EXHIBIT 10.7

When recorded, please return to:
Sharon Nye
Thompson & Knight L.L.P.
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201
 
CONVEYANCE OF OVERRIDING ROYALTY INTEREST
 
THIS CONVEYANCE OF OVERRIDING ROYALTY INTEREST (as from time to time
supplemented or amended, this “Conveyance”), dated as of September 8, 2006, is
made from and by Foothills Texas, Inc., a Delaware corporation (herein called
“WI Owner”), to and in favor of MTGLQ Investors, L.P., a Delaware limited
partnership, (herein called “Royalty Owner”).
 
ARTICLE I
 
Defined Terms
 
Section 1.1. Defined Terms. When used in this Conveyance or in any exhibit or
schedule hereto (unless otherwise defined in any such exhibit or schedule), the
following terms have the respective meanings assigned to them in this section or
in the sections, subsections, exhibits and schedules referred to below:
 
“Affiliate” means, as to any Person, each other Person that directly or
indirectly (through one or more intermediaries or otherwise) controls, is
controlled by, or is under common control with, such Person. A Person shall be
deemed to be “controlled by” any other Person if such other Person possesses,
directly or indirectly, power
 
(a) to vote 10% or more of the securities or other equity interests (on a fully
diluted basis) having ordinary voting power for the election of directors, the
managing general partner or partners or the managing member or members; or
 
(b) to direct or cause the direction of the management and policies of such
Person whether by contract or otherwise.
 
“Annual Reserve Report” means the final reserve engineering report prepared by,
or audited by, WI Owner’s independent petroleum reserve engineers for use in
connection with WI Owner’s annual audited financial statements for any fiscal
year.
 
 “Effective Time” means 7:00 a.m. local time at the locations of the Subject
Interests, respectively, on September 1, 2006.
 
“Environmental Laws” means any and all Laws relating to the environment or to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or wastes
into the environment including ambient air, surface water, ground water, or
land, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or wastes.
 
1

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

 
“Fixed Rate” means, for any day, the rate of twelve percent (12%) per annum,
based on actual days elapsed and a year of 360 days.
 
“Hazardous Materials” means any substances regulated under any Environmental
Law, whether as pollutants, contaminants, or chemicals, or as industrial, toxic
or hazardous substances or wastes, or otherwise.
 
“Hydrocarbons” means oil, gas and all other minerals, whether or not similar to
any of the foregoing (and including without limitation casinghead gas,
condensate, and sulphur, but excluding lignite and other surface and near
surface minerals not produced in conjunction with oil or gas). As used herein,
the term “Hydrocarbons” includes all extracted minerals and substances of any
kind, whether organic or inorganic
 
“Internal Revenue Code” means the United States Internal Revenue Code of 1986,
as amended from time to time and any successor statute or statutes, together
with all rules and regulations promulgated with respect thereto.
 
“Law” means any statute, law, regulation, ordinance, rule, treaty, judgment,
order, decree, permit, concession, franchise, license, agreement or other
governmental restriction of the United States or any state or political
subdivision thereof or of any foreign country or any department, province or
other political subdivision thereof. Any reference to a Law includes any
amendment or modification to such Law, and all regulations, rulings, and other
Laws promulgated under such Law.
 
“Month” means the period between 7:00 a.m. Texas time on the first day of each
calendar month and 7:00 a.m. Texas time on the first day of the next succeeding
calendar month.
 
“ORRI” has the meaning assigned to such term in Section 2.1.
 
“ORRI Hydrocarbons” means the oil, gas and other minerals attributable to the
ORRI.
 
“Permitted Encumbrances” means each of the following, to the extent existing on
the date of delivery of this Conveyance:
 
(a) the contracts, agreements, burdens, encumbrances and other matters set forth
as being applicable to certain of the Subject Interests in the descriptions of
such Subject Interests on Exhibit A hereto.
 
(b) liens for taxes, assessments or other governmental charges or levies which
are not due or which are being contested in good faith by appropriate action
promptly initiated and diligently conducted and for the payment of which WI
Owner has reserved adequate funds.
 
(c) liens of contractors, subcontractors, carriers, warehousemen, mechanics,
laborers or materialmen or other like liens arising by law or contract in the
ordinary course of business for sums which are not due or which are being
contested in good faith by appropriate action promptly initiated and diligently
conducted and for the payment of which WI Owner has reserved adequate funds.
 
2

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

 
(d) covenants, restrictions, easements, servitudes, permits, conditions,
exceptions, reservations, minor rights, minor encumbrances, minor irregularities
in title or conventional rights of reassignment prior to abandonment which do
not materially interfere with the occupation, use and enjoyment by WI Owner or
Royalty Owner of their respective interests in the Subject Interests in the
normal course of business as presently conducted or to be conducted, materially
impair the value thereof for the purpose of such business, or impair the value
of the ORRI.
 
(e) liens of operators under joint operating agreements or similar contractual
arrangements with respect to WI Owner’s proportionate share of the expense of
exploration, development and operation of oil, gas and mineral leasehold or fee
interests owned jointly with others, to the extent that such liens secure sums
which are not due or which are being contested in good faith by appropriate
action promptly initiated and diligently conducted and for the payment of which
WI Owner has reserved adequate funds.
 
(f) liens and security interests in favor of Affiliates of Royalty Owner,
provided that the same are subject and subordinate to this Conveyance.
 
“Person” means an individual, corporation, general partnership, limited
partnership, limited liability company, association, joint stock company, trust
or trustee thereof, estate or executor thereof, court or governmental unit or
any agency or authority thereof, or any other legally recognizable entity.
 
“Reimbursable Expenses” means all costs and expenses paid or incurred by or on
behalf of Royalty Owner or its Affiliates which are related to: (a) the
negotiation, acquisition, ownership, enforcement, or termination of the ORRI,
this Conveyance, or any waivers or amendments hereto or thereto, or (b) any
litigation, contest, release or discharge of any adverse claim or demand made or
proceeding instituted by any Person affecting in any manner whatsoever the ORRI,
any ORRI Hydrocarbons, this Conveyance, the enforcement or defense hereof or
thereof, or the defense of Royalty Owner’s and its Affiliates’ exercise of their
rights hereunder or thereunder. Included among the Reimbursable Expenses are (i)
all recording and filing fees, (ii) all actual and reasonable fees and expenses
of counsel, engineers, accountants and other consultants, experts and advisors
for Royalty Owner and its Affiliates and mortgagees, and (iii) all amounts which
Royalty Owner is entitled to receive hereunder and all costs of Royalty Owner in
exercising any of its remedies hereunder.
 
“Release” means the disposition or release of Hazardous Materials, other than
dispositions and releases done in material compliance with all applicable Laws
and for which WI Owner otherwise has no material remedial obligations.
 
“Specified Taxes” means all ad valorem or property taxes assessed against the
ORRI and all severance taxes or similar taxes assessed against or measured by
production and severance of ORRI Hydrocarbons or the value thereof.
 
“Subject Hydrocarbons” means that portion of the Hydrocarbons in and under and
that may be produced from (or, to the extent pooled or unitized, allocated to)
the Subject Lands which is attributable to the Subject Interests (determined
after deducting all royalties, overriding royalties, production payments and
similar burdens, excluding only the burdens under this Conveyance, which both
burden the Subject Interests at the Commencement Time and are reflected in the
NRI Percentage set out on Schedule I).
 
3

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

 
“Subject Interests” means:
 
(a) All of the leasehold interests and other property interests described in
Exhibit A attached hereto; and
 
(b) Without limitation of the foregoing, all other right, title and interest (of
whatever kind or character, whether legal or equitable and whether vested or
contingent) of WI Owner in and to the oil, gas and other minerals in and under
or that may be produced from any Subject Lands (including interests in oil, gas
or mineral leases to the extent the same cover such lands, overriding royalties,
production payments and net profits interests in such lands or such leases, and
fee mineral interests, fee royalty interests and other interests in such oil,
gas and other minerals) even though WI Owner’s interest in such oil, gas and
other minerals may be incorrectly described in, or omitted from, Exhibit A; and
 
(c) All rights, titles and interests of WI Owner in and to, or otherwise derived
from, all presently existing and valid oil, gas or mineral unitization, pooling,
or communitization agreements, declarations or orders and in and to the
properties covered and the units created thereby (including all units formed
under orders, rules, regulations, or other official acts of any federal, state,
or other authority having jurisdiction, voluntary unitization agreements,
designations or declarations, and so-called “working interest units” created
under operating agreements or otherwise) relating to the properties described in
subsections (a) or (b) above in this definition.
 
“Subject Lands” means the lands described or referred to in Exhibit A or in the
leases and other instruments described in Exhibit A.
 
“Subject Wells” means all wells now located on the Subject Lands (whether fully
drilled and completed or not) or hereafter drilled on the Subject Lands, and
(unless production therefrom is expressly excluded by the terms of the
descriptions on Exhibit A) any other wells now or hereafter located on lands or
leases pooled, communitized or unitized with the Subject Interests.
 
“WI Percentage” means, with respect to the various Subject Lands, the percentage
set forth on Exhibit A hereto indicating WI Owner’s Working Interest in such
Subject Lands, generally by reference to “Working Interest,” “WI,” “WI
Percentage,” “Mineral Interest,” “MI,” or words of similar import.
 
“Working Interest” means the interest owned in oil and gas leaseholds or other
oil and gas interests (including leasehold interests, operating rights interests
or other cost-bearing interests, and mineral fee or ownership interests) that
determines the percentage share of costs borne by the owner of such interest.
 
4

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

 
Section 1.2. Rules of Construction. All references in this Conveyance to
articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Conveyance unless
expressly provided otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words “this Conveyance”, “this instrument”, “herein”,
“hereof”, “hereunder”‘ and words of similar import refer to this Conveyance as a
whole and not to any particular subdivision unless expressly so limited. Unless
the context otherwise requires: “including” and its grammatical variations mean
“including without limitation”; “or” is not exclusive; words in the singular
form shall be construed to include the plural and vice versa; words in any
gender include all other genders; references herein to any instrument or
agreement refer to such instrument or agreement as it may be from time to time
amended or supplemented; and references herein to any Person include such
Person’s successors and assigns. All references in this Conveyance to exhibits
and schedules refer to exhibits and schedules to this Conveyance unless
expressly provided otherwise, and all such exhibits and schedules are hereby
incorporated herein by reference and made a part hereof for all purposes.
 
ARTICLE II
 
Granting Provisions
 
Section 2.1. Granting Clause. For a good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, WI Owner does hereby GRANT,
BARGAIN, SELL, TRANSFER, ASSIGN, CONVEY, WARRANT and DELIVER to Royalty Owner an
overriding royalty interest carved out of each Subject Interest (collectively,
the “ORRI”) equal to five percent (5.0%) of the WI Percentage of all oil, gas
and other minerals in, under and produced from or allocable to the Subject
Lands.
 
TO HAVE AND TO HOLD the ORRI unto Royalty Owner, its successors and assigns,
forever. This Conveyance is made with full substitution and subrogation of
Royalty Owner in and to all covenants and warranties by others heretofore given
or made.
 
Section 2.2. Non-Cost-Bearing Interest. Except for Specified Taxes (which are
for the account of Royalty Owner), the ORRI and the ORRI Hydrocarbons shall be
free and clear of (a) all taxes of any kind, (b) all costs and expenses
associated with acquiring, exploring, developing, maintaining, producing,
operating, reworking, recompleting, and remediating the Subject Interests, (c)
all royalties, overriding royalties, production payments, and similar charges
burdening the Subject Interests, and (d) all costs for separating, gathering,
compressing, treating, processing or marketing ORRI Hydrocarbons or of
transporting ORRI Hydrocarbons to the point of sale in a condition to meet
pipeline or transporter specifications and qualifications. All of the foregoing
taxes (other than Specified Taxes), costs and expenses, royalties, overriding
royalties, production payments, and similar charges shall be paid by WI Owner
promptly, on or before the dates the same become delinquent (unless being
disputed in good faith by appropriate proceedings being diligently pursued and
for which adequate reserves have been established). In addition, WI Owner will
promptly (and in any event within 30 days after receiving any notice or
statement for the same) pay all Reimbursable Expenses which have been incurred
and are unpaid and reimburse Royalty Owner for any Reimbursable Expenses which
have been paid by or on behalf of Royalty Owner. Each amount which is to be paid
by WI Owner pursuant to this Section 2.3 which is instead paid by or on behalf
of Royalty Owner shall bear interest at the Fixed Rate on each day from and
including the date of such payment until but not including the date repaid by WI
Owner.
 
5

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

 
Section 2.3. Measurement: Hydrocarbons Lost or Used. The ORRI shall not apply to
any oil, gas or other minerals that are unavoidably lost in the production
thereof or in the compression or transportation of Subject Hydrocarbons prior to
the applicable point of sale or which are used by WI Owner or the operator of
any Subject Well for the production of Subject Hydrocarbons or for the
compression or transportation thereof prior to the applicable point of sale, in
each case only to the extent the same are lost or used in the course of
operations which are being conducted prudently and in a good and workmanlike
manner. WI Owner hereby represents, warrants and covenants to Royalty Owner that
production from each Subject Well is and will continue to be measured at a point
prior to any point where gas or oil from such Subject Well is commingled with
gas or oil from any other well or wells that are not Subject Wells.
 
Section 2.4. Proportionate Reduction. In the event of title failure with respect
to any tract of Subject Lands that causes WI Owner to own a Working Interest in
such tract that is less than the entire WI Percentage that is described in
Exhibit A hereto with respect to such tract of Subject Lands, the ORRI for such
tract shall be reduced in the same proportion that such Working Interest bears
to the WI Percentage so described for such tract; provided, however, that upon
any subsequent acquisition of additional interests in such Subject Lands by WI
Owner (or any Affiliate of WI Owner) the ORRI shall be increased accordingly
until WI Owner (and its Affiliates) have acquired the entire WI Percentage in
any Subject Lands that is described in Exhibit A hereto. Each such reduction or
increase shall occur automatically without the need for any action by WI Owner
or Royalty Owner. No such reduction shall be deemed a breach of any
representation or warranty made by WI Owner in Section 4.2.
 
Section 2.5. Renewals and Extensions. This Conveyance and the ORRI shall apply
to WI Owner’s and its Affiliates’ interests in all renewals, extensions and
other similar arrangements of each lease (or other determinable interest) which
is included in the Subject Interests, whether such renewals, extensions or
arrangements have heretofore been obtained by WI Owner or are hereafter obtained
by or for WI Owner or any Affiliate thereof and whether or not the same are
described in Exhibit A. For the purposes of the preceding sentence, a new lease
that covers the same interest (or any part thereof) covered by a prior lease,
and which is acquired within one year after the expiration, termination, or
release of such prior lease, shall be treated as a renewal or extension of such
prior lease.
 
ARTICLE III
 
Marketing of ORRI Hydrocarbons and Distribution of Proceeds
 
Section 3.1 Nature of Marketing Arrangements. WI Owner shall have the obligation
to prudently market, or cause to be prudently marketed, the ORRI Hydrocarbons on
behalf of and for the account of Royalty Owner in arm’s-length transactions with
reputable purchasers, with each such marketing arrangement (including all
arrangements relating to sales, treating, transportation, compression and
processing) to be made upon terms and conditions that (a) are at least as
favorable as WI Owner or any Affiliate of WI Owner obtains for WI Owner’s share
of oil, gas or other minerals attributable to the Subject Interests or
attributable to any other properties in the same field or general area, (b) are
in accordance with the provisions of the leases making up the Subject Interests,
(c) give due regard to the interests of Royalty Owner, and (c) unless otherwise
agreed by Royalty Owner from time to time, provide for floating prices generally
based on spot-market prices plus or minus a basis differential; provided,
however, that no ORRI Hydrocarbons are or will become subject to any sales
arrangement whereby (i) payment for ORRI Hydrocarbons is or can be deferred for
a substantial period after the month in which the ORRI Hydrocarbons are
delivered (i.e., in the case of oil, in excess of 30 days, and in the case of
gas in excess of 60 days), or (ii) payments may be made other than by checks,
drafts, wire transfer or similar communications for the immediate payment of
money. WI Owner shall duly and prudently perform all obligations performable by
it under any arrangements by which ORRI Hydrocarbons are sold or otherwise
marketed, and shall take all appropriate measures to enforce the performance
under each such arrangement of the obligations of the other parties thereto. As
to any third parties, all acts of WI Owner in marketing the ORRI Hydrocarbons
and all sales or other marketing agreements executed by WI Owner in accordance
herewith shall be binding on Royalty Owner and the ORRI; it being understood
that the right and obligation to market the ORRI Hydrocarbons is at all times
vested in WI Owner, and Royalty Owner does not have any such right or
obligation. Accordingly, it shall not be necessary for Royalty Owner to join in
any production sales or marketing agreements or any amendments to existing
production sales or marketing agreements.
 
6

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

 
Section 3.2 Distribution of Funds. Until notified by Royalty Owner to the
contrary, WI Owner shall receive all payments for (or on account of) ORRI
Hydrocarbons and shall, on or before noon on the last business day of each
calendar month, distribute any such payments received during the previous
calendar month to Royalty Owner, net only of Specified Taxes, by wire transfer
(or, if consented to by Royalty Owner, by check) to such accounts (or locations)
as Royalty Owner may direct from time to time in writing. Royalty Owner shall
have the right at all times, upon written notice sent to WI Owner, to begin
receiving payment for (or on account of) all ORRI Hydrocarbons directly from the
purchasers thereof or from any other parties obligated to make payment therefor.
In the event Royalty Owner exercises its right to receive payment for (or on
account of) ORRI Hydrocarbons directly, WI Owner shall immediately cause to be
prepared and executed such division orders, transfer orders, or instructions in
lieu thereof, as Royalty Owner (or any third party) may require from time to
time to cause payments to be made directly to Royalty Owner; in the event that,
for any reason, Royalty Owner cannot (or does not) receive such payments
directly, the same shall be collected by WI Owner and shall constitute trust
funds in WI Owner’s hands, to be immediately paid over to Royalty Owner by wire
transfer or check to such account or location as Royalty Owner may direct from
time to time in writing (or by such other form of transfer reasonably specified
by Royalty Owner).
 
Section 3.3 Production Records, Statements and Payments. WI Owner shall keep
full, true, and correct records of the oil, gas, and other hydrocarbons produced
from or attributable to the Subject Interests, and the portion attributable to
the ORRI. Such records may be inspected by Royalty Owner or its authorized
representatives and copies made thereof at all reasonable times. On or before
the last business day of each Month, WI Owner shall send to Royalty Owner a
statement setting forth (i) the production from the Subject Interests for the
preceding Month, (ii) the portion of such production attributable to the ORRI,
(iii) to the extent Royalty Owner does not receive direct payment of proceeds
from sale of ORRI Hydrocarbons pursuant to Section 3.2 above, the gross proceeds
attributable to the sale of ORRI Hydrocarbons and any Specified Taxes deducted
therefrom, and (iv) such other data as Royalty Owner may reasonably request, in
such form as Royalty Owner may reasonably request.
 
7

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

 
ARTICLE IV
 
Representations, Warranties and Covenants
 
WI Owner hereby represents, warrants and covenants for the benefit of Royalty
Owner as follows:
 
Section 4.1 Operations. The Subject Interests and properties unitized therewith
are being (and, to the extent the same could adversely affect the ownership or
operation of the Subject Interests after the date hereof, have during WI Owner’s
tenure of ownership been) maintained, operated and developed in a good and
workmanlike manner, in accordance with prudent industry standards and in
conformity with all applicable laws, rules, regulations and orders of all duly
constituted authorities having jurisdiction and in conformity with all oil, gas
or their mineral leases, deeds and other contracts and agreements forming a part
of the Subject Interests. WI Owner has all governmental licenses and permits
necessary or appropriate to own and operate the Subject Interests, and WI Owner
has not received notice of any violations in respect of any such licenses or
permits. WI Owner shall develop, operate and maintain the Subject Interests as
would a prudent operator. Decisions with regard to the conduct of operations
will be made by WI Owner without considering the effect of the ORRI as a burden
on the Subject Interests. As to any portions of the Subject Interests as to
which WI Owner is not the operator, WI Owner shall take all such action and
exercise all such rights and remedies as are legally available to it to cause
the operator to so develop, maintain and operate such portions of the Subject
Interests.
 
Section 4.2. Title; Permitted Encumbrances. WI Owner has good and defensible
title to the Subject Interests, free and clear of all liens, security interests,
and encumbrances except for Permitted Encumbrances. Such qualification as to
Permitted Encumbrances is made for the sole purpose of limiting the
representations and warranties of WI Owner made herein, and is not intended to
restrict the description of the Subject Interests, nor is it intended that
reference herein to any Permitted Encumbrance shall subordinate the ORRI to such
Permitted Encumbrance or otherwise cause this Conveyance or any rights of
Royalty Owner hereunder to be made subject to, or encumbered by, such Permitted
Encumbrance. Subject to Section 2.4, WI Owner hereby binds itself to WARRANT and
FOREVER DEFEND all and singular title to the ORRI unto Royalty Owner, its
successors and assigns, against every person lawfully claiming or to claim the
same or any part thereof. This Conveyance is made with full substitution and
subrogation of Royalty Owner in and to all covenants, representations and
warranties by others heretofore given or made with respect to the Subject
Interests.
 
Section 4.3. Leases, Deeds and Contracts; Performance of Obligations. The oil,
gas or mineral leases, contracts, servitudes, fees, deeds, and other agreements
forming a part of the Subject Interests, to the extent the same cover or
otherwise relate to the Subject Interests, are in full force and effect, and WI
Owner agrees to so maintain them in full force and effect to the extent a
prudent operator, without giving effect to the ORRI or this Conveyance, would do
so.
 
8

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

 
Section 4.4. Compliance with Laws. The Subject Lands, and WI Owner’s present and
proposed operations thereon, are in compliance in all material respects with all
applicable Laws, including all Environmental Laws; (b) WI Owner has taken all
steps reasonably necessary to determine and has determined that no Release of
Hazardous Materials has occurred on the Subject Lands or as a result of
operations on the Subject Lands, and the use which WI Owner makes and intends to
make of the Subject Lands will not result in any such Release; (c) to the best
of WI Owner’s knowledge, none of such operations of WI Owner, and none of the
Subject Lands, is the subject of any federal, state or local investigation
evaluating whether any remedial action is needed to respond to a Release of any
Hazardous Materials into the environment or to the improper storage or disposal
(including storage or disposal at offsite locations) of any Hazardous Materials;
(d) neither WI Owner nor, to the best knowledge of WI Owner, any other Person
has filed any notice under any Environmental Law indicating that WI Owner is
responsible for the Release into the environment, or the improper storage or
disposal, of any Hazardous Materials that are now located on, were removed from,
or are in any way related to any Subject Lands, or that any Hazardous Materials
have been Released, or are improperly stored or disposed of, upon any Subject
Lands; and (e) neither WI Owner nor any of its Affiliates otherwise has any
material contingent liability in connection with operations on any Subject Lands
for the Release into the environment, or the improper storage or disposal, of
any Hazardous Materials. WI Owner will not cause or permit the Subject Lands or
WI Owner to be in violation of any Environmental Laws or other Laws with respect
to the Subject Lands or do anything or permit anything to be done which will
subject WI Owner, Royalty Owner or the Subject Lands to any material remedial
obligations under any Environmental Laws, assuming in each case disclosure to
the applicable governmental authorities of all relevant facts, conditions and
circumstances, if any, pertaining to the Subject Lands, and WI Owner will
promptly notify Royalty Owner in writing of any existing, pending or, to the
best knowledge of WI Owner, threatened investigation or inquiry of a material
nature affecting any Subject Lands by any private party or governmental
authority in connection with any Environmental Laws. WI Owner will take all
steps reasonably necessary to determine that no Hazardous Materials are disposed
of or otherwise Released on or to the Subject Lands in violation of any
Environmental Laws. WI Owner will not cause or permit the Release of any
Hazardous Materials on or to the Subject Lands in violation of any Environmental
Law and covenants and agrees to remove or remediate any Hazardous Materials
which has been Released on the Subject Lands in amounts which would violate any
Environmental Laws.
 
Section 4.5  Pooling and Unitization. WI Owner, at its option, shall have the
right and power to pool or combine the acreage covered by any portion of the
Subject Interests as to the Hydrocarbons or any part thereof, with other land or
leases to the fullest extent provided in the underlying leases comprising the
portion of the Subject Interests pooled, and Royalty Owner does hereby consent
to such pooling and agrees that Royalty Owner’s ORRI shall be subject to any
such pooled unit, provided, however, that such consent and agreement of Royalty
Owner shall not apply to any such pooling or combination of Subject Interests
with other acreage owned by WI Owner or any of its Affiliates and WI Owner
agrees that, unless Royalty Owner otherwise consents in writing at the time in
question, WI Owner will not make any such pooling or combination of Subject
Interests with any other acreage owned by WI Owner or any of its Affiliates.
 
9

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

 
Section 4.6. Imbalances.
 
(a) Definitions. As used herein, “undertake” means that an owner of production
from a Subject Well takes a lesser share of oil or gas produced from such
Subject Well than the share which such owner is entitled to take by virtue of
its ownership interest, determined without regard to any rights under any
production balancing agreement or similar arrangement or any rights under common
law with respect to production balancing, and “overtake” means that an owner of
production from a Subject Well takes a greater share of oil or gas produced from
such Subject Well than the share which such owner is entitled to take by virtue
of its ownership interest, again determined without regard to any rights under
any production balancing agreement or similar arrangement or any rights under
common law with respect to production balancing. If an owner undertakes, the
amount of production not taken is “underproduction” and if an owner overtakes,
the extra share of production taken is “overproduction”.
 
(b) No Undertakes Without Consent. WI Owner will not undertake or overtake from
a Subject Well (either for itself or on behalf of Royalty Owner) if an Affiliate
of WI Owner thereby overtakes or undertakes. WI Owner may otherwise elect to
undertake or overtake in its reasonable business judgment exercised for the
benefit of itself and Royalty Owner. If any undertake by WI Owner occurs in
violation of this subsection (b), the ORRI Hydrocarbons shall be determined (to
the maximum extent allowed under applicable Law and any applicable Permitted
Encumbrances) without regard thereto.
 
(c) No Balancing From Other Properties. WI Owner will not allow any Subject
Interest to be subject to any production balancing arrangement under which one
or more third Persons may overtake a portion of the production attributable to
such Subject Interest as a result of undertakes or overtakes (or other actions
or inactions) with respect to properties other than such Subject Interest. For
the purposes of this subsection (c), a production unit in which all parties have
uniform interests shall be considered to be a single Subject Interest.
 
Section 4.7. Royalty Right to Join in Sales. Whenever (after taking into account
all other covenants to Royalty Owner’s Affiliates under any loan agreement or
note purchase agreement with WI Owner) WI Owner has, and intends to take, the
opportunity to sell any part of its retained interest (in this section called a
“Sold Retained Interest”) in any properties and interests subject to this
Conveyance, WI Owner shall insure that Royalty Owner has, and shall cause
Royalty Owner to have, the option to sell that portion of the ORRI that burdens
the properties and interests to be sold (in this section called a “Sold
Royalty”) as a part of such transaction and at a price which is as favorable as
that available to WI Owner (taking into consideration that such Sold Royalty is
a cost free interest). In exercising such option, Royalty Owner may elect to
resell the Sold Royalty to WI Owner (for further sale on to the purchaser) or to
sell the Sold Royalty directly to the purchaser. Any such resale to WI Owner
shall be without representation or warranty other than Royalty Owner’s special
warranty of title to the Related Royalty. WI Owner shall give Royalty Owner at
least thirty (30) days notice of any such potential sale (or of any material
modification in the terms of any sale of which such a notice was previously
given). Royalty Owner has no obligation to participate in any such transaction
or otherwise to sell all or any part of any ORRI, but if Royalty Owner does
participate in any such transaction, then regardless of any purchase price
allocations made by the purchaser in such sale to the Sold Retained Interest and
the Sold Royalty, WI Owner and Royalty Owner shall divide between themselves the
aggregate purchase price received by both, net of costs of sale and any taxes
(other than income taxes, which shall be the separate obligations of WI Owner
and Royalty Owner), with WI Owner receiving A/C and Royalty Owner receiving B/C,
where:
 
10

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

 

 
“A”
equals the net present value attributable to the Sold Retained Interest, as
reasonably derived by Royalty Owner using the most recent Annual Reserve Report,
any other reserve engineering information, and any other information supplied by
WI Owner which is relevant to the value of the Sold Retained Interest,

 
“B”
equals the net present value attributable to the Sold Royalty, as reasonably
derived by Royalty Owner using the most recent Annual Reserve Report,

any other reserve engineering information, and any other information then
available to Royalty Owner which is relevant to the value of the Sold Royalty,
taking into account that the Sold Royalty is not subject to various costs and
expenses burdening the Sold Retained Interest, and

 
“C”
equals the sum of A plus B;

provided, however, that if WI Owner is dissatisfied with Royalty Owner’s
valuations of the Sold Retained Interest or the Sold Royalty, or both, then -
prior to the sale - WI Owner shall have the right, at its expense, to have the
Sold Retained Interest and the Sold Royalty appraised by an independent
appraiser selected by WI Owner (in this section called the “First Appraiser”).
WI Owner shall give Royalty Owner written notice of WI Owner’s election to have
the Sold Retained Interest and the Sold Royalty appraised within ten (10 ) days
after WI Owner receives written notice of Royalty Owner’s valuations. The
appraised values as determined by the First Appraiser shall be the values
assigned to A and B in place of the values determined by Royalty Owner;
provided, however, that if Royalty Owner is dissatisfied with the appraisal of
the First Appraiser, Royalty Owner shall have the right, at its expense, to have
the Sold Retained Interest and the Sold Royalty appraised by an independent
appraiser selected by Royalty Owner (in this section called the “Second
Appraiser”). Royalty Owner shall give WI Owner written notice of Royalty Owner’s
election to have the Sold Retained Interest and the Sold Royalty appraised
within ten (10) days after Royalty Owner receives a copy of the written
appraisal made by the First Appraiser. The appraised values of the Sold Retained
Interest and the Sold Royalty as determined by the First Appraiser and the
Second Appraiser shall be averaged, and such averages shall be the values
assigned to A and B.
 
ARTICLE V
 
Assignments and Transfers
 
Section 5.1. Assignment and Transfer by Royalty Owner. Royalty Owner may, and
nothing herein contained shall in any way limit or restrict the right of Royalty
Owner to, sell, convey, assign, mortgage or otherwise dispose of the ORRI
(including its rights, titles, interests, estates, remedies, powers and
privileges appurtenant or incident to the ORRI under this Conveyance), in whole
or in part. No change of ownership of the ORRI shall be binding upon WI Owner,
however, until WI Owner is furnished with copies of the original documents
evidencing such change. Upon receipt by WI Owner of copies of the original
documents evidencing a sale, conveyance, assignment, mortgage or other
disposition of the ORRI, WI Owner shall thereafter deal with the transferee
Royalty Owner in place of the transferring Royalty Owner and references herein
to the Royalty Owner shall thereafter be deemed to be references to such
transferee Royalty Owner, provided that the transferring Royalty Owner shall
continue to have, and benefit from, all rights to indemnification and
reimbursement that are provided herein.
 
11

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

 
Section 5.2. Assignment and Transfer by WI Owner. Any sale, conveyance,
assignment, mortgage or other disposition of the Subject Interests, or any part
thereof or interest therein, by WI Owner shall be subject to this Conveyance,
and in the instrument effecting such transfer or other disposition the
transferee or other disposition recipient must expressly recognize and assume
all obligations, covenants and agreements of WI Owner hereunder with respect to
the Subject Interests so sold, conveyed, assigned or otherwise disposed of (the
“Transferred Subject Interests”. Upon any such sale, conveyance, assignment or
other disposition of Transferred Subject Interests (other than to an Affiliate
of the selling WI Owner) in connection with which a purchasing WI Owner has so
assumed all obligations, covenants and agreements of WI Owner hereunder with
respect to such Transferred Subject Interests, the selling WI Owner’s
obligations under this Conveyance shall cease as to such Transferred Subject
Interests.
 
Section 5.3. Covenants Running With the Subject Interests. All covenants and
agreements of WI Owner herein contained shall be deemed to be covenants running
with the Subject Interests. All of the provisions hereof shall inure to the
benefit of Royalty Owner and its successors and assigns.
 
ARTICLE VI
 
Miscellaneous Provisions
 
Section 6.1. Further Assurances. WI Owner agrees to execute and deliver to
Royalty Owner, and, to the extent it is within WI Owner’s power to do so, to
cause any third parties to execute and deliver to Royalty Owner, all such other
and additional instruments and to do all such further acts and things as may be
necessary or appropriate to more fully vest in and assure to Royalty Owner all
of the rights, titles, interests, remedies, powers and privileges herein granted
or intended so to be.
 
Section 6.2. No Waiver. The failure of Royalty Owner to insist upon strict
performance of a covenant hereunder or of any obligation hereunder, irrespective
of the length of time for which such failure continues, shall not be a waiver of
Royalty Owner’s right to demand strict compliance in the future. No consent or
waiver, express or implied, to or of any breach or default in the performance of
any obligation hereunder shall constitute a consent or waiver to or of any other
breach or default in the performance of the same or any other obligation
hereunder. No provision of this Conveyance shall be deemed a waiver by Royalty
Owner of any rights granted to Royalty Owner under applicable Law governing
overriding royalty interests and the rights of the owners thereof.
 
12

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

 
Section 6.3. Applicable Law. This Conveyance and the rights and obligations of
the parties hereunder shall, without regard to principles of conflicts of laws,
be governed by and interpreted, construed and enforced in accordance with the
laws of the State of Texas.
 
Section 6.4. Severability. Every provision in this Conveyance is intended to be
severable. If any term or provision hereof is determined to be invalid, illegal
or unenforceable for any reason whatsoever, such invalidity, illegality or
unenforceability shall not affect the validity, legality and enforceability of
the remainder of this Conveyance.
 
Section 6.5.  NO LIABILITY OF ROYALTY OWNER; INDEMNITY. NO ROYALTY OWNER
INDEMNITEE SHALL EVER BE RESPONSIBLE FOR ANY PART OF THE COSTS, EXPENSES OR
LIABILITIES INCURRED IN CONNECTION WITH:
 
(A) THE EXPLORING, DEVELOPING, OPERATING, OWNING, MAINTAINING, REWORKING OR
RECOMPLETING OF THE SUBJECT INTERESTS OR SUBJECT LANDS, ANY OBLIGATIONS OF
WI OWNER WITH RESPECT TO ANY TAX PARTNERSHIPS BURDENING THE SUBJECT INTERESTS,
THE PHYSICAL CONDITION OF THE SUBJECT INTERESTS OR THE SUBJECT LANDS, OR THE
HANDLING, TREATING OR TRANSPORTING OF OIL, GAS OR OTHER MINERALS PRODUCED FROM
THE SUBJECT LANDS (INCLUDING ANY COSTS, EXPENSES, LOSSES OR LIABILITIES RELATED
TO VIOLATION OF AN ENVIRONMENTAL LAW OR OTHERWISE RELATED TO DAMAGE TO OR
REMEDIATION OF THE ENVIRONMENT, WHETHER THE SAME ARISE OUT OF ROYALTY OWNER’S
OWNERSHIP OF AN INTEREST IN PROPERTY OR OUT OF THE ACTIONS OF WI OWNER OR
ROYALTY OWNER OR OF THIRD PARTIES OR ARISE OTHERWISE), OR
 
(B) THE FAILURE BY WI OWNER TO HAVE GOOD AND DEFENSIBLE TITLE TO THE SUBJECT
INTERESTS FREE AND CLEAR OF ALL BURDENS, ENCUMBRANCES, LIENS AND TITLE
DEFECTS (INCLUDING ANY COSTS, EXPENSES, LOSSES OR LIABILITIES SUFFERED BY ANY
ROYALTY OWNER INDEMNITEE AS A RESULT OF ANY CLAIM THAT SUCH ROYALTY OWNER
INDEMNITEE MUST DELIVER OR PAY OVER TO ANY PERSON ANY PART OF THE
ORRI HYDROCARBONS OR ANY PROCEEDS THEREOF AT ANY TIME PREVIOUSLY RECEIVED OR
THEREAFTER TO BE RECEIVED BY SUCH ROYALTY OWNER INDEMNITEE),

 
13

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

 

AND WI OWNER AGREES TO INDEMNIFY AND HOLD EACH ROYALTY OWNER INDEMNITEE HARMLESS
FROM AND AGAINST ALL COSTS, EXPENSES, LOSSES AND LIABILITIES INCURRED BY ANY
ROYALTY OWNER INDEMNITEE (I) IN CONNECTION WITH ANY OF THE FOREGOING OR (II) IN
CONNECTION WITH THE ORRI, THIS CONVEYANCE, OR THE TRANSACTIONS AND EVENTS
(INCLUDING THE ENFORCEMENT OR DEFENSE THEREOF OR HEREOF) AT ANY TIME ASSOCIATED
WITH OR CONTEMPLATED IN ANY OF THE FOREGOING OR (III) IN CONNECTION WITH ANY TAX
PARTNERSHIP BURDENING ANY OF THE SUBJECT INTERESTS. SUCH INDEMNITY SHALL ALSO
COVER ALL REASONABLE COSTS AND EXPENSES OF ANY ROYALTY OWNER INDEMNITEE,
INCLUDING REASONABLE LEGAL FEES AND EXPENSES, WHICH ARE INCURRED INCIDENT TO THE
MATTERS INDEMNIFIED AGAINST. AS USED IN THIS ARTICLE VI, “ROYALTY OWNER
INDEMNITEES” MEANS ROYALTY OWNER AND ROYALTY OWNER’S SUCCESSORS AND ASSIGNS AND
PURCHASERS (INCLUDING ANY PERSON WHO AT ANY TIME PURCHASES ORRI HYDROCARBONS),
ALL OF THEIR RESPECTIVE AFFILIATES, AND ALL OF THE OFFICERS, DIRECTORS, AGENTS,
BENEFICIARIES, TRUSTEES, ATTORNEYS AND EMPLOYEES OF THEMSELVES AND THEIR
AFFILIATES.
 
THE FOREGOING INDEMNITY SHALL APPLY WHETHER OR NOT ARISING OUT OF THE SOLE,
JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITYOF ANY ROYALTY OWNER
INDEMNITEE AND SHALL APPLY, WITHOUT LIMITATION, TO ANY LIABILITY IMPOSED UPON
ANY ROYALTY OWNER INDEMNITEE AS A RESULT OF ANY THEORY OF STRICT LIABILITY OR
ANY OTHER DOCTRINE OF LAW, PROVIDED THAT THE FOREGOING INDEMNITY SHALL NOT APPLY
TO ANY COSTS, EXPENSES, LOSSES OR LIABILITIES INCURRED BY ANY ROYALTY OWNER
INDEMNITEE TO THE EXTENT PROXIMATELY CAUSED SOLELY BY THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF SUCH ROYALTY OWNER INDEMNITEE. THE FOREGOING INDEMNITY
SHALL SURVIVE ANY TERMINATION OF THIS CONVEYANCE.

Section 6.6. Counterparts. This Conveyance is being executed in several
counterparts, all of which are identical, except that, to facilitate
recordation, in certain counterparts hereof only that portion of Exhibit A which
contains specific descriptions of the Subject Interests located in the recording
jurisdiction in which the counterpart is to be recorded shall be included, and
all other portions of Exhibit A shall be included by reference only. All of such
counterparts together shall constitute one and the same instrument. Complete
copies of this Conveyance, containing the entire Exhibit A, have been retained
by WI Owner and Royalty Owner.
 
IN WITNESS WHEREOF, THIS CONVEYANCE IS EXECUTED on the date set forth in the
acknowledgment below, to be effective for all purposes as of the Effective Time.
 
[Remainder of page intentionally left blank.]
 
14

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

 

      WI OWNER: FOOTHILLS TEXAS, INC.  
   
   
    By:   /s/ W. Kirk Bosche  

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

Name: W. Kirk Bosche
  Title: Chief Financial Officer and Assistant Secretary

 
SIGNATURE PAGE

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