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STOCK PURCHASE AGREEMENT
 
This STOCK PURCHASE AGREEMENT, dated September 21, 2006 (this “Agreement”), is
by and among U.S. Energy Corporation, a Wyoming corporation (“USE”) and Crested
Corp. a Colorado corporation (together with USE, “Sellers”), and DLJ MB Partners
III GmbH & Co. KG, a limited company organized under the laws of Germany, DLJ
Offshore Partners III, C.V., a partnership organized under the laws of the
Netherland Antilles, DLJ Offshore Partners III-1, C.V., a partnership organized
under the laws of the Netherland Antilles, DLJ Offshore Partners III-2, C.V., a
partnership organized under the laws of the Netherland Antilles, Millennium
Partners II, L.P., a Delaware limited partnership, DLJ Merchant Banking Partners
III, L.P., a Delaware limited partnership, and MBP III Plan Investors, L.P., a
Delaware limited partnership (collectively, “Purchasers”).
 
W I T N E S S E T H:
 
WHEREAS, Sellers desire to sell to Purchasers shares of the common stock, par
value $.01 per share (“Common Stock”), of Pinnacle Gas Resources, Inc., a
Delaware corporation (the “Company”), and Purchasers desire to purchase shares
of Common Stock from Sellers, upon and subject to the terms of this Agreement;
 
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
 
ARTICLE I  
PURCHASE AND SALE
 
Section 1.1  Purchase and Sale of Shares. Upon the terms and subject to the
conditions set forth in this Agreement, and in reliance upon the representations
and warranties herein made by each party to the other, Sellers agree jointly to
sell, and Purchasers agree jointly to purchase from Sellers, at the Closing (as
hereinafter defined), an aggregate of 2,459,102 shares of Common Stock (the
“Shares”); and each Purchaser severally agrees to purchaser that number of
Shares of set forth opposite such Purchaser’s name on Schedule I.
 
Section 1.2  Purchase Price. As consideration for the purchase and sale of the
Shares, Purchasers jointly will pay, or cause to be paid, to Sellers on the
Closing Date, by wire transfer of immediately available funds to the account
identified on Schedule II, the sum of $13,800,000, which amount shall be
allocated between Sellers as set forth on Schedule II.
 
Section 1.3  Closing. The closing of the purchase and sale of the Shares (the
“Closing”) shall be at such date and time as shall be mutually agreed to by the
parties hereto (such date, the Closing Date”). The Closing shall take place at
the offices of Akin Gump Strauss Hauer & Feld, LLP, 1111 Louisiana Street, 44th
Floor, Houston, Texas or such other place as shall be mutually agreed to by the
parties hereto. Sellers will deliver to Purchasers at the Closing a certificate
or certificates representing all of the Shares with duly executed stock powers
attached thereto.
 
 
 
 

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ARTICLE II  
REPRESENTATIONS AND WARRANTIES
 
Section 2.1  Representations and Warranties of Sellers. Sellers hereby represent
and warrant to each Purchaser as follows:
 
(a)  Each Seller is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation.
 
(b)  Each Seller has all requisite power and authority to execute and deliver
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by each Seller and the consummation by
each Seller of the transactions contemplated hereby have been duly authorized by
all necessary action on the part of Seller.
 
(c)  This Agreement has been duly executed and delivered by each Seller and
(assuming that this Agreement is a legal, valid, and binding obligation of each
other parties hereto) constitutes a valid and binding obligation of each Seller,
enforceable against each Seller in accordance with its terms, except as
enforceability may be subject to the effects of bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting the rights of
creditors or general principles of equity.
 
(d)  The execution and delivery of this Agreement by each Seller and the
consummation by each Seller of the transactions contemplated hereby will not (A)
violate any provision of any existing law, statute, rule, regulation or
ordinance applicable to either Seller or (B) conflict with, result in any breach
of or constitute a default under (1) the Certificate of Incorporation or By-laws
of either Seller, (2) any order, writ, judgment, award or decree of any court,
governmental authority, bureau or agency to which either Seller is a party or by
which either Seller may be bound or (3) any contract or other agreement or
undertaking to which either Seller is a party or by which either Seller may be
bound.
 
(e)  No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, is required by or with respect
to either Seller in connection with the execution and delivery of this Agreement
or the consummation by either Seller of the transactions contemplated hereby
except for (i) such as have been obtained prior to the date hereof and (ii)
consent of Friedman Billings Ramsey & Co., Inc. to the transfer of the Shares
pursuant to that certain lock-up agreement dated March 31, 2006.
 
(f)  Each Seller has, and upon transfer by Sellers of the Shares hereunder,
Purchasers will have, good and marketable title to the Shares, free and clear of
any claims, liens, encumbrances, security interests, restrictions and adverse
claims of any kind or nature whatsoever. There are no outstanding subscriptions,
options, warrants, rights, contracts, understandings or agreements to purchase
or otherwise acquire the Shares.
 
 
 
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Section 2.2  Representations and Warranties of Purchasers. Purchasers hereby
represent and warrant to Sellers as follows:
 
(a)  Each Purchasers is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization.
 
(b)  Each Purchaser has all requisite power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by each Purchaser and the consummation by each
Purchaser of the transactions contemplated hereby have been duly authorized by
all necessary action on the part of each Purchaser.
 
(c)  This Agreement has been duly executed and delivered by each Purchaser and
(assuming that this Agreement is a legal, valid, and binding obligation of each
other parties hereto) constitutes a valid and binding obligation of each
Purchaser, enforceable against each Purchaser in accordance with its terms,
except as enforceability may be subject to the effects of bankruptcy,
insolvency, reorganization, moratorium or other laws relating to or affecting
the rights of creditors or general principles of equity.
 
(d)  The execution and delivery of this Agreement by each Purchaser and the
consummation by each Purchaser of the transactions contemplated hereby will not
(A) violate any provision of any existing law, statute, rule, regulation or
ordinance applicable to any Purchaser or (B) conflict with, result in any breach
of or constitute a default under (1) the Certificate of Incorporation or By-laws
of any Purchaser, (2) any order, writ, judgment, award or decree of any court,
governmental authority, bureau or agency to which any Purchaser is a party or by
which any Purchaser may be bound or (3) any contract or other agreement or
undertaking to which any Purchaser is a party or by which any Purchaser may be
bound.
 
(e)  No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, is required by or with respect
to any Purchaser in connection with the execution and delivery of this Agreement
or the consummation by any Purchaser of the transactions contemplated hereby
except for (i) such as have been obtained prior to the date hereof and (ii)
consent of Friedman Billings Ramsey & Co., Inc. to the transfer of the Shares
pursuant to that certain lock-up agreement dated March 31, 2006.
 
ARTICLE III  
CLOSING CONDITIONS.
 
Section 3.1  Conditions to Each Party’s Obligations. The obligation of
Purchasers to purchase the Shares at the Closing, and the obligation of Sellers
to sell the Shares at the Closing, are subject to the satisfaction or mutual
waiver at or prior to the Closing of the following conditions:
 
(a)  No preliminary or permanent injunction or other order shall have been
issued by any court of competent jurisdiction or by any governmental or
regulatory body, nor shall any statute, rule, regulation or executive order have
been promulgated or
 

 
 
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enacted by any governmental authority which prevents the consummation of the
transactions contemplated by this Agreement.
 
(b)  No action or proceeding before any court or any governmental or regulatory
authority shall have been commenced by any governmental or regulatory body and
shall be pending against any of the parties hereto or any of their respective
affiliates, associates, officers or directors seeking to prevent or delay the
transactions contemplated by this Agreement.
 
(c)  (i) Friedman, Billings, Ramsey & Co., Inc. shall have provided a waiver of
the applicable lock-up provisions under that certain letter agreement, dated
March 31, 2006, to the purchase and sale of the Shares hereunder (and Purchasers
shall have received a true and correct copy of such waiver) or (ii) the lock-up
period under such letter agreement shall have expired.
 
(d)  The representations and warranties of each of the parties hereto contained
in this Agreement shall have been true and complete when made and shall be true
and complete at and as of the Closing Date with the same force and effect as
though such representations and warranties were made at and as of the Closing
Date.
 
(e)  Each of the parties hereto shall have performed and complied with all
agreements, obligations and conditions required by this Agreement to be
performed or complied with by such party at or prior to the Closing.
 
ARTICLE IV  
MISCELLANEOUS
 
Section 4.1  Confidentiality; Non Disclosure. Each of the parties hereto shall,
and shall cause their respective officers, directors, employees, affiliates and
other agents and representatives (collectively, “Representatives”), to hold
confidential all information with respect to this Agreement, including the
identity of the parties hereto and the terms and provisions of the transactions
contemplated hereunder. None of the parties hereto will, and each of the parties
will direct their Representatives not to, directly or indirectly, make any
public comment, statement or communication with respect to, or otherwise
disclose or permit the disclosure of the existence of, this Agreement, any of
the terms, conditions or other aspects of this Agreement or the transactions
contemplated hereunder. The foregoing notwithstanding, any party hereto may
disclosure any such information to the extent, and only to the extent, (a)
required to be so disclosed pursuant to the terms of that certain
Securityholders Agreement, dated June 23, 2003, as amended, and (b) upon the
advice of counsel, such information is required to be disclosed by a party
hereto or any of its Representatives as a result of any applicable law
(including public reporting requirements under federal and state securities
laws); provided, however, that only such information that is required to be
disclosed may be disclosed and, in the event any information is required to be
disclosed pursuant to this clause (b), the party proposing such disclosure shall
provide the other parties hereto an opportunity, reasonably in advance of any
such disclosure, to review and comment on the form and content of such proposed
disclosure.
 
 
 
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Section 4.2  Exclusivity. In consideration of the covenants and agreements of
Purchasers set forth herein, Sellers further agree that prior to December 31,
2006, Sellers will not¸ and will not permit any of their respective
Representatives to, enter into any agreement, discussion, or negotiation with
(and shall terminate any existing discussions or negotiations with), or provide
information to, or solicit, encourage, entertain or consider any inquiries or
proposals from, any other person with respect to any purchase and sale of Common
Stock held by Sellers and/or any of their respective affiliates. During such
period Sellers will promptly notify Purchasers of any inquiries (including the
identity of the party making such inquiry) regarding any such proposed purchase
and sale of Common Stock.
 
Section 4.3  No Brokers. Sellers and Purchasers hereby represent to each other
that neither it nor any of its respective affiliates have employed any broker or
finder or incurred any liability for any brokerage or finder’s fees or
commissions or expenses related thereto in connection with the negotiation,
execution or consummation of this Agreement or any of the transactions
contemplated hereby and respectively agree to indemnify and hold the other
harmless from and against any and all claims, liabilities or obligations with
respect to any such fees, commissions or expenses asserted by any person on the
basis of any act or statement alleged to have been made by such party or any of
its affiliates.
 
Section 4.4  Entire Agreement. This Agreement constitutes the entire agreement
and understanding of the parties in respect of the subject matter hereof and
supersedes all prior understandings, agreements or representations by or between
the parties, written or oral, to the extent they relate in any way to the
subject matter hereof.
 
Section 4.5  Binding Effect; Third Party Beneficiaries. All of the terms,
agreements, covenants, representations, warranties and conditions of this
Agreement are binding upon and inure to the benefit of and are enforceable by,
the parties and their respective successors and permitted assigns. There are no
third party beneficiaries having rights under or with respect to this Agreement.
 
Section 4.6  Further Assurances. If any further action is necessary or
reasonably desirable to carry out this Agreement’s purposes, each party will
take such further action (including executing and delivering any further
instruments and documents and providing any reasonably requested information) as
the other party reasonably may request.
 
Section 4.7  Survival of Representations, Warranties and Covenants. Each
representation, warranty, covenant and obligation in this Agreement will survive
the execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement, and will not be affected by any
investigation by or on behalf of the other party to this Agreement.
 
Section 4.8  Indemnification. Sellers will indemnify and hold harmless each
Purchaser and Purchasers will indemnify and hold harmless Sellers, from and
against any and all losses, claims, damages, liabilities and expenses
(including, without limitation, legal fees and expenses) suffered or incurred by
any such indemnified party to the extent arising from any breach of any
representation or warranty of the indemnifying party contained in this Agreement
or any breach
 

 
 
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by the indemnifying party, or failure by the indemnifying party to fulfill, any
covenant or agreement contained herein.
 
Section 4.9  Notices. All notices, requests and other communications provided
for or permitted to be given under this Agreement must be in writing and given
by personal delivery, by certified or registered United States mail (postage
prepaid, return receipt requested), by a nationally recognized overnight
delivery service for next day delivery, or by facsimile transmission, as follows
(or to such other address as any party may give in a notice given in accordance
with the provisions hereof):
 
If to Sellers, to:
 
U.S. Energy Corporation 
877 North 8th West
Riverton, WY 82501
Attention: Mark J. Larsen, President 
Facsimile: (307) 857-3050  

and to:

Crested Corp.
877 North 8th West
Riverton, WY 82501 
Attention: Keith G. Larsen, Co-Chariman  
Facsimile: (307) 857-3050 

with a copy (which will not constitute notice) to:
 
U.S. Energy Corporation
877 North 8th West
Riverton, WY 82501
Attention: Steven R. Youngbauer,
Associate General Counsel
Facsimile: (307) 857-3050 

If to Purchasers, to:
 
c/o Credit Suisse
Eleven Madison Avenue, 16th Floor
New York, New York 10010
Attention: Daniel Gewirtz
Facsimile: (212) 325-2663
 

 

 
 
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with a copy to (which does not constitute notice) to:
 

 
Avista Capital Partners, LP
1000 Louisiana Street, Suite 1975
Houston, Texas 77002
Attention: Robert L. Cabes
Facsimile: (713) 328-1097
 
with a copy (which will not constitute notice) to:
 
Akin Gump Strauss Hauer & Feld LLP
1111 Louisiana, 44th Floor
Houston, Texas 77002
Attention: J. Michael Chambers
Facsimile: (713) 236-0822
 
Section 4.10  Specific Performance; Remedies. Each party acknowledges and agrees
that the other party would be damaged irreparably if any provision of this
Agreement were not performed in accordance with its specific terms or were
otherwise breached. Accordingly, the parties will be entitled to an injunction
or injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and its provisions in addition to any other
remedy to which they may be entitled, at law or in equity. Except as expressly
provided herein, the rights, obligations and remedies created by this Agreement
are cumulative and in addition to any other rights, obligations or remedies
otherwise available at law or in equity. Except as expressly provided herein,
nothing herein will be considered an election of remedies.
 
Section 4.11  Headings. The article and section headings contained in this
Agreement are inserted for convenience only and will not affect in any way the
meaning or interpretation of this Agreement.
 
Section 4.12  Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to any
choice of law principles.
 
Section 4.13  Amendment. This Agreement may not be amended or modified except by
a writing signed by all of the parties hereto.
 
Section 4.14  Extensions; Waivers. Any party may, for itself only, (a) extend
the time for the performance of any of the obligations of any other party under
this Agreement, (b) waive any inaccuracies in the representations and warranties
of any other party contained herein or in any document delivered pursuant hereto
and (c) waive compliance with any of the agreements or conditions for the
benefit of such party contained herein. Any such extension or waiver will be
valid only if set forth in a writing signed by the party to be bound thereby. No
waiver by any party of any default, misrepresentation or breach of warranty or
covenant hereunder, whether intentional or not, may be deemed to extent to any
prior or subsequent default, misrepresentation or breach of warranty or covenant
hereunder or affect in any way any rights arising because of any prior or
subsequent such occurrence. Neither the failure nor any delay on the party of
any
 
 
 
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Section 4.15  party to exercise any right or remedy under this Agreement will
operate as a waiver thereof, nor will any single or partial exercise of any
right or remedy preclude any other or further exercise of the same or of any
other right or remedy.
 
Section 4.16  Expenses. Sellers shall be responsible for, and shall promptly
pay, costs and expenses incurred by Purchasers in connection with the
preparation, execution and performance of this Agreement and the transactions
contemplated hereby including, without limitation, the reasonable fees and
expenses of Akin Gump Strauss Hauer & Feld, LLP, counsel to Purchasers.
 
Section 4.17  Counterparts; Effectiveness. This Agreement may be executed in two
or more counterparts, each of which will be deemed an original but all of which
together will constitute one and the same instrument. This Agreement will become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other party, which delivery may be made by exchange of
copies of the signature page by facsimile transmission.
 
[Signature Page to Follow]
 

 
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
 

 
DLJ MERCHANT BANKING PARTNERS III, L.P.
 
By: DLJ Merchant Banking III, Inc.,
       as Managing General Partner
 
By:   /s/ Kenneth J. Lohsen 
Name: Kenneth J. Lohsen
Title: Vice President
 
DLJ MERCHANT BANKING III, INC., as Advisory General Partner on behalf of DLJ
Offshore Partners III, C.V.
 
By:   /s/ Kenneth J. Lohsen 
Name: Kenneth J. Lohsen
Title: Vice President
   
DLJ MERCHANT BANKING III, INC., as Advisory General Partner on behalf of DLJ
Offshore Partners III-1, C.V. and as attorney-in-fact for DLJ Merchant Banking
III, L.P., as Associate General Partner of DLJ Offshore Partners III-1, C.V.
 
By:   /s/ Kenneth J. Lohsen 
Name: Kenneth J. Lohsen
Title: Vice President
   
DLJ MERCHANT BANKING III, INC., as Advisory General Partner on behalf of DLJ
Offshore Partners III-2, C.V. and as attorney-in-fact for DLJ Merchant Banking
III, L.P., as Associate General Partner of DLJ Offshore Partners III-2, C.V.
 
By:   /s/ Kenneth J. Lohsen 
Name: Kenneth J. Lohsen
Title: Vice President
   

Stock Purchase Agreement—Signature Page
 
 

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MILLENNIUM PARTNERS II, L.P. 
 
By: DLJ Merchant Banking III, Inc.,
       as Managing General Partner
 
By:   /s/ Kenneth J. Lohsen 
Name: Kenneth J. Lohsen
Title: Vice President
   
DLJ MB PARTNERS III GMBH & CO. KG
 
By: DLJ Merchant Banking III, L.P.,
       as Managing Limited Partner
 
By: DLJ Merchant Banking III, LLC,
       as General Partner
 
By: DLJ Merchant Banking III, Inc., as Managing Member
 
By:   /s/ Kenneth J. Lohsen 
Name: Kenneth J. Lohsen
Title: Vice President
   
MBP III PLAN INVESTORS, L.P.
 
By: DLJ Merchant Banking III, Inc.,
       as Managing General Partner
 
By:   /s/ Kenneth J. Lohsen 
Name: Kenneth J. Lohsen
Title: Vice President
 
 
U.S. ENERGY CORPORATION
 
By:   /s/ Keith G. Larsen 
Name: Keith G. Larsen
Title: Chief Executive Officer
 
 
CRESTED CORP.
 
By:   /s/ Harold F. Herron 
Name: Harold F. Herron
Title: President
 

 

 

 

Stock Purchase Agreement—Signature Page
 
 

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SCHEDULE I
 
SHARE ALLOCATIONS
 

 
Purchaser:
Number of Shares:
   
DLJ Merchant Banking Partners III, L.P.
1,870,117
   
DLJ Merchant Banking III, Inc., as Advisory General Partner on behalf of DLJ
Offshore Partners III, C.V.
 
100,615
   
DLJ Merchant Banking III, Inc., as Advisory General Partner on behalf of DLJ
Offshore Partners III-1, C.V. and as attorney-in-fact for DLJ Merchant Banking
III, L.P., as Associate General Partner of DLJ Offshore Partners III-1, C.V.
 
 
 
33,374
   
DLJ Merchant Banking III, Inc., as Advisory General Partner on behalf of DLJ
Offshore Partners III-2, C.V. and as attorney-in-fact for DLJ Merchant Banking
III, L.P., as Associate General Partner of DLJ Offshore Partners III-2, C.V.
 
 
 
23,772
   
Millennium Partners II, L.P.
15,772
   
DLJ MB Partners III GmbH & Co., KG
10,721
   
MBP III Plan Investors, L.P.
404,731
   
Total:
2,459,102

 

 

Schedule I
 
 

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SCHEDULE II
 
WIRING INSTRUCTIONS AND PURCHASE PRICE ALLOCATION
 

 

 

 
For the account of US Energy:
Purchase Price Allocation:
First Interstate Bank of Commerce
Casper Office
104 South Wolcott
P.O. Box 40
Casper, WY 82602
(307) 235-4207
 
ABA Number 092901683
Account of : U.S. Energy Corp.
Money Market Account Number: 836888750
 
Federal Identification Number 83-0205516
 
$8,970,003.93
   
For the account of Crested Corp.
Purchase Price Allocation:
   
First Interstate Bank of Commerce
Casper Office
104 South Wolcott
P.O. Box 40
Casper, WY 82602
(307) 235-4207
 
ABA Number 092901683
Account of : Crested Corp.
Money Market Account Number: 836888784
 
Federal Identification Number 84-0608126
 
$4,829,996.07
   

 

Schedule II
 
 

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