Exhibit 10.17


PURCHASE
AND SALE AGREEMENT


by
and between


PENNACO
ENERGY, INC. (“Seller”)


and

PRB ENERGY, INC. (“Purchaser”)


As of May 1, 2006









 



PURCHASE AND SALE
AGREEMENT


THIS
PURCHASE AND SALE AGREEMENT (this “Agreement”) is made and entered into as of May 1,
2006, by and between Pennaco Energy, Inc., a Delaware corporation (“Seller”), and PRB Energy, Inc., a
Colorado corporation (“Purchaser” and, together with Seller, the “Parties”).


RECITALS:


A.            Seller owns and operates the wells,
leases and other assets in the Powder River Basin of Wyoming defined in Section
2.2 hereof.


B.            Seller desires to sell and Purchaser
desires to purchase all of Seller’s right, title and interest in and to the
Assets, in accordance with and subject to the terms and conditions set forth
herein.


IN
CONSIDERATION OF the above recitals, the benefits to be derived by each party
under this Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Purchaser and Seller hereby agree
as follows:


ARTICLE I

DEFINITIONS


The
following terms, as used herein, have the following meanings:


“Affiliate” means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such other
Person.


“Governmental Authority” means the United States and any tribal,
state, county, city or other political subdivision, agency, court or
instrumentality.


“Knowledge” means with respect to a Person, the actual knowledge of that Person
and, where such Person is a business entity, means the actual knowledge of each
of the supervisory personnel, officers, directors and managers of such entity,
in all cases, without need for additional inquiry.


“Legal Requirement” means applicable common law and any
statute, ordinance, code, law, rule, regulation, order, judgment, decree,
requirement or procedure enacted, adopted, promulgated, applied or followed by,
or any agreement entered into by, any Governmental Authority in force and
effect on the date hereof or on the Closing Date as defined in subsection 8.1
below (including, without limitation, any Legal Requirement regarding building,
zoning, subdivision, land use or other similar legal requirements).


“Lien” means,
with respect to any property or asset, any mortgage, lien, pledge, charge,
security interest or encumbrance in respect of such property or asset. For the



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purposes of this Agreement, a Person shall be deemed
to own subject to a Permitted Lien any property or asset which it has acquired
or holds subject to the interest of a vendor or lessor under any conditional
sale agreement, capital lease or other title retention agreement relating to
such property or asset.


“Material Adverse Effect” means a material adverse effect exceeding
$50,000 in value on the condition (financial or otherwise), business, assets or
results of operations of the Assets (other than the Excluded Assets).


“Ordinary Course of Business” means the ordinary course of the business
of Seller with respect to the Assets consistent with Seller’s past practice and
custom.


“Permit” means
each license, franchise, permit, certificate, approval or other similar
authorization affecting, or relating in any way to the Assets.


“Permitted Liens and Encumbrances” shall mean any of the following:


(i)                                     any
Liens or other encumbrances described in Schedule 1(i);


(ii)                                  liens
for Taxes not yet due and payable or being contested in good faith;


(iii)                               inchoate
mechanics, materialmen’s or similar liens arising in the Ordinary Course of
Business or being contested in good faith (and for which adequate accruals or
reserves have been established by Seller, as applicable);


(iv)                              any
customary zoning law or ordinance or any similar Legal Requirement;


(v)                                 any
customary right reserved to any Governmental Authority or Entity to regulate
the affected property, and all applicable laws, rules and orders of
governmental authorities;


(vi)                              any
Lien (other than Liens securing indebtedness or arising out of the obligation
to pay money) which does not and shall not individually or in the aggregate
with one or more other Liens interfere with the right or ability to own, use,
enjoy or operate the Assets as they are currently operated, or to convey the
quality of title agreed to herein to the same (with respect to the Assets) or
materially detract from their value;


(vii)                           preferential
rights to purchase and required third-party consents and similar agreements
with respect to which waivers or consents are obtained from the appropriate
parties on or prior to the Closing Date or the appropriate time period for
asserting the right has expired or has been waived on or prior to the Closing
Date without an exercise of the rights;



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(viii)                        any Title
Defects and Environmental Conditions that Purchaser shall have expressly waived
in writing or of which Purchaser shall not have given Seller timely written
notice pursuant to Sections 3.3, 6.1 and 6.2 of this Agreement;


(ix)                                lessor’s
royalties, overriding royalties, reversionary interests and other agreements on
any leasehold working interest and wells described in Exhibit A (the “Wells”), if
the net cumulative effect of the burdens does not operate to reduce Seller’s
interest in all oil and gas produced from the leasehold interests and wells
below the net revenue interest as set forth on Exhibit A, or if they do not
increase Purchaser’s percentage obligation to pay in excess of its working
interest percentage;


(x)                                   all
rights to consent by, required notices to, filings with or other actions by
governmental entities in connection with the sale or conveyance of oil and gas
leases or interests, which are customarily obtained after the sale or
conveyance;


(xi)                                all
unit agreements, communitization agreements, pooling agreements or orders, all
operating agreements, all other instruments, agreements and matters described
in the Exhibits, or made available to Purchaser by Seller in Seller’s files,
whether of record or not;


“Person” means
an individual, corporation, partnership, limited liability company,
association, trust or other entity or organization, including a Governmental
Authority.


“Reasonable Good-Faith Efforts” shall be deemed to require a Party to
undertake reasonable efforts, but not extraordinary measures which include
without limitation the initiation or prosecution of legal proceedings or the
payment of amounts in excess of normal and usual filing fees, and processing
fees, if any.


ARTICLE II

PURCHASE AND SALE


2.1           Purchase
and Sale. Subject to
the terms and conditions of this Agreement, at Closing as defined in subsection
8.1 below, Seller agrees to sell, convey, transfer, assign and deliver, or
cause to be sold, conveyed, transferred, assigned and delivered, free and clear
of all Liens and Encumbrances created by, through or under Seller, other than
Permitted Liens and Encumbrances, to Purchaser and Purchaser agrees to
purchase, acquire, accept and receive from Seller, effective as of 12:01 a.m.,
Mountain time, June 30, 2006 (the “Effective
Date”), all of Seller’s
right, title and interest in, to and under the Assets, whether real, personal
or mixed, tangible or intangible, owned, leased, licensed, held or used in the
operation of the Assets by Seller, and all assets thereafter acquired by Seller
for which a Purchase Price Adjustment, as defined in Section 3.2, has been
made.



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2.2           The
Assets. As used herein, the term “Assets”
shall include all of Seller’s right, title and interest in, to, under or
derived from the following, including, without limitation:


(a)           the undivided working and other
interests and net revenue interests in and to the leasehold estates created by
the oil and gas leases described in Exhibit B (the “Leases”), insofar as the Leases cover the
lands (the “Lands”) described in Exhibit B hereto;


(b)           the undivided interest in and to the
oil and gas wells located on the Leases and Lands, or lands pooled or unitized
therewith described in Exhibit A, all injection, pressure maintenance and
disposal wells on the Leases or Lands, and all flowlines and all personal
property, inventory, facilities, equipment, improvements and fixtures now or as
of the Effective Date located on, used or held for use or charged to the
Leases, Land or Wells for the production, gathering, compression, treatment,
transportation, processing, sale or disposal of hydrocarbons or water produced
therefrom or attributable thereto, and all other appurtenances thereunto
belonging;


(c)           all of Seller’s right, title and
interest in and to all oil, natural gas, natural gas liquids or condensate
inventory produced from the Wells, the Land or attributable to the Leases, or
lands pooled or unitized therewith from and after the Effective Date, including
“line fill” and inventory below the pipeline connection in the storage tanks as
of the Effective Date, or the proceeds thereof;


(d)           all of Seller’s right, title and
interest in and to all unitization, communitization, pooling and operating
agreements, and the units created thereby which relate to the Leases or Land,
or interests therein, or which relate to any units or wells located on the
Leases, including any and all units formed under orders, regulations, rules,
and other official acts of the governmental authority having jurisdiction,
together with any right, title and interest created thereby in the Leases and
Land or lands pooled or unitized therewith;


(e)           all of Seller’s right, title and
interest in and to all gathering facilities and assets used or useful in
connection with the Leases, Land and Wells;


(f)            all of Seller’s right, title and
interest, to the extent applicable and transferable, in and to hydrocarbon
sales, purchase, gathering, transportation and processing contracts, operating
agreements, partnership agreements, farm-out agreements and other contracts,
agreements and instruments relating to the interests described in Sections
2.2(a), (b), (c) and (d) (including without limitation the “Material Agreements” as described on Exhibit C),
excluding, however, any insurance contracts;


(g)           all of Seller’s surface rights
incident or appurtenant to the Leases or the Land, and all of Seller’s right,
title and interest in and to all easements, rights-of-way,



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permits, licenses, servitudes or other similar
interests affecting the Wells, Leases or Land;


(h)           all of Seller’s right, title and
interest in and to claims and causes of action arising from or related to the
Wells, Leases or Land which Seller may now have or have in the future with
respect to Purchaser and its affiliates;


(i)            all other leasehold interests,
overriding royalty interests, mineral interests and other interests, if any,
owned by Seller in and to the Land, the Leases or the Wells, and in or
attributable to production therefrom;


(j)            to the extent they arise or accrue
on or after the Effective Date, all of Seller’s rights, claims, credits, causes
of action or rights of set off against third Persons relating to the Assets,
including without limitation unliquidated rights under manufacturers’ and
vendors’ warranties relating to the Assets;


(k)           all prepaid expenses, including but
not limited to Property Taxes, leases and rentals attributable to or arising on
or after the Effective Date; and


(l)            all deposits and amounts held in
suspense, if any, relating to or associated with the Assets, including all of
Seller’s obligations and liabilities for the payment of interest, if any, on
said amounts if properly accrued or reserved by Seller and the funds were
transferred to Purchaser; and


(m)          copies of the files, records, data and
information relating to the items described in Sections 2.2(a) through (l)
maintained by Seller (the “Records”),
but excluding the following: (i) all of Seller’s internal appraisals and
internal interpretive data related to the Leases and Lands, (ii) all
information and data under contractual or legal restrictions on assignment or
disclosure, (iii) all information subject to a privilege, including all of
Seller’s legal files, (iv) Seller’s corporate financial and general tax records
that do not relate to the Assets, (v) all accounting files that do not relate
to the Assets; (vi) records and files relating to Seller’s employees; (vii)
Seller’s computer programs and software; and (viii) all other files and records
which Seller is prohibited from assigning, conveying, or delivering to
Purchaser due to third party restrictions, non-waived confidentiality
provisions, or legal prohibitions;


in the case of each of
the foregoing, owned, held for use, leased, licensed, or used or useful in the
operation of the Assets.


2.3           Excluded
Assets. Notwithstanding the provisions of Section 2.2, the Assets
shall not include the following, which shall be retained by Seller (the “Excluded Assets”): (a) cash and cash
equivalents; (b) bonds, letters of credit, surety instruments, and other
similar items; (c) any agreement, right, asset or property owned or leased by
Seller that is not used or held for use or useful in the operation of the
Assets; (d) account books of original entry, general ledgers, and financial
records used in connection with the Assets; provided
that Seller shall provide copies of such books,



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records and ledgers pursuant to Section 2.2 to the
Purchaser to the extent not confidential and related to the Assets; (e) all
books, records, files and other materials to the extent they are or contain
confidential or legally privileged information or materials; (f) all rights,
claims, credits, causes of action or rights of set off against third Persons
(other than the Purchaser) applicable to periods prior to the Effective Date;
(g) any vehicles, tools, pulling machines, warehouse stock, equipment or
material temporarily located on the Lands, (h) any leased personal property,
(i) any equipment, pipelines, fixtures, facilities or interests in land owned
by any contractor, purchaser or transporter of oil and/or gas from the Assets;
(j) those excluded items listed at Section 2.2(m) of this Agreement; and (k)
those items identified on Schedule 2.3.


ARTICLE III 

PURCHASE PRICE


3.1           Purchase
Price and Manner of Payment; Performance Deposit. Purchaser will pay
Seller a total of six hundred thousand U.S. Dollars ($600,000) (“Purchase Price”) adjusted as provided in
Section 3.2 (the “Adjusted Purchase Price”).
Within two business days after full execution of this Agreement, Purchaser
shall remit to Seller ten percent (10%) of said $600,000 (being sixty thousand
dollars ($60,000) as a Performance Deposit (“Performance
Deposit”). The Adjusted Purchase Price shall be paid at Closing to
Seller, at Seller’s request, either by wire transfer of immediately available
funds, certified funds, cashier’s check, or by such other method as may be
agreed to by the Parties. At least five days prior to the Closing, Seller shall
deliver to Purchaser for Purchaser’s review and approval, a statement setting
forth the adjustments to the Purchase Price known as of such date and the
Adjusted Purchase Price resulting from such adjustments.


3.2           Adjustments
to the Purchase Price. The Purchase Price shall be adjusted (the “Purchase Price Adjustment”) as follows:


(a)           Upward
Adjustments. The Purchase Price shall be adjusted upward by the following:


(i)            the amount of expenses, costs,
Property Taxes, rents, lease payments and charges paid by Seller that are
attributable to the ownership and operation of the Assets on or after the
Effective Date, including but not limited to (A) the costs and expenses
attributable to operation and maintenance of the Assets incurred in the
Ordinary Course of Business, (B) any capital expenditures incurred in the
Ordinary Course of Business or approved in writing by Purchaser, attributable
to the Assets, (C) any amounts paid for the acquisition, extension or renewal
of any Asset incurred in the Ordinary Course of Business, (D) any amounts paid
for the acquisition of any asset included within the Assets after the Effective
Date and incurred in the Ordinary Course of Business or approved in writing by
Purchaser, (E) all prepaid expenditures (including taxes, lease payments and
rents), to the extent not otherwise included herein, made by Seller for costs
and expenses directly attributable to the Assets for the period after



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the Effective Date, and (F) any amounts relating to
obligations arising under the Material Agreements (other than amounts arising
as a result of Seller’s breach of such agreements); and


(ii)           any other amount agreed upon by
Seller and Purchaser.


(b)           Downward
Adjustments. The Purchase Price shall be adjusted downward by the
following:


(i)            all amounts received by Seller from
the Effective Date through the Closing Date (the “Adjustment Period”) that are attributable to the ownership and
operation of the Assets during the Adjustment Period, including, but not
limited to (A) income, revenues and proceeds received for gas gathering and
related services and (B) for the sale, salvage or other disposition during the
Adjustment Period of any property, equipment or rights included in the Assets;


(ii)           an amount equal to Property Taxes
relating to the time period prior to the Effective Date and which have not been
paid prior to the Closing;


(iii)          the amount of any reduction referred
to in Section 3.3(c) in connection with any estimated costs to cure Title
Defects;


(iv)          the amount of any reduction referred
to in Section 6.3 in connection with Estimated Remediation Costs as defined in
Section 6.2;


(v)           the amount of any reduction referred
to in Section 7.1 in connection with any Casualty Event as defined therein;


(vi)          the Performance Deposit referred to in
Section 3.1 above; and


(vii)         any other amount agreed upon by Seller
and Purchaser.


3.3           Title Due Diligence.


(a)           Following full execution of this
Agreement, Purchaser shall have until June 16, 2006 to complete, at Purchaser’s
sole cost, risk and expense, all title examination of the Assets which it
wishes to conduct. On or before such date, Purchaser shall deliver to Seller
written notice (“Claim of Title Defects”) of any claims that title to any
portion of the Assets is less than Defensible Title or that the Lease or Leases
are expiring within ninety days after the Closing. Within five (5) business
days after receipt of the Claim of Title Defects, Seller shall notify Purchaser
in writing as to what action Seller shall take with respect to each asserted
Title Defect, in accordance with the further provisions of this



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Article 3.3. Purchaser hereby waives and releases
Seller from any such claim not properly and timely asserted in the Claim of
Title Defects. The Claim of Title Defects shall specify the specific properties
affected, and shall specify any Title Defect which, in Purchaser’s opinion,
causes title to the specific affected properties to be less than Defensible
Title. Purchaser shall be solely responsible for any costs of title examination
it undertakes, and Seller shall not be required to create or supplement any
title documents, such as title opinions or abstracts of title. Purchaser will
not be given access to any data and records that Seller cannot legally provide
to Purchaser because of third-party restrictions on Seller.


(b)           The Claim of Title Defects shall
itemize Purchaser’s best estimate of the cost to cure each such Title Defect.
If Seller and Purchaser do not agree upon whether a certain matter constitutes
a Title Defect, or the estimated cost to cure of any such Title Defect, the
Parties shall engage promptly (and in any event within ten days) a Denver- or
Wyoming-based oil and gas attorney who is not the counsel of either Party, and
who is mutually acceptable to both Parties (the “Independent Attorney”). Such Independent Attorney shall render
an opinion as to whether or not the matter constitutes a Title Defect, and/or
the cost to cure such Title Defect, as the case may be. The determination of
the Independent Attorney shall be binding on Purchaser and Seller, and the fees
and expenses of such Independent Attorney shall be borne one-half each by
Purchaser and Seller. If the Parties are unable to agree on an Independent
Attorney, then each Party shall select one attorney of their choosing, both of
which attorneys shall then select the Independent Attorney.


(c)           Seller shall review the Claim of
Title Defects, and shall have the option of (1) curing the Title Defect, or (2)
reducing the Purchase Price by an amount equal to the product of $2,500
multiplied by proportionate percentage of reduction in the net revenue interest
shown on Exhibit A caused by the Title Defect, for each well affected by a
Title Defect. By way of example, if Exhibit A states that Seller owns an 87.5%
net revenue interest in a particular well, but, due to a Title Defect, Seller
owns only a 43.75% net revenue interest in that well, then the Purchase Price
shall be reduced by $1,250.


(d)           The Term “Title Defect” shall mean
any encumbrance encroachment, irregularity, defect in or objection to Seller’s
title to the Assets which, alone or in combination with other defects, renders
Seller’s title to the affected Asset less than Defensible Title. Permitted
Liens and Encumbrances shall not constitute Title Defects.


(e)           The Term “Defensible Title” shall mean:
(1) Defensible Title is that which entitles Seller on a leasehold basis to
receive not less than the net revenue interest set forth on Exhibit A for all
oil and gas produced, saved and marketed from the Lands as of the Effective
Date; (2) Defensible Title is that which obligates Seller on a leasehold basis
to bear the costs and expenses relating to the maintenance, development and
operation of the producing wells as



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set out on Exhibit A; (3) Defensible Title is that
which is free and clear of encumbrances, liens and defects that would
constitute Title Defects; and (4) Defensible Title is subject to Permitted
Liens and Encumbrances.


(f)            Seller shall be responsible for
curing, or reducing the Purchase Price by the Closing. If the reasonable
estimated reduction to the Purchase Price exceeds a total of $375,000 or more,
then Seller shall have the right, at its option, to terminate this Agreement by
written notice without further liability to the other party except for the
return by Seller of the Performance Deposit.


ARTICLE IV 

REPRESENTATIONS AND WARRANTIES OF SELLER


On
the date hereof and the Closing Date (and on such other date as may be set
forth below), Seller represents and warrants to Purchaser that:


4.1           Organization
and Standing. As of the Effective Date, the date hereof and the
Closing Date, Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all powers
required to carry on its business as now conducted. As of the Effective Date,
the date hereof and the Closing Date, Seller is duly qualified to do business
as a foreign entity and is in good standing in the state of Wyoming.


4.2           Authority.
Seller has the power and authority to enter into and perform this
Agreement and to carry out the transactions contemplated herein. Seller has all
the requisite legal authority to own the Assets and to carry on its business as
now conducted in regard to the Assets. The execution, delivery and performance
of this Agreement and the consummation by Seller of the transactions
contemplated herein have been duly and validly authorized by all necessary
action on the part of Seller.


4.3           Validity
of Agreement. This Agreement is a legal, valid and binding
obligation of Seller enforceable against Seller in accordance with the terms of
this Agreement, except as enforcement may be limited by bankruptcy, insolvency
or other similar laws affecting the enforcement of creditors’ rights in
general. The enforceability of Seller’s obligations under this Agreement is further
subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law). Neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated herein will conflict with or constitute a violation
of, or default under, or give rise to a right of cancellation, termination or
acceleration with respect to (i) any Legal Requirement; (ii) any contract,
commitment, agreement, understanding, arrangement or restriction of any kind to
which Seller is a party or by which Seller is bound; or (iii) the articles of
formation of Seller.


4.4           Litigation
and Claims. Except as disclosed on Schedule 4.4. there are no
governmental or other legal actions, claims, suits or other proceedings,
pending or, to



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the Knowledge of Seller threatened, to which Seller is
or would be a party and which (i) relate to any of the Assets, and (ii) which,
if adversely determined, could prevent or interfere with consummation of the
transactions contemplated by this Agreement or (A) have a Material Adverse
Effect, and (B) result in the modification, revocation, termination, suspension
or other limitation of any Material Agreement.


4.5           Compliance
with Applicable Legal Requirements. As of the Effective Date, the
date hereof and the Closing Date, except with respect to Environmental Legal
Requirements (which matters are addressed in Section 4.11): Seller and the
Assets are in compliance with and are not under investigation with respect to
and have not been threatened to be charged with or given notice of any
violation of, any applicable Legal Requirement in respect of the Assets.


4.6           Material
Agreements.


(a)           The Material Agreements, the Lands
and the Leases (A) constitute all of the material contracts relating to the
Assets and Seller’s operation thereof, (B) are valid and binding agreements and
are in full force and effect, and (C) may be freely assigned to Purchaser by
Seller without the consent of another Person. True and complete copies of each
Material Agreement, the Leases and the Lands have been made available to
Purchaser;


(b)           The Assets are not bound by:


(i)            any agreements for the sale or
purchase of hydrocarbons other than to Purchaser;


(ii)           any lease of personal property and
equipment (except for compression);


(iii)          any agreement for the purchase of
materials, supplies, goods, services, equipment or other assets providing for
either (1) annual payments by Seller of $20,000 or more or (2) aggregate
payments by Seller of $20,000 or more;


(iv)          any gas transportation, natural gas
liquids transportation and fractionation, gathering and processing,
distribution or other similar agreement for the sale by Seller of materials,
supplies, goods, services, equipment or other assets that provides for either (1)
annual payments to Seller of $20,000 or more or (2) aggregate payments to
Seller of $20,000 or more;


(v)           any agreement relating to the
acquisition or disposition of any business or giving rise to rights to a third
party’s right to make any acquisition or disposition (whether by merger, sale
of stock, sale of assets or otherwise);



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(vi)          any agreement relating to indebtedness
for borrowed money or the deferred purchase price of property; and


(vii)         any agency, dealer, sales
representative, marketing or other similar agreement.


4.7           Material
Breach.


(a)           As of the Effective Date, the date
hereof and the Closing Date, neither Seller nor any other party to the Material
Agreements, the Leases and the Lands has been or is in default with respect to
any obligation thereunder that would have a Material Adverse Effect, nor is
Seller aware of the existence of facts that, with the passage of time or upon
notice from another party to any of the Material Agreements, the Leases and the
Lands, would constitute such a default that would have a Material Adverse
Effect.


(b)           Seller has not received any notice
that (A) any Party to a Material Agreement will not honor the terms of any
Material Agreement to which it is a party at any time after the Closing Date,
and (B) any such Party has otherwise threatened to take any action described in
the preceding clause as a result of the execution, delivery or performance of
this Agreement.


4.8           Termination.
As of the Effective Date, the date hereof and the Closing Date, no
party to any of the Material Agreements, the Leases and the Lands has given
notice to Seller of any action to terminate, cancel, rescind or procure a
judicial reformation thereof.


4.9           Consents
and Preferential Rights. Except as disclosed on Schedule 4.9,
except to the extent same would not, in the aggregate, have a Material Adverse
Effect, and except Federal and State consents to assignment normally obtained
after closing, (i) to Seller’s Knowledge no consents are required from
Governmental Authorities or any other Persons, including the consent of any
third party required under any contract, in connection with the transfer of any
of the Assets by Seller, and (ii) no preferential purchase rights exist with
respect to the Assets, and no consent, approval or other action by, or filing
with any Person, including the consent of any third party required under any
material contract, or Governmental Authority is required, in connection with
the execution, delivery and performance by Seller of this Agreement, including
consents required under the Leases, Material Agreements, Permits and
Environmental Permits.


4.10         Conduct
of Business.


(a)           The Assets have been operated in
material compliance with applicable Legal Requirements, including all
Environmental Requirements, and in accordance with good industry practices.



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(b)           Except as incurred in the Ordinary
Course of Business and to the extent same would have a Material Adverse Effect,
there has not been:


(i)           any incurrence, assumption or
guarantee by Seller of any indebtedness for borrowed money with respect to the
Assets;


(ii)          any creation or other incurrence of
any Lien (other than Permitted Liens) on any Asset;


(iii)         any damage, destruction or other
casualty loss (whether or not covered by insurance) affecting any Asset;


(iv)        any transaction or commitment made, or
any contract or agreement entered into, by Seller relating to any Asset
(including the acquisition or disposition of any assets), or any relinquishment
by Seller of any contract or other right, in either case, material to the Assets,
other than transactions and commitments contemplated by this Agreement; or


(v)         any capital expenditure, or commitment
for a capital expenditure, for additions or improvements to property, plant and
equipment in excess of $20,000 in the aggregate or that have not been approved
in writing by Purchaser.


4.11         Compliance
with Environmental Legal Requirements. Except as disclosed on Schedule
4.11, with respect to the Assets, on the Effective Date and the Closing
Date:


(i)           Seller and the Assets have been and
are in material compliance with all applicable Legal Requirements pertaining to
health, safety, or the environment or to pollutants, contaminants, wastes or
chemicals (“Environmental Legal Requirements”)
and all permits, licenses, franchises, certificates, approvals or other similar
authorizations of Governmental Authorities relating to or required by
Environmental Legal Requirements (“Environmental
Permits”);


(ii)          with respect to the Assets, no
conditions exist that could reasonably be expected to require cleanup, removal,
remedial action or other response by Seller pursuant to any Environmental Legal
Requirements;


(iii)         neither Seller nor any part of the
Assets is subject to any pending or threatened judgment, decree or order,
notice, demand, request for information, review, investigative claim or
citation related to or arising out of Environmental Legal Requirements;



 12
 






 



(iv)        with respect to the Assets, Seller has
not received any written or oral notice stating that it has been named or
listed as a potentially responsible party by any Governmental Authority in a
matter arising under or relating to any Environmental Legal Requirement;


(v)         none of the Assets nor any property to
which Seller has directly or indirectly transported, or arranged for the
transportation of, Hazardous Substances (as defined in Article VI), is listed
or proposed for listing on the National Priorities List promulgated pursuant to
the Comprehensive, Environmental, Response, Conservation and Liability Act of
1980, as amended (“CERCLA”) or CERCLIS
(as defined by CERCLA) or on any similar federal, state, tribal or local list
of sites requiring investigation or cleanup; and


(vi)        no polychlorinated biphenyls,
radioactive material, lead, asbestos-containing material, sumps, surface
impoundments, lagoons, landfills, septic, wastewater treatment or other
disposal system or underground storage tanks are or have been, located on,
under, at or in the Assets in violation of any Environmental Legal Requirement
which has resulted in or could reasonably be expected to result in liability
under any Environmental Legal Requirement. Purchaser has been provided access
to all environmental investigations, studies and/or audits performed on the
Assets owned by Seller within the last two years which are in Seller’s
possession and non-confidential.


4.12         Licenses
and Permits. Exhibit D correctly describes each Permit
(including without limitation, Environmental Permits, but excluding all well
drilling permits and production permits) together with the name of the issuing
Governmental Authority and indicates with an asterisk any Permits (including
without limitation Environmental Permits) which by their terms are not
transferable to any third party. Except as set forth in the Exhibit E, to
Seller’s Knowledge, (i) the Permits are valid and in full force and effect,
(ii) Seller is not in default, and no condition exists that with notice or
lapse of time or both would constitute a default, under the Permits, and (iii)
except for the Permits marked with an asterisk on Exhibit E, none of the
Permits will, assuming the related Required Consents have been obtained prior
to the Closing Date, be terminated or impaired or become terminable, in whole
or in part, as a result of the transactions contemplated hereby.


4.13         Undisclosed
Liabilities. There are no undisclosed liabilities that would have a
Material Adverse Impact on the Leases, Land, Wells, rights-of-way or Related
Facilities and that would prevent same from being functional to the extent
necessary for their operation and compliance with the Material Agreements.


4.14         Purchaser
as Successor Operator. Seller does not represent or warrant that
Purchaser shall become successor operator of the Assets that Seller operates,
since the Assets may be subject to agreements that control the appointment of a
successor



 13
 






 



operator. Seller will use its best efforts to assist
Purchaser in becoming a successor operator. Seller agrees that as to the Assets
it operates, where it will assist to facilitate the appointment of a successor
operator, Seller will resign as operator at Closing. Purchaser will act
expeditiously to take all reasonable measures, including, but not limited to,
taking action prior to Closing if the parties hereto mutually agree that is
appropriate, to have Purchaser appointed successor operator of the Assets that
Seller operates, or, if the necessary votes under the applicable agreement(s)
cannot be obtained to appoint Purchaser as successor operator, to have another
working interest owner of such Assets appointed successor operator, according
to the terms of any applicable agreement.


ARTICLE V

REPRESENTATIONS AND WARRANTIES OF PURCHASER


On
the date hereof and on the Closing Date (and such other date as may be set
forth below), Purchaser represents and warrants to Seller that:


5.1           Organization
and Standing. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of Colorado and has
all corporate powers required to carry on its business as now conducted.


5.2           Authority.
Purchaser has the power and authority to enter into and perform this Agreement
and to carry out the transactions contemplated herein. The execution, delivery
and performance of this Agreement and the consummation by Purchaser of the
transactions contemplated herein have been duly and validly authorized by all
necessary action on the part of Purchaser.


5.3           Validity
of Agreement. This Agreement is a legal, valid and binding
obligation of Purchaser enforceable against Purchaser in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors’ rights in general. The
enforceability of Purchaser’s obligations under this Agreement is further
subject to general principles of equity (regardless of whether enforceability
is considered in a proceeding in equity or at law). Neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated herein will conflict with or constitute a violation of, or default
under, or give rise to a right of cancellation, termination or acceleration
with respect to (i) any order, judgment, decree or applicable law, or (ii) any
contract, commitment, agreement, understanding, arrangement or restriction of
any kind to which Purchaser is a party or by which Purchaser is bound, or (iii)
the certificate of incorporation or bylaws of Purchaser.


5.4           No
Consents Required. No consents, approvals or other action by or
filing with any Person or Governmental Authority is required in connection with
the execution, delivery and performance by Purchaser of this Agreement.



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ARTICLE VI

ENVIRONMENTAL MATTERS


6.1           Environmental
Due Diligence Report. Purchaser will have a Phase I environmental
due diligence report and/or regulatory compliance review of the Assets
(collectively, the “Phase I Environmental
Audit”) conducted by its consultant (“Purchaser’s Consultant”) and will supply the report to Seller
on or before June 16, 2006. Such Phase I Environmental Audit shall consist only
of (a) a review and assessment of the adequacy of Seller’s existing permits for
the Assets; (b) a review of historic data to determine prior land uses; (c) a
compilation of pertinent information related to the Assets, including
interpretation of analytical data in the files, except any such information
which Seller is prohibited from disclosing due to third-party restrictions; (d)
a physical examination of the surface of the Lands to identify any surface
contamination. The Phase I Environmental Audit shall not include soil boring,
collection of samples or analysis of any material on the Assets without Seller’s
prior express written consent. Purchaser shall notify Seller in writing if
Purchaser’s Consultant recommends a Phase II Environmental Audit, which shall
not be conducted without Seller’s prior written consent. If Seller does not
consent to the Phase II Environmental Audit within three (3) business days
after such notification, Purchaser may terminate this Agreement without any
liability to Seller, and Seller shall return the Performance Deposit. If Seller
does consent to the Phase II Environmental Audit, Purchaser shall conduct such
Audit as quickly as practicable. Seller shall have the right to have its
designated representative present during the Phase I Environmental Audit, and,
if allowed by Seller, the Phase II Environmental Audit, to split samples with
any samples taken by Purchaser’s Consultant, and to perform its own testing and
evaluations. Purchaser shall be responsible for all death, personal injury or
property damage caused by Purchaser’s Consultant arising in connection with the
Environmental Audit(s), and shall indemnify, defend and hold harmless Seller
from all Claims related thereto.


6.2           Notification
of Environmental Conditions to be Corrected. Purchaser will notify
Seller of all Environmental Conditions (as defined below) identified during the
course of performing the Environmental Audit(s) (which shall include all
matters discovered in the course of conducting the Environmental Audit(s) which
would or might render Seller’s representations hereunder not true and correct
as of the Closing Date), together with (i) all documents and analyses relating
to such Environmental Conditions, including the Environmental Audit and (ii)
Purchaser’s Consultant’s estimate of the costs required to correct, remove or
remediate such Environmental Conditions in the most reasonable cost-effective
manner (including risk-based remediation measures) (“Estimated Remediation Costs”).


6.3           Procedures
for Correction of Environmental Conditions. As to the Environmental Conditions, the following
procedures shall apply; based on their respective review of the Environmental
Audit(s) and such other data and information as shall be available to the
Parties concerning the condition of the Assets, Purchaser and Seller shall use
their Reasonable Good-Faith Efforts to agree on the identification of



 15
 






 



Environmental Conditions, whether remediation of same
is required and the manner thereof, and on the Estimated Remediation Costs for
which Seller shall be responsible. If Seller and Purchaser do not agree upon
whether a certain matter constitutes an Environmental Condition, or do not
agree upon the Estimated Remediation Cost of a particular Environmental
Condition, then the disagreement shall be settled in the same manner as
settlement of Title Defect disagreements under Section 3.3(b) of this Agreement
(with the exception that an Independent Environmental Consultant shall be
utilized rather than an Independent Attorney). Seller shall have the option of
(a) remediating any Environmental Conditions, or (b) reducing the Purchase
Price by the Estimated Remediation Costs. If Seller elects to remediate the
Environmental Conditions, Seller shall be solely responsible for the costs of
remediation, and shall undertake such activity promptly and diligently pursue
same, and such shall be subject to Purchaser’s Consultant’s inspection and
approval. If Seller elects to remediate, but fails to do so promptly, Purchaser
has the right, but not the obligation, to effect such remediation and bill
Seller therefor. Seller agrees to pay Purchaser’s bill within ten business days
after its receipt thereof.


6.4           Limitations
on Environmental Conditions. No individual matter shall constitute
an Environmental Condition unless its reasonable Estimated Remediation Cost
exceeds $5,000. If the reasonable Estimated Remediation Cost of all
Environmental Conditions exceeds $100,000, then Seller may, at its option, by
written notice either terminate this Agreement without further liability except
Seller’s return of the Performance Deposit to Purchaser or elect to cure such
Environmental Condition within ten business days.


6.5           Definition
of Environmental Condition. For purposes of this Article VI “Environmental
Condition” shall mean (i) any condition constituting, or which reasonably could
be expected to result in, a liability, obligation or commitment under, or a
violation of, any Environmental Legal Requirement or Environmental Permit, (ii)
the presence of Hazardous Substances in soil or other subsurface media, ambient
air, groundwater or surface water or building at, on, in or under the Assets or
Assets, or which has migrated from the Assets or Assets, in each case, in a
manner or quantity (A) which is, or is reasonably likely to be, required to be
remediated by or under (y) an Environmental Legal Requirement or (z) any
Governmental Authority, or (B) that has resulted, or could reasonably be
expected to result, in any claim, demand or cause of action under Environmental
Legal Requirements for damage to natural resources or the environment. As used
in this Agreement “Hazardous Substance”
means any substance, material or waste which is or will foreseeably be
regulated by any Governmental Authority, including any material, substance or
waste which is defined as “hazardous waste,” “hazardous material,” “hazardous
substance,” “extremely hazardous waste,” “contaminant,” “toxic waste” or “toxic
substance” under any provision of Environmental Law, and including petroleum,
petroleum products, asbestos, presumed asbestos-containing material or
asbestos-containing material, urea formaldehyde and polychlorinated biphenyls.



 16
 






 



6.6           Confidentiality
of Environmental Information. Purchaser
and Seller agree to maintain in strict confidence all of the environmental
information described in this Article VI, including without limitation the
Environmental Audit(s), except in connection with the consummation of the
transactions contemplated hereby, and except as otherwise required by any Legal
Requirement, in which latter event the Parties agree to promptly notify the
other Party of such requirement, and give the other Party the opportunity to
review and comment in advance on the content and timing of any such disclosure
the other Party proposes to make. Purchaser will insure that Purchaser’s
Consultant is also bound by this confidentiality provision. From and after
Closing, Purchaser shall have no further obligations under this subsection 6.6.
If Closing does not occur, Seller shall have no further obligations under this
subsection 6.6 from and after the date of termination of this Agreement.


ARTICLE VII

COVENANTS


7.1           Casualty
Loss. If, prior to the Closing, all or any portion of the Assets to
be conveyed to Purchaser at the Closing are destroyed by fire or other
casualty, are taken in condemnation or under the right of eminent domain or
proceedings for such purposes are pending (in each case, a “Casualty Event”), Purchaser may elect:


(i)            to reduce the Purchase Price by such
aggregate amount of damages as mutually agreed upon, in which case Purchaser
will not be entitled to sums paid to Seller by third parties by reason of the
Casualty Events nor be entitled to be assigned, transferred or subrogated to
the right, title and interest of Seller in and to any unpaid awards or other payments
from third parties arising out of the Casualty Events;


(ii)           to purchase such Assets
notwithstanding any such destruction, taking or pending taking and the Purchase
Price shall not be adjusted; provided
that if in Purchaser’s reasonable estimation the amount of aggregate damage
caused by one or more Casualty Events exceeds $10,000 (the “Casualty Threshold”), Purchaser may elect
to purchase the Assets notwithstanding any such Casualty Event (without reduction
of the Purchase Price therefor), in which case Seller shall, at Closing, pay to
Purchaser all sums paid to Seller by third parties (including insurance
providers of Seller and its Affiliates) by reason of the Casualty Events to the
extent such sums are not committed, used or applied by Seller prior to the
Closing Date to repair, restore or replace such damaged Asset and shall assign
and transfer to Purchaser or subrogate Purchaser to all of the right, title and
interest of Seller in and to any unpaid awards or other payments from third
parties (including insurance providers of Seller and its Affiliates) arising
out of the Casualty Events; or


(iii)          to terminate this Agreement.



 17
 






 



If the amount of aggregate damage caused by one or
more Casualty Events is less than the Casualty Threshold, Seller shall, at the
Closing, pay to Purchaser all sums paid to Seller by third parties by reason of
the destruction or taking of such Assets to be assigned to Purchaser, and shall
assign, transfer and set over unto Purchaser all of the right, title and
interest of Seller in and to any unpaid awards or other payments from third
parties arising out of the destruction, taking or pending or threatened taking
as to such Assets to be conveyed to Purchaser. Seller shall not voluntarily
compromise, settle or adjust any material amounts payable by reason of any
material destruction, taking or pending or threatened taking as to the Assets
to be conveyed to Purchaser without first obtaining the written consent of
Purchaser. Seller shall promptly notify Purchaser of any Casualty Event of
which Seller has Knowledge.


7.2           Covenants
and Agreements Prior to Closing.


(a)           Between the date hereof and the
Closing Date, Seller shall:


(i)            maintain and operate the Assets in
the Ordinary Course of Business;


(ii)           continue maintenance of and compliance
with the Material Agreements in the Ordinary Course of Business; and


(iii)          maintain insurance coverage on the
Assets in the amounts and of the types currently in force.


(b)           Without the written consent of
Purchaser (which shall not unreasonably be withheld, and which shall be deemed
given if not refused within five (5) business days of request for consent),
between the date hereof and the Closing Date, Seller shall not:


(i)            waive, compromise or settle any
right or claim which is in excess of Twenty-Five Thousand Dollars ($25,000);


(ii)           incur obligations with respect to or
undertake any transactions relating to the Assets other than transactions in
the Ordinary Course of Business;


(iii)          enter into any new agreements or
commitments with respect to the Assets or amend any such agreements outside of
the Ordinary Course of Business;


(iv)          terminate or amend or modify any of
the Material Agreements except in the Ordinary Course of Business;


(v)           encumber, sell or otherwise dispose
of any of the Assets (excluding inventory, natural gas, natural gas liquids or
oil), other than



 18
 






 



property which is replaced by equivalent property (in
type and value) or which is used, sold, consumed or abandoned in the Ordinary
Course of Business; or


(vi)          with respect to the Assets, make
commitments or agreements for capital expenditures or capital additions or
betterments exceeding in aggregate $20,000, except as may be involved in
ordinary repair, maintenance or replacements of the Assets or in connection
with the possible installation of vacuum pumps on the Wells.


(c)           Except as otherwise provided,
notwithstanding any other provision to the contrary, and except as may
otherwise be agreed between the Parties, Seller shall use all Reasonable
Good-Faith Efforts to obtain all consents, authorizations and approvals of, and
to make all necessary filings, notification or registrations with, all
Governmental Authorities (including with respect to Permits and Environmental
Permits) which are necessary for the transfer of the Assets to Purchaser, and
supply copies thereof to the Purchaser. Except as otherwise provided, as to
notices required to be provided before the Closing, Seller shall give all
notices to third parties and take such other actions as may be required to be
given or taken by it under any Permit, Environmental Permit, lease, agreement
or other instrument or any Legal Requirement in connection with the
transactions contemplated hereby (with copies thereof to the Purchaser), and
shall use its commercially reasonable efforts to obtain all other consents and
approvals necessary to enable Seller to transfer the Assets. Purchaser shall
use all commercially reasonable efforts to cooperate with Seller with respect
to Seller’s obligations described in the two preceding sentences. As to notices
which may be provided after the Closing, Purchaser shall give all notices to
third parties and take such other actions as may be required to be given or
taken by it under any Permit, Environmental Permit, lease, agreement or other
instrument or any Legal Requirement in connection with the transactions
contemplated hereby, and Seller shall cooperate therewith.


7.3           Compliance
with Conditions Precedent. Each
Party shall use its commercially reasonable efforts to cause the conditions
precedent set forth in Sections 8.3 and 8.4, applicable to such Party, to be
fulfilled and satisfied as soon as practicable but in any event prior to
Closing.


7.4           Preparation
of Closing Documents. Seller
shall commence the preparation of all forms of assignments, deeds, and other conveyances
and transfers pursuant to this Agreement, and the preparation of all applicable
schedules and exhibits to such forms of assignments, deeds and other
conveyances, and shall begin delivering such draft forms to Purchaser
reasonably promptly so that Purchaser can review such documents so that the
Parties can agree to any proposed changes consistent with the terms and
provisions of this Agreement prior to the Closing Date.



 19
 






 



7.5           Public
Announcements. Purchaser
and Seller shall agree upon the text of a press release which shall be
disseminated as soon as reasonably possible after the signing of the Purchase
and Sale Agreement and Closing. Any additional public announcements or
issuances of press releases by either Party regarding the existence of this Agreement,
the contents hereof or the transactions contemplated hereby shall require the
consent of the other Party which shall not be unreasonably withheld; provided, however, that the initial press
release concerning this Agreement and the transactions contemplated hereby
shall be agreed to by the Parties; and provided further that the foregoing
shall not restrict disclosures by either Party in compliance with applicable
securities or other laws or in compliance with existing loan or other
agreements binding such Party, in such Party’s discretion.


7.6           Confidentiality. Unless and until Closing occurs, any
non-public information that either Party may obtain from the other or which it
develops or causes to be developed in connection with this Agreement and the transactions
contemplated hereby shall be confidential, and following Closing, each Party
shall keep confidential any non-public information that such Party may receive
from the other in connection with this Agreement and the transactions
contemplated hereby (any such information, “Confidential
Information,” which
term shall not be deemed to include information that can be shown to have been
(i) in the public domain through no fault of Seller or its Affiliates; (ii)
later lawfully acquired by Seller or Purchaser, as the case may be, from
sources other than those related to its prior ownership of the Assets); or,
(iii) was already in the possession of Seller or Purchaser, as the case may be,
before the Effective Date.


Each
Party shall not disclose Confidential Information to any other person or entity
(other than to its Affiliates and to its and their directors, officers and
employees, and representatives of its advisors and lenders, in each case, whose
knowledge thereof is necessary or convenient in order to facilitate the
consummation of the transactions contemplated hereby, in which case such Party
shall be responsible for any breach by such person or entity) or use such
information to the detriment of the other; provided
that:


(i)            such Party may use and disclose any
such information once it has been publicly disclosed (other than by such Party
in breach of its obligations hereunder) or which, to its Knowledge, rightfully
has come into the possession of such Party (other than from the other Party),
and


(ii)           to the extent that such Party may, in
the reasonable judgment of its counsel, be compelled by an applicable Legal
Requirement to disclose any of such information, such Party may disclose such
information if it has used commercially reasonable efforts, and has afforded
the other the opportunity, to obtain an appropriate protective order, or other
satisfactory assurance of confidential treatment for the information compelled
to be disclosed.


 



 20















In the event of
termination of this Agreement, (A) the obligation set forth in this Section
shall continue for a period of one year after such termination, and (B) each
Party shall cause to be delivered to the other, and shall retain no copies of,
any documents, work papers or other materials obtained by such Party or on its
behalf from the other, whether so obtained before or after execution of this
Agreement, and shall destroy all other copies thereof, including any that bear
notes or analysis, and shall certify compliance with the return/destruction
obligation to the other on request.


7.7           Updated
Exhibits and Schedules. Each
Party shall, at least five (5) business days prior to Closing, supplement the
exhibits and schedules to this Agreement with additional information that, if
existing or known to it on the date of this Agreement, would have been required
to have been included in one or more exhibits or schedules to this Agreement
(including items identified in the course of Purchaser’s due diligence investigation
including Environmental Audit). For purposes of determining the satisfaction of
any of the conditions to the obligations of Purchaser and Seller in Sections
8.3 and 8.4 and the liability of Purchaser and Seller following Closing for
breaches of their respective representations, warranties and covenants under
this Agreement, the exhibits and schedules to this Agreement shall be deemed to
include only (a) the information contained therein on the date of this
Agreement and (b) information added to such exhibits and schedules by written
supplements to this Agreement delivered prior to Closing by the Party making
such amendment that reflect actions required by this Agreement to be taken
prior to Closing (including Exhibit B and schedule supplementation described in
the first sentence of this Section 7.7; provided, however, that if any such
change has a Material Adverse Effect on a party, then the other party may
reject such change by a written notice to the other party delivered within two
business days after the receipt of such change.


7.8           Notices
of Certain Events. Each
Party shall promptly notify the other of:


(a)           any notice or other communication
from any Person alleging that the consent of such Person is or may be required
in connection with the transactions contemplated by this Agreement;


(b)           any notice or other communication
from any Governmental Authority in connection with the transactions
contemplated by this Agreement;


(c)           any actions, suits, claims,
investigations or proceedings commenced or, to its Knowledge threatened
against, relating to or involving or otherwise affecting Seller or the Assets
that, if pending on the date of this Agreement, would have been required to
have been disclosed pursuant to Section 4.4 or 4.11, or that relate to the consummation
of the transactions contemplated by this Agreement; and


(d)           any matter that would represent a
material breach of the representations and warranties under this Agreement.



 21
 








7.9           Access
to Information. From the date hereof until the Closing
Date, Seller will (i) give Purchaser, its counsel, financial advisors, auditors
and other authorized representatives adequate and reasonable access, during
normal business hours to the offices, properties, books and records of Seller
relating to the Assets (including for the purposes of conducting the
Environmental Audit), (ii) furnish to Purchaser, its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information relating to the Assets as such Persons may
reasonably request and (iii) instruct the employees, counsel and financial
advisors of Seller to cooperate with Purchaser in its investigation of the
Assets. Except as otherwise provided herein, no investigation by Purchaser or
other information received by Purchaser shall operate as a waiver or otherwise
affect any representation, warranty or agreement given or made by Seller
hereunder.


ARTICLE VIII

CLOSING


8.1           Closing
Date. Unless the Parties agree otherwise in writing and subject to
the conditions in this Agreement, the consummation of the transactions
contemplated hereby (the “Closing”)
shall occur on the “Closing Date” which shall be (a) on or before June 30,
2006, as designated by the Purchaser, or (b) such other date as the Parties may
agree upon in writing.


8.2           Place
of Closing. The Closing
shall occur at Seller’s offices in Houston, Texas or at such other place as
Purchaser and Seller may agree in writing.


8.3           Conditions
to Purchaser’s Obligations. The
obligations of Purchaser to be performed by the Closing are, at the option of
the Purchaser, subject to satisfaction of each of the conditions set forth
below:


(a)           The representations and warranties
made by Seller in this Agreement that are not qualified by materiality or
Material Adverse Effect shall be true, complete and accurate in all material
respects, and those that are qualified by materiality or Material Adverse
Effect shall be true, complete and accurate in all respects, in each case, on
and as of the Closing Date. Seller shall also have performed or complied in all
material respects with all of its obligations under this Agreement, which are
to be performed or complied with by it prior to or on the Closing Date.


(b)           There shall not be in existence on
the Closing Date (i) any Legal Requirement, or order, decree or ruling by any
court or Governmental Authority, (ii) any threat thereof by any Governmental
Authority which is evidenced by a writing by the threatening Governmental
Authority, (iii) except as disclosed in Schedule 4.4, any threat thereof by any
other Person which is evidenced by a writing by the threatening Person, or (iv)
any instituted or pending action or proceeding which, in any case, would (w)
enjoin, restrain, make illegal or prohibit consummation of the transactions contemplated
hereby, (x) prohibit,



 22
 








render illegal or have a Material Adverse Effect upon
Purchaser’s proposed ownership or use of the Assets taken as a whole, (y)
compel Purchaser or any of its Affiliates to dispose of all or any material
portion of the Assets or the assets of Purchaser or any of its Affiliates or
(z) seek to require divestiture by Purchaser or any of its Affiliates of any
Assets.


(c)           Purchaser shall have received all
Required Consents except those related to Federal and State Leases and rights-of-way
in each case in form and substance reasonably satisfactory to Purchaser, and no
such consent, authorization or approval shall have been revoked.


(d)           Since the date hereof, no Material
Adverse Effect shall have occurred.


8.4           Conditions
to Seller’s Obligations. The obligations of Seller to be performed
on the Closing are, at the option of Seller, subject to satisfaction of each of
the conditions set forth below:


(a)           The representations and warranties
made by Purchaser in this Agreement that are not qualified by materiality
qualifier shall be true, complete and accurate in all material respects and
those that are qualified by materiality qualifier shall be true, complete and
accurate, in each case, on and as of the Closing Date. Purchaser shall also have
performed or complied in all material respects with all of its obligations
under this Agreement which are to be performed or complied with by it prior to
or on the Closing Date.


(b)           There shall not be in existence on
the Closing Date (i) any Legal Requirement or order, decree or ruling by any
court or Governmental Authority, (ii) any threat thereof by any Governmental
Authority or other Person which is evidenced in writing by the threatening
Authority or other threatening Person, or (iii) any instituted or pending
action or proceeding which, in any case, would enjoin, restrain, make illegal
or prohibit consummation of the transactions contemplated hereby.


(c)           Seller shall have received the
following documents from Purchaser:


(i)            Evidence, satisfactory to Seller,
that Purchaser has substi­tuted bonds satisfactory to the State of Wyoming it
has procured for those of Seller as to the Assets;


(ii)           A Letter of Credit in the form
attached hereto as Exhibit E in favor of Seller issued by Colorado State
Bank & Trust Company, the Bank of Oklahoma or other banking institution, to
secure the performance of Purchaser’s obligations under Sections 8.4(c)(ii) and
10.2(d) of this Agreement. Such Letter of Credit shall, subject to the terms
thereof and this Article 8.4, be in the amount of $3 million for one year after
Closing,



 23
 








$2 million for the second year and $1 million for the
final year, shall terminate three years after Closing, and is subject to
reduction only as set forth below. The Letter of Credit shall be reduced
annually by an amount which is equal to $10,000 times the number of wells: (1)
returned to production in commercial quantities, (2) deepened in the existing
wellbores to develop an additional interval, or (3) plugged and abandoned.
Notwithstanding the foregoing, the Letter of Credit shall not be reduced below
$1,000,000 (one million dollars) at any time during its term. During the term
of the Letter of Credit, and not later than ten (10) business days before each
six (6) month anniversary of the
Effective Date of this Agreement, Purchaser shall provide Seller sufficiently
detailed information for Seller to verify the well work which was performed by
Purchaser during the previous six (6) months, in order for Seller to determine
the amount by which the Letter of Credit shall be reduced on July 1, 2007 and
July 1, 2008. The Letter of Credit shall remain in force and effect, until its
termination and according to its terms and conditions, between Seller and
Purchaser regardless of whether Purchaser has sold, assigned, or conveyed any
of the Assets to any third party or parties.


8.5           Closing
Obligations. At Closing, the following shall occur:


(a)           Purchaser and Seller shall:


(i)            Execute and deliver a settlement
statement, prepared by Seller in accordance with this Agreement and generally
accepted accounting principles (the “Preliminary
Settlement Statement”). The
Preliminary Settlement Statement shall be delivered to Purchaser by Seller at
least five (5) days before Closing, and shall be agreed to mutually by Purchaser
and Seller at least two (2) days prior to Closing, and shall set forth the
Adjusted Purchase Price and each adjustment and the calculation of such
adjustments used to determine such amount.


(ii)           Execute and deliver such further
agreements, certificates and other documents as may be reasonably required to
be delivered to carry out the provisions of this Agreement and to close the
transaction provided for herein.


(b)           Seller shall:


(i)            Execute, acknowledge and deliver a
by, through and under warranty assignment, bill of sale and assumption
agreement substantially in the form of Schedule 8.5(b)(i) (the “General Assignment”) covering all of the
Assets to be assigned hereunder.


(ii)           Deliver to Purchaser exclusive
possession of the Assets, with Purchaser assuming operation of the Wells
described on Exhibit A



 24
 








effective as of 12:01
a.m. Mountain time on the day immediately following Closing.


(iii)          Deliver to Purchaser, if applicable,
the rights in respect of casualty losses set forth in Section 7.1.


(c)           Purchaser shall:


(i)            Deliver to Seller the Adjusted
Purchase Price.


(ii)           Deliver to Seller the documents
described in Section 8.4.


ARTICLE IX

POST-CLOSING AGREEMENTS


9.1           Post-Closing
Access. After Closing, Purchaser and Seller shall cooperate and
afford each other access to their respective books and records relating to the
Assets as may be needed by a Party (a) to determine any matter relating to its
rights and obligations hereunder, (b) to defend or respond to an audit, claim,
lawsuit or other legal or administrative proceeding or (c) in the event a Party
requires such information as part of a regulatory or legal disclosure,
including but not limited to those required by the Securities and Exchange
Commission.


9.2           Transition
Matters. The Parties recognize that Purchaser will need the
assistance of Seller and its personnel to effect an orderly transition of land,
administration and accounting functions. If Purchaser so requests, Seller
agrees to assist Purchaser in performing, on a timely basis, land,
administration and accounting functions, including but not limited to payment
of production proceeds, lease rentals and shut-in royalties, and payments due
under any Surface Use Agreements or other landowner agreements, and
transitioning these functions to Purchaser, until no later than three months
after closing. Purchaser shall pay Seller six thousand dollars ($6,000) for
each month, and any part of any month, during which Seller performs the land
administration and accounting functions on Purchaser’s behalf. Purchaser shall
reimburse Seller for all actual amounts paid by Seller on Purchaser’s behalf to
third parties (excluding any amounts received by Seller from a third party,
such as a gas purchaser, for further distribution). Purchaser agrees to defend,
indemnify, and hold Seller harmless from and against any and all claims,
demands, and causes of action brought by any third party or parties which
allege Seller’s non-performance or mis- performance of the land administration
and accounting functions during this period, except as are occasioned by Seller’s
gross negligence or willful misconduct. Purchaser shall pay Seller within ten
business days after receipt of Seller’s invoice and documentation acceptable to
Purchaser of any actual amounts paid by Seller on Purchaser’s behalf, or, at
Seller’s option, through the post-closing adjustment procedure.



 25
 








Seller shall retain the
originals of all files, records, data, and information (the “Records”) referred
to in Section 2.2(m) of this Agreement, and Purchaser shall receive copies only
thereof. Seller has in its possession only originals of some of the Records.
The cost of copying those original Records which Purchaser wishes to have
copied shall be borne by Seller. The cost of shipping copies of the Records
from Seller’s offices to Purchaser’s offices shall be borne by Purchaser.
Seller shall notify Purchaser when Seller is no longer under any legal
obligation or corporate records retention requirement to retain the original
Records, so that they may be transferred to Purchaser if Purchaser so desires.


9.3           Post-Closing
Adjustment Procedure. As soon as practicable after the Closing Date,
but no later than 90 days after the Closing Date, Purchaser shall prepare and
deliver to Seller, in accordance with this Agreement and generally accepted
accounting principles, a statement (the “Final
Settlement Statement”) setting
forth each adjustment in accordance with Section 3.2 and showing the
calculation of such adjustments. Within 15 days after receipt of the Final
Settlement Statement, Seller shall deliver to Purchaser a written report
containing any changes that Seller proposes be made to the Final Settlement
Statement. The Parties shall use their Reasonable Good-Faith Efforts to agree
with respect to the amounts due pursuant to such post-closing adjustment no
later than 15 days after Purchaser has received Seller’s proposed changes. The
Purchase Price as reflected in the Final Settlement Statement shall be called
the “Final Purchase Price.” The date upon which such agreement is
reached or upon which the Final Purchase Price is established shall be called
the “Final Settlement Date.”


If
(i) the Final Purchase Price is more than the Adjusted Purchase Price,
Purchaser shall pay in immediately available federal funds the amount of such
difference to Seller or to Seller’s account (as designated by Seller), or (ii)
the Final Purchase Price is less than the Adjusted Purchase Price, Seller shall
pay in immediately available federal funds the amount of such difference to
Purchaser or to Purchaser’s account (as designated by Purchaser). Payment by
Purchaser or Seller, as applicable, shall be made within five days after the
Final Settlement Date.


If
Seller and Purchaser are unable to agree upon the Final Settlement Statement
within 60 days after Purchaser’s receipt of same, the Parties agree to engage
promptly (and in any event within ten days) the Denver office of an accounting
firm which is not the auditor of either Party and is mutually acceptable to
both Parties (the “Independent Accountant”). Such Independent Accountant shall perform
such procedures as are agreed upon by Seller and Purchaser in order to
determine the Final Purchase Price. The determination of the Independent
Accountant that conducts the agreed upon procedures shall be binding on Purchaser
and Seller, and the fees and expenses of such Independent Accountant shall be
borne one-half each by Purchaser and Seller. Within five days after the
determination of the independent accounting firm, Purchaser or Seller, as the
case may be, shall promptly make a cash payment, in immediately available
funds, to the other equal to the amount, if any, found due by the Independent
Accountant.



 26
 








Purchaser
and Seller will, and will cause their representatives to, cooperate and assist
in the preparation of the Final Settlement Statement and the conduct of the
reviews and audits referred to in this Section 9.3, including (without
limitation) making available books, records and personnel as required.


9.4           Recording.
Purchaser shall be solely responsible for promptly recording the
assignments and any other instruments related to the conveyance of the Assets,
and Seller shall cooperate in providing to Purchaser any information reasonably
required by Purchaser to make such recording. Purchaser shall be responsible for
all filings with state and federal agencies for change of owner or operator.
All recording and filing fees shall be paid by Purchaser and, where paid by
Seller (with the written consent of Purchaser), reimbursed by Purchaser
promptly after receipt of an invoice. Purchaser shall provide copies of all
such recorded assignments and other instruments, and state and federal agency
filings, to Seller as soon as reasonably practical after their recording or
filing.


9.5           Contracts
Requiring Consents. If Seller and Purchaser should be unable to
obtain any consent required for the transfer of any of the Material Agreements,
Leases and Lands, other leases of Real Property and Rights-of-Way (each such
agreement, grant or lease, a “Non-Assigned
Agreement”), such
Non-Assigned Agreements shall be held by Seller for the benefit of Purchaser
after Closing for its term such that (a) Seller shall provide Purchaser with
the economic benefits thereof until or unless such consent is received (b)
Purchaser and Seller shall cooperate in enforcing, at Purchaser’s sole cost and
expense, any and all rights of Seller against a third party with respect to
such Non-Assigned Agreement. Purchaser shall fully indemnify, defend and hold
harmless Seller from all Claims with respect to the Non-Assigned Agreements and
related property to the extent such Claims did not arise from Seller’s
negligence or misconduct. Purchaser shall be entitled to retain for its own
account any amounts collected pursuant to the foregoing, including any amounts
payable as interest in respect thereof.


If
Seller fails to obtain such consent by December 31, 2006, and such failure
results in a Material Adverse Effect, Seller and Purchaser shall in good faith
negotiate a mutually agreeable adjustment to the Adjusted Purchase Price, which
Seller shall remit to Purchaser within ten (10) business days after such
agreement is reached. If Seller and Purchaser are unable to reach agreement,
then the issue shall resolved in the same manner as resolution of Title Defects
and Environmental Conditions under Articles 3.3(b) and Article 6.3 of this
Agreement.


9.6           Further
Assurances. Each Party shall, from time to time at the reasonable
request of the other, and without further consideration, execute and deliver
such other instruments of sale, transfer, conveyance, assignment, clarification
and termination and take such other action as the Party making the request may
require to carry out the transaction provided for in this Agreement in
accordance with the terms hereof, including those required, to sell, transfer,
convey and assign to, and vest in Purchaser, and to place Purchaser in
possession of the Assets. Seller intends to convey



 27
 








the Assets at Closing; however, in the event it is
determined after Closing that: (i) any part of the Assets were not in fact
conveyed to Purchaser, and that the title to any part of the Assets is
incorrectly in the name of Seller, or (ii) any asset not an Asset is conveyed
to Purchaser and that the title to such asset is incorrectly in the name of
Purchaser; then each Party shall take all such action necessary to correctly
convey such Assets to Purchaser, or such assets to Seller.


9.7           Post-Closing
Confidentiality. In addition to the confidentiality obliga­tions
imposed by Section 7.6, after the Closing, each Party and its Affiliates will
hold, and will use reasonable efforts to cause their respective officers,
directors, employees, accountants, counsel, consultants, advisors and agents to
hold, in confidence, all Confidential Information, to the extent required
hereunder. The obligation to hold any such information in confidence shall be
satisfied if they exercise the same care with respect to such information as
they would take to preserve the confidentiality of their own similar
information.


ARTICLE X 

INDEMNITIES, ASSUMED LIABILITIES AND EXCLUDED LIABILITIES


10.1         Disclaimers.
EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THE REPRESENTATIONS AND WARRANTIES
OF SELLER CONTAINED IN THIS AGREEMENT, THE ASSETS ARE TO BE SOLD BY SELLER AND
PURCHASED BY PURCHASER AS IS, WHERE IS, AND IN THEIR CURRENT CONDITION. THE
EXPRESS REPRESENTATIONS AND WARRANTIES OF SELLER CONTAINED IN THIS AGREEMENT
ARE EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS
OR IMPLIED, STATUTORY OR OTHERWISE AND, EXCEPT AS PROVIDED IN SECTION 10.4, THE
REPRESENTATIONS AND WARRANTIES CONTAINED HEREIN SHALL TERMINATE IN ALL RESPECTS
UPON CLOSING. SELLER MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS
OR IMPLIED, STATUTORY OR OTHERWISE RELATING TO THE ASSETS, INCLUDING WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR WARRANTIES AS TO
CONDITION, QUANTITY OR QUALITY, OTHER THAN THOSE REPRESENTATIONS AND WARRANTIES
EXPRESSLY SET FORTH HEREIN.


10.2         Assumed
Obligations. Except as provided in Section 10.4 and subject to
Section 10.3, at Closing, Purchaser shall assume, pay, discharge and perform
the following (the “Assumed Obligations”):


(a)           other obligations and liabilities of
Seller but only to the extent that there shall have been an adjustment or
accounting adjustment entry with respect thereto pursuant to Section 3.2;


(b)           all obligations and liabilities
relating to, arising out of or attributable to ownership or operation of the
Assets after the Effective Date



 28
 








(including all liability for plugging and abandoning
any of the Wells) other than any Income Taxes of Seller (without prejudice to
Purchaser’s right to enforce representations, warranties, covenants and
indemnities expressly provided under this Agreement);


(c)           commencing one (1) year after the
Effective Date, all obligations and liabilities relating to, arising out of or
attributable to ownership or operation of the Assets regardless of whether such
obligations and liabilities arose before or after the Effective Date,
(including, but not limited to those matters described in Section 10.3 (c)),
other than any Income Taxes of Seller and those matters described in Sections
10.3(a), 10.3(b), 10.3(d), and 10.3(e) of this Agreement (without prejudice to
Purchaser’s right to enforce representations, warranties, covenants and
indemnities expressly provided under this Agreement);


(d)           all responsibility, obligation, and
liability to plug and abandon the Wells described on Exhibit A and to restore
the surface of the Lands, both in accordance with all applicable leases,
surface use agreements, statutory and common laws, and the regulations of any
governmental entities, and Purchaser agrees to defend, indemnify, and hold
Seller harmless from and against any and all liability related thereto; and


(e)           other than with respect to title and
environmental matters and the Excluded Obligations, any and all liabilities,
obligations or commitments arising after the Effective Date in connection with
or relating in any way to the use, ownership or operation of the Assets, and for
proper and prompt payment of any suspended revenues, together with any interest
due thereon if properly accrued or reserved by Seller and the funds were
transferred to Purchaser.


10.3         Excluded
Obligations. Notwithstanding any provision in this Agreement or any
other writing to the contrary, Purchaser is assuming only the Assumed
Obligations and is not assuming any other liability or obligation of Seller (or
any predecessor of Seller or any prior owner of all or part of its businesses
and assets) of whatever nature, whether presently in existence or arising
hereafter. All such other liabilities and obligations shall be retained by and
remain obligations and liabilities of Seller (all such liabilities and
obligations not being assumed being herein referred to as the “Excluded Obligations”), and, notwithstanding anything to the
contrary in this Section 10.3 (and without limiting the generality of the
foregoing), none of the following shall be Assumed Obligations for the purposes
of this Agreement and all of the following shall be deemed Excluded
Obligations:


(a)           any liability or obligation of
Seller, or any member of any consolidated, affiliated, combined or unitary
group of which Seller is or has been a member, for Taxes other than Property
Taxes and Sales. Taxes that are expressly assumed by Purchaser pursuant to
Section 11.3(b) and (c);



 29
 








(b)           any liability or obligation relating
to employee benefits or compensation arrangements existing on or prior to the
Closing Date, including, without limitation, any liability or obligation under
any of Seller’s employee benefit agreements, plans or other employee-related
arrangements;


(c)           except to the extent assumed by
Purchaser in Section 10.2 of this Agreement, any and all liabilities (whether
accrued, contingent, absolute, determined, determinable or otherwise),
obligations or commitments relating to the time period prior to the Effective
Date which arise under or relate in any way to any Environmental Legal
Requirement and arise out of or in any way relate to (i) any of the
Environmental Conditions set forth on Schedule 4.11, (ii) the current or former
ownership, lease or operation by Seller, any operator of the Assets or any of
their respective predecessors or Affiliates of any business, real property or
facility, other than the Assets or the Assets purchased by Purchaser hereunder,
or (iii) the storage, disposal, treatment, transportation or recycling, or
arrangement for any of the foregoing, of any material or substance prior to the
Closing Date at any location other than the Assets.


(d)           all fines, penalties or other similar
monetary sanctions (“Fines”)
assessed by a Governmental Authority, or any criminal, punitive or exemplary
damages (“Criminal Damages” and together with Fines, “Fines
and Damages”) that are payable to a Person other than a Party or an
Affiliate of a Party, that arise out of or relate to the operation of the
Assets or Assets prior to the Effective Date; and


(e)           any liability or obligation relating
to an Excluded Asset.


10.4         Survival
and Indemnification.


(a)           The representations and warranties of
the Parties hereto contained in this Agreement or in any certificate or other
writing delivered pursuant hereto or in connection herewith shall survive the
Closing until December 31, 2006. Notwithstanding the preceding sentence, any
representation, warranty, covenant or agreement which is specified as surviving
Closing and in respect of which indemnity may be sought under this Agreement
shall survive the time at which it would otherwise terminate pursuant to the preceding
sentence, if specific notice of the inaccuracy thereof giving rise to such
right of indemnity shall have been given to the Party against whom such
indemnity may be sought prior to such time.


(b)           From and after Closing, Purchaser
shall indemnify, defend and hold harmless Seller and its Affiliates, and their
respective directors, officers, employees, agents, representatives, contractors
and subcontractors from and against any and all losses, damages, claims, suits,
causes of action, penalties, costs, expenses (including without limitation,
reasonable expenses of investigation and reasonable attorneys’ fees and
expenses in connection with any



 30
 








action, suit or proceeding and liabilities other than
special or punitive damages), including, without limitation, damage to
property, injury to or death of persons or other claims (collectively, the “Claims”), regardless of whether the Claims
arise as a result of the negligence, strict liability or any other liability
under any theory of law or equity of, arising out of or resulting from:


(i)            the breach of any of the
representations and warranties made by Purchaser in this Agreement or in any
document, instrument or certificate delivered in connection herewith, during
the applicable survival period;


(ii)           any failure by Purchaser to perform
in all material respects any of its covenants, agreements or obligations in
this Agreement or in any document, instrument or certificate delivered in
connection herewith;


(iii)          the Assumed Obligations, except those
set forth in Section 10.2(d) which arise under or relate to actions occurring
or conditions existing prior to the Closing Date;


(iv)          Sales Taxes and Property Taxes and
other Taxes for which Purchaser is liable under Article XI hereof; and


(v)           any brokerage commissions or finders’
fees incurred by Purchaser in connection with this Agreement or the
transactions contemplated hereby.


(c)           Without limiting Seller’s obligations
under this Agreement, from and after Closing, Seller shall indemnify, defend
and hold harmless Purchaser and its Affiliates and Purchaser’s and their
respective directors, officers, employees, agents, representatives, contractors
and sub-contractors from and against any Claims, regardless of whether such
Claims arise as a result of the negligence, strict liability or any other
liability under any theory of law or equity of, arising out of or resulting
from:


(i)            the breach of any of the
representations or warranties made by Seller in this Agreement or in any
document, instrument or certificate delivered in connection herewith, during
the applicable survival period;


(ii)           any failure by Seller to perform in
all material respects any of its covenants, agreements or obligations in this
Agreement or in any document, instrument or certificate delivered in connection
herewith; and


(iii)          any brokerage commissions or finders’
fees incurred by Seller in connection with this Agreement or the transactions
contemplated hereby.



 31
 








10.5         Procedures.
The Party seeking indemnification under Section 10.4 (the “Indemnified Party”) agrees to give prompt
notice to the Party against whom indemnity is sought (the “Indemnifying Party”) of the assertion of
any claim, or the commencement of any suit, action or proceeding in respect of
which indemnity may be sought under such Section 10.4. The Indemnifying Party
may with the consent of the Indemnified Party participate in and control the
defense of any such suit, action or proceeding at its own expense. The
Indemnifying Party shall not be liable under Section 10.4 for any settlement
effected without its consent of any claim, litigation or proceeding in respect
of which indemnity may be sought hereunder.


ARTICLE XI 

TAXES


11.1         Tax
Definitions. The following terms, as used herein, have the following
meanings:


“Income Tax” means all Taxes based upon or
measured by or with respect to gross or net income.


“Property Tax” means any ad valorem, real
property, personal property, production, excise, net proceeds, severance,
windfall profit and all other Taxes and similar obligations assessed against the
Assets or based upon or measured by the ownership of the Assets or the
gathering or processing of hydrocarbons or the receipt or proceeds therefrom,
other than Income Taxes.


“Sales Tax” means all excise, sales, use,
value added, registration, stamp, recording, documentary, conveyance, transfer,
gains and similar Taxes.


“Tax” means (i) any tax, governmental fee or
other like assessment or charge of any kind whatsoever (including, but not
limited to, withholding on amounts paid to or by any Person), together with any
interest, penalty, addition to tax or additional amount imposed by any
Governmental Authority (a “Taxing Authority”)
responsible for the imposition of any such tax (domestic or foreign), or (ii)
liability for the payment of any amounts of the type described in (i) as a
result of being party to any agreement or any express or implied obligation to
indemnify any other Person.


“Tax Year” means the twelve month period
beginning with the Assessment Date, January 1.


11.2         Representations.
Seller hereby represents and warrants to Purchaser that:


(a)           Except for Sales Taxes imposed in
connection with the transfer of the Assets, Seller has timely paid all Taxes
which will have been required to be paid on or prior to the date hereof, the
non-payment of which would result in a Lien on any Asset, would otherwise
adversely affect any of the Assets or would result in Purchaser becoming liable
or responsible therefor.



 32
 








(b)           Except as to Taxes for which a
Purchase Price Adjustment has been made or as otherwise provided in this
Agreement, and except as would not cause a Material Adverse Effect, Seller has
established, in accordance with generally accepted accounting principles
applied on a basis consistent with that of preceding periods, adequate reserves
for the payment of, and will timely pay, all Taxes which arise from or with
respect to the Assets or the operation of any of the Assets and are incurred in
or attributable to any Tax period (or portion thereof) ending on or before the
Effective Date, the non-payment of which would result in a Lien on any Asset,
would otherwise adversely affect any of the Assets or would result in Purchaser
becoming liable therefor.


11.3         Tax
Cooperation.


(a)           Notwithstanding any other provision
of this Agreement to the contrary, Purchaser and Seller agree to furnish or
cause to be furnished to each other, upon request, as promptly as practicable,
such information and assistance relating to any of the Assets and the Assets
(including, without limitation, access to books and records) as is reasonably
necessary for the filing of all Tax returns, the making of any election
relating to Taxes, the preparation for any audit by any Taxing Authority, and
the prosecution or defense of any claim, suit or proceeding relating to any
Tax. Purchaser and Seller shall retain all books and records with respect to
Taxes pertaining to the Assets for a period of at least six years following the
Closing Date.


(b)           Based on the best current information
available as of the Closing Date, all Property Taxes for the current Tax Year
that are or will become due and payable in respect of the Assets shall be
prorated between Seller and Purchaser as of the Effective Date. Seller’s
pro-rata share of the Property Taxes shall be calculated as the product of the
ratio of months or partial months in the period beginning with the Assessment
Date through the Effective Date times the amount of Property Taxes in respect
of the Assets. The proration shall be deemed a final settlement of Property
Taxes between the Parties. The Purchase Price shall be reduced by the unpaid
portion of Seller’s pro-rata share of Property Taxes. After Closing, Purchaser
expressly assumes all obligations and liabilities for all Property Taxes
payable by the Seller with respect to the Assets.


(c)           All Property Taxes and Sales Taxes
shall be timely paid, and all applicable filings, reports and returns shall be
filed, as required by applicable Legal Requirements or as provided herein. The
paying Party shall be entitled to reimbursement from the non-paying Party in
accordance with Section 11.3(b) or 11.3(e), as the case may be. Upon payment of
any such Property Tax or Sales Tax, the paying Party shall present a statement
to the non-paying Party setting forth the amount of reimbursement to which the
paying Party is entitled under Section 11.3(b) or 11.3(e), as the case may be,
together with such supporting evidence as is reasonably necessary to calculate
the amount to be reimbursed.



 33
 








The non-paying Party shall make such reimbursement
promptly but in no event later than 10 days after the presentation of such
statement.


(d)           Tax
Proceedings. In the event Purchaser or any of Purchaser’s Affiliates
receives notice of any examination, claim, adjustment or other proceeding
relating to the liability for Taxes of or with respect to the Assets for any
period prior to the Effective Date other than obligations and liabilities for
Property Taxes and Sales Taxes assumed by Purchaser pursuant to Sections
11.3(b) and 11.3(e), Purchaser shall notify Seller in writing within seven (7) days
of receiving notice thereof. The failure by Purchaser to so notify Seller shall
not relieve Seller of any liability that it may have to Purchaser under this
Agreement, except to the extent that such failure actually and materially
prejudices Seller. As to any such Taxes for which Seller is or may be liable,
Seller shall at Seller’s expense control or settle the contest of such
examination, claim, adjustment or other proceeding; provided that, so long as Seller’s interests are not
adversely affected thereby, Purchaser shall, at its expense, control the
defense of any examination, claim, adjustment or proceeding which would affect
(i) any Tax return of Purchaser or (ii) the manner in which Purchaser or any of
its Affiliates conducts any Tax audit, suit action or proceeding with respect
to such Tax return; provided, further, that
Purchaser shall not settle any examination, claim, adjustment or proceeding the
defense of which it has controlled without the Seller’s prior written consent.
The Parties shall cooperate with each other and with their respective
Affiliates in the negotiations and settlement of any proceeding described in
this Section 11.3.


(e)           Sales
Taxes. All Sales Taxes incurred in connection with the transactions
contemplated by this Agreement shall be borne by Purchaser.


(f)            Allocation
of Purchase Price. The Adjusted Purchase Price shall be allocated
among the Assets, including contracts and other intangibles assets, by the
Purchaser and Seller within 60 days following the Closing Date, subject to the
following:


(i)            Such allocation of the Adjusted
Purchase Price will be reflected in a Form 8594 that will be filed by Purchaser
and Seller in accordance with Section 1060 of the Code; and


(ii)           The Purchaser and Seller agree to use
their best efforts to treat and report in filings under the Code (and, if
necessary, to cause each of their respective Affiliates to so treat and report)
the transactions contemplated by this Agreement in a manner consistent with one
another.



 34
 








ARTICLE XII 

MISCELLANEOUS PROVISIONS


12.1         Commissions.
Each of the Parties represents and warrants that there are no claims for
brokerage commissions or finders’ fees payable by it in connection with the
transactions contemplated by this Agreement. Seller and Purchaser each will pay
or discharge its own brokerage commissions or finders’ fees, if any, and will
indemnify the other Party from any liability with respect thereto.


12.2         Further
Assurances. From time to time, and without further consideration
each Party will execute and deliver to the other Party such documents and take
such actions as the other Party may reasonably request in order to consummate
more effectively the transactions contemplated hereby.


12.3         Assignment.
The terms, provisions and conditions of this Agreement shall extend to, be
binding upon and inure to the benefit of the Parties, their respective
successors, permitted assigns and legal representatives. No Party shall assign
this Agreement or any of its rights hereunder, or delegate any of its
obligations hereunder, without the prior written consent of the other, such
consent may not be unreasonably withheld except that Purchaser may assign or
delegate its rights and obligations under this Agreement or any part hereof to
one or more Affiliates of Purchaser, but no such assignment shall in any way
operate to enlarge, alter or change any obligation of or due to Seller or
relieve Purchaser of its obligations.


12.4         Entire
Agreement; Amendments. This Agreement and the exhibits and schedules
attached hereto and incorporated by reference herein contain the entire
understanding of the Parties with respect to its subject matter. There are no
restrictions, agreements, promises, warranties, covenants or undertakings other
than those expressly set forth herein. Notwithstanding any representations that
may have been made by either Party in connection with the transactions
contemplated by this Agreement, each Party acknowledges that it has not relied
on any representation by the other Party with respect to such transactions or
the Assets except those contained in this Agreement or in the exhibits or
schedules hereto. This Agreement may be amended only by a written instrument
duly executed by the Parties. No waiver by any Party of any one or more
defaults by the other in performance of any of the provisions of this Agreement
shall operate or be construed as a waiver of any future default or defaults,
whether of a like or different character.


12.5         Severability.
Each portion of this Agreement is intended to be severable. If any term or provision
hereof is illegal or invalid for any reason whatsoever, such illegality or
invalidity shall not affect the validity of the remainder of this Agreement.


12.6         Actions.
Without limiting its right to avail itself of rights of termination available
to it under this Agreement, Seller and Purchaser, singularly and plurally,
warrant and agree that each shall use its Reasonable Good-Faith Efforts to take
or cause to be taken all such action as may be necessary to consummate and make
effective the



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transactions as set forth in this Agreement and to
assure that it will not be under any material corporate, legal or contractual
restriction that would prohibit or delay the timely consummation of such
transaction.


12.7         Termination.
This Agreement and the transactions contemplated hereby may be terminated in
the following instances:


(a)           By either Party upon written notice
to the other, if (x) the other (the “Breaching
Party”) is in material breach or default of its respective
covenants, agreements or other obligations herein or (y) any of its
representations are not true and accurate in all material respects when made or
when otherwise required by this Agreement to be true and accurate; provided, however, that (i) the Breaching
Party is given prompt written notice which provides a reasonably detailed
explanation of the facts and circumstances surrounding such breach or default
and (ii) the Breaching Party is given 30 days after receipt of such notice
within which to cure such breach or default to the reasonable satisfaction of
the non-Breaching Party. If this Agreement is terminated under this Section
12.7(a) by Seller due to Purchaser’s breach, then Seller shall retain the
Performance Deposit. If this Agreement is terminated under this Section 12.7(a)
by Purchaser due to Seller’s breach, then Seller shall refund the Performance
Deposit to Purchaser within two business days after termination.


(b)           By either Party if Closing shall not
have occurred by the Closing Date as extended pursuant to the terms hereof,
upon written notice to the non-terminating Party at any time following such
date. If this Agreement is terminated under this Section 12.7(b) by Seller due
to Purchaser’s failure or refusal to close, then Seller shall retain the
Performance Deposit. If this Agreement is terminated under this Section 12.7(b)
by Purchaser due to Seller’s failure or refusal to close, then Seller shall
refund the Performance Deposit to Purchaser within two business days after
termination.


(c)           At any time by the mutual written
agreement of Purchaser and Seller, in which event Seller shall refund the
Performance Deposit to Purchaser within two business days after termination, or


(d)           By Seller, pursuant to Sections
3.3(f) and 6.4, or by Purchaser pursuant to Section 7.1. If either Seller or
Purchaser exercises its right of termination under this Section 12.7(d), Seller
shall refund the Performance Deposit to Purchaser within two business days
after termination.


12.8         Liabilities
Upon Termination or Breach.


(a)           If this Agreement is terminated as
permitted by Section 12.7, such termination shall be without liability of
either Party (or any stockholder, director, officer, manager, member, employee,
agent, consultant or representative of such Party) to the other Party, except
as provided therein for refund or



 36
 








retention of the Performance Deposit; provided that if
such termination shall result from the (i) willful failure of either Party to
fulfill a condition to the performance of the obligations of the other Party,
(ii) failure to perform a covenant of this Agreement or (iii) breach by either
Party hereto of any representation or warranty or agreement contained herein,
and in any such case there is not an unqualified right of termination available
to such Party, such Party shall be fully liable for any and all Claims incurred
or suffered by the other Party as a result of such failure or breach. The
provisions of Sections 7.6, 12.8, 12.10 and 12.13 shall survive any termination
hereof pursuant to Section 12.7.


(b)           Except as provided above in this
Section 12.8, prior to Closing, nothing contained herein shall be construed to
limit Seller’s or Purchaser’s legal or equitable remedies in the event of
breach of this Agreement, provided that neither party shall have any greater
rights or remedies before Closing than such party would have had subsequent to
Closing. After Closing, the Parties’ respective rights and remedies with
respect to any material breach or default of the covenants, agreements or
obligations hereunder shall be solely limited to those set forth in Article X
of this Agreement. Notwithstanding anything to the contrary contained in this
Agreement, in no event shall either Purchaser or Seller be liable to the other
for any incidental or consequential damages.


12.9         Counterparts.
This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.


12.10       Governing
Law. This Agreement shall be governed by, enforced in accordance
with, and interpreted under, the laws of the State of Wyoming. Each of the
Parties consents to venue and jurisdiction in the United States Court for the
District of Wyoming.


12.11       Preparation
of Agreement. This Agreement was prepared jointly by the Parties and
not by either to the exclusion of the other.


12.12       Notices
and Addresses. Any notice, request, instruction, waiver or other
communication to be given hereunder by any Party shall be in writing and
delivered personally, by registered or certified mail with postage prepaid and
return receipt requested, by recognized overnight courier service with charges
prepaid or by facsimile transmission directed to the intended recipient as
follows:



 37
 








 


	
  Seller:

  	
   

  	
  Pennaco Energy, Inc.

  
	
   

  	
   

  	
  5555 San Felipe Street

  
	
   

  	
   

  	
  Houston, Texas 77056

  
	
   

  	
   

  	
  Attention: Land Manager

  
	
   

  	
   

  	
  Powder River Basin

  
	
   

  	
   

  	
  Telephone: (713) 296-2335

  
	
   

  	
   

  	
  Facsimile: (713) 296-3396

  
	
   

  	
   

  	
  e-mail: DSchulte@Marathonoil.com

  
	
   

  	
   

  	
   

  
	
  Purchaser:

  	
   

  	
  PRB Energy, Inc.

  
	
   

  	
   

  	
  1875 Lawrence Street, Suite 450

  
	
   

  	
   

  	
  Denver, Colorado 80202

  
	
   

  	
   

  	
  Attention: William F. Hayworth, President

  
	
   

  	
   

  	
  Telephone: (303)308-1330

  
	
   

  	
   

  	
  Facsimile: (303)308-1590

  
	
   

  	
   

  	
  e-mail: bhayworth@prbtrans.com

  



or at such other address
as either Party may designate by written notice provided in the foregoing manner.


12.13       WAIVER
OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY
WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT
OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.


12.14       Bulk Sales Legal Requirements. Purchaser
and Seller each hereby waive compliance by Seller with the provisions of the “bulk sales,” “bulk transfer” or similar
Legal Requirements of any state. Seller agrees to indemnify and hold Purchaser
harmless against any and all Claims incurred by Purchaser or any of its
Affiliates as a result of any failure by Seller to comply with any such “bulk sales,” “bulk transfer” or similar
Legal Requirements.


12.15       Expenses.
Except as otherwise provided herein, all costs and expenses incurred
in connection with this Agreement shall be paid by the Party incurring such
cost or expense.


12.16       Use of
Pennaco’s Name. No later than thirty (30) days after Closing,
Purchaser shall remove, or cause to be removed, the names and marks used by
Pennaco and all variations and derivatives and logos from the Assets, if
Pennaco has not already done so. Purchaser shall not make any use of Pennaco’s
name, marks and logos after Closing in operation of the Assets. Pennaco shall
have the right to enter the premises and remove all signs and logos containing
Pennaco’s name at Purchaser’s expense should Purchaser fail to do so in a
timely manner.


12.17       Execution
Deadline. This Agreement shall be open for Seller’s and Purchaser’s
acceptance and execution until 5:00 p.m. Mountain Time on May 18, 2006,



 38
 








and if not accepted and fully executed by such time,
shall be null and void. Acceptance within the time provided shall constitute a
contract of purchase and sale binding upon the Parties and their respective
successors and assigns.


IN WITNESS WHEREOF, the Parties have
executed this Agreement as of the date first set forth above.


	
  “SELLER”

  	
   

  	
  “PURCHASER”

  
	
  PENNACO
  ENERGY, INC.

  	
   

  	
  PRB ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Robert J.
  Colosimo

  	
   

  	
  By:

  	
  /s/ William F.
  Hayworth

  
	
   

  	
  Robert J.
  Colosimo

  	
   

  	
  William F.
  Hayworth, President

  
	
   

  	
  Attorney-in-Fact

  	
   

  	
   

  
						



 



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