EFFECTIVE, THE PROVISIONS IN THIS AGREEMENT IN BOLD-TYPE
ALL CAPS FONT ARE “CONSPICUOUS” AND COMPLY WITH THE EXPRESS NEGLIGENCE RULE FOR
THE PURPOSE OF ANY APPLICABLE LAW.
 
Section 15.14 Time of Essence.  This Agreement contains a number of dates and
times by which performance or the exercise of rights is due, and the Parties
intend that each and every such date and time be the firm and final date and
time, as agreed.  For this reason, each Party hereby waives and relinquishes any
right it might otherwise have to challenge its failure to meet any performance
or rights election date applicable to it on the basis that its late action
constitutes substantial performance, to require the other Parties to show
prejudice, or on any equitable grounds.  Without limiting the foregoing, time is
of the essence in this Agreement.  If the date specified in this Agreement for
giving any notice or taking any action is not a Business Day (or if the period
during which any notice is required to be given or any action taken expires on a
date which is not a Business Day), then the date for giving such notice or
taking such action (and the expiration date of such period during which notice
is required to be given or action taken) shall be the next day that is a
Business Day.
 
Section 15.15 Severability.  The invalidity or unenforceability of any term or
provision of this Agreement in any situation or jurisdiction shall not affect
the validity or enforceability of the other terms or provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction, and the remaining terms and provisions
shall remain in full force and effect unless doing so would result in an
interpretation of this Agreement that is manifestly unjust.
 
Section 15.16 Specific Performance.  The Parties agree that if any of the
provisions of this Agreement were not performed in accordance with their
specific terms, irreparable damage
 
 
46

--------------------------------------------------------------------------------

 
 
would occur, no adequate remedy at Law would exist and damages would be
difficult to determine, and the Parties shall be entitled to specific
performance of the terms hereof and immediate injunctive relief, without the
necessity of proving the inadequacy of money damages as a remedy, in addition to
any other remedy available at Law or in equity.
 
[Signature Pages Follow]
 
 
 
 
 
 
47

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IN WITNESS WHEREOF, this Agreement has been signed by each of the Parties on the
Execution Date.
 

  PRP:           PARALLEL RESOURCE PARTNERS, LLC            
By:
/s/ John K. Howie             Name: John K. Howie             Title: Managing
Director  

                                                                

 
FLATONIA:
          FLATONIA ENERGY, LLC            
By:
/s/ John K. Howie             Name: John K. Howie             Title: President  

  

 
SABINE:
          SABINE RIVER ENERGY, LLC            
By:
/s/ Frank A. Lodzinski             Name: Frank A. Lodzinski             Title:
President  

                                                              

 
OAK VALLEY:
          OAK VALLEY RESOURCES, LLC            
By:
/s/ Frank A. Lodzinski             Name: Frank A. Lodzinski             Title:
Chief Executive Officer and President  

 
 

 
OAK VALLEY OPERATOR:
          OAK VALLEY RESOURCES, LLC            
By:
/s/ Frank A. Lodzinski             Name: Frank A. Lodzinski             Title:
President  

 
                                                                                                                                   
 
 

--------------------------------------------------------------------------------

 
 

 
EARTHSTONE:
         
EARTHSTONE ENERGY, INC.
           
By:
/s/ Ray Singleton             Name: Ray Singleton             Title: President  

 
                        
 
 
 
 
 
 
                                         
 
 
 

--------------------------------------------------------------------------------

 
 
APPENDIX A
 
ATTACHED TO AND MADE A PART OF THAT
 
CERTAIN CONTRIBUTION AGREEMENT
 
DATED AS OF OCTOBER 16, 2014
 
DEFINITIONS
 
“Actual Knowledge” means (a) with respect to PRP and Flatonia, information
personally known by the individuals set forth on Sections 5.1 and 6.1, as
applicable, of the Flatonia Disclosure Schedule, (b) with respect to the Oak
Valley Entities, information personally known by the individuals set forth on
Section 7.1 of the Oak Valley Disclosure Schedule and (c) with respect to
Earthstone, information personally known by the individuals set forth on
Section 8.1 of the Earthstone Disclosure Schedule.
 
“Affiliate” means, with respect to any Person, any Person that directly or
indirectly Controls, is Controlled by or is under common Control with such
Person.
 
“Agreement” has the meaning set forth in the Preamble of this Agreement.
 
“Allocated Leasehold” means (a) the portion of the leased premises under a Lease
that would be held by production or drilling operations on a Well if the Lease
were otherwise to terminate and (b) if in the case of any Well clause (a) is not
applicable, a portion of the leased premises under the applicable Lease
comprising (i) in the case of a vertical Well, 80 acres, in the form of a square
with the wellbore in the center and (ii) in the case of a horizontal Well,
(A) the acreage included within the proration unit plat for the Well as filed by
the operator of such Well with the Texas Railroad Commission or (B) the acreage
prescribed by the applicable field rules or orders.
 
“Allocated Value” has the meaning set forth in Section 3.3(a).
 
“Amended Operating Agreement” has the meaning set forth in Section 9.6.
 
“Asbestos and Related Liabilities” means any and all Damages, obligations and
responsibilities relating to or arising from, directly or indirectly, the
existence or alleged existence of any one or more of asbestos, NORM,
polychlorinated biphenyls, chromium and/or lead-based paint at, on or within the
Properties, including any contamination resulting therefrom.
 
“Assets” has the meaning set forth in Section 2.2.
 
“Assumed Sabine Obligations” means (a) all obligations and liabilities of
Flatonia (including Environmental Liabilities), known or unknown, with respect
to or arising from the Assets, other than the Retained Flatonia Obligations,
regardless of whether such obligations or liabilities arose prior to, on or
after the Effective Time, including obligations and liabilities relating in any
manner to the use, ownership or operation of the Assets, including
(i) obligations to furnish makeup gas and/or settle Imbalances attributable to
the Assets according to the terms of applicable gas sales, processing, gathering
or transportation Contracts, (ii) obligations to pay Working Interests,
royalties, overriding royalties and other interest owners’ revenues or proceeds
 
 
Appendix A-1

--------------------------------------------------------------------------------

 
 
attributable to sales of Hydrocarbons produced from the Assets and any Suspense
Funds, (iii)  Decommissioning and Asbestos and Related Liabilities, (iv) any
obligations to abandon, clean up, restore and/or remediate the premises covered
by or related to the Assets in accordance with applicable Contracts and Laws and
(v) all obligations applicable to or imposed on the lessee, owner, or operator
under the Leases, Surface Agreements and Contracts, or as required by any
applicable Law, including the payment of all Taxes for which Sabine is
responsible hereunder; (b) all obligations under the Leases, Contracts and
Surface Agreements; and (c) Sabine’s obligations under Article 14; but
excluding, in all such instances, prior to the Cut-off Date, the amount of the
Cash Settlement, which will be exclusively settled and accounted for pursuant to
the terms of Section 3.4(b) and Section 11.5.
 
“Business Day” means each calendar day except Saturdays, Sundays, and United
States federal holidays.
 
“Cash Settlement” has the meaning set forth in Section 3.4.
 
“Casualty” means acts of God, terrorist acts, fire, explosion, earthquake,
flood, wind storm, blizzard, tornado, condemnation, exercise of eminent domain,
confiscation or seizure.
 
“Casualty Loss” has the meaning set forth in Section 4.2.
 
“Central Time” means the central standard time zone of the United States of
America.
 
“CERCLA” means the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. § 9601 et seq., as amended.
 
“Certificate of Incorporation” means that Amended and Restated Certificate of
Incorporation of Earthstone, dated February 26, 2010, as amended by that
Certificate of Amendment to the Certificate of Incorporation, dated December 20,
2010.
 
“Claim Notice” has the meaning set forth in Section 13.3(b).
 
“Closing” has the meaning set forth in Section 11.1.
 
“Closing Date” has the meaning set forth in Section 11.1.
 
“Closing Payment” has the meaning set forth in Section 11.5(a).
 
“Code” means the U.S. Internal Revenue Code of 1986, as amended.
 
“Consents” has the meaning set forth in Section 4.1.
 
“Contracts” has the meaning set forth in Section 2.2(d).
 
“Contribution” has the meaning set forth in the Recitals of this Agreement.
 
“Contribution Consideration” has the meaning set forth in Section 2.1.
 
 
Appendix A-2

--------------------------------------------------------------------------------

 
 
“Control” means the ability to direct the management and policies of a Person
through ownership of voting shares or other equity rights, pursuant to a written
agreement, or otherwise.  The terms “Controls” and “Controlled by” and other
derivatives shall be construed accordingly.
 
“Conveyance” means the form of Conveyance attached hereto as Exhibit B.
 
“COPAS” has the meaning set forth in Section 2.5(a).
 
“Current Tax Period” has the meaning set forth in Section 14.2.
 
“Customary Post-Closing Consents” means the consents and approvals from
Governmental Bodies for the assignment of the Assets to Sabine that are
customarily obtained after the assignment of properties similar to the Assets,
consents to assignment of Surface Agreements that may not be unreasonably
withheld and consents of lessors under Leases or counterparties under Material
Contracts that, in each case, may not be unreasonably withheld.
 
“Cut-off Date” has the meaning set forth in Section 3.4.
 
“Damages” means the amount of any actual liability, loss, cost, expense, claim,
award or judgment incurred or suffered by any Person to be indemnified under
this Agreement arising out of or resulting from the indemnified matter, whether
attributable to personal injury or death, property damage, contract claims
(including contractual indemnity claims), torts, or otherwise, including
reasonable fees and expenses of attorneys, consultants, accountants or other
agents and experts reasonably incident to matters indemnified against, and the
costs of investigation and/or monitoring of such matters, and the costs of
enforcement of the indemnity; provided, however, that the term “Damages” shall
not include (a) loss of profits or other consequential damages suffered by any
Person claiming indemnification except as otherwise provided in Section 15.11
and (b) any liability, loss, cost, expense, claim, award or judgment to the
extent resulting from or to the extent increased by the actions or omissions of
any Indemnified Person after the Closing Date.
 
“Decommissioning” means all decommissioning, dismantlement and removal
activities and obligations with respect to the Properties as are required by
Laws, Contracts or Surface Agreements associated with the Properties or any
Governmental Body and further including all well plugging, replugging and
abandonment, dismantlement and removal of buildings, facilities, pipelines and
flowlines and all other assets of any kind related to or associated with
operations or activities conducted on the Properties; and associated site
clearance, site restoration and site remediation on the Properties.
 
“Defensible Title” means the right, title and interest of Flatonia acquired in
the Assets pursuant to the SBE-Ramshorn Assignments and the OV Assignments,
subject to the Permitted Encumbrances.
 
“DOJ” means the U.S. Department of Justice.
 
“Earthstone” has the meaning set forth in the Preamble of this Agreement.
 
“Earthstone Board” means the Board of Directors of Earthstone.
 
 
Appendix A-3

--------------------------------------------------------------------------------

 
 
“Earthstone Common Stock” has the meaning set forth in the Recitals of this
Agreement.
 
“Earthstone Contribution Shares” has the meaning set forth in Section 3.2.
 
“Earthstone Group” means Earthstone, its current and former Affiliates, and each
of their respective stockholders, officers, directors, employees, agents,
advisors and other representatives.
 
“Earthstone Rights Agreement” means the Rights Agreement dated February 4, 2009
between Earthstone and Corporate Stock Transfer, Inc., as amended by that First
Amendment to the Rights Agreement, dated May 15, 2014 and that Second Amendment
to the Rights Agreement, dated as of May 15, 2014.
 
“Earthstone Share Amount” has the meaning set forth in Section 3.2.
 
“Earthstone Stockholder Approval” means the affirmative vote or consent of (i)
the holders of the outstanding shares of Earthstone Common Stock in the manner
provided under the definition of “Earthstone Stockholder Approval” in the
Exchange Agreement, and (ii) at least a majority of the outstanding shares of
Earthstone Common Stock that are represented in person or by proxy at the
Earthstone Stockholders Meeting in favor of the issuance of the Earthstone
Contribution Shares.
 
“Effective Time” has the meaning set forth in Section 2.4.
 
“Environmental Laws” means, as in effect as of the Execution Date, CERCLA, the
Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq.; the Federal
Water Pollution Control Act, 33 U.S.C. § 1251 et seq.; the Clean Air Act,
42 U.S.C. § 7401 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C.
§ 1471 et seq.; the Toxic Substances Control Act, 15 U.S.C. §§ 2601 through
2629; the Oil Pollution Act, 33 U.S.C. § 2701 et seq.; the Emergency Planning
and Community Right-to-Know Act, 42 U.S.C. § 11001 et seq.; the Safe Drinking
Water Act, 42 U.S.C. §§ 300f through 300j and all other Laws as of the Execution
Date of any Governmental Body having jurisdiction over the Property in question
addressing pollution or protection of the environment and all regulations as of
the Execution Date implementing the foregoing that are applicable to the
operation and maintenance of the Assets.
 
“Environmental Liabilities” means any and all environmental response costs
(including costs of Remediation), damages, natural resource damages,
settlements, consulting fees, expenses, penalties, fines, orphan share,
prejudgment and post judgment interest, court costs, attorneys’ fees and other
liabilities incurred or imposed (a) pursuant to any Order, notice of
responsibility, directive (including requirements embodied in Environmental
Laws) or similar act (including settlements) by any Governmental Body to the
extent arising out of any violation of, or remedial obligation under, any
Environmental Laws that are attributable to the ownership or operation of the
Assets or (b) pursuant to any claim or cause of action by a Governmental Body or
other Person for personal injury, property damage, damage to natural resources,
remediation or response costs to the extent arising out of any violation of, or
any remediation obligation under, any Environmental Laws, in each case, that is
attributable to the ownership or operation of the Assets.
 
 
Appendix A-4

--------------------------------------------------------------------------------

 
 
“Equipment” has the meaning set forth in Section 2.2(f).
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
“Exchange Agreement” has the meaning set forth in the Recitals to this
Agreement.
 
“Excluded Assets” means (a) Excluded Records, (b) the amounts calculated under
Section 3.4(a), (c) all claims and causes of action of Flatonia arising under or
with respect to any Lease or Contract that are attributable to the period of
time prior to the Effective Time (including any claims for refunds, credits or
rebates), (d) subject to Section 4.2, all rights and interests of Flatonia or
its Affiliates (i) under any policy or agreement of insurance or indemnity
agreement, (ii) under any bond and (iii) any insurance or condemnation proceeds
or awards arising, in each case, from acts, omissions or events, or damage to or
destruction of property prior to the Closing Date, (e) any Tax benefits
(including any refunds, credits, rebates, and net operating loss carry-forwards)
attributable to ownership and operation of the Assets or the production of
Hydrocarbons therefrom prior to and at the Effective Time or to Flatonia’s
assets or operations unrelated to the Assets or its business generally,
including, for the avoidance of doubt, any reduction in severance Taxes
(including any refund, credit or rebate) that may be realized after the
Effective Time but that results from payments or production for periods prior to
the Effective Time, (f) all personal property of Flatonia not included within
the definition of Assets, (g) all geophysical and other seismic and related
technical data and information relating to the Assets to the extent that such
geophysical and other seismic and related technical data and information is not
transferable without payment of a fee or other consideration that Sabine has not
agreed in writing to pay, but in any event excluding all interpretations,
analyses and related interpretative data of Flatonia shall be excluded from the
“Assets”, (h) all of Flatonia’s proprietary computer software, patents, trade
secrets, copyrights, names, trademarks, logos and other intellectual property,
except for proprietary geophysical, geological and similar data to be
transferred from Flatonia to Sabine pursuant to Section 2.2(i), (i) all data and
Contracts that cannot be disclosed to Sabine as a result of confidentiality
arrangements under agreements with Third Parties; provided, however, that
Flatonia has used its commercially reasonable efforts to obtain a waiver of any
such confidentiality restriction, (j) any of the Assets excluded from the
transactions contemplated hereunder pursuant to Section 4.1, or Section 4.2 and
(k) any other items set forth on Exhibit A-3.
 
“Excluded Records” means (a) all corporate, financial, income and franchise Tax
and legal records of Flatonia that relate to Flatonia’s business generally
whether or not also relating to the Assets, (b) any Records to the extent
disclosure or transfer is restricted by any Third Party license agreement, other
Third Party agreement or applicable Law; provided, however, that Flatonia has
used its commercially reasonable efforts to obtain a waiver of any such
confidentiality restriction, (c) computer software, (d) all legal records and
legal files of Flatonia and all other work product of and attorney-client
communications with any of Flatonia’s legal counsel, other than copies of title
opinions and Contracts, (e) personnel records, (f) records relating to
Flatonia’s sale process for the Assets, including bids received from and records
of negotiations with Third Parties, (g) records relating to engineering
forecasts, evaluations and reserve estimates, (h) any records with respect to
the other Excluded Assets and (i) any records retained pursuant to Section
2.2(i).
 
 
Appendix A-5

--------------------------------------------------------------------------------

 
 
“Execution Date” has the meaning set forth in the Preamble of this Agreement.
 
“Final Netted Amount” has the meaning set forth in Section 11.5(b).
 
“Flatonia” has the meaning set forth in the Preamble of this Agreement.
 
“Flatonia Consent Parties” has the meaning set forth in Section 4.1.
 
“Flatonia Designee” has the meaning set forth in Section 9.10(a).
 
“Flatonia Financial Assurances” has the meaning set forth in Section 6.9.
 
“Flatonia Group” means Flatonia and its current and former Affiliates and PRP
and its current and former Affiliates, and each of their respective members,
equity owners, officers, directors, employees, agents, advisors and other
representatives.
 
“Flatonia Observer” has the meaning set forth in Section 9.10(b).
 
“Flatonia Material Adverse Effect” means an event, effect or circumstance that,
individually or in the aggregate with all other events, effects or
circumstances, does or would reasonably be expected to have a material adverse
effect on (a) the ownership or operation of the Assets, taken as a whole or (b)
the ability of Flatonia or PRP to consummate the transactions contemplated by
this Agreement; provided, however, that, for the purpose of clause (a) hereof,
none of the following shall be taken into account in determining whether a
Material Adverse Effect has or would reasonably be expected to occur: (i) any
effect resulting from changes in generally applicable market, economic,
financial or political conditions (including changes in fuel supply or
Hydrocarbon transportation markets or interest rates) in Texas, the United
States or worldwide, or any outbreak of hostilities, war or terrorist acts; (ii)
any effect that affects the Hydrocarbon exploration and production or
development industry generally, including any changes in the prices of
Hydrocarbons or other commodities; (iii) any effect resulting from entering into
this Agreement or the announcement of the transactions contemplated herein; (iv)
Casualty Losses; (v) acts or failures to act of Governmental Bodies or a change
in Laws from and after the Execution Date, in each case, generally applicable to
oil and gas producers in Texas; (vi) matters that are cured or no longer exist
by the earlier of the Closing and the termination of this Agreement, without
cost or liability to Sabine; (vii) reclassification or recalculation of reserves
in the ordinary course of business; or (viii) declines in well performance due
to natural causes.  The Party claiming that a Material Adverse effect has
occurred shall have the burden of proof with respect to whether a Material
Adverse Effect has occurred.
 
“Flatonia Registration Rights Agreement” has the meaning set forth in
Section 9.8.
 
“FTC” means the U.S. Federal Trade Commission.
 
“GAAP” means U.S. generally accepted accounting principles.
 
“Governmental Body” means any instrumentality, subdivision, court, arbitral
body, administrative agency, commission, official or other governmental
authority of the United States or any other country or any state, province,
prefect, municipality, locality or other government or
 
 
Appendix A-6

--------------------------------------------------------------------------------

 
 
political subdivision thereof, or any quasi-governmental or private body
exercising any administrative, executive, judicial, legislative, police,
regulatory, taxing, importing or other governmental or quasi-governmental body.
 
“Hazardous Substances” means any pollutants, contaminants, toxic or hazardous
substances, materials, wastes, constituents, compounds or chemicals that are
regulated by, or may form the basis of liability under any Laws, including
asbestos-containing materials (but excluding any NORM).
 
“Hydrocarbons” means oil, gas, condensate and other gaseous and liquid
hydrocarbons or any combination thereof.
 
“Imbalances” means any imbalance (a) at the wellhead between the amount of
Hydrocarbons produced from a Well and allocated to the interest of Flatonia
therein and the shares of production from the relevant Well to which Flatonia
was entitled or (b) at the pipeline flange between the amount of Hydrocarbons
nominated by or allocated to Flatonia and the Hydrocarbons actually delivered on
behalf of Flatonia at that point.
 
“Indemnified Person” has the meaning set forth in Section 13.3(a).
 
“Indemnifying Person” has the meaning set forth in Section 13.3(a).
 
“Jointly-Owned Properties” has the meaning set forth in the Recitals to this
Agreement.
 
“Lands” has the meaning set forth in Section 2.2(b).
 
“Laws” means all Permits, statutes, rules, regulations, ordinances, Orders, and
codes of Governmental Bodies.
 
“Leases” has the meaning set forth in Section 2.2(a).
 
“Material Adverse Effect” means, when used with respect to a Person, any change,
effect, event or occurrence that, individually or in the aggregate, has had or
would reasonably be expected to have a material adverse effect on the business,
financial condition or results of operations of such Person and its
Subsidiaries, taken as a whole; provided, however, that any adverse changes,
effects, events or occurrences resulting from or due to any of the following
shall be disregarded in determining whether there has been a Material Adverse
Effect:  (i) changes, effects, events or occurrences generally affecting the
United States or global economy, the financial, credit, debt, securities or
other capital markets or political, legislative or regulatory conditions or
changes in the industries in which such Person operates; (ii) the announcement
or pendency of this Agreement or the transactions contemplated hereby or the
performance of this Agreement; (iii) any change in the market price or trading
volume of Earthstone Common Stock (it being understood and agreed that the
foregoing shall not preclude any other Party to this Agreement from asserting
that any facts or occurrences giving rise to or contributing to such change that
are not otherwise excluded from the definition of Material Adverse Effect should
be deemed to constitute, or be taken into account in determining whether there
has been, or would reasonably be expected to be, a Material Adverse Effect);
(iv) acts of war or terrorism (or the escalation of the foregoing) or natural
disasters or other force majeure
 
 
Appendix A-7

--------------------------------------------------------------------------------

 
 
events; (v) changes in any applicable Laws or regulations applicable to such
Person or applicable accounting regulations or principles or the interpretation
thereof; (vi) any legal proceedings commenced by or involving any current or
former member, partner or stockholder of such Person (on their own or on behalf
of such Person) arising out of or related to this Agreement or the transactions
contemplated hereby; and (vii) changes, effects, events or occurrences generally
affecting the prices of oil, gas, natural gas, natural gas liquids or other
commodities; provided, however, that changes, effects, events or occurrences
referred to in clauses (i), (iv) and (v) above shall be considered for purposes
of determining whether there has been or would reasonably be expected to be a
Material Adverse Effect if and to the extent such state of affairs, changes,
effects, events or occurrences has had or would reasonably be expected to have a
disproportionate adverse effect on such Person and its Subsidiaries, as compared
to other companies operating in the industries in which such Person and its
Subsidiaries operate.
 
“Material Contracts” has the meaning set forth in Section 6.8(a).
 
“Memorandum of Operating Agreement” has the meaning set forth in Section 9.6.
 
“Net Revenue Interest” means, with respect to any Property, the interest in and
to all Hydrocarbons produced, saved and sold from or allocated to such Property,
after giving effect to all royalties, overriding royalties, production payments,
net profits interests and other similar burdens upon, measured by or payable out
of production therefrom.
 
“NORM” means naturally occurring radioactive material.
 
“Oak Valley” has the meaning set forth in the Preamble of this Agreement.
 
“Oak Valley Entity” means Oak Valley, Oak Valley Operator and Sabine.  Sabine is
included in such definition by the Parties, notwithstanding the fact that, after
the closing of the transactions contemplated by the Exchange Agreement, and
prior to the Closing, Sabine will be wholly owned by Earthstone.
 
“Oak Valley Group” means each Oak Valley Entity and its respective current and
former Affiliates, and each of their respective members, equity owners,
officers, directors, employees, agents, advisors and other representatives.
 
“Oak Valley Operator” has the meaning set forth in the Preamble of this
Agreement.
 
“Operating Agreement” has the meaning set forth in the Recitals of this
Agreement.
 
“Order” means any judgment, order, consent order, injunction, decree or writ of
any Governmental Body.
 
“OV Assignments” means the assignments listed on Appendix C.
 
“Participation Agreement” has the meaning set forth in the Recitals of this
Agreement.
 
“Party” and “Parties” have the meanings set forth in the Preamble of this
Agreement.
 
 
Appendix A-8

--------------------------------------------------------------------------------

 
 
“Permits” means any permits, approvals or authorizations by, or filings with,
Governmental Bodies.
 
“Permitted Encumbrances” means any or all of the following:
 
(a) royalties and any overriding royalties, net profits interests, free gas
arrangements, production payments, reversionary interests and other similar
burdens on production to the extent that the net cumulative effect of such
burdens does not reduce Flatonia’s Net Revenue Interest below that shown in the
applicable Exhibit for a Well or increase Flatonia’s Working Interest above that
shown in the applicable Exhibit for a Well without a proportionate increase in
the Net Revenue Interest of Flatonia;
 
(b) all unit agreements, pooling agreements, operating agreements, farmout
agreements, Hydrocarbon production sales contracts, division orders and other
contracts, agreements and instruments applicable to the Properties, to the
extent that the net cumulative effect of such instruments does not reduce
Flatonia’s Net Revenue Interest below that shown in the applicable Exhibit for a
Well or increase Flatonia’s Working Interest above that shown in the applicable
Exhibit for a Well without a proportionate increase in the Net Revenue Interest
of Flatonia;
 
(c) Preferential Rights and Consents and similar transfer restrictions,
including Customary Post-Closing Consents;
 
(d) liens for Taxes or assessments not yet delinquent or, if delinquent, being
contested in good faith by appropriate actions;
 
(e) materialman’s, mechanic’s, repairman’s, employee’s, contractor’s, operator’s
and other similar liens or charges arising in the ordinary course of business
for amounts not yet delinquent (including any amounts being withheld as provided
by Law), or if delinquent, being contested in good faith by appropriate actions;
 
(f) excepting circumstances where such rights have already been triggered,
rights of reassignment arising upon final intention to abandon or release all or
any of the Assets;
 
(g) easements, rights-of-way, covenants, servitudes, Permits, surface leases and
other rights in respect of surface operations that do not prevent or adversely
affect operations as currently conducted on the Properties covered by the
Assets;
 
(h) Imbalances;
 
(i) all rights reserved to or vested in any Governmental Bodies to control or
regulate any of the Assets in any manner and all obligations and duties under
all applicable Laws;
 
(j) any lien, charge or other encumbrance on or affecting the Assets that is
expressly waived, bonded or paid by Sabine at or prior to the Closing or that is
discharged by Flatonia at or prior to the Closing;
 
 
Appendix A-9

--------------------------------------------------------------------------------

 
 
(k) any lien or trust arising in connection with workers’ compensation,
unemployment insurance, pension or employment Laws or regulations;
 
(l) the terms and conditions of the Contracts;
 
(m) any lien or encumbrance created by a lessor;
 
(n) liens, mortgages, security interests, pledges, restrictions or any other
type of burden or encumbrance arising under or created pursuant to the WF Deed
of Trust;
 
(o) liens created by Law or retained in Leases to secure the obligation of the
lessee to pay royalty or royalties (provided that any such liens arise in the
ordinary course for amounts not yet delinquent); and
 
(p) all other liens, charges, encumbrances, defects or irregularities that do
not, individually or in the aggregate, materially detract from the value of or
materially interfere with the use or ownership of the Wells, Undeveloped Leases
or Units subject thereto or affected thereby (as currently used or owned), which
would be accepted by a reasonably prudent purchaser engaged in the business of
owning and operating oil and gas properties in the United States, and which do
not reduce Flatonia’s Net Revenue Interest below that shown in the applicable
Exhibit for a Well or increase Flatonia’s Working Interest above that shown in
the applicable Exhibit for a Well without a proportionate increase in the Net
Revenue Interest of Flatonia.
 
“Person” means any individual, firm, corporation, partnership, limited liability
company, joint venture, association, trust, unincorporated organization,
Governmental Body or any other entity.
 
“Post-Closing Payment” has the meaning set forth in Section 11.5(b).
 
“PR Value” has the meaning set forth in Section 4.1.
 
“Preferential Rights” has the meaning set forth in Section 4.1.
 
“Prepayments” means all prepayments, cash call and advances made by Flatonia to
Oak Valley Operator, as Operator, pursuant to the Operating Agreement, for
expenses, as of the applicable date, not yet incurred.
 
“Prime Rate” means the rate of interest published from time to time as the
“Prime Rate” in the “Money Rates” section of The Wall Street Journal.
 
“Properties” has the meaning set forth in Section 2.2(c).
 
“Property Costs” means (a) all operating and production expenses, including
costs of insurance, rentals, shut-in payments and royalty payments; title
examination and curative actions; Property Taxes (but not income or franchise
Taxes) attributable to the ownership or operation of the Assets or the
production of Hydrocarbons therefrom; and gathering, processing and
transportation costs in respect of Hydrocarbons produced from the Properties,
and capital
 
 
Appendix A-10

--------------------------------------------------------------------------------

 
 
expenditures, including bonuses, broker fees, acquisition costs of royalty
interests or other burdens on production, and other lease or other royalty
acquisition, extension or renewal costs, costs of drilling and completing wells
and costs of acquiring equipment, incurred in the ownership and operation of the
Assets in the ordinary course of business and (b) overhead costs charged to the
Assets under the applicable operating agreement.
 
“Property Taxes” means all real property, personal property, ad valorem,
severance, production and similar Taxes.
 
“PRP” has the meaning set forth in the Preamble of this Agreement.
 
“Representatives” means (a) partners, employees, officers, directors, members,
equity owners and counsel of a Party or any of its Affiliates or any prospective
purchaser of an interest in a Party; (b) any consultant, advisor or agent
retained by a Party or the parties listed in subsection (a) above; and (c) any
bank, other financial institution or entity funding, or proposing to fund, such
Party’s operations in connection with the Assets, including any consultant
retained by such bank, other financial institution or entity.
 
“Retained Flatonia Obligations” means all obligations and liabilities of
Flatonia, known or unknown, with respect to or arising from (a) the Excluded
Assets and (b) Flatonia’s obligations under Sections 2.4 and 3.4 and Article 14.
 
“SBE-Ramshorn Assignments” means the assignments listed on Appendix B.
 
“Sabine” has the meaning set forth in the Preamble of this Agreement.
 
“Sabine Consent Parties” has the meaning set forth in Section 4.1.
 
“SEC” means the United States Securities and Exchange Commission, or any
successor agency.
 
“SEC Filings” has the meaning set forth in the Exchange Agreement.
 
“Securities Act” means the Securities Act of 1933, as amended.
 
“Subsidiary” when used with respect to any Party, means any corporation, limited
liability company, partnership, association, trust or other entity the accounts
of which would be consolidated with those of such Party in such Party’s
consolidated financial statements if such financial statements were prepared in
accordance with GAAP, as well as any other corporation, limited liability
company, partnership, association, trust or other entity of which securities or
other ownership interests representing more than fifty percent (50%) of the
equity or more than fifty percent (50%) of the ordinary voting power (or, in the
case of a partnership, more than fifty percent (50%) of the general partnership
interests or, in the case of a limited liability company, the managing member)
are, as of such date, owned by such Party or one or more Subsidiaries of such
Party or by such Party and one or more Subsidiaries of such Party.
 
“Surface Agreements” has the meaning set forth in Section 2.2(e).
 
 
Appendix A-11

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“Suspense Funds” means proceeds of production and associated penalties and
interest in respect of any of the Properties that are payable to Third Parties
and are being held in suspense by Oak Valley Operator as the operator of such
Properties.
 
“Tax Allocations” has the meaning set forth in Section 3.3(b).
 
“Tax Audit” has the meaning set forth in Section 14.4.
 
“Tax Return” means any return (including any information return), report,
statement, schedule, notice, form, election, claim for refund or other document
(including any attachments thereto and amendments thereof) filed with or
submitted to, or required to be filed with or submitted to, any Governmental
Body with respect to any Tax.
 
“Tax Indemnified Person” has the meaning set forth in Section 14.4.
 
“Taxes” means all federal, state, local, and foreign income, profits, franchise,
sales, use, ad valorem, property, severance, production, excise, stamp,
documentary, gross receipts, goods and services, registration, capital,
transfer, employment, estimated or withholding taxes or other assessments,
duties, fees or charges imposed by any Governmental Body, including any
interest, penalties or additional amounts that may be imposed with respect
thereto.
 
“Third Party” means any Person other than a Party to this Agreement or an
Affiliate of a Party to this Agreement.
 
“Third Person Claim” has the meaning set forth in Section 13.3(b).
 
“Transfer Taxes” has the meaning set forth in Section 14.5.
 
“Undeveloped Lease” means the portion of any Lease that is not included within
the boundaries of a Unit or the Allocated Leasehold associated with any Well
drilled thereon.
 
“Units” has the meaning set forth in Section 2.2(c).
 
“Wells” has the meaning set forth in Section 2.2(b).
 
“WF Deed of Trust” means that certain Deed of Trust, Mortgage, Fixture Filing,
Assignment of As-Extracted Collateral, Security Agreement and Financing
Statement dated July 19, 2013, and recorded at Volume 1655, Page 891, Official
Records, Fayette County, Texas, and at Volume 1133, Page 190, Official Records,
Gonzales County, Texas.
 
“Working Interest” with respect to any Property, means the interest in and to
such Property that is burdened with the obligation to bear and pay costs and
expenses of maintenance, development and operations on or in connection with
such Property, but without regard to the effect of any royalties, overriding
royalties, production payments, net profits interests and other similar burdens
upon, measured by or payable out of production therefrom.
 
 
Appendix A-12

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EXHIBIT D
 
FORM OF REGISTRATION RIGHTS AGREEMENT
 
This Registration Rights Agreement (this “Agreement”) dated as of
[_________ ___], 2014, is entered into by and among Earthstone Energy, Inc., a
Delaware corporation (the “Company”), Parallel Resource Partners, LLC, a
Delaware limited liability company (“PRP”) and Flatonia Energy, LLC, a Delaware
limited liability company and a portfolio company managed by PRP (“Flatonia”)
and, solely for the purposes of Sections 6 and 10 hereof, Oak Valley Resources,
LLC (“Oak Valley”).
 
RECITALS
 
WHEREAS, pursuant to that certain Exchange Agreement between the Company and Oak
Valley executed on May 15, 2014 (the “Exchange Agreement”), Oak Valley will
receive the number of shares of common stock, $0.001 par value per share
(“Earthstone Common Stock”) set forth beneath the heading for Oak Valley
on Schedule 1 attached hereto;
 
WHEREAS, as a condition to Oak Valley’s obligation to consummate the
transactions contemplated by the Exchange Agreement, the Company has agreed to
grant to Oak Valley and certain other parties certain registration rights with
respect to the Earthstone Common Stock received by Oak Valley pursuant to the
Exchange Agreement, on the terms and subject to the conditions set forth in that
certain Registration Rights Agreement by and between the Company and Oak Valley
dated as of the date hereof (the “Oak Valley Registration Rights Agreement”);
 
WHEREAS, in accordance with Section 5.2(b)(ii) of the Exchange Agreement, the
Company, Oak Valley, Sabine River Energy, LLC, a wholly-owned subsidiary of Oak
Valley, Oak Valley Operating LLC, a wholly owned subsidiary of Oak Valley, PRP
and Flatonia have entered into that certain Contribution Agreement dated as of
October 16, 2014 (the “Flatonia Contribution Agreement”);
 
WHEREAS, pursuant to the Flatonia Contribution Agreement, Flatonia will receive
the number of shares of Earthstone Common Stock set forth beneath the heading
for Flatonia on Schedule 1 attached hereto;
 
WHEREAS, as a condition to Flatonia’s and PRP’s respective obligations to
consummate the transactions contemplated by the Flatonia Contribution Agreement,
the Company has agreed to grant to Flatonia, PRP and the other Stockholders (as
defined below) certain registration rights with respect to the Registrable
Securities, on the terms and subject to the conditions set forth herein;
 
NOW, THEREFORE, in consideration of the mutual promises contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
 
Section 1. Definitions. For purposes of this Agreement, the following terms
shall have the respective meanings assigned to them in this Section 1. All
capitalized terms
 
 
1

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used but not defined in this Agreement shall have the respective meanings
assigned to them in the Flatonia Contribution Agreement.
 
“Additional Holder” means any holder of Earthstone Common Stock that (a) is not
a Stockholder and (b) has the right to participate with respect to such
Earthstone Common Stock in a Demand Registration or a Shelf Registration, as
applicable.
 
“Affiliate” shall mean, with respect to any Person, any other Person directly or
indirectly controlling, controlled by or under common control with such Person;
provided, however, that no securityholder of the Company shall be deemed an
Affiliate of any other securityholder solely by reason of any investment in the
Company.  For the purpose of this definition, the term “control” (including,
with correlative meanings, the terms “controlling,” “controlled by” and “under
common control with”), as used with respect to any Person, means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
 
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
 
“Person” means an individual, corporation, partnership, limited liability
company, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof, and
shall include any successor (by merger or otherwise) thereto.
 
“Registrable Securities” shall mean (a) the shares of Earthstone Common Stock
issued to Flatonia pursuant to the Flatonia Contribution Agreement and (b) any
securities issued or issuable with respect to the shares described in clause (a)
above by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization; provided, however, that as to any particular Registrable
Securities, such securities shall cease to be Registrable Securities when (i) a
registration statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
disposed of in accordance with such registration statement or (ii) such
securities shall have been sold to the public pursuant to Rule 144 (or any
successor provision) under the Securities Act.
 
“Registration Statement” means any registration statement of the Company under
the Securities Act that covers any of the Registrable Securities pursuant to the
provisions of this Agreement.
 

“Securities Act” shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
 
“Shelf Registered Securities” means any Registrable Securities whose offer and
sale is registered pursuant to a Registration Statement filed in connection with
a Shelf Registration.
 
“Stockholders” shall mean Flatonia, PRP and any Affiliates of PRP that become
holders of Registrable Securities as a result of transfers of Registrable
Securities by Flatonia, PRP or any Affiliate of PRP in accordance with
applicable securities laws.
 
 
2

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1.1  
Each of the following terms is defined in the Section set forth opposite such
term:

 
Term
 
Section
Agreement
 
Preamble
Company
 
Preamble
Demand Registration
 
2.1
Earthstone Common Stock
 
First Recital
Exchange Agreement
 
First Recital
Flatonia
 
Preamble
Flatonia Contribution Agreement
 
Third Recital
Lock-Up Period
 
9
Lock-Up Provisions
 
9
Oak Valley
 
Preamble
Oak Valley Registration Rights Agreement
 
Second Recital
Prospectus
 
2.1.5
PRP
 
Preamble
Registered Holders
 
12.1.1
Requested Shelf Registered Securities
 
3.2
Requisite Holders
 
2.1
SEC
 
2.1.4
Shares
 
2.1, 3.1 and 4.1
Shelf Public Offering
 
3.2
Shelf Public Offering Notice
 
3.2
Shelf Public Offering Request
 
3.2
Shelf Public Offering Requesting Stockholders
 
3.2
Shelf Registration
 
3.1
Tag-Along Selling Holder
 
10.1
Tag-Along Participant
 
10.1
Termination Date
 
19

 
Section 2. Demand Registration Rights.
 
2.1  
The Company hereby grants to the Stockholders, and to each of them, the right to
require, subject to the Lock-Up Provisions, the Company to use its reasonable
best efforts to cause the registration for sale in a public offering of all or a
portion of the Stockholders’ Registrable Securities in accordance with
this Section 2 (a “Demand Registration”); provided, however, that the Company
shall not have any obligation to effect more than a total of two (2) effective
Demand Registrations pursuant to this Section 2 or effect more than one (1) in
any six (6) month period. If the Company shall have received a written request
submitted by one or more Stockholders owning at least a majority of the
Registrable Securities outstanding at the time of such request (the “Requisite
Holders”) that such Stockholders desire to have the Company register Registrable
Securities for sale and specifying the number of Registrable Securities proposed
to be sold (for the purposes of this Section 2, together with the Registrable
Securities referred to in Section 2.1.2 below, “Shares”), which request shall in
no event cover Shares with less than a

 
 
3

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  $5 million estimated offering price, and the proposed plan for distribution of
the Shares, the Company will:

 
2.1.1  
Give prompt (but in any event within fifteen (15) days after the receipt of the
Requisite Holders’ notice) notice to all other Stockholders of such request and
of such other Stockholders’ rights to have their Registrable Securities included
in such Demand Registration.

 
2.1.2  
Upon the request of any such Stockholder made within fifteen (15) days after the
receipt by such Stockholder of the notice given pursuant to Section 2.1.1 (which
request shall specify the Registrable Securities intended to be included in such
Demand Registration by such Stockholder and the intended method or methods of
disposition thereof), the Company will use its reasonable best efforts to effect
the registration of all Shares which the Company has been so requested to
register pursuant to this Section 2.1.2.

 
2.1.3  
Prepare and file as soon as practicable, but in no event later than sixty
(60) days from the date notice is received from the Requisite Holders a
Registration Statement with the Securities and Exchange Commission (“SEC”) on
Form S-1, or other appropriate forms available for use by the Company, and use
its reasonable best efforts to cause such Registration Statement to become
effective in order that the Stockholders may sell the Shares in accordance with
the proposed plan of distribution.

 
2.1.4  
Prepare and file with the SEC such amendments and supplements to such
Registration Statement and the prospectus used in connection therewith including
any preliminary prospectus or supplemental or amended prospectus (the
“Prospectus”) as may be necessary to keep such Registration Statement
continuously effective and to comply with the provisions of the Securities Act
with respect to the offer of the Shares during the period required for
distribution of the Shares, which period shall not be in excess of the earlier
of (i) nine (9) months from the effective date of such Registration Statement,
and (ii) the sale or other disposition of all Shares covered by such
Registration Statement.

 
2.1.5  
Furnish to each Stockholder such number of copies of the Prospectus (including
any preliminary prospectus or supplemental or amended prospectus) as such
Stockholder may reasonably request in order to facilitate the sale and
distribution of the Shares.

 
2.2  
Notwithstanding the foregoing, if the Company shall furnish to each Stockholder
that requested such Demand Registration a certificate signed by the President of
the Company stating that, in the good faith judgment of the board of directors
of the Company, it would be detrimental to the Company and its stockholders for
such Registration Statement to be filed and it is therefore essential to defer
the filing of such Registration Statement, the Company shall have the right to
defer

 
 
4

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  such filing for a period of not more than ninety (90) days after receipt of
the request of the Requisite Holders; provided, however, that the Company may
not utilize this right (or any comparable right under the Oak Valley
Registration Rights Agreement or any other registration rights or similar
agreement) with respect to a Demand Registration request under Section 2 or any
demand registration request pursuant to the Oak Valley Registration Rights
Agreement or any such other agreement more than once in any twelve (12) month
period.

 
2.3  
The right of each Stockholder to require the Company to register Shares pursuant
to the provisions of this Section 2 shall be subject to the condition that if a
request for a Demand Registration is made within sixty (60) days prior to the
conclusion of the Company’s then current fiscal year, the Company shall have the
right to delay the filing of the Registration Statement until the Company files
with the SEC its audited financial statements for such fiscal year.

 
2.4  
If the Requisite Holders intend to distribute the Registrable Securities covered
by the notice pursuant to Section 2.1 by means of an underwriter, the Requisite
Holders shall so advise the Company as a part of the notice made pursuant to
Section 2.1 and provide the name of the managing underwriter or underwriters
that the Requisite Holders propose to engage in connection with the proposed
public offering. If the managing underwriter of such underwritten offering shall
inform the Company and the Stockholders requesting that their Shares be
registered pursuant to this Section 2 by letter of its belief that the amount of
Shares requested to be included in such registration exceeds the amount that can
be sold in (or during the time of) such offering within a price range acceptable
to the Requisite Holders, then the Company will include in such registration
such amount of Shares that the Company is so advised can be sold in (or during
the time of) such offering prorata on the basis of the amount of such Shares so
proposed to be sold and so requested to be included by the Stockholders. All
Shares requested to be included in the registration by Stockholders will be
given priority over the inclusion of shares of Earthstone Common Stock requested
for inclusion by any Additional Holders.

 
2.5  
A registration shall not be deemed to have been effected (i) unless a
Registration Statement has been declared effective by the SEC and remained
effective for the period specified in Section 2.1.5, (ii) if, after it has
become effective, such registration is terminated by a stop order, injunction or
other order of the SEC or other governmental agency or court prior to the time
period specified in Section 2.1.5, or (iii) if the conditions to closing
specified in any purchase agreement or underwriting agreement entered into in
connection with such registration are not satisfied for any reason, other than
as a result of the voluntary termination of such offering by the Requisite
Holders or any failure by the Requisite Holders to satisfy or perform the
conditions or covenants on their part to be satisfied or performed.

 
2.6  
The Stockholders acknowledge that certain Additional Holders may, subject to
compliance with the provisions of the Oak Valley Registration Rights Agreement,

 
 
5

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  have piggy-back registration rights with respect to shares of Earthstone
Common Stock owned by such Additional Holders, and the Stockholders will
cooperate with the Company and such Additional Holders in connection with the
exercise of any such piggy-back registration rights.

 
Section 3. Shelf Registration Rights.
 
3.1  
At any time after the date that is six months after the date hereof and upon
written request submitted by the Requisite Holders, (i) if the Company is
eligible to use Form S-3 in connection with a secondary public offering of its
equity securities and (ii) a Shelf Registration on a Form S-3 registering
Registrable Securities for resale is not then effective, the Company shall
(A) give written notice to all of the Stockholders as promptly as practicable
but in no event later than 15 days after the Company receives such request, and
(B) as promptly as practicable, register, under the Securities Act on Form S-3
for an offering on a delayed or continuous basis pursuant to Rule 415
promulgated under the Securities Act (a “Shelf Registration”), the offer and
sale of all of the Registrable Securities owned by the Stockholders and such
other Persons as the Company shall determine to include in the Shelf
Registration (for the purposes of this Section 3 only, such shares of Earthstone
Common Stock to be offered and sold in such Shelf Registration, including those
owned by Stockholders and those owned by Additional Holders and other Persons,
shall be the “Shelf Shares”).  The “Plan of Distribution” section of such Shelf
Registration shall permit the disposition of Shelf Shares pursuant to
firm-commitment underwritten public offerings, block trades, agented
transactions, sales directly into the market, purchases or sales by brokers and
sales not involving a public offering.  With respect to each Shelf Registration,
the Company shall (a) file a Registration Statement as promptly as practicable,
but in no event later than 20 days after receiving a request from the Requisite
Holders to file such Registration Statement, and (b) cause such Registration
Statement to remain effective until the earlier of the date (1) on which all of
the Shelf Shares covered by such Shelf Registration (except for those Shelf
Shares, if any, held by Additional Holders or other Persons) are no longer
Registrable Securities and (2) on which the Company cannot extend the
effectiveness of such Shelf Registration because it is no longer eligible for
use of Form S-3.

 
3.2  
Upon written request by Stockholders holding a majority of the Shelf Registered
Securities owned by Stockholders (such Stockholders, the “Shelf Public Offering
Requesting Stockholders”), which request (the “Shelf Public Offering Request”)
shall specify the class or series and amount of such Shelf Public Offering
Requesting Stockholders’ Shelf Registered Securities to be sold (the “Requested
Shelf Registered Securities”), the Company shall perform its obligations
hereunder with respect to the sale of such Requested Shelf Registered Securities
in the form of a firm commitment underwritten public offering (unless otherwise
consented to by the Shelf Public Offering Requesting Stockholder) (a “Shelf
Public Offering”) if the aggregate proceeds expected to be received from the
sale of the Requested Shelf Registered Securities equals or exceeds
$3 million.  Promptly upon receipt of a Shelf Public Offering Request, the
Company shall

 
 
6

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provide notice (the “Shelf Public Offering Notice”) of such proposed Shelf
Public Offering (which notice shall state the material terms of such proposed
Shelf Public Offering, to the extent known, as well as the identity of the Shelf
Public Offering Requesting Stockholders) to the other Stockholders holding Shelf
Registered Securities and to the “Stockholders” (as defined in the Oak Valley
Registration Rights Agreement) holding Shelf Registered Securities.  Such
holders of Shelf Registered Securities may, by written request to the Company
and the Shelf Public Offering Requesting Stockholders, within five (5) business
days after receipt of such Shelf Public Offering Notice, include up to all of
their Shelf Registered Securities of the same class or series as the Requested
Shelf Registered Securities in such proposed Shelf Public Offering; provided,
however, that any such Shelf Registered Securities must be sold subject to the
same terms as are applicable to the Shelf Registered Securities of the Shelf
Public Offering Requesting Stockholders.  The lead managing underwriter or
underwriters selected for such Shelf Public Offering shall be proposed by the
Shelf Public Offering Requesting Stockholders in the Shelf Public Offering
Request. The Company shall not have any obligation to effect more than a total
of five (5) underwritten Shelf take-downs at the request of any Stockholders
pursuant to this Section 3.2, to effect more than one (1) underwritten Shelf
take-down at the request of any Stockholders in any six (6) month period, or to
effect any underwritten Shelf take-down at the request of any Stockholders
within 90 days of an underwritten offering undertaken by the Company.  The
Company’s obligation to effect an underwritten Shelf take-down pursuant to this
Section 3.2 shall be subject to the ability of the Company to defer such
offering under the conditions, and subject to the terms of, Section 2.2.

 
3.3  
In a Shelf Public Offering, if the lead managing underwriter shall inform the
Company and the Shelf Public Offering Requesting Stockholders by letter of its
belief that the amount of Shelf Registered Securities requested to be included
in such Shelf Public Offering exceeds the amount that can be sold in (or during
the time of) such offering within a price range acceptable to the Shelf Public
Offering Requesting Stockholders, then the Company will include in such Shelf
Public Offering such amount of Shelf Registered Securities that the Company is
so advised can be sold in (or during the time of) such Shelf Public Offering
prorata on the basis of the amount of such Shelf Registered Securities so
proposed to be sold and so requested to be included in the Shelf Public Offering
by each Stockholder. All Shelf Registered Securities owned by Stockholders will
be given first priority in any underwritten offering prior to inclusion of any
shares of Earthstone Common Stock requested to be included pursuant to
registration rights of any other Person; provided, however, that the
“Stockholders” (as defined in the Oak Valley Registration Rights Agreement) will
be paripassu with the Stockholders; provided further that if the effect of such
paripassu treatment results in the cutback of any Shelf Registered Securities
owned by any Stockholders, then such Shelf take-down shall not count against any
of the limits contained in Section 3.2.

 
 
7

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3.4  
Notwithstanding anything to the contrary, no Shelf Registration shall be
required pursuant to this Section 3 if a Demand Registration is then in
effect.  In addition, no Shelf Registration pursuant to this Section 3 shall be
deemed a Demand Registration or be counted against the number of Demand
Registrations to which the Stockholders are entitled under Section 2.

 
Section 4. Piggy-Back Registration Rights.
 
4.1  
If, subject to the Lock-Up Provisions, the Company proposes to file, on its own
behalf or on behalf of any holder of Earthstone Common Stock or other securities
of the Company, a Registration Statement under the Securities Act on Form S-1 or
S-3 or similar forms available for use by the Company, other than pursuant
to Section 2 or Section 3 of this Agreement or on Form S-8 in connection with a
dividend reinvestment, employee stock purchase, option, equity incentive, or
similar plan or on Form S-4 in connection with a merger, consolidation or
reorganization, the Company shall give written notice to each Stockholder at
least fifteen (15) days before the filing with the SEC of such Registration
Statement. Such notice shall offer to include in such filing all or a portion of
the Registrable Securities owned by each Stockholder. If a Stockholder desires
to include all or a portion of its Registrable Securities in such Registration
Statement, it shall give written notice to the Company within five (5) business
days after the date of mailing of such offer specifying the amount of
Registrable Securities to be registered (for purposes of this Section 4,
“Piggyback Shares”). The Company shall thereupon include in such filing the
Piggyback Shares, subject to priorities in registration set forth in this
Agreement, and subject to its right to withdraw such filing, and shall use its
reasonable best efforts to effect the registration under the Securities Act of
the Piggyback Shares.

 
4.2  
The right of a Stockholder to have Piggyback Shares included in any Registration
Statement in accordance with the provisions of this Section 4 shall be subject
to the following conditions:

 
4.2.1  
The Company shall have the right to require that the Stockholder agree to
refrain from offering or selling any shares of Earthstone Common Stock that it
owns which are not included in any such Registration Statement in accordance
with this Section 4 for any reasonable time period, not to exceed one hundred
twenty (120) days, as may be specified by any managing underwriter of the
offering to which such Registration Statement relates.

 
4.2.2  
If (i) a registration pursuant to this Section 4 involves an underwritten
offering of the securities being registered to be distributed (on a firm
commitment basis) by or through one or more underwriters of recognized standing
under underwriting terms appropriate for such a transaction and (ii) the
managing underwriter of such underwritten offering shall inform the Company and
the Stockholders who have requested that their Piggyback Shares be registered
pursuant to this Section 4 by letter of its

 
 
8

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  belief that the amount of Shares requested to be included in such registration
exceeds the amount which can be sold in (or during the time of) such offering
within a price range acceptable to the Company, then the Company will include in
such registration such amount of securities which the Company is so advised can
be sold in (or during the time of) such offering as follows: first, the
securities being offered by the Company for its own account; second, the
Piggyback Shares of the Stockholders and the Additional Holders that are
requested to be included in such registration prorata on the basis of the number
of such Piggyback Shares so proposed to be sold and so requested to be included
by such Stockholders and Additional Holders; and third, the securities of the
Company, if any, proposed to be included in the registration by any other
holders of the Company’s securities, other than the Additional Holders (whether
or not such holders have contractual rights to include such securities in the
registration).

 
4.2.3  
The Company shall furnish each Stockholder with such number of copies of the
Prospectus as such Stockholder may reasonably request in order to facilitate the
sale and distribution of its Shares.

 
4.3  
Notwithstanding the foregoing, the Company in its sole discretion may determine
not to file the Registration Statement or proceed with the offering as to which
the notice specified in Section 4.1 is given without liability to the
Stockholders.

 
Section 5. Participation in Underwritten Registrations. A Stockholder may not
participate in any registration hereunder that relates to an underwritten
offering unless such Stockholder (a) agrees to sell its Shares included in such
registration on the basis provided in any underwriting arrangements approved,
with respect to offerings pursuant to Section 2 or 3, by Stockholders owning at
least a majority of the Registrable Securities to be included in such
registration, or by a Person appointed by such holders to act on their behalf to
approve such arrangements, or, with respect to offerings pursuant to Section 4,
by the Company or the other Person at whose request the registration is being
undertaken, and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements; provided, however,
that no Stockholder shall be required to make any representations or warranties
to, or agreements with, the Company or any underwriters other than such
representations, warranties or agreements as are customary and reasonably
requested by the underwriters.
 
Section 6. Exclusive Registration Rights and Transfer. The rights of Flatonia,
as the initial Stockholder under this Agreement, may upon notice to the Company
be transferred to PRP or to any Affiliate of PRP to which any Registrable
Securities are transferred in accordance with applicable law. However, the
rights of the Stockholders under this Agreement may not be assigned or
transferred otherwise without the Company’s written consent.  Except as provided
in this Section 6, the rights granted under this Agreement are granted
specifically to and for the benefit of the Stockholders and shall not pass to
any other transferee of Registrable Securities that is not an Affiliate
 
 
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of Flatonia or PRP.  From and after the date of this Agreement, the Company will
not, without the prior written consent of Stockholders holding at least a
majority of the Registrable Securities then outstanding, enter into any
agreement or amend any existing agreement with respect to its securities that
violates or is detrimental to the rights granted to the Stockholders in this
Agreement.  The foregoing shall not restrict or prevent the Company from
amending or entering into any other agreement with any party pertaining to the
registration by the Company of such party’s Earthstone Common Stock; provided,
however, that no such agreement or amendment shall grant to any Person
registration rights that are superior or preferential to the rights granted to
the Stockholders hereunder or that would otherwise frustrate the purposes of
this Agreement.  The Company, Oak Valley, PRP and Flatonia hereby agree that the
rights of Oak Valley and its permitted assigns to register Earthstone Common
Stock under the Oak Valley Registration Rights Agreement are, subject to the
provisions of this Agreement (including, without limitation, the Lock-Up
Provisions) and the Oak Valley Registration Rights Agreement, pari passu with
the rights of Flatonia and its permitted assigns to register Earthstone Common
Stock under this Agreement.  Except as set forth in Schedule 2 attached hereto,
the Company represents and warrants to the Stockholders that, as of the date
hereof, the Company is not a party to any agreement, other than this Agreement
and the Oak Valley Registration Rights Agreement, pertaining to the registration
by the Company of Earthstone Common Stock.
 
Section 7. Expenses. The Company shall bear all the expenses in connection with
any Registration Statement under this Agreement, other than transfer taxes
payable on the sale of Shares, the fees and expenses of counsel engaged by the
Stockholders and fees, commissions and discounts of brokers, dealers and
underwriters.
 
Section 8. Recall of Prospectuses, etc. With respect to a Registration Statement
or amendment thereto filed pursuant to this Agreement, if, at any time, the
Company notifies the Stockholders that an amendment to such Registration
Statement or an amendment or supplement to the prospectus included therein is
necessary or appropriate, the Stockholders will forthwith cease selling and
distributing Shares thereunder and will, upon the Company’s request, forthwith
redeliver to the Company all copies of such Registration Statement and
prospectuses then in its possession or under its control. The Company will use
its reasonable best efforts to cause any such amendment or supplement to become
effective as soon as practicable and will furnish the Stockholders with a
reasonable number of copies of such amended or supplemented prospectus (and the
period during which the Company is required to use its best efforts to maintain
such Registration Statement in effect pursuant to this Agreement will be
increased by a number of days equal to the number of days in the period from the
date on which the Stockholders were required to cease selling and distributing
Shares thereunder to the date on which the Company delivers copies of such
effective amendment or supplement to the Stockholders).
 
Section 9. Lock-Up Provisions.  Each Stockholder agrees that such Stockholder
will not, without the prior written consent of the Company, during the period
commencing on the Closing Date (as such term is defined in the Flatonia
Contribution Agreement) and ending on the one year anniversary of the Closing
Date (the “Lock-Up Period”), sell or
 
 
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transfer any Registrable Securities.  Notwithstanding the foregoing, nothing in
this Agreement shall prohibit or restrict:
 
(i)           sales or transfers of Registrable Securities to PRP or any
Affiliate of PRP, as permitted in Section 6 hereof; provided, however, that any
such acquirer or transferee shall be subject to the provisions of this
Section 9;
 
(ii)           the ability of the Stockholders to exercise their piggy-back
registration rights pursuant to Section 4 of this Agreement in connection with
the sale of Earthstone Common Stock by any “Stockholder” (as defined in the Oak
Valley Registration Rights Agreement), whether upon exercise of its own demand
registration rights, piggyback registration rights or otherwise; or
 
(iii)           the ability of the Stockholders to exercise their tag-along
rights pursuant to Section 10 of this Agreement.
 
Each Stockholder agrees to execute and deliver such other agreements as may be
reasonably requested by the Company which are consistent with the foregoing
provisions (the “Lock-Up Provisions”) or which are necessary to give further
effect thereto.
 
Section 10. Tag-Along Rights.
 
10.1  
If, during the Lock-Up Period, any “Stockholder” (as defined in the Oak Valley
Registration Rights Agreement) proposes or agrees to transfer all or a portion
of the shares of Earthstone Common Stock (including beneficial ownership with
respect thereto) held by such Person that are not sold as part of a public
offering (each such Person, a “Tag-Along Selling Holder”) to a Person that is
not an Affiliate of such Tag-Along Selling Holder, then each Stockholder will
have the right to participate in such transfer as provided herein; provided,
however, that the foregoing provisions will not apply to transfers by gift of a
de minimis number of shares to immediate family members of the transferor (or
trusts for the sole benefit of immediate family members).  Not later than thirty
(30) days prior to the consummation of any such transaction, the Tag-Along
Selling Holder will deliver or cause to be delivered a notice to each
Stockholder, which notice will specify the terms and conditions of the proposed
sale and the maximum number of shares of Earthstone Common Stock the purchaser
is willing to purchase on the same terms.  Each Stockholder will have fifteen
(15) days from the receipt of such notice in which to elect to participate in
the transfer pursuant to the rights granted herein, and each such Stockholder
who so elects to participate, together with each Tag-Along Selling Holder, will
be referred to as a “Tag-Along Participant.”  Oak Valley agrees that it will not
transfer beneficial ownership of any shares of Earthstone Common Stock prior to
the end of the Lock-Up Period unless the proposed transferee of such beneficial
ownership agrees in writing to be bound by the provisions of this Section 10,
and the parties to this Agreement agree that any purported transfer of any such
beneficial ownership not in compliance with this Section 10 will be null and
void ab initio.

 
 
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10.2  
Each Tag-Along Participant will be entitled to transfer any number of shares of
Earthstone Common Stock held by such Person up to an amount equal to the product
of (i) the maximum number of shares of Earthstone Common Stock the purchaser is
willing to purchase multiplied by (ii) the total number of shares of Earthstone
Common Stock held by such Tag-Along Participant divided by the total number of
shares of Earthstone Common Stock held by all of the Tag-Along Participants,
such product to be then rounded down to the next whole share of Earthstone
Common Stock.  If any Tag-Along Participant elects to transfer less than the
maximum number of shares of Earthstone Common Stock such Person is entitled to
transfer pursuant to the provisions of this Section 10.2, then each fully
participating Tag-Along Participant will have the right to transfer additional
shares of Earthstone Common Stock, prorata according to the respective number of
shares of Earthstone Common Stock offered in the transfer by all such fully
participating Tag-Along Participants (and further prorata if any such fully
participating Tag-Along Participant elects to transfer less than its prorata
portion of additional shares of Earthstone Common Stock, provided that such
allocation will be determined within twenty-five (25) days after the date of the
applicable notice given by the Tag-Along Selling Holder pursuant to
Section 10.1).

 
10.3  
All reasonable costs and expenses incurred by the Tag-Along Participants
pursuant to this Section 10 will be allocated prorata based upon the number of
shares of Earthstone Common Stock transferred by each Tag-Along Participant.

 
Section 11. Cooperation. The Company shall be entitled to require the
Stockholders to cooperate with the Company in connection with a registration of
Registrable Securities pursuant to this Agreement, and each Stockholder will
furnish (i) such information concerning such Stockholder as may be required by
the Company or the SEC in connection therewith and (ii) such representations,
undertakings and agreements as may be required by the SEC in connection
therewith.
 
Section 12. Registration Procedures. Upon the receipt of a request for
registration of any Registrable Securities pursuant to Section 2,  Section 3 or
Section 4 of this Agreement, the Company will use its reasonable best efforts to
effect the registration of the Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:
 
12.1.1  
Prepare and file with the SEC a Registration Statement on an appropriate form
under the Securities Act and use its reasonable best efforts to cause such
Registration Statement to become effective at the earliest practicable date,
provided that before filing a Registration Statement or prospectus or any
amendments or supplements thereto, the Company will promptly furnish to the
holders of Registrable Securities to be registered pursuant to this Agreement
(the “Registered Holders”) and the underwriters, if any, copies of all such
documents proposed to be filed, which documents will be subject to the review of
the Registered Holders and the underwriters, and the Company will not file any
Registration Statement or amendment thereto, or any prospectus or any supplement
thereto (other than

 
 
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  documents incorporated by reference) to which the Registered Holders or the
underwriters, if any, shall reasonably object in light of the requirements of
the Securities Act and any other applicable laws and regulations.

 
12.1.2  
Prepare and file with the SEC such amendments and post-effective amendments to
the Registration Statement as may be necessary to keep such Registration
Statement effective for the applicable period; cause the related prospectus to
be filed pursuant to Rule 424(b) (or any successor provision) under the
Securities Act; cause such prospectus to be supplemented by any required
prospectus supplement and, as so supplemented, to be filed pursuant to
Rule 424(b) (or any successor provision) under the Securities Act; and comply
with the provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the applicable period
in accordance with the intended methods of disposition set forth in such
Registration Statement or prospectus or supplement to such prospectus.

 
12.1.3  
Notify the Registered Holders and the managing underwriters, if any, promptly,
and (if requested by any such Person) confirm such advice in writing, (i) when a
prospectus or any prospectus supplement or post-effective amendment has been
filed, and, with respect to a Registration Statement or any post-effective
amendment, when the same has become effective, (ii) of any request by the SEC
for amendments or supplements to a Registration Statement or related prospectus
or for additional information, (iii) of the issuance by the SEC of any stop
order suspending the effectiveness of a Registration Statement or the initiation
of any proceeding for that purpose, (iv) if at any time the representations and
warranties of the Company contemplated by Section 12.1.10 cease to be true and
correct, (v) of the receipt by the Company of any notification with respect to
the suspension of qualification of any of the Registrable Securities for sale in
any jurisdiction or the initiation of any proceeding for such purpose, (vi) of
the happening of any event that requires the making of any changes in a
Registration Statement or related prospectus so that such documents will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading and (vii) of the Company’s reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate or
that there exist circumstances not yet disclosed to the public that make further
sales under such Registration Statement inadvisable pending such disclosures and
post-effective amendment.

 
12.1.4  
Make reasonable efforts to obtain the withdrawal of any order suspending the
effectiveness of a Registration Statement, or the lifting of any suspension of
the qualification of any of the Registrable Securities for sale in any
jurisdiction, as soon as practicable.

 
 
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12.1.5  
If requested by the managing underwriters or the Registered Holders in
connection with an underwritten offering, immediately incorporate in a
prospectus supplement or post-effective amendment such information as the
managing underwriters and the Registered Holders agree should be included
therein regarding the number of Registrable Securities being sold to such
underwriters and the purchase price being paid therefor by such underwriters and
with respect to any other terms of the underwritten (or best efforts
underwritten) offering of the Registrable Securities to be sold in such
offering; make all required filings of such prospectus supplement or
post-effective amendment as soon as notified of the matters to be incorporated
in such prospectus supplement or post-effective amendment; and supplement or
make amendments to any Registration Statement if requested by the Registered
Holders or any underwriter of such Registrable Securities.

 
12.1.6  
If requested, furnish to the Registered Holders and each managing underwriter,
if any, without charge, at least one signed copy of the Registration Statement,
any post-effective amendment thereto, including financial statements and
schedules, all documents incorporated therein by reference and all exhibits
(including those incorporated by reference).

 
12.1.7  
Deliver without charge to the Registered Holders and the underwriters, if any,
as many copies of the prospectus or prospectuses (including each preliminary
prospectus) and any amendment or supplement thereto as such Persons may
reasonably request; and the Company consents to the use of such prospectus or
any amendment or supplement thereto by such Registered Holders and the
underwriters, if any, in connection with the offer and sale of the Registrable
Securities covered by such prospectus or any amendment or supplement thereto.

 
12.1.8  
Prior to any public offering of Registrable Securities, register or qualify or
cooperate with the Registered Holders, the underwriters, if any, and respective
counsel in connection with the registration or qualification of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions as the Registered Holders or an underwriter reasonably requests in
writing; keep each such registration or qualification effective during the
period the Registration Statement is required to be kept effective and do any
and all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by the applicable
Registration Statement; provided, however, that the Company will not be required
in connection therewith or as a condition thereto to qualify generally to do
business or subject itself to general service of process in any such
jurisdiction where it is not then so subject.

 
12.1.9  
Upon the occurrence of any event contemplated by Section 12.1.3(ii)-(vii) above,
prepare, to the extent required, a supplement or post-effective

 
 
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  amendment to the applicable Registration Statement or related prospectus or
any document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchaser of the Registrable
Securities being sold thereunder, such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.

 
12.1.10  
If the Registrable Securities to be covered by such registration are to be
offered in an underwritten offering: (i) make such representations and
warranties to the Registered Holders as to the Registration Statement,
prospectus and documents incorporated by reference, if any, in form, substance
and scope as are customarily made by issuers to underwriters in underwritten
offerings and confirm the same if and when requested; (ii) obtain opinions of
counsel to the Company and updates thereof with respect to the Registration
Statement and the prospectus in the form, scope and substance that are
customarily delivered in underwritten offerings; (iii) enter into an
underwriting agreement in form, scope and substance as is customary in
underwritten offerings; (iv) obtain comfort letters and updates thereof from the
Company’s independent certified public accountants addressed to the Registered
Holders and the underwriters, if any, such letters to be in customary form and
covering matters of the type customarily covered in comfort letters by
accountants in connection with underwritten offerings; (v) cause the
underwriting agreement to include indemnification provisions and procedures
customarily included in underwriting agreements in underwritten offerings; and
(vi) the Company shall deliver such documents and certificates as may be
requested by the Registered Holders and the managing underwriters, if any, to
evidence compliance with clause (i) above and with any customary conditions
contained in the underwriting agreement or other agreement entered into by the
Company. The above shall be done at each closing under such underwriting or
similar agreement or as and to the extent required thereunder.

 
12.1.11  
Make available for inspection by a representative of the Registered Holders, any
underwriter participating in any disposition pursuant to such registration, and
any attorney or accountant retained by the Registered Holders or such
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company’s officers, directors and
employees to supply all information reasonably requested by any such
representative, underwriter, attorney or accountant in connection with such
registration; provided, however, that any records, information or documents that
are designated by the Company in writing as confidential shall be kept
confidential by such Persons unless disclosures of such records, information or
documents is required by court or administrative order.

 
 
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12.1.12  
Otherwise use its reasonable best efforts to comply with all applicable rules
and regulations of the SEC and make generally available to its security holders
earning statements satisfying the provisions of Section 11(a) of the Securities
Act and Rule 158 thereunder, no later than 90 days after the end of any 12-month
period (i) commencing at the end of any fiscal quarter in which Registrable
Securities are sold to underwriters in a firm or best efforts underwritten
offering and (ii) beginning with the first day of the Company’s first fiscal
quarter next succeeding each sale of Registrable Securities after the effective
date of a Registration Statement, which statements shall cover said 12-month
periods, and which requirement shall be satisfied if the Company timely files
complete and accurate information on Forms 10-Q, 10-K and 8-K under the Exchange
Act.

 
12.1.13  
Use its reasonable best efforts to list all Registrable Securities covered by
the Registration Statement on the NYSE MKT and any other securities exchange or
trading market on which any of the equity securities of the Company of the same
class as the Registrable Securities are then listed.

 
12.1.14  
At all times during the term of this Agreement, maintain the effectiveness of
the registration of the Registrable Securities under the Exchange Act and use
its reasonable best efforts to prepare and file in a timely manner all documents
and reports required by the Exchange Act.

 
12.1.15  
If the Company, in the exercise of its reasonable judgment, objects to any
change requested by the Registered Holders or the underwriters, if any, to any
Registration Statement or prospectus or any amendments or supplements thereto
(including documents incorporated or to be incorporated therein by reference) as
provided for in this Section12, the Company shall not be obligated to make any
such change and such Registered Holders may withdraw their Registrable
Securities from such registration, in which event (i) the Company shall pay all
registration expenses (including its counsel fees and expenses) incurred in
connection with such Registration Statement or amendment thereto or prospectus
or supplement thereto, and (ii) in the case of a Demand Registration being
effected pursuant to Section 2, such registration shall not count as one of the
Demand Registrations the Company is obligated to effect pursuant to Section 2.

 
Section 13. Indemnification.
 
13.1  
In the event of any registration of any securities under the Securities Act
pursuant to this Agreement, the Company will indemnify and hold harmless the
Stockholders, any underwriter and each other Person, if any, who controls a
Stockholder or underwriter within the meaning of the Securities Act, and the
respective officers, directors, partners, managers, members and employees of
such Stockholders, underwriters and controlling Persons, from and against any
and all

 
 
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   losses, claims, damages or liabilities, joint or several, to which any such
indemnified Person may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or action in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in a Registration Statement or
preliminary prospectus or final or summary prospectus contained therein, or any
amendment or supplement thereto, and any other document prepared by the Company
and provided to Registered Holders for their use in connection with the
registered offering, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements made therein (in the case of a prospectus or
preliminary prospectus, in light of the circumstances under which they were
made) not misleading, and will reimburse such indemnified Persons for any
reasonable legal and other expenses incurred by them in connection with
investigating or defending any such action or claim, excluding any amounts paid
in settlement of any litigation, commenced or threatened, if such settlement is
effected without the prior written consent of the Company; provided, however,
that the Company will not be liable to an indemnified Person in any such case to
the extent that any such loss, claim, damage, liability or expense arises out of
or is based upon an untrue statement or omission or alleged untrue statement or
omission made in a Registration Statement, preliminary prospectus or final or
summary prospectus or any amendment or supplement thereto or other document, in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of such indemnified Person, specifically for use in the
preparation thereof; and provided further that the indemnity agreement contained
in this Section 13 with respect to any preliminary prospectus shall not inure to
the benefit of any indemnified Person using the same in respect of any loss,
claim, damage, liability or action asserted by someone who purchased shares from
such Person if a copy of an amended preliminary prospectus or prospectus
supplement was delivered by the Company to the Registered Holders and the
underwriters, if any, prior to the pricing of the sale of the securities (if an
underwritten offering) or prior to the effectiveness of the Registration
Statement, but was not delivered to the purchaser of the securities from the
indemnified Person, and the untrue statement or omission or alleged untrue
statement or omission of a material fact contained in such preliminary
prospectus was corrected in the amended preliminary prospectus or prospectus
supplement.

 
13.2  
In the event of any registration of securities under the Securities Act pursuant
to this Agreement, the Registered Holders, severally and not jointly, will
indemnify and hold harmless the Company, each of its directors and officers, any
underwriter and each other Person, if any, who controls the Company or such
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities to which any such indemnified Person may become
subject, under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or action in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in such Registration Statement or preliminary prospectus or final or
summary prospectus

 
 
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  contained therein, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements made therein
(in the case of a prospectus or preliminary prospectus, in light of the
circumstances under which they were made) not misleading, and will reimburse
such indemnified Persons for any reasonable legal and other expenses incurred by
them in connection with investigating or defending any such action or claim,
excluding any amounts paid in settlement of any litigation, commenced or
threatened, if such settlement is effected without the prior written consent of
the indemnifying Registered Holder; but in all cases only if, and to the extent
that any such loss, claim, damage, liability or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission therein made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the indemnifying
Registered Holder specifically for use in the preparation thereof.
Notwithstanding the foregoing, the amount of the indemnity provided by each
Registered Holder pursuant to this Section 13 shall not exceed the net proceeds
received by such Registered Holder in the related registration and sale.  Each
Registered Holder’s indemnification pursuant to this Section 13 is several in
the proportion that the proceeds of the offering received by such Registered
Holder bears to the total proceeds of the offering received by all such
Registered Holders and not joint.

 
13.3  
Promptly after receipt by a party entitled to indemnification under Section 13.1
or 13.2 hereof of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the indemnifying
party under either of such Sections, notify the indemnifying party in writing of
the commencement thereof. In case any such action is brought against the
indemnified party and it shall so notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it so chooses, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party, and, after notice
from the indemnifying party that it so chooses, such indemnifying party shall
not be liable for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof; provided, however,
that if the indemnifying party fails to take reasonable steps necessary to
diligently defend such claim within twenty (20) days after receiving notice from
the indemnified party that the indemnified party believes the indemnifying party
has failed to take such steps, the indemnified party may assume its own defense
and the indemnifying party shall be liable for any expenses therefor. The
indemnity and contribution agreements in this Section 13 are in addition to any
liabilities which the indemnifying parties may have pursuant to law.

 
13.4  
If the indemnification provided for in this Section 13 from the indemnifying
party is unavailable to an indemnified party hereunder in respect of any losses,
claims, damages, liabilities or expenses referred to herein, or is insufficient
to hold the indemnified party harmless therefrom, then the indemnifying party,
in lieu of indemnifying such indemnified party, shall contribute to the amount
paid or

 
 
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  payable by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and indemnified parties in connection
with the actions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
fault of such indemnifying party and indemnified parties shall be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or relates to information
supplied by, such indemnifying party or indemnified parties, and the parties’
relative intent, knowledge, access to information and opportunity to correct or
prevent such action. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in this
Section 13, any legal or other fees or expenses reasonably incurred by such
party in connection with any investigation or proceeding.  Notwithstanding the
foregoing, the amount of the contribution required to be paid by each Registered
Holder pursuant to this Section 13.4 shall not exceed the net proceeds received
by such Registered Holder in the related registration and sale.  Each Registered
Holder’s obligation to contribute pursuant to this Section 13.4 is several in
the proportion that the proceeds of the offering received by such Registered
Holder bears to the total proceeds of the offering received by all such
Registered Holders and not joint.

 
The parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 13 were determined by prorata allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
 
Section 14. Sales under Rule 144. With a view to making available to the
Stockholders the benefits of Rule 144 promulgated under the Securities Act and
any other similar rule or regulation of the SEC that may at any time permit the
Stockholders to sell the Registrable Securities without registration, the
Company agrees to:
 
14.1  
make and keep available adequate current public information, as those terms are
understood and defined in Rule 144 (or any successor provision);

 
14.2  
use reasonable best efforts to file with the SEC in a timely manner all reports
and other documents required to be filed by the Company under the Securities Act
and the Exchange Act; and

 
14.3  
furnish to any Stockholder forthwith upon request (i) a written statement by the
Company that it has complied with the foregoing requirements and (ii) such other
information as may be reasonably requested by Stockholder in availing itself of
any rule or regulation of the SEC that permits the selling of any such
securities without registration.

 
 
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Section 15. Removal of Legend. The Company agrees, to the extent allowed by law,
to remove any legends on certificates representing Registrable Securities
describing transfer restrictions applicable to such securities (i) upon the sale
of such securities pursuant to an effective Registration Statement under the
Securities Act or in accordance with the provisions of Rule 144 under the
Securities Act, or (ii) upon the written request of any holder of Registrable
Securities if such securities may then be sold without restriction under Rule
144.
 
Section 16. Notices. Any notice to be given by any party hereunder to any other
shall be in writing, mailed by certified or registered mail, return receipt
requested, or via overnight delivery service and shall be addressed to the other
parties at the addresses listed on the signature pages hereof. Notice shall be
deemed effective upon receipt or refusal.
 
Section 17. Modification. Notwithstanding anything to the contrary in this
Agreement or otherwise, no modification, amendment or waiver of any of the
provisions of this Agreement shall be effective unless in writing and signed by
the Company and the Stockholders holding not less than 75% of the Registrable
Securities then outstanding. Any such modification, amendment or waiver shall be
binding on all holders of Registrable Securities and all Persons who may
thereafter acquire any Registrable Securities.
 
Section 18. Non-Waiver. The failure to enforce at any time any of the provisions
of this Agreement, or to require at any time performance by any other party of
any of the provisions hereof, shall in no way be construed to be a waiver of
such provisions.
 
Section 19. Partial Invalidity. If any clause, sentence, paragraph, section or
part of this Agreement shall be deemed invalid, unenforceable or against public
policy, the part that is invalid, unenforceable or contrary to public policy
shall not affect, impair, invalidate or nullify the remainder of this Agreement,
but the invalidity, unenforceability or contrariness to public policy shall be
confined only to the clause, sentence, paragraph, section or part of this
Agreement so invalidated, unenforceable or against public policy.
 
Section 20. Termination of Registration Right. No Stockholder shall be entitled
to exercise any right provided for in this Agreement after the third anniversary
of the Closing of the transactions contemplated by the Contribution Agreement
(the “Termination Date”). Notwithstanding any other provision of this Agreement
to the contrary, the registration rights granted under Section 2 and Section 3
will terminate prior to the Termination Date as to any Stockholder upon the
first day the Stockholder is able to sell all of the Registrable Securities
owned by such Holder under Rule 144 within any given three-month period.
 
Section 21. Construction. The language in all parts of this Agreement shall in
all cases be construed simply, according to its fair meaning, and shall not be
construed strictly for or against either of the parties hereto.
 
 
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Section 22. Governing Law. This Agreement shall be governed and construed
according to the laws of the State of Delaware, without regard to its conflicts
of law principles.
 
Section 23. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute but one and the same instrument.
 
Section 24. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.
 
Section 25. Specific Performance. The parties agree that, to the extent
permitted by law, (i) the obligations imposed on them in this Agreement are
special, unique and of an extraordinary character, and that in the event of a
breach by any such party damages would not be an adequate remedy and (ii) the
other party shall be entitled to specific performance and injunctive and
equitable relief in addition to any other remedy to which it may be entitled at
law or in equity.
 
[Signature Pages Follow]
 
 
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
 
EARTHSTONE ENERGY, INC.
 
By: _______________________________
Name:  ____________________________
Title: ____________________________
 
Address for Notice:
 
Earthstone Energy, Inc.
633 Seventeenth Street, Suite 2320
Denver, Colorado 80202
Attention: Chief Executive Officer
Fax: (303) 773-8099
 
 
FLATONIA ENERGY, LLC
 
By:_________________________________
Name: John K. Howie
Title: President
 
 
PARALLEL RESOURCE PARTNERS, LLC
 
By:_________________________________
Name: John K. Howie
Title: Managing Director
 
Address for Notice to Flatonia and PRP:
 
Parallel Resource Partners, LLC
700 Louisiana St., 50th Floor
Houston, TX 77002
Attn:  John Howie, Managing Director
Fax:
 
With a copy (which shall not constitute notice) to:
 
Sidley Austin LLP
1000 Louisiana St., Suite 6000
 
 
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Houston, TX 77002
Attn:  J. Mark Metts
Fax:  (713) 495-7799
 
SOLELY FOR THE PURPOSE OF SECTIONS 6 AND 10:
 
OAK VALLEY RESOURCES, LLC
 
By: _______________________________
Name: ____________________________
Title: ____________________________
 

 
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Schedule 1
 
Securities to be Acquired by Oak Valley Resources, LLC pursuant to the Exchange
Agreement
 
1.           [9,124,452] shares of Earthstone Common Stock, $0.001 par value per
share.
 
Securities to be Acquired by Flatonia Energy, LLC pursuant to the Flatonia
Contribution Agreement
 
1.           [2,957,304] shares of Earthstone Common Stock, $0.001 par value per
share.
 

 
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Schedule 2
 
Other Agreements Pertaining to Registration of Common Stock
 
None
 

 

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