Exhibit 10.1


 


OMNIBUS AGREEMENT


 


This
Omnibus Agreement (this “Agreement”) is entered into as of October 31,
2005, to be effective as of the Transaction Closing Date, by and among Cano
Petroleum, Inc., a Delaware corporation (“Cano”), Carlile
Management, LLC, a Texas limited liability company (“Carlile”), and
Haddock Enterprises, LLC, a Texas limited liability company (“Haddock”),
as members (each a “Member” and collectively the “Members”), and
Sabine Production Partners, LP (the “Company”).


 


WHEREAS,
the Members entered into that certain SPP Transaction Summary dated August 4,
2005 (the “Summary”); and


 


WHEREAS,
the Members are the sole members of Sabine Production Operating, LLC, a Texas
limited liability company (“Sabine Operating”), which serves as the Manager
of Sabine Production Management, LLC, a Texas limited liability company (“Sabine
Management”), which serves as the general partner of the Company; and


 


WHEREAS,
those certain Amended and Restated Regulations of Sabine Operating (the “Regulations”)
that the Members are entering into contemporaneously herewith ( to be effective
as of the Transaction Closing Date) incorporate certain principles set forth in
the Summary, including without limitation, the protocol to be followed by the
Governing Board of Managers and its Conflicts Committee in evaluating any
Related Party Transaction; and


 


WHEREAS,
pursuant to Paragraph X of the Summary, the Members and the Company desire to
contemporaneously enter into this Agreement, the Regulations, the Compensation
Reimbursement Agreement dated the date hereof between Cano and the Company (the
“Compensation Reimbursement Agreement”) and the Noncompetition and
Confidentiality Agreement dated the date hereof between Dr. Kenneth Q.
Carlile and the Company (collectively, the “Transaction Agreements”)
effectuating the principles set forth in the Summary.


 


NOW,
THEREFORE, in consideration of and in reliance upon the foregoing premises, the
mutual covenants hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto do hereby agree as follows:


 


1.             Definitions. Except as may be otherwise herein expressly
provided, the following terms and phrases shall have the meanings set forth
below:


 


“Acceptance Notice” means a written notice from
the Company to a Sourcing Member by which the Company accepts the Company’s
Participation Level in the Definitive Oil & Gas Opportunity identified
in that notice.


 


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“Affiliate”
of any specified Person means any other Person, directly or indirectly,
controlling or controlled by or under direct or indirect common control with
such specified Person. For the purposes of this definition, “control” when used
with respect to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the
beneficial ownership of a majority of voting securities, by contract or
otherwise; and the terms “controlling” and “controlled” have meanings
correlative to the foregoing.  For
purposes of this Agreement, the Company shall be deemed to be an Affiliate of a
Member with respect to a confidentiality obligation of a Member to a third
party relating to an Oil and Gas Opportunity.


 


“Co-Investment Right” means the right of a
Member and means the right of the Company provided in Section 5(b) to
participate alongside each other in an Oil & Gas Opportunity.


 


“Competitive Business” means, except as set
forth in this Agreement, the acquisition, development,
production, leasing, ownership, management, operation, or otherwise dealing
with or participating
in an Identified Property.


 


“Company Business Strategy” means the business
strategy for the Company described in the Company’s Registration Statement
No. 333-1273203 on Form S-4 filed with the Securities and Exchange
Commission (the “Registration Statement”).


 


“Company Participation Level” means that
participation level, expressed as a percentage, in a Definitive Oil &
Gas Opportunity to which the Company becomes entitled following exercise by the
Company and the Sourcing Member of their respective Co-Investment Rights; the
Company Participation Level is calculated by subtracting the Sourcing Member’s
Participation Level from 100%.


 


“Company Withdrawal Date” means with respect to
any Oil & Gas Opportunity the date on which the Company rejects that
Oil & Gas Opportunity.


 


“Identified Property” means (a) an
Oil & Gas Opportunity presented to the Company by a Member; and (b) any
other oil or gas
(or their constituents) property, field, interest or prospect
which the Company from time to time identifies in writing to the Members as (i) the
subject of a possible acquisition or investment by the Company, (ii) owned,
operated, managed, leased, being developed or engaged in
production activities by the Company thereon; (iii) subject to
a contract, agreement, or letter of intent, or a written definitive plan, to
acquire by the
Company; or (iv) with respect to which the Company has
performed, or commissioned due diligence to be performed, thereon.


 


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“Oil & Gas Opportunity” means a direct
or indirect opportunity to acquire, own, operate, participate in, invest in, manage, lease, market or develop oil or
natural gas (or
their constituents) properties, fields, interests or prospects owned by third
Persons, provided that such opportunity falls within the Company Business
Strategy, but specifically excluding any asset, prospect, opportunity,
property, field or interest owned, identified or controlled by, any Member or
its Affiliates as of the Transaction Closing Date.   Each Oil & Gas Opportunity shall be
further classified as a “Potential Oil & Gas Opportunity” or a “Definitive
Oil & Gas Opportunity,” as follows:


 


(i)                                                                                     an
Oil & Gas Opportunity that is not a Definitive Oil & Gas
Opportunity shall be classified as a “Potential Oil & Gas
Opportunity”;


 


(ii)                                                                                  an
Oil & Gas Opportunity, the terms of which are set forth in complete,
definitive documentation, the execution and delivery of which would create an
enforceable agreement among the parties thereto, shall be classified as a “Definitive
Oil & Gas Opportunity”.


 


“Person”
means any individual, corporation, partnership, limited liability company,
joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.


 


“Purchase Price” means the aggregate
acquisition price of an Oil & Gas Opportunity.


 


“Rejection Notice” means a written notice from
the Company to a Sourcing Member, or from a Sourcing Member to the Company, by
which the party giving the notice waives its right to participate in the Oil &
Gas Opportunity identified in that notice.


 


“Related Party Transaction” has the meaning set
forth in the Regulations.


 


A party’s “Representatives” shall include a
party’s Affiliates and the directors, managers, members, officers, employees,
agents, partners or advisors of such party (including, without limitation,
attorneys, accountants, consultants, bankers and financial advisors) of all of
them.


 


“Right of First Offer” is the right set forth
in Section 5(a) hereof.


 


“ROFO Period” means the period beginning on the
Transaction Closing Date and ending on the second anniversary of the
Transaction Closing Date.


 


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“Sourcing Member” has the meaning ascribed to
such term in Section 5(a) hereof.


 


“Transaction Closing Date” means the date on
which the Company completes the acquisition of assets of
Sabine Royalty Trust as described in the Registration Statement.


 


2.             Exception for Dr. Carlile.  The Members and the Company acknowledge that,
as of the date of this Agreement, Dr. Kenneth Q. Carlile (“Dr. Carlile”)
serves, directly or indirectly, as an officer, director, partner or member (his
“Capacities”) of various other entities (“Other Entities”) that
engage in oil and gas activities, and he engages in such activities on an
individual basis.  The Company and the
other Members agree that the performance by Dr. Carlile of his duties in
those Capacities on behalf of those Other Entities and as an individual shall
not be subject to the provisions of Section 5 or 10 of this Agreement.


 


3.             Employment of Personnel. 
As soon as practicable after the Transaction Closing Date, the Members,
in cooperation with each other and the Company, will use their respective
commercially reasonable best efforts to identify, recruit, retain, engage and
otherwise obtain operating personnel and management to be employed by the Company
on terms to be determined by Sabine Operating’s Governing Board of Managers.


 


4.             Operations.


 


(a)           With
respect to any interest, including any Identified Property, that is owned or
acquired by the Company and which has operational rights associated with it
but in which
no Member or its Affiliate has participated under the terms of this Agreement,
the Company shall enter into an operating agreement with a contract operator on
commercially reasonable industry terms.


 


(b)           With
respect to any interest, including any Identified Property, that is owned or
acquired by the Company and which has operational rights associated with it and in which
a Member or its Affiliate has participated under the terms of this Agreement,
that Member shall have a right of first offer to be the operator thereof;
provided, that until the Company shall have entered into an operating contract
for that property,  the Company shall
have the right to negotiate and enter into a contract with a third party on
more favorable terms.


 


5.             Right of First Offer and Co-Investment Agreement.


 


(a)           Right
of First Offer.


 


(i)            Subject
to the exception for Dr. Carlile set forth in Section 2 of this
Agreement, whenever during the ROFO Period, Cano or its Affiliates (the “Cano
Entities”) or


 


4





















 


Haddock
or its Affiliates (the “Haddock Entities”) or Carlile (the Cano
Entities, the Haddock Entities or Carlile providing the below described
Opportunity Notice shall be referred to individually as the “Sourcing Member”)
becomes aware of a Potential Oil & Gas Opportunity, the Sourcing
Member shall promptly notify the Company in writing about that Potential Oil &
Gas Opportunity and, unless and until either party gives to the other a
Rejection Notice with respect thereto, 
the Sourcing Member and the Company shall thereafter jointly manage,
negotiate, perform due diligence on, and otherwise deal with such Potential Oil &
Gas Opportunity, at all times cooperating with each other in good faith;
provided, however, that each party shall bear its expenses in connection with
such Potential Oil & Gas Opportunity, subject only to the provisions
of Section 5(c)(iv) and Section 5(c)(v) hereof.


 


(ii)           When
such Potential Oil & Gas Opportunity becomes (if it does become) a
Definitive Oil & Gas Opportunity, then, prior to either the Company or
the Sourcing Member executing any definitive documentation in connection
therewith (“Definitive Instruments”), each party shall give the other
written notice of its intention to exercise or to refrain from exercising its
Co-Investment Right.  The parties will
respond promptly and with due consideration given to the closing date and other
time limitations established in the Definitive Instruments for the Definitive
Oil & Gas Opportunity.  The
Company’s decision whether to exercise or to refrain from exercising its
Co-Investment Right is a Related Party Transaction and each Member covenants to
comply in a timely manner with the protocol established in the Regulations for
handling consideration of a Related Party Transaction by the Governing Board of
Managers of Sabine Operating and its Conflicts Committee.


 


(A)          If neither
party elects to exercise its Co-Investment Right, then (x)  neither party shall execute or deliver any of
the Definitive Instruments and neither party shall acquire any interest
afforded by the Oil & Gas Opportunity, (y) the Company shall be
deemed, for purpose of Section 5(a)(iv), to have rejected the Oil &
Gas Opportunity and the Sourcing Member which brought the Oil & Gas
Opportunity to the Company shall have no further obligations under this
Agreement with respect to such Oil & Gas Opportunity except as set
forth in Section 5(a)(iv) below, and (z) Section 5 (c)(iv) shall
not be applicable.


 


(B)           If one
party elects to exercise its Co-Investment Right but the other party elects not
to elect its Co-Investment Right, then (x) the party electing to exercise its
Co-Investment Right may, but shall not be obligated to, execute and deliver the
Definitive Instruments and acquire solely for itself all of the interest
afforded by the Oil & Gas Opportunity; (y) if the only party electing
not to exercise its Co-Investment Right is the Company, then the Company shall
be deemed, for purpose of Section 5(a)(iv), to have rejected the Oil &
Gas Opportunity and the


 


5





















 


Sourcing
Member who brought the Oil & Gas Opportunity to the Company shall have
no further obligations under this Agreement with respect to such Oil &
Gas Opportunity except as set forth in Section 5(a)(iv) below; and
(z) Section 5(c)(iv) shall not be applicable.


 


(C)           If each
party elects to exercise its Co-Investment Right, then the provisions of Section 5(b) shall
become applicable.


 


(iii)          Subject
to the exception for Dr. Carlile set forth in Section 2 of this
Agreement, during the ROFO Period, no Sourcing Member may directly or
indirectly seek, accept, participate in, manage, invest in or undertake any Oil &
Gas Opportunity except as provided in this Agreement.  If any personnel of a Sourcing Member
develops an Oil & Gas Opportunity, or if any Oil & Gas
Opportunity otherwise becomes available to such personnel, then that Oil &
Gas Opportunity shall be deemed developed by the Member employing such
personnel and not by the Company, irrespective of whether such personnel
are also employed or otherwise engaged by the Company.


 


(iv)          If
the Company rejects or is deemed to reject an Oil & Gas
Opportunity,  the Sourcing Member shall,
for a period of one year after the Company Withdrawal Date, be entitled to
acquire the Oil & Gas Opportunity at a price, and on terms and
conditions, that are not more favorable to the Member in any material respect
than the price and terms and conditions relating to such Oil & Gas
Opportunity as set forth in the Definitive Instruments.  If the Member does not enter into a binding
agreement to acquire the Oil & Gas Opportunity within such one-year
period, or if the price and terms and conditions are more favorable to the
Member in any material respect than the price and terms and conditions set
forth in the Definitive Instruments, the Member shall again be required to
comply with the procedures set forth above in Section 5 (a) if it
desires to acquire such Oil & Gas Opportunity.


 


(b)           Co-Investment
Right.


 


(i)            If
the Company and the Sourcing Member both exercise their respective
Co-Investment Rights with respect to a Definitive Oil & Gas
Opportunity, then the Sourcing Member will have the right to participate in the
Definitive Oil & Gas Opportunity alongside the Company for the following
participation levels:


 


Up to 70% of the first $25 million of the Purchase
Price; plus


 


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Up to
7.33% of the next $75 million of the Purchase Price; plus


 


Up to
23% of all amounts of the Purchase Price in excess of $100 million.


 


The
following table illustrates operation of such participation levels:


 


	
  Purchase Price

  	
   

  	
   

  	
   

  	
  Sourcing Member Participation Level

  	
   

  
	
  From

  	
   

  	
  To

  	
   

  	
  Up to Percentage

  	
   

  	
  Participation

  	
   

  	
  Aggregate

  	
   

  
	
  $

  	
  —

  	
   

  	
  $

  	
  25,000,000

  	
   

  	
  70.00

  	
  %

  	
  $

  	
  17,500,000

  	
   

  	
  $

  	
  17,500,000

  	
   

  
	
  25,000,000

  	
   

  	
  50,000,000

  	
   

  	
  7.33

  	
  %

  	
  1,833,333

  	
   

  	
  19,333,333

  	
   

  
	
  50,000,000

  	
   

  	
  75,000,000

  	
   

  	
  7.33

  	
  %

  	
  1,833,333

  	
   

  	
  21,166,667

  	
   

  
	
  $

  	
  75,000,000

  	
   

  	
  $

  	
  100,000,000

  	
   

  	
  7.33

  	
  %

  	
  $

  	
  1,833,333

  	
   

  	
  $

  	
  23,000,000

  	
   

  
	
  100,000,000+

  	
   

  	
   

  	
   

  	
  23

  	
  %

  	
   

  	
   

  	
   

  	
   

  



 


(ii)           If
the Company and the Sourcing Member both exercise their respective
Co-Investment Rights with respect to a Definitive Oil & Gas
Opportunity, then the parties shall engage in good faith discussions regarding
the exact participation levels (by percentage) at which the Sourcing Member and
the Company desire to participate in the Oil & Gas Opportunity,
following which the Sourcing Member shall notify the Company in writing of the
exact participation level (within the parameters set forth in Section 5(b)(i) hereof)
at which the Sourcing Member elects, in its sole discretion,  to participate in the Oil & Gas
Opportunity; such participation level, expressed as a percentage, is called the
“Sourcing Member’s Participation Level.”


 


(iii)          Promptly
following receipt of a notice from the Sourcing Member given pursuant to Section 5(b)(ii) hereof,
the Company shall determine whether or not it desires to accept the Company
Participation Level.  If it desires to
accept the Company Participation Level, then the Company shall give an
Acceptance Notice to the Sourcing Member, whereupon the Sourcing Member’s
Participation Level and the Company Participation Level shall become
fixed.  If it does not desire to accept
the Company Participation Level, then (x) the Company shall give a Rejection
Notice to the Sourcing Member, which shall have no further obligations under
this Agreement with respect to such Oil & Gas Opportunity except as
set forth in Section 5(a)(iv), and (y) the Company shall not be entitled
to reimbursement of any expenses under Section 5(c)(iv).


 


(c)           General
Terms and Conditions Applicable to Right of First Opportunity and Co-
Investment Right.


 


(i)            The
Right of First Offer right set forth in this Agreement shall be subordinated to
any seller confidentiality requirements; no party shall be required to comply
with the Right of First Offer set forth in this Agreement to the extent such
compliance would violate any seller confidentiality requirements. Each Sourcing
Member shall use its commercially reasonable best efforts to have any confidentiality
agreement entered into by it with respect to any Oil & Gas


 


7





















 


Opportunity permit
disclosure by the Member to Affiliates. To the extent that confidential
information covered by any such confidentiality agreement is disclosed to the
Company, the Company hereby agrees to be bound by the terms of any such
confidentiality agreement entered into by a Member with respect to an Oil &
Gas Opportunity and further agrees to defend, indemnify, protect and hold such
Member harmless as set forth in Exhibit A
hereto, which is incorporated herein by reference.


 


(ii)           While
it is the intention of the parties to align their businesses in accordance with
the terms of this Agreement, each party shall act independently in its own best
interests, and except as expressly set forth in this Agreement, the Regulations
or any other written agreement among the Company and the Members, no party
shall be considered by virtue of this Agreement to be a partner or agent of any
other party or to owe any fiduciary or other common law duties to any other
party.


 


(iii)          No
Member (other than the Sourcing Member) shall have the right to participate in
any Oil & Gas Opportunity.


 


(iv)          If
the Sourcing Member elects to participate in the Definitive Oil & Gas
Opportunity at the Sourcing Member’s Participation Level and the Company elects
to participate in the Definitive Oil & Gas Opportunity at the Company
Participation Level, then the aggregate amount of out of pocket expenses
incurred by them in connection with that Oil & Gas Opportunity up to
and including the fixing of their respective participation levels (the “Aggregate
Expenses”) shall be prorated between them in the same ratio as the Oil &
Gas Opportunity has been allocated between them; that is, the Sourcing Member
shall assume and be responsible for so much of the Aggregate Expenses as equal
the product realized by multiplying the Aggregate Expenses by the Sourcing
Member’s Participation Level and the Company shall assume and be responsible
for so much of the Aggregate Expenses as equal the product realized by
multiplying the Aggregate Expenses by the Company’s Participation Level.  Each party shall promptly upon demand by the
other party reimburse the other party (without interest) to the extent that it
pays or has paid more than its share of the Aggregate Expenses.


 


(v)           Notwithstanding
anything else contained in this Agreement, the Company or the Sourcing Member
may at any time give the other a Rejection Notice with respect to any identified
Oil & Gas Opportunity.  The
party that gives a Rejection Notice with respect to an identified Oil &
Gas Opportunity shall not be entitled to reimbursement from the other party of
any expenses incurred by it in connection with such Oil & Gas
Opportunity.


 


(vi)          Except
as set forth in Section 5(a)(iv), this Agreement will cease to apply with
respect to an Oil & Gas Opportunity if and when the Company and the
Sourcing Member which brought that Oil & Gas Opportunity to the
Company shall have both exercised their Co-Investment Rights and consummated
their investment in such Oil & Gas Opportunity in


 


8





















 


accordance with the provisions of this Section 5.


 


6.             Non-Disclosure Agreement.


 


(a)           Each
of the Cano Entities, the Haddock Entities and Carlile will not, except in
performance of its obligations under this Agreement or with the Company’s
prior written consent, directly or indirectly disclose any Confidential
Information; provided, however, that a Member may disclose Confidential
Information to its Representatives that are informed of and agree to comply
with the foregoing non-disclosure agreement. 
The Company will not, except in performance of its obligations under
this Agreement or with the prior written consent of all of the Members,
directly or indirectly disclose any Confidential Information; provided,
however, that the Company may disclose Confidential Information to its
Representatives that are informed of and agree to comply with the foregoing
non-disclosure agreement.  A party hereto
shall be liable for a violation by any of its Representatives of that party’s
non-disclosure agreement.  “Confidential
Information” includes information with respect to any Identified Property and any Oil &
Gas Opportunity; provided, however, Confidential Information
shall NOT include and shall exclude information which (i) was in
the possession of or known by a party without obligation to maintain
confidentiality prior to its receipt by such party from another party, (ii) is
obtained by a party from a third party who is not subject to a confidentiality obligation;
(iii) is independently developed by a party or its Affiliate; (iv) is
or becomes available to the public or is generally known in the industry in
which the parties operate other than as a result of disclosure by any person
(including but not limited to a Member or the Company) in violation of any
obligation owing to the other parties hereunder; or (v) a Member is
required to disclose under any applicable laws, rules, regulations or
directives of any stock exchange to which a party may be subject or of any
government agency, tribunal or authority having proper jurisdiction or under
subpoena or other process of law.


 


(b)           The
covenant of Section 6(a) does not modify, limit or otherwise affect
the confidentiality obligations of any Member under the Regulations or
applicable law.


 


7.             Non-Use Agreement. 
Except as specifically provided herein with respect to disclosure, none
of the Cano Entities, the Haddock Entities, Carlile or the Company shall use
any Confidential Information for any purpose other than performing their
obligations under
this Agreement or in connection with their participation in, or their acting as
operator with respect to, an Oil & Gas Opportunity.   Except as specifically provided herein with
respect to disclosure, neither the Members nor the Company shall
make copies (written, electronic or in any other media) of any Confidential
Information except to the extent reasonably necessary for performance of their respective
obligations under this Agreement or in connection with their participation in,
or acting as operator with respect to, an Oil & Gas Opportunity.


 


9





















 


8.             Obligations In Respect of Confidential Information of Third Parties.  Similarly, the Members, on the one hand,
and the Company, on the other hand, acknowledge that the other party
from time to time receives from third parties, confidential information of such
third party, subject to an obligation to maintain the confidentiality of such
information and to use it for limited purposes. 
The
Members, on the one hand, and the Company, on the other hand, to
the extent that such confidential information is disclosed to them, will
likewise hold the confidential information of third parties in strictest
confidence and not disclose or use it except as required by applicable law and as necessary
to perform their respective obligations under this
Agreement or in connection with their participation in, or acting as operator
with respect to, an Oil & Gas Opportunity, and as is consistent with the Member’s or
the Company’s agreement with those third parties.  The Members or the Company, as the case may
be, to the
extent that confidential information covered by any such confidentiality
obligation is disclosed to them,  hereby
agrees to be bound by the terms of any such confidentiality agreement or
obligation entered into with such third party with respect to an Oil &
Gas Opportunity and further agrees to defend, indemnify, protect and hold the
other parties harmless as set forth in Exhibit A
hereto.


 


9.             Duty to Return Confidential Information.  The Confidential Information will remain the
property of the party
that developed it and all reports, analyses, worksheets, compilations,
studies, memorandums, and other documents, whether contained in writing, on
compact disc, on tape, on computer disks or otherwise preserved in any medium,
whether prepared by the Company or a Member, which contain or reflect
Confidential Information (“Other Materials”) will also be the sole property of
the party that
developed such Other Materials. 
Upon the Company’s or a Member’s demand, a Member or the Company shall
immediately return or turn over to the other party all Confidential
Information and Other Materials without making or retaining any copies thereof
in any medium.


 


10.           Noncompetition Agreement. 
Except as provided in Section 2 hereof and except for participation in Identified
Properties in accordance with the terms of this Agreement, (x)
each Member agrees that during the ROFO Period it will not directly or
indirectly engage in a Competitive Business and (y) each Member other than
Carlile agrees that during the ROFO Period it will not permit any of its
Affiliates to directly or indirectly engage in a Competitive Business.


 


11.           Reasonableness.  The
Members and
the Company acknowledge and agree that the restrictions imposed
in this Agreement are reasonable as to time, activity and geographic scope; are
not oppressive; were accepted by them with full knowledge and understanding of
their implications; and are necessary to protect the business interests of the
Company.  The Company and the Members
recognize that the laws and public policies of various jurisdictions may differ
as to the validity and enforceability of covenants and undertakings of
noncompetition and intend that the provisions shall be enforced to the fullest
extent permissible under the laws and public policies of each jurisdiction in
which enforcement is sought and that unenforceability (or


 


10





















 


modification to conform to laws and public policies) of any provision
of this Agreement shall not render unenforceable or impair the remainder of the
provisions of this Agreement.  Accordingly,
if any provision shall be determined to be invalid or unenforceable, in whole
or in part, under the laws or public policies of any jurisdiction in which
enforcement is sought, then, as to such jurisdiction, the provisions shall be
deemed amended to delete or modify as necessary the offending provision and to
alter the balance thereof in order to render it valid and enforceable in such
jurisdiction.


 


12.           Time of Essence.  Time
is of the essence in the performance of this Agreement.


 


13.           Remedies for Breach.  Each of the
Members and
the Company admit that a breach of any provision of this
Agreement would cause irreparable damage to the other party and that monetary
damages for any such breach would be an inadequate remedy to the non-breaching party.  Therefore, the Members and the Company consent
that the non-breaching
party shall be entitled to seek, before any court having
jurisdiction, and without the posting of bond or other security and without the
necessity of proving monetary loss or the inadequacy of monetary damages, a
temporary restraining order and a temporary or permanent injunction or
injunctions to prevent breaches of any provision of this Agreement by any party
and to enforce specifically the performance of the provisions of this Agreement
by a party
hereto.  The remedies under
this paragraph are not exclusive and will be in addition to any other remedy
which a party
hereto may have by law, at equity or otherwise.


 


14.           Non-Assignability.  No party hereto may assign its rights or
obligations hereunder without the prior written consent of all of the other
parties hereto.


 


15.           Applicable Law.  THIS
AGREEMENT IS MADE, DELIVERED AND PERFORMABLE IN TARRANT COUNTY, TEXAS, AND
SHALL BE CONSTRUED
UNDER, GOVERNED BY AND ENFORCED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS WITHOUT REGARD TO ITS CHOICE OF LAW PRINCIPLES.  ANY ACTION OR PROCEEDING AGAINST ANY PARTY HERETO UNDER
OR IN CONNECTION WITH THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR
FEDERAL COURT IN TARRANT COUNTY, TEXAS. 
EACH OF THE PARTIES HERETO IRREVOCABLY (A) SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF SUCH COURTS AND (B) WAIVES ANY OBJECTION IT MAY NOW
OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN
ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM.


 


16.           Notices.  Notices
shall be sent to the parties at the following addresses:


 


11





















 


	
  If to the
  Company:

  	
   

  	
  Sabine
  Production Operating, LLC

  
	
   

  	
   

  	
  Attn: Governing
  Board of Managers

  
	
   

  	
   

  	
  512 Main Street,
  Suite 1200

  
	
   

  	
   

  	
  Fort Worth, TX
  76102

  
	
   

  	
   

  	
  Facsimile: (817)
  885-8391

  
	
   

  	
   

  	
   

  
	
  If to Cano:

  	
   

  	
  Cano
  Petroleum, Inc.

  
	
   

  	
   

  	
  Attn: S. Jeffrey
  Johnson, CEO

  
	
   

  	
   

  	
  The
  Oil & Gas Commerce Building

  
	
   

  	
   

  	
  309 West Seventh
  Street, Suite 1600

  
	
   

  	
   

  	
  Fort Worth, TX
  76102

  
	
   

  	
   

  	
  Facsimile: (817)
  698-0762

  
	
   

  	
   

  	
   

  
	
  If to Carlile:

  	
   

  	
  Carlile
  Management, LLC

  
	
   

  	
   

  	
  Attn:
  Dr. Kenneth Q. Carlile, Manager

  
	
   

  	
   

  	
  2615 East End
  Blvd. South

  
	
   

  	
   

  	
  Marshall, TX
  75672

  
	
   

  	
   

  	
  Facsimile: (903)
  935-0521

  
	
   

  	
   

  	
   

  
	
  If to Haddock:

  	
  Haddock
  Enterprises, LLC

  
	
   

  	
   

  	
  Attn: Gerald W.
  Haddock, President

  
	
   

  	
   

  	
  512 Main Street,
  Suite 1200

  
	
   

  	
   

  	
  Fort Worth, TX
  76102

  
	
   

  	
   

  	
  Facsimile: (817)
  885-8391

  



 


Notices may be sent be
certified mail, return receipt requested, Federal Express or comparable
overnight delivery service, or facsimile. Notice will be deemed received on the
fourth business day following deposit in U.S. mail and on the first business
day following deposit with Federal Express or other nationally recognized
overnight delivery service, or transmission by facsimile with proof of receipt
in the form of a transmission confirmation page. Any party to this Agreement
may change its address for notice by giving written notice to the other parties
at the address and in accordance with the procedures provided above.


 


17.            Miscellaneous.  This
document together
with the other Transaction Agreements contains the entire
agreement between the Members and the Company on the subject matter hereof,
supersedes all prior agreements, understandings and discussions among the
Members on the subject matter hereof (including but not limited to the
Summary), and may not be modified or waived in any manner except in a writing
signed by all parties.  No failure or
delay by any
party in exercising any right will operate as a waiver
thereof.  The obligations contained
herein may not be delegated to any other person.  The parties’ agreements shall
survive termination of this Agreement, cessation of their service, and
redelivery of all Confidential Information. 
To the extent permitted by applicable law, this Agreement shall be
binding on the parties
hereto and


 


12





















 


their respective heirs, assigns, and legal representatives.  If any provision of this Agreement is held
invalid or unenforceable, the remaining provisions of this Agreement shall not
be affected thereby.  The parties
agree that, at the request of the other party, they will without further
consideration execute and deliver all other instruments, agreements and
documents, and do all other actions, as the requesting party may
reasonably request in order more effectively to carry out the purposes and
intentions of this Agreement.


 


18.           Term.  This Agreement
shall expire and be of no further force or effect on the second anniversary of
the Transaction Closing Date.


 


19.           Termination in Event Transaction Is Delayed.  Notwithstanding anything else contained in
this Agreement, this Agreement shall terminate, without continuing obligation
or liability on the part of any party hereto, if the Transaction Closing Date
has not occurred on or before December 31, 2006.


 


13





















 


20.           Counterparts.  This
Agreement shall become binding upon the parties hereto upon execution and
delivery of this document by all parties, which execution and delivery may
occur by facsimile and in multiple counterparts, each of which being deemed an
original and all of which, when taken together being deemed a single document.


 


 


	
   

  	
  CANO PETROLEUM,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
          S.
  Jeffrey Johnson

  
	
   

  	
   

  	
         S.
  Jeffrey Johnson, CEO

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  CARLILE MANAGEMENT,
  LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
             Dr. Kenneth
  Q. Carlile

  
	
   

  	
   

  	
         Dr. Kenneth
  Q. Carlile, Manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  HADDOCK
  ENTERPRISES, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
             Gerald
  W. Haddock

  
	
   

  	
   

  	
        Gerald
  W. Haddock, President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
  ACCEPTED:

  	
   

  
	
   

  	
   

  
	
  SABINE PRODUCTION
  OPERATING, LLC

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  Gerald W. Haddock

  	
   

  	
   

  
	
   

  	
  Gerald W. Haddock, Chairman

  	
   

  	
   

  



 


14





















 


EXHIBIT A


Terms of Indemnity


 


In the event that a
Member or its Representatives, on the one hand, or the Company or its
Representatives, on the other hand (such party and its Representatives being
referred to herein as an “Indemnified Person”), becomes involved in any action,
proceeding or investigation brought by or against any third person in
connection with or as a result of the breach of any such confidentiality
agreement, the Members, severally and not jointly (if the Indemnified Person is
the Company), or the Company (if the Indemnified Person is a Member) (such
party being referred to herein as an “Indemnifying Person”), shall indemnify
and hold the Indemnified Person harmless against any and all losses, claims,
damages or liabilities asserted by any such third person and the Indemnified
Person’s reasonable legal and other expenses, including the reasonable cost of
any investigation and preparation (such losses, claims, damages, liabilities
and expenses collectively referred to herein as the “Losses”), in connection
with or as a result of the breach of any such confidentiality agreement by the
Indemnifying Person or its Representatives, except to the extent that any such
Losses result from the gross negligence, willful misconduct or bad faith of the
Indemnified Person.  If for any reason
the foregoing indemnification is unavailable to the Indemnified Party or
insufficient to hold it harmless, then the Indemnifying Person shall contribute
to the amount paid or payable by the Indemnified Person as a result of such
Losses in such proportion as is appropriate to reflect the relative economic
interests of the Indemnifying Person on the one hand and the Indemnified Person
on the other hand as well as the relative fault of the Indemnifying Person and
the Indemnified Person with respect to such Losses and any other relevant
equitable considerations.  The
reimbursement, indemnity and contribution obligations of an Indemnifying Person
under this paragraph shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Indemnified
Person and the Indemnifying Person.


 


Promptly
after receipt by an Indemnified Person of notice of its involvement in any
action, proceeding or investigation described above, the Indemnified Party
shall, if a claim for indemnification in respect thereof is to be made against
the Indemnifying Person, notify the Indemnifying Person of such
involvement.  Failure by the Indemnified
Person to so notify the Indemnifying Person shall relieve the Indemnifying
Person from the obligation to indemnify the Indemnified Person only to the
extent that the Indemnified Person suffers actual prejudice as a result of such
failure, but shall not relieve the Indemnifying Person from its obligation to
provide reimbursement and contribution to the Indemnified Person.  The Indemnifying Person shall be entitled to
assume the defense of any such action or proceeding with counsel reasonably
satisfactory to the Indemnified Person. 
Upon assumption by the Indemnifying Person of the defense of any such
action or proceeding, the Indemnified Person shall have the right to


 


15





















 


participate in such action or proceeding and to retain its own counsel
but the Indemnifying Person shall not be liable for any legal expenses of other
counsel subsequently incurred by such Indemnified Person in connection with the
defense thereof unless (i) the Indemnified Person has agreed to pay such
fees and expenses, (ii) the Indemnifying Person shall have failed to
employ counsel reasonably satisfactory to the Indemnified Person in a timely
manner, or (iii) the Indemnified Person shall have been advised by counsel
that there are actual or potential conflicting interests between the
Indemnifying Person and the Indemnified Person, including situations in which
there are one or more legal defenses available to the Indemnified Person that
are different from or additional to those available to the Indemnifying Person;
provided, however, that the Indemnifying Person shall not, in connection with
any one such action or proceeding or separate but substantially similar actions
or proceedings arising out of the same general allegations, be liable for the
fees and expenses of more than one separate firm of attorneys at any time for
all Indemnified Persons, except to the extent that local counsel, in addition
to its regular counsel, is required in order to effectively defend against such
action or proceeding.  The Indemnifying
Person shall not consent to the terms of any compromise or settlement of any
action defended by the Indemnifying Person in accordance with the foregoing
without the prior written consent of the Indemnified Person unless such
compromise or settlement (i) includes an unconditional release of the
Indemnified Person from all liability arising out of such action and (ii) does
not include a statement as to or an admission of fault, culpability or a
failure to act, by or on behalf of any Indemnified Person.


 


16