Exhibit 10.1
PURCHASE AND SALE AGREEMENT
between
THE HOUSTON EXPLORATION COMPANY
as Seller
and
MERIT MANAGEMENT PARTNERS I, L.P., MERIT MANAGEMENT PARTNERS II,
L.P., MERIT MANAGEMENT PARTNERS III, L.P., MERIT ENERGY PARTNERS III,
L.P., MERIT ENERGY PARTNERS D-III, L.P., MERIT ENERGY PARTNERS E-III,
L.P. AND MERIT ENERGY PARTNERS F-III, L.P.
as Buyer
Dated
February 28, 2006

 

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TABLE OF CONTENTS

                      Page   ARTICLE I DEFINITIONS AND INTERPRETATION     1  
1.1
  Defined Terms     1  
1.2
  References     12  
1.3
  Articles     12  
1.4
  Number and Gender     12  
 
            ARTICLE II PURCHASE AND SALE     13  
2.1
  Purchase and Sale     13  
2.2
  Excluded Assets     14  
2.3
  Revenues and Expenses     14  
 
            ARTICLE III PURCHASE PRICE     14  
3.1
  Purchase Price     14  
3.2
  Deposit     15  
3.3
  Adjustments to Purchase Price     15  
3.4
  Adjustment Methodology     17  
3.5
  Preliminary Settlement Statement     17  
3.6
  Final Settlement Statement     18  
3.7
  Disputes     18  
3.8
  Allocation of Purchase Price / Allocated Values     19  
3.9
  Interim Settle Up     19  
 
            ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER     19  
4.1
  Organization, Existence     19  
4.2
  Authorization     19  
4.3
  No Conflicts     20  
4.4
  Consents     20  
4.5
  Litigation     20  
4.6
  Material Contracts     20  
4.7
  No Violation of Laws     20  
4.8
  Insurance     20  
4.9
  Hurricane Damage     21  
4.10
  Wells     21  
4.11
  Preferential Rights     21  
4.12
  Royalties, Etc     21  
4.13
  Personal Property     21  
4.14
  Current Commitments     21  
4.15
  Environmental     21  
4.16
  Production Taxes     22  
4.17
  Brokers’ Fees     22  
4.18
  Accuracy of Data     22  
4.19
  Affiliated Contracts     22  

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                      Page  
4.20
  Sales Contracts     22  
4.21
  Hedging     23  
4.22
  Limitations     23  
 
            ARTICLE V BUYER’S REPRESENTATIONS AND WARRANTIES     23  
5.1
  Organization; Existence     23  
5.2
  Authorization     23  
5.3
  No Conflicts     23  
5.4
  Consents     23  
5.5
  Bankruptcy     24  
5.6
  Litigation     24  
5.7
  Financing     24  
5.8
  Regulatory     24  
5.9
  Independent Evaluation     24  
5.10
  Brokers’ Fees     24  
5.11
  NORM, Wastes and Other Substances     24  
 
            ARTICLE VI COVENANTS     25  
6.1
  Conduct of Business     25  
6.2
  HSR Act     26  
6.3
  Bonds, Letters of Credit and Guarantees     26  
6.4
  Cooperation with Seller Retained Litigation, Etc     26  
6.5
  Cooperation with Respect to Insurance Claims     26  
6.6
  Plugging, Abandonment, Decommissioning and Other Costs     27  
6.7
  Record Retention     27  
6.8
  Notifications     27  
 
            ARTICLE VII BUYER’S CONDITIONS TO CLOSING     27  
7.1
  Representations     27  
7.2
  Performance     28  
7.3
  No Legal Proceedings     28  
7.4
  Title Defects and Environmental Defects     28  
7.5
  HSR Act     28  
 
            ARTICLE VIII SELLER’S CONDITIONS TO CLOSING     28  
8.1
  Representations     28  
8.2
  Performance     28  
8.3
  No Legal Proceedings     28  
8.4
  Title Defects and Environmental Defects     29  
8.5
  HSR Act     29  
8.6
  Replacement Bonds, Letters of Credit and Guarantees     29  
8.7
  Insurance     29  
 
            ARTICLE IX CLOSING     29  
9.1
  Date of Closing     29  
9.2
  Place of Closing     29  
9.3
  Closing Obligations     29  

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                      Page  
9.4
  Records     31  
 
            ARTICLE X ACCESS/DISCLAIMERS     31  
10.1
  Access     31  
10.2
  Confidentiality     33  
10.3
  Disclaimers     33  
 
            ARTICLE XI TITLE MATTERS; CASUALTIES; TRANSFER RESTRICTIONS     34  
11.1
  Seller’s Title     34  
11.2
  Notice of Title Defects; Defect Adjustments     34  
11.3
  Casualty or Condemnation Loss     39  
11.4
  Preferential Purchase Rights and Consents to Assign     40  
 
            ARTICLE XII ENVIRONMENTAL MATTERS     42  
12.1
  Environmental Defects     42  
12.2
  NORM, Wastes and Other Substances     42  
 
            ARTICLE XIII ASSUMPTION; INDEMNIFICATION; SURVIVAL     45  
13.1
  Assumption of Obligations by Buyer     45  
13.2
  Indemnities of Seller     45  
13.3
  Indemnities of Buyer     46  
13.4
  Express Negligence     46  
13.5
  Indemnification Procedures     46  
13.6
  Survival     48  
13.7
  Non Compensatory Damages     49  
13.8
  Disclaimer of Application of Anti Indemnity Statutes     49  
13.9
  Buyer Credit Support     49  
 
            ARTICLE XIV TERMINATION, DEFAULT AND REMEDIES     50  
14.1
  Right of Termination     50  
14.2
  Effect of Termination     50  
 
            ARTICLE XV MISCELLANEOUS     50  
15.1
  Exhibits and Schedules     50  
15.2
  Expenses and Taxes     51  
15.3
  Assignment     51  
15.4
  Preparation of Agreement     52  
15.5
  Publicity     52  
15.6
  Notices     52  
15.7
  Removal of Name     53  
15.8
  Further Cooperation     53  
15.9
  Filings, Notices and Certain Governmental Approvals     53  
15.10
  Entire Agreement; Conflicts     53  
15.11
  Parties in Interest     54  
15.12
  Amendment     54  
15.13
  Waiver; Rights Cumulative     54  
15.14
  Governing Law; Jurisdiction, Venue; Jury Waiver     54  

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                      Page  
15.15
  Severability     54  
15.16
  Counterparts     55  
15.17
  Like Kind Exchange     55  
15.18
  Certain Governmental Approvals     55  
15.19
  Adequacy of Supplemental Bonds or Arrangements for the Pledge of Securities  
  56  
15.20
  Special Offshore Interests     57  

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EXHIBITS AND SCHEDULES

     
Exhibits
   
 
   
 
   
Exhibit A
  Well (WI/NRI), Encumbrances
Exhibit B
  Form of Bill of Sale
Exhibit C
  Form of Assignment of Record Title to Oil and Gas Lease
Exhibit D
  Form of Assignment of Oil and Gas Lease Operating Rights
Exhibit E
  Form of Assignment of Right of Way
Exhibit F
  Form of Assignment of Contract Rights
Exhibit G
  Form of Title Indemnity Agreement
Exhibit H
  Form of Access Agreement
 
   
Schedules
   
 
   
Schedule 1.1(j)
  Contested Mechanics’ or Similar Liens
Schedule 1.1(k)
  Contested Liens Under Leases or Operating Agreements
Schedule 2.1(i)
  Excluded Geologic Data
Schedule 3.3
  Oil and Gas Imbalances
Schedule 3.8
  Allocated Values
Schedule 4.4
  Consents
Schedule 4.5
  Litigation
Schedule 4.6
  Material Contracts
Schedule 4.7
  Violation of Laws
Schedule 4.8
  Insurance
Schedule 4.9
  Hurricane Damage
Schedule 4.10
  Wells
Schedule 4.11
  Preferential Rights
Schedule 4.13
  Personal Property
Schedule 4.14
  AFEs
Schedule 4.15
  Environmental
Schedule 4.16
  Production Taxes
Schedule 4.20
  Sales Contracts
Schedule 6.1
  Conduct of Business
Schedule 13.1
  Retained Litigation

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PURCHASE AND SALE AGREEMENT
     THIS PURCHASE AND SALE AGREEMENT (as may be amended, restated, supplemented
or otherwise modified from time to time, the “Agreement”) is executed this 28th
day of February, 2006, between The Houston Exploration Company, a Delaware
corporation (“Seller”), and Merit Management Partners I, L.P., Merit Management
Partners II, L.P., Merit Management Partners III, L.P., Merit Energy Partners
III, L.P., Merit Energy Partners D-III, L.P., Merit Energy Partners E-III, L.P.
and Merit Energy Partners F-III, L.P., all Delaware limited partnerships
(collectively, “Buyer”).
Recitals:
     Seller desires to sell and convey, and Buyer desires to purchase and pay
for, the Assets (as hereinafter defined) effective as of the Effective Time (as
hereinafter defined).
     NOW, THEREFORE, for and in consideration of the mutual promises contained
herein, the benefits to be derived by each party hereunder, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Seller and Buyer agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
     1.1 Defined Terms. In addition to the terms defined in the introductory
paragraph and elsewhere in this Agreement, for purposes hereof, the following
expressions and terms shall have the meanings set forth in this Article I,
unless the context otherwise requires:
     “Access Agreement” shall have the meaning set forth in Section 12.1(b)(iv).
     “Accounting Arbitrator” shall have the meaning set forth in Section 3.7.
     “Adjusted Purchase Price” shall have the meaning set forth in Section 3.3.
     “AFEs” shall have the meaning set forth in Section 4.14.
     “Affected Well” shall have the meaning set forth in Section 11.2(g)(v).
     “Affiliate” shall mean any Person that, directly or indirectly, through one
or more intermediaries, controls or is controlled by or is under common control
with, another Person. The term “control” and its derivatives 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.
     “Aggregate Deductible” shall mean $4,000,000.
     “Agreement” shall have the meaning set forth in the first paragraph herein.

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     “Allocated Value,” with respect to any Asset, means the amount set forth on
Schedule 3.8 for such Asset.
     “Applicable Contracts” means all Contracts by which the Properties and
other Assets are bound or that primarily relate to the Properties or other
Assets and (in each case) that will be binding on the Assets or Buyer after the
Closing, including, without limitation; farmin and farmout agreements;
bottomhole agreements; crude oil, condensate and natural gas purchase and sale,
gathering, transportation and marketing agreements; hydrocarbon storage
agreements; acreage contribution agreements; operating agreements; balancing
agreements; pooling declarations or agreements; unitization agreements;
processing agreements; saltwater disposal agreements; facilities or equipment
leases; crossing agreements; letters of no objection; platform use agreements;
production handling agreements; and other similar contracts and agreements, of
Seller and primarily related to the Properties or other Assets, but exclusive of
any master service agreements.
     “Assets” shall have the meaning set forth in Section 2.1.
     “Assignments” means the Assignments of Record Title to Oil and Gas
Lease(s), substantially in the form attached as Exhibit C, the Assignments of
Oil and Gas Lease(s) Operating Rights, substantially in the form attached as
Exhibit D, the Assignments of Rights of Way, substantially in the form attached
as Exhibit E and assignments of Seller’s rights, obligations and interests in
all contracts and agreements transferred to Buyer in this transaction, including
the operating agreements and other contracts described on Exhibit A,
substantially in the form of Exhibit F.
     “Assumed Obligations” shall have the meaning set forth in Section 13.1.
     “Buyer” shall have the meaning set forth in the first paragraph of this
Agreement.
     “Buyer Indemnified Parties” shall have the meaning set forth in
Section 13.2.
     “Buyer’s Representatives” shall have the meaning set forth in
Section 10.1(a).
     “Claim” shall have the meaning set forth in Section 13.5(c).
     “Claim Notice” shall have the meaning set forth in Section 13.5(c).
     “Closing” shall have the meaning set forth in Section 9.1.
     “Closing Date” shall have the meaning set forth in Section 9.1.
     “Code” means the Internal Revenue Code of 1986, as amended.
     “Confidentiality Agreement” shall mean that certain Confidentiality
Agreement between Merit Energy Company and Wachovia Securities dated December 7,
2005.
     “Contract” means any written contract, agreement, lease, license or other
legally binding arrangement of Seller insofar only as same relates or pertains
to the Assets, excluding, however,

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any (a) Lease, easement, right-of-way, permit or other instrument creating or
evidencing an interest in the Assets or a real or immovable property related to
or used in connection with the operations of any Assets and (b) master service
agreement.
     “Cure Period” shall have the meaning set forth in Section 11.2(c).
     “Customary Post-Closing Consents” shall mean the consents and approvals for
the assignment of the Assets to Buyer that are customarily obtained after the
assignment of properties similar to the Assets.
     “Defective Support Property” shall have the meaning set forth in
Section 11.2(g)(v).
     “Defensible Title” shall mean such title of Seller with respect to the
Assets that:
     (i) with respect to each Well (or the specified zone(s) therein) shown in
Exhibit A, entitles Seller as of the Effective Time to receive the Net Revenue
Interest shown in Exhibit A for such Well (or the specified zone(s) therein)
throughout the duration of the productive life of such Well (or the specified
zone(s) therein), except for (A) decreases in connection with those operations
in which Seller may be a non-consenting co-owner to the extent identified on
Exhibit A, (B) decreases resulting from the establishment or amendment of pools
or units, (C) decreases required to allow other working interest owners to make
up past underproduction or pipelines to make up past under deliveries (which are
covered in Section 3.3), and (D) as otherwise stated in Exhibit A;
     (ii) with respect to each Well (or the specified zone(s) therein) shown in
Exhibit A, obligates Seller as of the Effective Time to bear the Working
Interest shown in Exhibit A for such Well (or the specified zone(s) therein) not
greater than the Working Interest shown in Exhibit A for such Well (or the
specified zone(s) therein) without increase throughout the productive life of
such Well (or the specified zone(s) therein), except (A) increases resulting
from contribution requirements with respect to defaulting co-owners under
applicable operating agreements or applicable Law, (B) increases to the extent
that they are accompanied by a proportionate increase in Seller’s Net Revenue
Interest and (C) as otherwise stated in Exhibit A; and
     (iii) is free and clear of all Encumbrances, other than Permitted
Encumbrances.
     “Deposit” shall have the meaning set forth in Section 3.2.
     “Dispute Notice” shall have the meaning set forth in Section 3.6.
     “DOJ” shall mean the Department of Justice.
     “Effective Time” shall mean 7:00 a.m. (Central Standard Time) on January 1,
2006.
     “Encumbrance” shall mean any lien, security interest, pledge, charge or
encumbrance.
     “Environmental Arbitrator” shall have the meaning set forth in
Section 12.1(e).

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     “Environmental Claim Date” shall have the meaning set forth in
Section 12.1(a).
     “Environmental Condition” shall mean (a) a condition existing on the date
of this Agreement with respect to the air, soil, subsurface, surface waters,
ground waters and/or sediments that causes an Asset (or Seller with respect to
an Asset) not to be in compliance with any Environmental Law or (b) the
existence as of the date of this Agreement with respect to the Assets or their
operation of any environmental pollution or contamination caused by or related
to any Asset for which remedial or corrective action is presently required (or
if known, would be presently required) under Environmental Laws.
     “Environmental Defect Notice” shall have the meaning set forth in
Section 12.1(a).
     “Environmental Laws” means all applicable Laws in effect as of the date of
this Agreement relating to the protection of the environment, including, without
limitation, those laws relating to the storage, handling, generation,
processing, treatment, storage, transportation, disposal or other management of
Hazardous Substances.
     “Excluded Assets” shall mean all assets of Seller and its Subsidiaries
other than the Assets expressly set forth in Section 2.1 hereof. Excluded Assets
shall include, without limitation, (a) all of Seller’s corporate minute books,
financial records and other business records that relate to Seller’s business
generally (including the ownership and operation of the Assets); (b) all trade
credits, all accounts, receivables and all other proceeds, income or revenues
attributable to the Assets with respect to any period of time prior to the
Effective Time to the extent they arise by the first anniversary of the Closing
Date; it being understood that following such anniversary, they shall be the
property of Buyer; (c) all claims and causes of action of Seller arising under
or with respect to any Contracts that are attributable to periods of time prior
to the Effective Time to the extent they arise by the first anniversary of the
Closing Date, except that any claims or causes of action for indemnification,
contribution, breach of contract or duty or similar rights shall continue to be
Excluded Assets during the period for which Seller is responsible for the
related liabilities in the definition of Excluded Liabilities; it being
understood that following such time, they shall be the property of Buyer;
(d) all rights and interests of Seller (A) under any agreement of indemnity,
(B) under any bond or (C) to any insurance or condemnation proceeds or awards
(except with respect to damage from Hurricane Rita and Katrina as set forth in
Section 2.1(d)) arising, in each case, from acts, omissions or events or damage
to or destruction of property with respect to all periods prior to the Effective
Time; (e) all Hydrocarbons produced and sold from the Properties with respect to
all periods prior to the Effective Time; (f) all claims of Seller for refunds of
or loss carry forwards with respect to (A) production or any other taxes
attributable to any period prior to the Effective Time, (B) income or franchise
taxes or (C) any taxes attributable to the Excluded Assets; (g) all personal
computers and associated peripherals and all radio and telephone equipment;
(h) all of Seller’s proprietary and other computer software, patents, trade
secrets, copyrights, names, trademarks, logos and other intellectual property;
(i) all documents and instruments of Seller that may be protected by an
attorney-client privilege; (j) all data that cannot be disclosed to Buyer as a
result of confidentiality arrangements under agreements with Third Parties;
(k) all audit rights as to Third Parties arising (A) under any of the Applicable
Contracts or otherwise with respect to any period prior to the Effective Time to
the extent they arise by the first anniversary of the Closing Date; it being
understood that following such anniversary, they shall be the property of Buyer
or (B) with

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respect to any of the Excluded Assets; (l) all Seismic Data (except to the
extent that it becomes Geologic Data); (m) documents prepared or received by
Seller with respect to (A) lists of prospective purchasers of the Assets
compiled by Seller or its representatives or advisors, (B) bids submitted by
other prospective purchasers of the Assets, (C) analyses by Seller of any bids
submitted by any prospective purchaser, (D) correspondence between or among
Seller, its respective representatives and any prospective purchaser other than
Buyer and (E) correspondence between Seller or any of its respective
representatives with respect to any of the bids, the prospective purchasers or
the transactions contemplated by this Agreement or any similar agreement; and
(n) any offices, office leases or personal property located on such sites that
are not directly related to any one or more of the Assets.
Seller and Buyer recognize that the Excluded Assets may include automation
equipment or telemetry equipment that is critical to the operation of some of
the Assets. Seller and Buyer recognize that it is not the intent hereof to
damage the value of any Asset through the exclusion of such equipment and in the
event of the existence of essential equipment, the parties will enter into an
agreement that will preserve the value of such Assets.
     “Excluded Liabilities” shall mean all obligations and liabilities of Seller
to the extent they are:
     (i) Operating Expenses attributable to or arising out of the ownership, use
or operation of the Assets (except insofar as they are attributable or related
to Environmental Conditions) prior to the Effective Time (it being agreed that
such obligations or liabilities which are of a continuous or ongoing nature and
extend over the Effective Time shall be apportioned between Seller and Buyer on
the basis of the respective obligations or liabilities suffered before or after
the Effective Time) to the extent they arise by the first anniversary of the
Closing Date;
     (ii) attributable to or arise out of the off-site disposal of Hazardous
Substances prior to the Effective Time to the extent they arise by the first
anniversary of the Closing Date;
     (iii) attributable to bodily injury and death, personal injury, illness,
disease, maintenance, cure, wrongful death, loss of support arising prior to the
Effective Time (whether arising out of environmental matters or otherwise) to
the extent they arise by the second anniversary of the Closing Date;
     (iv) attributable to or arise out of the ownership, use or operation of the
Excluded Assets by Seller or an Affiliate of Seller;
     (v) attributable to or arise out of the actions, suits or proceedings, if
any, set forth on Schedule 13.1, except insofar as they are attributable or
relate to the Assets for periods after the Effective Time;
     (vi) Third Party Claims for payment of any rentals, royalties, minimum
royalty, excess royalty, overriding royalty interests, production payments, and
other payments due and/or payable by Seller to mineral and royalty holders and
other interest owners prior to the Effective Time under or with respect to the
Assets and the

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Hydrocarbons produced therefrom or attributable thereto to the extent they arise
by the first anniversary of the Closing Date, except for any loss of title,
Title Defect or other title defect attributable to any failure to properly or
timely make any such payment; and
     (vii) resulting from Third Party joint interest billing audits to the
extent related to time periods prior to the Effective Time and to the extent
they arise by the first anniversary of the Closing Date.
     “Final Price” shall have the meaning set forth in Section 3.6.
     “Final Settlement Statement” shall have the meaning set forth in
Section 3.6.
     “FTC” shall mean the Federal Trade Commission.
     “GAAP” means United States generally accepted accounting principles,
consistently applied.
     “Geologic Data” means all (i) seismic, geological, geochemical or
geophysical data (including cores and other physical samples of materials from
wells or tests) belonging to Seller or licensed from third parties relating to
the Properties that can be transferred without additional consideration to such
third parties (or including such licensed data in the event Buyer agrees to pay
such additional consideration), and (ii) interpretations of seismic, geological,
geochemical or geophysical data belonging to Seller or licensed from third
parties that can be transferred without additional consideration to such third
parties (or including such licensed data in the event Buyer agrees to pay such
additional consideration).
     “Governmental Authority” shall mean any federal, state, local, municipal or
other government; any governmental, regulatory or administrative agency,
commission, body or other authority exercising or entitled to exercise any
administrative, executive, judicial, legislative, regulatory or taxing authority
or power; and any court or governmental tribunal having or asserting
jurisdiction.
     “Hazardous Substances” shall mean any substance defined or regulated as a
“hazardous substance” or “hazardous waste” under any Environmental Laws.
     “HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder.
     “Hydrocarbons” means oil and gas and other hydrocarbons produced or
processed in association therewith.
     “Imbalance” means (i) any imbalance at the wellhead between the amount of
Hydrocarbons produced from a Well and allocable to the interests of Seller
therein and the shares of production from the relevant Well to which Seller is
entitled and (ii) any marketing imbalance between the quantity of Hydrocarbons
required to be delivered by Seller under any Contract relating to the purchase
and sale, gathering, transportation, storage, processing or marketing of
Hydrocarbons and the quantity of Hydrocarbons actually delivered by Seller
pursuant to the relevant Contract, together with any appurtenant rights and
obligations concerning future in-kind

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and/or cash balancing at the wellhead and production balancing at the delivery
point into the relevant sale, gathering, transportation, storage or processing
facility.
     “Indemnified Party” shall have the meaning set forth in Section 13.5(a).
     “Indemnifying Party” shall have the meaning set forth in Section 13.5(a).
     “Individual Environmental Threshold” shall have the meaning set forth in
Section 12.1(d).
     “Individual Title Benefit Threshold” shall have the meaning set forth in
Section 11.2(i).
     “Individual Title Defect Threshold” shall have the meaning set forth in
Section 11.2(i).
     “Interim Period” shall mean that period of time commencing with the
Effective Time and ending at 7:00 a.m. (Central Standard Time) on the Closing
Date.
     “Knowledge” shall mean with respect to Seller, the actual knowledge
(without investigation) of Seller’s Chief Executive Officer, Chief Operating
Officer, Chief Financial Officer, General Manager — Offshore, Corporate Counsel
and Offshore Operations Manager.
     “Lands” shall have the meaning set forth in Section 2.1(a).
     “Law” shall mean any applicable statute, law, rule, regulation, ordinance,
order, code, ruling, writ, injunction, or decree of or by any Governmental
Authority.
     “Leases” shall have the meaning set forth in Section 2.1(a).
     “Liabilities” shall mean any and all claims, causes of actions, payments,
charges, judgments, assessments, liabilities, losses, damages, penalties, fines
or costs and expenses, including any attorneys’ fees, legal or other expenses
incurred in connection therewith and including liabilities, costs, losses and
damages for personal injury or death or property damage.
     “Material Adverse Effect” shall mean an event, condition or circumstance
that, individually or in the aggregate, results in a material adverse effect on
the ownership, operations or value of the Assets, taken as a whole and as
currently operated as of the date of this Agreement, or a material adverse
effect on the ability of Seller to consummate the transactions contemplated by
this Agreement; provided, however, that none of the following shall constitute a
Material Adverse Effect: (i) any effect resulting from entering into or taking
any actions required by this Agreement or the announcement of the transactions
contemplated by this Agreement; (ii) any effect resulting from changes in
general market, economic, financial or political conditions in the area in which
the Assets are located, the United States or worldwide, any disruptions of the
capital markets, any acts of God, any outbreak of hostilities or war or any acts
of terrorism, (iii) any effect resulting from a change in Laws from and after
the date of this Agreement; (iv) any reclassification or recalculation of
reserves in the ordinary course of business; (v) any changes in the prices of
Hydrocarbons or other changes affecting the oil and gas industry generally; (vi)
any results of Seller’s drilling activities after the date of this Agreement or
declines in well performance in the absence of gross negligence or willful

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misconduct on the part of Seller; (vii) any effect resulting from actions taken
by Buyer or its Affiliates; (viii) any effect resulting from a change in
accounting requirements or principles imposed on the Seller, its business or the
Assets by GAAP implemented after the date of this Agreement; and (ix) any effect
resulting from any delay in third party transportation or processing due to
hurricanes or related repairs.
     “Material Contracts” shall have the meaning set forth in Section 4.6.
     “MMS” shall mean the Minerals Management Service.
     “Net Revenue Interest,” with respect to any Well, means the interest in and
to all Hydrocarbons produced, saved and sold from or allocated to such Well,
after giving effect to all royalties, overriding royalties, production payments,
carried interests, net profits interests, reversionary interests and other
burdens upon, measured by or payable out of production therefrom.
     “NORM” shall mean naturally occurring radioactive material.
     “OPA” means the Oil Pollution Act of 1990, as amended.
     “Operating Expenses” shall have the meaning set forth in Section 2.3.
     “P & A Obligations” shall have the meaning set forth in Section 6.6.
     “Permitted Encumbrances” shall mean:
     (a) lessor’s royalties, non-participating royalties, overriding royalties,
reversionary interests and similar burdens upon, measured by or payable out of
production if the net cumulative effect of such burdens does not operate to
reduce the Net Revenue Interest of Seller in any Well (or the specified zone(s)
therein) to an amount less than the Net Revenue Interest set forth on Exhibit A
for such Well (or the specified zone(s) therein) and do not obligate Seller to
bear a Working Interest for such Well (or the specified zone(s) therein) in any
amount greater than the Working Interest set forth on Exhibit A for such Well
(or the specified zone(s) therein) (unless the Net Revenue Interest for such
Asset is greater than the Net Revenue Interest set forth on Exhibit A in the
same proportion as any increase in such Working Interest);
     (b) preferential rights to purchase set forth on Schedule 4.11 and required
third party consents to assignments and similar agreements;
     (c) liens for taxes or assessments not yet due or delinquent or, if
delinquent, that are being contested in good faith in the normal course of
business;
     (d) Customary Post-Closing Consents;
     (e) conventional rights of reassignment;
     (f) such Title Defects as Buyer may have waived expressly in writing;

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     (g) all applicable Laws and rights reserved to or vested in any
Governmental Authority (i) to control or regulate any Asset in any manner;
(ii) by the terms of any right, power, franchise, grant, license or permit or by
any provision of Law, to terminate such right, power, franchise grant, license
or permit or to purchase, condemn, expropriate or recapture or to designate a
purchaser of any of the Assets; (iii) to use such property in a manner which
does not materially impair the use of such property for the purposes for which
it is currently owned and operated and (iv) to enforce any obligations or duties
affecting the Assets to any Governmental Authority, with respect to any
franchise, grant, license or permit;
     (h) rights of a common owner of any interest in rights-of-way or easements
currently held by Seller and such common owner as tenants in common or through
common ownership;
     (i) easements, conditions, covenants, restrictions, servitudes, permits,
rights-of-way and other rights in the Assets for the purpose of pipelines,
transportation lines, distribution lines and other like purposes or for the
joint or common use of, rights-of-way, facilities and equipment which do not
materially impair the value of the Assets or the use of the Assets as currently
owned and operated;
     (j) vendors, carriers, warehousemen’s, repairmen’s, mechanics, workmen’s,
materialmen’s, construction or other like liens arising by operation of Law in
the ordinary course of business or incident to the construction or improvement
of any property in respect of obligations which are not yet due, or which are
being contested in good faith by appropriate proceedings by or on behalf of
Seller as identified on Schedule 1.1(j);
     (k) liens created under leases and/or operating agreements or by operation
of Law in respect of obligations that are not yet due, or that are being
contested in good faith by appropriate proceedings by or on behalf of Seller as
identified on Schedule 1.1(k);
     (l) any encumbrance affecting the Assets which is expressly assumed, bonded
or paid by Buyer at or prior to Closing or which is discharged by Seller at or
prior to Closing;
     (m) any matters referenced on Exhibit A;
     (n) the terms and conditions of the Leases and all Material Contracts that
do not reduce the Net Revenue Interest of Seller in any Well (or the specified
zone(s) therein) to an amount less than the Net Revenue Interest set forth on
Exhibit A for such Well (or the specified zone(s) therein) and do not obligate
Seller to bear a Working Interest for such Well (or the specified zone(s)
therein) in any amount greater than the Working Interest set forth on Exhibit A
for such Well (unless the Net Revenue Interest for such Asset is greater than
the Net Revenue Interest set forth on Exhibit A in the same proportion as any
increase in such Working Interest); and
     (o) all other instruments, obligations, defects and irregularities
affecting the Assets that do not reduce the Net Revenue Interest of Seller in
any Well (or the specified zone(s) therein) to an amount less than the Net
Revenue Interest set forth on Exhibit A

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for such Well (or the specified zone(s) therein) and do not obligate Seller to
bear a Working Interest for such Well (or the specified zone(s) therein) in any
amount greater than the Working Interest set forth on Exhibit A for such Well
(unless the Net Revenue Interest for such Asset is greater than the Net Revenue
Interest set forth on Exhibit A in the same proportion as any increase in such
Working Interest).
     “Person” shall mean any individual, firm, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization, Governmental Authority or any other entity.
     “Personal Property” shall have the meaning set forth in Section 2.1(g).
     “Preference Notices” shall have the meaning set forth in Section 11.4(b).
     “Preference Right Assets” shall have the meaning set forth in
Section 11.4(d).
     “Preference Rights” shall have the meaning set forth in Section 11.4(a).
     “Preliminary Settlement Statement” shall have the meaning set forth in
Section 3.5.
     “Property” or “Properties” shall have the meaning set forth in
Section 2.1(b).
     “Purchase Price” shall have the meaning set forth in Section 3.1.
     “Qualified Buyer” shall mean any Buyer that, in Seller’s sole discretion,
is financially capable of satisfying the Assumed Obligations.
     “Qualified Parent Guarantor” shall mean any Parent Guarantor that, in
Seller’s sole discretion, is financially capable of satisfying the Assumed
Obligations.
     “Records” shall have the meaning set forth in Section 2.1(i).
     “Remediation” shall mean, with respect to an Environmental Condition, the
implementation and completion of any remedial, removal, response, construction,
closure, disposal or other corrective actions required under Environmental Laws
to correct or remove such Environmental Condition.
     “Remediation Amount” shall mean, with respect to an Environmental
Condition, the present value as of the Closing Date (using an annual discount
rate of ten percent) of the cost (net to Seller’s interest)) of the most cost
effective Remediation of such Environmental Condition to a regulatory standard
equal to but no more stringent than as required for land use of the Asset as of
the Closing Date.
     “Seismic Data” means all seismic, geological or geophysical data owned by
Third Parties that Seller does not have the right to transfer (or that Seller
can only transfer upon payment of additional consideration to such Third
Parties).
     “Seller” shall have the meaning set forth in the first paragraph of this
Agreement.

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     “Seller Indemnified Parties” shall have the meaning set forth in
Section 13.3(a).
     “Third Party” shall mean any Person other than a party to this Agreement or
an Affiliate of a party to this Agreement.
     “Title Arbitrator” shall have the meaning set forth in Section 11.2(j).
     “Title Benefit” shall mean any right, circumstance or condition that
operates (i) to increase the Net Revenue Interest of Seller in any Well (or the
specified zone(s) therein) above that shown for such Well in Exhibit A, to the
extent the same does not cause a greater than proportionate increase in Seller’s
Working Interest therein above that shown in Exhibit A, or (ii) to decrease the
Working Interest of Seller in any Well (or the specified zone(s) therein) below
that shown for such Well (or the specified zone(s) therein) in Exhibit A, to the
extent the same causes a decrease in Seller’s Working Interest that is
proportionately greater than the decrease in Seller’s Net Revenue Interest
therein below that shown in Exhibit A.
     “Title Benefit Amount” shall have the meaning set forth in Section 11.2(e).
     “Title Benefit Notice” shall have the meaning set forth in Section 11.2(b).
     “Title Claim Date” shall have the meaning set forth in Section 11.2(a).
     “Title Defect” means any Encumbrance, defect or other matter that causes
Seller not to have Defensible Title in and to the Assets as of the Effective
Time; provided that the following shall not be considered Title Defects:
     (i) defects in the chain of title consisting of the failure to recite
marital status in a document or omissions of successions of heirship or estate
proceedings, unless Buyer provides affirmative evidence that such failure or
omission has resulted in another Person’s superior claim of title to the
relevant Asset;
     (ii) defects arising out of lack of survey, unless a survey is expressly
required by applicable Laws;
     (iii) defects arising out of lack of evidence of record of corporate or
other entity authorization unless Buyer provides affirmative evidence that such
corporate or other entity action was not authorized and results in another
Person’s superior claim of title to the relevant Asset;
     (iv) defects that have been cured by applicable Laws of limitations or
prescription;
     (v) the exercise by a Third Party prior to the Closing of a preferential
purchase right, which is addressed solely in Section 11.3(b); or
     (vi) the failure or refusal of a Third Party to consent on or before the
Closing Date to the assignment of an Asset to Buyer, which is addressed solely
in Section 11.4(e).

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     “Title Defect Amount” shall have the meaning set forth in
Section 11.2(d)(i) of this Agreement.
     “Title Defect Notice” shall have the meaning set forth in Section 11.2(a).
     “Title Defect Property” shall have the meaning set forth in
Section 11.2(a).
     “Title Indemnity Agreement” shall have the meaning set forth in
Section 11.2(d)(ii).
     “Transaction Documents” means those documents executed pursuant to or in
connection with this Agreement.
     “Treasury Regulations” means the regulations promulgated by the United
States Department of the Treasury pursuant to and in respect of provisions of
the Code. All references herein to sections of the Treasury Regulations shall
include any corresponding provision or provisions of succeeding, similar,
substitute, proposed or final Treasury Regulations.
     “Wachovia” means Wachovia Capital Markets, LLC.
     “Wells” shall have the meaning set forth in Section 2.1(b).
     “Working Interest,” with respect to any Well, means the interest in and to
such Well that is burdened with the obligation to bear and pay costs and
expenses of maintenance, development and operations on or in connection with
such Well, 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.
     1.2 References. The words “hereby,” “herein,” “hereinabove,” “hereinafter,”
“hereinbelow,” “hereof,” “hereto,” “hereunder,” and words of similar import when
used in this Agreement shall refer to this Agreement as a whole and not to any
particular article, section or provision of this Agreement. References in this
Agreement to articles, sections, exhibits or schedules are to such articles,
sections, exhibits or schedules of this Agreement unless otherwise specified.
     1.3 Articles. This Agreement, for convenience only, has been divided into
articles. The rights and other legal relations of the parties hereto shall be
determined from this Agreement as an entirety and without regard to the
aforesaid division into articles and sections and without regard to headings
prefixed to such articles.
     1.4 Number and Gender. Whenever the context requires, reference herein made
to a single number shall be understood to include the plural; and likewise, the
plural shall be understood to include the singular. Words denoting sex shall be
construed to include the masculine, feminine and neuter, when such construction
is appropriate; and specific enumeration shall not exclude the general but shall
be construed as cumulative. Definitions of terms defined in the singular or
plural shall be equally applicable to the plural or singular, as applicable,
unless otherwise indicated.

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ARTICLE II
PURCHASE AND SALE
     2.1 Purchase and Sale. Subject to the terms and conditions of this
Agreement, Seller agrees to sell and assign and Buyer agrees to purchase and pay
for, all of Seller’s right, title and interest in and to the following (less and
except for the Excluded Assets) (collectively, the “Assets)”:
     (a) the oil and gas leases more particularly described in Exhibit A,
subject to any depth restrictions described in Exhibit A, (collectively, the
“Leases”), together with any and all other rights, titles and interests of
Seller in and to (i) the leasehold estates created thereby, subject to any depth
restrictions described in Exhibit A, and to the terms, conditions, covenants and
obligations set forth in the Leases and/or Exhibit A, and (ii) the lands covered
by the Leases or included in units with which the Leases may have been pooled or
unitized, subject to any depth restrictions described in Exhibit A (the
“Lands”), including in each case, without limitation, royalty interests,
overriding royalty interests, production payments, net profits interests,
carried interests, reversionary interests and all other interests of any kind or
character;
     (b) all oil and gas wells located on the Leases and the Lands or on other
leases or lands with which the Leases and/or the Lands may have been pooled or
unitized, including those specified on Exhibit A (collectively, the “Wells”) and
all Hydrocarbons produced therefrom or allocated thereto from and after the
Effective Time (the Leases, the Lands, and the Wells being collectively referred
to hereinafter as the “Properties”);
     (c) all rights and interests in, under or derived from all unitization and
pooling agreements in effect with respect to the Properties and the units
created thereby which accrue or are attributable to the interests of Seller in
the Properties;
     (d) all rights and interests in or to insurance claims, proceeds or unpaid
awards with respect to damage to the Assets from Hurricane Rita and Katrina,
including those set forth on Schedule 4.9 hereto;
     (e) to the extent that they may be assigned, all Applicable Contracts;
     (f) to the extent that they may be assigned, all permits, licenses,
servitudes, easements and rights-of-way to the extent used primarily in
connection with the ownership or operation of the Properties or the Personal
Property (as hereinafter defined);
     (g) all equipment, machinery, fixtures and other real, moveable and
non-moveable personal and mixed property located on the Properties or the other
Assets described above as of the Effective Time, including, without limitation,
well equipment, casing, rods, tanks, boilers, tubing, pumps, motors, fixtures,
machinery, compression equipment, flow lines, pipelines, gathering systems,
processing and separation facilities, platforms, structures, materials and other
items used primarily in the operation thereof (“Personal Property”);
     (h) all Imbalances relating to the Properties or other Assets;

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     (i) except as set forth on Schedule 2.1(i) hereto, the Geologic Data to the
extent relating primarily to the Properties; and
     (j) all of the rights, titles and interests of Seller in and to all of the
original (or copies if originals are not available) files, records, information
and data, whether written or electronically stored, primarily relating to the
Assets (the “Records”), including, without limitation: (i) land and title
records (including abstracts of title, title opinions and title curative
documents); (ii) contract files; (iii) correspondence; (iv) operations,
engineering, geological, environmental, production and accounting records and
(v) facility, field and well records but excluding any of the foregoing items
that are Excluded Assets.
     2.2 Excluded Assets. Seller shall reserve and retain all of the Excluded
Assets.
     2.3 Revenues and Expenses. Subject to the provisions hereof, Seller shall
remain entitled to all of the rights of ownership (including, without
limitation, the right to all production, proceeds of production and other
proceeds including overhead payments received from Third Parties, amounts for
the handling, processing and transportation of Hydrocarbons and amounts for
platform space for or by Third Parties), subject to any applicable time periods
set forth in the definition of “Excluded Assets,” and shall remain responsible
for all Operating Expenses, in each case attributable to the Assets for the
period of time prior to the Effective Time, subject to any applicable time
periods set forth in the definition of “Excluded Liabilities.” Subject to the
provisions hereof and subject to the occurrence of the Closing, Buyer shall be
entitled to all of the rights of ownership (including, without limitation, the
right to all production, proceeds of production and other proceeds including
overhead payments received from Third Parties, amounts for the handling,
processing and transportation of Hydrocarbons and amounts for platform space for
or by Third Parties) and shall be responsible for all Operating Expenses, in
each case, attributable to the Assets for the period of time from and after the
Effective Time, and, to the extent they arise after the first anniversary of the
Closing Date, the period of time prior to the Effective Time. All Operating
Expenses attributable to the Assets, in each case that are: (i) actually
incurred with respect to operations conducted or production prior to the
Effective Time shall be paid by or allocated to Seller and (ii) incurred with
respect to operations conducted or production after the Effective Time shall be
paid by or allocated to Buyer. “Operating Expenses” means all operating expenses
(including without limiting the foregoing in any respect, rentals, costs of
insurance and ad valorem, property, severance, production and similar taxes
based upon or measured by the ownership or operation of the Assets or the
production of Hydrocarbons therefrom, but excluding any other taxes) and capital
expenditures incurred in the ownership and operation of the Assets and, where
applicable, in accordance with any relevant operating or unit agreement and
overhead costs charged to the Assets under any relevant operating agreement or
unit agreement.
ARTICLE III
PURCHASE PRICE
     3.1 Purchase Price. The purchase price for the Assets shall be $220,000,033
(the “Purchase Price”), payable in United States currency by wire transfer in
same day funds as and when provided in this Agreement.

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     3.2 Deposit. Upon execution of this Agreement, Buyer shall deposit by wire
transfer in same day funds into escrow with Seller the sum of $11,000,000,
representing 5% of the Purchase Price (the “Deposit”). The Deposit shall be
applied toward the Purchase Price at the Closing.
     (a) If (i) all conditions precedent to the obligations of Buyer set forth
in Article VII have been met and (ii) the transactions contemplated by this
Agreement are not consummated on or before the Closing Date because of: (A) the
failure of Buyer to materially perform any of its obligations hereunder, (B) the
failure of any of Buyer’s representations or warranties hereunder to be true and
correct in all material respects as of the Closing, then, in such event, Seller
shall have the right to terminate this Agreement and retain the Deposit.
     (b) If this Agreement is terminated by the mutual written agreement of
Buyer and Seller, or if the Closing does not occur on or before the Closing Date
for any reason other than as set forth in Section 3.2(a), then Buyer shall be
entitled to the prompt return of the Deposit, free of any claims by Seller with
respect thereto. Buyer and Seller shall thereupon have the rights and
obligations set forth in Section 14.2.
     3.3 Adjustments to Purchase Price. The Purchase Price shall be adjusted as
follows, and the resulting amount shall be herein called the “Adjusted Purchase
Price”:
     (a) The Purchase Price shall be adjusted upward by the following amounts
(without duplication):
     (i) an amount equal to all Operating Expenses and other costs and expenses
incurred by Seller that are attributable to the Assets after the Effective Time,
whether incurred before or after the Effective Time, including, without
limitation, a fixed rate overhead of $200,000 per month;
     (ii) the amount of all prepaid expenses attributable to the Assets that are
incurred by or on behalf of Seller prior to the Closing Date and that are, in
accordance with GAAP, attributable to the period after the Effective Time,
including without limitation, (A) bond and insurance premiums incurred by or on
behalf of Seller during the Interim Period, (B) royalties or other burdens upon,
measured by or payable out of proceeds of production, (C) rentals and other
lease maintenance payments, (D) ad valorem, property, severance and production
taxes and any other taxes (exclusive of income taxes and the Texas Franchise
Tax) based upon or measured by the ownership of the Assets, the production of
Hydrocarbons or the receipt of proceeds therefrom, and (E) prepayments of
Operating Expenses made by or on behalf of Seller to operators of Properties not
operated by Seller pursuant to cash calls or otherwise;
     (iii) to the extent that Seller is underproduced as of the Effective Date
in an aggregate amount greater (or overproduced in a lesser amount) than the net
Imbalances for gas set forth in Schedule 3.3, as complete and final settlement
of all Imbalances, an amount based on a rate mutually agreeable to Buyer and
Seller;

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     (iv) to the extent that Seller is underproduced as of the Effective Date in
an aggregate amount greater (or overproduced in a lesser amount) than the net
Imbalances for oil set forth in Schedule 3.3, as complete and final settlement
of all Imbalances, an amount based on a rate mutually agreeable to Buyer and
Seller;
     (v) the amount incurred by Seller prior to the Effective Time for repair of
hurricane damage to the Assets, as set forth on Schedule 4.9 hereto;
     (vi) Title Benefit Amounts as a result of any Title Benefits for which the
Title Benefit Amount has been determined prior to the date of the Final
Settlement Statement;
     (vii) without duplication of any other amounts set forth in this Section
3.3(a), the amount of all taxes prorated to Buyer but paid by Seller in
accordance with Section 15.2; and
     (viii) any other amount provided for elsewhere in this Agreement or
otherwise agreed upon by Seller and Buyer.
     (b) The Purchase Price shall be adjusted downward by the following amounts
(without duplication):
     (i) an amount equal to all proceeds received by the Seller attributable to
the sale of Hydrocarbons produced from or allocable to the Assets during the
Interim Period, net of Third Party expenses (other than Operating Expenses)
directly incurred in earning or receiving such proceeds and for which no
adjustment pursuant to Section 3.3(a) is made, and any sales, excise or similar
Taxes in connection therewith not reimbursed to Seller by a third party
purchaser;
     (ii) an amount equal to all other proceeds received by Seller (other than
from the sale of Hydrocarbons produced from or allocable to the Assets) to which
Buyer is entitled pursuant to Section 2.3;
     (iii) if Seller makes the election under Section 11.2(d)(i) with respect to
a Title Defect, the Title Defect Amount with respect to such Title Defect if the
Title Defect Amount has been determined prior to Closing;
     (iv) if Seller makes the election under Section 12.1(b)(i) with respect to
an Environmental Defect, the Remediation Amount with respect to such
Environmental Defect if the Remediation Amount has been determined prior to
Closing;
     (v) an amount equal to all amounts received by Seller as (A) overhead
payments from Third Parties, (B) handling, processing and transportation fees,
(C) platform rental payments, and (D) other payments from Third Parties related
to ownership of the Assets, in each case attributable to time periods after the
Effective Time;

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     (vi) an amount determined pursuant to Section 11.4(c) or Section
12.1(b)(iii) for any Properties and other Assets excluded from the Assets
pursuant to such Sections;
     (vii) without duplication of any other amounts set forth in this Section
3.3, the amount of all taxes prorated to Seller but payable by Buyer in
accordance with Section 15.2;
     (viii) to the extent that Seller is overproduced as of the Effective Date
in an aggregate amount greater (or underproduced in a lesser amount) than the
net Imbalances for gas as set forth in Schedule 3.3, as complete and final
settlement of all such Imbalances, an amount based on a rate of mutually
agreeable to Buyer and Seller;
     (ix) to the extent that Seller is overproduced as of the Effective Date in
an aggregate amount greater (or underproduced in a lesser amount) than the net
Imbalances for oil as set forth in Schedule 3.3, as complete and final
settlement of all such Imbalances, an amount based on a rate mutually agreeable
to Buyer and Seller; and
     (x) any other amount provided for elsewhere in this Agreement or otherwise
agreed upon by Seller and Buyer.
Buyer and Seller agree that neither party shall be charged interest on the
Deposit or the Purchase Price. Buyer and Seller agree that any adjustments
related to Subsections 3.3(a)(iii) and (iv) and Section 3.3(b)(viii) and (ix)
shall be handled on the Final Settlement Statement and not on the Preliminary
Settlement Statement or after the payment of the final adjustment pursuant to
Section 3.6. It is intended that adjustments pursuant to such Subsections are to
be based on the net variance from the amount of underproduction or
overproduction shown on Schedule 3.3, as the volumes shown on such schedule are
understood to have been accounted for in the Purchase Price. The rate for
adjustment for Imbalance variances from the amount shown on Schedule 3.3 is
intended to be a reasonable amount (based on such factors as the time period
that the Imbalance was accrued, the time period allowed for repayment and the
historical or projected price for the product during the time period in
question) for those Imbalances discovered and raised by either party within the
time frames set forth in Section 3.6. Buyer and Seller agree that any upward
adjustments for amounts under Subsection 3.3(a)(v) related to expenses for which
Seller has not received reimbursement from Seller’s insurers shall be deferred
to the Final Settlement Statement, rather than addressed on the Preliminary
Settlement Statement.
     3.4 Adjustment Methodology. When available, actual figures will be used for
the adjustments to the Purchase Price at the Closing. To the extent actual
figures are not available, estimates will be used subject to final adjustments
in accordance with Section 3.6.
     3.5 Preliminary Settlement Statement. Not less than five business days
prior to the Closing, Seller shall prepare and submit to Buyer for review a
draft settlement statement (the

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“Preliminary Settlement Statement”) that shall set forth the Adjusted Purchase
Price, reflecting each adjustment made in accordance with this Agreement as of
the date of preparation of such Preliminary Settlement Statement and the
calculation of the adjustments used to determine such amount, together with the
designation of Seller’s account for the wire transfer of funds as set forth in
Section 9.3(d). Within three business day of receipt of the Preliminary
Settlement Statement, Buyer will deliver to Seller a written report containing
any changes that Buyer proposes to be made to the Preliminary Settlement
Statement and an explanation of any such changes and the reasons therefor. The
Preliminary Settlement Statement, with any changes agreed upon by the parties,
will be used to adjust the Purchase Price at Closing.
          3.6 Final Settlement Statement.
          (a) On or before 120 days after the Closing, a final settlement
statement (the “Final Settlement Statement”) will be prepared by Seller, based
on actual income and expenses during the Interim Period and which takes into
account all final adjustments made to the Purchase Price and shows the resulting
final Purchase Price (“Final Price”). The Final Settlement Statement shall set
forth the actual proration of the amounts required by this Agreement. As soon as
practicable, and in any event within 60 days, after receipt of the Final
Settlement Statement, Buyer shall either agree in writing with the Final
Settlement Statement or return a written report containing any proposed changes
to the Final Settlement Statement and an explanation of any such changes and the
reasons therefor (the “Dispute Notice”). If the Final Price set forth in the
Final Settlement Statement is mutually agreed upon by Seller and Buyer, the
Final Price shall be paid according thereto. For the avoidance of doubt, any
payment owing under this Section 3.6 shall not be subject to the Indemnification
Threshold or Indemnification Cap contained in Section 13.5. Any difference in
the Adjusted Purchase Price as paid at Closing pursuant to the Preliminary
Settlement Statement and the Final Price shall be paid by the owing party
without interest within ten days of (i) the Final Settlement Statement or
(ii) if the Final Price is disputed, resolution of the Final Price, to the owed
party. All amounts paid pursuant to this Section 3.6 shall be delivered in
United States currency by wire transfer of immediately available funds to the
account specified in writing by the relevant party.
          (b) If Seller fails to prepare the Final Settlement Statement within
such 120-day period, it shall pay to Buyer interest at the rate of 10% per annum
from the 121st day after the Closing until preparation of such Final Settlement
Statement on the net amount, if any, owing to Buyer as shown on such Final
Settlement Statement.
          (c) If Buyer fails to either agree with the Final Settlement Statement
or return a Dispute Notice within 60 days of its receipt of the Final Settlement
Statement, it shall pay to Seller interest at the rate of 10% per annum from the
61st day after receipt of the Final Settlement Statement on the net amount, if
any, owing to Seller as shown on such Final Settlement Statement.
          3.7 Disputes. If Seller and Buyer are unable to resolve the matters
addressed in the Dispute Notice, each of Buyer and Seller shall within 60 days
after the earlier of delivery of such Dispute Notice or the deadline for
submitting such Dispute Notice under Section 3.6 above, summarize its position
with regard to such dispute in a written document of twenty pages or less

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and submit such summaries to such party as the parties may mutually select (the
“Accounting Arbitrator”), together with this Agreement, the Dispute Notice, the
Preliminary Settlement Statement, the Final Settlement Statement and any other
documentation such party may desire to submit. Within 30 business days after
receiving the parties’ respective submissions, the Accounting Arbitrator shall
render a decision choosing either Seller’s position or Buyer’s position with
respect to each matter addressed in any Dispute Notice, based on the materials
described above. Any decision rendered by the Accounting Arbitrator pursuant
hereto shall include a written statement as to the basis for such decision and
shall be final, conclusive and binding on Seller and Buyer and will be
enforceable against any of the parties in any court of competent jurisdiction.
The costs of such Accounting Arbitrator shall be borne by the non-prevailing
party.
          3.8 Allocation of Purchase Price / Allocated Values. Buyer and Seller
agree that the unadjusted Purchase Price shall be allocated among the Assets as
set forth in Schedule 3.8 of this Agreement. The “Allocated Value” for any Asset
equals the portion of the unadjusted Purchase Price allocated to such Asset on
Schedule 3.8 and such Allocated Value shall be used in calculating adjustments
to the Purchase Price as provided herein.
          3.9 Interim Settle-Up. The Parties acknowledge that it is not the
intent of this Agreement that either party be deprived of material amounts of
revenue or be burdened by material amounts of expense until the final adjustment
pursuant to Section 3.6. If at any time after Closing either party believes it
is owed material revenues or material expense reimbursement, which revenues and
expense reimbursement owed shall be netted against revenues and expenses due the
other party, it may request payment from the other party, not more frequently
than monthly, and such party shall make payment of any undisputed amounts within
a commercially reasonable period of time. For purposes of this Section 3.9,
material shall mean an amount in excess of $4,000,000.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
     Seller represents and warrants to Buyer the following:
          4.1 Organization, Existence. Seller is a corporation duly formed and
validly existing under the laws of the State of Delaware. Seller has all
requisite power and authority to own and operate its property (including,
without limitation, its interests in the Assets) and to carry on its business as
now conducted. Seller is duly licensed or qualified to do business as a
corporation and is in good standing in all jurisdictions in which such
qualification is required by Law.
          4.2 Authorization.Seller has full power and authority to enter into
and perform this Agreement and the Transaction Documents to which it is a party
and the transactions contemplated herein and therein. The execution, delivery
and performance by Seller of this Agreement have been duly and validly
authorized and approved by all necessary corporate action on the part of Seller.
This Agreement is, and the Transaction Documents to which Seller is a party when
executed and delivered by Seller will be, the valid and binding obligation of
Seller, enforceable against Seller in accordance with their respective terms,
subject to the effects of

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bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
similar Laws, as well as to principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
          4.3 No Conflicts. Subject to the giving of all notices to Third
Parties and the receipt of all consents, approvals and waivers from Third
Parties in connection with the transactions contemplated hereby, the execution,
delivery and performance by Seller of this Agreement and the consummation of the
transactions contemplated herein will not (i) conflict with or result in a
breach of any provisions of the organizational documents of Seller, (ii) result
in a default or the creation of any Encumbrance or give rise to any right of
termination, cancellation or acceleration under any of the terms, conditions or
provisions of any Lease, Applicable Contract, note, bond, mortgage, indenture,
license or other material agreement to which any Seller is a party or by which
any Seller or the Assets may be bound or (iii) violate any material Law
applicable to any Seller or any of the Assets.
          4.4 Consents. Except (a) for consents set forth in Schedule 4.4,
(b) for Customary Post-Closing Consents, (c) for consents under Contracts that
are terminable upon not greater than 90 days’ notice without payment of any fee
or are otherwise material, (d) compliance with any applicable requirements of
the MMS and (e) compliance with any applicable requirements of the HSR Act,
there are no other consents required in connection with the transfer of the
Assets or the consummation of the transactions contemplated by this Agreement.
          4.5 Litigation. Except as set forth in Schedule 4.5, there is no suit,
action, investigation or inquiry by any Person or by or before any Governmental
Authority, and no legal, administrative or arbitration proceedings pending, or
to Seller’s Knowledge, threatened against Seller or any of the Assets, to which
Buyer is a party or which individually or in the aggregate would be material or
would materially adversely affect the ability of Seller to consummate the
transactions contemplated in this Agreement.
          4.6 Material Contracts.
          (a) Schedule 4.6 sets forth all Applicable Contracts to which Seller
is a party that are material to the Assets (collectively, the “Material
Contracts”).
          (b) Except as set forth on Schedule 4.6, (i) there exist no defaults
under the Material Contracts by Seller or, to Seller’s Knowledge, by any other
Person that is a party thereto, and (ii) no event has occurred that with notice
or lapse of time or both would constitute any default under any such Material
Contract by Seller or, to Seller’s Knowledge, any other Person who is a party
thereto. Seller has made available to Buyer copies of each Material Contract and
all amendments thereto.
          4.7 No Violation of Laws. Except as set forth on Schedule 4.7, to
Seller’s Knowledge, Seller has not materially violated any applicable Laws with
respect to the ownership or operation of the Assets. This Section 4.7 does not
include any matters with respect to Environmental Laws, such matters being
addressed exclusively in Section 4.15.
          4.8 Insurance. Seller has made available to Buyer a list of, and true
and complete copies of, its insurance policies and fidelity bonds relating to
the Assets. Schedule 4.8 sets forth

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all material claims of Seller pending under any of such policies or bonds with
respect to the Assets, none of which coverage has been denied or disputed by the
underwriters of such policies or bonds or in respect of which such underwriters
have reserved their rights. Seller has made available to Buyer true and complete
copies of all material correspondence between Seller, its agents and Affiliates
and Seller’s insurers or underwriters with respect to the claims listed on
Schedule 4.8.
          4.9 Hurricane Damage. Schedule 4.9 sets forth as of the date hereof
(i) to Seller’s Knowledge, a true and correct list of all material damage to the
Assets from Hurricane Rita and Katrina, (ii) Seller’s good faith estimate of the
cost to repair such damage, (iii) the cost of such repairs incurred as of the
Effective Time and incurred as of the date hereof, (iv) the status and estimated
completion date of such repairs and (v) the status of insurance claims with
respect to each such repair.
          4.10 Wells. Schedule 4.10 sets forth the status as of February 1, 2006
of each of the Wells included in the Assets. The mechanical condition of such
Wells does not deviate materially from the well bore schematics made available
to Buyer in the data room.
          4.11 Preferential Rights. Except as set forth in Schedule 4.11, there
are no preferential rights to purchase that are applicable to the transfer of
the Assets in connection with the transactions contemplated hereby.
          4.12 Royalties, Etc. Seller has timely and properly paid all
royalties, overriding royalties and other burdens on production due by Seller
with respect the Properties, or if not paid, is contesting such royalties and
other burdens in good faith.
          4.13 Personal Property. To Seller’s Knowledge, except as set forth in
Schedules 4.9 or 4.13(a), taken as a whole, all Personal Property constituting a
part of the Assets are in a state of repair so as to be adequate for normal
operations, ordinary wear and tear excepted. Schedule 4.13(b) sets forth the
Personal Property (including automation equipment and telemetry equipment) used
by Seller with respect to the Assets that is not being transferred to Buyer
hereunder.
          4.14 Current Commitments. Schedule 4.14 sets forth, as of the date of
this Agreement, all authorities for expenditures (“AFEs”) relating to the
Properties to drill or rework Wells or for other capital expenditures pursuant
to any of the Material Contracts or any applicable joint or unit operating
agreement for which all of the activities anticipated in such AFEs or
commitments have not been completed by the date of this Agreement.
          4.15 Environmental.
          (a) Except as set forth in Schedule 4.15, Seller has not received
written notice from any Person of, and to Seller’s Knowledge there has not been,
any release, disposal, event, condition, circumstance, activity, practice or
incident concerning the Assets that (i) violates any Environmental Law,
(ii) interferes with or prevents compliance by Seller with any Environmental
Law; or (iii) gives rise to or results in any liability of Seller to any Person
under any Environmental Law.

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          (b) To Seller’s Knowledge, all material reports, studies and written
notices from environmental Governmental Authorities specifically addressing
environmental matters related to Seller’s ownership or operation of the
Properties, which are in Seller’s possession, have been made available to Buyer.
          4.16 Production Taxes. Except as disclosed in Schedule 4.16, during
the period of Seller’s ownership of the Assets, all ad valorem, property,
production, severance and similar taxes and assessments (including penalties and
interest) based on or measured by the ownership of the Assets, the production of
Hydrocarbons or the receipt of proceeds therefrom that have become due and
payable before the Effective Time are being properly paid, other than taxes
which are being contested in good faith.
          4.17 Brokers’ Fees. Seller has incurred no liability, contingent or
otherwise, for brokers’ or finders’ fees relating to the transactions
contemplated by this Agreement for which Buyer or any Affiliate of Buyer shall
have any responsibility.
          4.18 Accuracy of Data. To Seller’s Knowledge, (i) all documents
furnished to Buyer by Seller, including, without limitation, all maps, reports
and analyses, are true and correct copies of documents contained in Seller’s
files, and (ii) all lease operating expense information and data furnished by
Seller to Buyer are true and correct in all material respects. The
representations and warranties contained in this Section 4.18 shall not be
construed to be representations or warranties with respect to the accuracy of
any estimates, forecasts or conclusions contained in any document, any such
representations or warranties being expressly denied.
          4.19 Affiliated Contracts. After Closing, the Assets will not be bound
or burdened by any contractual obligation to Seller or an Affiliate of Seller
except pursuant to this Agreement.
          4.20 Sales Contracts. With respect to any agreement or contract for
the sale of hydrocarbons affecting or relating to the Assets (the “Sales
Contracts”):
          (a) Advance Payments. Except for imbalances or as shown on Schedule
4.20, Seller is not obligated by virtue of (i) any prepayment arrangement,
(ii) a “take-or-pay” or similar provision, (iii) a production payment, or
(iv) any other arrangement to deliver hydrocarbons produced from the Assets at
some future time without then or thereafter receiving full payment therefor.
          (b) Carried Payments. Payments for hydrocarbons sold pursuant to each
of the Sales Contracts are current (subject to adjustment in accordance with the
Sales Contracts) and to the best of Seller’s Knowledge in accordance with the
prices set forth in the Sales Contracts.
          (c) Terminable Sales Contracts. Except as set forth on Schedule 4.20,
no Sales Contract has a term in excess of 90 days, or is not terminable upon
notice of 90 days or less.

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          4.21 Hedging. All of Seller’s hedging arrangements and the net profits
interest of Transworld pursuant to that certain Purchase and Sale Agreement
dated September 3, 2003 with Transworld Exploration and Production Inc. and
certain of its affiliates shall be retained by Seller and Buyer shall have no
responsibility therefor.
          4.22 Limitations. Seller’s representations and warranties are given
subject to and are qualified by any matters disclosed by or under this
Agreement, including any Schedule attached hereto.
ARTICLE V
BUYER’S REPRESENTATIONS AND WARRANTIES
     Each Buyer hereby jointly and severally represents and warrants to Seller
the following:
          5.1 Organization; Existence. Each Buyer is duly organized and validly
existing under the laws of the State of Delaware and has all requisite power and
authority to own and operate its property and to carry on its business as now
conducted. Each Buyer is duly licensed or qualified to do business as a limited
partnership in all jurisdictions in which such qualification is required by Law.
          5.2 Authorization. (a) Each Buyer has full power and authority to
enter into and perform this Agreement and the Transaction Documents to which it
is a party and the transactions contemplated herein and therein; (b) the
execution, delivery and performance by each Buyer of this Agreement have been
duly and validly authorized and approved by all necessary partnership action on
the part of each Buyer; and (c) this Agreement is, and the Transaction Documents
to which each Buyer is a party when executed and delivered by such Buyer will
be, the valid and binding obligations of such Buyer, enforceable against Buyer
in accordance with their respective terms, subject to the effects of bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance and similar laws,
as well as to principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
          5.3 No Conflicts. The execution, delivery and performance by each
Buyer of this Agreement and the Transaction Documents and the consummation of
the transactions contemplated herein and therein will not conflict with or
result in a breach of any provisions of the certificate of formation, agreement
of limited partnership or other governing documents of any Buyer nor will it
violate any Law or Order applicable to any Buyer or any of its property.
          5.4 Consents. Except for Customary Post-Closing Consents and
compliance with any applicable requirements under the HSR Act, there are no
consents or other restrictions on assignment that any Buyer is obligated to
obtain or furnish, including, but not limited to, requirements for consents from
Third Parties to any assignment (in each case) that would be applicable in
connection with the consummation of the transactions contemplated by this
Agreement by Buyer.

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          5.5 Bankruptcy. There are no bankruptcy, reorganization or
receivership proceedings pending, being contemplated by or, to Buyer’s
knowledge, threatened against any Buyer.
          5.6 Litigation. There is no suit, action, investigation or inquiry by
any Person or by or before any Governmental Authority, and no legal,
administrative or arbitration proceedings pending, or to Buyer’s knowledge,
threatened against any Buyer, or to which any Buyer is a party, that would have
a material adverse effect upon the ability of Buyer to consummate the
transactions contemplated in this Agreement.
          5.7 Financing. Buyer has and shall have as of the Closing Date,
sufficient funds on hand with which to pay the Purchase Price and consummate the
transactions contemplated by this Agreement.
          5.8 Regulatory. Each Buyer is, and after Closing shall continue to be,
qualified to own the federal oil, gas and mineral leases in the MMS Gulf of
Mexico Outer Continental Shelf Region, including meeting Buyer’s existing or
increased bonding or any other bonding and financial requirements of the MMS or
other governmental agencies. The consummation of the transactions contemplated
in this Agreement will not cause any Buyer to be disqualified as such an owner
or to exceed any acreage limitation imposed by any law, statute, rule or
regulation. To the extent required by any applicable Laws and except to the
extent, if any, that any Buyer will, as of Closing, be covered by the bonds of
Third Party operators of the applicable Assets, each Buyer will have as of
Closing, and will thereafter continue to maintain, lease bonds, area-wide bonds
or any other surety bonds as may be required by, and in accordance with, all
applicable Laws governing the ownership of such leases, and has filed any and
all required reports necessary for such ownership with all Governmental
Authorities having jurisdiction over such ownership, including but not limited
to adequate financial assurance in accordance with OPA.
          5.9 Independent Evaluation. Each Buyer is sophisticated in the
evaluation, purchase, ownership and operation of oil and gas properties and
related facilities. In making its decision to enter into this Agreement and to
consummate the transactions contemplated herein, each Buyer (a) has relied or
shall rely solely on its own independent investigation and evaluation of the
Assets and the advice of its own legal, tax, economic, insurance, environmental,
engineering, geological and geophysical advisors and the express provisions of
this Agreement and not on any comments, statements, projections or other
materials made or given by any representatives or consultants or advisors
engaged by Seller, and (b) has satisfied or shall satisfy itself through its own
due diligence as to the environmental and physical condition and state of repair
of and contractual arrangements and other matters affecting the Assets. Buyer
has no knowledge of any fact that results in the breach of any representation,
warranty or covenant of Seller given hereunder or of any “scrivener’s error” of
the type referred to in Section 11.2(k).
          5.10 Brokers’ Fees. No Buyer nor any of their Affiliates has incurred
any liability, contingent or otherwise, for brokers’ or finders’ fees relating
to the transactions contemplated by this Agreement for which Seller or Seller’s
Affiliates shall have any responsibility.
          5.11 NORM, Wastes and Other Substances. Each Buyer acknowledges that
the Assets have been used for exploration, development and production of oil and
gas and that there

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may be petroleum,produced water, wastes or other substances or materials located
in, on or under the Assets 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
Assets 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 without
limitation, water, soils or sediment. Special procedures may be required for the
assessment, remediation, removal, transportation or disposal of environmental
media, wastes, asbestos, NORM and Hazardous Substances from the Assets.
ARTICLE VI
COVENANTS
          6.1 Conduct of Business. Except as set forth in Schedule 6.1, Seller
agrees that from and after the date hereof until Closing, except as expressly
contemplated by this Agreement or as expressly consented to in writing by Buyer
(which consent will not be unreasonably withheld or delayed), it will:
          (a) use customary commercially reasonable efforts to operate, where
Seller is the operator, or to cause the operators thereof, where Seller is not
the operator, to maintain and operate the Assets in the usual, regular and
ordinary manner consistent with past practice;
          (b) use commercially reasonable efforts to continue repairs to the
Assets for hurricane damage and to preserve and pursue all insurance claims on
Schedule 4.9 with respect thereto;
          (c) maintain the books of account and records relating to the Assets
in the usual, regular and ordinary manner, in accordance with its usual
accounting practices;
          (d) maintain insurance relating to the Assets of the types and amounts
consistent with Seller’s past practices;
          (e) not enter into a Material Contract or terminate or materially
amend or change the terms of any Material Contract;
          (f) not approve any authorization for expenditure in excess of
$500,000 relating to the Assets;
          (g) not transfer, sell, farm-out, mortgage, pledge or dispose of any
material portion of the Assets other than the sale and/or disposal of
Hydrocarbons in the ordinary course of business and sales of equipment that is
no longer necessary in the operation of the Assets or for which replacement
equipment has been obtained; and
          (h) not elect to non-consent or fail to timely elect to participate in
and thus be deemed to have elected to non-consent, any proposed well or other
operation on or relating to the Assets without first consulting with Buyer, and
Buyer’s preference with

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respect to any such proposed well or other operation shall be considered in good
faith by Seller.
     Buyer acknowledges Seller owns undivided interests in certain of the
properties comprising the Assets that it is not the operator thereof, and Buyer
agrees that the acts or omissions of the other working interests owners
(including the operators) who are not Seller or any Affiliates of Seller shall
not constitute a breach of the provisions of this Section 6.1, nor shall any
action required by a vote of working interest owners constitute such a breach so
long as Seller has voted its interest in a manner that complies with the
provisions of this Section 6.1.
          6.2 HSR Act. If applicable, within five business days following the
execution by Buyer and Seller of this Agreement, Buyer and Seller will each
prepare and simultaneously file with the DOJ and the FTC, as applicable, the
notification and report form required for the transactions contemplated by this
Agreement by the HSR Act, and request early termination of the waiting period
thereunder. Buyer and Seller agree to respond promptly to any inquiries from the
DOJ or the FTC concerning such filings and to comply in all material respects
with the filing requirements of the HSR Act. Buyer and Seller shall cooperate
with each other and, subject to the terms of the Confidentiality Agreement,
shall promptly furnish all information to the other party that is necessary in
connection with Buyer’s and Seller’s compliance with the HSR Act. Buyer and
Seller shall keep each other fully advised with respect to any requests from or
communications with the DOJ or FTC concerning such filings and shall consult
with each other with respect to all responses thereto. Each of Seller and Buyer
shall use its reasonable efforts to take all actions reasonably necessary and
appropriate in connection with any HSR Act filing to consummate the transactions
contemplated hereby.
          6.3 Bonds, Letters of Credit and Guarantees. Buyer acknowledges that
none of the bonds, letters of credit and guarantees, if any, posted by Seller or
its Affiliates with Governmental Authorities or Third Parties and relating to
the Assets are transferable to Buyer. Except to the extent that Buyer will, as
of Closing, be covered by the bonds of the operators of the applicable Assets,
then on or before the Closing Date, Buyer shall obtain, or cause to be obtained
in the name of Buyer, replacements for such bonds, letters of credit and
guarantees, to the extent such replacements are necessary to permit the
cancellation as of Closing of the bonds, letters of credit and guarantees posted
by Seller and/or its Affiliates.
          6.4 Cooperation with Seller Retained Litigation, Etc. Buyer agrees to
use reasonable efforts to cooperate with Seller in connection with Seller’s
defense and other actions relating to or arising out of the litigation and
claims set forth on Schedule 13.1 and with respect to future audits. Buyer
agrees to make available Buyer’s employees engaged in, or having information
about, the ownership and operation of the Assets, for the purposes of providing
testimony, depositions, information and other related activities relating to
such litigation, claims and audits.
          6.5 Cooperation with Respect to Insurance Claims. From and after the
Closing Date, Seller and Buyer shall fully cooperate and shall use their
commercially reasonable efforts to work with each other and Seller’s insurers to
enable Buyer to expeditiously recover insurance proceeds for damage to the
Assets resulting from Hurricanes Rita and Katrina (if any), as set

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forth on Schedule 4.9 hereto, and Seller shall promptly pay over to Buyer any
such proceeds that it receives.
          6.6 Plugging, Abandonment, Decommissioning and Other Costs. In
addition to its other obligations under this Agreement, Buyer shall comply with
all Laws, Leases, Applicable Contracts (including all joint and unit operating
agreements) and prevailing industry standards relating to (i) the plugging,
abandonment and/or replugging of all Wells, including inactive Wells or
temporarily abandoned Wells, included in the Assets, (ii) the dismantling or
decommissioning and removal of any Personal Property and other property of
whatever kind related to or associated with operations and activities conducted
by whomever on the Properties or otherwise, pursuant to the Leases or Applicable
Contracts and (iii) the clean up, restoration and/or remediation of the property
covered by the Leases or related to the Assets (collectively, the “P&A
Obligations”).
          6.7 Record Retention. Buyer, for a period of seven years following
Closing, will (i) retain the Records, (ii) provide Seller, its Affiliates and
its and their officers, employees and representatives with access to the Records
(to the extent that Seller has not retained the original or a copy) during
normal business hours for review and copying at Seller’s expense and upon
reasonable notice, and (iii) provide Seller, its Affiliates and its and their
officers, employees and representatives with access, during normal business
hours, to materials received or produced after Closing relating to any indemnity
claim made under Section 13.2 of this Agreement for review and copying at
Seller’s expense. If Buyer shall desire to dispose of or transfer any such
Records or other materials upon or after the expiration of such seven-year
period, Buyer shall, prior to any disposition, give Seller notice and a
reasonable opportunity at Seller’s expense to segregate and remove or copy such
Records or other materials as Seller may select.
          6.8 Notifications. Each Party shall promptly notify the other Party in
writing of any circumstances or facts or matters which become known to it after
execution of this Agreement but prior to Closing which are inconsistent in any
respect with any Party’s representations and warranties which would if
subsisting at Closing be inconsistent with any of those representations and
warranties. The Parties agree that the disclosures set forth in the Schedules
hereto shall be deemed to be amended, as applicable, with effect on and from the
date of such written notification to reflect such circumstances, facts or
matters. No supplement or amendment of any Schedule made pursuant to this
Section 6.8 shall be deemed to cure any breach of a representation or warranty
made by Seller or Buyer in this Agreement unless the parties agree thereto.
ARTICLE VII
BUYER’S CONDITIONS TO CLOSING
     The obligations of Buyer to consummate the transactions provided for herein
are subject, at the option of Buyer, to the fulfillment on or prior to the
Closing Date of each of the following conditions:
          7.1 Representations. The representations and warranties of Seller set
forth in this Agreement shall be true and correct on and as of the Closing Date,
with the same force and effect as though such representations and warranties had
been made or given on and as of the Closing

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Date, except where the failure of such representations or warranties to be so
true and correct does not have, and would not have, individually or in the
aggregate, a Material Adverse Effect. Notwithstanding, the Seller’s
representations and warranties referenced above, there presently exist other
provisions in this Agreement pursuant to which price and other adjustments can
be made relating to certain of the representations and warranties, which may
reduce Material Adverse Effects, by cure or otherwise. The referenced provisions
of Article IV and the provisions of this Section 7.1, are not intended to
replace or override those adjustment mechanisms, to the extent they are
applicable.
          7.2 Performance. Seller shall have performed or complied in all
material respects with all obligations, agreements and covenants contained in
this Agreement as to which performance or compliance by Seller is required prior
to or at the Closing Date.
          7.3 No Legal Proceedings. No material suit, action or other proceeding
shall be pending before any Governmental Authority seeking to restrain,
prohibit, enjoin or declare illegal, or seeking substantial damages in
connection with, the transactions contemplated by this Agreement.
          7.4 Title Defects and Environmental Defects. The sum of (i) all Title
Defect Amounts determined under Section 11.2(d)(i) prior to the Closing, less
the sum of all Title Benefit Amounts determined under Section 11.2(b) prior to
Closing, plus (ii) all Remediation Amounts for environmental defects determined
under Article XII prior to the Closing, shall not exceed 15% of the Purchase
Price.
          7.5 HSR Act. If applicable, the waiting period under the HSR Act
applicable to the consummation of the transactions contemplated hereby shall
have expired, notice of early termination shall have been received, or a consent
order issued by or from applicable Governmental Authorities.
ARTICLE VIII
SELLER’S CONDITIONS TO CLOSING
     The obligations of Seller to consummate the transactions provided for
herein are subject, at the option of Seller, to the fulfillment on or prior to
the Closing Date of each of the following conditions precedent:
          8.1 Representations. The representations and warranties of Buyer set
forth in this Agreement shall be true and correct on and as of the Closing Date,
with the same force and effect as though such representations and warranties had
been made or given on and as of the Closing Date, except where the failure of
such representations or warranties to be so true and correct would not have,
individually or in the aggregate, a Material Adverse Effect.
          8.2 Performance. Buyer shall have performed or complied in all
material respects with all obligations, agreements and covenants contained in
this Agreement as to which performance or compliance by Buyer is required prior
to or at the Closing Date.
          8.3 No Legal Proceedings. No material suit, action or other proceeding
shall be pending before any Governmental Authority seeking to restrain, prohibit
or declare illegal or

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seeking substantial damages in connection with, the transactions contemplated by
this Agreement.
          8.4 Title Defects and Environmental Defects. The sum of (i) all Title
Defect Amounts determined under Section 11.2(d)(i) prior to the Closing, less
the sum of all Title Benefit Amounts determined under Section 11.2(b) prior to
Closing, plus (ii) all Remediation Amounts for environmental defects determined
under Article XII prior to the Closing, shall not exceed 15% of the Purchase
Price.
          8.5 HSR Act. If applicable, the waiting period under the HSR Act
applicable to the consummation of the transactions contemplated hereby shall
have expired, notice of early termination shall have been received or a consent
order issued by or from applicable Governmental Authorities.
          8.6 Replacement Bonds, Letters of Credit and Guarantees. Buyer shall
have obtained, or caused to be obtained, in the name of Buyer, replacements for
Seller’s and/or its Affiliates’ bonds, letters of credit and guaranties, if any,
to the extent required by Section 6.3.
          8.7 Insurance. Buyer shall have furnished Seller with certificates of
insurance on forms reasonably acceptable to Seller which list Buyer’s insurance
policies relating to the Assets, including (i) insurance which complies with all
applicable workers’ compensation and occupational disease laws covering all of
Buyer’s employees performing any work or activities as to oil and gas leasehold
interests subject to this Agreement, (ii) insurance for all work performed
offshore, including insurance to cover claims under the United States
Longshoremen’s and Harbor Workers’ Act extended to include the Outer Continental
Shelf, (iii) commercial general liability insurance (including contractual
liability coverage) and pollution liability insurance, (iv) excess liability
insurance (including contractual liability coverage), (v) well control insurance
and (vi) such other insurance and proof of financial responsibility as is
required under the applicable provisions of OPA or MMS requirements.
ARTICLE IX
CLOSING
          9.1 Date of Closing. Subject to the conditions stated in this
Agreement, the sale by Seller and the purchase by Buyer of the Assets pursuant
to this Agreement (the “Closing”) shall occur on or before 9:00 a.m. on
March 31, 2006, or such other date as Buyer and Seller may agree upon in
writing. The date of the Closing shall be the “Closing Date.”
          9.2 Place of Closing. The Closing shall be held at the offices of Akin
Gump Strauss Hauer & Feld LLP, 1111 Louisiana Street, 44th Floor, Houston, Texas
77002, or at such other place as Seller and Buyer may agree to in writing.
          9.3 Closing Obligations. At the Closing, the following documents shall
be delivered and the following events shall occur, the execution of each
document and the occurrence of each event being a condition precedent to the
others and each being deemed to have occurred simultaneously with the others:

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          (a) Seller and Buyer shall execute and deliver the Assignments, in
sufficient counterparts to facilitate recording in the applicable counties and
parishes adjacent to the Assets.
          (b) Seller and Buyer shall execute and deliver the Preliminary
Settlement Statement.
          (c) Buyer and Seller shall execute and file all forms (and Buyer shall
perform all acts) required by the MMS (and other appropriate governmental
agencies) to transfer ownership and operatorship of the Assets, where
applicable, from Seller to Buyer effective as of the Effective Time.
          (d) Buyer shall deliver to Seller, to the account designated in the
Preliminary Settlement Statement, by direct bank or wire transfer in same day
funds, the Adjusted Purchase Price, less the amount of the Deposit.
          (e) Buyer shall deliver to Seller evidence acceptable to Seller that
Buyer is qualified to hold title to the Leases with the MMS and to operate
(should Buyer’s Affiliate become the operator of the Assets or a portion
thereof) the platforms, wells, pipelines and facilities associated therewith,
including copies of Buyer’s MMS qualification card and any powers of attorney of
those persons executing documents at Closing on behalf of Buyer.
          (f) Buyer shall deliver to Seller evidence satisfactory to Seller that
Buyer (or its nominated Affiliated operator, if one is designated by Buyer upon
Closing) has obtained all lease, pipeline and operating bonds necessary for it
to become operator of record by MMS with respect to the Leases and oil and gas
properties subject hereto.
          (g) Buyer shall deliver to Seller a secretary’s certificate of Buyer’s
general partner, including certified resolutions of its general partner,
evidencing the approval of Buyer’s general partner of this Agreement and the
transactions contemplated hereby and including an incumbency certificate
regarding the authority of the person(s) signing this Agreement and any of the
Closing documents on behalf of the Buyer.
          (h) Where Seller is the designated Operator of a Lease, Buyer shall
promptly file all appropriate forms, declarations or bonds with federal and
state governmental agencies relative to Buyer’s Affiliate’s assumption of
operations from such Seller. Buyer shall also take all actions necessary to
qualify as a successor Operator to Seller under any applicable joint operating
agreement (subject to the terms of that operating agreement) and to provide
appropriate evidence of financial responsibility as required by OPA.
          (i) Seller shall deliver to Buyer a secretary’s certificate of Seller,
including certified resolutions of its Board of Directors, evidencing the
approval of Seller’s Board of Directors of this Agreement and the transactions
contemplated hereby and including an incumbency certificate regarding the
authority of the person(s) signing this Agreement and any of the Closing
documents on behalf of the Seller.
          (j) Seller shall deliver to Buyer on forms reasonably acceptable to
Buyer transfer orders or letters in lieu thereof directing all purchasers of
production to make

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payment to Buyer of proceeds attributable to production from the Assets from and
after the Effective Time, for delivery by Buyer to the purchasers of production.
          (k) Seller shall deliver an executed statement described in Treasury
Regulation §1.1445-2(b)(2) certifying that Seller is not a foreign person within
the meaning of the Code.
          (l) Seller and Buyer shall execute and deliver any other agreements,
instruments and documents which are required by other terms of this Agreement to
be executed and/or delivered at the Closing.
          9.4 Records. In addition to the obligations set forth under
Section 9.3 above, within 30 days following the Closing, Seller shall deliver to
Buyer possession of the Records.
ARTICLE X
ACCESS/DISCLAIMERS
          10.1 Access.
          (a) From and after the date hereof and up to and including the Closing
Date (or earlier termination of this Agreement) but subject to applicable laws,
the other provisions of this Section 10.1 and obtaining any required consents of
Third Parties, including Third Party operators of the Assets (with respect to
which consents Seller shall use commercially reasonable efforts to obtain),
Seller shall afford to Buyer and its officers, employees, agents, accountants,
attorneys, investment bankers and other authorized representatives (“Buyer’s
Representatives”) full access, during normal business hours and upon reasonable
notice, to the Assets and all Records and other documents in Seller’s or any
their respective Affiliates’ possession relating primarily to the Assets. Seller
shall also make available to Buyer and Buyer’s Representatives, upon reasonable
notice during normal business hours, Seller’s personnel knowledgeable with
respect to the Assets in order that Buyer may make such diligence investigation
as Buyer considers necessary or appropriate. All investigations and due
diligence conducted by Buyer or any Buyer’s Representative shall be conducted at
Buyer’s sole cost, risk and expense and any conclusions made from any
examination done by Buyer or any Buyer’s Representative shall result from
Buyer’s own independent review and judgment.
          (b) Buyer shall be entitled to conduct a non-invasive environmental
site assessment with respect to the Assets. Seller or its designee shall have
the right to accompany Buyer and Buyer’s Representatives whenever they are on
site on the Assets. Notwithstanding anything herein to the contrary, Buyer shall
not have access to, and shall not be permitted to conduct any environmental due
diligence with respect to any Assets where Seller does not have the authority to
grant access for such due diligence; provided, however, Seller shall use its
commercially reasonable efforts to obtain permission from any Third Party
operator to allow Buyer and Buyer’s Representatives such access, it being
understood by Buyer that the execution by Buyer of a customary boarding
agreement may be a condition of such access.

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          (c) Buyer shall coordinate its environmental site assessments and
physical inspections of the Assets with Seller to minimize any inconvenience to
or interruption of the conduct of business by Seller. Buyer shall abide by
Seller’s, and any Third Party operator’s, safety rules, regulations and
operating policies while conducting its due diligence evaluation of the Assets
including any environmental or other inspection or assessment of the Assets.
Buyer hereby agrees to defend, indemnify and hold harmless each of the Third
Party operators and owners of the Assets and Seller Indemnified Parties from and
against any and all Liabilities arising out of, resulting from or relating to
any field visit, environmental property assessment, or other due diligence
activity conducted by Buyer or any Buyer’s Representative with respect to the
Assets, even if such Liabilities arise out of or result from, solely or in part,
the sole, active, passive, concurrent or comparative negligence, strict
liability or other fault or violation of Law of or by any such Third Party
operator or owner or Seller Indemnified Party, excepting only Liabilities
actually resulting on the account of the gross negligence or willful misconduct
of such person.
          (d) Upon Seller’s request, Buyer agrees to provide Seller promptly,
but not later than the Environmental Claim Date, copies of all reports, test
results, and other documentation and data prepared or compiled by Buyer and/or
any of Buyer’s Representatives and which contain information collected or
generated from Buyer’s due diligence with respect to the Assets. Seller shall
not be deemed by its receipt of said documents or otherwise to have made any
representation or warranty, expressed, implied or statutory, as to the condition
to the Assets or to the accuracy of said documents or the information contained
therein.
          (e) Upon completion of Buyer’s due diligence, Buyer shall at its sole
cost and expense and without any cost or expense to Seller or its Affiliates,
(i) repair all damage done to the Assets in connection with Buyer’s due
diligence in accordance with recognized industry standards or requirements of
Third Party operators, (ii) restore the Assets to the approximate same or better
condition than existed prior to commencement of Buyer’s due diligence, to the
full extent of any damage related to Buyer’s due diligence, and (iii) remove all
equipment, tools or other property brought onto the Assets in connection with
Buyer’s due diligence. Any disturbance to the Assets (including, without
limitation, any real property, platform or other fixtures associated with such
Assets) resulting from Buyer’s due diligence will be promptly corrected by
Buyer.
          (f) During all periods that Buyer, and/or any of Buyer’s
Representatives are on the Assets, Buyer shall maintain, at its sole expense and
with insurers reasonably satisfactory to Seller, policies of insurance of the
types and in the amounts reasonably requested by Seller. Coverage under all
insurance required to be carried by Buyer hereunder will (i) be primary
insurance, (ii) list Seller Indemnified Parties as additional insureds,
(iii) waive subrogation against Seller Indemnified Parties, (iv) be maintained
for three years following Buyer’s and/or Buyer’s Representatives due diligence
activities, and (v) provide for 30 days’ prior notice to Seller in the event of
cancellation or modification of the policy or reduction in coverage. Upon
request by Seller, Buyer shall provide evidence of such insurance to Seller
prior to entering upon the Assets.

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          10.2 Confidentiality. Buyer acknowledges that, pursuant to its right
of access to the Records or the Assets, Buyer will become privy to confidential
and other information of Seller and that such confidential information shall be
held confidential by Buyer and Buyer’s Representatives in accordance with the
terms of the Confidentiality Agreement. If the Closing should occur, the
foregoing confidentiality restriction on Buyer, including the Confidentiality
Agreement, shall terminate (except as to (i) such portion of the Assets that are
not conveyed to Buyer pursuant to the provisions of this Agreement, (ii) any
assets covered by the Confidentiality Agreement that are not conveyed to the
Buyer pursuant to this Agreement; and (iii) the Excluded Assets).
          10.3 Disclaimers.
          (a) Except as and to the extent expressly set forth in Article IV and
elsewhere in this Agreement and the special warranty in the assignments to be
executed pursuant hereto, (i) Seller makes no representations or warranties,
express, statutory or implied, and (ii) Seller expressly disclaims all liability
and responsibility for any representation, warranty, statement or information
made or communicated (orally or in writing) to Buyer or any of its Affiliates or
Representatives (including, without limitation, any opinion, information,
projection or advice that may have been provided to Buyer by any officer,
director, employee, agent, consultant, representative or advisor of Seller or
any of its Affiliates). In particular, except as expressly set forth in
Article IV and elsewhere in this Agreement and the special warranty in the
assignments to be executed pursuant hereto, and without limiting the generality
of the foregoing, Seller expressly disclaims any representation or warranty,
express, statutory or implied, as to (i) title to any of the Assets, (ii) the
contents, character or nature of any report of any petroleum engineering
consultant or any engineering, geological or seismic data or interpretation,
relating to the Assets, (iii) the quantity, quality or recoverability of
Hydrocarbons in or from the Assets, (iv) any estimates of the value of the
Assets or future revenues generated by the Assets, (v) the production of
Hydrocarbons from the Assets, (vi) the maintenance, repair, condition, quality,
suitability, design or marketability of the Assets, (vii) the content of any
information memorandum, reports, brochures, charts or statements prepared by
Seller or third parties with respect to the Assets and (viii) any other
materials or information that may have been made available to Buyer or its
Affiliates, or its or their Representatives in connection with the transactions
contemplated by this Agreement or any discussion or presentation relating
thereto. Except as expressly set forth in Article IV and elsewhere in this
Agreement, Seller further disclaims any representation or warranty, express,
statutory or implied, of merchantability, freedom from latent vices or defects,
fitness for a particular purpose or conformity to models or samples of materials
of any assets, rights of a purchaser under appropriate statutes to claim
diminution of consideration or return of the Purchase Price, it being expressly
understood and agreed by the parties hereto that Buyer shall be deemed to be
obtaining the Assets in their present status, condition and state of repair, “as
is” and “where is” with all faults or defects (known or unknown, latent,
discoverable or undiscoverable), and that Buyer has made or caused to be made
such inspections as Buyer deems appropriate. With respect to any of the Assets
that are located in or in

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federal waters offshore Louisiana, Buyer acknowledges that this waiver has been
expressly called to its attention and includes, without limitation, a waiver of
warranty against rehibitory vices arising under Louisiana Civil Code Articles
2520 through 2548, inclusive.
          (b) Seller and Buyer agree that, to the extent required by applicable
Law to be effective, the disclaimers of certain representations and warranties
contained in this Section 10.3 are “conspicuous” disclaimers for the purpose of
any applicable Law.
ARTICLE XI
TITLE MATTERS; CASUALTIES; TRANSFER RESTRICTIONS
          11.1 Seller’s Title. General Disclaimer of Title Warranties and
Representations. Other than the special warranty in the assignments to be
executed pursuant hereto, Seller makes no warranty or representation, express,
implied, statutory or otherwise, not even as to a return of the Purchase Price,
with respect to Seller’s title to any of the Assets and Buyer hereby
acknowledges and agrees that, other than pursuant to the special warranty in the
assignments to be executed pursuant hereto, Buyer’s sole remedy for any defect
of title, including any Title Defect, with respect to any of the Assets shall be
as set forth in Section 11.2.
          11.2 Notice of Title Defects; Defect Adjustments.
          (a) Title Defect Notices. On or before five business days prior to
Closing at 11:59 p.m. Central Standard Time, (the “Title Claim Date”), Buyer
must deliver claim notices to Seller meeting the requirements of this
Section 11.2(a) (collectively the “Title Defect Notices” and individually a
“Title Defect Notice”) setting forth any matters which, in Buyer’s reasonable
opinion, constitute Title Defects and which Buyer intends to assert as a Title
Defect pursuant to this Article XI. For all purposes of this Agreement and
notwithstanding anything herein to the contrary, Buyer shall be deemed to have
waived, and Seller shall have no liability for, any Title Defect which Buyer
fails to assert as a Title Defect by a Title Defect Notice received by Seller on
or before the Title Claim Date. To be effective, each Title Defect Notice shall
be in writing, and shall include (i) a description of the alleged Title
Defect(s), (ii) the Wells (and the applicable zone(s) therein) and/or other
Assets affected by the Title Defect (each a “Title Defect Property”), (iii) the
Allocated Value of each Title Defect Property, (iv) supporting documents
reasonably necessary for Seller to verify the existence of the alleged Title
Defect(s), and (v) the amount by which Buyer reasonably believes the Allocated
Value of each Title Defect Property is reduced by the alleged Title Defect(s)
and the computations upon which Buyer’s belief is based. To give Seller an
opportunity to commence reviewing and curing Title Defects, Buyer agrees to use
reasonable efforts to give Seller, on or before the end of each calendar week
prior to the Title Claim Date, written notice of all Title Defects discovered by
Buyer during the preceding calendar week, which notice may be preliminary in
nature and supplemented prior to the Title Claim Date.
          (b) Title Benefit Notices. Seller shall have the right, but not the
obligation, to deliver to Buyer on or before the Title Claim Date with respect
to each Title Benefit a notice (a “Title Benefit Notice”) including (i) a
description of the Title Benefit, (ii) the

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Wells (and the applicable zone(s) therein) affected by the Title Benefit, and
(iii) the amount by which Seller reasonably believes the Allocated Value of
those Wells (and the applicable zone(s) therein) is increased by the Title
Benefit and the computations upon which Seller’s belief is based. Seller shall
be deemed to have waived all Title Benefits of which it has not given notice on
or before the Title Claim Date.
          (c) Seller’s Right to Cure. Seller shall have the right, but not the
obligation, to attempt, at its sole cost, to cure at any time prior to the
Closing Date (the “Cure Period”), any Title Defects of which it has been advised
by Buyer. In addition, Seller shall have the right to hold back any Title Defect
Property from the Closing for a period of up to 30 days to attempt to cure, at
Seller’s sole cost, the applicable Title Defect, and the Purchase Price payable
at Closing shall be reduced by the Allocated Value of such Property. Any Title
Defect Property that is withheld from the initial Closing will be conveyed to
Buyer at a subsequent Closing on or before the 40th day following the Closing
Date, at which Closing Buyer shall pay to Seller the Allocated Value (subject to
the applicable adjustments set forth in this Article XI or in Section 3.3) of
such Property, whether or not Seller was able to cure the Title Defect.
          (d) Remedies for Title Defects. Subject to Seller’s continuing right
to dispute the existence of a Title Defect and/or the Title Defect Amount
asserted with respect thereto in accordance with this Section 11.2 and subject
to the rights of the parties pursuant to Section 14.1, in the event that any
Title Defect timely asserted by Buyer in accordance with Section 11.2(a) is not
waived in writing by Buyer or cured on or before Closing (or subsequent Closing,
if applicable, pursuant to subsection (c) above), Seller shall, at its sole
option, elect to:
     (i) subject to the Individual Title Defect Threshold and the Aggregate
Deductible, reduce the Purchase Price by an amount (“Title Defect Amount”)
determined pursuant to Section 11.2(g) or 11.2(j) as being the value of such
Title Defect;
     (ii) indemnify Buyer against all Liability resulting from such Title Defect
pursuant to an indemnity agreement (the “Title Indemnity Agreement”) in the form
attached hereto as Exhibit G; or
     (iii) if applicable, terminate this Agreement pursuant to Section 14.1(a).
          Notwithstanding the foregoing, Seller may, at its option notify Buyer
at any time on or before 11:59 p.m. Central time on the second business day
following the Title Claim Date that Seller disputes the Title Defect and elects
to exclude the Title Defect Property from the Assets to be conveyed to Buyer at
Closing, and the Purchase Price shall be reduced by the Allocated Value of the
Title Defect Property so excluded, and such disputed Title Defect shall be
resolved pursuant to Section 11.2(j). Upon resolution of the dispute under
Section 11.2(j), then within ten business days following such resolution, Buyer
shall purchase from Seller such Title Defect Property excluded from the
conveyance of the Assets at the Closing pursuant to the preceding sentence,
under the terms of this Agreement for price equal to the Allocated Value thereof
previously

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withheld from the Purchase Price, adjusted if applicable for any Title Defect
Amount and/or Title Benefit Amount associated therewith as determined by the
arbitrator under said Section 11.2(j) and adjusted as otherwise provided herein.
          (e) Remedies for Title Benefits. With respect to each Well (or
specified zone(s) therein) affected by Title Benefits reported under
Section 11.2(b), the Purchase Price shall be increased by an amount (the “Title
Benefit Amount”) equal to the increase in the Allocated Value for such Well
caused by such Title Benefits, as determined pursuant to Section 11.2(h).
Notwithstanding anything to the contrary, (i) in no event shall there be any
adjustments to the Purchase Price or other remedies provided to Seller for any
individual Title Benefit for which the Title Benefit Amount does not exceed
$200,000 (the “Individual Title Benefit Threshold”); and (ii) in no event shall
there be any adjustments to the Purchase Price or other remedies provided to
Seller for any Title Benefit that exceeds the Individual Title Benefit Threshold
unless the sum of the Title Benefit Amounts of all such Title Benefits that
exceed the Individual Title Benefit Threshold, in the aggregate, exceeds the
Aggregate Deductible, after which point Seller shall be entitled to adjustments
to the Purchase Price only with respect to such Title Benefits in excess of such
Aggregate Deductible.
          (f) Exclusive Remedy. Section 11.2(d) shall be the exclusive right and
remedy of Buyer with respect to Seller’s failure to have Defensible Title with
respect to any Asset, other than pursuant to the special warranty in the
assignments to be executed pursuant hereto.
          (g) Title Defect Amount. The Title Defect Amount resulting from a
Title Defect shall be the amount by which the Allocated Value of the affected
Title Defect Property is reduced as a result of the existence of such Title
Defect and shall be determined in accordance with the following terms and
conditions:
     (i) if Buyer and Seller agree on the Title Defect Amount, then that amount
shall be the Title Defect Amount;
     (ii) if the Title Defect is an Encumbrance that is undisputed and
liquidated in amount, then the Title Defect Amount shall be the amount necessary
to be paid to remove the Title Defect from the Title Defect Property;
     (iii) if the Title Defect does not affect the ratio of the Net Revenue
Interest to the Working Interest for any Title Defect Property stated in
Exhibit A, then the Title Defect Amount shall be the product of the Allocated
Value of such Title Defect Property multiplied by a fraction, the numerator of
which is the Net Revenue Interest decrease and the denominator of which is the
Net Revenue Interest stated in Exhibit A;
     (iv) if the Title Defect represents an obligation or Encumbrance upon or
other defect in title to the Title Defect Property of a type not described
above, the Title Defect Amount shall be determined by taking into account the
Allocated Value of the Title Defect Property, the portion of the Title Defect
Property

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affected by the Title Defect, the legal effect of the Title Defect, the
potential economic effect of the Title Defect over the life of the Title Defect
Property, the values placed upon the Title Defect by Buyer and Seller and such
other reasonable factors as are necessary to make a proper evaluation; provided,
however, that if such Title Defect is reasonably capable of being cured, the
Title Defect Amount shall not be greater than the reasonable cost and expense of
curing such Title Defect;
     (v) If (A) a Title Defect Property is not a Well (or specified zone(s)
therein), (B) such Title Defect Property does not have an Allocated Value,
(C) the Title Defect with respect to such Title Defect Property causes a loss of
title to such Title Defect Property, and (D) the loss of such title to such
Title Defect Property will prevent the continued operation or production of a
Well (or one or more specified zone(s) therein) shown in Exhibit A (such Well or
the specified zone(s) therein being referred to as the “Affected Well”) and the
other Assets are not capable of providing an alternative means to support, in
all material respects, the continued operation or production of the Affected
Well, then such Title Defect Property (a “Defective Support Property”) and such
Affected Well(s) shall collectively be considered a single Title Defect Property
for purposes of this Article XI; provided, however, that the Title Defect Amount
resulting from the Title Defect affecting such Defective Support Property shall
be the lesser of (1) the reasonable cost to replace such Defective Support
Property, if such Defective Support Property is reasonably capable of being
replaced, (2) the reasonable cost of providing an alternative means to support
in all material respects the continued operation or production of the Affected
Well, or (3) the Title Defect Amount that would otherwise be applicable to such
Title Defect under this Article XI.
     (vi) the Title Defect Amount with respect to a Title Defect Property shall
be determined without duplication of any costs or losses included in another
Title Defect Amount hereunder; and
     (vii) notwithstanding anything to the contrary in this Article XI, the
aggregate Title Defect Amounts attributable to the effects of all Title Defects
upon any Title Defect Property shall not exceed the Allocated Value of the Title
Defect Property.
          (h) Title Benefit Amount. The Title Benefit Amount resulting from a
Title Benefit shall be determined in accordance with the following methodology,
terms and conditions:
     (i) if Buyer and Seller agree on the Title Benefit Amount, then that amount
shall be the Title Benefit Amount; and
     (ii) if the Title Benefit represents a benefit in title of a type not
described above, the Title Benefit Amount shall be determined by taking into
account the Allocated Value of the affected property, the portion of the subject
property affected by the Title Benefit, the legal effect of the Title Benefit,
the

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potential economic effect of the Title Benefit over the life of the subject
property, the values placed upon the Title Benefit by Buyer and Seller and such
other reasonable factors as are necessary to make a proper evaluation.
          (i) Title Deductibles. Notwithstanding anything to the contrary,
(i) in no event shall there be any adjustments to the Purchase Price or other
remedies provided by Seller for any individual Title Defect for which the Title
Defect Amount does not exceed $200,000 (“Individual Title Defect Threshold”);
and (ii) in no event shall there be any adjustments to the Purchase Price or
other remedies provided by Seller for any Title Defect that exceeds the
Individual Title Defect Threshold unless the sum of (1) the Title Defect Amounts
of all such Title Defects that exceed the Individual Title Defect Threshold, in
the aggregate, excluding any Title Defects cured by Seller plus (2) the
Remediation Amounts of all environmental defects, in the aggregate, excluding
any individual Environmental Defect for which the Remediation Amount does not
exceed the Individual Environmental Threshold and any environmental defects
cured by Seller, exceeds the Aggregate Deductible, after which point Buyer shall
be entitled to adjustments to the Purchase Price or other remedies only with
respect to such Title Defects in excess of such Aggregate Deductible.
          (j) Title Dispute Resolution. Seller and Buyer shall attempt to agree
on all Title Defects, Title Benefits, Title Defect Amounts and Title Benefit
Amounts prior to Closing. If Seller and Buyer are unable to agree by Closing,
the Title Defect Amounts and Title Benefit Amounts in dispute shall be
exclusively and finally resolved pursuant to this Section 11.2(j). There shall
be a single arbitrator, who shall be a title attorney with at least ten years
experience in oil and gas titles involving properties in the regional area in
which the Title Defect Properties are located, as selected by mutual agreement
of Buyer and Seller within 15 days after the end of the Cure Period, and absent
such agreement, by the Houston office of the American Arbitration Association
(the “Title Arbitrator”). The arbitration proceeding shall be held in Houston,
Texas and shall be conducted 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. The Title Arbitrator’s determination
shall be made within 20 days after submission of the matters in dispute and
shall be final and binding upon both parties, without right of appeal. In making
his determination, the Title Arbitrator shall be bound by the provisions of
Sections 11.2(g) and 11.2(h) and, subject to the foregoing, may consider such
other matters as in the opinion of the Title Arbitrator are necessary to make a
proper determination. The Title Arbitrator, however, may not award the Buyer a
greater Title Defect Amount than the Title Defect Amount claimed by Buyer in its
applicable Title Defect Notice and may not award Seller a greater Title Benefit
Amount than the Title Benefit Amount claimed by Seller in its applicable Title
Benefit Notice. The Title Arbitrator shall act as an expert for the limited
purpose of determining the specific disputed Title Defect, Title Benefit, Title
Defect Amounts and/or Title Benefit Amounts submitted by either party and may
not award damages, interest or penalties to either party with respect to any
matter. Seller and Buyer shall each bear its own legal fees and other costs of
presenting its case. The non-prevailing party shall bear the costs and expenses
of the Title Arbitrator. To the extent that the award of the Title Arbitrator
with respect to any Title Defect Amount or Title Benefit Amount is not taken
into account as an

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adjustment to the Purchase Price pursuant to Section 3.5 or Section 3.6, then
within ten days after the Title Arbitrator delivers written notice to Buyer and
Seller of his award with respect to a Title Defect Amount or a Title Benefit
Amount, and subject to the other terms and provisions hereof, (i) Buyer shall
pay to Seller the amount, if any, so awarded by the Title Arbitrator to Seller
and (ii) Seller shall pay to Buyer the amount, if any, so awarded by the Title
Arbitrator to Buyer.
          (k) Scrivener’s Error. Notwithstanding anything set forth in this
Article XI, in the event that any of the Working Interests or Net Revenue
Interests set forth in Exhibit A differ from Seller’s records, and the parties
agree that such difference is attributable to a scrivener’s error, (i) Buyer
shall have the right to raise such error as a Title Defect subject to the
provisions of this Section 11.2, (ii) Buyer and Seller shall meet and attempt to
agree on a Purchase Price adjustment due to such difference, and (iii) the
Individual Title Defect Threshold and the Aggregate Deductible shall not apply
to any such Purchase Price adjustment.
          11.3 Casualty or Condemnation Loss.
          (a) Notwithstanding anything herein to the contrary, from and after
the Effective Time, subject to the Closing, Buyer shall assume all risk of loss
with respect to production of Hydrocarbons through normal depletion (including
watering out of any well, collapsed casing or sand infiltration of any well) and
the depreciation of Personal Property due to ordinary wear and tear, in each
case, with respect to the Assets.
          (b) If, after the date of this Agreement but prior to the Closing
Date, any portion of the Assets is destroyed by fire or other casualty or is
taken in condemnation or under right of eminent domain, and the aggregate amount
of any such loss or taking exceeds 15% of the Purchase Price, either party shall
have the right to terminate this Agreement and Buyer shall promptly receive back
the Deposit. If the aggregate amount of any such loss or taking is 15% or less
of the Purchase Price, Buyer shall be required to close. If the loss as a result
of such individual casualty or taking exceeds $250,000 and the parties proceed
to Closing, Seller shall elect by written notice to Buyer prior to Closing
either (i) to cause the Assets affected by such casualty or taking to be
repaired or restored to at least its condition prior to such casualty or taking,
at Seller’s sole cost, as promptly as reasonably practicable (which work may
extend after the Closing Date), or (ii) to indemnify Buyer through a document
reasonably acceptable to Seller and Buyer against any costs or expenses that
Buyer reasonably incurs to repair the Assets subject to such casualty or taking
or (iii) to treat such casualty or taking as a Title Defect with respect to the
affected Asset or Assets under Section 11.2 or (iv) Seller, at Closing, shall
pay to Buyer all sums paid or payable to Seller by Third Parties by reason of
such casualty or taking insofar as with respect to the Assets and shall assign,
transfer and set over to Buyer or subrogate Buyer to all of Seller’s right,
title and interest (if any) in insurance claims, unpaid awards and other rights
against Third Parties (excluding any Liabilities, other than insurance claims,
of or against any Seller Indemnified Parties) arising out of such casualty or
taking insofar as with respect to the Assets; provided, however, that in the
case of (iv), Seller shall reserve and retain (and Buyer shall assign to Seller)
all rights, title, interests and claims against Third Parties for the recovery
of

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Seller’s costs and expenses incurred prior to the Closing Date in pursuing or
asserting any such insurance claims or other rights against Third Parties or in
defending or asserting rights in such condemnation or eminent domain action with
respect to the Assets. In the case of (i) — (iii), Seller shall retain all
rights to insurance, condemnation awards and other claims against third parties
with respect to the casualty or taking except to the extent the parties
otherwise agree in writing.
          (c) If any action for condemnation or taking under right of eminent
domain is pending or threatened with respect to any Asset or portion thereof
after the date of this Agreement, but no taking of such Asset or portion thereof
occurs prior to the Closing Date, Buyer shall nevertheless be required to close
and Seller, at Closing, shall assign, transfer and set over to Buyer or
subrogate Buyer to all of Seller’s right, title and interest (if any) in such
condemnation or eminent domain action, including any future awards therein,
insofar as they are attributable to the Assets threatened to be taken, except
that Seller shall reserve and retain (and Buyer shall assign to Seller) all
rights, titles, interests and claims against Third Parties for the recovery of
Seller’s costs and expenses incurred prior to the Closing in defending or
asserting rights in such action with respect to the Assets.
     11.4 Preferential Purchase Rights and Consents to Assign.
          (a) The provisions of this Section 11.4 shall apply to agreements
relating to the Properties which enable or may enable a Third Party to purchase
a Property or any part thereof, as a result of the sale of such Property or
portion thereof to Buyer (such rights hereafter referred to as “Preference
Rights”). Buyer is purchasing the Properties subject to all Preference Rights.
          (b) Seller shall send notices of the transactions contemplated hereby
to holders of Preference Rights (“Preference Notices”) set forth on
Schedule 4.11. The Preference Notices shall be in a form reasonably satisfactory
to Buyer, and shall include the Allocated Value of the Property or portion
thereof affected by each Preference Right. After receiving a response to a
Preference Notice, the Seller shall promptly provide a copy of the response to
Buyer at the address set forth in this Agreement. Seller and Buyer agree that
the Allocated Value for properties subject to Preference Rights shall be the
sole responsibility of Buyer, and Buyer agrees to indemnify Seller and hold
Seller harmless from all liability and claims related to the reasonableness of
such values.
          (c) In the event, and only in such event, the holder of a Preference
Right elects to properly exercise such Preference Right and to purchase the
Property subject thereto upon the Closing, Seller shall convey on substantially
the same terms and conditions set forth in the applicable assignment attached to
this Agreement (subject to such modifications as deemed reasonably necessary by
Buyer to reflect the relevant Preference Right transaction, the price and the
additional terms as contemplated by this Agreement) the Property or portion of
the Property subject to the Preference Right to the holder of such Preference
Right at the Closing; provided, however, that the Seller shall have no
obligation to convey any Property to a Preference Right holder unless and until
the Closing occurs and provided further that Seller shall: (i) convey to Buyer
at Closing

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all Property subject to Preference Rights for which the time for election to
exercise such Preferential Purchase Right has expired and the Preferential Right
has not been properly asserted; and (ii) retain all other Property subject to a
Preference Right, subject to Seller’s obligation to convey such Property to
Buyer at such delayed Closing date to occur at the time that the election to
exercise such Preference Right has expired, and Buyer shall take all such
Property with any outstanding obligations or remaining Preference Rights and
shall indemnify Seller for any losses incurred in connection therewith as
described below. The Purchase Price to be paid at Closing by Buyer shall be
reduced by the Allocated Value of all Properties regarding which a Preference
Right has been properly exercised and no other adjustments related to such
Property(ies) shall be made to the Purchase Price under this Agreement.
Notwithstanding the foregoing, any Property that is subject to a Preference
Right and held back at the initial Closing will be conveyed to Buyer at a
delayed Closing when the time for election to exercise such Preference Right has
expired (which shall become the new Closing Date with respect to such Property).
At the delayed Closing, Buyer shall pay Seller an amount equal to the amount by
which the Purchase Price was reduced on account of the holding back of such
retained Property (as adjusted pursuant to Section 3.3 through the new Closing
Date therefor).
          (d) Buyer acknowledges that Seller desires to sell all of the Assets
and would not have entered into this Agreement but for Buyer’s agreement to
purchase all of the Assets as herein provided. Accordingly, it is expressly
understood and agreed that Seller does not desire to sell any Asset that is
subject to a Preference Right (collectively the “Preference Right Assets”)
unless the sale of all of the Assets is consummated on the Closing Date in
accordance with the terms of this Agreement. In furtherance of the foregoing,
Seller’s obligation hereunder to sell the Preference Right Assets to Buyer is
expressly conditioned upon the consummation on the Closing Date of the sale of
all of the Assets in accordance with the terms of this Agreement, either by
conveyance to Buyer or conveyance pursuant to an applicable Preference Right;
provided that, nothing herein is intended or shall operate to extend or apply
any Preference Right to any portion of the Assets which is not otherwise
burdened thereby. Time is of the essence with respect to the parties’ agreement
to consummate the sale of the Assets on the Closing Date.
          (e) In addition, Seller shall send to each holder of a right to
consent to assignment pertaining to the Assets and the transactions contemplated
hereby a notice seeking such party’s consent to the transaction contemplated
hereby. If Seller fails to obtain a consent prior to the Closing and the failure
to obtain such consent would cause the assignment of such Asset to Buyer to be
void, then the Seller shall continue to hold the operating rights or other legal
title to such Asset as nominee for Buyer. Seller shall not be obligated to incur
any expenses, obligations or other liabilities, or be responsible for any
Claims, in Seller’s capacity as nominee and Buyer shall indemnify, defend and
hold harmless Seller in relation to such Assets. Seller and Buyer, as between
themselves, shall treat and deal with such Assets as if full legal and equitable
title to such Assets had passed from Seller to Buyer at Closing. If Seller fails
to obtain a consent prior to Closing and such consent does not relate to a
material Asset or the failure to obtain such consent would not cause the
assignment of such Asset to Buyer to be void, then Buyer shall have no rights or
remedies against Seller with respect thereto.

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ARTICLE XII
ENVIRONMENTAL MATTERS
     12.1 Environmental Defects.
          (a) Assertions of Environmental Defects. Buyer must deliver claim
notices to Seller meeting the requirements of this Section 12.1(a) (collectively
the “Environmental Defect Notices” and individually an “Environmental Defect
Notice”) not later than five days prior to Closing (the “Environmental Claim
Date”) setting forth any matters which, in Buyer’s reasonable opinion,
constitute environmental defects and which Buyer intends to assert as
environmental defects pursuant to this Section 12.1. For all purposes of this
Agreement, Buyer shall be deemed to have waived any Environmental Defect which
Buyer fails to assert as an Environmental Defect by an Environmental Defect
Notice received by Seller on or before the Environmental Claim Date. To be
effective, each Environmental Defect Notice shall be in writing and shall
include (i) a description of the matter constituting the alleged Environmental
Defect, (ii) a description of each Asset (or portion thereof) that is affected
by the alleged Environmental Defect, (iii) Buyer’s assertion of the Allocated
Value of the portion of the Assets affected by the alleged Environmental Defect,
(iv) supporting documents reasonably necessary for Seller to verify the
existence of the alleged Environmental Defect, and (v) a calculation of the
Remediation Amount (itemized in reasonable detail) that Buyer asserts is
attributable to such alleged Environmental Defect. Buyer’s calculation of the
Remediation Amount included in the Environmental Defect Notice must describe in
reasonable detail the Remediation proposed for the Environmental Condition that
gives rise to the asserted Environmental Defect and identify all assumptions
used by the Buyer in calculating the Remediation Amount, including the standards
that Buyer asserts must be met to comply with Environmental Laws. Seller shall
have the right, but not the obligation, to cure any claimed Environmental Defect
on or before Closing. It shall be Buyer’s sole responsibility to inspect,
investigate, and assess any Environmental Conditions prior to the Environmental
Claim Date.
          (b) Remedies for Environmental Defects. Subject to Seller’s continuing
right to dispute the existence of an Environmental Defect and/or the Remediation
Amount asserted with respect thereto, in the event that any Environmental Defect
timely asserted by Buyer in accordance with Section 12.1(a) is not waived in
writing by Buyer or cured on or before Closing, Seller shall, at its sole
option, elect to:
     (i) subject to the Individual Environmental Threshold and the Aggregate
Deductible, reduce the Purchase Price by the Remediation Amount;
     (ii) assume responsibility for the Remediation of such Environmental
Defect;
     (iii) with consent of Buyer which shall not be unreasonably conditioned,
withheld or delayed, retain the entirety of the Asset that is subject to such
Environmental Defect, together with all associated Assets, in which event

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the Purchase Price shall be reduced by an amount equal to the Allocated Value of
such Asset and such associated Assets; or
     (iv) if applicable, terminate this Agreement pursuant to Section 14.1.
          If Seller elects the option set forth in clause (i) above, Buyer shall
be deemed to have assumed responsibility for Remediation of such Environmental
Defect and such Environmental Defect and all Liabilities with respect thereto
shall be deemed to constitute Assumed Obligations. If Seller elects the option
set forth in clause (ii) above, Seller shall use reasonable efforts to implement
such Remediation in a manner which is consistent with the requirements of
Environmental Laws in a timely fashion for the type of Remediation that Seller
elects to undertake and shall have access to the affected Assets after the
Closing Date to implement and complete such Remediation in accordance with an
Access Agreement in substantially the form attached hereto as Exhibit H (the
“Access Agreement”). Seller will be deemed to have adequately completed the
Remediation required in the immediately preceding sentence (A) upon receipt of a
certificate or approval from the applicable Governmental Authority that the
Remediation has been implemented to the extent necessary to comply with existing
regulatory requirements equal to but no more stringent than as required for land
use of the Assets as of the Closing Date or (B) upon written consent of Buyer
which consent may not be unreasonably withheld).
          (c) Exclusive Remedy. Subject to Section 12.1(d), Section 12.1(b)
shall be the exclusive right and remedy of Buyer with respect to any
Environmental Defect. Buyer hereby waives any claims of cost recovery or
contribution from Seller or its Affiliates related to the Assets under any
Environmental Law or any other cause of action.
          (d) Environmental Deductibles. Notwithstanding anything to the
contrary, (i) in no event shall there be any adjustments to the Purchase Price
or other remedies provided by Seller for any individual Environmental Defect for
which the Remediation Amount does not exceed $200,000 (“Individual Environmental
Threshold”); and (ii) in no event shall there be any adjustments to the Purchase
Price or other remedies provided by Seller for any Environmental Defect for
which the Remediation Amount exceeds the Individual Environmental Threshold
unless (A) the sum of (1) the Remediation Amounts of all such environmental
defects that exceed the Individual Environmental Threshold, in the aggregate,
excluding any environmental defects cured by Seller, plus (2) the Title Defect
Amounts of all Title Defects, in the aggregate, excluding any individual Title
Defect for which the Title Defect Amount does not exceed the Individual Title
Defect Threshold and any Title Defects cured by Seller, (B) exceeds the
Aggregate Deductible, after which point Buyer shall be entitled to adjustments
to the Purchase Price or other remedies only with respect to such environmental
defects in excess of such Aggregate Deductible.
          (e) Environmental Dispute Resolution. Seller and Buyer shall attempt
to agree on all environmental defects and Remediation Amounts prior to Closing
and as to the completion of Remediation efforts after Closing. If Seller and
Buyer are unable to

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agree by Closing (or, after Closing, as to the completion of Remediation
efforts), the environmental defects and/or Remediation Amounts in dispute shall
be exclusively and finally resolved by arbitration pursuant to this
Section 12.1. There shall be a single arbitrator, who shall be an environmental
attorney with at least ten years experience in environmental matters involving
offshore oil and gas producing properties in the Gulf of Mexico, as selected by
mutual agreement of Buyer and Seller within fifteen days after the Closing Date,
and absent such agreement, by the Houston office of the American Arbitration
Association (the “Environmental Arbitrator”). The arbitration proceeding shall
be held in Houston, Texas and shall be conducted 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 Article. The
Environmental Arbitrator’s determination shall be made within twenty days after
submission of the matters in dispute and shall be final and binding upon both
parties, without right of appeal. In making his or her determination, the
Environmental Arbitrator shall be bound by the provisions set forth in this
Section 12.1 and, subject to the foregoing, may consider such other matters as
in the opinion of the Environmental Arbitrator are necessary or helpful to make
a proper determination. The Environmental Arbitrator, however, may not award the
Buyer more than the Remediation Amount claimed by Buyer in its applicable
Environmental Defect Notice. The Environmental Arbitrator shall act as an expert
for the limited purpose of determining the specific disputed environmental
defects and/or Remediation Amounts submitted by either party and may not award
damages, interest or penalties to either party with respect to any matter.
Seller and Buyer shall each bear its own legal fees and other costs of
presenting its case. The non-prevailing party shall bear the costs and expenses
of the Environmental Arbitrator. To the extent that the award of the
Environmental Arbitrator with respect to any Remediation Amount is not taken
into account as an adjustment to the Purchase Price pursuant to Section 3.3,
then within ten days after the Environmental Arbitrator delivers written notice
to Buyer and Seller of his or her award with respect to a Remediation Amount,
and subject to Section 12.1 and the other terms and provisions hereof, (i) Buyer
shall pay to Seller the amount, if any, so awarded by the Environmental
Arbitrator to Seller and (ii) Seller shall pay to Buyer the amount, if any, so
awarded by the Environmental Arbitrator to Buyer.
          12.2 NORM, Wastes and Other Substances. Buyer acknowledges that the
Assets have been used for exploration, development, and production of oil and
gas and that there may be petroleum, produced water, wastes, or other substances
or materials located in, on or under the Assets or associated with the Assets.
Equipment and sites included in the Assets may contain asbestos, NORM or
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 Assets or included in the Assets may contain NORM,
asbestos 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 without limitation, water, soils or
sediment. Special procedures may be required for the assessment, remediation,
removal, transportation, or disposal of environmental media, wastes, asbestos,
NORM and Hazardous Substances from the Assets.

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ARTICLE XIII
ASSUMPTION; INDEMNIFICATION; SURVIVAL
          13.1 Assumption of Obligations by Buyer. Without limiting or otherwise
affecting Buyer’s rights to indemnity under this Article XIII and Buyer’s rights
under any Title Indemnity Agreement, from and after the Closing, Buyer assumes
and hereby agrees to fulfill, perform, pay and discharge (or cause to be
fulfilled, performed, paid or discharged) all obligations and Liabilities, known
or unknown, with respect to the Assets, regardless of whether such obligations
or Liabilities arose prior to, on or after the Effective Time, including but not
limited to the P&A Obligations, Environmental Conditions and all other
obligations and Liabilities relating in any manner to the use, ownership or
operation of the Assets, including but not limited to obligations to (a) furnish
makeup gas and/or settle Imbalances according to the terms of applicable gas
sales, processing, gathering or transportation Contracts, and (b) pay working
interests, royalties, overriding royalties and other interest, owners revenues
or proceeds attributable to sales of Hydrocarbons relating to the Properties,
(c) properly plug and abandon any and all Wells, including inactive Wells or
temporarily abandoned Wells, drilled on the Properties or otherwise pursuant to
the Assets, (d) replug any Well, Wellbore or previously plugged Well on the
Properties to the extent required or necessary, (e) dismantle or decommission
and remove any Personal Property and other property of whatever kind related to
or associated with operations and activities conducted by whomever on the
Properties or otherwise pursuant to the Assets, (f) clean up, restore and/or
remediate the premises covered by or related to the Assets in accordance with
applicable agreements and Laws, (g) perform all obligations with respect to any
Preferential Purchase Right and consent pertaining to any Asset and the
transactions contemplated hereby that are not fully resolved prior to Closing
and (h) perform all obligations applicable to or imposed on the lessee or owner
under the Leases and the Applicable Contracts, or as required by Laws; and (all
of said obligations and Liabilities referenced in this Section 13.1, subject to
the exclusions below, are herein referred to as the “Assumed Obligations”);
provided, Buyer does not assume any obligations or Liabilities of Seller to the
extent that they are:
          (i) attributable to or arise out of the ownership, use or operation of
the Excluded Assets; or
          (ii) Excluded Liabilities.
          13.2 Indemnities of Seller. Effective as of the Closing, subject to
the limitations in this Article XIII, Seller shall be responsible for, and
hereby agrees to defend, indemnify, hold harmless and forever release Buyer and
its Affiliates and all of its and their respective stockholders, partners,
members, directors, officers, managers, employees, agents and representatives
(collectively, “Buyer Indemnified Parties”) from and against any and all
liabilities, arising from, based upon, related to or associated with:
          (a) any act or omission by Seller involving or relating to the
Excluded Assets;
          (b) the Excluded Liabilities for the applicable time periods set forth
therein;

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          (c) any breach of any representation or warranty made by Seller
contained in Sections 4.1, 4.2, 4.3, 4.4, 4.5, 4.11, and 4.17; and
          (d) any breach of Seller’s covenants or agreements contained in
Sections 6.5, 11.4.
          13.3 Indemnities of Buyer. (a) Effective as of the Closing, each Buyer
and each of its successors and assigns shall jointly and severally assume, be
responsible for, and hereby agree to defend, indemnify, hold harmless and
forever release Seller and its Affiliates and all of their respective
stockholders, partners, members, directors, officers, managers, employees,
agents and representatives (collectively, “Seller Indemnified Parties”) from and
against any and all liabilities arising from, based upon, related to or
associated with:
          (i) the Assumed Obligations;
          (ii) ownership or operation of the Assets after the Effective Time,
including, without limitation, the claims and expenses in Section 15.18(b);
          (iii) Title Defects related or attributable to the Assets (other than
the special warranty in the assignments to be executed pursuant hereto);
          (iv) environmental defects related or attributable to the Assets;
          (v) the Excluded Liabilities (other than the Excluded Assets) from and
after the applicable time periods set forth therein;
          (vi) any breach of any representation or warranty made by Buyer
contained in Article V; and
          (vii) any breach of Buyer’s covenants or agreements contained in
Sections 6.3, 6.4, 6.6, and 11.4.
          13.4 Express Negligence. The indemnification, release and Assumed
Obligations provided for in this Agreement shall be applicable whether or not
the liabilities, losses, costs, expenses and damages in question arose or
resulted solely or in part from the gross, sole, active, passive, concurrent or
comparative negligence, strict liability or other fault or violation of law of
or by any Indemnified Party. Buyer and Seller acknowledge that this statement
complies with the express negligence rule and is conspicuous.
          13.5 Indemnification Procedures. All claims for indemnification under
Sections 13.2 and 13.3 shall be asserted and resolved as follows:
          (a) Notwithstanding anything to the contrary in this Agreement, the
Buyer Indemnified Parties shall not be entitled to indemnification under, and
shall not assert any claim for indemnification pursuant to, Sections 13.2(b) or
(c) or until the aggregate amount of such claims exceeds .5% of the Purchase
Price (the “Indemnification Threshold”), and then shall be entitled to such
indemnification from the first dollar. In

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no event will Buyer be entitled to indemnification under Sections 13.2(b) or (c)
once the aggregate of all claims made under such Section equals 15% of the
Purchase Price (the “Indemnification Cap”); provided that the Indemnification
Threshold and the Indemnification Cap shall not apply with respect to any claim
for indemnification asserted under Sections 13.2(a) or (d).
          (b) For purposes of this Article XIII, the term “Indemnifying Party”
when used in connection with particular Liabilities shall mean the party or
parties having an obligation to indemnify another party or parties with respect
to such Liabilities pursuant to this Article XIII, and the term “Indemnified
Party” when used in connection with particular Liabilities shall mean the party
or parties having the right to be indemnified with respect to such Liabilities
by another party or parties pursuant to this Article XIII.
          (c) To make claim for indemnification under Sections 10.1(c), 13.2 or
13.3, an Indemnified Party shall notify the Indemnifying Party of its claim
under this Section 13.5, 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 Party (a “Claim”), the Indemnified Party shall provide its Claim
Notice promptly after the Indemnified Party has actual knowledge of the Claim
and shall enclose a copy of all papers (if any) served with respect to the
Claim; provided that the failure of any Indemnified Party to give notice of a
Claim as provided in this Section 13.5 shall not relieve the Indemnifying Party
of its obligations under Sections 10.1(c), 13.2 or 13.3 (as applicable) except
to the extent such failure results in insufficient time being available to
permit the Indemnifying Party to effectively defend against the Claim or
otherwise materially prejudices the Indemnifying Party’s ability to defend
against the 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 that was inaccurate or breached.
          (d) In the case of a claim for indemnification based upon a Claim, the
Indemnifying Party shall have 30 days from its receipt of the Claim Notice to
notify the Indemnified Party whether it admits or denies its liability to defend
the Indemnified Party against such Claim at the sole cost and expense of the
Indemnifying Party. The Indemnified Party is authorized, prior to and during
such 30-day 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 Party and that is not prejudicial to the Indemnifying Party.
          (e) If the Indemnifying Party admits its liability, it shall have the
right and obligation to diligently defend, at its sole cost and expense, the
Claim. The Indemnifying Party shall have full control of such defense and
proceedings, including any compromise or settlement thereof. If requested by the
Indemnifying Party, the Indemnified Party agrees to cooperate in contesting any
Claim which the Indemnifying Party elects to contest. The Indemnified Party may
participate in, but not control, any defense or settlement of any Claim
controlled by the Indemnifying Party pursuant to this Section 13.5(e). An
Indemnifying Party shall not, without the written consent of the

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Indemnified Party, (i) settle any Claim or consent to the entry of any judgment
with respect thereto which does not include an unconditional written release of
the Indemnified Party from all liability in respect of such Claim or (ii) settle
any Claim or consent to the entry of any judgment with respect thereto in any
manner that may materially and adversely affect the Indemnified Party (other
than as a result of money damages covered by the indemnity).
          (f) If the Indemnifying Party does not admit its liability or admits
its liability but fails to diligently prosecute or settle the Claim, then the
Indemnified Party shall have the right to defend against the Claim at the sole
cost and expense of the Indemnifying Party, with counsel of the Indemnified
Party’s choosing, subject to the right of the Indemnifying Party to admit its
liability and assume the defense of the Claim at any time prior to settlement or
final determination thereof. If the Indemnifying Party has not yet admitted its
liability for a Claim, the Indemnified Party shall send written notice to the
Indemnifying Party of any proposed settlement and the Indemnifying Party shall
have the option for ten days following receipt of such notice to (i) admit in
writing its liability for the Claim and (ii) if liability is so admitted,
reject, in its reasonable judgment, the proposed settlement.
          (g) In the case of a claim for indemnification not based upon a Claim,
the Indemnifying Party shall have 30 days from its receipt of the Claim Notice
to (i) cure the Liabilities complained of, (ii) admit its liability for such
Liability or (iii) dispute the claim for such Liabilities. If the Indemnifying
Party does not notify the Indemnified Party within such 30-day period that it
has cured the Liabilities or that it disputes the claim for such Liabilities,
the amount of such Liabilities shall conclusively be deemed a liability of the
Indemnifying Party hereunder.
     13.6 Survival.
          (a) Each representation, warranty, covenant and agreement made herein
shall terminate and cease to be of further force and effect as of the Closing or
such later date after Closing as is expressly stipulated in this Section for the
survival thereof; except as to claims for indemnification permitted by this
Article XIII as to which a bona fide Claim Notice with respect to such Claim has
been delivered to the applicable Indemnifying Party on or prior to such date. If
any Asset becomes a retained Asset and the Closing with respect thereto is
delayed pursuant to Section 11.4, the parties’ respective representations,
warranties, covenants and agreements provided for in this Agreement with respect
to such retained Asset shall survive under this Section 13.6 in relation to such
delayed Closing rather than the initial Closing under this Agreement. In
addition, the definitions set forth in the Definitions section at the beginning
of this Agreement or in any other provision of this Agreement which are used in
the representations, warranties, covenants and agreements which survive the
Closing pursuant to this Section shall survive the Closing to the extent
necessary to give operative effect to such surviving representations,
warranties, covenants and agreements. It is expressly agreed that:

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     (i) Sections 4.1, 4.2, 4.3, 4.17, 4.21, 6.4, 6.5, 6.6, 9.4, 11.4, and
Article V shall survive the Closing without limitation or for such shorter
period of time as may be stipulated in such provisions or allowed by Law.
     (ii) The covenants and agreements of the parties in Section 6.7 shall
survive the Closing for a period of seven years.
     (iii) Sections 4.4, 4.5, 4.8, 4.9, 4.11, and 6.3 shall survive until the
first anniversary of the Closing Date.
     (iv) The agreements in Section 3.3 shall survive Closing until the Final
Settlement Statement has been executed by all parties to this Agreement.
     (v) The indemnities in Article XIII shall terminate as of the termination
date of each respective covenant or agreement that is subject to
indemnification, except in each case as to matters for which a specific written
claim for indemnity has been delivered to the Indemnifying Party on or before
such termination date. Buyer’s indemnities in Section 13.3 shall be deemed
covenants running with the Assets (provided, however, that Buyer and its
successors and assigns shall not be released from any of, and shall remain
jointly and severally liable to the Seller Indemnified Parties for, the
obligations or Liabilities of Buyer under such Article upon any transfer or
assignment of any Asset) and Seller’s indemnity set forth in Section 13.2 shall
survive the Closing without time limit.
          13.7 Non-Compensatory Damages. None of the Buyer Indemnified Parties
nor Seller Indemnified Parties shall be entitled to recover from Seller or
Buyer, or their respective Affiliates, any indirect, consequential, punitive or
exemplary damages or damages for lost profits of any kind arising under or in
connection with this Agreement or the transactions contemplated hereby, except
to the extent any such party suffers such damages (including costs of defense
and reasonable attorney’s fees incurred in connection with defending of such
damages) to a Third Party, which damages (including costs of defense and
reasonable attorney’s fees incurred in connection with defending against such
damages) shall not be excluded by this provision as to recovery hereunder.
Subject to the preceding sentence, Buyer, on behalf of each of the Buyer
Indemnified Parties, and Seller, on behalf of each of Seller Indemnified
Parties, waive any right to recover punitive, special, exemplary and
consequential damages, including damages for lost profits, arising in connection
with or with respect to this Agreement or the transactions contemplated hereby.
          13.8 Disclaimer of Application of Anti-Indemnity Statutes. The parties
acknowledge and agree that the provisions of any anti-indemnity statute relating
to oilfield services and associated activities shall not be applicable to this
Agreement and/or the transactions contemplated hereby.
          13.9 Buyer Credit Support. Unless Buyer is a Qualified Buyer, prior to
Closing Buyer shall furnish at Closing for the benefit of, and deliver to,
Seller (i) a letter of credit in form and substance reasonably satisfactory to
Seller or (ii) a Buyer Parent Guaranty, in either case to

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secure Buyer’s performance of the Assumed Obligations and Buyer’s other
obligations under Article XIII and applicable of the Assignments. If at any time
Seller determines that Buyer is no longer a Qualified Buyer, or that such
Buyer’s Qualified Parent Guarantor is no longer a Qualified Parent Guarantor,
then Buyer shall promptly provide such letter of credit or Buyer Parent
Guaranty, as applicable.
ARTICLE XIV
TERMINATION, DEFAULT AND REMEDIES
          14.1 Right of Termination. This Agreement and the transactions
contemplated herein may be terminated at any time at or prior to Closing:
     (a) by Seller, at Seller’s option, if any of the conditions set forth in
Article VIII have not been satisfied on or before the Closing Date;
     (b) by Buyer, at Buyer’s option, if any of the conditions set forth in
Article VII have not been satisfied on or before the Closing Date; or
     (c) by Seller or Buyer if the Closing shall not have occurred on or before
May 31, 2006;
provided, however, that no party shall have the right to terminate this
Agreement pursuant to clause (a), (b) or (c) above if such party or its
Affiliates are at such time in material breach of any provision of this
Agreement.
          14.2 Effect of Termination. If the obligation to close the
transactions contemplated by this Agreement is terminated pursuant to any
provision of Section 14.1 hereof, then, except as provided in Section 3.2 and
except for the provisions of Sections 1.1, 10.2, 10.3, 13.7 and this
Section 14.2 and Article XV (other than Sections 15.2(b), 15.7, 15.8, 15.9 and
15.17), and any other provision hereof which, by its very nature, must survive
such termination so as to carry out the stated intent of Buyer and Seller, this
Agreement shall forthwith become of no further force or effort and the parties
shall have no liability or obligation hereunder except and to the extent such
termination results from the material breach by a party of any of its covenants
or agreements hereunder. Upon a material breach of this Agreement by Seller that
is not cured by the Closing Date, Buyer, at its sole option and as its sole
remedy, may (i) enforce specific performance, or (ii) terminate this Agreement.
In the event Buyer elects to terminate this Agreement as set forth above, Seller
shall immediately return the Performance Deposit to Buyer.
ARTICLE XV
MISCELLANEOUS
          15.1 Exhibits and Schedules. All of the Exhibits and Schedules
referred to in this Agreement are hereby incorporated into this Agreement by
reference and constitute a part of this Agreement. Each party to this Agreement
and its counsel has received a complete set of Exhibits and Schedules prior to
and as of the execution of this Agreement. The Seller has or may have set

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forth information on a Schedule in a section thereof that corresponds to the
section of this Agreement to which it relates. A matter set forth in one section
of a Schedule need not be set forth in any other Schedule so long as its
relevance to such other section of the Schedule or section of the Agreement is
reasonably apparent on the face of the information disclosed therein to the
Person to which such disclosure is being made. The parties acknowledge and agree
that (a) the Schedules to this Agreement may include certain items and
information solely for informational purposes for the convenience of Buyer and
(b) the disclosure by Seller of any matter in the Schedules shall not be deemed
to constitute an acknowledgement by Seller that the matter is required to be
disclosed by the terms of this Agreement or that the matter is material.
     15.2 Expenses and Taxes.
          (a) Except as otherwise specifically provided, all fees, costs and
expenses incurred by Buyer or Seller in negotiating this Agreement or in
consummating the transactions contemplated by this Agreement shall be paid by
the party incurring the same, including, without limitation, legal and
accounting fees, costs and expenses.
          (b) All required documentary, filing and recording fees and expenses,
including HSR filing fees, in connection with the filing and recording of the
assignments, conveyances or other instruments required to convey title to the
Assets to Buyer shall be borne by Buyer. Seller shall assume responsibility for,
and shall bear and pay, all federal income taxes, state income taxes and other
similar taxes (including any applicable interest or penalties) incurred or
imposed with respect to the transactions described in this Agreement. Buyer
shall assume responsibility for, and shall bear and pay, all state sales and use
taxes (including any applicable interest or penalties) incurred or imposed with
respect to the transactions described in this Agreement. Seller shall assume
responsibility for, and shall bear and pay, all ad valorem, property, severance,
production, and similar taxes and assessments based upon or measured by the
ownership of the Assets, the production of Hydrocarbons or the receipt of
proceeds therefrom, but exclusive of income taxes (including any applicable
penalties and interest) and assessed against the Assets by any taxing authority
for any period prior to the Effective Time, and Buyer shall be responsible for,
and shall bear and pay, all such taxes and assessments assessed against the
Assets by any taxing authority for any period that begins on or after the
Effective Time. For purposes of this Agreement, the foregoing proration of ad
valorem and property taxes shall be accomplished at the Closing based on the
ratio of the number of days in the year prior to (for Seller) and on and after
(for Buyer) the Effective Time to the total number of days in the year as
applied to the amount of ad valorem and property taxes for the most recent year
for which the amount of such taxes can be finally determined at the Closing.
Buyer shall be responsible for payment to the taxing authorities of all ad
valorem and property taxes for the current year, except to the extent Seller has
paid all or a portion of the ad valorem and property taxes to the taxing
authorities for the current tax year.
          15.3 Assignment. This Agreement may not be assigned by Buyer without
prior written consent of Seller. No assignment of any rights hereunder by Buyer
shall relieve Buyer of any obligations and responsibilities hereunder.

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          15.4 Preparation of Agreement. Both Seller and Buyer and their
respective counsel participated in the preparation of this Agreement. In the
event of any ambiguity in this Agreement, no presumption shall arise based on
the identity of the draftsman of this Agreement.
          15.5 Publicity. Seller and Buyer shall consult with each other with
regard to all press releases or other public or private announcements issued or
made at or prior to the Closing concerning this Agreement or the transactions
contemplated herein, and, except as may be required by applicable Laws or the
applicable rules and regulations of any governmental agency or stock exchange,
neither Buyer nor Seller shall issue any such press release or other publicity
without the prior written consent of the other party, which shall not be
unreasonably withheld (it being agreed that the exclusion of Buyer’s name from a
press release by Seller shall be reasonable if requested by Buyer).
          15.6 Notices. All notices and communications required or permitted to
be given hereunder shall be in writing and shall be delivered personally, or
sent by nationally recognized overnight courier, or mailed by U.S. Express Mail
or by certified or registered United States Mail with all postage fully prepaid,
or sent by facsimile transmission (provided any such facsimile transmission is
confirmed either orally or by written confirmation), addressed to the
appropriate party at the address for such party shown below or at such other
address as such party shall have theretofore designated by written notice
delivered to the party giving such notice:

         
 
  If to Seller:   The Houston Exploration Company
 
      1100 Louisiana Street
 
      Suite 2000
 
      Houston, Texas 77002
 
      Attn: Jeffrey Sherrick
 
      Fax: 713-830-6885
 
       
 
  with a copy to:   Akin, Gump, Strauss, Hauer & Feld LLP
 
      1111 Louisiana Street
 
      44th Floor
 
      Houston, Texas 77002
 
      Attn: Christine LaFollette
 
                 Jennifer De la Rosa
 
      Fax: 713-236-0822
 
       
 
  If to Buyer:   Merit Energy Company
 
      13727 Noel Road, Suite 500
 
      Dallas, Texas 75240
 
      Attn: General Counsel
 
      Fax: 972-960-8420

          Any notice given in accordance herewith shall be deemed to have been
given when delivered to the addressee in person or by courier, or transmitted by
facsimile transmission during normal business hours, or upon actual receipt by
the addressee after such notice has either been delivered to an overnight
courier or deposited in the United States Mail, as the case may be.

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The parties hereto may change the address, telephone numbers and facsimile
numbers to which such communications are to be addressed by giving written
notice to the other parties in the manner provided in this Section 15.6.
          15.7 Removal of Name. As promptly as practicable, but in any case
within 30 days after the Closing Date, Buyer shall eliminate the names “The
Houston Exploration Company” and any variants thereof from the Assets acquired
pursuant to this Agreement and, except with respect to such grace period for
eliminating existing usage, shall have no right to use any logos, trademarks or
trade names belonging to Seller or any of its Affiliates.
          15.8 Further Cooperation. Without causing any representation or
warranty to survive the Closing, Buyer and Seller shall execute and deliver, or
shall cause to be executed and delivered from time to time, such further
instruments of conveyance and transfer, and shall take such other actions as any
party may reasonably request, to convey and deliver the Assets to Buyer, to
perfect Buyer’s title thereto, and to accomplish the orderly transfer of the
Assets to Buyer in the manner contemplated by this Agreement, whether before or
after the Closing. If any party hereto receives monies belonging to the other,
such amount shall immediately be paid over to the proper party. If an invoice or
other evidence of an obligation is received by a party, which is partially an
obligation of both Seller and Buyer, then the parties shall consult with each
other and each shall promptly pay its portion of such obligation to the obligee.
          15.9 Filings, Notices and Certain Governmental Approvals. Promptly
after Closing Buyer shall (a) record the Assignments of the Assets and all
federal assignments executed at the Closing in all applicable real property
records and/or, if applicable, all state or federal agencies, (b) send notices
to vendors supplying goods and services for the Assets of the assignment of the
Properties to Buyer and, if applicable, the designation of Buyer as the operator
thereof, (c) actively pursue the unconditional approval of all applicable
Governmental Authorities of the Assignments of the Assets to Buyer and the
designation of Buyer (if applicable), as the operator thereof and (d) actively
pursue all other consents and approvals that may be required in connection with
the assignment of the Assets to Buyer and the assumption of the liabilities
assumed by Buyer hereunder, that shall not have been obtained prior to Closing.
Buyer obligates itself to take any and all action required by any Governmental
Authority in order to obtain such unconditional approval, including but not
limited to, the posting of any and all bonds or other security that may be
required in excess of any applicable or existing lease, pipeline or area-wide
bond.
          15.10 Entire Agreement; Conflicts. This Agreement, the exhibits hereto
and the Confidentiality Agreement collectively constitute the entire agreement
among Seller and Buyer pertaining to the subject matter hereof and supersede all
prior agreements, understanding, negotiations and discussion, whether oral or
written, of the parties pertaining to the subject matter hereof. There are no
warranties, representations or other agreements among the parties relating to
the subject matter hereof except as specifically set forth in this Agreement or
the assignments and other documents expressly contemplated hereby, and neither
Seller nor Buyer shall be bound by or liable for any alleged representation,
promise, inducement or statements of intention not so set forth. In the event of
a conflict between the terms and provisions of this Agreement and the terms and
provisions of any exhibit hereto, the terms and provisions of this Agreement
shall govern

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and control; provided, however, that the inclusion in any of the exhibits hereto
of terms and provisions not addressed in this Agreement shall not be deemed a
conflict, and all such additional provisions shall be given full force and
effect, subject to the provisions of this Section 15.10.
          15.11 Parties in Interest. The terms and provisions of this Agreement
shall be binding upon and inure to the benefit of Seller and Buyer and their
respective legal representatives, successors and assigns. No other person shall
have any right, benefit, priority or interest hereunder or as a result hereof or
have standing to require satisfaction of the provisions hereof in accordance
with their terms.
          15.12 Amendment. This Agreement may be amended only by an instrument
in writing executed by the parties hereto against whom enforcement is sought.
          15.13 Waiver; Rights Cumulative. Any of the terms, covenants,
representations, warranties or conditions hereof may be waived only by a written
instrument executed by or on behalf of the party hereto waiving compliance. No
course of dealing on the part of Seller or Buyer, or their respective officers,
employees, agents or representatives, nor any failure by Seller or Buyer to
exercise any of its rights under this Agreement shall operate as a waiver
thereof or affect in any way the right of such party at a later time to enforce
the performance of such provision. No waiver by any party of any condition, or
any breach of any term, covenant, representation, or warranty contained in this
Agreement, in any one or more instances, shall be deemed to be or construed as a
further or continuing waiver of any such condition or breach or a waiver of any
other condition or of any breach of any other term, covenant, representation or
warranty. The rights of Seller and Buyer under this Agreement shall be
cumulative, and the exercise or partial exercise of any such right shall not
preclude the exercise of any other right.
          15.14 Governing Law; Jurisdiction, Venue; Jury Waiver. This Agreement
and the legal relations among the parties shall be governed and construed in
accordance with the laws of the State of Texas, excluding any conflicts of law
rule or principle that might refer construction of such provisions to the laws
of another jurisdiction. All of the parties hereto consent to the exercise of
jurisdiction in personam by the courts of the State of Texas for any action
arising out of this Agreement or the other Transaction Documents. All actions or
proceedings with respect to, arising directly or indirectly in connection with,
out of, related to, or from this Agreement or the other Transaction Documents
shall be exclusively litigated in courts having situs in Houston, Harris County,
Texas. Each party hereto waives, to the fullest extent permitted by applicable
law, any right it may have to a trial by jury in respect of any action, suit or
proceeding arising out of or relating to this Agreement.
          15.15 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any adverse manner to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an

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acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the extent possible.
          15.16 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all of such counterparts shall constitute for all purposes one
agreement. Any signature hereto delivered by a party by facsimile transmission
shall be deemed an original signature hereto.
          15.17 Like-Kind Exchange. Buyer agrees to cooperate fully with Seller
in facilitating a tax-deferred, like-kind exchange of the Assets pursuant to
Section 1031 of the U.S. Internal Revenue Code of 1986, as amended, the U.S.
Treasury Regulations promulgated thereunder, and U.S. Revenue Procedure 2000-37
(“Rev. Proc. 2000-37”). At Seller’s request, Buyer shall execute all documents,
conveyances and other instruments necessary for Seller to effectuate a like-kind
exchange. For purposes of this Section 15.17, cooperation by Buyer shall include
(i) executing with immediate delivery, before, on or after Closing, any
documents and agreements reasonably requested by Seller for such purpose and
(ii) any other action reasonably requested by Seller for such purpose, including
for the purpose of satisfying the requirements set forth in Rev. Proc. 2000-37;
provided, however, that Buyer shall not be obligated to incur any costs or
liabilities or postpone the Closing in connection therewith.
          15.18 Certain Governmental Approvals. Buyer shall use its best efforts
after Closing to obtain the unconditional approval by the MMS of (i) the
Assignments of Record Title to Oil and Gas Lease(s) in the form attached hereto
as Exhibit C; (ii) the Assignments of Oil and Gas Lease Operating Rights in the
form attached hereto as Exhibit D; and (iii) the Assignments of Rights of Way in
the form attached hereto as Exhibit E. In the event Buyer or its nominated
operator is elected successor operator under the operating agreements applicable
to any of the Leases, Buyer also obligates itself to ensure that it or the
successor operator makes application to the MMS to qualify as operator with
respect to that portion of the Assets it will operate. Buyer shall take any
actions reasonably required of it by the MMS or any other regulatory agencies to
obtain all requisite regulatory approvals, including but not limited to, the
purchase and posting of any and all bonds, supplemental bonds or other
securities which may be required of it pursuant to OPA and 30 C.F.R §§ 250.7,
256.58, 256.59, and 256.61 in excess of any existing lease, pipeline or
area-wide bond(s). Until the governmental approval with respect to an assignment
described in this Section 15.18 is obtained, however, the following shall occur:
          (a) Seller shall continue to hold the operating rights and record
title to the applicable Assets as nominee for Buyer;
          (b) Buyer’s indemnity under Section 13.3 shall include any and all
claims, expenses of any kind or character relating to the Assets accruing after
the Effective Time including but not limited to any bonding or regulatory costs
incurred by Seller;
          (c) Seller shall act as Buyer’s nominee with respect to the Assets but
shall be authorized to act only upon and in accordance with Buyer’s specific
written instructions, and Seller shall have no authority, responsibility or
discretion to perform any tasks or functions with respect to the Assets other
than those which are purely administrative or ministerial in nature, unless
otherwise specifically requested and authorized by Buyer in writing; and

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          (d) Buyer shall continue to maintain and provide at its cost the
insurance coverages as reviewed by Seller under Section 8.7 of this Agreement.
          If the MMS does not, within twelve months from the Closing Date,
approve all (i) the Assignments of Record Title of the Leases into Buyer,
(ii) the Assignments of Oil and Gas Lease Operating Rights into Buyer, and
(iii) the Assignments of Rights of Way into Buyer, then:
          (w) As to those assignments that the MMS has approved, the transaction
contemplated by this Agreement will proceed as to those Assets in accordance
with the terms and conditions of this Agreement, mutatis mutandis; and
          (x) As to those assignments that the MMS has not approved due to a
reason other than the MMS’s delay in addressing otherwise valid filings by
Buyer, Seller, at its option, may either:
          (i) continue to hold the operating rights, title to the Leases and the
rights of way as Buyer’s nominee, or,
          (ii) upon 30 days’ notice to Buyer, rescind the purchase and sale of
the Assets that are the subject of such non-approvals and terminate this
Agreement as to those Assets, but only as to those Assets.
          (y) The exercise by Seller of the option to rescind as specified in
the preceding clause (x)(ii), however, shall be predicated upon Seller’s
reasonable determination either that (i) Buyer has failed to comply with the
requirements of 30 C.F.R. § 256.64 and not taken any and all actions required by
MMS to obtain such approval, or (ii) there had been a Material Adverse Effect on
the financial condition of Buyer after Closing.
          (z) Upon such termination and rescission, this Agreement shall be null
and void as between Buyer and Seller with respect to the non-approved Assets,
and (i) Buyer shall return to Seller the assignments and any and all other
documents, materials and data previously delivered to Buyer with respect to such
Assets; and (ii) Seller shall return to Buyer the Purchase Price allocated to
such Assets in Schedule 3.8, without interest, less the proceeds of production
net of all expenses, capital expenditures, royalties, and costs of operations
(including plugging and abandonment expenses but excluding mortgage interest and
any burdens or encumbrances created by Buyer which shall be released prior to
this payment) attributable to the Leases and other rights from and after the
Effective Time. In no event, however, shall Seller ever be required to reimburse
Buyer for any expenditures associated with workovers, recompletions, or the
drilling, completion or plugging and abandonment of wells drilled or work
performed by Buyer on or with respect to such Assets unless same were necessary
to perpetuate the related Leases or operating rights or other rights. Seller
shall not be liable to Buyer if MMS approvals are not obtained, except as
expressly provided in this Section 15.18.
          15.19 Adequacy of Supplemental Bonds or Arrangements for the Pledge of
Securities. Prior to execution hereof, Buyer shall confer with the MMS regarding
the amounts and terms for the posting of supplemental bonds or pledge of
securities pursuant to the

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provisions of 30 C.F.R §§ 256.61 and 250.7, and within a reasonable time of any
MMS determination pursuant to such regulations, Buyer (directly or through its
representative) shall satisfy the MMS requirements concerning same, including
all financial responsibility requirements under OPA.
          15.20 Special Offshore Interests. The Parties acknowledge and agree
that certain of the offshore Assets are in the nature of contract rights that
are not recognized by the MMS as “record title” or “operating rights,” and that,
accordingly, the MMS will not approve, and Buyer and Seller do not expect the
MMS to approve, the assignment of these interests from Seller to Buyer. Buyer
shall ensure nevertheless that the assignment documents relating to such
interests are appropriately filed in the “non-required filing” system of the
MMS. Such interests shall be excluded from the scope of Section 15.18 for all
purposes.

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          IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first above written.

     
 
  SELLER:
 
   
 
  THE HOUSTON EXPLORATION COMPANY

             
 
  By:     /s/ Jeffery B. Sherrick    
 
           
 
  Name:    Jeffrey B. Sherrick    
 
  Title:    Senior Vice President — Business Development    

     
 
  BUYER:
 
   MERIT MANAGEMENT PARTNERS I, L.P.
 
   MERIT MANAGEMENT PARTNERS II, L.P.
 
   MERIT MANAGEMENT PARTNERS III, L.P.
 
   MERIT ENERGY PARTNERS III, L.P.
 
   By: MERIT ENERGY COMPANY, General Partner

             
 
  By:     /s/ Fred N. Diem    
 
           
 
       Fred N. Diem, Vice President    

     
 
  MERIT ENERGY PARTNERS D-III, L.P.
 
  By: MERIT MANAGEMENT PARTNERS I, General Partner
 
  By: MERIT ENERGY COMPANY, General Partner

             
 
  By:     /s/ Fred N. Diem    
 
           
 
       Fred N. Diem, Vice President    

     
 
  MERIT ENERGY PARTNERS E-III, L.P.
 
  By: MERIT MANAGEMENT PARTNERS II, L.P., General Partner
 
  By: MERIT ENERGY COMPANY, Sole Member

             
 
  By:     /s/ Fred N. Diem    
 
           
 
       Fred N. Diem, Vice President    

     
 
  MERIT ENERGY PARTNERS F-III, L.P.
 
  By: MERIT MANAGEMENT PARTNERS III, L.P., General Partner
 
  By: MERIT ENERGY COMPANY, Sole Member

             
 
  By:     /s/ Fred N. Diem    
 
           
 
       Fred N. Diem, Vice President