**Exhibit 10.5**

 

**CONSENT AND AMENDMENT NO. 13**

 

ThisCONSENT AND AMENDMENT NO. 13 (“Amendment”) entered into and madeeffective as of September 30, 2008 (“Effective Date”) is among CanoPetroleum, Inc., a Delaware corporation (“Borrower”), theGuarantors (as defined below), the Lenders (as defined below), and Union Bankof California, N.A., as administrative agent for such Lenders (in suchcapacity, the “Administrative Agent”) and as issuing lender (in suchcapacity, the “Issuing Lender”).

 

**RECITALS**

 

A.                                   The Borrower is party tothat certain Credit Agreement dated as of November 29, 2005, as heretoforeamended (as so amended, the “Credit Agreement”) among the Borrower, thelenders party thereto from time to time (the “Lenders”), theAdministrative Agent, and the Issuing Lender.

 

B.                                     The Borrower proposes to sell 100% of themembership interest that the Borrower holds in Pantwist, LLC (the “PantwistSubsidiary”) to Legacy Reserves Operating LP (the “Purchaser”)pursuant to that certain Purchase and Sale Agreement (a copy of which isattached hereto as Exhibit A) dated September 5, 2008 among theBorrower, the Purchaser and the Pantwist Subsidiary (such transfer being the “PantwistSale”) and the Borrower also hereby requests that the Pantwist Subsidiarybe released from its obligations under its Guaranty (as defined in the CreditAgreement).

 

C.                                     The Borrower also proposes to pay theSubordinated Debt (as defined in the Credit Agreement) in full, including allinterest accrued thereon and premiums and fees owing in respect thereto, withAdvances (as defined in the Credit Agreement).

 

D.                                    Without the consent of the Lenders (asdefined in the Credit Agreement) (i) the proposed Pantwist Sale would beprohibited under the provisions of Section 6.04 of the Credit Agreement, (ii) thePantwist Sale would constitute a Change in Control (as defined in the CreditAgreement) resulting in an Event of Default (as defined in the CreditAgreement), (iii) the payment of the Subordinated Debt would be prohibitedunder the provisions of Section 6.20 of the Credit Agreement, (iv) theuse of proceeds of Advances to make payment on the Subordinated Debt would beprohibited under the provisions of Sections 5.09 and 6.12 of the CreditAgreement, and (v) the Pantwist Subsidiary may not be released from itsobligations under its Guaranty.

 

E.                                      The Lenders, subject to the terms andconditions set forth herein, wish to (i) consent to the Pantwist Sale, (ii) releasePantwist Subsidiary from its obligations under its Guaranty, and (iii) makecertain other amendments to the Credit Agreement and provide such otherconsents as provided herein.

 

THEREFORE, the Borrower, the Guarantors, theLenders, and the Administrative Agent hereby agree as follows:

 

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**Section 1.****                                         ****DefinedTerms; Other Definitional Provisions****.**As used in this Amendment,each of the terms defined in the opening paragraph and the Recitals above shallhave the meanings assigned to such terms therein. Each term defined in theCredit Agreement and used herein without definition shall have the meaningassigned to such term in the Credit Agreement, unless expressly provided to thecontrary. The words “hereof”, “herein”, and “hereunder” and words of similarimport when used in this Amendment shall refer to this Amendment as a whole andnot to any particular provision of this Amendment. Paragraph headings have beeninserted in this Amendment as a matter of convenience for reference only and itis agreed that such paragraph headings are not a part of this Amendment andshall not be used in the interpretation of any provision of this Amendment.

 

**Section 2.****                                         ****Consent****.**Subject to theterms hereof, the Lenders hereby consent to (a) the Pantwist Sale pursuantto the PSA, (b) the release of the Pantwist Subsidiary from itsobligations under the Guaranty to which it is a party, (c) theAdministrative Agent releasing and discharging 100% of the Equity Interest thatthe Borrower holds in the Pantwist Subsidiary and all right, title and interestthat the Pantwist Subsidiary holds in any Collateral (collectively, the “PantwistCollateral”) from the liens and security interests granted to theAdministrative Agent by the Borrower or by the Pantwist Subsidiary under theLoan Documents, and (d) the payment in full of the Subordinated Debt withthe proceeds of Advances to be made under the Credit Agreement; provided that,the foregoing consents are contingent upon the following:  (i) such payment of the SubordinatedDebt may not be made after the consummation of the Pantwist Sale and (ii) thePantwist Sale must be consummated within three Business Days after the paymentin full of the Subordinated Debt. The consents by the Lenders described hereinare contingent upon the satisfaction of the foregoing conditions and arestrictly limited to the Pantwist Sale, the Pantwist Subsidiary, the PantwistCollateral and the prepayment in full of the Subordinated Debt and shall not beconstrued to be a consent to or a permanent waiver of the Section 5.09, Section 6.04,or Section 6.12 of the Credit Agreement or any other terms, provisions,covenants, warranties or agreements contained in any Loan Document.

 

**Section 3.****                                         ****Amendments to Credit Agreement****.**

 

(a)                                  Section 1.01 (CertainDefined Terms) of the Credit Agreement is hereby amended by replacing thedefined term “EBITDA” with the following:

 

*“EBITDA” means, for anyperiod, without duplication, (a) Consolidated Net Income for such period plus(b) to the extent deducted in determining Consolidated Net Income,Interest Expense, taxes, depreciation, amortization, depletion and othernon-cash charges for such period (including any provision for the reduction inthe carrying value of assets recorded in accordance with GAAP and includingnon-cash charges resulting from the requirements of SFAS 133 or 143) for suchperiod minus (c) all non-cash items of income which were includedin determining such Consolidated Net Income (including non-cash incomeresulting from the requirements of SFAS 133 or 143) plus (d) thenet gain on the Pantwist Sale; provided that this clause (d) shall onlyapply for the financial covenant ratios calculated at, and as of, the fiscalquarter ending December 31, 2008, March 31, 2009, June 30, 2009and September 30, 2009, plus (e) without duplication, anyitems provided for in clause (a), (b) and (c) *

 

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*above associated withPantwist, LLC for any period that such Person was a wholly-owned Subsidiary ofthe Borrower; provided that neither clause (d) nor clause (e) shall  apply if terms and conditions related to thePantwist Sale set forth in Amendment No. 13 have not been satisfied.*

 

(b)                                 Section 1.01 (CertainDefined Terms) of the Credit Agreement is hereby further amended by adding thefollowing new terms in alphabetical order therein:

 

*“Amendment No. 13”means the Consent and Amendment No. 13 dated as of September    ,2008 which amends this Agreement.*

 

*“Pantwist Net Cash Proceeds”means with respect to the Pantwist Sale, the proceeds thereof in the form ofcash, cash equivalents and marketable securities (including any such proceedsreceived by way of deferred payment of principal pursuant to a note orinstallment receivable or purchase price adjustment receivable, or by the sale,transfer or other disposition of any non-cash consideration received inconnection therewith or otherwise, but only as and when received) received bythe Borrower or any Subsidiary thereof (including cash proceeds subsequentlyreceived (as and when received by the Borrower or any Subsidiary thereof) inrespect of non-cash consideration initially received) net of (i) reasonableand customary selling expenses (including reasonable brokers’ fees orcommissions, legal, accounting and other professional and transactional fees,transfer and similar taxes and Borrower’s good faith estimate of income taxespaid or payable in connection with such sale (after taking into account anyavailable tax credits or deductions and any tax sharing arrangements)), (ii) amountsprovided as a reserve, in accordance with GAAP, against (x) anyliabilities under any indemnification obligations associated with such AssetSale or (y) any other liabilities retained by the Borrower or anySubsidiary thereof associated with the properties sold in such Pantwist Sale,and (iii) the principal amount, premium or penalty, if any, interest andother amounts on any Debt for borrowed money that is secured by a Lien on theproperties sold in such Pantwist Sale and which is repaid with such proceeds(other than any such Debt assumed by the purchaser of such properties).*

 

*“Pantwist Sale” means the saleof 100% of the Equity Interest held by the Borrower in Pantwist LLC pursuant tothe terms of the Purchase and Sale Agreement dated as of September 5, 2008among the Borrower, Pantwist LLC and Legacy Reserves Operating LP withoutgiving effect to any amendments, modification or supplements thereto.*

 

**Section 4.****                                         ****Representations and Warranties****.**Each of the Borrower andGuarantors represents and warrants that: (a) after giving effect to thisAmendment, the representations and warranties contained in the Credit Agreementand the representations and warranties contained in the other Loan Documentsare true and correct in all material respects on and as of the Effective Dateas if made on as and as of such date except to the extent that any suchrepresentation or warranty expressly relates solely to an earlier date, inwhich case such representation or warranty is true and correct in all materialrespects as of such earlier date; (b) after giving effect to this 

 

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Amendment, no Default has occurred and is continuing; (c) the execution,delivery and performance of this Amendment are within the corporate, limitedliability company, or partnership power and authority of such Person and havebeen duly authorized by appropriate corporate, limited liability company, orpartnership action and proceedings; (d) this Amendment constitutes thelegal, valid, and binding obligation of such Person enforceable in accordancewith its terms, except as limited by applicable bankruptcy, insolvency,reorganization, moratorium, or similar laws affecting the rights of creditorsgenerally and general principles of equity; (e) there are no governmentalor other third party consents, licenses and approvals required in connectionwith the execution, delivery, performance, validity and enforceability of thisAmendment; (f) the Liens under the Security Instruments are valid andsubsisting and secure the Borrower’s and such Person’s obligations under theLoan Documents; and (g) as to each Guarantor, it has no defenses to theenforcement of the Guaranty.

 

**Section 5.****                                         ****PSA**. The Borrower hereby represents andwarrants that (a) the PSA attached hereto as Exhibit A is the true,correct and complete copy of the PSA, including any and all amendments, supplementsor modifications thereto and (b) there are no other agreements, documentsand instrumentsexecuted in connection therewith other than the agreements the forms of whichare attached as exhibits to the PSA.

 

**Section 6.****                                         ****Mandatory Prepayment**. Immediately upon receipt of theproceeds from the Pantwist Sale, the Borrower shall repay the outstandingprincipal amount of the Advances in an amount equal to the lesser of (a) 100%of the Pantwist Net Cash Proceeds (as defined in the Credit Agreement, asamended hereby) and (b) 100% of the outstanding principal amount of theAdvances. The Borrower shall, concurrently with such payment of principal, alsopay all interest accrued thereon. The failure to comply with this Section 6shall be an immediate Event of Default under the Credit Agreement.

 

**Section 7.****                                         ****Conditions to Effectiveness****.**This Amendmentand the amendments to the Credit Agreement provided herein shall becomeeffective on the Effective Date and enforceable against the parties hereto uponthe occurrence of the following conditions precedent: (a) theAdministrative Agent shall have received multiple original counterparts, asrequested by the Administrative Agent, of this Amendment duly and validlyexecuted and delivered by duly authorized officers of the Borrower, theGuarantors, the Administrative Agent, and the Lenders, (b) no Defaultshall have occurred and be continuing as of the Effective Date, (c) the  representations and warranties in thisAmendment shall be true and correct in all material respects, and (d) the Borrower shall have paid all fees and expenses of the Administrative Agent’soutside legal counsel and other consultants pursuant to all invoices presentedfor payment on or prior to the Effective Date.

 

**Section 8.****                                         ****Acknowledgments and Agreements****.**

 

(a)                                  The Borroweracknowledges that on the date hereof all Obligations are payable withoutdefense, offset, counterclaim or recoupment.

 

(b)                                 TheAdministrative Agent and the Lenders hereby expressly reserve all of theirrights, remedies, and claims under the Loan Documents. Nothing in thisAmendment shall constitute a waiver or relinquishment of (i) any Defaultor Event of Default under any of the 

 

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LoanDocuments, (ii) any of the agreements, terms or conditions contained inany of the Loan Documents, (iii) any rights or remedies of theAdministrative Agent or any Lender with respect to the Loan Documents, or (iv) therights of the Administrative Agent or any Lender to collect the full amountsowing to them under the Loan Documents.

 

(c)                                  Each of theBorrower, the Guarantors, Administrative Agent, and Lenders does hereby adopt,ratify, and confirm the Credit Agreement, as amended hereby, and acknowledgesand agrees that the Credit Agreement, as amended hereby, is and remains in fullforce and effect, and the Borrower and the Guarantors acknowledge and agreethat their respective liabilities and obligations under the Credit Agreement,as amended hereby, and the Guaranty, are not impaired in any respect by thisAgreement.

 

(d)                                 From and afterthe Effective Date, all references to the Credit Agreement and the LoanDocuments shall mean such Credit Agreement and such Loan Documents as amendedby this Amendment.

 

(e)                                  This Amendmentis a Loan Document for the purposes of the provisions of the other LoanDocuments. Without limiting the foregoing, any breach of representations,warranties, and covenants under this Amendment shall be a Default or Event ofDefault, as applicable, under the Credit Agreement.

 

**Section 9.****                                         ****Reaffirmation of the Guaranty**. Each Guarantor herebyratifies, confirms, acknowledges and agrees that its obligations under theGuaranty are in full force and effect and that such Guarantor continues tounconditionally and irrevocably guarantee the full and punctual payment, whendue, whether at stated maturity or earlier by acceleration or otherwise, all ofthe Guaranteed Obligations (as defined in the Guaranty), as such GuaranteedObligations may have been amended by this Amendment, and its execution and deliveryof this Amendment does not indicate or establish an approval or consentrequirement by such Guarantor under the Guaranty in connection with theexecution and delivery of amendments, consents or waivers to the CreditAgreement, the Notes or any of the other Loan Documents.

 

**Section 10.****                                  ****Counterparts;Invalidity****.**This Amendment may be signedin any number of counterparts, each of which shall be an original and all ofwhich, taken together, constitute a single instrument. This Amendment may beexecuted by facsimile signature and all such signatures shall be effective asoriginals. In the event that any one or more of the provisions contained inthis Amendment shall for any reason be held invalid, illegal or unenforceablein any respect, such invalidity, illegality or unenforceability shall notaffect any other provision of this Amendment.

 

**Section 11.****                                  ****Successorsand Assigns****.**This Amendment shall bebinding upon and inure to the benefit of the parties hereto and theirrespective successors and assigns permitted pursuant to the Credit Agreement.

 

**Section 12.****                                  ****GoverningLaw****.**This Amendment shall be deemed to be a contract madeunder and shall be governed by and construed in accordance with the laws of theState of Texas.

 

**Section 13.****                                  ****EntireAgreement****.** THIS AMENDMENT, THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT, THENOTES, AND THE OTHER LOAN 

 

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DOCUMENTS CONSTITUTE THEENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECTMATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECTTHERETO.

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.**

 

**[SIGNATURES BEGIN ON NEXT PAGE]**

 

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EXECUTED effective as of the date first abovewritten.

 
| BORROWER:       | **CANO  PETROLEUM, INC.**                      |
|-----------------|------------------------------------------------|
|            | ** **                                     |
|            |                                           |
|            | By:                                            | /s/  S. Jeffrey Johnson |
|            | Name:                                          | S.  Jeffrey Johnson |
|            | Title:                                         | Chairman  and Chief Executive Officer |
|            |                                           |
| **GUARANTORS:** | **SQUARE  ONE ENERGY, INC.**                   |
|            | **LADDER  COMPANIES, INC.**                    |
|            | **W.O.  ENERGY OF NEVADA, INC.**               |
|            | **WO ENERGY,  INC.**                           |
|            | **PANTWIST,  LLC**                             |
|            | **CANO  PETRO OF NEW MEXICO, INC.**            |
|            | ** **                                     |
|            |                                           |
|            | Each  by:                                      | /s/  S. Jeffrey Johnson |
|            |                                           | Name: | S.  Jeffrey Johnson |
|            |                                           | Title: | President |
|            |                                           |
|            | **W.O.  OPERATING COMPANY, LTD.**              |
|            | By: WO  Energy, Inc., its general partner |
|            |                                           |
|            |                                           | By: | /s/  S. Jeffrey Johnson |
|            |                                           |   | Name: | S.  Jeffrey Johnson |
|            |                                           |   | Title: | President |
|            |                                           |
|            | **W.O.  PRODUCTION COMPANY, LTD.**             |
|            | By: WO  Energy, Inc., its general partner |
|            |                                           |
|            |                                           | By: | /s/  S. Jeffrey Johnson |
|            |                                           |   | Name: |  S. Jeffrey Johnson |
|            |                                           |   | Title: | President |
|                 |                                                |  |  |  |  |  |  |  |  |  |  |

 

 

Signature Page to Consentand Amendment No. 13

 

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| **ADMINISTRATIVE  AGENT/**  |                                 |
|-----------------------------|--------------------------------------|
| **ISSUING  LENDER/LENDER:** | **UNION  BANK OF CALIFORNIA, N.A.,** |
| ** **                  | ** **                           |
| ** **                  | ** **                           |
|                        | By:                                  |  /s/  Randall Osterberg |
|                        |                                 |       Randall  Osterberg |
|                        |                                 |       Senior  Vice President |

 

 

Signature Page to Consentand Amendment No. 13

 

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|   | **NATIXIS,**as a Lender |
|--------|-------------------------|
|   |                    |   |
|   |                    |   |
|   | By:                     |  /s/  Donovan Broussard |
|   |                    |       Donovan  Broussard |
|   |                    |       Managing  Director |
|   |                    |   |
|   | By:                     | /s/ Lian Tchernysheva |
|   |                    |      Liana Tchernysheva |
|   |                    |      Director |
|        |                         |  |  |

 

 

Signature Page to Consent and Amendment No. 13

 

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**Exhibit A**

 

See Attached.

 

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*Execution Version*

 

**PURCHASE AND SALE AGREEMENT**

 

**BY AND AMONG**

 

**CANO PETROLEUM, INC.,**

 

**AS SELLER**

 

**AND**

 

**LEGACY RESERVES OPERATING LP,**

 

**AS BUYER**

 

**AND**

 

**PANTWIST, LLC,**

 

**AS THE COMPANY**

 

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TABLE OF CONTENTS

 
| ** **                                                                     | ** ** | **PAGE** |
|--------------------------------------------------------------------------------|------------|----------|
| 1.   PURCHASE  AND SALE                                         |       | 4        |
| 1.1   Purchase of the Membership Interests                      |       | 4        |
| 1.2   Excluded Assets and Liabilities                           |       | 4        |
| 2.   PURCHASE  PRICE                                            |       | 4        |
| 2.1   Base Purchase Price                                       |       | 4        |
| 2.2   Deposit                                                   |       | 4        |
| 2.3   Certain Definitions                                       |       | 5        |
| 2.4   Adjustments to the Base Purchase Price                    |       | 6        |
| 2.5   Allocation                                                |       | 7        |
| 3.   CLOSING                                                    |       | 8        |
| 3.1   Closing                                                   |       | 8        |
| 3.2   Delivery by Seller                                        |       | 8        |
| 3.3   Delivery by Buyer                                         |       | 8        |
| 3.4   Further Cooperation                                       |       | 9        |
| 4.   ACCOUNTING  ADJUSTMENTS                                    |       | 9        |
| 4.1   Closing Adjustments                                       |       | 9        |
| 4.2   Strapping and Gauging                                     |       | 9        |
| 4.3   Taxes                                                     |       | 9        |
| 4.4   Post-Closing Adjustments                                  |       | 10       |
| 4.5   Suspended Funds                                           |       | 11       |
| 4.6   Audit Adjustments                                         |       | 11       |
| 4.7   Cooperation                                               |       | 11       |
| 5.   DUE  DILIGENCE: TITLE MATTERS                              |       | 11       |
| 5.1   General Access                                            |       | 11       |
| 5.2   Defensible Title                                          |       | 12       |
| 5.3   Defect Letters                                            |       | 13       |
| 5.4   Effect of Title Defect                                    |       | 15       |
| 5.5   Consents                                                  |       | 16       |
| 6.   ENVIRONMENTAL  ASSESSMENT                                  |       | 17       |
| 6.1   Physical Condition of the Oil and Gas Properties          |       | 17       |
| 6.2   Inspection and Testing                                    |       | 18       |
| 6.3   Notice of Adverse Environmental Conditions                |       | 19       |
| 6.4   Rights and Remedies for Adverse Environmental  Conditions |       | 19       |
| 6.5   Remediation by Seller                                     |       | 21       |
| 7.   REPRESENTATIONS  AND WARRANTIES OF SELLER                  |       | 22       |
| 7.1   Seller’s Representations and Warranties              |       | 22       |
| 7.2   Scope of Representations of Seller                        |       | 29       |
| 8.   REPRESENTATIONS  AND WARRANTIES OF BUYER                   |       | 31       |
| 8.1   Buyer’s Representations and Warranties               |       | 31       |
| 9.   CERTAIN  AGREEMENTS OF SELLER                              |       | 32       |
| 9.1   Maintenance of Oil and Gas Properties                     |       | 32       |
| 9.2   Conduct of Business of the Company                        |       | 32       |
| 9.3   Records and Audit Rights                                  |       | 34       |
| 9.4   Reasonable Efforts; Notification                          |       | 35       |
| 9.5   Payment of Indebtedness                                   |       | 35       |
| 9.6   Insider Debt and Liabilities                              |       | 35       |
| 9.7   Operation of Oil and Gas Properties                       |       | 36       |
| 10.   CERTAIN  AGREEMENTS OF BUYER                              |       | 36       |
| 10.1   Plugging Obligation                                      |       | 36       |
| 10.2   Plugging Bond                                            |       | 36       |
| 10.3   Seller’s Logos                                      |       | 36       |
| 10.4   Like-Kind Exchanges                                      |       | 36       |
| 11.   CONDITIONS  PRECEDENT TO OBLIGATIONS OF BUYER             |       | 37       |
| 11.1   No Litigation                                            |       | 37       |
| 11.2   Representations and Warranties                           |       | 37       |
| 11.3   Operations                                               |       | 37       |
| 11.4   Due Diligence                                            |       | 37       |
| 11.5   Releases                                                 |       | 37       |
| 11.6   Release of Indebtedness and Liens                        |       | 37       |
| 12.   CONDITIONS  PRECEDENT TO THE OBLIGATIONS OF SELLER        |       | 37       |
| 12.1   No Litigation                                            |       | 37       |
| 12.2   Representations and Warranties                           |       | 37       |

 

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| 13.   TERMINATION                              |   | 38 |
|---------------------------------------------------------------|--------|----|
| 13.1   Causes of Termination                   |   | 38 |
| 13.2   Effect of Termination                   |   | 38 |
| 14.   INDEMNIFICATION                          |   | 39 |
| 14.1   Indemnification  by Seller              |   | 39 |
| 14.2   Indemnification by Buyer                |   | 41 |
| 14.3   Physical Inspection                     |   | 41 |
| 14.4   Notification                            |   | 42 |
| 15.   TAX  MATTERS                             |   | 42 |
| 16.   MISCELLANEOUS                            |   | 44 |
| 16.1   Casualty Loss                           |   | 44 |
| 16.2   Confidentiality                         |   | 44 |
| 16.3   Notices                                 |   | 45 |
| 16.4   Press Releases and Public Announcements |   | 45 |
| 16.5   Compliance with Express Negligence Test |   | 45 |
| 16.6   Governing Law                           |   | 46 |
| 16.7   Exhibits                                |   | 46 |
| 16.8   Fees and Expenses                       |   | 46 |
| 16.9   Assignment                              |   | 46 |
| 16.10   Entire Agreement                       |   | 46 |
| 16.11   Severability                           |   | 46 |
| 16.12   Captions                               |   | 46 |
| 16.13   Time of the Essence                    |   | 46 |
| 16.14   Counterpart Execution                  |   | 46 |

 

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EXHIBITS

 
| A         | Leases and Land                            |
|-----------|--------------------------------------------|
| B         | Wells and Allocation of the Purchase Price |
| C         | Equipment                                  |
| D         | Excluded Assets                            |
|      |                                       |
| SCHEDULES |
|      |                                       |
| 7.1(E)    | AFE’s                                 |
| 7.1(G)    | Pending Litigation                         |
| 7.1(K)    | Material Agreements                        |
| 7.1(M)    | Consents and Preferential Purchase Rights  |
| 7.1(AA)   | Insurance                                  |
| 7.1(BB)   | Bank Accounts                              |
| 7.1(EE)   | Related Party Transactions                 |
| 7.1(FF)   | Payout Balances                            |
| 7.1(II)   | Non-Competition Commitments                |
|           |                                            |  |

 

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PURCHASE AND SALE AGREEMENT

 

This Purchase and SaleAgreement (this “Agreement”) is entered into this         day of September, 2008, by andamong **CANO PETROLEUM, INC.**, a Delawarecorporation (“Seller”), **LEGACY RESERVES OPERATINGLP**, a Delaware limited partnership (“Buyer”), and **PANTWIST, LLC**, a Texas limited liability company (the “Company”).  Buyer, Seller and the Company arecollectively referred to herein as the “Parties” and sometimes individuallyreferred to as a “Party.”

 

RECITALS:

 

A.                                  TheCompany is a Texas limited liability company with its principal executiveoffices at801 Cherry Street, Unit 25, Suite 3200, Fort Worth, Texas.

 

B.                                    Sellerowns all of the issued and outstanding membership interests of the Company (the“Membership Interests”), constituting all of the equity interests and ownershipof the Company.

 

C.                                     Sellerdesires to sell to Buyer and Buyer desires to purchase from Seller all of theMembership Interests pursuant to the terms hereof.

 

WITNESSETH:

 

Inconsideration of the mutual agreements contained in this Agreement and othergood and valuable consideration, Buyer and Seller agree as follows:

 

# 1.             PURCHASE AND SALE.

 

## 1.1           Purchase of the MembershipInterests.  Subject to the terms and conditions of thisAgreement, on the Closing Date, Seller agrees to sell and convey to Buyer, freeand clear of all Encumbrances, and Buyer agrees to purchase and accept fromSeller, all of the Membership Interests.

##  

## 1.2           Excluded Assets and Liabilities.  The assets (“Excluded Assets”) andliabilities of the Company described on Exhibit D are excluded fromthis purchase and shall be distributed or transferred to, or assumed by, Selleror a designee of Seller immediately prior to Closing pursuant to appropriatedocuments approved in advance by Buyer. Seller or its designee to whom any of the foregoing assets aredistributed or transferred shall expressly assume all liabilities andobligations related to the foregoing.

##  

# 2.             PURCHASE PRICE.

 

## 2.1           Base Purchase Price.  The purchase price for the Assets is FortyTwo Million Seven Hundred Thousand Dollars ($42,700,000) (the “Base PurchasePrice”).

##  

## 2.2           Deposit.  Within three (3) days of the executionof this Agreement, Buyer shall deliver to Seller, in cash by wire-transfer inimmediately available funds to an account designated by Seller, a Deposit in anamount equal to Two Million One Hundred Thirty Five Thousand ($2,135,000) 

 

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## (such amount together with all accruedinterest thereon, the “Deposit”).  Priorto Closing, the Deposit shall be maintained by Seller in an interest bearingaccount.  The Deposit shall bedistributed to Seller and credited to the Base Purchase Price at Closing, or ifthis Agreement is terminated, shall be distributed or retained pursuant to Article 13.  In the event the Deposit is not delivered toSeller as prescribed, this Agreement shall terminate.

##  

## 2.3          Certain Definitions.  As used in this Agreement, the followingterms shall have the following meanings (other capitalized terms are definedthroughout this Agreement):

##  

### (A)         “Oil and Gas Properties” means (in each case other than theExcluded Assets)

###  

#### (i)                  all of theCompany’s right, title and interest in, to and under the oil, gas and/ormineral leases described on Exhibit A attached hereto (the “Leases”),whether or not such interests are accurately or completely described on Exhibit A,and all of the Company’s oil and gas leasehold, mineral, royalty, overridingroyalty, surface or other interests in the lands covered by the Leases or inthe lands described on Exhibit A (collectively, the “Land”),together with all the property and rights incident thereto, including withoutlimitation all of the Company’s rights in, to and under all operatingagreements; pooling, communitization and unitization agreements; farmoutagreements; joint venture agreements; product purchase and sale contracts;transportation, processing, treatment or gathering agreements; leases; permits(the “Permits”); rights-of-way (the “Rights-of-Way”); surface use agreements;surface leases; surface estates; easements (the “Easements”); licenses;options; declarations; orders; contracts; and instruments in any way relatingto the Leases or Land;

####  

#### (ii)               all of the Company’sright, title and interest in and to the wells situated on or used inconjunction with operations on the Leases and/or Land or on land pooled,communitized or unitized therewith (“Pooled Land”), including, withoutlimitation, all producing, non-producing, injection, disposal and water supplywells and the wells listed on Exhibit B attached hereto(collectively, the “Wells”);

####  

#### (iii)    all of the Company’s right,title and interest in and to all of the personal property, fixtures,improvements and other property, whether real, personal or mixed, now or as ofthe Effective Time on, appurtenant to or used or obtained by the Company inconnection with the Leases, Land, Pooled Land or Wells or with the production,injection, treatment, sale or disposal of hydrocarbons and all other substancesproduced therefrom or attributable thereto, including, without limitation, wellequipment, casing, tubing, tanks, generators, boilers, buildings, pumps,motors, machinery, pipelines, gathering systems, power lines, telephone andtelegraph lines, roads, field processing plants, field offices and otherfurnishings related thereto, all vehicles, rolling stock, pulling units,equipment leases, trailers, inventory in storage and storage yards locatedthereon or used in connection therewith, all of the equipment and otherpersonal property described on Exhibit C attached hereto, and allother improvements or appurtenances thereunto belonging (collectively, the “Equipment”);

 

5

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### (B)          “Oil and Gas” means all of the oil and gas and associatedhydrocarbons in and under or otherwise attributable to the Leases, Land, andPooled Land or produced from the Wells; and

###  

### (C)          “Effective Time” means 7:00 a.m. (Central Time) on July 1,2008.

###  

### (D)          “Affiliate” means, with respect to any person, any otherperson that directly or indirectly, through one or more intermediaries,controls, is controlled by, or is under common control with, such first person.

###  

## 2.4          Adjustments to the Base PurchasePrice.  At Closing, appropriate adjustments to theBase Purchase Price shall be made as follows in accordance with Section 4.1(as adjusted, the “Purchase Price”):

##  

### (A)         The Base Purchase Price shall be adjusted upward by:

###  

#### (i)      the value of the Oil and Gasin inventory as of the Effective Time pursuant to Section 4.2;

####  

#### (ii)     Property Taxes and SeveranceTaxes related to the Assets prepaid by Seller or the Company but attributableto the period following the Effective Time as determined pursuant to Section 4.3;

####  

#### (iii)    an amount equal to the costs,expenses and other expenditures, excluding amounts paid for overhead, (whethercapitalized or expensed) prepaid by the Company before the Effective Time in accordancewith this Agreement that are attributable to the Oil and Gas Properties for theperiod from and after the Effective Time;

####  

#### (iv)    for all operated Wells, amonthly overhead fee of $400, prorated for partial months, per active producingWell while Seller or its affiliate is operating the Oil and Gas Properties fromand after the Effective Time;

####  

#### (v)      an amount equal to theamount of proceeds derived from the sale of Oil and Gas net of royalties andseverance taxes paid by the Company, actually received by the Company after theEffective Time and directly attributable to the Wells which are, in accordancewith generally accepted accounting procedures, attributable to the period oftime prior to the Effective Time; and

####  

#### (vi)    any other amount agreed uponin writing by Seller and Buyer.

####  

### (B)          The Base Purchase Price shall be adjusted downward by:

###  

#### (i)       an amount equal to theamount of proceeds derived from the sale of Oil and Gas, , net of royalties andseverance taxes paid by the Company, actually received by the Company anddirectly attributable to the Wells which are, in accordance with generallyaccepted accounting procedures, attributable to the period of time from andafter the Effective Time;

 

6

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#### (ii)     an amount equal to allexpenditures, liabilities and costs relating to the Oil and Gas Properties(other than Property Taxes and Severance Taxes related to the Oil and GasProperties) that are unpaid as of the Closing Date and assessed for orattributable to periods of time or the ownership of production prior to theEffective Time regardless how such expenditures, liabilities and costs arecalculated provided that to the extent the actual amounts cannot be determinedprior to the agreement of Buyer and Seller with respect to the ClosingAdjustment Statement, a reasonable estimate of such expenditures, liabilitiesand costs shall be used;

####  

#### (iii)    all amounts related to TitleDefects as determined pursuant to Section 5.4, consents and preferentialrights as determined pursuant to Section 5.5, Adverse EnvironmentalConditions as determined pursuant to Section 6.4, Exclusion Adjustments asdetermined pursuant to Sections 5.5 or 6.4, and Casualty Losses as determinedpursuant to Section 15.1;

####  

#### (iv)    Property Taxes and SeveranceTaxes related to the Oil and Gas Properties to be paid by the Company after theEffective Time but attributable to the period prior to the Effective Time asdetermined pursuant to Section 4.3;

####  

#### (v)     the amount of the Deposit;

####  

#### (vi)    an amount equal to any and alldividends, distributions or other payments of any kind made by the Companyafter the Effective Time to or for the benefit, directly or indirectly, ofSeller or any of its Affiliates, including any costs or expenses related tothis Agreement or the transactions contemplated hereby;

####  

#### (vii)   an amount equal to all income,employment, franchise and other taxes, and penalties and interest relatedthereto, paid or payable by Company after the Effective Time but attributableto periods on or prior to the Effective Time;

####  

#### (viii)  an amount equal to all otherliabilities of the Company not otherwise included in an adjustment to the BasePurchase Price pursuant to this Section 2.4(B), excluding asset retirementobligations paid or payable after the Effective Time but attributable toperiods on or prior to the Effective Time; and

####  

#### (ix)     any other amount agreed uponin writing by Seller and Buyer.

####  

### (C)          Seller shall have the right to collect any receivable,refund or other amounts associated with periods prior to the EffectiveTime.  To the extent that Buyer collectsany such receivable, refund or other amounts, then Buyer shall promptly remitany such amounts to Seller.

###  

## 2.5          Allocation.  The Base Purchase Price shall be allocated tothe Oil and Gas Properties as set forth in Exhibit B and Exhibit C.  The Parties agree that the values allocatedto various portions of the Oil and Gas Properties, which are set forth on Exhibit Band Exhibit C (singularly with respect to each item, the “AllocatedValue” and collectively, the “Allocated Values”), shall 

 

7

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## be binding on Seller and Buyer and shall beused only for the purposes of adjusting the Base Purchase Price pursuant toSections 4.3 (relating to Taxes), 5.4 (relating to Title Defects), 15.1(relating to Casualty Losses), and 6.4 (relating to Adverse EnvironmentalConditions), and are not intended as a measure of value for any other purpose.

##  

# 3.             CLOSING.

 

## 3.1           Closing.  The sale and purchase of the MembershipInterests (“Closing”) shall be held at or before 9:00 a.m. on October 1,2008 (“Closing Date”).  The Closing willtake place at the offices of the Company, in Fort Worth, Texas.

##  

## 3.2           Delivery by Seller.  At Closing, Seller shall deliver to Buyer:

##  

### (A)          An assignment of the Membership Interests and/or, asapplicable, certificates representing the Membership Interests, duly endorsed(or accompanied by duly executed stock powers);

###  

### (B)           Except for the Excluded Assets, all personal property of theCompany, including, without limitation, (i) all files and data (includingthose in electronic form or otherwise), contracts, records, and (ii) specifically,lease records, well records, and division order records; well files andprospect files; title records (including abstracts of title, title opinions andmemoranda, and title curative documents related to the Leases and Wells);contracts and contract files; correspondence; computer data files; micro-fichedata files; geological, geophysical and seismic records, interpretations, data,maps and information, production records, electric logs, core data, pressuredata, decline curves and graphical production curves; and accounting records(all such items in (ii) are collectively referred to herein as the “Records”);

###  

### (C)           On or before the Closing Date, the written resignations ofall officers, managers and employees of the Company;

###  

### (D)          Executed releases of any mortgages or financing statementsin favor of any third party that may be currently encumbering the Oil and GasProperties or any other assets of the Company;

###  

### (E)           An executed Closing Adjustment Statement;

###  

### (F)           Shareholder or member resolutions, as applicable, of theCompany and Seller, certified by the secretary or other appropriate officer ofthe Company and Seller, authorizing the execution and performance of thisAgreement and the transactions contemplated hereby; and

###  

### (G)           Such other documents as Seller may reasonably request.

###  

## 3.3           Delivery by Buyer.  At Closing, Buyer shall deliver to Seller:

##  

### (A)          The Purchase Price set forth in the Closing AdjustmentStatement by wire transfer in immediately available funds, less the Deposit;and

 

8

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### (B)           An executed Closing Adjustment Statement.

###  

## 3.4           Further Cooperation.  At the Closing and thereafter as may benecessary, Seller and Buyer shall execute and deliver such other instrumentsand documents and take such other actions as may be reasonably necessary toevidence and effectuate the transactions contemplated by this Agreement.

##  

# 4.             ACCOUNTING ADJUSTMENTS.

 

## 4.1           Closing Adjustments.  With respect to matters that can bedetermined as of the Closing, Seller shall prepare, in accordance with theprovisions of this Article 4, a statement (the “Closing AdjustmentStatement”) with relevant supporting information setting forth each adjustmentto the Base Purchase Price submitted by Seller. Seller shall submit the Closing Adjustment Statement to Buyer, togetherwith all records or data supporting the calculation of amounts presented on theClosing Adjustment Statement, no later than three (3) business days priorto the scheduled Closing Date.  Prior tothe Closing, Buyer and Seller shall review the adjustments proposed by Sellerin the Closing Adjustment Statement.  Agreedadjustments shall be taken into account in computing any adjustments to be madeto the Base Purchase Price at the Closing. When available, actual figures will be used for the adjustments atClosing.  To the extent actual figuresare not available, estimates shall be used subject to final adjustments asdescribed in Section 4.4 below.

##  

## 4.2           Strapping and Gauging.  Seller caused the Oil and Gas in the storagefacilities located on, or utilized in connection with, the Leases to bemeasured, gauged or strapped as of the Effective Time.  Seller caused the production meter charts (orif such do not exist, the sales meter charts) on the pipelines transporting Oiland Gas from the Leases to be read as of such time.  The Oil and Gas in such storage facilitiesabove six inches or through the meters on the pipelines as of the EffectiveTime shall be allocated to the Seller and shall be valued based on the priceactually paid for Oil and Gas produced from the Oil and Gas Properties for themonth prior to the Effective Time, and the Oil and Gas placed in such storagefacilities after the Effective Time and production upstream of the aforesaidmeters shall belong to the Company and become part of the Oil and GasProperties.  Buyer or Buyer’srepresentative shall have the option to witness the gauging by Seller.  To the extent, but only to the extent, theCompany does not receive the sales proceeds from the sale of such stored Oiland Gas prior to Closing, the value of such shared Oil and Gas shall be anupward adjustment to the Base Purchase Price as provided in Section 2.4(A).  This provision should not apply to any Oiland Gas Properties that are not operated by the Company.  There shall be no settlement for Stock inTanks on non-operated Oil and Gas Properties.

##  

## 4.3           Taxes.

##  

### (A)          Property Taxes.  All ad valorem taxes, real property taxes,personal property taxes and similar obligations assessed on the Oil and GasProperties (“Property Taxes”) shall be apportioned as of the Effective Timebetween Buyer and Seller.  Buyer shallcause the Company to file all required reports and returns incident to PropertyTaxes which are due on or after the Closing, and the Company shall pay or causeto be paid to the taxing authorities all such taxes reflected on such reportsand returns.  The Post-Closing 

 

9

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### Adjustment Statement shall settle all liability for Property Taxes,using estimates based on previous assessments to the extent current assessmentsare not known.

###  

### (B)           Sales Taxes, Filing Fees, Etc. The Base Purchase Price is netof any sales taxes or other transfer taxes. Buyer shall be liable for any sales tax or other transfer tax as well asany applicable conveyance, transfer and recording fees.  If Seller is required by applicable state lawto report and pay these taxes or fees, Buyer shall promptly reimburse Seller infull payment of the invoice.

###  

### (C)           Severance Taxes.  All production, severance or excise taxes,conservation fees and other similar taxes or fees (other than income taxes)payable on a current basis with respect to Oil and Gas produced and sold fromthe Assets (“Severance Taxes”) shall be allocated to Seller to the extent theproduction on which such taxes are based occurs prior to the Effective Time andshall be allocated to Buyer to the extent such production occurs after theEffective Time.

###  

## 4.4           Post-Closing Adjustments.

 

### (A)          A post-closing adjustment statement (the “Post-ClosingAdjustment Statement”) based on the actual income and expenses shall beprepared and delivered by Seller to Buyer within ninety (90) days after theClosing, proposing further adjustments to the calculation of the Purchase Pricebased on the information then available. Seller or Buyer, as the case may be, shall be given access to and shallbe entitled to review and audit the other Party’s records pertaining to thecomputation of amounts claimed in such Post-Closing Adjustment Statement.

###  

### (B)           Within thirty (30) days after receipt of the Post-ClosingAdjustment Statement, Buyer shall deliver to Seller a written statement describingin reasonable detail its objections (if any) to any amounts or items set forthon the Post-Closing Adjustment Statement. If Buyer does not raise objections within such period, then thePost-Closing Adjustment Statement shall become final and binding upon theParties at the end of such period.

###  

### (C)           If Buyer raises objections, the Parties shall negotiate ingood faith to resolve any such objections. If the Parties are unable to resolve any disputed item within thirty(30) days after Buyer’s receipt of the Post-Closing Adjustment Statement, anydisputed accounting item shall be submitted to a nationally recognizedindependent accounting firm mutually agreeable to the Parties who shall beinstructed to resolve such disputed item within thirty (30) days.  The resolution of disputes by the accountingfirm so selected shall be set forth in writing and shall be conclusive, bindingand non-appealable upon the Parties with respect to the accounting matterssubmitted and the Post-Closing Adjustment Statement shall become final andbinding upon the Parties on the date of such resolution.  The fees and expenses of such accounting firmshall be paid one-half by Buyer and one-half by Seller.

###  

### (D)          After the Post-Closing Adjustment Statement has become finaland binding on the Parties, Seller or Buyer, as the case may be, shall pay tothe other such sums as are due to settle accounts between the Parties due todifferences between the estimated Purchase Price 

 

10

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### paid pursuant to the Closing Adjustment Statement and the actualPurchase Price set forth on the Post-Closing Adjustment Statement.

###  

## 4.5           Suspended Funds.  At the Closing, Seller shall provide to Buyera listing showing all third party proceeds from production attributable to theoperated Leases which are currently held in suspense and shall transfer toBuyer all of those suspended proceeds. The Company shall be responsible for proper distribution of all thesuspended proceeds, to the extent so identified by Seller, to the partieslawfully entitled to them and any claims related thereto, and the Companyhereby agrees to indemnify, defend and hold harmless Seller from and againstany and all claims, liabilities, losses, costs and expenses arising out of orrelating to those suspended proceeds and any claims related thereto after theEffective Time.  Seller shall beresponsible and liable for, any claims, liabilities, losses, costs and expensesarising out of or relating to those suspended proceeds and any claims relatedthereto through the Closing Date and related to any suspended funds notidentified by Seller as provided above.

##  

## 4.6           Audit Adjustments.  Seller retains all rights to adjustmentsresulting from any operating agreement and other audit claims asserted againstthird party operators on transactions occurring prior to the Effective Time(which includes Buyer, if applicable). Any credit received by Buyer pertaining to such an audit claim shall bepaid to Seller within thirty (30) days after receipt.

##  

## 4.7           Cooperation.  Each Party covenants and agrees to promptlyinform the other with respect to amounts owing under Sections 4.4 and 4.6hereof.

##  

# 5.             DUE DILIGENCE: TITLE MATTERS.

 

## 5.1           General Access.

 

### (A)          During reasonable business hours, Seller and the Companyagree to grant Buyer physical access to the Oil and Gas Properties and otherassets of the Company to allow Buyer to conduct, at Buyer’s sole risk andexpense, on-site inspections and environmental assessments of the Oil and GasProperties and other assets of the Company. In connection with any such on-site inspections, Buyer agrees not tointerfere with the normal operation of the Oil and Gas Properties and otherassets of the Company and agrees to comply with all requirements of theoperators of the Wells.  If Buyer or itsagents prepares an environmental assessment of any of the Oil and GasProperties and other assets of the Company, Buyer agrees to keep suchassessment confidential.  In connectionwith granting such access, Buyer represents that it is adequately insured andwaives, releases and agrees to indemnify the Seller and the Company against allclaims for injury to, or death of, persons or for damage to operations orproperty arising in any way from the access afforded to Buyer hereunder or theactivities of Buyer, except to the extent caused by Seller’s or the Company’sgross negligence or willful misconduct. This waiver, release and indemnity by Buyer shall survive termination ofthis Agreement.

###  

### (B)           Upon the execution of this Agreement, Seller and the Companyshall give Buyer and its representatives, employees, consultants, independentcontractors, attorneys and other advisors reasonable access to the Records andother books and records of the Company during regular office hours for any andall inspections and copying.

 

11

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## 5.2           Defensible Title.  As used herein the term “Defensible Title”shall mean:

##  

### (A)          As to the Oil and Gas Properties, that record title of theCompany which:

###  

#### (i)      entitles the Company toreceive not less than the interests shown in Exhibit B as the “NetRevenue Interest” of all Oil and Gas produced, saved and marketed from orallocated to the Wells, all without reduction, suspension or termination duringthe life of such Wells except as stated in such Exhibit; and

####  

#### (ii)     obligates the Company to beara percentage of the costs and expenses relating to the maintenance anddevelopment of, and operations relating to, the Wells not greater than the “WorkingInterest” shown in Exhibit B (without a proportionate increase inthe Net Revenue Interest), all without increase during the life of such Wellsexcept as stated in such Exhibit; and

####  

### (B)           That title of the Company to the Oil and Gas Properties isfree and clear of liens, encumbrances and defects that materially and adverselyaffect the ownership, operation or use of the Oil and Gas Properties, exceptfor Permitted Encumbrances.

###  

### (C)           As used herein, the term “Permitted Encumbrances” shall meanany one or more of the following:

###  

(1)           Anylessor’s royalties, overriding royalties, net profits interests, carriedinterests, production payments, reversionary interests and similar burdensreflected in the public records, if the net cumulative effect of the burdensdoes not operate to reduce the Net Revenue Interest of the Company below theinterests described in Exhibit B;

 

(2)           Anyincrease in lessor’s royalty occasioned by the repeal or suspension of anygovernmental regulation providing for the reduction of royalty for wellsproducing below defined threshold amounts;

 

(3)           Divisionorders and production sales contracts terminable without penalty upon no morethan ninety (90) days notice to the purchaser;

 

(4)           PreferentialRights and required third party consents to assignment and similar agreementswith respect to which waivers or consents are obtained from the appropriateparties, or the appropriate time period for asserting any such right hasexpired without an exercise of the right;

 

(5)           Materialman’s,mechanic’s, repairman’s, employee’s, contractor’s, operator’s and other similarliens or charges arising in the ordinary course of business for obligationsthat are not delinquent and that will be paid and discharged in the ordinarycourse of business, or if delinquent, that are being contested in good faith byappropriate action of which Buyer is notified in writing before Closing;

 

12

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(6)                                Allrights to consent by, required notices to, filings with, or other actions bygovernmental entities in connection with the sale or conveyance of oil and gasleases or interests therein if they are routinely obtained subsequent to thesale or conveyance;

 

(7)                                Easements,rights-of-way, servitudes, permits, surface leases and other rights in respectof surface operations that do not materially interfere with the oil and gasoperations to be conducted on any Well or Lease;

 

(8)                                Alloperating agreements, unit agreements, unit operating agreements, poolingagreements and pooling designations affecting the Assets that are either (i) ofrecord in the Company’s chain of title or (ii) reflected or referenced inthe Records or (iii) included as Material Agreements on Schedule 7.1(K),to the extent the same do not decrease the Company’s Net Revenue Interestsbelow the interests set forth on Exhibit B or increase the Company’sWorking Interests above the interests set forth on Exhibit B;

 

(9)                                Conventionalrights of reassignment prior to release or surrender requiring notice to theholders of the rights;

 

(10)                          Allrights reserved to or vested in any governmental, statutory or public authorityto control or regulate any of the Oil and Gas Properties in any manner, and allapplicable laws, rules and orders of governmental authority;

 

(11)                        Defectsthat are defensible by possession under applicable statutes of limitation foradverse possession or for prescription;

 

(12)                          Allother liens, charges, encumbrances, contracts, agreements, instruments,obligations, defects and irregularities which results in an adjustment to theBase Purchase Price under Section 5.4.

 

(13)                          Allother liens, charges, encumbrances, contracts, agreements, instruments,obligations, defects and irregularities affecting the Oil and Gas Propertiesthat individually or in the aggregate are not such as to materially interferewith or affect the operation, value or use of any of the Oil and Gas Propertiesand have not prevented, and cannot reasonably be expected to prevent, theCompany from receiving the proceeds of production from the affected Oil and GasProperties.

 

## 5.3                               Defect Letters.

##  

### (A)                            Buyer may from time to time andno later than September 25, 2008, at 5:00 p.m., Central Time (the “DefectNotice Deadline”) notify Seller in writing (a “Notice”) of any matter whichwould cause title to all or part of the Oil and Gas Properties not to beDefensible Title (“Title Defect”).  Thereshall be no adjustment to the Base Purchase Price unless the aggregate TitleDefect Values of all Title Defects exceed two percent (2%) of the BasePurchase Price (the “Title Defect Threshold”) (such amount being a threshold,not a deductible).  In order to provideSeller a reasonable opportunity to cure any Title Defects 

 

13

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### prior to Closing, Buyer shall use reasonable efforts to provide theNotice as soon as reasonably possible after becoming aware of or making itsdetermination of the Title Defect.

###  

### (B)                              In the Notice, Buyer mustdescribe with reasonable detail each alleged Title Defect it has discovered andthe steps required to cure each Title Defect, include Buyer’s reasonableestimate of the Title Defect Value attributable to each, and include all dataand information in Buyer’s possession or control bearing thereon.  Except for Title Defects arising by, throughor under the Company, Buyer shall be deemed to have conclusively waived allTitle Defects not disclosed to Seller in a Notice on or before the DefectNotice Deadline.

###  

### (C)                              Upon timely delivery of a Noticeby Buyer:

###  

#### (i)                   within three (3) businessdays after Seller’s receipt of the Title Defects Notice, Seller shall notifyBuyer whether Seller agrees with Buyer’s claimed Title Defects and/or theproposed Title Defect Values therefor (“Seller’s Response”).  If Seller does not agree with any claimedTitle Defect and/or the proposed Title Defect Value therefor, then the Partiesshall enter into good faith negotiations and shall attempt to agree on suchmatters;

####  

#### (ii)                within one (1) businessday after Seller’s notice of its cure of a Title Defect, Buyer shall notifySeller whether Buyer agrees with Seller’s proposed cure of a Title Defect (“Buyer’sResponse”).  All actions to attempt tocure a Title Defect shall be at Seller’s expense.  If Buyer does not agree with any such cure,then the Parties shall enter into good faith negotiations and shall attempt toagree on such matters;

####  

#### (iii)             if the Parties cannotreach agreement concerning either the existence of a Title Defect, Seller’sproposed cure of a Title Defect, or a Title Defect Value within ten (10) daysafter Buyer’s receipt of Seller’s Response or Seller’s receipt of Buyer’sResponse, as applicable, upon either Party’s request, the Parties shallmutually agree on and employ an attorney experienced in title examination inthe state where the Oil and Gas Properties are located (“Title Consultant”) toresolve all points of disagreement relating to Title Defects and Title DefectValues; provided that Seller or Buyer may elect to proceed to Closing with suchOil and Gas Property subject to the Title Defect becoming an Excluded Asset andadjust the Base Purchase Price in the amount of the Allocated Value and notsubmit such matter to arbitration;

####  

#### (iv)            if at any time anyTitle Consultant so chosen fails or refuses to perform hereunder, a new TitleConsultant shall be chosen by the Parties. The cost of any such Title Consultant shall be borne one hundred percent(100%) by the party that does not prevail. Each Party shall present a written statement of its position on theTitle Defect and/or Title Defect Value in question to the Title Consultantwithin five (5) days after the Title Consultant is selected, and the TitleConsultant shall make a determination of all points of disagreement inaccordance with the terms and 

 

14

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#### conditions of this Agreement within ten (10) businessdays of receipt of such position statements. The determination by the Title Consultant shall be conclusive andbinding on the Parties, and shall be enforceable against any Party in any courtof competent jurisdiction.  If necessary,the Closing Date shall be deferred until the Title Consultant has made adetermination of the disputed issues with respect thereto; provided, however,that, unless Seller and Buyer mutually agree to the contrary, the Closing Dateshall not be deferred in any event for more than thirty (30) days beyond thescheduled Closing Date in Section 3.1. Once the Title Consultant’s determination has been expressed to bothParties, if applicable, Seller shall have five (5) days in which to adviseBuyer in writing which of the options available to Seller under Section 5.4that Seller elects regarding each of the Oil and Gas Properties as to which theTitle Consultant has made a determination. In evaluating whether a Title Defect exists, due consideration shall begiven to the length of time that the particular Oil and Gas Property has beenproducing Oil and Gas and whether such fact, circumstance or condition is ofthe type expected to be encountered in the area involved and is usual andcustomarily acceptable to reasonable and prudent operators, working interestowners and/or purchasers engaged in the business of the exploration,development, and operation of oil and gas properties.

####  

## 5.4                               Effect of Title Defect.

##  

### (A)                              In the event Buyer providesSeller with a timely Notice and the Title Defects are valid and exceed theTitle Defect Threshold, for those Title Defects not cured by Closing, Sellermay, at its sole discretion:

###  

#### (i)                   adjust the BasePurchase Price in the amount of the Title Defect Value of the Oil and GasProperty to which such Title Defect relates and proceed to Closing on all Oiland Gas Properties; or

####  

#### (ii)                proceed with (a) Closingon those Oil and Gas Properties not affected by the valid Title Defects andsuch Oil and Gas Properties to which a Title Defect relates but for whichSeller has elected to proceed to Closing with an adjustment of the BasePurchase Price in the amount of the Title Defect Value of such Oil and GasProperties, and (b) defer Closing on those other Oil and Gas Properties towhich a Title Defect relates and for which Seller has elected to attempt tocure such Title Defect and to not proceed to Closing, for which Buyer shallplace into escrow an amount equal to the Allocated Values of the Oil and GasProperties affected by the valid Title Defects, which withheld amount shall bepaid to Seller when the Oil and Gas Property affected by any valid Title Defectis cured or the Title Defect is waived by Buyer and the affected Oil and GasProperty is conveyed from Seller to Buyer. If neither of the above occurs and if Seller later determines it willnot cure a Title Defect on or before thirty (30) days from the Closing Date, theamount in the escrow account attributable to such Title Defect will be returnedto Buyer and such Oil and Gas Property affected by such Title Defect shall bedeemed an Excluded Asset and be transferred to Seller or Seller’s designeepursuant to Section 1.2.

 

15

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### (B)                              The diminution in value of anOil and Gas Property attributable to a valid Title Defect (the “Title DefectValue”) notified in a Notice shall be determined by the following:

###  

#### (i)                   if the valid TitleDefect asserted is that the actual Net Revenue Interest attributable to theproducing or valued formation in any Oil and Gas Property is less than thatstated in the applicable Exhibit, then the Title Defect Value is the product ofthe Allocated Value attributed to the affected formation(s) in such Oiland Gas Property, multiplied by a fraction, the numerator of which is thedifference between the Net Revenue Interest set forth in the applicable Exhibit andthe actual Net Revenue Interest, and the denominator of which is the NetRevenue Interest stated in the applicable Exhibit; or

####  

#### (ii)                if the valid TitleDefect represents an obligation, encumbrance, burden or charge upon theaffected Oil and Gas Property (including any increase in Working Interest for whichthere is not a proportionate increase in Net Revenue Interest), the amount ofthe Title Defect Value is to be determined by taking into account the AllocatedValue of such Oil and Gas Property, the portion of the Oil and Gas Propertyaffected by the Title Defect, the legal effect of the Title Defect, thepotential economic effect of the Title Defect over the life of the affected Oiland Gas Property, and the Title Defect Values placed upon the Title Defect byBuyer and Seller.

####  

#### (iii)             Notwithstanding theabove, in no event shall the total of the Title Defect Values related to aparticular Oil and Gas Property exceed the Allocated Value of such Oil and GasProperty.

####  

### (C)                              If the aggregate value of (i) theBase Purchase Price adjustment for Title Defect Values plus (ii) theAllocated Value of Oil and Gas Properties which are excluded in lieu of cure oradjustment equals or exceeds ten percent (10%) of the Base Purchase Price, thenby notice delivered prior to the Closing either Party may terminate this Agreementand neither Party shall have any further obligation to conclude the transactioncontemplated by this Agreement.

###  

## 5.5                               Consents.  Seller shall cause the Company to use itsbest efforts to obtain all required consents. If Buyer discovers other affected Oil and Gas Properties during thecourse of Buyer’s due diligence activities, Buyer shall notify Sellerimmediately and Seller shall cause the Company to use its best efforts toobtain such consents prior to Closing.

##  

### Except for consents and approvals which arecustomarily obtained post-Closing, if a necessary consent to assign any Leasehas not been obtained as of the Closing, then (i) the portion of the Oiland Gas Properties for which such consent has not been obtained shall become anExcluded Asset conveyed to Seller or Seller’s designee at the Closing, (ii) theAllocated Value for that Oil and Gas Property shall not be paid to Seller, and (iii) Sellershall use best efforts to obtain such consent as promptly as possible followingClosing.  If such consent has beenobtained as of the date on which the Post-Closing Adjustment Statement becomesfinal, Seller shall convey the affected Oil and Gas 

 

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### Property to theCompany effective as of the Effective Time and Buyer shall pay Seller theAllocated Value of the affected Oil and Gas Property, less any proceeds fromthe affected Oil and Gas Property received by Seller attributable to the periodof time after the Effective Time (calculated in accordance with Section 2.3).  If such consent has not been obtained or hasnot been waived by Buyer as of the date on which the Post-Closing AdjustmentStatement becomes final, Seller shall elect either to (i) challenge incourt the enforceability of such consent right, in which event the affected Oiland Gas Property shall be assigned to Seller as an Excluded Asset and a portionof the Purchase Price equal to the Allocated Value of the affected Oil and GasProperty shall be withheld by Buyer until such legal challenge is finallyresolved by settlement or non-appealable court order, after which Seller shallconvey the affected Oil and Gas Property to the Company under the terms of thisAgreement and Buyer shall pay the Allocated Value for such Oil and GasProperty, less any proceeds received by Seller attributable to such Oil and GasProperty for the period from and after the Effective Time (calculated inaccordance with Section 2.3) or (ii)  deem the affected Oil and GasProperty an Excluded Asset and the Base Purchase Price shall be reduced by anamount equal to the Allocated Value of the affected Oil and Gas Property (withsuch adjustment being an “Exclusion Adjustment”).  Buyer shall reasonably cooperate with Sellerin obtaining any required consent including providing assurances of reasonablefinancial conditions, but Buyer shall not be required to expend funds or makeany other type of financial commitments a condition of obtaining such consent.

###  

# 6.                                     ENVIRONMENTAL ASSESSMENT.

 

## 6.1                               Physical Condition of the Oiland Gas Properties.

##  

### (A)                            Buyer acknowledges that the Oiland Gas Properties have been used for oil and gas drilling and productionoperations and possibly for the storage and disposal of waste materials orhazardous substances related to standard oil field operations. Physical changesin or under the Oil and Gas Properties or adjacent lands may have occurred as aresult of such uses.  The Oil and GasProperties also may contain previously plugged and abandoned wells, buriedpipelines, storage tanks and other equipment, whether or not of a similarnature, the locations of which may not now be known by Seller or be readilyapparent by a physical inspection of the Oil and Gas Properties.  Upon consummation of the Closing Buyer shallbe deemed to have assumed the risk of expense, claim, damage or liabilityarising from any such matter referred to in this section, including withoutlimitation the risk that the Oil and Gas Properties may contain waste orcontaminants and that adverse physical conditions, including the presence ofwaste or contaminants, may not have been revealed by Buyer’sinvestigation.  Upon consummation of theClosing the Company shall retain all responsibility and liability related todisposal, spills, waste or contamination on or below the Oil and Gas Properties.

###  

### (B)                              In addition, Buyer acknowledgesthat some oil field production equipment located on the Oil and Gas Propertiesmay contain asbestos and/or naturally-occurring radioactive material (“NORM”).  In this regard, Buyer expressly understandsthat NORM may affix or attach itself to inside of wells, materials andequipment as scale or in other forms, and that wells, materials and equipmentlocated on the Oil and Gas Properties described herein may contain NORM andthat NORM-containing materials may be buried or have been otherwise disposed ofon the Oil and Gas Properties.  Buyeralso expressly understands that special procedures may be required for theremoval and disposal of 

 

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### asbestos and NORM from the Oil and Gas Properties where it may befound, and that upon consummation of the Closing the Company shall be deemed tohave retained all liability when such activities are performed

###  

## 6.2                               Inspection and Testing.

##  

### (A)                            Prior to Closing, Buyer shallhave the right, at its sole cost and risk, to review Seller’s or the Company’sPhase I environmental assessments of the Oil and Gas Properties, if any exist,and to conduct any further environmental assessment of the Oil and GasProperties it deems appropriate, to the extent that Seller or the Company hasthe authority to grant such right to Buyer. Buyer shall immediately provide to Seller any data obtained from suchassessments, including any reports and conclusions.  Seller, the Company and Buyer shall keep all informationrelating to such assessments strictly confidential whether or not Closingoccurs, except as may be required pursuant to any Environmental Laws.

###  

### (B)                              Buyer waives and releases allclaims against Seller, the Company, their Affiliates, and each of theirrespective directors, officers, employees, agents, and other representativesand their successors and assigns (collectively, the “Seller’s Group”), forinjury to or death of persons, or damage to property, arising in any way fromthe exercise of rights granted to Buyer in Section 6.2(A) above orthe activities of Buyer or its employees, agents or contractors on the Oil andGas Properties pursuant to Section 6.2(A) above.  EXCEPT TO THE EXTENT CAUSED BY THE GROSSNEGLIGENCE OR WILLFUL MISCONDUCT OF THE SELLER’S GROUP, BUYER SHALL INDEMNIFYTHE SELLER’S GROUP AGAINST AND HOLD THE MEMBERS OF THE SELLER’S GROUP HARMLESSFROM ANY AND ALL REASONABLE LOSS, COST, DAMAGE, EXPENSE OR LIABILITY, INCLUDINGREASONABLE ATTORNEY’S FEES, WHATSOEVER ARISING OUT OF (I) ANY AND ALLSTATUTORY OR COMMON LAW LIENS OR OTHER ENCUMBRANCES FOR LABOR OR MATERIALSFURNISHED IN CONNECTION WITH SUCH TESTS, SAMPLINGS, STUDIES OR SURVEYS AS BUYERMAY CONDUCT WITH RESPECT TO THE OIL AND GAS PROPERTIES; AND (II) ANYINJURY TO OR DEATH OF PERSONS OR DAMAGE TO PROPERTY OCCURRING IN, ON OR ABOUTTHE OIL AND GAS PROPERTIES AS A RESULT OF SUCH EXERCISE OR ACTIVITIES.

###  

### (C)                              “Environmental Laws” means allapplicable local, state, and federal laws, rules, regulations, and ordersregulating or otherwise pertaining to: (i) the use, generation, migration,storage, removal, treatment, remedy, discharge, release, transportation,disposal, or cleanup of pollutants, contamination, hazardous wastes, hazardoussubstances, hazardous materials, toxic substances or toxic pollutants; (ii) surfacewaters, ground waters, ambient air and any other environmental medium on or offany Lease; or (iii) the environment, habitat protection or health andsafety-related matters; including the following as from time to time amendedand all others whether similar or dissimilar: the Comprehensive EnvironmentalResponse, Compensation, and Liability Act of 1980, as amended by the SuperfundAmendments and Reauthorization Act of 1986, the Resource Conservation andRecovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, theSolid Waste Disposal Act Amendments of 1980, and the Hazardous and Solid WasteAmendments of 1984, the Hazardous Materials Transportation Act, the Toxic 

 

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### Substance Control Act, the Clean Air Act, the Clean Water Act, the SafeDrinking Water Act, the National Environmental Policy Act, the EndangeredSpecies Act, the Oil Pollution Act of 1990, and all regulations promulgatedpursuant thereto.

###  

## 6.3                               Notice of Adverse EnvironmentalConditions.  No later than the Defect Notice Deadline,Buyer shall notify Seller in writing of any Adverse Environmental Conditionwith respect to the Oil and Gas Properties. Such notice shall describe in reasonable detail the AdverseEnvironmental Condition and include the estimated Environmental Defect Valueattributable thereto (the “Environmental Defect Notice”) based on an estimateof the cost to Remediate the Adverse Environmental Condition.  There shall be no adjustment to the BasePurchase Price unless the aggregate Environmental Defect Values of all AdverseEnvironmental Conditions exceeds one percent (1%) of the Base PurchasePrice (the “Environmental Defect Threshold”) (such amount being a threshold,not a deductible).  The “EnvironmentalDefect Value” attributable to any Adverse Environmental Condition shall be theestimated amount (net to the Company’s interest) of all reasonable costs andclaims necessary to Remediate the Adverse Environmental Conditions, as reasonablydetermined and estimated by Buyer.  Theterm “Adverse Environmental Condition” means (i) the failure of the Oiland Gas Properties to be in material compliance with all applicableEnvironmental Laws; (ii) the Oil and Gas Properties being subject to anyagreements, consent orders, decrees or judgments currently in existence basedon any Environmental Laws that negatively and materially impact the future useof any portion of the Oil and Gas Properties or that require any materialchange in the present conditions of any of the Oil and Gas Properties; or (iii) theOil and Gas Properties being subject to any material uncured violations of ornon-compliance with any applicable Environmental Laws or any Lease oragreement.  Buyer shall be deemed to haveconclusively waived (i) all Adverse Environmental Conditions not containedin an Environmental Defect Notice delivered to Seller on or before the DefectNotice Deadline, and (ii) any remedy against Seller for AdverseEnvironmental Conditions if the Environmental Defect Value of all AdverseEnvironmental Conditions do not exceed the Environmental Defect Threshold.

##  

## 6.4                               Rights and Remedies for AdverseEnvironmental Conditions.

##  

### (A)                             With respect to any AdverseEnvironmental Conditions affecting one or more of the Oil and Gas Propertieswhich exceed the Environmental Defect Threshold, Seller may on anproperty-by-property basis (i) cause Company at Seller’s expense toremediate the Adverse Environmental Conditions to Buyer’s reasonablesatisfaction prior to Closing, but Seller shall have no obligation to do so,and proceed to Closing with no adjustment of the Base Purchase Price; (ii) proceedto Closing and adjust the Base Purchase Price in an amount equal to theapplicable Environmental Defect Value; or (iii) deem the affected Oil andGas Property an Excluded Asset and reduce the Base Purchase Price by theAllocated Value of the affected Oil and Gas Property (“Exclusion Adjustment”).

###  

### (B)                              Buyer waives any AdverseEnvironmental Condition for which Buyer has received an adjustment to the BasePurchase Price in accordance with Section 6.4(A).

###  

### (C)                              If Buyer delivers a validEnvironmental Defect Notice to Seller and if the aggregate of the EnvironmentalDefects claimed is less than the Environmental Defect Threshold, Buyer will bedeemed to have accepted the Oil and Gas Properties “where-is, as-is” with 

 

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### respect to all Adverse Environmental Conditions in, on or under the Oiland Gas Properties.  The EnvironmentalDefect Threshold is a threshold and not a deductible.  The Environmental Defect Threshold and theTitle Defect Threshold are separate and distinct and operate independently.

###  

### (D)                             If the aggregate value of (i) theBase Purchase Price adjustment for Adverse Environmental Conditions plus (ii) anyExclusion Adjustments in lieu of Remediating any Adverse EnvironmentalConditions equals or exceeds ten percent (10%) of the Base Purchase Price,either Party may terminate this Agreement and neither Party shall have any furtherobligation to conclude the transfer of the Oil and Gas Properties under thisAgreement.

###  

### (E)                               The term “Remediate” or “Remediation”means, with respect to any valid Adverse Environmental Condition, causing theCompany at Seller’s expense to undertake and complete those actions andactivities necessary to eliminate or correct such Adverse EnvironmentalCondition to the degree sufficient that such Adverse Environmental Condition nolonger constitutes an Adverse Environmental Condition as defined above.  Seller shall promptly notify Buyer at suchtime as it believes that it has Remediated an Adverse EnvironmentalCondition.  Buyer shall promptly notifySeller whether it agrees such condition is Remediated.  If Buyer fails to notify Seller of itsdetermination with respect to such Remediation within ten (10) businessdays following Seller’s notice, such Adverse Environmental Condition shall bedeemed Remediated.

###  

### (F)                               If Seller and Buyer are unableto agree on the amount of the Environmental Defect Value within ten (10) businessdays after Seller’s receipt of the Environmental Defect Notice or that anAdverse Environmental Condition exists, has been Remediated or is required tobe Remediated, then the dispute will be submitted to a mutually acceptablecompany with recognized expertise in the oil and gas environmental remediationand regulation field (the “Environmental Consultant”) whose determination shallbe final and binding upon the Parties. Seller and Buyer shall each bear their respective costs and expensesincurred in connection with any such dispute, and one-half (1/2) of the fees,costs and expenses charged by the Environmental Consultant.  Each Party shall present a written statementof its position on the Adverse Environmental Condition and/or the EnvironmentalDefect Value in question to the Environmental Consultant within five (5) businessdays after the Environmental Consultant is selected, and the EnvironmentalConsultant shall make a determination of all points of disagreement inaccordance with the terms and conditions of this Agreement within ten (10) businessdays of receipt of such position statements. If necessary, the Closing Date shall be deferred until the EnvironmentalConsultant has made a determination of the disputed issues with respectthereto; provided, however, that, unless Seller and Buyer mutually agree to thecontrary, the Closing Date shall not be deferred in any event for more thanthirty (30) days beyond the scheduled Closing Date in Section 3.1.  Once the Environmental Consultant’sdetermination has been expressed to both Parties, if applicable, Seller shallhave five (5) business days in which to advise Buyer in writing which ofthe options available to Seller under Section 6.4(A) Seller electsregarding each of the Oil and Gas Properties as to which the EnvironmentalConsultant has made a determination.

 

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## 6.5                               Remediation by Seller.  If Seller elects to Remediate an AdverseEnvironmental Condition or is required by a governmental or regulatory agencyto Remediate an Adverse Environmental Condition, the following will govern theRemediation:

##  

### (A)                            Seller shall be responsible forall negotiations and contacts with federal, state, and local agencies andauthorities.  Buyer may not make anyindependent contacts with any agency, authority, or other third party withrespect to the Adverse Environmental Condition or Remediation and shall keepall information regarding the Adverse Environmental Condition and Remediationconfidential, except in each instance to the extent required by applicable law.

###  

### (B)                              Seller shall Remediate theAdverse Environmental Condition to the level agreed upon by Seller and Buyer(or failing such agreement to the level determined by the EnvironmentalConsultant), but in no event shall Seller be required to Remediate the AdverseEnvironmental Condition beyond the level required by the applicableEnvironmental Laws, Lease or agreement in effect at the Effective Time.

###  

### (C)                              Buyer shall grant and warrantaccess and entry to the Oil and Gas Properties after Closing to Seller andthird parties conducting assessments or Remediation, to the extent and as longas necessary to conduct and complete the assessment or Remediation work, toremove equipment and facilities, and to perform any other activities reasonablynecessary in connection with assessment or Remediation.

###  

### (D)                             Buyer shall facilitate Seller’singress and egress or assessment or Remediation activities after theClosing.  Seller shall make reasonableefforts to perform the work so as to minimize disruption to Buyer’s and theCompany’s business activities.

###  

### (E)                               Seller shall continueRemediation of the Adverse Environmental Condition until the first of thefollowing occurs:

###  

#### (i)                   the appropriategovernmental authorities provide notice to Seller or Buyer that no furtherRemediation of the Adverse Environmental Condition is required; or

####  

#### (ii)                the AdverseEnvironmental Condition has been Remediated to the level required by theapplicable Environmental Laws, Lease or agreement, or as agreed by the Parties.

####  

Upon the occurrence of either (i) or(ii) above, Seller shall notify Buyer that Remediation of the AdverseEnvironmental Condition is complete and provide a copy of the notificationdescribed in (i) above, if applicable. Upon delivery of said notice, Seller shall be released from allliability and have no further obligations under any provisions of thisAgreement in connection with an Adverse Environmental Condition.

 

### (F)                               Until Seller completesRemediation of an Adverse Environmental Condition, Seller and Buyer shall eachnotify the other of any pending or threatened claim, action, or proceeding byany authority or private party that relates to or would affect theenvironmental condition, the assessment, or the Remediation of the Oil and GasProperties.

 

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# 7.                                     REPRESENTATIONS AND WARRANTIESOF SELLER.

 

## 7.1                               Seller’s Representations andWarranties.  Seller represents and warrants to Buyer thefollowing as of the date of execution of this Agreement and the Closing:

##  

### (A)                            Status. The Company is a limitedliability company and Seller is a corporation, each duly organized, legallyexisting and in good standing under the laws of the State of Texas, and dulyqualified to own its properties and assets and carry on its business as nowbeing conducted.

###  

### (B)                              Authority.  Each of Seller and the Company has therequisite power and authority to enter into this Agreement, to carry out thetransactions contemplated hereby and to undertake all of the obligations ofSeller set forth in this Agreement.

###  

### (C)                              Validity of Obligations.  The execution, delivery and performance ofthis Agreement and the transactions contemplated hereby have been duly andvalidly authorized by all requisite action on the part of Seller and theCompany, each as required under its formation documents.  This Agreement and any documents orinstruments delivered by each of Seller and the Company shall constitute legal,valid and binding obligations of Seller and the Company enforceable inaccordance with their terms subject, however, to the effects of bankruptcy,insolvency, reorganization, moratorium and other laws for the protection ofcreditors, as well as to general principles of equity, regardless of whethersuch enforceability is considered in a proceeding in equity or at law.

###  

### (D)                             No Violation.  The execution and delivery of this Agreementby Sellers and the Company does not, and the fulfillment of and compliance withthe terms and conditions hereof will not, as of Closing, violate, or be inconflict with, any provision of the governing documents of Seller or theCompany, or any statute, rule or regulation applicable to Seller or theCompany or any agreement or instrument to which Seller or the Company is aparty or by which it is bound, or, to Seller’s knowledge, violate, or be inconflict with any judgment, decree or order applicable to Seller or the Companyor require the approval or consent of any third party.

###  

### (E)                               AFE’s.  With respect to the joint, unit or otheroperating agreements relating to the Oil and Gas Properties, except as setforth in Schedule 7.1(E), there are no outstanding calls orpayments under authorities for expenditures for payments relating to the Oiland Gas Properties which are due or which the Company has committed to makewhich have not been made.

###  

### (F)                               Contractual Restrictions.  The Company has not entered into anycontracts for or received prepayments, take-or-pay arrangements, buydowns,buyouts for Oil and Gas, or storage of the same relating to the Oil and GasProperties which the Company shall be obligated to honor after Closing and makedeliveries of Oil and Gas without receiving full payment therefor or payrefunds of amounts previously paid under such contracts or arrangements.

###  

### (G)                              Litigation.  Except as set forth in Schedule 7.1(G),there is no suit, action or proceeding pending or, to Seller’s knowledge,threatened against Seller, the Company or the Oil and 

 

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### Gas Properties that could have an adverse affect upon the Company orthe ownership, operation or value of any of the Oil and Gas Properties.

###  

### (H)                             Permits and Consents.  The Company has (i) acquired allmaterial permits, licenses, approvals and consents from appropriategovernmental bodies, authorities and agencies to conduct its business and toown, use and operate the Oil and Gas Properties and its other assets incompliance with applicable laws, rules, regulations, ordinances and orders; and(ii) is in material compliance with all such permits, licenses, approvalsand consents.

###  

### (I)                                  Broker’s Fees.  Neither the Company nor Seller has incurredany obligation or liability, contingent or otherwise, for brokers’ or finders’fees in respect of the matters provided for in this Agreement for which theCompany or Buyer shall have any responsibility.

###  

### (J)                                 Taxes.   The Company has filed all federal, state,local and foreign tax returns and reports required to be filed by it and haspaid and discharged, or established adequate reserves for, all taxes shown asdue thereon or otherwise owed by the Company when due (including withoutlimitation all Property Taxes, Severance Taxes, income, gross receipts,payroll, employment, excise, franchise, withholding, social security,unemployment, disability, sales, use, transfer or other taxes), and has madeall required estimated tax deposits, other than such payments as are beingcontested in good faith by appropriate proceedings.  No taxing authority or agency is now assertingor, to the best knowledge of the Company and the Sellers, threatening to assertagainst the Company any deficiency or claim for additional taxes or interestthereon or penalties in connection therewith. The Company has not granted any waiver of any statute of limitationswith respect to, or any extension of a period for the assessment of, anyfederal, state, county, municipal or foreign income tax.

###  

### (K)                             Material Agreements.

###  

#### (i)                   To the best ofSeller’s and Company’s knowledge, all material contracts, leases, plans andother arrangements to which the Company is a party or by which it or itsassets, including without limitation the Oil and Gas Properties, are bound orsubject to, are listed on Schedule 7.1(K) (“MaterialAgreements”).  Seller and the Companyhave provided Buyer with access to true, correct and complete copies of allwritten Material Agreements and all amendments, modifications and supplementsthereto.  All of the Material Agreementsare in writing.  To the knowledge ofSeller and the Company, the Company’s relationships are generally satisfactorywith its suppliers and vendors who are material to the conduct of the Company’sbusiness.  The Company does not haveoutstanding any powers of attorney with any Person.  Each of the Material Agreements to which theCompany is a signatory has been duly executed by the Company and the Company isnot in breach of any Material Agreement.

####  

#### (ii)                To the best ofSeller’s and Company’s knowledge, the Company has performed in all materialrespects each material term, covenant and condition of each of the MaterialAgreements to which it is a party or by which it is bound, and, to theknowledge of Seller and the Company, no material event of default on the partof 

 

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#### any other party thereto exists under any ofthe Material Agreements.  The Company iscurrent on all payment obligations under all Material Agreements to which it isa party or by which it is bound.

####  

#### (iii)             To the best of Seller’sand Company’s knowledge, no event has occurred under any of the MaterialAgreements that would constitute a material default thereunder on the part ofany other party thereto.  Theconsummation of the transaction contemplated by this Agreement will not resultin a default, violation, termination or right to terminate under any of theMaterial Agreements.

####  

#### (iv)            To the best of Seller’sand Company’s knowledge, each of the Material Agreements is valid, binding,enforceable and in full force and effect, unimpaired by any acts or omissionsof the Company or its officers, managers and agents, and constitutes the legaland binding obligation of the Company in accordance with its terms, except that(i) such enforcement may be subject to bankruptcy, insolvency,reorganization, moratorium or other similar laws or judicial decisions now orhereafter in effect relating to creditors’ rights generally, and (ii) theremedy of specific performance and injunctive relief may be subject toequitable defenses and to the discretion of the court before which anyproceeding therefor may be brought.

####  

### (L)                               No Default.  The Company is not in default, breach orviolation (and no event has occurred which, with notice or the lapse of time orboth, would constitute a default or violation) of any term, condition orprovision of (i) the Company’s organizational documents; (ii) anynote, bond, mortgage, indenture, license, agreement or other instrument orobligation to which the Company is now a party or by which the Company or anyof its properties, business or assets is bound; (iii) any order, writ,injunction, decree, statute, rule or regulation applicable to the Company;or (iv) any Lease.

###  

### (M)                          Consents and PreferentialPurchase Rights.  To the best of Seller’s knowledge, Schedule 7.1(M) listsall consents and preferential purchase rights contained in the Leases orMaterial Agreements.

###  

### (N)                             Gas Imbalances.  There are no gas imbalances with respect tothe Oil and Gas Properties as of the Effective Time.

###  

### (O)                             Royalties.  All rentals, royalties and other payments dueunder the Leases have been properly paid, except those amounts properly beingheld in suspense.

###  

### (P)                               Production Sales Contracts.  There are no production sales contractspertaining to the Oil and Gas Properties that provide for a fixed price andthat cannot be cancelled at any time upon ninety (90) days (or less) priornotice.

###  

### (Q)                             Calls on Production.  There are no calls on production pertainingto the Oil and Gas Properties that provide for payment at less than applicablecurrent market prices.

 

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### (R)                              Compliance with Laws.  To Seller’s knowledge, the Company’sownership and operation of the Oil and Gas Properties has been in compliancewith all applicable statutes, laws, rules and regulations, except to theextent any non-compliance would not have a material adverse affect on theownership, value or operation of the Oil and Gas Properties.

###  

### (S)                               No Subsidiaries.  The Company has no subsidiaries, and does notown, directly or indirectly, any capital stock or other ownership,participation or equity interest in any corporation, partnership, limitedliability company, association, joint venture or other entity , and (b) thereare no outstanding contractual obligations or commitments of the Company toacquire or make any investment in any shares of capital stock or otherownership, participation or equity interest in any corporation, partnership,limited liability company, association, joint venture or other entity.

###  

### (T)                              Capital Structure.  The Company has no outstanding options,appreciation rights, phantom units, profit participation or similar rights withrespect to the Company. No shares of capital stock or other equity or votingsecurities of the Company are reserved for issuance or are outstanding. TheMembership Interests are duly authorized, validly issued, fully paid andnonassessable and have not been issued in violation of any preemptive rights orin violation of state or federal securities laws, and there are no preemptiverights with respect thereto. Except for the Membership Interests, there are nooutstanding or authorized securities, options, warrants, calls, rights,commitments, preemptive rights, agreements, arrangements or undertakings of anykind to which the Company is a party, or by which it is bound, obligating theCompany to issue, deliver or sell, or cause to be issued, delivered or sold,any equity or voting securities of, or other ownership interests in, theCompany or obligating the Company to issue, grant, extend or enter into anysuch security, option, warrant, call, right, commitment, agreement, arrangementor undertaking. There are not as of the date of this Agreement and there willnot be at the Closing Date any buy-sell agreements, voting trusts or otheragreements or understandings to which the Company is a party or by which it isbound relating to the voting of any securities of the Company.  The Membership Interests constitute all ofthe issued and outstanding equity securities or other ownership interests ofthe Company.  Except for the purchase andsale of the Company Shares pursuant to this Agreement, there are no outstandingclaims, options or other rights of any person to purchase from Seller, and nocontracts or commitments providing for the granting of rights to acquire, anyof the Membership Interests.  There areno claims pending or, to the knowledge of Seller and the Company, threatened,against the Company or Seller that concern or affect title to the MembershipInterests, or that seek to compel the issuance of any securities of theCompany.  There are no outstandingobligations in connection with the redemption by the Company of any of thepreviously issued and outstanding securities of the Company.

###  

### (U)                             Title to Membership Interests.  With the exception of the liens that will bereleased at closing, Seller has legal, beneficial and record title to all ofthe Membership Interests, free and clear of any and all liens, restrictions,options, voting trusts or agreements, proxies, encumbrances, interests, claimsor charges of any kind whatsoever and all such Membership Interests are validlyissued, fully paid and nonassessable. Seller has or will have at the Closing physical custody of anycertificates evidencing all of the Membership Interests.  At Closing, Buyer will acquire good anddefensible title to the Membership 

 

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### Interests, free and clear of any and all liens, restrictions, options,voting trusts or agreements, proxies, encumbrances, claims, interests orcharges of any kind.

###  

### (V)                              Title to and Condition of Non-Oiland Gas Properties.  The Company does not have, and has not everhad, any assets other than the Oil and Gas Properties and the Records.  The Records are free and clear of all liens,claims and other encumbrances, have been maintained in accordance with industrystandards and are not subject to any restrictions with respect to thetransferability thereof.

###  

### (W)                         Oil and Gas Properties.  Subject to the title review process set forthin Article 5, the Company has Good and Defensible Title to the Oil and GasProperties.  There is no pendingcondemnation or similar proceeding affecting the Oil and Gas Properties or anyportion thereof, and, to the knowledge of Seller and the Company, no suchaction is presently threatened. All oil and gas leases and agreementsconstituting a part of the Oil and Gas Properties are valid and subsisting, infull force and effect and, to the knowledge of Seller and the Company thereexists no default or event or circumstances which with the giving of notice orthe passage of time or both would give rise to a default under any such leaseor agreement which would materially interfere with the operation, value or useof the Company’s assets or properties. The Company has performed in allmaterial respects each material term, covenant and condition of each of theLeases.

###  

### (X)                             Financial Statements.  The Company and Sellers have provided toBuyer true and complete copies of the unaudited balance sheets of the Companyas of December 31, 2006 and 2007 and as of June 30, 2008, and therelated unaudited statements of operations and changes in Members’ equity forthe two fiscal years and six month period then ended (collectively, the “FinancialStatements”). The Financial Statements (i) have been prepared utilizinggenerally accepted accounting principles in the United States consistentlyapplied; (ii) present fairly, in all material respects, the financialcondition of the Company as of the dates thereof and the results of itsoperations for the periods then ended; and (iii) are consistent with thebooks and records of the Company, which books and records are true, correct andcomplete in all material respects.

###  

### (Y)                              No Undisclosed Liabilities.  At Closing, the Company will have no debt,liability or obligation of any kind, whether accrued, absolute, contingent,inchoate, determined, determinable or otherwise, except for (i) liabilitiesor obligations incurred in the ordinary course of business which, individuallyor in the aggregate would not have a material adverse effect on the Company, (ii) liabilitiesor obligations under this Agreement or incurred in connection with thetransactions contemplated hereby, or (iii) liabilities or obligationsdisclosed in the Financial Statements.

###  

### (Z)                              No Material Changes.  Since June 30, 2008 the Company has conductedits business only in the ordinary course consistent with past practices andthere has not been: (a) any amendment or change in the organizationaldocuments or equity securities of the Company, (b) any repurchase,redemption or other acquisition by the Company of any securities of, or otherownership interests in the Company, (c) any change in any method ofaccounting or accounting practice or any tax method, practice or election bythe Company, (d) any sale, assignment or other disposition of any materialasset, (e) any 

 

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### commitment or dispute that would reasonably be expected to have amaterial adverse effect on the Company, (f) any material adverse change inthe financial condition, operations, assets, liabilities or business of theCompany or any material change in the general and administrative expenses ofthe Company; (g) any declaration, setting aside, or payment of anydividend or other distribution in respect of the Company’s capital stock or otherequity securities, (h) any labor or employment dispute of whatever natureor any bonuses paid or material change in employee compensation or benefits, (i) anyinvestment or loan made by the Company, (j) any lien, claim or otherencumbrance (except Permitted Encumbrances) created on any asset of theCompany, (k) any indebtedness incurred by the Company, (l) anytransaction with any Affiliate of the Company, (m) any materialtransaction or agreement entered into or amended by the Company, (n) anyaction which would have been prohibited under Sections 9.1 and 9.2 hereof,(o) any discharge or satisfaction of any lien, claim or other encumbranceor payment of any obligation or liability, absolute or contingent, other thancurrent liabilities incurred and paid in the ordinary course of business andconsistent with past practices, (p) any delay or postponement in thepayment of accounts payable or other liabilities (except those disputedconsistent with industry practices), (q) any issuance, sale, or other dispositionof any membership interests or other securities of the Company or any grant ofany rights or options to purchase or obtain (including upon conversion,exchange, or exercise) any securities of the Company, (r) any action tomake or commit to make any single (or series of related) capital expenditure inexcess of $50,000, (s) any agreements entered into with respect to anyhedging transaction which remains open, (t) any material damage,destruction, or loss, whether or not covered by insurance, affecting anymaterial assets or properties of the Company, (u) any default, or eventwhich with the lapse of time or giving of notice would constitute a default, ofthe Company under any indebtedness or other obligation of the Company, or (v) anyother event or condition known to the Company or Seller that might have amaterial adverse effect on the Company.

###  

### (AA)                    Insurance.  The Company has in full force and effect theliability and casualty insurance, and workers compensation, as described in Schedule 7.1(AA).  The Company is not in default in any materialrespect with respect to such insurance policies, and the Company has not failedto give any notice or present any claim under any policies in due and timelyfashion.  All insurance claims currentlypending or made within two years prior to the date hereof are described on Schedule 7.1(AA).

###  

### (BB)                      Bank Accounts.  All bank or other financial institutionaccounts of the Company are described in Schedule 7.1(BB), and suchSchedule also lists all persons with check writing authority on behalf of theCompany.

###  

### (CC)                      Employees.  The Company does not have and has not everhad any employees, and does not have and has not ever had (1) any employeewelfare benefit plan or employee pension benefit plan as defined in sections 3(1) and3(2) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”),or (2) any other employee benefit agreement or arrangement that is not anERISA plan, including any deferred compensation plan, incentive plan, bonusplan or arrangement, stock option plan, stock purchase plan, stock award plan,golden parachute agreement, severance pay plan, 

 

27

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### dependent care plan, flexible benefit plan, cafeteria plan, employeeassistance program, scholarship program, employment contract, retentionincentive agreement, noncompetition agreement, consulting agreement,confidentiality agreement, vacation policy, or other similar plan or agreementor arrangement.

###  

### (DD)                    Environmental Compliance.  To the knowledge of Seller and Company,subject to the environmental assessment procedure set forth in Article 6,

###  

#### (i)                   the Company hascomplied in all material respects with all Environmental Laws, and there is noexisting action, suit, proceeding, hearing, investigation, charge, complaint,claim, demand, or notice filed, commenced or, to the knowledge of Seller andthe Company, threatened against the Company or any of its assets which: (a) assertsor alleges that the Company violated any Environmental Laws; (b) assertsor alleges that the Company is required to clean up, remove or take remedial orother response action due to the disposal, depositing, discharge, leaking orother release of any hazardous materials; or (c) asserts or alleges thatthe Company is required to pay all or a portion of the cost of any past,present or future cleanup, removal or remedial or other response action whicharises out of or is related to the disposal, depositing, discharge, leaking orother release of any hazardous materials;

####  

#### (ii)                without limitingthe generality of the foregoing, to the knowledge of Seller and the Company,each of the Company and its Affiliates has obtained and been in compliance inall material respects with all of the terms and conditions of all permits,licenses, and other authorizations which are required under, and has compliedin all material respects with all other limitations, restrictions, conditions,standards, prohibitions, requirements, obligations, schedules and timetableswhich are contained in, Environmental Laws;

####  

#### (iii)             there are noconditions existing currently which would subject the Company to damages,penalties, injunctive relief or cleanup costs under any Environmental Laws orwhich require cleanup, removal, remedial action or other response pursuant toEnvironmental Laws by the Company;

####  

#### (iv)            the Company is notsubject to any judgment, order or citation related to or arising out of anyEnvironmental Laws and is not, and has not been, named or listed as apotentially responsible party by any Governmental Entity in a matter related toor arising out of any Environmental Laws;

####  

#### (v)               there are noagreements with any person pursuant to which the Company would be required todefend, indemnify, hold harmless, or otherwise be responsible for any violationby or other liability or expense of such person, or alleged violation by orother liability or expense of such person, arising out of any EnvironmentalLaw; and

 

28

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#### (vi)            the Company hasprovided Buyer copies of all environmental audits, assessments or otherevaluations, if any, of the Company or any of its assets, properties orbusiness operations.

####  

### (EE)                        Related Party Transactions.  At Closing there will be no existing businessarrangements, between the Company and Seller, the officers or managers of theCompany, or any of their respective Affiliates. Schedule 7.1(EE) contains a description of all transactionsbetween the Company and any such persons since January 1, 2006.   Other than the Material Agreements, thereare no material continuing obligations owing from the Company to any thirdPerson created by any of Seller, officers or managers of the Company nor any oftheir Affiliates.  None of Seller,officers or managers of the Company, nor any of their respective Affiliates,owns any material asset, tangible or intangible, which will be used in theoperation of the business of the Company.

###  

### (FF)                         Payout Balances.  The Payout Balance for any Well is properlyreflected on Schedule 7.1(FF) as of the respective dates shownthereon.  “Payout Balance(s)” means thestatus, as of the dates of the Company’s calculations, of the recovery by theCompany or a third party of a cost amount specified in the contract relating toa Well out of the revenue from such Well where the net revenue interest of theCompany therein will be increased or reduced when such amount has beenrecovered.

###  

### (GG)                     Hedging Transactions.  There are no outstanding hedging transactionsaffecting the Company or the Oil and Gas Properties.

###  

### (HH)                    Books and Records.  All books, records and files of the Company(including the Records and those pertaining to the production, gathering,transportation and sale of Oil and Gas, and corporate, accounting, financialand employee records) (a) have been prepared, assembled and maintained ona consistent basis in accordance with usual and customary policies andprocedures, and (b) fairly and accurately reflect in all material respectsthe ownership, use, enjoyment and operation by the Company of its assets.

###  

### (II)                              Non-Competition Commitments.  There are no agreements or arrangements thatwill be binding on the Company after Closing that limit the ability of theCompany to compete in any line of business or with any person in anygeographical area, except customary area of mutual interest provisions thatcover properties in the immediate vicinity of the lands subject to suchagreements, which are described on Schedule 7.1(II).

###  

### (JJ)                            Previously Owned Properties.  To the knowledge of Seller and the Company,the Company does not have any obligations or liabilities, contingent orotherwise, with respect to any properties previously owned or leased byCompany, but not currently owned or leased, except for such matters that wouldnot reasonably be expected to have a material adverse effect on the Company orthe Oil and Gas Properties.

###  

## 7.2                               Scope of Representations ofSeller.

##  

### (A)                             Information About the Oil andGas Properties.  Except as expressly set forth in thisAgreement, Seller disclaims all liability and responsibility for anyrepresentation, warranty, statements or communications (orally or in writing)to Buyer regarding the Oil 

 

29

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### and Gas Properties, including any information contained in any opinion,information or advice that may have been provided to Buyer by any employee,officer, director, agent, consultant, engineer or engineering firm,representative, partner, member, beneficiary, owner or contractor of Sellerwherever and however made, including those made in any data room or internetsite and any supplements or amendments thereto or during any negotiations withrespect to this Agreement or any confidentiality agreement previously executedby the Parties with respect to the Asset. EXCEPT AS SET FORTH IN ARTICLE 7 OF THIS AGREEMENT, SELLER MAKES NOWARRANTY OR REPRESENTATION, EXPRESS, STATUTORY OR IMPLIED, AS TO (i) THEACCURACY, COMPLETENESS OR MATERIALITY OF ANY DATA, INFORMATION OR RECORDSFURNISHED TO BUYER IN CONNECTION WITH THE OIL AND GAS PROPERTIES; (ii) THEPRESENCE, QUALITY AND QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TOTHE OIL AND GAS PROPERTIES, INCLUDING WITHOUT LIMITATION SEISMIC DATA ANDSELLER’S INTERPRETATION AND OTHER ANALYSIS THEREOF; (iii) THE ABILITY OFTHE OIL AND GAS PROPERTIES TO PRODUCE HYDROCARBONS, INCLUDING WITHOUTLIMITATION PRODUCTION RATES, DECLINE RATES AND RECOMPLETION OPPORTUNITIES; (iv) IMBALANCEOR PAYOUT ACCOUNT INFORMATION, ALLOWABLES, OR OTHER REGULATORY MATTERS; (v) THEPRESENT OR FUTURE VALUE OF THE ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY, TOBE DERIVED FROM THE OIL AND GAS PROPERTIES; (vi) THE ENVIRONMENTALCONDITION OF THE OIL AND GAS PROPERTIES; (vii) ANY PROJECTIONS AS TOEVENTS THAT COULD OR COULD NOT OCCUR; (viii) THE TAX ATTRIBUTES OF ANY OILAND GAS PROPERTY; (ix) ANY OTHER MATTERS CONTAINED IN OR OMITTED FROM ANYINFORMATION OR MATERIAL FURNISHED TO BUYER BY SELLER OR OTHERWISE CONSTITUTINGA PORTION OF THE OIL AND GAS PROPERTIES; AND, (x) THE COMPLETENESS ORACCURACY OF THE INFORMATION CONTAINED IN ANY EXHIBIT HERETO REGARDING THE OILAND GAS PROPERTIES.  ANY DATA,INFORMATION OR OTHER RECORDS FURNISHED BY SELLER REGARDING THE OIL AND GASPROPERTIES ARE PROVIDED TO BUYER AS A CONVENIENCE AND BUYER’S RELIANCE ON ORUSE OF THE SAME IS AT BUYER’S SOLE RISK.

###  

### (B)                              Independent Investigation.  Buyer agrees that it has, or by Closing willhave, made its own independent investigation, analysis and evaluation of theOil and Gas Properties and the transaction contemplated by this Agreement(including Buyer’s own estimate and appraisal of the extent and value of theCompany’s Oil and Gas reserves attributable to the Oil and Gas Properties andan independent assessment and appraisal of the environmental risks andliabilities associated with the acquisition of the Oil and GasProperties).  Buyer agrees that it hashad, or will have prior to Closing, access to all information necessary toperform its investigation and has not relied and will not rely on anyrepresentations by Seller other than those expressly set forth in thisAgreement.

 

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# 8.                                     REPRESENTATIONS AND WARRANTIESOF BUYER.

 

## 8.1                               Buyer’s Representations andWarranties.  Buyer represents and warrants to Seller asfollows as of the date hereof and the Closing:

##  

### (A)                            Status.  Buyer is a limited partnership dulyorganized, validly existing and in good standing under the laws of the State ofDelaware.

###  

### (B)                              Authority.  Buyer has the power and authority to enterinto this Agreement, to carry out the transactions contemplated hereby and toundertake all of the obligations of Buyer set out in this Agreement.

###  

### (C)                              Validity of Obligations.  The consummation of the transactionscontemplated by this Agreement will not in any respect violate, nor be inconflict with, any provision of Buyer’s partnership agreement or othergoverning documents, or any agreement or instrument to which Buyer is a partyor is bound, or any judgment, decree, order, statute, rule or regulationapplicable to Buyer (subject to governmental consents and approvals customarilyobtained after the Closing).  ThisAgreement and the documents executed and delivered by Buyer in connection withthe Closing shall constitute legal, valid and binding obligations of Buyer,enforceable in accordance with their terms, subject, however, to the effects ofbankruptcy, insolvency, reorganization, moratorium and other laws for theprotection of creditors, as well as to general principles of equity, regardlessof whether such enforceability is considered in a proceeding in equity or atlaw.

###  

### (D)                             Qualification and Bonding.  Buyer or its Affiliate which will operate theOil and Gas Properties is, or will be on the Closing Date, in compliance withthe bonding and liability insurance requirements of all applicable state orfederal laws or regulations that could affect its ability or authority tooperate the Oil and Gas Properties.

###  

### (E)                               Non-Security Acquisition.  Buyer intends to acquire the MembershipInterests for its own benefit and account and is not acquiring the MembershipInterests with the intent of distributing such interests such as would besubject to regulation by federal or state securities laws, and if, in thefuture, it should sell, transfer or otherwise dispose of the MembershipInterests, it will do so in compliance with any applicable federal and statesecurities laws.

###  

### (F)                               Evaluation.  By reason of Buyer’s knowledge and experiencein the evaluation, acquisition and operation of oil and gas properties, Buyerhas evaluated the merits and risks of purchasing the Membership Interests fromSeller and has formed an opinion based solely upon Buyer’s knowledge andexperience and not upon any representations or warranties by Seller exceptthose set forth herein.

###  

### (G)                              Financing.  Buyer has sufficient cash, available lines ofcredit or other sources of immediately available funds to enable it to pay thePurchase Price to Seller at the Closing.

###  

### (H)                             Broker’s Fees.  Buyer has incurred no obligation orliability, contingent or otherwise, for brokers’ or finders’ fees in respect ofthe matters provided for in this Agreement for which Seller shall have anyresponsibility.

 

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# 9.                                     CERTAIN AGREEMENTS OF SELLER.  Seller and the Company agree and covenantthat, unless Buyer shall have otherwise agreed in writing, the followingprovisions shall apply:

 

## 9.1                               Maintenance of Oil and GasProperties.  From the Effective Time until Closing, Sellerand the Company agree that they and their Affiliates shall:

##  

### (A)                            Administer and operate theoperated Oil and Gas Properties in a good and workmanlike manner and inaccordance with the applicable operating agreements.

###  

### (B)                              Not introduce any new methods ofmanagement, operation or accounting with respect to any or all of the Oil andGas Properties.

###  

### (C)                              Use commercially reasonableefforts to maintain and keep the Oil and Gas Properties in full force andeffect; and fulfill all contractual or other covenants, obligations andconditions imposed upon the Company with respect to the Oil and Gas Properties,including, but not limited to, payment of royalties, delay rentals, shut-in gasroyalties and any and all other required payments.

###  

### (D)                             Except to the extent necessaryor advisable to avoid forfeiture or penalties, not enter into agreements todrill new wells or to rework, plug back, deepen, plug or abandon any Well, norcommence any drilling, reworking or completing or other operations on theLeases which requires estimated expenditures exceeding Ten Thousand Dollars($10,000.00), net to the working interest of the Company, for each operation(except for emergency operations and operations required under presentlyexisting contractual obligations) without obtaining the prior written consentof Buyer (which consent shall not be unreasonably withheld, delayed or conditioned).

###  

### (E)                               Not voluntarily relinquish theCompany’s or its Affiliate’s position as operator to anyone other than Buyerwith respect to any of the operated Oil and Gas Properties or voluntarilyabandon any of the Wells other than as required pursuant to the terms of aLease or by regulation.

###  

### (F)                               To the extent known to Seller orthe Company, provide Buyer with prompt written notice of (i) any claims,demands, suits or actions made against Seller which materially affect the Oiland Gas Properties; or (ii) any proposal from a third party to engage inany material transaction (e.g., a farmout) with respect to the Oil and GasProperties.

###  

## 9.2                               Conduct of Business of theCompany.

##  

### (A)                            Ordinary Course.  During the period from the date of thisAgreement to the Closing Date (except as otherwise specifically contemplated bythe terms of this Agreement), the Company shall, and Seller shall use bestefforts to cause the Company to, carry on its businesses in the usual, regularand ordinary course in substantially the same manner as conducted at the datehereof, and, to the extent consistent therewith, use all reasonable efforts topreserve intact its current business organization, keep available the servicesof its current officers and employees and preserve its relationships withcustomers, vendors, suppliers, licensors, licensees, distributors and othershaving business dealings with the Company, in each case consistent with pastpractice, to the end that their goodwill and 

 

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### ongoing businesses shall be unimpaired to the fullest extent possibleat the Closing Date. Without limiting the generality of the foregoing or therequirements or restrictions set forth in Section 9.1, prior to theClosing Date the Company will not, and Seller will not, without the priorwritten consent of Buyer, permit or allow the Company to:

###  

#### (i)                   purchase,redeem or otherwise acquire or divest any membership interests or othersecurities of the Company or any rights, warrants or options to acquire anysuch interests or other securities;

####  

#### (ii)                issue, deliver,sell, pledge, dispose of or otherwise encumber any of its equity securities orany securities convertible into, or any rights, warrants or options to acquire,any such equity securities;

####  

#### (iii)             amend the Company’sorganizational documents;

####  

#### (iv)            acquire or agree toacquire (a) by merging or consolidating with, or by purchasing asubstantial portion of the stock, or other ownership interests in, or assetsof, or by any other manner, any business or any corporation, partnership,association, joint venture, limited liability company or other entity ordivision thereof, or (b) any assets that would be material, individuallyor in the aggregate, to the Company;

####  

#### (v)               except forPermitted Encumbrances, sell, lease, mortgage, pledge, grant a lien on orotherwise encumber or dispose of any of its properties or assets, except (a) thesale of Oil and Gas in the ordinary course of business consistent with pastpractice, or (b) other transactions involving not in excess of $50,000.00in the aggregate;

####  

#### (vi)            (a) incur any newindebtedness for borrowed money or guarantee any such indebtedness of anotherperson, issue or sell any debt securities or warrants or other rights toacquire any debt securities of the Company, guarantee any debt securities ofanother person, enter into any “keep well” or other agreement to maintain anyfinancial statement condition of another person or enter into any arrangementhaving the economic effect of any of the foregoing, or (b) make any loans,advances or capital contributions to, or investments in, any other person;

####  

#### (vii)         make or incur capitalexpenditures in the aggregate in excess of $50,000;

####  

#### (viii)      make any material electionrelating to taxes or settle or compromise any material tax liability;

####  

#### (ix)              pay, discharge orsatisfy any claims, liabilities or obligations (absolute, accrued, asserted orunasserted, contingent or otherwise), other than the payment, discharge orsatisfaction, in the ordinary course of business consistent with past practiceand in accordance with their terms, of liabilities reflected or reservedagainst in the most recent Financial Statement (as of June 30, 2008);

####  

#### (x)                 waive thebenefits of, or agree to modify in any manner, any confidentiality, standstillor similar agreement to which the Company is a party;

 

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| (xi)   | adopt a plan  of complete or partial liquidation or resolutions providing for or  authorizing such a liquidation or a dissolution, merger, consolidation,  restructuring, recapitalization or reorganization;                                                                                                                                                                                  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (xii)  | enter into  or amend any material contract, agreement or lease, including any collective  bargaining agreement;                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (xiii) | change any  accounting principle used by it, except for changes conforming to the  Internal Revenue Code and to regulations and other pronouncements promulgated  by the United States Treasury;                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (xiv)  | settle or  compromise any litigation (whether or not commenced prior to the date of this  Agreement) other than settlements or compromises: (a) of litigation  where the amount paid in settlement or compromise does not exceed $50,000.00,  or (b) in consultation and cooperation with Buyer, and, with respect to  any such settlement, with the prior written consent of Buyer; |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (xv)   | approve any  authority for expenditure (AFE) or otherwise make any commitment which might  require the Company to make any capital expenditure or incur any expense  other than ordinary operating expenses within industry standards; or                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (xvi)  | authorize  any of, or commit or agree to take any of, the foregoing actions.                                                                                                                                                                                                                                                                                                                   |

####  

## 9.3                               Records and Audit Rights.  Seller shall have the right to make andretain copies of the Records as Seller may desire prior to the delivery of theRecords to Buyer.  Buyer, for a period ofseven (7) years after the Closing Date, shall make available to Seller (atthe location of such Records in Buyer’s organization) access to such Records asBuyer may have in its possession (or to which it may have access) upon writtenrequest of Seller, during normal business hours; provided, however, that Buyershall not be liable to Seller for the loss of any Records by reason of clericalerror or inadvertent loss or destruction of Records.

##  

## Seller agrees to make available to Buyer prior to and for a period oftwelve (12) months following Closing any and all existing information anddocuments in the possession of Seller that Buyer may reasonably require tocomply with Buyer’s tax and financial reporting requirements and audits.  Without limiting the generality of theforegoing, Seller will use its commercially reasonable efforts after executionof this Agreement and for twelve (12) months following Closing to cooperatewith the independent auditors chosen by Buyer (“Buyer’s Auditor”) in connectionwith their audit of any financial statements of the Company that Buyer or anyof its Affiliates requires to comply with their tax and financial reportingrequirements, and their review of any interim quarterly financial statements ofthe Company that Buyer requires to comply with such reportingrequirements.  Seller’s cooperation willinclude (i) such reasonable access to Seller’s employees who wereresponsible for preparing the financialstatements and work papers and othersupporting documents used in the preparation of such financial statements asmay be required by Buyer’s Auditor to perform an audit in accordance withgenerally accepted auditing standards, and (ii) delivery of one or morecustomary representation letters (in substantially the form previously approvedby Seller and Buyer) from Seller to Buyer’s Auditor that are requested by Buyerto allow such auditors to complete an audit (or review of any interim quarterly

 

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## financials), and to issue an opinion that in Buyer’s experience isacceptable with respect to an audit or review of those financialstatementsrequired pursuant to this Section.  Buyerwill reimburse Seller, within three (3) business days after demandtherefor, for any reasonable out-of-pocket and overhead costs with respect toany costs incurred by Seller in complying with the provisions of this Section.

##  

## 9.4                               Reasonable Efforts; Notification.

 

### (A)                            Reasonable Efforts. Upon the terms and subject tothe conditions set forth in this Agreement, except to the extent otherwiseprovided in this Section 9.4, each of the parties agrees to usecommercially reasonable efforts to take, or cause to be taken, all actions, andto do, or cause to be done, and to assist and cooperate with the other partiesin doing, all things necessary, proper or advisable to consummate and makeeffective, in the most expeditious manner practicable, the transactionscontemplated by this Agreement, including (i) the obtaining of allnecessary actions or nonactions, waivers, consents and approvals fromgovernmental authorities and the making of all necessary registrations andfilings (including filings with governmental authorities, if any) and thetaking of all reasonable steps as may be necessary to obtain an approval orwaiver from, or to avoid an action or proceeding by, any governmentalauthorities, (ii) the obtaining of all necessary consents, approvals orwaivers from third parties, (iii) the defending of any lawsuits or otherlegal proceedings, whether judicial or administrative, challenging thisAgreement or the consummation of the transactions contemplated hereby,including seeking to have any stay or temporary restraining order entered byany court or other governmental authorities vacated or reversed, and (iv) theexecution and delivery of any additional instruments necessary to consummatethe transactions contemplated by this Agreement; provided, however, thatneither the Company nor Buyer shall be under any obligation to take any actionto the extent that the governing body of such party shall conclude in goodfaith, after consultation with and based upon the written advice of theirrespective outside legal counsel (which advice in each case need not constitutean opinion), that such action would cause a breach of fiduciary obligationsunder applicable law.

 

### (B)                              Notification.  The Seller and the Company shall give promptnotice to Buyer, and Buyer shall give prompt notice to the Seller and theCompany, of (i) any representation or warranty made by it contained inthis Agreement becoming untrue or inaccurate in any material respect or (ii) thefailure by it to comply with or satisfy in any material respect any covenant,condition or agreement to be complied with or satisfied by it under thisAgreement; *provided, however*, that no suchnotification shall affect the representations or warranties or covenants oragreements of the parties or the conditions to the obligations of the partieshereunder.

###  

## 9.5                               Payment of Indebtedness.  Seller will cause all indebtedness owed tothe Company by Seller or any Affiliate of Seller, if any, to be paid in fullprior to Closing.

##  

## 9.6                               Insider Debt and Liabilities.  All debt, obligations and liabilities, ifany, owed by the Company to Seller and its Affiliates shall be deemed paid andcancelled at Closing.  Seller 

 

35

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## agrees to and agrees to cause its Affiliatesto waive and release the Company, from any and all such debts, liabilities andobligations, by executing and delivering a release at Closing in a formacceptable to Buyer (collectively, the “Releases”).  Seller shall deliver any documents evidencingsuch debt, if any, marked paid, to Buyer at Closing.

##  

## 9.7                               Operation of Oil and GasProperties.  Seller shall cause the transfer alloperations of the Oil and Gas Properties to Buyer or Buyer’s designee effectiveas of Closing.

##  

# 10.                               CERTAIN AGREEMENTS OF BUYER.  Buyer agrees and covenants that unless Sellershall have consented otherwise in writing, the following provisions shallapply:

 

## 10.1                         Plugging Obligation.  Upon consummation of the Closing, the Companyand Buyer shall perform all necessary and proper plugging and abandonment ofall Wells and all surface restoration and reclamation required by law or theLeases, in each case to the extent the same relate to the Oil and GasProperties.

##  

## 10.2                         Plugging Bond.  The Company, Buyer or Buyer’s Affiliate shallpost, prior to Closing, the necessary bonds or letters of credit as required bythe state in which the Leases are located for the plugging of all Wells, andprovide Seller with a copy of same, and provide proof satisfactory to Sellerthat the applicable state has accepted such bonds or letters of credit assufficient assurance to cover the plugging of all Wells and related matters.  Further, Buyer shall provide to Seller copiesof the approval by any applicable regulatory agencies concerning change ofoperatorship of the Oil and Gas Properties if Buyer or Buyer’s Affiliate isduly elected Operator.

##  

## 10.3                         Seller’s Logos.  Commencing no later than sixty (60) daysafter Closing, Buyer shall promptly cover or cause to be covered by decals ornew signage any names and marks on the Oil and Gas Properties used by Seller,and all variations and derivatives thereof and logos relating thereto, andshall not thereafter make any use whatsoever of such names, marks and logos.

##  

## 10.4                         Like-Kind Exchanges.  Each Party consents to the other Party’sassignment of its rights and obligations under this Agreement to its QualifiedIntermediary (as that term is defined in Section 1.1031(k)-1(g)(4)(v) ofthe Treasury Regulations), or to its Qualified Exchange AccommodationTitleholder (as that term is defined in Rev. Proc. 2000-37), in connection witheffectuation of a like-kind exchange. However, Seller and Buyer acknowledge and agree that any assignment ofthis Agreement to a Qualified Intermediary or to a Qualified ExchangeAccommodation Titleholder does not release either Party from any of theirrespective liabilities and obligations to each other under the Agreement.  Each Party agrees to cooperate with the otherto attempt to structure the transaction as a like-kind exchange.  The electing Party shall indemnify and holdharmless the non-electing Party from and against all claims, expenses(including reasonable attorney’s fees and court costs) and liabilitiesresulting from any such like-kind exchange.

 

36

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# 11.                               CONDITIONS PRECEDENT TOOBLIGATIONS OF BUYER.  All obligations of Buyer under this Agreementare, at Buyer’s election, subject to the fulfillment, prior to or at theClosing, of each of the following conditions:

#  

## 11.1                         No Litigation.  At the Closing, no suit, action or otherproceeding shall be pending before any court or governmental agency whichattempts to prevent the occurrence of the transactions contemplated by thisAgreement.

##  

## 11.2                         Representations and Warranties.  All representations and warranties of Sellerand the Company contained in this Agreement shall be true in all materialrespects as of the Closing as if such representations and warranties were madeas of the Closing Date (except for those representations or warranties that areexpressly made only as of another specific date, which representations andwarranties shall be true in all material respects as of such other date) andSeller and the Company shall have performed and satisfied in all materialrespects all covenants and fulfilled all conditions required by this Agreementto be performed and satisfied by Seller and the Company at or prior to theClosing.

##  

## 11.3                         Operations.  Operations of the Oil and Gas Propertiesshall have been transferred to Buyer or Buyer’s designee.

##  

## 11.4                         Due Diligence.  Buyer’s due diligence review of the Companyand its properties, books and records and operations shall not have identifiedany issue, contingency or other matter which could have a material adverseeffect on the Company or its assets.

##  

## 11.5                         Releases.  Seller and any of its Affiliates involved intransactions with the Company shall have executed and delivered the Releases toBuyer so long as said Releases comply with the terms of this Agreement.

##  

## 11.6                         Release of Indebtedness andLiens.  All indebtedness of the Company shall havebeen paid in full and discharged and all of its assets shall have been releasedfrom all liens, security interests and other encumbrances.

##  

# 12.                               CONDITIONS PRECEDENT TO THEOBLIGATIONS OF SELLER.  All obligations of Seller under thisAgreement are, at Seller’s election, subject to the fulfillment, prior to or atthe Closing, of each of the following conditions:

 

## 12.1                         No Litigation.  At the Closing, no suit, action or otherproceeding shall be pending before any court or governmental agency whichattempts to prevent the occurrence of the transactions contemplated by thisAgreement.

##  

## 12.2                         Representations and Warranties.  All representations and warranties of Buyercontained in this Agreement shall be true in all material respects as of theClosing, as if such representations and warranties were made as of the ClosingDate (except for those representations or warranties that are expressly madeonly as of another specific date, which representations and warranties shall betrue in all material respects as of such other date) and Buyer shall haveperformed and satisfied in all material respects all covenants and fulfilledall conditions required by this Agreement to be performed and satisfied byBuyer at or prior to the Closing.

 

37

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# 13.                               TERMINATION.

 

## 13.1                         Causes of Termination.  This Agreement and the transactionscontemplated herein may be terminated:

##  

### (A)                            At any time by mutual consent ofthe Parties.

###  

### (B)                              By either Party as provided inSections 5.4(C) and 6.4(D) pertaining to Title Defects and AdverseEnvironmental Conditions, respectively, and by Buyer as provided in Section 5.5(B) pertainingto preferential purchase rights.

###  

### (C)                              By Buyer if, on the ClosingDate, any of the conditions set forth in Article 11 hereof shall not havebeen satisfied or waived.

###  

### (D)                             By Seller if, on the ClosingDate, any of the conditions set forth in Article 12 hereof shall not havebeen satisfied or waived.

###  

### (E)                               By Seller or Buyer if Closinghas not occurred on or before October 31, 2008.

###  

### (F)                               Notwithstanding anythingcontained herein, a Party shall not have the right to terminate this Agreementpursuant to clause (C), (D) or (E) above if such Party is at suchtime in material breach of any provision of this Agreement.

###  

## 13.2                         Effect of Termination.

##  

### (A)                            Buyer’s Breach.  If Closing does not occur because Buyerwrongfully fails to tender performance at Closing or otherwise breaches thisAgreement prior to Closing, and Seller is ready to close and is not in materialbreach of this Agreement, Seller shall have the right to terminate thisAgreement and retain the Deposit, together with interest thereon, as liquidateddamages.  Buyer’s failure to close shallnot be considered wrongful if (i) conditions to Buyer’s obligation toclose under Article 11 are not satisfied through no fault of Buyer and arenot waived, or (ii) Buyer has terminated this Agreement as of right under Section 13.1.  The remedy set forth herein shall be Seller’ssole and exclusive remedy for Buyer’s wrongful failure to close hereunder andSeller expressly waives any and all other remedies, legal and equitable, thatit otherwise may have for Buyer’s failure to close.

###  

### (B)                              Seller’s Breach.  If Closing does not occur because Sellerwrongfully fails to tender performance at Closing or otherwise breaches thisAgreement prior to Closing, and Buyer is ready to close and is not in materialbreach of this Agreement, Buyer may terminate this Agreement, in which eventSeller will return the Deposit, together with interest thereon, to Buyerimmediately after the determination that the Closing will not occur.  If Buyer elects not to terminate thisAgreement upon any such breach by Seller, Buyer shall retain all legal remediesfor Seller’s breach of this Agreement, including, without limitation, specificperformance of this Agreement.  Seller’sfailure to close shall not be considered wrongful if (i) conditions toSeller’s conditions to close under Article 12 are not satisfied through nofault of Seller and are not waived; or (ii) Seller has terminated thisAgreement as of right under Section 13.1.

 

38

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### (C)                              Termination Pursuant to Section 13.1.  If Buyer or Seller terminates this Agreementpursuant to Section 13.1 in the absence of a breach by the other Party,Seller shall return the Deposit and all accrued interest thereon to Buyer andneither Buyer nor Seller shall have any liability to the other Party fortermination of this Agreement.  If Buyeror Seller terminates this Agreement pursuant to Section 13.1 and assertsthat a breach of this Agreement has occurred, the notice of termination shallinclude a statement describing the nature of the alleged breach together withsupporting documentation.

###  

### (D)                             Effect of Termination.  In the event of the termination of thisAgreement pursuant to the provisions of this Article 13 or elsewhere inthis Agreement, this Agreement shall become void and have no further force andeffect and, except as provided in this Article 13, for the indemnitiesprovided for in Sections 6.2(B) and 14.3, any breach of this Agreementprior to such termination and any continuing confidentiality requirement,neither Party shall have any further right, duty or liability to the otherhereunder.  Upon termination, Buyeragrees to return to Seller or destroy all materials, documents and copiesthereof provided, obtained or discovered in the course of any due diligenceinvestigations of the Assets.

###  

# 14.                               INDEMNIFICATION.

 

## 14.1                         Indemnificationby Seller.  UPON CLOSING, SELLER SHALL TO THE FULLESTEXTENT PERMITTED BY LAW, RELEASE, DEFEND, INDEMNIFY, AND HOLD HARMLESS BUYER,THE COMPANY, THEIR AFFILIATES, AND EACH OF THEIR RESPECTIVE OWNERS, PARTNERS,MEMBERS, MANAGERS, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, OTHERREPRESENTATIVES, SUCCESSORS AND ASSIGNS (COLLECTIVELY THE “BUYER GROUP”) FROMAND AGAINST THE FOLLOWING:

##  

### (A)                            MISREPRESENTATIONS.  ALL CLAIMS, DEMANDS, LIABILITIES, JUDGMENTS,LOSSES AND REASONABLE COSTS, EXPENSES AND ATTORNEYS’ FEES (INDIVIDUALLY A “LOSS”AND COLLECTIVELY, THE “LOSSES”) ARISING FROM THE BREACH BY SELLER OR THECOMPANY OF ANY REPRESENTATION OR WARRANTY SET FORTH IN THIS AGREEMENT;

###  

### (B)                              BREACH OF COVENANTS.  ALL LOSSES ARISING FROM THE BREACH BY SELLEROR THE COMPANY OF ANY COVENANT SET FORTH IN THIS AGREEMENT; AND

###  

### (C)                              OWNERSHIP AND OPERATION.  ALL LOSSES ARISING FROM THE COMPANY’SBUSINESS OR THE OWNERSHIP OR OPERATION OF THE COMPANY AND THE OIL AND GASPROPERTIES PRIOR TO THE EFFECTIVE TIME DIRECTLY ASSOCIATED WITH THE FOLLOWINGMATTERS:

###  

#### (i)                   DAMAGES TOPERSONS OR PROPERTY, OR DEATH, FOR CLAIMS ASSERTED BY ANY THIRD PARTY ANDACCRUING PRIOR TO THE EFFECTIVE TIME;

 

39

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#### (ii)                THE VIOLATION BYTHE COMPANY OR ITS AFFILIATES OF THE TERMS OF ANY AGREEMENT BINDING UPON THECOMPANY OR ITS AFFILIATES;

####  

#### (iii)             CLAIMS AGAINST THECOMPANY OR ITS AFFILIATES BY CO-OWNERS, PARTNERS, JOINT VENTURERS AND OTHERPARTICIPANTS IN THE WELLS;

####  

#### (iv)            THE IMPROPER PAYMENTOF ROYALTIES, RENTALS AND SIMILAR PAYMENTS BY THE COMPANY OR ITS AFFILIATESUNDER THE LEASES PRIOR TO THE EFFECTIVE TIME;

####  

#### (v)               THE LITIGATIONMATTERS SET FORTH ON SCHEDULE 7.1(G);

####  

#### (vi)            AD VALOREM, PROPERTY,SEVERANCE, FRANCHISE, INCOME, PAYROLL AND OTHER TAXES ATTRIBUTABLE TO THEPERIOD OF TIME PRIOR TO THE EFFECTIVE TIME;

####  

#### (vii)         ANY CONTAMINATION ORCONDITION THAT IS THE RESULT OF ANY OFF-SITE DISPOSAL BY THE COMPANY OR ITSAFFILIATES OF ANY POLLUTANTS, CONTAMINANTS OR HAZARDOUS MATERIAL ON, IN ORBELOW ANY PROPERTIES NOT INCLUDED IN THE ASSETS PRIOR TO THE EFFECTIVE TIME;

####  

#### (viii)      COSTS AND EXPENSES RELATINGTO THE OWNERSHIP OR OPERATION OF THE OIL AND GAS PROPERTIES THAT ARE UNPAID ASOF THE CLOSING DATE AND THAT ARE ATTRIBUTABLE TO THE PERIOD OF TIME PRIOR TOTHE EFFECTIVE TIME;

####  

#### (ix)              ALL LOSSES RELATINGTO ANY OF THE EXCLUDED ASSETS OR EXCLUDED LIABILITIES OR THE ASSIGNMENTTHEREOF.

####  

### (D)                             Notwithstanding the above, thefollowing limitations shall apply to Seller’s indemnification obligations:

###  

#### (i)                   Seller shallnot be obligated to indemnify Buyer for any Loss unless Buyer has delivered awritten notice of such Loss within the Survival Period (as defined below)applicable to such Loss.  Any Loss forwhich Seller does not receive written notice before the end of the SurvivalPeriod shall be deemed to be an Assumed Liability.  The “Survival Period” applicable to Lossesshall mean:

####  

##### (1)                                Withregard to a breach of representations and warranties contained inSections 7.1(A), (B), (C), (D), (G), (J), (O), (S) (T), (U) and(EE) for an indefinite period following the Closing;

#####  

##### (2)                                Withregard to a breach of all of the other representations and warranties by Sellerin this Agreement for a period of one (1) year following the Closing;

 

40

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##### (3)                                Withregard to a breach of a covenant by Seller, for a period or one (1) yearfollowing the Closing; and

#####  

##### (4)                                Withregard to the matters covered by Section 14.1 (C), for one year followingthe Closing.

#####  

#### (ii)                Seller shall haveno liability or obligation for any Losses, unless and until and only to theextent that the aggregate Losses for which Buyer is entitled to recover underthis Agreement exceeds three percent (3%) of the Base Purchase Price (the “IndemnityDeductible”) (such amount being a deductible and not a threshold).

####  

#### (iii)             The amount of Lossesrequired to be paid by Seller to indemnify Buyer pursuant to this Agreementshall be reduced to the extent of any amounts actually received by Buyerpursuant to the terms of the insurance policies (if any) covering such claimand any tax benefits received by Buyer.

####  

#### (iv)            Except as specificallyprovided in Section 14.1(C), Seller’s indemnification obligations shallnot cover any liabilities, duties and obligations relating to properly pluggingand abandoning wells, restoring and reclaiming the surface, removal of allpipelines, equipment, and related facilities now or hereafter located on theOil and Gas Properties, and cleaning up, restoring and Remediation of the Oiland Gas Properties in accordance with the Environmental Laws and the relevantLeases, or any other violation or claimed violation of Environmental Laws(including but not limited to the payment of fines, penalties, monetarysanctions or other civil liabilities) or the presence, disposal, release orthreatened release of any hazardous substance or hazardous waste from the Oiland Gas Properties into the atmosphere or into or upon land or any water courseor body of water, including groundwater, whether or not attributable to theCompany’s activities or the activities of third parties.  All such matters are covered exclusively by Article 6of this Agreement.

####  

## 14.2                         Indemnification by Buyer.  UPON CLOSING, BUYER SHALL TO THE FULLESTEXTENT PERMITTED BY LAW, RELEASE, DEFEND, INDEMNIFY, AND HOLD HARMLESS SELLER’SGROUP FROM AND AGAINST THE FOLLOWING:

##  

### (A)                            MISREPRESENTATIONS.  ALL LOSSES ARISING FROM THE BREACH BY BUYEROF ANY REPRESENTATION OR WARRANTY SET FORTH IN THIS AGREEMENT THAT SURVIVESCLOSING;

###  

### (B)                              BREACH OF COVENANTS.  ALL LOSSES ARISING FROM THE BREACH BY BUYEROF ANY COVENANT SET FORTH IN THIS AGREEMENT;

###  

### (C)                              POST-CLOSING LIABILITIES.  ALL LOSSES ARISING FROM THE OWNERSHIP ANDOPERATION OF THE OIL AND GAS PROPERTIES AFTER THE CLOSING DATE.

###  

## 14.3                         Physical Inspection.  BUYER INDEMNIFIES AND AGREES TO RELEASE,DEFEND, INDEMNIFY AND HOLD HARMLESS THE SELLER’S GROUP FROM AND AGAINST 

 

41

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## ANY AND ALL CLAIMS ARISING FROM BUYER’SINSPECTING AND OBSERVING THE OIL AND GAS PROPERTIES, INCLUDING (A) CLAIMSFOR PERSONAL INJURIES TO OR DEATH OF EMPLOYEES OF THE BUYER, ITS CONTRACTORS,AGENTS, CONSULTANTS AND REPRESENTATIVES, AND DAMAGE TO THE PROPERTY OF BUYER OROTHERS ACTING ON BEHALF OF BUYER; AND (B) CLAIMS, DEMANDS, LOSSES,DAMAGES, LIABILITIES, JUDGMENTS, CAUSES OF ACTION, COSTS OR EXPENSES FORPERSONAL INJURIES TO OR DEATH OF EMPLOYEES OF THE SELLER’S GROUP OR THIRDPARTIES, AND DAMAGE TO THE PROPERTY OF THE SELLER’S GROUP OR THIRDPARTIES.  THE FOREGOING INDEMNITYINCLUDES, AND THE PARTIES INTEND IT TO INCLUDE, AN INDEMNIFICATION OF THESELLER’S GROUP FROM AND AGAINST CLAIMS ARISING OUT OF OR RESULTING, IN WHOLE ORPART, FROM THE CONDITION OF THE ASSETS OR THE SELLER’S GROUP’S SOLE, JOINT,COMPARATIVE, OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR FAULT BUT NOT THEGROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SELLER’S GROUP.

##  

## 14.4                         Notification.  As soon as reasonably practical afterobtaining knowledge thereof, the indemnified Party shall notify theindemnifying Party of any claim or demand which the indemnified Party hasdetermined has given or could give rise to a claim for indemnification underthis Article 14.  Such notice shallspecify the agreement, representation or warranty with respect to which theclaim is made, the facts giving rise to the claim and the alleged basis for theclaim, and the amount (to the extent then determinable) of liability for whichindemnity is asserted.  In the event anyaction, suit or proceeding is brought with respect to which a Party may beliable under this Article 14, the defense of the action, suit orproceeding (including all settlement negotiations and arbitration, trial,appeal, or other proceeding) shall be at the discretion of and conducted by theindemnifying Party.  If an indemnifiedParty shall settle any such action, suit or proceeding without the writtenconsent of the indemnifying Party (which consent shall not be unreasonablywithheld), the right of the indemnified Party to make any claim against theindemnifying Party on account of such settlement shall be deemed conclusivelydenied.  An indemnified Party shall havethe right to be represented by its own counsel at its own expense in any suchaction, suit or proceeding, and if an indemnified Party is named as thedefendant in any action, suit or proceeding, it shall be entitled to have itsown counsel and defend such action, suit or proceeding with respect to itselfat its own expense.  Subject to theforegoing provisions of this Article 14, neither Party shall, without theother Party’s written consent, settle, compromise, confess judgment or permitjudgment by default in any action, suit or proceeding if such action wouldcreate or attach any liability or obligation to the other Party.  The Parties agree to make available to eachother, and to their respective counsel and accountants, all information anddocuments reasonably available to them which relate to any action, suit orproceeding, and the Parties agree to render to each other such assistance asthey may reasonably require of each other in order to ensure the proper andadequate defense of any such action, suit or proceeding.

##  

# 15.                               TAX MATTERS.

 

### (A)                            Except as otherwise expresslyprovided in this Agreement, the parties agree that (i) Seller will beresponsible for and will pay all taxes attributable to or arising from theownership, sale, or other disposition of the Membership Interests on or priorto the Effective Time, 

 

42

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### including the transaction contemplated hereby, and all taxesattributable to or arising from the operation of the Company and its assetsprior to the Effective Time, and Buyer may invoice Seller for any such taxesnot accounted for in the Purchase Price adjustments set forth herein and Sellershall pay the amount of such invoice within thirty (30) days thereof, (ii) Buyerwill be responsible for and will pay all taxes attributable to or arising fromthe ownership of the Membership Interests after the Effective Time, and (iii) theCompany will be responsible for and will pay all taxes attributable to orarising from the operation of its business and its assets after the EffectiveTime, as such taxes become due and payable. Any party which pays any taxes for which the other party is responsiblewill be entitled to prompt reimbursement upon presentation of evidence of suchpayment.  The foregoing shall not effector limit any liability or indemnification related to any breach ofrepresentation, warranty or covenant of Seller or the Company set forth herein.

###  

### (B)                              Seller shall cause to beprepared (subject to Buyer’s review and approval) any and all tax returns whichare required to be filed for, by, on behalf of, or with respect to, the Companyfor any period before June 30, 2008, including any tax return required forany short tax year ending as of the Effective Time.

###  

### (C)                              Seller (at Seller’s sole risk,cost and expense) shall have the right to control the conduct of any audit,examination, investigation or administrative, court or other proceeding inconnection with any taxing period, tax return or other tax matter (a “TaxContest”) related to the Membership Interests arising out of or with respect toany period on or before the Effective Time. Buyer shall have the right (at Buyer’s sole cost, risk and expense) tocontrol the conduct of any Tax Contest related to the Membership Interestsarising or with respect to any period after the Effective Time.  Buyer and the Company shall have the right tocontrol the conduct of any Tax Contest related to the Company whether arisingor with respect to any period prior to or after the Effective Time.  If either party hereto or any of theirAffiliates receives any written or oral communication with respect to anyquestion, adjustment, assessment or pending or threatened Tax Contest whichpertains to any period for which the other party has the right of control underthis Section 15(e), the receiving party shall promptly notify theother parties hereto of such communication.

###  

### (D)                             In connection with thepreparation of any tax return or with respect to any Tax Contest, each of theparties hereto shall grant or cause to be granted to the other parties or suchparties’ representatives, access at all reasonable times during normal businesshours and following reasonable notice to all information, books and recordsrelating to the Company within its possession or control, including the rightto make copies thereof to the extent reasonably necessary in connection withthe rights and responsibilities for the tax matters set forth herein, and shallfurnish such assistance and cooperation as may be reasonably requested inconnection therewith.

 

43

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# 16.                               MISCELLANEOUS.

 

## 16.1                         Casualty Loss.

 

### (A)                            An event of casualty meansvolcanic eruptions, acts of God, fire, explosion, earthquake, wind storm,flood, drought, condemnation, the exercise of any right of eminent domain,confiscation and seizure (a “Casualty”). A Casualty does not include depletion due to normal production anddepreciation or failure of equipment or casing.

###  

### (B)                              If, prior to the Closing, aCasualty occurs (or Casualties occur) which results in a reduction in the valueof any of the Oil and Gas Properties (“Casualty Loss”), (i) Seller shallretain such Oil and Gas Property and such Oil and Gas Property shall be thesubject of an adjustment to the Base Purchase Price in the same manner setforth in Section 5.4 hereof, or (ii) at the Closing, Seller shallassign to Buyer or the Company, at Buyer’s election, the right to receive allinsurance proceeds or other sums payable to Seller or its Affiliates by reasonof such Casualty Loss, the Base Purchase Price shall not be adjusted by reasonof such payment, and the affected Oil and Gas Property will continue to beowned by the Company.  In the event aCasualty Loss results in a five percent (5%) or greater reduction in the valueof an affected Oil and Gas Property, Buyer shall have the right to exclude suchOil and Gas Property from this transaction, receive a reduction of the BasePurchase Price based on the Allocated Value of such Oil and Gas Property, andthe Company shall transfer the affected Oil and Gas Property to Seller orSeller’s designee as an Excluded Asset.

###  

### (C)                              For purposes of determining thediminution in value of an Asset as a result of a Casualty Loss, the Partiesshall use the same methodology as applied in determining the diminution invalue of an Asset as a result of a Title Defect as set forth in Section 5.4.

###  

## 16.2                         Confidentiality.

##  

### (A)                            Prior to Closing, to the extentnot already public, Buyer shall not disclose to any party that it is conductingnegotiations with Seller or has entered into this Agreement other than asexpressly provided herein or as permitted in the confidentiality agreementexecuted by Buyer in Seller’s favor prior to the execution of this Agreement,which shall continue to apply until the Closing and thereafter in the event oftermination of this Agreement prior to the Closing. Buyer shall exercise alldue diligence in safeguarding and maintaining secure all engineering,geological and geophysical data, seismic data, reports and maps, the resultsand findings of Buyer with regard to its due diligence associated with theAssets (including without limitation with regard to due diligence associatedwith environmental and title matters) and other data relating to the Assets(collectively, the “Confidential Information”). Buyer acknowledges that, prior to Closing, all Confidential Informationshall be treated as confidential. Notwithstanding the foregoing, Sellerunderstands that Buyer has public reporting obligations that may require publicannouncement of certain information relating to this Agreement.  Seller and Buyer shall consult with eachother with regard to all publicity and other releases at or prior to theClosing concerning this Agreement and the transaction contemplated hereby and,except as provided herein or as required by applicable law or other applicable rules orregulations of any governmental body or stock exchange, neither party shallissue any publicity or other release without the prior written consent of theother party, such consent not to be unreasonably withheld.

 

44

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### (B)                              In the event of termination ofthis Agreement for any reason, Buyer shall not use or knowingly permit othersto use such Confidential Information in a manner detrimental to Seller, andwill not disclose any such Confidential Information to any person, firm,corporation, association or other entity for any reason or purpose whatsoever,except to Seller or to a governmental agency pursuant to a valid subpoena orother order or pursuant to applicable governmental regulations, rules orstatutes.

###  

### (C)                              The undertaking of confidentialityshall not diminish or take precedence over any separate confidentialityagreement between the Parties.  Shouldthis Agreement terminate, such separate confidentiality agreement shall remainin full force and effect.

###  

## 16.3                         Notices.  Any notice, request, demand, or consentrequired or permitted to be given hereunder shall be in writing and deliveredin person or by certified letter, with return receipt requested, or byfacsimile addressed to the Party for whom intended at the following addresses:

##  

| **SELLER:**                                  |
|----------------------------------------------|
|                                         |
| Cano Petroleum, Inc.                    |
| 801 Cherry Street, Unit 25, Suite 3200  |
| Fort Worth, Texas 76102                      |
| Attn:  Phillip Feiner                        |
| Tel: (817)  698-0900                         |
| Fax: (817)  698-0763                         |
|                                         |
| **BUYER:**                                   |
|                                         |
| Legacy Reserves Operating LP                 |
| 303 West Wall, Suite 1400               |
| Midland, Texas 79701                         |
| Attn:    Mr. Steven H. Pruett |
| Tel:    (432) 689-5200             |
| Fax:    (432) 689-5299             |

 

or at such other address as any of the aboveshall specify by like notice to the other.

 

## 16.4                         Press Releases and PublicAnnouncements.  Buyer and Seller are permitted to issue apress release and filing on Form 8-K with the Securities and ExchangeCommission related to the present transaction. Notwithstanding the foregoing, no press release or any publicannouncement shall identify the principals of Buyer or Seller without the otherparty’s prior written consent, which consent shall not be unreasonablywithheld.

##  

## 16.5                         Compliance with ExpressNegligence Test.  THE PARTIES AGREE THAT THE INDEMNIFICATIONOBLIGATIONS OF THE INDEMNIFYING PARTY SHALL BE WITHOUT REGARD TO THE NEGLIGENCE(EXCLUDING GROSS NEGLIGENCE) OR STRICT LIABILITY OF THE INDEMNIFIED PERSON(S),WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT,CONCURRENT OR SOLE.

 

45

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## 16.6                           Governing Law.  This Agreement is governed by and must beconstrued according to the laws of the State of Texas, excluding anyconflicts-of-law rule or principle that might apply the law of another jurisdiction.  All disputes related to this Agreement shallbe submitted exclusively to the jurisdiction of the courts of the State ofTexas.

##  

## 16.7                           Exhibits.  The Exhibits attached to this Agreement areincorporated into and made a part of this Agreement.

##  

## 16.8                           Fees and Expenses.  Each Party shall be solely responsible forall costs and expenses incurred by it in connection with this transaction(including, but not limited to fees and expenses of its counsel andaccountants) and shall not be entitled to any reimbursements from the otherParty, except as otherwise provided in this Agreement.

##  

## 16.9                           Assignment.  This Agreement or any part hereof may not beassigned by either Party without the prior written consent of the other Party;provided, however, upon notice to the other Party, either Party shall have theright to assign all or part of its rights (but none of its obligations) underthis Agreement in order to qualify transfer of the Assets as a “like-kind”exchange for federal tax purposes as provided in Section 10.4.  Subject to the foregoing, this Agreement isbinding upon the Parties hereto and their respective successors and assigns.

##  

## 16.10                  Entire Agreement.  This Agreement constitutes the entireagreement reached by the Parties with respect to the subject matter hereof,superseding all prior negotiations, discussions, agreements and understandings,whether oral or written, relating to such subject matter.

##  

## 16.11                     Severability.  In the event that any one or more covenants,clauses or provisions of this Agreement shall be held invalid or illegal, suchinvalidity or unenforceability shall not affect any other provisions of thisAgreement.

##  

## 16.12                     Captions.  The captions in this Agreement are forconvenience only and shall not be considered a part of or affect theconstruction or interpretation of any provision of this Agreement.

##  

## 16.13                     Time of the Essence.  The parties recognize and agree that time isof the essence of this Agreement.

##  

## 16.14                     Counterpart Execution.  This Agreement may be executed in any numberof counterparts, and each counterpart hereof shall be effective as to eachParty that executes the same upon execution of a counterpart by all Parties,whether or not all such Parties execute the same counterpart.  If counterparts of this Agreement areexecuted, the signature pages from various counterparts may be combinedinto one composite instrument for all purposes. All counterparts together shall constitute only one Agreement but eachcounterpart shall be considered an original.

##  

Executed as of the day and year first above written.

 

46

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|       | **SELLER:**                                                |
|------------|------------------------------------------------------------|
|       | ** **                                                 |
|       | **CANO PETROLEUM, INC.**                                   |
|       | ** **                                                 |
|       | By:                                                        |   /s/ S. Jeffrey Johnson |
|       | Name:                                                      |   S. Jeffrey Johnson |
|       | Title:                                                     |   Chairman and Chief Executive  Officer |
|       |                                                       |
|       |                                                       |
|       | **PANTWIST, LLC**                                          |
|       | ** **                                                 |
|       | ** **                                                 |
|       | By:                                                        |   /s/ S. Jeffrey Johnson |
|       | Name:                                                      |   S. Jeffrey Johnson |
|       | Title:                                                     |   President |
|       |                                                       |
|       |                                                       |
|       | **BUYER:**                                                 |
|       | ** **                                                 |
|       | **LEGACY RESERVES OPERATING LP**                           |
| ** ** | **By:**                                                    | **Legacy  Reserves Operating GP LLC,** |
| ** ** | ** **                                                 | **Its  General Partner** |
| ** ** | ** **                                                 | ** ** |
| ** ** | **By:**                                                    | **Legacy  Reserves LP,** |
| ** ** | ** **                                                 | **Its sole  member** |
| ** ** | ** **                                                 | ** ** |
| ** ** | **By:**                                                    | **Legacy  Reserves GP, LLC,** |
| ** ** |                                                       | **Its  General Partner** |
| ** ** | ** **                                                 |
| ** ** | ** **                                                 |
|       | By:                                                        |   /s/ Steven H. Pruett |
|       | Name: Steven H. Pruett                                     |
|       | Title:   President & Chief Financial Officer |
|            |                                                            |  |  |  |  |  |  |

 

47

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**FIRST AMENDMENT TO PURCHASE AND SALEAGREEMENT**

 

This FirstAmendment to Purchase and Sale Agreement (this “Amendment”) dated as of September 30,2008, is made and entered into by and among **CANOPETROLEUM, INC.,**aDelaware corporation (“Seller”), **LEGACY RESERVES OPERATINGLP,**a Delaware limited partnership (“Buyer”), and **PANTWIST, LLC,** a Texas limited liability company (the “Company”).

 

W I T N E S S E T H:

 

WHEREAS,Seller, Buyer and the Company entered into that certain Purchase and SaleAgreement dated September 5, 2008, wherein Seller agreed to sell to Buyerand Buyer agreed to purchase from Seller all of the issued and outstandingmembership interests of the Company (the “Purchase Agreement”); and

 

WHEREAS,Seller, Buyer and the Company desire to amend certain exhibits attached to thePurchase Agreement.

 

Agreement

 

NOW,THEREFORE, for and in consideration of the mutual agreements contained in thePurchase Agreement and this Amendment and other good and valuableconsideration, Seller, Buyer and the Company agree as follows:

 

1.             Exhibit Ato the Purchase Agreement is hereby amended in its entirety to read as setforth on Exhibit A attached to this Amendment.

 

2.             Exhibit B to the PurchaseAgreement is hereby amended in its entirety to read as set forth on Exhibit Battached to this Amendment.

 

3.             Except as specifically providedherein, all terms and provisions of the Purchase Agreement shall remainunchanged, and the Purchase Agreement, as modified by this Amendment, is herebyratified, acknowledged and reaffirmed by Seller, Buyer and the Company.

 

4.             This Amendment may be executed in any number ofcounterparts and all such counterparts shall be taken together as onedocument.  Signatures on this Amendmenttransmitted by fax or other electronic means shall constitute and be deemedoriginal signatures and be binding for all purposes.

 

[*Remainder ofPage Intentionally Left Blank*]

 

----

 

EXECUTEDeffective as of the date first above written.

 
|       | **SELLER:**                      |
|------------|----------------------------------|
|       |                             |
|       | **CANO PETROLEUM, INC.**         |
| ** ** | ** **                       |
|       |                             |
|       | By:                              | /s/ S. Jeffrey Johnson |
|       | Name:                            |   S. Jeffrey Johnson |
|       | Title:                           |     Chairman and Chief Executive Officer |
|       |                             |
|       |                             |
|       | **THE COMPANY:**                 |
|       |                             |
|       | **PANTWIST, LLC**                |
| ** ** | ** **                       |
|       |                             |
|       | By:                              |      /s/  S. Jeffrey Johnson |
|       | Name:                            |   S. Jeffrey Johnson |
|       | Title:                           |     President |
|       |                             |
|       |                             |
|       | **BUYER:**                       |
|       |                             |
|       | **LEGACY RESERVES OPERATING LP** |
|       | **By:**                          | **Legacy Reserves Operating GP LLC,** |
|       |                             | **Its General Partner** |
|       |                             |   |
|       | **By:**                          | **Legacy Reserves LP, Its Sole Member** |
|       |                             |   |
|       | **By:**                          | **Legacy Reserves GP, LLC, Its** |
|       |                             | **General Partner** |
|       |                             |
|       |                             |
|       | By:                              | /s/ Kyle A. McGraw |
|       | Name:                            |  Kyle A. McGraw |
|       | Title:                      | EVP |
|            |                                  |  |  |  |  |  |  |  |  |  |  |

 

2

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Exhibit A – Leases and Land

 

Exhibit B – Wells and Allocation of the Purchase Price

 

3

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