**Exhibit 2.1**

 

**ASSET PURCHASEAND SALE AGREEMENT**

 

**AMONG**

 

**MYRIAD RESOURCES CORPORATION, WESTLANDENERGY COMPANY, andPAMTEX, a Texas general partnership composed of**

**PAMTEX GP1 LTD.AND PAMTEX GP2 LTD.**

**as Sellers,andCANO PETROLEUM. INC.as Buyer**

 

 

**April 25, 2006**

 

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Table Of Contents

 
| ** **                                                     | **Page** |
|----------------------------------------------------------------|----------|
|                                                           |     |
| ARTICLE I. DEFINITIONS AND INTERPRETATION                      | 1        |
| 1.1 Defined  Terms                                             | 1        |
| 1.2  References                                                | 1        |
| 1.3 Articles  and Sections                                     | 1        |
| 1.4 Number  and Gender                                         | 2        |
|                                                           |     |
| ARTICLE II. PURCHASE AND SALE                                  | 2        |
| 2.1 Purchase  and Sale                                         | 2        |
| 2.2 Excluded  Assets                                           | 4        |
| 2.3  Consideration                                             | 6        |
| 2.4  Assumption of Obligations                                 | 9        |
| 2.5 Retained  Liabilities                                      | 10       |
| 2.6  Possession; Risk of Loss                                  | 11       |
| 2.7  Allocation of Adjusted Consideration                      | 11       |
|                                                           |     |
| ARTICLE III. REPRESENTATIONS AND WARRANTIES                    | 12       |
| 3.1  Representations and Warranties of Sellers                 | 12       |
| 3.2  Representations and Warranties of Buyer                   | 17       |
| 3.3  Disclaimers                                               | 18       |
|                                                           |     |
| ARTICLE IV. ACCESS; DUE DILIGENCE                              | 18       |
| 4.1 Access  to Records                                         | 18       |
| 4.2  Operation and Environmental Assessment                    | 19       |
| 4.3 Defects,  Environmental Conditions and Related Adjustments | 19       |
|                                                           |     |
| ARTICLE V. OTHER MATTERS PRIOR TO CLOSING                      | 22       |
| 5.1  Operations                                                | 22       |
| 5.2 Casualty  Event                                            | 23       |
| 5.3 Advances                                                   | 26       |
| 5.4  Imbalances and Other Matters                              | 24       |
| 5.5  Publicity                                                 | 24       |
| 5.6  Compliance with Conditions                                | 25       |
| 5.7  Maintenance of Existence                                  | 25       |
| 5.8 Mutual  Assurances                                         | 25       |
| 5.9  Notification of Certain Matters                           | 25       |
| 5.10  Designation as Operator                                  | 25       |
|                                                           |     |
| ARTICLE VI. CONDITIONS; TERMINATION;  REMEDIES                 | 26       |
| 6.1  Conditions Precedent to Sellers’ Obligation to Close | 26       |
| 6.2  Conditions Precedent to Buyer’s Obligation to Close  | 26       |
| 6.3 Termination                                                | 27       |
| 6.4 Remedies                                                   | 28       |
|                                                           |     |
| ARTICLE VII. CLOSING                                           | 28       |
| 7.1 Closing                                                    | 28       |
| 7.2  Preliminary Settlement Statement                          | 28       |

 

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| 7.3 Actions  at Closing                      | 29     |
|----------------------------------------------|--------|
| 7.4 Records                                  | 29     |
|                                         |   |
| ARTICLE VIII. POST CLOSING MATTERS           | 30     |
| 8.1  Settlement Statement                    | 30     |
| 8.2 Further  Cooperation                     | 30     |
| 8.3  Undisbursed Revenues                    | 31     |
|                                         |   |
| ARTICLE IX. SURVIVAL                         | 31     |
| 9.1 Survival                                 | 31     |
|                                         |   |
| ARTICLE X. MISCELLANEOUS                     | 31     |
| 10.1  Exhibits                               | 31     |
| 10.2  Expenses                               | 31     |
| 10.3  Proration of Taxes                     | 31     |
| 10.4  Assignment                             | 32     |
| 10.5 Notices                                 | 32     |
| 10.6 ENTIRE  AGREEMENT; CONFLICTS            | 33     |
| 10.7  Amendment                              | 33     |
| 10.8 Waiver;  Rights Cumulative              | 33     |
| 10.9  GOVERNING LAW; CONSENT TO JURISDICTION | 33     |
| 10.10  Severability                          | 34     |
| 10.11  Counterparts                          | 35     |

 
| SCHEDULES        |   |                                                                                      |   |
|------------------|--------|-------------------------------------------------------------------------------------------|--------|
| Schedule 1.1     | -      | Defined  Terms                                                                            |   |
| Schedule  3.1(d) | -      | Claims and  Litigation - Sellers                                                          |   |
| Schedule  3.1(e) | -      | Preferential  Purchase Rights; Required Third Person Consents to Assignment               |   |
| Schedule  3.1(f) |   | Required  Governmental Consents – Seller                                             |   |
| Schedule  3.1(g) |   | Call on  Production                                                                       |   |
| Schedule  3.1(i) |   | AMIs, “Payout”,  Reversion/Conversion, and Similar Provisions; Tax Partnerships |   |
| Schedule  3.1(k) |   | Wells to be  Plugged and Abandoned                                                        |   |
| Schedule  3.1(m) |   | Imbalances                                                                                |   |
| Schedule  3.1(n) |   | Commitments  for Expenditures                                                             |   |
| Schedule  3.1(r) |   | Insurance  Coverage                                                                       |   |
| Schedule  3.2(g) |   | Required  Governmental Consents – Buyer                                              |   |
|             |   |                                                                                      |   |
| EXHIBITS         |   |                                                                                      |   |
| Exhibit A        | -      | Leases                                                                                    |   |
| Exhibit B        | -      | Wells;  Working Interests and Net Revenue Interests; Allocated Values                     |   |
| Exhibit C        | -      | Real  Property Interests                                                                  |   |
| Exhibit D        | -      | Personal  Property                                                                        |   |
| Exhibit E        | -      | Contracts                                                                                 |   |
| Exhibit F        | -      | Permits;  Transferable Permits                                                            |   |
| Exhibit G        | -      | Form of  Assignment, Bill of Sale, and Conveyance                                         |   |
| Exhibit H        | -      | Form of  Sellers’ Affidavit                                                          |   |

 

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**ASSET PURCHASE AND SALE AGREEMENT**

 

THIS ASSET PURCHASE AND SALE AGREEMENT (“Agreement”) is executedas of this 25th day of April 2006, by MYRIAD RESOURCES CORPORATION, a Texascorporation (“MRC”), WESTLAND ENERGY COMPANY, a Texas corporation (“Westland”)and PAMTEX, a Texas general partnership (“PAMTEX”) composed of PAMTEXGP1 LTD. AND PAMTEX GP2 LTD. (MRC, Westland and PAMTEX are collectively, “Sellers”),and CANO PETROLEUM, INC., a Delaware corporation (“Buyer”).

 

**RECITALS**

 

WHEREAS, Sellers are the owners of certain oil and gas properties andassets located in the State of Texas described more particularly herein;

 

WHEREAS, Sellers desire to sell and convey, and Buyer desires topurchase and pay for, all of such oil and gas properties and assets on theterms set forth herein.

 

NOW, THEREFORE, for and in consideration of the mutual promisescontained herein, the benefits to be derived by each Party hereunder, and othergood and valuable consideration, the receipt and sufficiency of which arehereby acknowledged, Sellers and Buyer agree as follows:

 

# **ARTICLE I.DEFINITIONS AND INTERPRETATION**

 

## 1.1           DefinedTerms. In addition to the terms defined in the introductoryparagraph and the Recitals of this Agreement, for purposes hereof, thecapitalized expressions and terms set forth in Schedule 1.1 shall havethe meanings set forth therein, unless expressly indicated otherwise. Otherterms may be defined elsewhere in this Agreement and shall, for purposeshereof, have the meanings so specified, unless expressly indicated otherwise.

##  

## 1.2           References. The words “hereby,”“herein,” “hereinabove,” “hereinafter,” “hereinbelow,” “hereof,” “hereto,” “hereunder,”and words of similar import when used in this Agreement shall refer to thisAgreement as a whole and not to any particular article, section, or provisionof this Agreement. References in this Agreement to articles, sections,exhibits, or schedules are to such articles, sections, exhibits, or schedulesof this Agreement unless otherwise specified.

##  

## 1.3           Articles andSections. This Agreement, for convenience only, has been dividedinto articles and sections. The rights and other legal relations of the partieshereto shall be determined from this Agreement as an entirety and withoutregard to the aforesaid division into articles and sections and without regardto headings prefixed to such articles and sections.

 

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## 1.4           Number andGender. Whenever the context requires, reference herein made to asingle number shall be understood to include the plural; and likewise, theplural shall be understood to include the singular. Words denoting sex shall beconstrued to include the masculine, feminine, and neuter, when suchconstruction is appropriate; and specific enumeration shall not exclude thegeneral but shall be construed as cumulative. Definitions of terms defined inthe singular or plural shall be equally applicable to the plural or singular,as applicable, unless otherwise indicated.

##  

# **ARTICLE II.PURCHASE AND SALE**

#  

## 2.1           Purchase andSale. Subject to the terms hereof, Sellers agree to sell andconvey to Buyer, and Buyer agrees to purchase from Sellers and pay for, thefollowing properties and assets (collectively, the “Assets”):

##  

### (a)           theundivided Working Interests, associated Net Revenue Interests, and otherinterests set forth on Exhibit B, together with any and all otherrights, titles, and interests of Sellers (including in each case, withoutlimitation, fee mineral interests, leasehold interests, royalty interests,overriding royalty interests, production payments, net profits interests,carried interests, reversionary interests, possibilities of reverter, andconversion rights and options) in, to, under, or derived from (i) the oil andgas leases described more particularly on Exhibit A and the leaseholdestates created thereby, as to all lands and depths covered thereby or theapplicable part or portion thereof if specifically limited in depth and/orareal extent in Exhibit A (collectively, the “Leases”), (ii) thelands covered by the Leases or otherwise described on Exhibit A, (iii) allunits created by the pooling, unitization, and communitization agreements ineffect with respect to the Leases and the lands covered thereby or otherwisedescribed on Exhibit A, and (iv) the oil and gas leases and landsincluded in any units with which the Leases or the lands covered thereby orotherwise described on Exhibit A may have been pooled, unitized, orcommunitized, and all other rights, interests, privileges, benefits, and powersof any kind or character conferred upon Sellers as the owners of any of suchinterests;

###  

### (b)           theundivided Working Interests and the associated Net Revenue Interests set forthin Exhibit B, together with any and all other rights, titles, andinterests of Sellers, in and to the wells for the production of Hydrocarbons thatare located on the Leases or on other leases or lands with which the Leases orthe lands covered thereby or otherwise described on Exhibit A may havebeen pooled, unitized, or communitized, including without limitation the thosedescribed more particularly on Exhibit_B (collectively, the “Wells”);

###  

### (c)           all ofSellers’ rights, titles, and interests in and to all crude oil, natural gas,condensate, distillate, natural gasoline, natural gas liquids, plant products,refined petroleum products, other liquid or gaseous hydrocarbons (including,without limitation, coalbed methane), sulphur, other gases (including, withoutlimitation, hydrogen and carbon dioxide), and every other mineral or substance,or any of them, the right to explore for which, or an interest in which, isgranted pursuant to the Leases or the other interests described herein (“Hydrocarbons”)(i) produced from or allocable to the

 

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### interestsof Sellers described in clauses (a) and (b) of this Section 2.1 andexisting in pipelines, storage tanks, or other processing or storage facilitiesupstream of the delivery points to the relevant purchasers as of the EffectiveTime, and (ii) produced from or allocable to such interests of Sellers from andafter the Effective Time;

###  

### (d)           all ofSellers’ rights, titles, and interests in and to all surface leases, easements,rights-of-way, servitudes, licenses, franchises, road, railroad, and othersurface use permits or agreements, and similar rights and interests (if any)located on the lands covered by the Leases or otherwise described on ExhibitA or on any units with which the Leases or the lands covered thereby orotherwise described on Exhibit A may have been pooled, unitized, orcommunitized, or that otherwise relate to the interests of Sellers described inclauses (a) and (b) of this Section 2.1, described more particularly on ExhibitC (collectively, the “Real Property Interests”);

###  

### (e)           all ofSellers’ rights, titles, and interests in and to all equipment, machinery,fixtures, inventory, improvements, and other personal, mixed, or movableproperty, located on or off the lands covered by the Leases or otherwisedescribed on Exhibit A or with which the Leases or the lands coveredthereby or otherwise described on Exhibit A have been pooled, unitized,or communitized, to the extent used in connection with or attributable to theinterests of Sellers described in clauses (a) and (b) of this Section 2.1(except for any such personal property leased from third Persons), including,without limitation: water wells; saltwater disposal wells and facilities;injection wells and facilities; well equipment; casing; rods; tanks and tankbatteries; boilers; tubing; pumps; pumping units and engines; platforms;Christmas trees; derricks; production facilities (whether surface or sub-sea);compressors and compression equipment; dehydration units and facilities;heater-treaters; processing, fractionation, treatment, and separation plantsand facilities; testing and sampling equipment; sulfur recovery units andfacilities; valves; gauges; meters; generators; motors; gun barrels; flowlines; water lines; gas lines; gathering lines, laterals and trunk lines, andother pipe lines; gas systems (for gathering, treatment, and compression);chemicals; solutions; water systems (for treatment, disposal, and injection);power plants; poles; lines; transformers; starters and controllers; machineshops; tools; storage yards and equipment, materials, and supplies storedtherein, to the extent charged or reasonably chargeable to the interests ofSellers described in clauses (a) and (b) of this Section 2.1; vehicles;telegraph, telephone, remote telemetry, and other communication systems;loading docks, loading racks, and shipping facilities; spare parts; and any andall additions or accessions to, substitutions for, and replacements of any ofthe foregoing, wherever located, together with all attachments, components,parts, equipment, and accessories installed thereon or affixed thereto, all as describedmore particularly on Exhibit D (collectively, the “Personal Property”);

###  

### (f)            all fees,rentals, proceeds, payments, revenues, and other rights and economic benefitsof every kind and character accruing or payable to the owners of the Assetsthat are attributable to the period from and after the Effective Time;

###  

### (g)           all ofSellers’ rights, titles, and interests in and to all Contracts, the transfer ofwhich is not prohibited or restricted by a preferential right to purchase,

 

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### requiredconsent to assignment, right of first refusal, right of first offer, or similarprovision or as to which the required waivers or consents have been obtained,or the appropriate time period for asserting such rights has expired, in eithercase as of the Closing Date (collectively, the “Transferred Contracts”);

###  

### (h)           all Permitsthat are transferable by Sellers to Buyer, described more particularly on ExhibitF;

###  

### (i)            all ofSellers’ rights, titles, and interests in and to all intangible rights,inchoate rights, transferable rights under warranties made by prior owners,manufacturers, vendors, and third Persons, and rights accruing under applicablestatutes of limitation or prescription, all Claims of Sellers, whether in contract,tort or arising under Law, and whether asserted, unasserted, known or unknownat Closing, against any Person arising out of any Environmental Condition orthe presence of any Environmental Contaminants, all insofar only as theforegoing rights and interests relate or are attributable to the items listedin this Section 2.1, and do not constitute Excluded Assets, butincluding, without limitation, all Claims of Sellers with respect tounderproduction accounts or credits pertaining to Imbalances in existence as ofthe Effective Time (collectively, “Intangible Rights”);

###  

### (j)            all files,records (including, without limitation, land and title records, plats, surveys,abstracts of title, title insurance policies, title opinions, and titlecurative, lease, contract, division order, marketing, correspondence,operations, environmental, insurance, production, accounting, regulatory, andfacility and well records and files), and other information that relate in anyway to any of the items listed in this Section 2.1, are in thepossession of Sellers, and the disclosure and transfer of which is notprohibited by confidentiality or other contractual arrangements in existence onthe Closing Date (collectively, the “Records”); and

###  

### (k)           all ofSellers’ rights, titles, and interests in and to all maps, logs, geological,geophysical, reserve engineering, and other scientific and technicalinformation, reports, and data (including, without limitation, conventional and3-D seismic data) that relate in any way to the items listed in this Section2.1, are owned by Sellers, do not constitute Excluded Assets, and thedisclosure and transfer of which is not prohibited by confidentiality or othercontractual arrangements in existence on the Closing Date (collectively, the “TransferableData”);

###  

LESSANDEXCEPT the ExcludedAssets. The conveyance of the Assets shall be effective as of the EffectiveTime, except for the assumption by Buyer of certain Liabilities associated withthe Assets that are provided, in Section 2.4, to be assumed as of thePossession Time.

 

## 2.2           ExcludedAssets. Sellers except, reserve, and retain to themselves,severally according to their respective ownership interests in the Assets andnot jointly, the following properties and assets (collectively, the “ExcludedAssets”):

##  

(a)           all corporate,financial, legal, and tax records of each Seller;

 

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(b)           all deposits, cash,checks in process of collection, cash equivalents, and funds attributable toeach Seller’s interest in the Assets for the period prior to the EffectiveTime;

 

(c)           all Hydrocarbonsproduced from or allocable to the Assets prior to the Effective Time (and theproceeds of such production), except for those Hydrocarbons described in Section2.1(c)(i);

 

(d)           all documents andrecords of each Seller subject to the attorney/client privilege,confidentiality agreements, claims of privilege, or other restrictions onaccess;

 

(e)           all rights, interests,and Claims that each Seller may have under any policy of insurance orindemnity, surety bond, or any insurance or condemnation proceeds or recoveriesfrom third Persons relating to property damage or casualty loss affecting theAssets occurring prior to the Possession Time;

 

(f)            all Claims (other thanthose Claims relating to Environmental Conditions or Environmental Contaminantstransferred and assigned to Buyer 2.1(i)), whether in contract, in tort, orarising by operation of Law, and whether asserted or unasserted as of thePossession Time, that any Seller may have against any Person arising out ofacts, omissions, or events, or injury to or death of Persons or loss ordestruction of or damage to property, relating in any way to, the Assets thatoccurred prior to the Possession Time; provided, however, that no such Claimmay be settled, compromised, or otherwise resolved in a manner that results inan obligation borne by Buyer or the Assets from and after the Possession Timewithout the prior written consent of Buyer;

 

(g)           all exchange tradedfutures contracts and over-the-counter derivative contracts of each Seller asto which such Seller has an open position as of the Effective Time;

 

(h)           any and all rights touse each Seller’s name, marks, trade dress or insignia, or to use the name ofany Affiliate of any Seller, and all of each Seller’s intellectual property,including, without limitation, proprietary or licensed computer software;patents; trade secrets; copyrights; geological and geophysical information anddata (including, without limitation, conventional and 3-D seismic data)licensed from third Persons, and such Seller’s proprietary interpretationsthereof; economic analyses; and pricing forecasts;

 

(i)            all amounts due orpayable to any Seller as adjustments to insurance premiums related to theAssets for periods prior to the Effective Time;

 

(j)            all Claims of eachSeller for refunds of or any loss carry-forwards with respect toProperty-Related Taxes and income or franchise taxes relating to the Assets forperiods prior to the Effective Time;

 

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(k)           all audit rights andall amounts due or payable to any Seller as refunds, adjustments, orsettlements of disputes arising under the Leases, the Real Property Interests,the Permits, and the Contracts for periods prior to the Effective Time;

 

(l)            all trade credits andthe proceeds of all accounts receivable, notes receivable, instruments, generalintangibles, and other receivables due or payable to any Seller relating to theAssets that accrued prior to the Effective Time;

 

(m)          except as otherwiseprovided herein, all fees, rentals, proceeds, payments, revenues, rights, andeconomic benefits of every kind and character (and all security or otherdeposits made) payable to the owners of the Assets and that are attributable tothe period prior to the Effective Time; and

 

(n)           all interests, rights,property, and assets of each Seller not located on or used in connection withthe Assets or otherwise specifically included in the definition of the Assets.

 

## 2.3           Consideration. (a) Thepurchase price for the Properties shall be (i) $24,000,000, subject toadjustment as provided in Sections 2.3(b) and 2.3(c) (the “BaseConsideration”).

##  

### (b)           The BaseConsideration shall be adjusted upward by the following:

###  

##### (i)            the amountof the value of all merchantable Hydrocarbons produced from or allocable to theAssets existing in pipelines, storage tanks, or other processing or storagefacilities (including, without limitation, unsold inventories of plant productsowned by Sellers, if any) upstream of the delivery points to the relevantpurchasers as of the Effective Time, the value to be based on the contractprice applicable to such Hydrocarbons in effect as of the Effective Time (orthe market value, if there is no contract price, in effect as of the EffectiveTime), less amounts payable as royalties, overriding royalties, and otherburdens upon such Hydrocarbons and Property-Related Taxes deducted by thepurchaser of such Hydrocarbons;

#####  

##### (ii)           the amountof all direct capital, operating, and other expenditures and costs and allprepaid costs and expenses attributable to the Assets (exclusive ofProperty-Related Taxes) incurred and actually paid by or on behalf of Sellersin the ordinary course of owning and operating the Assets that are attributableto the period from the Effective Time through the Possession Time, including,without limitation, (A) royalties, overriding royalties, and othersimilar burdens on production, (B) rentals, shut-in well payments, and otherlease maintenance payments made under the

 

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##### terms of the Leases, (C) except as otherwiseprovided below in clause (D)(1) of this paragraph, the direct overhead andother charges and expenses billed to Sellers by the operator or operators (including,without limitation, any Seller or its Affiliates) of the Assets underapplicable operating agreements, including, without limitation, unreimbursedexpenses paid by any Seller on behalf of third Persons to which such Seller isentitled to reimbursement under such operating agreements, and(D) premiums paid by each Seller with respect to any policy of insuranceor indemnity or any surety bond directly related to the Assets and allocable tothe period from the Effective Time through the Possession Time, butexclusiveof (1) direct overhead and other charges billed by any Seller or itsAffiliate as operator of an Asset, to any Seller, to the extent that suchcharges exceed the like charges invoiced by any Seller or its Affiliate toother co-owners of interests in the relevant Asset, (2) expenses incurred bySellers in connection with the cure or remediation of Defects or EnvironmentalConditions pursuant to Section 4.3 or the repair of a Casualty Event orreplacement of a damaged or taken Asset pursuant to Section 5.2, and (3)the general, administrative, and office overhead expenses of any Seller. TheParties expressly agree that the out of pocket costs incurred by Sellers withthird parties in making repairs to Sellers’ Personal Property as a result ofthe grassfires that occurred on a portion of the Assets in March, 2006, lessany insurance proceeds received, due or claimed, shall be an upward adjustmentunder this Section 3.2(b)(iii) ;

#####  

##### (iii)          any increaserequired as the result of the proration of Property-Related Taxes under Section10.3;

#####  

##### (iv)          the amountof the value of any Imbalance as to which any Seller is in an “under” positionas of the Effective Time, as agreed upon by Sellers and Buyer pursuant to Section5.4; and

#####  

##### (v)           any otheramount provided for elsewhere in this Agreement or otherwise agreed upon bySellers and Buyer as being an increase to the Base Consideration.

#####  

### (c)           The BaseConsideration shall be adjusted downward by:

###  

##### (i)            reductions(if any) provided for in Sections 4.3 and 5.2;

 

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##### (ii)           the proceedsreceived by Sellers from the sale of Hydrocarbons produced from or allocable tothe Assets during the period from the Effective Time through the Closing Date,less amounts payable as royalties, overriding royalties, and other burdens uponsuch Hydrocarbons and Property-Related Taxes deducted by the purchaser of suchHydrocarbons;

#####  

##### (iii)          all otherfees, rentals, proceeds from any permitted sale, salvage, or other disposition,and other revenues pertaining to the Assets that are attributable to, and werereceived by Sellers during, the period from the Effective Time through theClosing Date (excluding overhead reimbursements to any Seller under applicableoperating agreements under which such Seller is the operator);

#####  

##### (iv)          the amountof the value of any Imbalance as to which Seller is in an “over” position as ofthe Effective Time, as well as the amount of the value of any Hydrocarbonsproduced from or allocable to the Assets that third Persons may otherwise beentitled to receive out of Sellers’ interests in such Assets after theEffective Time without making full payment therefor at or after the time ofdelivery as the result of a “take-or-pay”, prepayment, forward sale, productionpayment, deferred production, or similar arrangement in existence as of theEffective Time, such value to be as agreed upon by Sellers and Buyer pursuantto Section 5.4;

#####  

##### (v)           anyreduction required as the result of the proration of Property-Related Taxesunder Section 10.3;

#####  

##### (vi)          an amountequal to all Advances paid by Buyer to Sellers pursuant to Section 4 of the “BindingProvisions” of the Letter of Intent and Section 5.3 hereof; and

#####  

##### (vii)         any otheramount provided for elsewhere in this Agreement or otherwise agreed upon bySellers and Buyer as being a reduction in the Base Consideration.

#####  

### (d)           The BaseConsideration, as adjusted pursuant to Sections 2.3(b) and 2.3(c),shall be referred to herein as the “Adjusted Consideration.”  All adjustments to the Base Considerationprovided for in Sections 2.3(b) and 2.3(c) shall be determinedwithout duplication and on an accrual basis, in accordance with generallyaccepted accounting principles consistently applied.

 

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## 2.4           Assumptionof Obligations. Subject to the terms of this Agreement,upon the Closing, Buyer assumes and agrees to pay, perform, and discharge thefollowing duties, obligations, and Liabilities (collectively, the “AssumedLiabilities”), effective as of the Effective Time or the Possession Time,as applicable, as set forth below:

##  

### (a)           theperformance of the terms, conditions, and covenants of, and the discharge ofSellers’ shares of the duties, obligations, and liabilities (other thanobligations or liabilities for the payment of money) arising under the termsof, the Leases, the Real Property Interests, the Permits, and the TransferredContracts for the period from and after the Possession Time;

###  

### (b)           allobligations and Liabilities of Sellers for the payment of money with respect tothe Assets (including, without limitation, the payment of Sellers’ shares ofall costs and expenses incurred in connection with the Assets and the paymentof Sellers’ shares of all royalties, overriding royalties, and other similarburdens on production, as well as all rentals, shut-in well payments, minimumroyalties, and other lease maintenance payments under the terms of the Leases)for the period from and after the Effective Time;

###  

### (c)           allobligations of Sellers regarding the plugging and abandonment of all Wells andPersonal Property and the performance of all related salvage, site clearance,and surface restoration operations in accordance with applicable Law and theterms of the Leases and applicable Transferred Contracts;

###  

### (d)           **ALL ASSUMED ENVIRONMENTAL LIABILITIES**(which is adefined term on Schedule 1.1 and includes all liabilities for EnvironmentalConditions other than Retained Environmental Liabilities, which is also adefined term on Schedule 1.1)**;**

###  

### (e)           **EXCEPT FOR RETAINED LIABILITIES, ALL OTHER CLAIMS AND LIABILITIES FORINJURY TO OR DEATH OF ANY PERSON, PERSONS, OR OTHER LIVING THINGS, OR LOSS ORDESTRUCTION OF OR DAMAGE TO PROPERTY AFFECTING OR RELATING TO THE ASSETS,REGARDLESS OF WHETHER SUCH CLAIM OR LIABILITY RESULTS, IN WHOLE OR IN PART,FROM THE NEGLIGENCE OR STRICT LIABILITY OF ANY SELLER OR ITS AFFILIATES,EMPLOYEES, AGENTS, OR REPRESENTATIVES, TO THE EXTENT THAT SUCH CLAIM ORLIABILITY, OR THE ACTS, OMISSIONS, EVENTS, OR CONDITIONS GIVING RISE THERETO,ARISES, OCCURS, OR EXISTS AT OR AFTER THE POSSESSION TIME;**

###  

### (f)            allobligations of Sellers owed to other Persons with respect to Imbalances (ifany) in existence at or arising after the Effective Time;

###  

### (g)           all Claimsand Liabilities relating to the payment of taxes (including interest,penalties, and additions to tax) for which Buyer has agreed to be responsibleunder the terms hereof;

 

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### (h)           allobligations of any Seller (if any) relating to the accounting for and distributionor payment of proceeds from the sale of the Hydrocarbons produced from orallocable to the Assets, including, without limitation, the distribution orpayment of funds held in suspense as of the Closing Date and transferred toBuyer pursuant to Section 8.3;

###  

### (i)            theresponsibility for compliance with applicable Laws relating to the Assets, andthe maintenance and, when necessary, procurement of Permits required by anyGovernmental Authority in connection with the Assets, in each case for theperiod from and after the Possession Time;

###  

### (j)            all Claimsand Liabilities arising out of, resulting from, or relating in any way toDefects, Environmental Conditions, or Casualty Events on or relating to theAssets that become Assumed Liabilities by operation of Section 4.3 or Section5.2; and

###  

### (k)           all otherduties, obligations, Liabilities, and Claims, whether in contract, in tort, orarising by operation of Law, accruing or resulting from, arising out of, orotherwise associated with the Assets for the period from and after thePossession Time.

###  

## 2.5           RetainedLiabilities. Subject to the terms of this Agreement,Sellers hereby expressly retain and agree to pay, perform, and discharge,severally according to their respective ownership interests in the Assets andnot jointly, the following duties, obligations, and Liabilities (collectively,the “Retained Liabilities”):

##  

### (a)           theperformance of the terms, conditions, and covenants of, and the discharge ofSellers’ shares of the duties, obligations, and Liabilities (other thanobligations or Liabilities for the payment of money) arising under the termsof, the Leases, the Real Property Interests, the Transferable Permits, and theContracts for the period prior to the Possession Time;

###  

### (b)           except forAssumed Liabilities, all obligations and Liabilities of Sellers for the paymentof money with respect to the Assets (including, without limitation, the paymentof Sellers’ shares of all costs and expenses incurred in connection with theAssets and the payment of Sellers’ shares of all royalties, overridingroyalties, and other similar burdens on production, as well as all rentals,shut-in well payments, minimum royalties, and other lease maintenance paymentsunder the Leases) for the period prior to the Effective Time;

###  

### (c)           all Claimsand Liabilities relating to the payment of taxes (including interest,penalties, and additions to tax) for which Sellers have agreed to beresponsible hereunder;

###  

### (d)           except forAssumed Liabilities, all Claims and Liabilities, whether in contract, in tort,or arising by operation of Law, against or suffered by any Seller that relatein any way to, the Assets **(INCLUDING, WITHOUTLIMITATION, INJURY TO OR DEATH OF ANY PERSON, PERSONS, OR OTHER LIVING THINGS,OR LOSS OR DESTRUCTION OF OR DAMAGE TO PROPERTY AFFECTING**

 

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### **OR RELATING TO THE ASSETS, REGARDLESS OF WHETHER SUCH CLAIM ORLIABILITY RESULTS, IN WHOLE OR IN PART, FROM THE NEGLIGENCE OR STRICT LIABILITYOF BUYER OR ITS AFFILIATES, EMPLOYEES, AGENTS, OR REPRESENTATIVES)**, to extentthat any such Claim or Liability, or the acts, omissions, events, or conditionsgiving rise thereto, arose, occurred, or existed prior to the Possession Time,regardless of whether such Claim or Liability has been asserted as of thePossession Time. Without limiting the effect of this Section 2.5(d),or any other provision of this Agreement, the grassfires and consequencesthereof that occurred on a portion of the Assets in March and April, 2006, areRetained Liabilities, except that the expenses incurred by Sellers in repairingSellers’ Personal Property constitute an upward adjustment to the BaseConsideration under Section 2.3(b)(ii) above.

###  

### (e)           all Claims(if any) of third Persons, whether as the result of audits or otherwise, torefunds, adjustments, settlements of disputes, or other amounts of any kind dueunder the terms of the Leases, the Real Property Interests, the TransferablePermits, or the Contracts and attributable to the period prior to the EffectiveTime;

###  

### (f)            all amountspayable by any Seller under the terms of all exchange traded futures contractsand over-the-counter derivative contracts to which any Seller is a party as ofthe Effective Time, including, without limitation, all breakage costs (if any)incurred by any Seller under the terms of any such agreement as the result ofthe transactions contemplated in this Agreement;

###  

### (g)           allindebtedness (if any) of any Seller, whether or not encumbering all or anyportion of the Assets;

###  

### (h)           **ALL RETAINED ENVIRONMENTAL LIABILITIES**(which is adefined term on Schedule 1.1)**;**and

###  

### (i)            except forAssumed Liabilities, all other duties, obligations, Claims, and Liabilities,whether in contract, in tort, or arising by operation of Law, accruing orresulting from, arising out of, or otherwise associated with (i) the Assets forthe period prior to the Possession Time, and (ii) the Excluded Assets.

###  

## 2.6           Possession;Risk of Loss. As of the Possession Time, Sellersshall deliver to Buyer exclusive possession and control of the Assets. Sellersagree to cooperate with Buyer to facilitate the transition of the ownership ofthe Assets to Buyer and the transition of operator status to Buyer with regardto the Assets. As between Sellers and Buyer, and subject to the terms of Sections2.4 and 2.5, Sellers shall, severally according to their respectiveownership interests in the Assets and not jointly, assume and bear all risk ofloss associated with the Assets prior to the Possession Time, and Buyer shallassume and bear all risk of loss associated with the Assets from and after thePossession Time.

##  

## 2.7           Allocationof Adjusted Consideration. Buyer and Sellers shall usecommercially reasonable efforts to agree, on or before the Closing Date, uponan

 

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## allocationof the Adjusted Consideration among the Assets for financial accounting and taxpurposes in accordance with Section 1060 of the Code. Buyer and Sellers shalleach file a Form 8594 (Asset Acquisition Statement Under Section 1060) on atimely basis, reporting the allocation of the Adjusted Consideration consistentwith such allocation. Buyer and Sellers shall file, on a timely basis, anyamendments required to such Form 8594 as a result of a subsequent increase ordecrease of the Adjusted Consideration after the Closing Date. Buyer andSellers shall not take any position on their respective income tax returns thatis inconsistent with the allocation of the Adjusted Consideration as so agreed,or as adjusted as the result of any subsequent increase or decrease in theAdjusted Consideration. If Buyer and Sellers are unable to agree on theallocation of the Adjusted Consideration provided for in this Section 2.7by the Closing Date, either Buyer or Sellers may initiate arbitration of suchdispute pursuant to the terms of Section 10.11. In that event, theClosing shall be deferred until such dispute is resolved as provided in Section10.11.

##  

# **ARTICLE III.REPRESENTATIONS AND WARRANTIES**

#  

## 3.1           Representationsand Warranties of Sellers. Sellers jointly and severally representand warrant to Buyer as follows:

##  

### (a)           MRC andWestland are each a corporation duly formed, currently existing, and in goodstanding under the Laws of the State of Texas. PAMTEX is a general partnershipduly formed, currently existing, and in good standing under the Laws of theState of Texas.

###  

### (b)           Each Sellerhas full capacity, power, and authority to enter into and perform thisAgreement and the transactions contemplated herein. The execution, delivery,and performance by each Seller of this Agreement has been duly and validlyauthorized and approved by all necessary action on the part of each Seller, andthis Agreement and the documents executed in connection herewith are, or upontheir execution and delivery will be, the valid and binding obligations of eachSeller and enforceable against each Seller in accordance with their terms,subject to the effects of bankruptcy, insolvency, reorganization, moratorium,and similar Laws, as well as to principles of equity (regardless of whether suchenforceability is considered in a proceeding in equity or at law).

###  

### (c)           Theexecution, delivery, and performance by each Seller of this Agreement and theconsummation of the transactions contemplated herein will not (i) conflict withor result in a breach of any provisions of the organizational documents of anySeller, (ii) result in a default or the creation of any Lien or give rise toany right of termination, cancellation, or acceleration under any of the termsof any Lease, Contract, Real Property Interest, Permit, note, bond, mortgage,indenture, license, or other agreement, document, or instrument to which anySeller is a party or by which any Seller or any of the Assets may be bound, or(iii) violate any order, writ, injunction, judgment, decree, or Law applicableto any Seller or the Assets.

 

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### (d)           Except asotherwise reflected in Schedule 3.1(d), there is no Claim by any Personor Governmental Authority (including, without limitation, expropriation orforfeiture proceedings), and no legal, administrative, or arbitrationproceeding pending or, to any Seller’s Knowledge, threatened against any Selleror the Assets, or to which any Seller is a party, that reasonably may beexpected to (i) impair Sellers’ title to any of the Assets,(ii) hinder or impede the operation of all or any portion of the Assets,(iii) subject the owner or operator of the Assets to liability in favor ofany Governmental Authority or other Person as the result of the alleged violationof, or non-compliance with, any Environmental Law by any Seller or anyAffiliate of any Seller with respect to the Assets or require the owner oroperator of the Assets to remediate, remove, or respond to an EnvironmentalCondition, or a threatened Environmental Condition, on or affecting the Assets,or (iv) otherwise adversely affect the Assets or the ability of Sellers toconsummate the transactions contemplated in this Agreement. Further, except asotherwise reflected in Schedule 3.1(d), there has been no Release or ThreatenedRelease of Environmental Contaminants at, to, from or about the Assets.

###  

### (e)           Except asotherwise reflected in Schedule 3.1(e), none of the Leases, RealProperty Interests, or Contracts is subject to a preferential right to purchase,third Person consent to assignment requirement, right of first refusal, rightof first offer, or similar right or restriction.

###  

### (f)            Except forapprovals by Governmental Authorities customarily obtained after the Closing,no authorization, consent, approval, exemption, franchise, permit, or licenseof, or filing with, any Governmental Authority is required to authorize, or isotherwise required by any Governmental Authority in connection with, the validexecution and delivery by Sellers of this Agreement, the transfer of the Assetsto Buyer, or the performance by Sellers of their other obligations hereunder.

###  

### (g)           Each Leaseis in full force and effect. Each Seller has, in all material respects,fulfilled all requirements for filings, certificates, consents, approvals,disclosures, and similar matters contained in the Leases and applicable Law,and each Seller is fully qualified to own, operate, and transfer the Leasesunder the terms thereof and applicable Law. No Seller is in material breach ormaterial default, and there has occurred no event, fact, or circumstance that,with the lapse of time or the giving of notice, or both, would constitute sucha material breach or material default by any Seller, with respect to any termsof any Lease, and, to Sellers’ Knowledge, no other Person owning an interestin, or serving as operator of, any Lease is in material breach or materialdefault with respect to any of its obligations thereunder. No lessor under anyLease has given or, to Sellers’ Knowledge, threatened to give notice of anyaction to terminate, cancel, rescind, repudiate, or procure a judicialreformation of any Lease or any provision thereof. The Leases contain noexpress obligations on the part of the owner(s) thereof, applicable after theEffective Time, to engage in continuous or other development operations inorder to maintain any Lease. The Leases contain no provisions that increase theroyalty share of the lessor thereunder, except such increases as are reflectedin the Net Revenue Interests for the Leases and Wells set forth in Exhibit B.Each Seller has correctly made, or caused to be correctly made, all payments,including,

 

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### withoutlimitation, royalties, rentals, shut-in well payments, and other leasemaintenance payments, due in respect of the Leases thereunder.

###  

### (h)           Each of theReal Property Interests is in full force and effect. Each Seller has, in allmaterial respects, fulfilled all requirements for filings, certificates,consents, approvals, disclosures, and similar matters contained in the RealProperty Interests and applicable Law, and each Seller is fully qualified toown, operate, and transfer the Real Property Interests under the terms thereofand applicable Law. No Seller is in material breach or material default, andthere has occurred no event, fact, or circumstance that, with the lapse of timeor the giving of notice, or both, would constitute such a material breach ormaterial default by any Seller, with respect to any of its obligations underany Real Property Interest, and, to Sellers’ Knowledge, no other Person owningan interest in any Real Property Interest or serving as operator of anyProperty is in material breach or material default with respect to any of itsobligations thereunder. No grantor, lessor, licensor, or other counterpartyunder any Real Property Interest has given or, to Sellers’ Knowledge,threatened to give notice of any action to terminate, cancel, rescind,repudiate, or procure a judicial reformation of any Real Property Interest orany provision thereof. Each Seller has correctly made, or caused to becorrectly made, all rental and other payments due in respect of the RealProperty Interests thereunder.

###  

### (i)            Sellers havefurnished to Buyer true and correct copies of all of the Contracts described onExhibit E, and there are no contracts, agreements, instruments, ordocuments affecting the Assets other than the Contracts described on ExhibitE. With respect to the Contracts: (i) all Contracts are in full force andeffect; (ii) no Seller is in material breach or material default, and there hasoccurred no event, fact, or circumstance that, with the lapse of time or thegiving of notice, or both, would constitute such a material breach or materialdefault by any Seller, with respect to the terms of any Contract; (iii) toSellers’ Knowledge, no other party is in material breach or material defaultwith respect to the terms of any Contract; and (iv) no Seller and, to Sellers’Knowledge, no other party to any Contract has given or threatened to givenotice of any action to terminate, cancel, rescind, or procure a judicialreformation of any Contract or any provision thereof. The Assets are notsubject to any Contract containing an area of mutual interest, maintenance ofuniform interest, “before payout” or “after payout” reversion or conversion, orother provision under which Seller or Buyer may be obligated to makeassignments to third Persons of interests in any Asset after the EffectiveTime, except such assignments of interests as are reflected in Schedule3.1(i) and are taken into account in the Working Interests and Net RevenueInterests set forth for the Leases and Wells in Exhibit B. Except asotherwise shown on Schedule 3.1(i), the Assets are not subject to anytax partnership agreement.

###  

### (j)            The Permitsdescribed on Exhibit F constitute all necessary Permits affecting orpertaining to the Assets. All Transferable Permits are also described on ExhibitF. Each Seller or, to Sellers’ Knowledge, each operator of the Assets, asapplicable, has complied in all material respects with all Laws and Permitsrelating to the Assets, including, without limitation, Environmental Laws andLaws requiring the provision of surety bonds or other forms of security orfinancial assurance with respect to the performance of operations (including,without limitation, plugging and abandonment

 

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### operations)on the Assets. Each Seller or, to Sellers’ Knowledge, each operator of the Assets,as applicable, has all Permits required in connection with the ownership andoperation of the Assets (including those required under Environmental Laws),and has properly made all filings necessary or appropriate to obtain suchPermits. All of such Permits and filings are in full force and effect and tothe extent necessary, Sellers have filed for renewal of any such Permits in amanner so that the expiring Permits remain in full force and effect during thependency of the application for renewal. No Seller and, to Sellers’ Knowledge,no other Person has received notice from any Governmental Authority or otherPerson that any such applicable Law, Permit, or filing has been violated or notcomplied with in respect to the Assets by any Seller or other Person.

###  

### (k)           As of thedate of this Agreement, to Sellers’ Knowledge the Wells described on ExhibitB are the only wells for the production of Hydrocarbons currently locatedon the Leases. All of such Wells have been drilled, completed, and operatedwithin the boundaries of the Leases or within the limits otherwise permitted bycontract and by applicable Law and in compliance with the provisions of theapplicable Contracts and all applicable Laws. The production of Hydrocarbonsfrom such Wells has not been in excess of the allowable production establishedfor each Well. All Hydrocarbon wells located on the Leases that havepermanently ceased the production of Hydrocarbons in paying quantities, as wellas all plants, pipelines, personal property, pits, equipment, materials,appurtenances, and facilities located on or used in connection with the Leases,Wells, and Real Property Interests and that Sellers have abandoned or otherwisepermanently ceased to use, have been plugged and/or abandoned, and all relatedsalvage, site clearance, and surface restoration operations have beencompleted, in accordance with applicable Laws (including, without limitation,Environmental Laws) and in accordance with the terms of the Leases, and allcosts and expenses incurred in connection therewith have been paid in full. Exceptas otherwise provided in Schedule 3.1(k), none of the Wells has beenplugged and abandoned.

###  

### (l)            Except forthe call on production described on Schedule 3.1(g), there are nocalls on production, options to purchase, or similar rights in effect withrespect to any portion of Sellers’ shares of the Hydrocarbons, and allContracts for the sale of Hydrocarbons are terminable without penalty on nomore than thirty (30) days’ prior notice. Sellers are currently receiving theprices provided for under such sales Contracts with respect to the Hydrocarbons.All proceeds from the sale of Hydrocarbons attributable to the interests ofSellers in the Assets have been and are being disbursed to Sellers underappropriate division orders, transfer orders, or similar documents signed by orotherwise binding on Sellers, and no portion of any such proceeds is being heldin suspense, subject to a Claim for refund by the purchaser, used as an offsetor as collateral for other obligations (whether disputed or undisputed), orotherwise not being paid to Sellers as it becomes due in the ordinary course ofbusiness.

###  

### (m)          Except asshown in Schedule 3.1(m), as of the date of execution of this Agreement,no Seller has a Claim constituting an Asset, or is subject to any obligationconstituting an Assumed Liability, with respect to any Imbalance that relatesto any of the Assets. Except for the Imbalances (if any) shown in Schedule3.1(m) as to which Sellers are subject to an obligation constituting anAssumed Liability, no Seller is

 

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### on thedate of execution of this Agreement, or will be after the Effective Time,obligated by virtue of any prepayment made under any sales Contract or otherContract containing a “take-or-pay” clause, or under any production payment,forward sale, balancing, deferred production, or similar arrangement, todeliver Hydrocarbons produced from or allocable to any Asset at some futuretime without receiving full payment therefor at or after the time of delivery.

###  

### (n)           Each Sellerhas paid its respective proportionate share of all amounts owed by each Sellerin connection with the Assets for which each Seller has received invoices fromthe operator(s) thereof, and there are no outstanding calls or payments duefrom any Seller under the terms of the Contracts. Schedule 3.1(n) containsa true and complete list and description, as of the date of execution of thisAgreement, of all authorities for expenditures, plans of exploration and/ordevelopment, and other commitments as to which any Seller has become obligatedregarding drilling, reworking, or other operations or other capitalexpenditures on or relating to the Assets for which all of the activities orexpenditures anticipated in such AFEs, plans, or commitments have not beencompleted prior to the date of this Agreement. Except as set forth in Schedule3.1(n), neither the Leases nor the Contracts contain any expresscontractual obligation to drill additional Hydrocarbon wells or engage in otheroperations on the Assets as to which any Seller has become obligated, exceptfor obligations arising under offset well provisions and obligations arisingunder Contracts that allow the parties thereto to elect whether to participate.There are no material operations on the Leases under any of the Contracts withrespect to which any Seller or any other Person has become a non-consentingparty, except for those operations set forth on Schedule 3.1(n), theeffects of which are reflected in the Working Interests and Net RevenueInterests set forth for the Leases and Wells in Exhibit B.

###  

### (o)           Except withrespect to those Property-Related Taxes prorated between Sellers and Buyer asprovided in Section 10.3, during the period of Sellers’ ownership of theAssets, all Property-Related Taxes imposed or assessed with respect to,measured by, charged against, or attributable to the Assets, or the ownershipthereof, or the production, processing, gathering, treatment, transportation,and marketing of Hydrocarbons therefrom or allocable thereto, in each case thatbecame due and payable prior to the Effective Time have been properly paid.

###  

### (p)           No Sellerhas engaged any financial advisor, broker, or finder, or incurred anyliability, contingent or otherwise, in favor of any such other Person relatingto the transactions contemplated in this Agreement.

###  

### (q)           There are nobankruptcy, insolvency, reorganization, or arrangement proceedings pending,being contemplated by, or to Sellers’ Knowledge, threatened against any Selleror any Affiliate that controls any Seller.

###  

### (r)            Schedule3.1(r) lists all insurance policies or self-insurance programsmaintained in effect by Sellers or their Affiliates with respect to the Assetsas of the date of execution of this Agreement. Sellers, or their Affiliates,have paid all premiums required under, and are otherwise in compliance with,the terms of all such

 

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### insurancepolicies or self-insurance programs, all of which policies or programs, orrenewals thereof, have been during the period of Sellers’ ownership of theAssets, and are as of the date of execution of this Agreement, in full forceand effect.

###  

### (s)           SinceFebruary 1, 2006, there has not occurred a Material Adverse Change except forthe grassfires occurring in the month of March, 2006, of which the Buyer hasknowledge.

###  

### (t)            Theinformation relating to Sellers and the Assets which has been made available toBuyer is not false or misleading with respect to any material fact and does notomit any material fact necessary in order to make the statements therein notmisleading.

###  

## 3.2           Representationsand Warranties of Buyer. Buyer represents and warrants to Selleras follows:

##  

### (a)           Buyer is acorporation duly organized, validly existing, and in good standing under theLaws of the State of Delaware. Buyer has all requisite power and authority toown and operate its property and to carry on its business as now conducted.

###  

### (b)           Buyer hasfull capacity, power, and authority to enter into and perform this Agreementand the transactions contemplated herein. The execution, delivery, andperformance by Buyer of this Agreement have been duly and validly authorizedand approved by all necessary action of Buyer. This Agreement and the documentsexecuted in connection herewith are, or upon their execution and delivery willbe, the valid and binding obligations of Buyer and enforceable against Buyer inaccordance with their terms, subject to the effects of bankruptcy, insolvency,reorganization, moratorium, and similar Laws, as well as to principles ofequity (regardless of whether such enforceability is considered in a proceedingin equity or at law).

###  

### (c)           Theexecution, delivery, and performance by Buyer of this Agreement and theconsummation of the transactions contemplated herein will not (i) conflict withor result in a breach of any provision of the organizational documents ofBuyer, (ii) result in a default or the creation of any Lien or give rise to anyright of termination, cancellation, or acceleration under any of the terms ofany note, bond, mortgage, indenture, license, or other agreement to which Buyeris a party or by which Buyer or any of its property may be bound, or (iii)violate any order, writ, injunction, judgment, decree, or Law applicable toBuyer or its property.

###  

### (d)           There is noClaim by any Person or Governmental Authority (including, without limitation,expropriation or forfeiture proceedings), and no legal, administrative, orarbitration proceeding pending or, to Buyer’s Knowledge, threatened againstBuyer, or to which Buyer is a party, that reasonably may be expected to have amaterial adverse effect upon the ability of Buyer to consummate thetransactions contemplated in this Agreement.

 

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### (e)           Except forapprovals by Governmental Authorities customarily obtained after the Closing,no authorization, consent, approval, exemption, franchise, permit, or licenseof, or filing with, any Governmental Authority or any other Person is requiredto authorize, or is otherwise required in connection with, the valid executionand delivery by Buyer of this Agreement or the performance by Buyer of itsobligations hereunder and thereunder.

###  

### (f)            Buyer hasnot engaged any other financial advisor, broker, agent or finder, or incurredany liability, contingent or otherwise, in favor of any other such Personrelating to the transactions contemplated by this Agreement.

###  

### (g)           There are nobankruptcy, insolvency, reorganization, or arrangement proceedings pending,being contemplated by, or, to Buyer’s Knowledge, threatened against Buyer orany Affiliate that controls Buyer.

###  

### (h)           Buyer isacquiring the Assets for its own account, for investment, and not with a viewto, or for offer or resale in connection with, a distribution thereof(including, without limitation, the transfer of fractional undivided intereststherein) within the meaning of the Securities Act and the rules and regulationspromulgated thereunder, or a distribution thereof in violation of anyapplicable securities Law. If, in the future, Buyer sells, transfers, orotherwise disposes of the Assets, or any portion thereof, or any fractionalundivided interest therein, Buyer will do so in full compliance with anyapplicable securities Laws.

###  

## 3.3           Disclaimers. To theextent required by applicable Law to be operative, the disclaimers of certainwarranties contained in this Section 3.3 are “conspicuous disclaimers”for purposes of any applicable Law. **EXCEPT ASOTHERWISE PROVIDED IN THIS AGREEMENT AND THE CONVEYANCE, BUYER AGREES THATSELLERS ARE CONVEYING THE ASSETS WITHOUT REPRESENTATION, WARRANTY, ORINDEMNITY, EITHER EXPRESSED OR IMPLIED AT COMMON LAW, BY STATUTE, OR OTHERWISE(ALL OF WHICH SELLERS HEREBY DISCLAIM), RELATING TO (i) TITLE, (ii)MERCHANTABILITY, DESIGN, OR QUALITY, OR (iii) FITNESS FOR ANY PARTICULARPURPOSE.**

##  

# **ARTICLE IV.ACCESS; DUE DILIGENCE**

#  

## 4.1           Access toRecords. From and after the date of execution hereof through theClosing Date, Sellers shall provide to Buyer and its representatives fullaccess, during normal business hours (and, if reasonably requested, such othertimes as Buyer may deem necessary to complete its due diligence within the timeperiod provided herein) at Sellers’ offices, to all books, records, documents,and information of every kind and character (including, without limitation,originals or photocopies, as available, of the Leases, the Real PropertyInterests, the Contracts, the Permits, the Records, and the Transferable Data)in Sellers’ possession relating in any way to the Assets. Sellers shall alsocause their employees, counsel, accountants, and other consultants to cooperatewith and assist

 

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## Buyer inconnection with such due diligence review. Unless prohibited from doing so byconfidentiality or other contractual arrangements between any Seller and thirdPersons, Buyer shall have the right to photocopy such books, records,documents, and information, or any portion thereof, at Buyer’s expense. IfBuyer requests information not in the possession of Sellers, Sellers shall usereasonable efforts to obtain the requested information, at Buyer’s expense,from the applicable operators or other Persons.

##  

## 4.2           Operationand Environmental Assessment. From and after the date of executionhereof through the Closing Date, Sellers shall afford, or shall use reasonableefforts to cause relevant operators or other Persons to afford, to Buyer andits authorized representatives, at reasonable times and at the sole cost, risk,and expense of Buyer or its representatives, as applicable, reasonable accessto and entry upon all of the Leases, Wells, and Real Property Interests for thepurposes of Buyer’s on-site inspections and inventories of the Assets(including, without limitation, the witnessing of well tests, the examinationof well logs and other geological and geophysical data, and the performance ofsoil, water and groundwater tests and such other tests, inspections,examinations, investigations, and studies as Buyer deems necessary to permitBuyer to prepare reserve engineering and other reports relating to, and assessthe operational and environmental condition of, the Assets) and reasonableaccess to any employees or contract personnel that have been involved with the operation,maintenance, or development of the Assets.

##  

## 4.3           Defects,Environmental Conditions and Related Adjustments.

##  

### (a)           From time totime on or before the Closing Date, but in no event later than five (5)Business Days prior to the Scheduled Closing Date, Buyer may give to Sellerswritten notice of any claimed Defect or Environmental Condition discovered byBuyer in its due diligence review of the Assets. Each such notice shall setforth (i) a detailed description of the relevant Defect or Environmental Conditionand, as applicable, the Asset affected thereby, (ii) the Defect Amount orRemediation Estimate applicable thereto as determined by Buyer, and (iii) thespecific documentation or action that Buyer requests to cure or remedy suchDefect or Environmental Condition. In addition, if Sellers are aware or becomeaware, between the date of execution of this Agreement and the Closing Date, ofany Environmental Condition affecting any Asset, Sellers shall provide to Buyerwritten notice of such fact no later than three (3) Business Days after theexecution of this Agreement or Sellers’ discovery of such EnvironmentalCondition, whichever comes first. If such three-Business Day period wouldexpire after the Closing Date, the Closing Date shall be deferred, at aminimum, until the expiration of such three-Business Day period. AnyEnvironmental Condition thus brought to Buyer’s attention by Sellers shall bedeemed to have been asserted by Buyer in a timely manner as provided in this Section4.3(a). Defects and Environmental Conditions discovered by Buyer in its duediligence pertaining to the Assets or those existing but not known to Seller atclosing and not asserted in a timely manner as provided in this Section4.3(a) shall be deemed to have been waived by Buyer, and, together with allother Defects and Environmental Conditions other than Retained EnvironmentalLiabilities (defined on Schedule 1.1) shall become Assumed Liabilities forpurposes hereof.

 

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### (b)           Sellersshall have the first right and option, but not the obligation, to cure orremedy all such Defects or Environmental Conditions at Sellers’ sole cost,risk, and expense (and in the case of an Environmental Condition, in accordancewith applicable Environmental Laws, consistent with the current use of theAsset and in a manner reasonably acceptable to Buyer). If Sellers elect to cureor remedy a Defect or Environmental Condition, Sellers shall provide to Buyerwritten notice of such fact no later than three (3) Business Days after theirreceipt of Buyer’s notice. The failure of Sellers to give such notice to Buyerwithin such three-Business Day period shall constitute an election by Sellersnot to cure or remedy the relevant Defect or Environmental Condition.

###  

### (c)           If Sellerselect to cure or remedy a Defect or Environmental Condition, Sellers willcommence such curative activities or remediation as soon as reasonablypracticable after their receipt of Buyer’s notice and shall promptly anddiligently continue such efforts until such Defect or Environmental Conditionhas been fully cured or remediated (in the case of an Environmental Condition,in accordance with applicable Environmental Laws), consistent with the currentuse of the Asset and in a manner reasonably acceptable to Buyers. If Sellers donot complete such curative activities or remediation prior to the Closing Date,the Closing Date shall be extended, without further action by the Parties, fora period of up to sixty (60) days to permit Sellers to complete such curativeactivities or remediation. If Sellers complete such curative activities orremediation within such sixty-day period, Sellers and Buyer shall close thetransactions contemplated herein at such time and place as the Parties mayagree. If Sellers do not complete such curative activities or remediation priorto the expiration of such sixty-day period, (i) Buyer may elect to offerSellers an extension of time within which to complete such curative or remedialactions; or (ii) in the absence of such an extension, Sections 4.3(d)and 4.3(e), or Section 4.3(f), as applicable, will govern.

###  

### (d)           If Sellerselect, or are deemed to have elected, not to cure a Defect asserted in a timelymanner under Section 4.3(a), or if Sellers are unable to cure a Defectin a timely manner as provided in Section 4.3(c), then except asprovided hereinafter, Buyer shall accept the affected Asset subject to suchuncured Defect, proceed to Closing, and receive a reduction in the BaseConsideration equal to the Defect Amount applicable to such Defect as agreedupon by Sellers and Buyer or determined by arbitration as provided in Section4.3(g), in which case, such Defect shall become an Assumed Liability forpurposes hereof. Notwithstanding the preceding terms of this Section 4.3(d),if the applicable Defect Amount as agreed upon by Sellers and Buyer ordetermined by arbitration as provided in Section 4.3(g) is greater thanor equal to twenty-five percent (25%) of the Allocated Value of the affectedAsset, Buyer may elect to exclude the affected Asset from the Assets conveyedto Buyer at Closing, and the Base Consideration shall be reduced by an amountequal to the full Allocated Value of such Asset.

###  

### (e)           If an Asset(including, without limitation, a Contract) is subject to a preferential rightto purchase, right of first refusal, right of first offer, or similar rightthat is exercised prior to the Closing, or a third Person consent to assignmentrequired to be obtained before the relevant Asset may be assigned and that isnot obtained prior to the Closing, Sellers shall be deemed to have suffered acomplete failure of title with respect

 

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### to theaffected Asset, such Asset shall be excluded from the Assets conveyed to Buyerat the Closing, the Base Consideration shall be reduced by an amount equal tothe full Allocated Value of the affected Asset, and, in the case of such apreferential right to purchase or similar right, Sellers shall be entitled toretain all proceeds paid for the affected Asset by the Person exercising suchpreferential right to purchase or similar right. If Buyer purchases at theClosing an Asset burdened by a preferential right to purchase or similar rightthat has not been exercised as of the Closing Date, regardless of whether thetime period for the exercise of such right has expired, no reduction of theAdjusted Consideration paid at the Closing shall be made with respect thereto. If,for any reason, such preferential right to purchase or similar right issuccessfully exercised by the holder thereof after the Closing, Buyer shall beentitled to retain all proceeds paid for the affected Asset by the holder ofthe relevant preferential right to purchase or similar right, and Sellers shallpay to Buyer, in cash, an amount equal to the excess (if any) of theAllocated Value of such Asset (adjusted as provided in Sections 2.3(c)(ii)and 2.3(d)(ii) and net of applicable Property-Related Taxes) overthe proceeds received by Buyer from the holder of such preferential right topurchase.

###  

### (f)            If Sellerselect, or are deemed to have elected, not to remedy an Environmental Conditionasserted in a timely manner under Section 4.3(a), or if Sellers areunable to remedy an Environmental Condition in a timely manner as provided in Section4.3(c), then except as provided hereinafter, Buyer shall accept theaffected Asset subject to such unremedied Environmental Condition, proceed toClosing, and receive a reduction in the Base Consideration equal to the actualcosts, including, without limitation, Liabilities (or in the absence of actualcosts, the Remediation Estimate agreed to by Sellers and Buyer or determined byarbitration as provided in Section 4.3(g)), to remedy the relevantEnvironmental Condition, in which case, such unremediated EnvironmentalCondition shall become an Assumed Liability for purposes hereof. Notwithstandingthe preceding terms of this Section 4.3(f), if the aggregate actualcosts, including, without limitation, Liabilities (or in the absence of actualcosts, the Remediation Estimate agreed upon by Sellers and Buyer or determinedby arbitration as provided in Section 4.3(g)), to remedy anEnvironmental Condition asserted by Buyer in a timely manner under Section4.3(a) is greater than or equal to twenty-five percent (25%) of theAllocated Value of the affected Asset, Buyer may elect to exclude the affectedAsset from the Assets conveyed to Buyer at Closing, and the Base Considerationshall be reduced by an amount equal to the full Allocated Value of such Asset.

###  

### (g)           Sellers andBuyer shall endeavor, in good faith, to agree on the existence of all claimedDefects or Environmental Conditions, the methods of curing or remedying suchDefects or Environmental Conditions, and the Defect Amounts or RemediationEstimates applicable thereto. In the event of a dispute concerning any of suchmatters that is not resolved prior to the Closing, either Buyer or Sellers mayinitiate arbitration of such dispute pursuant to the terms of Section 10.11.In that event, the Closing shall be deferred until three (3) Business Daysafter the issuance of the decision of the arbitrators as to such dispute. Followingthe issuance of the arbitrator’s decision, Sellers and Buyer shall have therights and options provided in Section 4.3(d) and Section 4.3(e),or Section 4.3(f), as applicable.

 

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# **ARTICLE V.****OTHER MATTERS PRIOR TO CLOSING**

#  

## 5.1           Operations. Throughthe Possession Time, Sellers shall, to the extent within their reasonablecontrol: (a) cause the Assets to be maintained and operated in a good andworkmanlike manner consistent with past practices and in compliance withapplicable Laws; (b) obtain the prior written consent of Buyer as to allmaterial decisions relating to the Assets (other than decisions required forsafety purposes or by other emergencies), including, without limitation, (i) allcontracts or agreements regarding the sale of Hydrocarbons with terms of ninety(90) days or more, (ii) proposed expenditures after the date of thisAgreement related to any individual Asset, except for expenditures in responseto the grassfires referred to in Section 3.2(b)(iii), in an amountgreater than U.S. $25,000.00, net to Sellers’ interests, (iii) all farmoutor farmin proposals or agreements, (iv) all operations as to which anySeller or any other co-owner of an Asset proposes not to participate, (v) theplugging and abandonment of any Well or Personal Property included in theAssets, (vi) the amendment, release, or abandonment of any Lease, orportion thereof, (vii) the waiver, compromise, or settlement of any rightor Claim pertaining to the Assets, (viii) all amendments to, or waivers ofrights under, or termination of any Real Property Interest or Contract, and (ix) theinitiation of any proceeding before any Governmental Authority pertaining tothe Assets; (c) perform all material obligations of Sellers under theLeases, Real Property Interests, Contracts, and Permits; (d) promptlynotify Buyer of (i) any notice or threatened notice of which Sellersbecome aware relating to any default, inquiry into any possible default, oraction to alter, terminate, rescind, repudiate, or procure a judicialreformation of any Lease, Real Property Interest, Contract, or Permit, or anyprovision thereof, (ii) any new suit, action, or other proceedings beforeany court or Governmental Authority relating to the Assets, and (iii) anyother event, fact, or circumstance of which Sellers become aware that may materiallyimpair the value of the Assets or the ability of Sellers to consummate thetransactions contemplated herein; (f) maintain all Permits in full forceand effect (including making application for renewal of Permits if required forsuch Permits to remain in full force and effect during the pendency of theapplication) and make or give all notifications, filings, consents, orapprovals from, to, or with all Governmental Authorities, and take all otheractions reasonably requested by Buyer that are necessary for, and cooperatewith Buyer in obtaining, the issuance, assignment, or transfer, as the case may be,by each such Governmental Authority of such Permits as may be necessaryfor Buyer own and operate the Assets after the Closing; (g) maintain ineffect insurance with respect to the Assets providing the same type ofcoverage, in the same amounts, and with the same deductibles as the insurancemaintained in effect by Sellers with respect to the Assets and described on Schedule 3.1(r);(h) timely pay and discharge when due all costs and expenses incurred inconnection with the Assets, except to the extent contested in good faith bySellers utilizing appropriate actions, and otherwise keep the Assets free ofLiens that do not constitute Permitted Encumbrances; and (i) not mortgage,pledge, encumber, dedicate, or sell, or agree to mortgage, pledge, encumber,dedicate, or sell, any portion of the Assets except for the disposition ofHydrocarbons in the ordinary course of Sellers’ business pursuant to Contractsin effect on the date hereof.

 

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## 5.2           CasualtyEvent.

##  

### (a)           Sellersshall give Buyer prompt written notice of any Casualty Event that occurs withrespect to any Asset between the date of execution hereof and the Closing Date,together with a description of the applicable insurance coverage and anestimate of Sellers’ exposure with respect to such Casualty Event. Sellersshall have the first right and option to repair or, in the case of PersonalProperty, replace with items of equivalent quality and value, any Asset damagedor taken by the relevant Casualty Event. If Sellers elect to repair or replacesuch damaged or taken Asset, Sellers shall provide to Buyer written notice ofsuch fact no later than three (3) Business Days after the occurrence ofthe relevant Casualty Event. The failure of Sellers to give such a notice toBuyer within such three-Business Day period shall constitute an election bySellers not to repair the damage caused by such Casualty Event or replace thedamaged or taken Asset. If such three-Business Day period would expire afterthe Closing Date, the Closing Date shall be deferred, at a minimum, until theexpiration of such three-Business Day period.

###  

### (b)           If Sellerselect to repair the damage caused by the relevant Casualty Event or replace theAsset damaged or taken, Sellers will commence such repair or replacement assoon as reasonably practicable after the occurrence of such Casualty Event andshall promptly and diligently continue such efforts until such damaged or takenAsset has been fully repaired or replaced with an item of comparable qualityand value. If Sellers do not complete such repair or replace the damaged ortaken Asset prior to the Closing Date, the Closing Date shall be extended,without further action by the Parties, for a period of up to sixty (60) days topermit Sellers to complete the repair or replacement of the damaged or takenAsset. If Sellers complete the repair or replacement of the damaged or takenAsset prior to the expiration of such sixty-day period, Sellers and Buyer shallclose the transactions contemplated herein at such time and place as theParties may agree. If Sellers do not complete the repair or replacement ofthe damaged or taken Asset prior to the expiration of such sixty-day period, (i) Buyermay elect to offer Sellers an extension of time within which to completesuch remedial actions; or (ii) in the absence of such an extension, Section 5.2(c) willgovern.

###  

### (c)           If Sellerselect, or are deemed to have elected, not to repair or replace the damaged ortaken Asset, or if Sellers are unable to repair or replace the damaged or takenAsset in a timely manner as provided in Section 5.2(b), then exceptas provided hereinafter, Buyer shall accept the affected Asset subject to suchunremedied Casualty Event, proceed to Closing, and receive a reduction in theBase Consideration equal to the actual costs (or in the absence of actualcosts, the estimated costs, as agreed to by Sellers and Buyer or determined byarbitration as provided below in Section 5.2(d)), to repair thedamaged or taken Asset or to replace same with an item of comparable qualityand value, in which case such Casualty Event shall become an Assumed Liabilityfor purposes hereof. Notwithstanding the preceding terms of this Section 5.2(c),if the actual costs (or in the absence of actual costs, the estimated costs, asagreed to by Sellers and Buyer or determined by arbitration as provided in Section 5.2(d)),to repair or replace the damaged or taken Asset are greater than or equal totwenty percent (20%) of the Allocated Value of the affected Asset, Buyer may electto exclude the affected Asset

 

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### from the Assets conveyed to Buyer at Closing,and the Base Consideration shall be reduced by an amount equal to the fullAllocated Value of such Asset.

###  

### (d)           In the eventof a dispute concerning the estimated cost to repair or replace a damaged ortaken Asset as provided in this Section 5.2 that is not resolvedprior to the Closing, either Buyer or Sellers may initiate arbitration ofsuch dispute pursuant to the terms of Section 10.11. In that event,the Closing shall be deferred until three(3) Business Days after theissuance of the decision of the arbitrators as to such dispute. Following theissuance of the arbitrator’s decision, Sellers and Buyer shall have the rightsand options provided in Section 5.2(c).

###  

## 5.3           Imbalancesand Other Matters. As soon as reasonably practicable, butin no event later than ten (10) Business Days after, the Effective Time,Sellers shall provide to Buyer written notice setting forth the status andextent of any Imbalances, as well as any “take-or-pay”, prepayment, forwardsale, production payment, deferred production, and similar arrangements, ineffect with respect to the Assets as of the Effective Time. For purposes of theadjustment of the Base Consideration pursuant to Sections 2.3(c) and2.3(d), such Imbalances and other arrangements shall be valued basedupon the contract price applicable to the relevant category of Hydrocarbons (orif there is no contract price, the market value thereof) as of the EffectiveTime. In the event of a dispute concerning the market value of any suchHydrocarbons that is not resolved prior to the Closing, either Buyer or Sellersmay initiate arbitration of such dispute pursuant to the terms of Section 10.11.In that event, if necessary, the Closing shall be deferred until three (3) BusinessDays after the issuance of the decision of the arbitrators as to such dispute.

##  

## 5.4           Publicity. Sellersand Buyer shall consult with each other with regard to all press releases orother public or private announcements issued or made at or after the date ofexecution hereof concerning this Agreement or the transactions contemplatedherein, and, except as may be required by applicable Laws or theapplicable rules and regulations of any stock exchange, neither Buyer norSellers shall issue any such press release or other publicity without the priorwritten consent of the other party, which shall not be unreasonably withheld.

##  

## 5.5           Compliancewith Conditions. Promptly following the execution ofthis Agreement, Sellers shall send to the holder of each preferential right topurchase, right of first refusal, right of first offer, or similar rightburdening an Asset and each Person whose consent to an assignment of an Assetis required prior to the Closing such written notice concerning thetransactions contemplated in this Agreement as is required under the terms ofthe document or instrument creating such right or requiring such consent,requesting, as applicable, the waiver of the relevant right or the granting ofthe required consent. In addition, each Party will proceed diligently to causeall of the conditions to the other Party’s obligations to close to besatisfied. If the conditions to either Party’s obligations to close have beensatisfied, or expressly waived by such Party, in a timely manner as providedherein, and such Party refuses to close, the Party refusing to close, at theoption of the other Party, shall be deemed to have breached this Agreement.

 

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## 5.6           Maintenanceof Existence. Until the Closing, Buyer and eachSeller shall maintain its existence and its rights and franchises and procurethe extension or renewal of any right, franchise, or privilege expiring as theresult of the lapse of time.

##  

## 5.7           Mutual Assurances. Subject tothe terms of this Agreement, each Party will use reasonable commercial effortsto take, or to cause to be taken, all actions and to do, or cause to be done,all things necessary, proper, or advisable under applicable Laws to consummate andmake effective the transactions contemplated by this Agreement, including (a) cooperationin determining whether any action, approval, or waiver by or in respect of, orfiling with, any Governmental Authority is required in connection with theconsummation of the transactions contemplated by this Agreement; (b) cooperationin seeking and obtaining any such actions, approvals, waivers, or filings; and (c) theexecution of any additional instruments necessary to consummate thetransactions contemplated hereby.

##  

## 5.8           Notificationof Certain Matters. Each Party shall give prompt notice tothe other Party of (a) the occurrence or nonoccurrence of any event thatwould be likely to cause any representation or warranty of such Party containedin this Agreement to be untrue or inaccurate in any material respect at orprior to the Closing Date and (b) any material failure of such Party tocomply with or satisfy any covenant, condition, or agreement to be compliedwith or satisfied by it hereunder; provided, however, that the delivery of anynotice pursuant to this Section 5.8 shall not limit or otherwiseaffect the remedies available hereunder to the Party receiving such notice.

##  

## 5.9           Designationas Operator. On the Closing Date, except asotherwise provided in Section 8.5 or otherwise agreed by theParties, Sellers shall resign as operator of all Assets as to which any Sellerhas served as operator prior to the Closing. Sellers do not warrant orguarantee that, after the Closing, Buyer will become the operator of any Assetoperated by any Seller or prior to the Closing as to which there are co-ownersof the relevant Lease(s). With respect to each such Asset, Sellers shallsupport Buyer in Buyer’s efforts to be named replacement operator of suchAssets under the terms of the applicable Contracts effective as of thePossession Time (or as soon thereafter as is reasonably practicable) and willuse reasonable commercial efforts to obtain the votes of the other co-owners inthe relevant Lease(s) in favor of such election. With respect to each Assetowned in its entirety by a Seller, within five (5) Business Days after theClosing, and with respect to each Asset as to which there are co-owners of therelevant Lease(s), within five (5) Business Days after Buyer is namedreplacement operator under the terms of the applicable Contracts, Sellers andBuyer shall make all necessary filings and take all other actions necessary tocause the resignation of any Seller as operator and Buyer’s designation as thereplacement operator of such Assets to be recognized and, if required, approvedby all relevant Governmental Authorities. In each case, Sellers shall usereasonable commercial efforts to assist Buyer in assuming the timely operationand management of such Assets.

 

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# **ARTICLE VI.CONDITIONS; TERMINATION; REMEDIES**

#  

## 6.1           ConditionsPrecedent to Sellers’ Obligation to Close. Allobligations of Sellers under this Agreement are subject, at Sellers’ option, tothe fulfillment, on or prior to the Closing Date, of each of the followingconditions:

##  

### (a)           each andevery representation and warranty of Buyer under this Agreement shall be trueand accurate in all material respects (and in all respects, in the case ofrepresentations and warranties qualified by materiality) as of the date whenmade and shall be deemed to be made again at and as of the Closing Date andshall then be true and accurate in all material respects (and in all respects,in the case of representations and warranties qualified by materiality), exceptthat if such representations and warranties speak as of an earlier date, theyshall be true and correct as of such date;

###  

### (b)           Buyer shallhave performed and complied in all material respects with each and everycovenant, agreement, and condition required by this Agreement to be performedor complied with, executed and delivered all documents required to bedelivered, and otherwise taken all actions required to be taken, in each caseby Buyer on or prior to the Closing Date;

###  

### (c)           no suit,action, or other proceeding shall be pending or threatened before any court orarbitration tribunal or any Governmental Authority seeking to enjoin, restrain,prohibit, or declare illegal, or seeking substantial damages in connectionwith, the transactions contemplated in this Agreement;

###  

### (d)           Buyer shallhave received all consents, authorizations, waivers, and approvals required tobe obtained prior to the Closing by any court or Governmental Authority underany applicable Law concerning the transactions contemplated herein which mustbe in form reasonably acceptable to Sellers;

###  

### (e)           Buyer shallhave delivered to Sellers a certificate, dated and effective as of the ClosingDate, executed by the president or an authorized vice president of Buyer,certifying to Sellers that on the Closing Date, except for such representationsand warranties that speak as of an earlier date, the representations andwarranties of Buyer contained in this Agreement are true and correct in allmaterial respects (and in all respects, in the case of representations andwarranties qualified by materiality) and all covenants of Buyer containedherein have been performed in all material respects.

###  

## 6.2           ConditionsPrecedent to Buyer’s Obligation to Close. Allobligations of Buyer under this Agreement are subject, at Buyer’s option, tothe fulfillment, on or prior to the Closing Date, of each of the followingconditions:

##  

### (a)           each andevery representation and warranty of Sellers under this Agreement shall be trueand accurate in all material respects (and in all respects, in the case ofrepresentations and warranties qualified by materiality) as of the date whenmade and shall be deemed to be made again at and as of the Closing Date andshall then be true and accurate in all material respects (and in all respects,in the case of representations and

 

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### warranties qualified by materiality), exceptthat if such representations and warranties speak as of an earlier date, theyshall be true and correct as of such date;

###  

### (b)           Sellersshall have performed and complied in all material respects with each and everycovenant, agreement, and condition required by this Agreement to be performedor complied with, executed and delivered all documents required to bedelivered, and otherwise taken all actions required to be taken, in each caseby Sellers on or prior to the Closing Date;

###  

### (c)           no suit,action, or other proceeding shall be pending or threatened before any court orarbitration tribunal or any Governmental Authority seeking to restrain,prohibit, or declare illegal, or seeking substantial damages in connectionwith, the transactions contemplated in this Agreement;

###  

### (d)           Sellersshall have received all consents, authorizations, waivers, and approvals requiredto be obtained prior to the Closing by any court or Governmental Authorityunder any applicable Law concerning the transactions contemplated herein(including, without limitation, all consents and authorizations, if any, fromGovernmental Authorities required to be obtained with respect to theTransferable Permits prior to the Closing) which must be in form reasonablyacceptable to Buyer;

###  

### (e)           Sellersshall have delivered to Buyer all consents to assignment, waivers ofpreferential rights to purchase, and other similar matters (if any) from thirdPersons required to be obtained prior to the Closing under the terms of theLeases, the Real Property Interests, and the Contracts, in each case as aresult of the transactions contemplated in this Agreement;

###  

### (f)            each Sellershall have delivered to Buyer a certificate, dated and effective as of theClosing Date, executed by the president or an authorized vice president of suchSeller, certifying to Buyer that, on the Closing Date, except for suchrepresentations and warranties that speak as of an earlier date, therepresentations and warranties of such Seller contained in this Agreement aretrue and correct in all material respects (and in all respects, in the case ofrepresentations and warranties qualified by materiality) and that all covenantsof Seller contained herein have been performed in all material respects; and

###  

### (g)           Buyer shallhave completed due diligence reviews satisfactory to Buyer with respect to theAssets.

###  

## 6.3           Termination. ThisAgreement may be terminated, and the transactions contemplated herein may beabandoned at any time prior to the Closing:

##  

### (a)           by mutualwritten consent of Sellers and Buyer;

###  

### (b)           by Sellers,at Sellers’ option, if any of the conditions applicable to Buyer set forthabove in Section 6.1 have not been satisfied as provided therein onor before the Scheduled Closing Date;

 

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### (c)           by Buyer, atBuyer’s option, if any of the conditions applicable to Sellers set forth abovein Section 6.2 have not been satisfied as provided therein on orbefore the Scheduled Closing Date; and

###  

### (d)           by Buyer, atBuyer’s option, if the amount by which the Base Consideration would be reducedat the Closing under the terms of either Section 4.3 or Section 5.2,or, in the aggregate, both of such provisions, equals or exceeds fifteenpercent (15%) of the Base Consideration.

###  

## 6.4           Remedies. If thisAgreement is terminated by (a) either Sellers or Buyer pursuant to Section 6.3(a),(b) Sellers pursuant to Section 6.3(b) if the conditionin Section 6.1(c) is not satisfied, (c) Buyer pursuant toSection 6.3(c) if the condition in Section 6.2(c),Section 6.2(g) or Section 6.2(h) is not satisfied,or (d) Buyer pursuant to Section 6.3(d), neither Party shallhave any further liability to the other as the result of such termination. Ifthis Agreement is otherwise terminated pursuant to either Section 6.3(b) orSection 6.3(c), the terminating Party shall be entitled to allremedies available at law or in equity, including, without limitation, theremedy of specific performance. If a Party resorts to legal proceedings toenforce this Agreement or any part thereof, the prevailing Party in suchproceedings shall be entitled to recover all costs incurred by such Party, includingreasonable attorneys’ fees, in addition to any other relief to which such Partymay be entitled.

##  

# **ARTICLE VII.CLOSING**

#  

## 7.1           Closing. TheClosing shall be held at the offices of Haynes and Boone, LLP, 901 Main,Dallas, Texas 75202, at 10:00 A.M., Central Time, on April 28, 2006(the “Scheduled Closing Date”), unless an earlier or later time isselected by agreement of the Parties. The date of the Closing, whenever itoccurs as provided herein, is referred to herein as the “Closing Date.”

##  

## 7.2           PreliminarySettlement Statement. No later than three (3) BusinessDays prior to the Closing Date, Sellers shall prepare and submit to Buyer apreliminary settlement statement (the “Preliminary Settlement Statement”),which sets forth Sellers’ estimate of the Adjusted Consideration, reflectingthe calculation of the Base Consideration in accordance with Section 2.3(b) andSection 2.3(c) and each adjustment and proration and itsmethod of calculation made in accordance with this Agreement as of the date ofpreparation of such Preliminary Settlement Statement, together with thedesignation of Sellers’ account for the wire transfer of such estimatedAdjusted Consideration pursuant to Section 7.3. If, for any reason,Buyer disputes any information contained in the Preliminary SettlementStatement, and Buyer and Sellers are unable to resolve such dispute prior tothe Closing Date, the Parties shall submit the dispute to arbitration pursuantto Section 10.11, and the Closing shall be deferred until three (3) BusinessDays after the issuance of the decision of the arbitrators as to such dispute,and such date shall become the Scheduled Closing Date.

 

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## 7.3           Actions atClosing. At the Closing, Sellers and Buyer shall take the followingactions:

##  

### (a)           Sellers andBuyer shall each execute and deliver (i) the Conveyance in sufficientcounterparts to facilitate recording in all relevant jurisdictions and (ii) thePreliminary Settlement Statement.

###  

### (b)           Buyer shalldeliver to Sellers the estimated Adjusted Consideration reflected in thePreliminary Settlement Statement by bank wire transfer of immediately availableU.S. funds to the accounts designated in the Preliminary Settlement Statementwith each Seller receiving such portion of the Adjusted Consideration on a prorata basis based on the value of the Assets being sold by each Seller ascompared to the value of the Assets in the aggregate.

###  

### (c)           Sellersshall deliver to Buyer (i) releases of all Liens (if any) encumbering theAssets that do not constitute Permitted Encumbrances, (ii) transfer ordersor letters in lieu thereof, on forms provided by Buyer, directing allpurchasers of production to make payment to Buyer of proceeds attributable toHydrocarbons produced from the Assets after the Effective Time, (iii) allconsents, waivers, and other similar matters pertaining to the Assets obtainedby Sellers prior to the Closing pursuant to Section 6.2(d) andSection 6.2(e), and (iv) all undisbursed revenues that Sellersare required to deliver to Buyer under Section 8.3.

###  

### (d)           Sellersshall deliver to Buyer the certificate provided for in Section 6.2(f).

###  

(e)           Buyershall deliver to Sellers all consents, waivers, and other similar matterspertaining to the Assets obtained by Sellers prior to the Closing pursuant to Section 6.1(d),and

 

### (f)            Buyer shalldeliver to Seller the certificate provided for in Section 6.1**(**e).

###  

### (g)           Each Sellershall deliver to Buyer a statement that satisfies the requirements of Treas.Reg. §1.1445-2(b)(2), certifying that each Seller is not a “foreign” Person forfederal income tax purposes.

###  

### (h)           Sellersshall execute and deliver the Sellers’ Affidavit attached hereto as Exhibit H.

###  

### (i)            Sellers andBuyer shall execute such other documents and take such other actions as areprovided for elsewhere in this Agreement or as may be necessary toconsummate the transactions contemplated herein.

###  

## 7.4           Records. At anytime after the Closing, pursuant to Buyer’s reasonable instructions, Sellersshall deliver to Buyer the Records. Buyer shall be entitled to all originalRecords affecting all of the Assets. Sellers may make and retain, at theirexpense, copies of the Records prior to the delivery thereof to Buyer. Buyeragrees to

 

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## maintain all Records until the fifth (5th)anniversary of the Closing Date (or such longer period of time as Sellers may requestfor those Records relevant for tax audit purposes), or, if any of such Recordspertain to a Claim pending at such fifth anniversary date, until such Claim isfinally resolved and the time for all appeals has been exhausted. Buyer willprovide to Sellers reasonable access to the Records for purposes of obtaininginformation for the preparation of tax returns, financial statements, and otherlegitimate business purposes of Sellers.

##  

# **ARTICLE VIII.POST CLOSING MATTERS**

#  

## 8.1           SettlementStatement. On or before ninety (90) days after the Closing Date,Buyer will prepare a final accounting statement, subject to verification bySellers, which sets forth the final calculation and amount of the AdjustedConsideration (including all adjustments thereto) in accordance with Sections2.3(b) and 2.3(c), the calculations used to determine suchamounts, and the actual proration of all other amounts required by thisAgreement (the “Final Settlement Statement”). No later than fifteen (15)days after Sellers’ receipt of the Final Settlement Statement from Buyer (butno earlier than ninety (90) days after the Closing Date), Sellers shall deliverto Buyer written notice setting forth any changes to the Final SettlementStatement proposed by Sellers. On or before fifteen (15) days after Buyer’sreceipt of Sellers’ proposed changes to the Final Settlement Statement, Buyerand Sellers shall agree on the Final Settlement Statement and, as the case may be,shall pay to the other such sums as may be found to be due in the finalaccounting. All amounts paid pursuant to this Section 8.1 shall bedelivered by wire transfer of immediately available U.S. funds to the accountspecified in writing by the relevant Party. If Buyer and Sellers are unable toagree on the Final Settlement Statement on or before fifteen (15) days afterBuyer’s receipt of Seller’s proposed changes thereto, then Buyer and Sellersshall submit all unresolved claims and amounts for arbitration in accordancewith the terms of Section 10.11.

##  

## 8.2           FurtherCooperation. After the Closing Date, Buyer andSellers shall execute and deliver, or shall cause to be executed and deliveredfrom time to time, such further instruments of conveyance and transfer, andshall take such other actions as either Party may reasonably request, toconvey and deliver the Assets to Buyer, to perfect Buyer’s title thereto, andto accomplish the orderly transfer of the Assets to Buyer in the mannercontemplated by this Agreement. If, after the Closing Date, either Partyreceives monies belonging to the other, such amounts shall be promptlydisbursed to the Party entitled to receive them. If an invoice or otherevidence of an obligation is received by a Party, which is either an obligationassumed by the other Party or partially an obligation of both Sellers andBuyer, the Parties shall consult with each other, and an adjustment for suchamount will be made either on the Final Settlement Statement, or, if theevidence of the obligation is not received until after the completion of thefinal accounting pursuant to Section 8.1, in cash as the Parties may agree.If Sellers and Buyer are unable to agree on the disposition of such an obligation,Sellers and Buyer shall submit the matter to binding arbitration in accordancewith the terms of Section 10.11.

 

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## 8.3           UndisbursedRevenues. No later than the Closing Date, Sellers shall disburse toBuyer all monies (if any) relating to the Assets that any Seller is obligatedto pay or disburse to other Persons (including amounts held in suspense by anySeller) and that, as of the Closing Date, have not been thus paid or disbursed.Buyer shall take and apply such funds in a manner consistent with prudent oiland gas business practices to satisfy the Claims of third Persons with respectto such monies. Sellers shall cooperate with Buyer following the Closing toassure the proper disbursement of any such funds.

##  

# **ARTICLE IX.SURVIVAL**

#  

##  Therepresentations and warranties contained in Section 3.1(d) through(o) and 3.1(r) and (s) shall not survive the Closing andare made and given solely to measure Buyer’s obligation to close under Section 6.2(a).The representations and warranties contained in Section 3.2(d), and(e) shall not survive the Closing and are given and made solely tomeasure Seller’s obligation to close under Section 6.1(a). Allother representations, warranties, covenants and agreements of Buyer andSellers under this Agreement shall survive the Closing and the delivery of theConveyance, shall not be merged with or into the Conveyance, and shall remainin force and effect as provided in this Article IX, as applicable,regardless of any investigation at any time made by or on behalf of Buyer orSellers, or of any information that Buyer or Sellers may have with respectthereto. Such survival does not obligate any Party to make any furtherrepresentation or warranty after the Closing Date, or to cause anyrepresentation or warranty made hereunder to remain true and correct after theClosing Date.

##  

# **ARTICLE X.MISCELLANEOUS**

#  

## 10.1         Exhibits. Allexhibits and schedules referred to in this Agreement are hereby incorporatedinto this Agreement by reference and constitute a part of this Agreementfor all purposes. Each Party and its counsel has received a complete set ofexhibits and schedules prior to and as of the date of execution of thisAgreement.

##  

## 10.2         Expenses. Except asotherwise specifically provided herein, all fees, costs, and expenses incurredby Buyer and Sellers in negotiating this Agreement and in consummating thetransactions contemplated by this Agreement shall be paid by the Partyincurring the same, including, without limitation, legal and accounting fees,costs, and expenses. All required documentary, filing, and recording fees andexpenses in connection with the filing and recording of the Conveyance andother instruments required to convey title to the Assets to Buyer shall beborne by Buyer.

##  

## 10.3         Proration ofTaxes. Each Party shall assume responsibility for, and shall bearand pay, all federal income taxes, state income taxes, franchise taxes, andother similar taxes (including any applicable interest or penalties) incurredby or imposed upon such Party with respect to the transactions described inthis Agreement. Sellers shall assume responsibility for, and shall bear andpay, all Transfer Taxes incurred or imposed with respect to the transfer of theAssets. Sellers shall assume responsibility for, and

 

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## shall bear and pay, all Property-RelatedTaxes (including any applicable penalties and interest) based upon or measuredby the ownership of the Assets or the receipt of proceeds therefrom, butexclusive of income taxes, and assessed against the Assets by any taxingauthority for the period prior to the Effective Time. Buyer shall beresponsible for, and shall bear and pay, all such Property-Related Taxesassessed against the Assets by any taxing authority for any period that beginson or after the Effective Time. In the event of a conflict between the terms ofthis Section 10.3 and any other provision of this Agreement, theterms of this Section 10.3 shall govern and control.

##  

## 10.4         Assignment. NeitherSellers nor Buyer shall assign this Agreement, except to an Affiliate of theassigning Party by assignment, transfer of equity, merger, reorganization, orconsolidation, without the prior written consent of the non-assigning Party,which shall not be unreasonably withheld or delayed. Any such assignment ofrights shall provide for the assumption by the transferee of the obligations ofthe assigning Party under this Agreement. Upon the assumption by such atransferee of the obligations of the assigning Party under this Agreement, suchtransferee shall become solely liable for all such obligations assumed;provided, however, that no assignment shall relieve Cano Petroleum, Inc.of its obligation to deliver or to cause the delivery of the Adjusted Considerationunder Section 7.3(b). Subject to the foregoing, this Agreementshall be binding upon and inure to the benefit of the Parties and theirrespective successors and assigns.

##  

## 10.5         Notices. Allnotices and communications required or permitted to be given hereunder shall bein writing and shall be delivered personally, or sent by bonded overnightcourier, or by telex or facsimile transmission (provided any such telegram,telex, or facsimile transmission is confirmed either orally or by writtenconfirmation), addressed to the appropriate Party at the address for such Partyshown below or at such other address as such Party shall have theretoforedesignated by written notice delivered to the Party giving such notice:

 
| If to Buyer:                  |   | If to Seller:                            |
|-------------------------------|--------|------------------------------------------|
|                          |   |                                     |
| P.O Box 380                   |   | 309 West Seventh Street, Suite 1600 |
| Pampa, TX 79066-0380          |   | Fort Worth, TX 76102                     |
| Attention: Dennis Stowers     |   | Attention: James K. Teringo, Jr.    |
| Telephone No.: (806) 665-0000 |   | Telephone No.: (817) 698-0900            |
| Facsimile No.: (806) 665-6528 |   | Telecopier: (817) 698-0796               |

 

Any notice given in accordance herewith shallbe deemed to have been given on the Business Day when delivered to theaddressee in person or by telex, facsimile, or bonded overnight courier;provided, however, that if any such notice is received after normal businesshours, the notice will be deemed to have been given on the next succeedingBusiness Day. Any Party may change the address, telephone number,

 

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and facsimile number to which such communications to such Party are tobe addressed by giving written notice to the other Party in the manner providedin this Section 10.5.

 

## 10.6         **ENTIRE AGREEMENT; CONFLICTS****. THIS AGREEMENT, THE EXHIBITS HERETO, THE CONVEYANCE CONSTITUTE THEENTIRE AGREEMENT AMONG THE PARTIES PERTAINING TO THE SUBJECT MATTER HEREOF ANDSUPERSEDE ALL PRIOR AGREEMENTS (INCLUDING, WITHOUT LIMITATION, THE LETTER OFINTENT), UNDERSTANDINGS, NEGOTIATIONS, AND DISCUSSIONS, WHETHER ORAL ORWRITTEN, OF THE PARTIES PERTAINING TO THE SUBJECT MATTER HEREOF. THERE ARE NOWARRANTIES, REPRESENTATIONS, OR OTHER AGREEMENTS BETWEEN THE PARTIES RELATINGTO THE SUBJECT MATTER THEREOF EXCEPT AS SPECIFICALLY SET FORTH HEREIN OR IN THECONVEYANCE, AND NEITHER BUYER NOR SELLERS SHALL BE BOUND BY OR LIABLE FOR ANYALLEGED REPRESENTATION, PROMISE, INDUCEMENT, OR STATEMENT OF INTENTION NOT SOSET FORTH. IN THE EVENT OF A CONFLICT BETWEEN THE TERMS OF THIS AGREEMENT ANDTHE TERMS OF THE CONVEYANCE, THE TERMS OF THIS AGREEMENT SHALL GOVERN AND CONTROL;PROVIDED, HOWEVER, THAT THE INCLUSION IN THE CONVEYANCE OF TERMS NOT ADDRESSEDIN THIS AGREEMENT SHALL NOT BE DEEMED A CONFLICT, AND ALL SUCH ADDITIONAL TERMSSHALL BE GIVEN FULL FORCE AND EFFECT, SUBJECT TO THE TERMS OF THIS SECTION 10.6.**

##  

## 10.7         Amendment. ThisAgreement may be amended only by an instrument in writing executed by theParties.

##  

## 10.8         Waiver;Rights Cumulative. Any of the terms, covenants,representations, warranties, or conditions hereof may be waived only by awritten instrument executed by or on behalf of the Party waiving compliance. Nocourse of dealing on the part of Buyer or Seller, or their respectiveofficers, employees, agents, or representatives, or any failure by Buyer orSeller to exercise any of its rights under this Agreement, shall operate as awaiver thereof or affect in any way the right of such Party at a later time toenforce the performance of such provision. No waiver by any Party of anycondition, or any breach of any term, covenant, representation, or warranty containedin this Agreement, in any one or more instances, shall be deemed to be orconstrued as a further or continuing waiver of any such condition or breach ora waiver of any other condition or of any breach of any other term, covenant,representation, or warranty. The rights of Buyer and Seller under thisAgreement shall be cumulative, and the exercise or partial exercise of any suchright shall not preclude the exercise of any other right.

##  

## 10.9         GOVERNINGLAW; CONSENT TO JURISDICTION. **THISAGREEMENT AND THE LEGAL RELATIONS AMONG THE PARTIES SHALL BE GOVERNED ANDCONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANYCONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER CONSTRUCTION OF SUCHPROVISIONS TO THE LAWS OF ANOTHER JURISDICTION. ALL OF THE**

 

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## **PARTIES CONSENT TOTHE EXERCISE OF JURISDICTION IN PERSONAM BY THE COURTS OF THE STATE OF TEXASFOR ANY ACTION ARISING OUT OF THIS AGREEMENT. ALL ACTIONS OR PROCEEDINGS WITHRESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATEDTO, OR FROM THIS AGREEMENT SHALL BE LITIGATED IN COURTS HAVING SITUS INLUBBOCK, LUBBOCK COUNTY, TEXAS.**

##  

## 10.10       Severability. If anyterm or other provision of this Agreement is invalid, illegal, or incapable ofbeing enforced by any rule of Law or public policy, all other conditionsand provisions of this Agreement shall nevertheless remain in full force andeffect so long as the economic or legal substance of the transactionscontemplated hereby is not affected in any adverse manner to any Party. Uponsuch determination that any term or other provision is invalid, illegal, orincapable of being enforced, the Parties shall negotiate in good faith tomodify this Agreement so as to effect the original intent of the Parties asclosely as possible in an acceptable manner to the end that the transactionscontemplated hereby are fulfilled to the extent possible.

##  

## 10.11       Arbitration.

##  

### (a)           Anydisagreement, difference, or dispute among the Parties that is to be resolvedby arbitration pursuant to the terms of this Agreement shall be resolvedpursuant to arbitration according to the procedures set forth in this Section 10.11.Either Party may commence an arbitration proceeding hereunder by givingwritten notice to the other Party. No later than five (5) Business Daysafter the delivery of the notice commencing the arbitration proceeding, Sellersand Buyer shall each select an arbitrator. Promptly following their selection,the arbitrators selected by Sellers and Buyer jointly shall select a thirdarbitrator. All arbitrators selected under this Agreement shall have at leasteight (8) years of professional experience in the oil, gas, or accountingindustries, as applicable, and shall not previously have been employed byeither Party and shall not have a direct or indirect interest in either Partyor the subject matter of the arbitration. The arbitration hearing shallcommence as soon as is practical, but in no event later than thirty (30) daysafter the selection of the third arbitrator. If any arbitrator selected underthis Section 10.11(a) should die, resign, or otherwise beunable to perform his duties hereunder, a successor arbitrator shall beselected pursuant to the procedures set forth in this Section 10.11(a).

###  

### (b)           Thearbitrators shall settle all disputes in accordance with the FederalArbitration Act and the Commercial Arbitration Rules of the AmericanArbitration Association, to the extent that such Rules do not conflictwith the terms of such Act or the terms of this Agreement. Any arbitrationhearing shall be held in Lubbock, Lubbock County, Texas. The decision of thearbitrators shall be final and binding on the Parties and, if necessary, may beenforced in any court of competent jurisdiction. The Law governing all suchdisputes shall be the Laws of the State of Texas, including, withoutlimitation, the Uniform Commercial Code as in effect in the State ofTexas, as the same may be amended from time to time, but without regard toconflicts of laws principles. The fees and expenses of the arbitrators shall beshared one-half

 

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### by Sellers and one-half by Buyer. Any paymentto be made as the result of any dispute resolved by arbitration hereunder shallbe accomplished pursuant to the Final Settlement Statement, with the finalpayments due thereunder being deferred until the arbitrators have renderedtheir decisions on all matters to be resolved by arbitration hereunder.

###  

## 10.12       Counterparts. ThisAgreement may be executed in any number of counterparts, and each suchcounterpart hereof shall be deemed to be an original instrument, but allof such counterparts shall constitute for all purposes one agreement. ThisAgreement may be executed by the Parties in different locations and shallbecome binding upon both Parties upon the exchange by the Parties of executedsignature pages by facsimile; provided, however, that no later than five (5) BusinessDays after such execution hereof by facsimile, the Parties shall have executedand delivered each to the other a fully executed original counterpart ofthis Agreement.

 

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IN WITNESS WHEREOF, Sellers and Buyer haveexecuted this Agreement on the date first above written.

 
|   | SELLERS:                     |                              |   |
|--------|------------------------------|-----------------------------------|--------|
|   |                         |                              |   |
|   | MYRIAD RESOURCES CORPORATION |                              |
|   |                         |                              |   |
|   |                         |                              |   |
|   | By:                          |   /s/ Dennis V. Stowers |   |
|   |                         | Dennis V. Stowers                 |   |
|   |                         | President                         |   |
|   |                         |                              |   |
|   |                         |                              |   |
|   | WESTLAND ENERGY COMPANY      |                              |
|   |                         |                              |   |
|   |                         |                              |   |
|   | By:                          |   /s/ Dennis V. Stowers |   |
|   |                         | Dennis V. Stowers                 |   |
|   |                         | President                         |   |
|        |                              |                                   |        |  |  |

 

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|   | PAMTEX, a general partnership |                                 |
|--------|-------------------------------|--------------------------------------|
|   |                          |                                 |   |
|   |                          |                                 |   |
|   | By:                           | PAMTEX GP1, Ltd., general            |
|   | partner                       |                                 |
|   |                          |                                 |   |
|   |                          | By: DSGP LLC, its general partner    |
|   |                          |                                 |   |
|   |                          | By:                                  |  /s/ Dennis V. Stowers |   |
|   |                          |                                 | Dennis V.  Stowers |
|   |                          |                                 | Manager |
|   |                          |                                 |   |
|   |                          |                                 |   |
|   | By:                           | PAMTEX GP2, Ltd., general            |
|   | partner                       |
|   |                          |                                 |   |
|   |                          | By: KSGP LLC, its general partner    |
|   |                          |                                 |   |
|   |                          | By:                                  |  /s/ Keith Stowers |   |
|   |                          |                                 | Keith  Stowers |
|   |                          |                                 | Manager |
|   |                          |                                 |   |
|   |                          |                                 |   |
|   |                          |                                 |   |
|   | BUYER:                        |
|   |                          |                                 |   |
|   | CANO PETROLEUM, INC.,    |
|   |                          |                                 |   |
|   |                          |                                 |   |
|   | By:                           |   /s/ S. Jeffrey Johnson   |   |
|   |                          | S. Jeffrey Johnson                   |
|   |                          | Chairman and Chief Executive Officer |
|        |                               |                                      |  |  |  |  |  |  |  |  |

 

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**SCHEDULE 1.1**

 

**DEFINEDTERMS**

 

The following terms and expressions shallhave the meanings set forth in the indicated provisions of this Agreement:  “Adjusted Consideration”, Section 2.3(e);  “Assets”, Section 2.1; “AssumedLiabilities”, Section 2.4; “Base Consideration”, Section 2.3(a);“Closing Date”, Section 7.1; “Final Settlement Statement”, Section 8.1;“Hydrocarbons”, Section 2.1(c); “Intangible Rights”, Section 2.1(i);“Leases”, Section 2.1(a); “Personal Property”, Section 2.1(e);“Preliminary Settlement Statement”, Section 7.2; “Real PropertyInterests”, Section 2.1(d); “Records”, Section 2.1(j); “RetainedLiabilities”, Section 2.5; “Securities Act”, Section 3.1(u);“Transferred Contracts”, Section 2.1(g); Section 2.3(a);and “Wells”, Section 2.1(b).

 

In addition, the following terms andexpressions shall have the meanings set forth hereinafter:

 

“Affiliate” means, with respect to aParty, any Person that directly or indirectly controls, is controlled by, or isunder common control with, the relevant Party. For purposes of this definition,the term “control” means the possession, directly or indirectly, of the powerto direct or cause the direction of the management and policies of a Person,whether through ownership of voting securities, contract, voting trust,membership in management or in the group appointing or electing management, orotherwise through formal or informal arrangements or business relationships.

 

“Allocated Value” means, with respectto each Well, Real Property Interest, item of Personal Property, and otherAsset to which value is allocated herein, the amount set forth on Exhibit Bunder the column styled “Allocated Value” for such Well, Real PropertyInterest, item of Personal Property, or other Asset. For purpose of thisAgreement, Sellers and Buyer agree and stipulate that the Allocated Values setforth in Exhibit B have been established solely for use incalculating adjustments to the Base Consideration as provided herein, and notfor purposes of federal or state income taxation, such Allocated Values beingsolely for the convenience of the Parties.

 

“Assumed Environmental Liabilities”means, collectively, **ALL CLAIMS ANDLIABILITIES (INCLUDING, WITHOUT LIMITATION, CLAIMS AND LIABILITIES RELATING TOENVIRONMENTAL CONDITIONS THAT BECOME “ASSUMED ENVIRONMENTAL LIABILITIES” BYOPERATION OF SECTION 4.3, BUT EXCLUDING THE RETAINED ENVIRONMENTALLIABILITIES**(which term is also defined in this Schedule 1.1)**.**

 

“Business Day” means any day otherthan a Saturday, Sunday, or other day on which commercial banks in Fort Worth,Texas, are required or authorized by Law to be closed.

 

“Casualty Event” means (a) anyfire, explosion, accident, earthquake, act of the public enemy, act of God, orother similar event or occurrence that results in damage to

 

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or the destruction of any Asset, and (b) any taking of any Assetby condemnation or under the right of eminent domain.

 

“Claims”, for purposes of thisAgreement, means any and all claims, demands, Liens, notices of non-complianceor violation, notices of liability or potential liability, investigations,actions (whether judicial, administrative, or arbitrational), causes of action,suits, and controversies.

 

“Closing” means the consummation ofthe transactions contemplated in this Agreement.

 

“Code” means the United StatesInternal Revenue Code of 1986, as amended.

 

“Contracts” means all seismic or otherexploration agreements; farm-in, farm-out, and participation agreements; dryhole, acreage contribution, and bottom hole agreements; partnership, jointventure, and similar agreements; Hydrocarbon purchase, sale, exchange,gathering, storage, transportation, and marketing agreements;  acquisition agreements; operating agreements;area of interest agreements; balancing agreements; pooling, communization, andunitization agreements; processing, fractionation, condensate removal and handling,dehydration, treatment, and separation agreements; saltwater, water, and wasteinjection and disposal agreements; options; service agreements; communications,facilities, and equipment leases and licenses, to the extent transferable; andother contracts, agreements, and rights owned by Sellers, in whole or in part,to the extent that they are (i) appurtenant to or affect the propertiesand rights comprising the Assets, or (ii) used or held for use inconnection with the use, ownership, or operation thereof, all as described moreparticularly on Exhibit E.

 

“Conveyance” means the Assignment,Bill of Sale, and Conveyance substantially in the form attached hereto as Exhibit G.

 

“Defect” means any Lien, charge,contract, agreement, obligation, or defect of title, other than a PermittedEncumbrance, that causes, or could reasonably be expected (in Buyer’s goodfaith judgment) to cause:  (a) aloss of title, in whole or in part, by any Seller with respect to an Asset; (b) thetitle to an Asset not to be good, valid, and indefeasible; (c) an Asset tobe subject to a Lien other than a Permitted Encumbrance; (d) in the caseof a Lease or Well, and without limiting clauses (a), (b), and (c) of thisdefinition, (i) Sellers to receive a percentage of all Hydrocarbonsproduced, saved, and marketed from or allocable to such Lease or Well that isless than the Net Revenue Interest set forth in Exhibit B for suchLease or Well, without reduction, suspension, or termination for the productivelife of such Lease or Well, or (ii) Sellers to be obligated to bear apercentage of the costs and expenses of operations on and the maintenance anddevelopment of such Lease or Well that is greater than the Working Interest setforth for such Lease or Well on Exhibit B without increase for theproductive life of such Lease or Well, unless such greater Working Interestyields a correspondingly greater Net Revenue Interest; or (e) Sellers’interests in any Asset otherwise to be extinguished or the operation, use,possession, ownership, or value of Sellers’ interest in any Asset to bematerially affected or interfered with, except for Permitted Encumbrances. Theterm

 

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“Defect” shall include a preferential right to purchase, right of firstrefusal, right of first offer, or similar right affecting any Asset (including,without limitation, any Contract) that is exercised prior to the Closing, or athird Person consent to assignment required before an Asset may beassigned and that is not obtained prior to the Closing.

 

“Defect Amount” means:  (a) if the relevant Defect affects allof Sellers’ interest in an Asset, such that the Defect results in a completefailure of title with respect thereto, the Defect Amount shall equal the fullAllocated Value for the affected Asset; (b) if the Defect constitutesundischarged taxes, indebtedness, or Liens encumbering all or any portion ofany Asset, the Defect Amount shall equal the sum necessary to be paid to theobligee to remove the Defect; (c) if the Defect results from a deficiencyin Sellers’ actual Net Revenue Interest relative to that shown for the affectedLease or Well on Exhibit B and on which the Allocated Value of suchLease or Well is based, the Defect Amount shall equal the positive difference(if any) obtained by subtracting (i) the product obtained bymultiplying the Allocated Value for the affected Lease or Well by the ratioof the actual Net Revenue Interest being conveyed to the NetRevenue Interest set forth for such Lease or Well on Exhibit B, from(ii) the Allocated Value for such Lease or Well; (d) if the Defectresults from Sellers’ actual expense-bearing interest in a Lease or Well beinggreater than the Working Interest shown for the affected Lease or Well on Exhibit Band on which the Allocated Value of such Lease or Well is based, and suchlarger expense-bearing interest is not accompanied by a proportionate increasein Sellers’ Net Revenue Interest in such Lease or Well, the Defect Amount shallequal the positive difference (if any) obtained by subtracting (i) arecalculated Allocated Value for such Lease or Well using the same productionrates, pricing, costs, tax forecasts, and discount factors used to calculatethe original Allocated Value for such Lease or Well, adjusted to account forthe diminution in the net present value of the future cash flows that resultsfrom the higher expense-bearing interest, from (ii) the AllocatedValue for such Lease or Well set forth on Exhibit B; and (e) ifthe Defect is one other than the Defects described above in clauses (a), (b), (c),and (d) of this definition, the Defect Amount shall equal an amountdetermined by Sellers and Buyer by evaluating the portion of the Assetsaffected by such Defect, the legal effect of the Defect, and the potentialeconomic effect of the Defect over the life of the Assets affected.

 

“Effective Time” means 7:00 a.m.,Central Time, on February 1, 2006.

 

“Environmental Contaminants” meansmaterials regulated because of their effect or potential effect on human healthand the environment, and includes, without limitation, “hazardous substances”and “pollutants or contaminants”, as those terms are defined in Section 101of the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”),petroleum, including any fraction thereof, and “natural gas, natural liquids,liquefied natural gas, or synthetic gas usable for fuel” as those terms areused in Section 101 of CERCLA, any “solid waste” or “hazardous waste” asthose terms are defined or used in the Resource Conservation and Recovery Actor in the Texas Solid Waste Disposal Act, and any wastes regulated byapplicable rules of the Railroad Commission of Texas. The term alsoincludes naturally occurring radioactive material (“NORM”) concentrated,disposed of, released or present on, resulting from, or in association withHydrocarbon activities.

 

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“Environmental Condition” means: (a) anyevent or condition (including, without limitation, any Release or threatenedrelease) with respect to air, land, soil, surface, subsurface strata, surfacewater, ground water, or sediment that causes the Assets to become subject to(or their owner or operator to have Liability or be potentially liable for) anyinvestigation, reporting, removal, remediation, or response action under, ornot be in compliance with, any Environmental Law or any Permit pursuant to anyEnvironmental Law; (b) the existence of any written or oral Claim pendingor threatened that reasonably may be expected to subject the Assets or theowner or the operator of the Assets to Liability under any Environmental Law asit pertains to the Assets or the existence of any event or condition on theAssets described in this definition; (c) the failure of the Assets to bein compliance, or the owner or operator of the Assets to comply with allapplicable Environmental Laws with respect to the Assets; (d) the failureof the owner or operator of the Assets to obtain or maintain in full force andeffect any Permit required under applicable Environmental Laws with respect tothe Assets; or (e) any event or condition described in the precedingclauses (a), (b), (c), and (d) that results, or could reasonably beexpected to result, in Liability for any investigation, removal, remediation,or response action, or any other Person for injury to or death of any Person,Persons, or other living thing, or damage, loss, or destruction of propertylocated on the Assets. An event or circumstance that results in the inaccuracyor breach of the representations and warranties contained in Section 3.1(d)(iii) orSection 3.1(j) (insofar only as such representation and warrantyrelates to environmental matters) shall constitute an Environmental Condition.The term “Environmental Condition” includes, without limitation, any release,disposal, spilling, leaking, migration, pouring, emission, emptying, discharge,injection, escape, transmission, leaching, or dumping (collectively, a “Release”),or any threatened Release, of any Environmental Contaminants on, to or from, orrelated in any way to the use, ownership, or operation of, the Assets that hasnot been remediated in accordance with all applicable Environmental Laws.

 

“Environmental Laws” means allapplicable Laws (including, without limitation, the Comprehensive EnvironmentalResponse, Compensation, and Liability Act, the Resource Conservation andRecovery Act, and the Oil Pollution Act of 1990, the Texas Solid Waste DisposalAct, and applicable rules of the Texas Railroad Commission relating to themanagement or disposal of oilfield waste, in each case as amended from time totime) relating to the protection of the public health, welfare, andenvironment, worker protection, emergency planning, and/or a community’s rightto know, including, without limitation, those Laws relating to the storage,handling, and use of chemicals and other hazardous materials or other materialsregulated because of their effect or potential effect on human health and theenvironment, those relating to the Release, generation, processing, treatment,storage, transportation, disposal, investigation, removal, remediation or othermanagement of waste materials of any kind, those relating to the protection ofenvironmentally sensitive areas, and employee health and safety.

 

“Governmental Authority” means anygovernmental or quasi-governmental federal, state, provincial, county, city, orother political subdivision of the United States, any foreign country, or anydepartment, bureau, agency, commission, court, or other statutory or regulatorybody or instrumentality thereof.

 

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“Imbalance” means any imbalancebetween (a) the quantity of Hydrocarbons produced from any Well andallocated to a Person from time to time and the share of such production towhich such Person is actually entitled by virtue of its ownership interest insuch Well, (b) the quantity of Hydrocarbons produced from or allocable tothe Assets delivered, and the quantity of such Hydrocarbons received, in eachcase for gathering, transportation, or storage for the account of a Person, (c) thequantity of Hydrocarbons produced from or allocable to the Assets delivered forprocessing or refining, and the quantity of products or residue Hydrocarbonsredelivered, in each case for the account of a Person, and (d) othersimilar types of Hydrocarbon-related imbalances attributable to the Assets.

 

“Knowledge”, when used with referenceto either Party, means (a) knowledge of those matters of which therelevant Party is charged with constructive notice under applicable Law, and (b) theactual knowledge of the current directors and officers of such Party.

 

“Laws” means all constitutions, laws,statutes, ordinances, rules, regulations, orders, and decrees of the UnitedStates, any foreign country, and any local, state, provincial, or federalpolitical subdivision or agency thereof, as well as all judgments, decrees,orders, and decisions of courts having the effect of law in each suchjurisdiction, including, without limitation, all Environmental Laws.

 

“Liabilities” means, for purposes ofthis Agreement, any and all losses, judgments, damages, liabilities, injuries,costs, expenses, interest, penalties, taxes, fines, obligations, anddeficiencies.

 

“Lien” means any mortgage, deed oftrust, pledge, security interest, encumbrance, lien, or charge of any kind(including any agreement to grant any of the foregoing), any conditional saleor title retention agreement, any lease in the nature thereof, or the filing ofor agreement to give any financing statement under the Uniform CommercialCode of any jurisdiction.

 

“Material Adverse Change” means anevent, occurrence, development, or condition that is materially adverse to theAssets taken as a whole, excluding (a) any general, regional,industry-wide, economic, or political event, occurrence, development, orcondition (including, without limitation, the price of Hydrocarbons), whetherdomestic or international, and (b) any change in the condition of theAssets during the period from the date of this Agreement through the PossessionTime resulting from normal depletion of Hydrocarbon reserves or thedepreciation of the Personal Property through ordinary wear and tear.

 

 “NetRevenue Interest” means, with respect to each Lease and Well, the interestin and to all Hydrocarbons produced and saved from or attributable to theLease(s) on which such Well is located, after giving effect to all validroyalties, overriding royalties, production payments, net profits interests,carried interests, reversionary interests, and other similar interestsconstituting burdens upon, measured by, or payable out of Hydrocarbons producedand saved from or attributable to such Lease(s) and Wells.

 

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“Parties” means, collectively, Sellersand Buyer.

 

“Permits” means the permits, licenses,authorizations, certificates, registrations, or other approvals (other thanpermits and licenses constituting Real Property Interests) granted by anyGovernmental Authority that pertain or relate in any way to the Assets,described more particularly on Exhibit F.

 

“Permitted Encumbrances” means:

 

(a)           preferentialrights to purchase any Asset (including, without limitation, any Contract),required non-governmental, third Person consents to assignment, and similaragreements with respect to which, prior to the Closing, (i) waivers orconsents are obtained from the appropriate Persons, or (ii) theappropriate time period for asserting such rights has expired without anexercise of such right;

 

(b)           requirednon-governmental, third Person consents to assignment if such consent is of atype customarily obtained subsequent to a sale or conveyance, and the failureto obtain such consent would not have a material adverse effect on the use orvalue of the Assets;

 

(c)           Liensfor taxes or assessments not yet delinquent or, if delinquent, those taxes orassessments that are being contested in good faith by proceedings diligentlyconducted in the normal course of business;

 

(d)           allrights to consent by, required notices to, filings with, or other actions byGovernmental Authorities in connection with the sale or conveyance of theAssets if the same are customarily obtained, given, or made subsequent to suchsale or conveyance;

 

(e)           theLeases, the Contracts, the Permits, and the Real Property Interests;

 

(f)            alleasements, rights-of-way, servitudes, permits, licenses, surface leases, andother rights to use the surface (in addition to the Real Property Interests)affecting or pertaining to the Assets, but that are not included in the Assetsand do not interfere materially with the ownership, operation, value, or use ofthe Assets;

 

(g)           lessor’sroyalties, overriding royalties, division orders, production payments, netprofits interests, carried interests, rights to recoupment, unitization,pooling, proration, and spacing designations, orders, and agreements,reversionary interests, and similar burdens, if the net cumulative effectthereof does not operate to cause Sellers to receive less than the Net RevenueInterest set forth on Exhibit B of all Hydrocarbons produced,saved, and marketed from any Lease or Well or bear and pay more than theWorking Interest shown on Exhibit B of all costs and expenses ofoperations in respect of such Lease or Well without a proportionate increase inthe associated Net Revenue Interest;

 

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(h)           anyoperator’s or other inchoate or undetermined Lien or charge, whether statutoryor contractual, constituting or securing the payment of expenses which were orwill be incurred in the ordinary course of business and incidental to themaintenance, development, production, or operation of any Asset, to the extentthe same secure amounts not yet due and payable or that are being contested ingood faith by proceedings diligently conducted in the normal course ofbusiness;

 

(i)            anyLien created under the terms of any Lease, Real Property Interest, or Contractto secure the performance of the lessee’s obligations thereunder;

 

(j)            conventionalrights of reassignment;

 

(k)           therights reserved to, vested in, or imposed by any Governmental Authority tocontrol, regulate, or monitor the Assets in any manner, and all applicableLaws;

 

(l)            Defectsand Environmental Conditions waived in writing by Buyer;

 

(m)          anymatters set forth in the Schedules to this Agreement; and

 

(n)           allother Liens, charges, encumbrances, contracts, agreements, instruments,obligations, and irregularities affecting any Asset that in the aggregate arenot such as to (i) interfere materially with the ownership, operation,value, or use of such Asset for the purposes for which it is held; (ii) preventSellers from receiving any proceeds from the sale of any Hydrocarbons; or (iii) causeSellers (A) to receive less than the Net Revenue Interest set forth on Exhibit Bof all Hydrocarbons produced, saved, and marketed from any Lease or Well, or (B) bearand pay more than the Working Interest shown on Exhibit B of allcosts and expenses of operations in respect of such Lease or Well without aproportionate increase in the associated Net Revenue Interest.

 

“Person” means any individual,corporation, limited liability company, partnership, trust, unincorporatedorganization, Governmental Authority, or any other form of entity.

 

“Possession Time” means the time onthe Closing Date when all of the actions required under Section 7.3to be taken by Sellers and Buyer at the Closing have been taken.

 

“Property-Related Taxes” means any andall ad valorem, property, severance, generation, conversion, Btu or gas,transportation, utility, gross receipts, privilege, consumption, excise, lease,transaction, and other taxes, franchise fees, governmental charges or fees,licenses, fees, permits, and assessments, or increases therein, and anyinterest or penalties thereon, other than Transfer Taxes and taxes based on ormeasured by net income or net worth.

 

“Remediation Estimate” means, withrespect to an Environmental Condition, the estimated cost (inclusive ofLiabilities to Governmental Authorities and other Persons

 

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reasonably anticipated to be incurred by Sellers as the result of suchEnvironmental Condition), determined by Buyer in good faith, to remediate therelevant Environmental Condition in accordance with applicable Environmental Laws.

 

“Retained Environmental Liabilities”means only those **LIABILITIES ARISING OUT OF,RESULTING FROM, OR RELATING IN ANY WAY TO THE EXISTENCE OF AN ENVIRONMENTALCONDITION ON OR RELATING TO ONE OR MORE ASSETS (INCLUDING, WITHOUT LIMITATION,LIABILITY FOR INJURY TO OR DEATH OF ANY PERSON, PERSONS, OR OTHER LIVINGTHINGS, OR LOSS OR DESTRUCTION OF OR DAMAGE TO PROPERTY OCCURRING AS THE RESULTTHEREOF) WHICH WERE DISCLOSED TO SELLER PURSUANT TO SECTION 4.3 OR OFWHICH A SELLER OTHERWISE HAS KNOWLEDGE AND WHICH WERE NOT DISCLOSED TO BUYER INWRITING PRIOR TO CLOSING.**

 

“SEC” means the Securities andExchange Commission.

 

“Transfer Taxes” means any sales, use,stock, stamp, document, filing, recording, registration, and similar tax orcharge, including, without limitation, any interest or penalties thereon, butnot the recording costs collected by county clerks in Texas in connection withrecording conveyances in the real estate records.

 

“Working Interest” means, with respectto each Lease or Well, the interest of Sellers that is burdened with theobligation to bear and pay costs of operations on or in respect of such Leaseor Well.

 

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