Document:

Exhibit 10.3

 

FIRST AMENDMENT TO EMPLOYMENT AGREEMENT

 

THIS FIRST
AMENDMENT TO EMPLOYMENT AGREEMENT (this “Amendment”) is made and entered into by and between Cano Petroleum Inc., a Delaware corporation
with its principal executive offices in Fort Worth, Texas (the “Company”), and Phillip Feiner, an individual currently
residing in Collin County, Texas (“Employee” collectively, the “Parties”),
effective as of the 8th day of September, 2008 (the “Amendment Effective Date”).

 

WHEREAS, the Company and Employee entered into that
certain Employment Agreement dated as of May 31, 2008, (the “Agreement”);
and

 

WHEREAS, the Company and Employee now desire to
amend, alter, modify and change the terms and provisions of the Agreement, as
follows.

 

NOW THEREFORE, for and in consideration of the mutual
benefits to be obtained hereunder and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged and confessed, the
Company and Employee do hereby agree to amend, alter, modify and change the
Agreement, effective prospectively, as of the Amendment Effective Date as
follows:

 

1.                                      Section 4. (a)  Compensation.
shall be deleted in its entirety and the following substituted in place and in
lieu thereof:

 

(a)                                  Salary:  The Company shall pay Employee
for his services, a base salary, on an annualized basis, of $170,000.00 (One
Hundred Seventy Thousand Dollars) per annum for the period from the Effective
Date, which salary shall be payable by the Company in substantially equal
installments on the Company’s normal payroll dates.  All applicable taxes
on the base salary will be withheld in accordance with applicable federal,
state and local taxation guidelines.

 

Except as specifically amended, altered, modified
and changed hereby and heretofore, the Agreement remains in full force and
effect as originally written.

 

 

[Signature Page Follows]

 

1

 

Signatures

 

To evidence the binding
effect of the covenants and agreements described above, the Parties hereto have
executed this Amendment effective as of the date first above written.

 

 

	
   

  	
  THE COMPANY:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
  S. Jeffrey Johnson

  
	
   

  	
   

  	
  Chairman and Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  EMPLOYEE:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Phillip Feiner

  
	
   

  	
   Phillip Feiner

  

 

2Exhibit 10.4

 

September 30, 2008

 

Cano Petroleum, Inc.

Burnett Plaza

801 Cherry Street

Suite 3200, Unit 25

Fort Worth, TX  76102

 

Re:                               Payment
of Prepayment Premium

 

Ladies and Gentlemen:

 

Reference is made to the Subordinated Credit Agreement dated as of March 17,
2008, as hereto amended (as so amended, the “Credit Agreement”) among
Cano Petroleum, Inc. (the “Borrower”), the lenders from time to time parties thereto
(the “Lenders”), and UnionBanCal Equities, Inc. as Administrative
Agent for the benefit of the Lenders (in such capacity, the “Administrative
Agent”). Unless otherwise defined in this letter, each term used in
this letter which is defined in the Credit Agreement has the meaning assigned
to such term in the Credit Agreement.

 

The Borrower has advised the Administrative Agent and the Lenders that
the Borrower will make a voluntary prepayment in full of all outstanding
principal, interest and fees under the Credit Agreement on September 30,
2008 (“Payment Date”). Pursuant to Section 2.05 of the Credit
Agreement, such prepayment of principal must be accompanied by, among other
things, a prepayment premium equal to 2.00% of the principal amount being
prepaid. The Borrower and the Lenders acknowledge and agree that a prepayment
in full of the principal amount of the Advances on the Payment Date would
result in a prepayment premium equal to $300,000.00 (“Prepayment Premium
Amount”). The Borrower has requested that the Lenders accept a portion of
such Prepayment Premium Amount after the Payment Date. Notwithstanding anything
to the contrary contained in the Credit Agreement or in any other Loan
Document, the Lenders and the Borrower hereby agree that (a) $262,500.00
of the Prepayment Premium Amount shall be paid on the Payment Date and (b) $37,500.00
of the Prepayment Premium Amount shall be paid by the Borrower on or prior to
the 75th day after the Payment Date. Notwithstanding the foregoing, UnionBanCal Equities, Inc. shall
waive the installment of $37,500.00 if either (i) the Borrower and UnionBanCal Equities, Inc. enter
into and close a senior, second lien credit facility with an initial commitment
of at least $15,000,000.00 (“New Facility”) by October 31, 2008 or (ii) UnionBanCal Equities, Inc. elects
not to enter into and close the New Facility other than as a result of (A) the
Borrower’s failure to meet the customary conditions precedent for the closing
of the New Facility by October 31, 2008 or (B) a change, occurrence or development that has
occurred after the date hereof or has become known to UnionBanCal Equities, Inc.
after the date hereof, that is reasonably likely in the opinion of

 

 

UnionBanCal
Equities, Inc., to have a material adverse effect on the business,
prospects, assets, liabilities, operations, or condition (financial or otherwise)
of the Borrower and its subsidiaries and affiliates).

 

This letter agreement (“Agreement”) shall not be assignable by
the Borrower without the prior written consent of UnionBanCal Equities, Inc. and
may not be amended or otherwise modified except in writing executed by the
Borrower and UnionBanCal Equities, Inc.
This Agreement may be executed in any number of counterparts, each of
which shall be an original and all of which, when taken together, shall
constitute one agreement. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Texas. This Agreement is not intended
to confer any benefits upon, or create any rights in favor of, any Person other
than the parties hereto. The existence and terms of this Agreement shall be
kept confidential; provided that the terms may be disclosed (i) to such of
your employees and affiliates, officers and directors and legal, accounting and
other advisors who have a need to know such information, are informed by you of
the confidential nature of the information, and are subject to appropriate
confidentiality restrictions, and (ii) as may be required by applicable
law or regulations or by an order of a court or governmental agency of
competent jurisdiction, provided that you give us prior notice before sharing
any such information pursuant to such applicable law or regulations

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ted
  McNulty

  
	
   

  	
  Name:

  	
  Ted McNulty

  
	
   

  	
  Title:

  	
  SVP

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Derrick
  Pan

  
	
   

  	
  Name:

  	
  Derrick Pan

  
	
   

  	
  Title:

  	
  V.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
  ACCEPTED AND AGREED TO

  	
   

  
	
  This 30th day of September, 2008.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  CANO PETROLEUM, INC.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ S.
  Jeffrey Johnson

  	
   

  
	
  Name:

  	
  Jeff Johnson

  	
   

  
	
  Title:

  	
  Chairman & CEO

  	
   

  
										

 

2

 

	
  SQUARE ONE ENERGY, INC.

  	
   

  
	
  LADDER COMPANIES, INC.

  	
   

  
	
  W.O. ENERGY OF NEVADA, INC.

  	
   

  
	
  WO ENERGY, INC.

  	
   

  
	
  PANTWIST, LLC

  	
   

  
	
  CANO PETRO OF NEW MEXICO, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Each by:

  	
  /s/ S.
  Jeffrey Johnson

  	
   

  
	
  Name:

  	
  Jeff Johnson

  	
   

  
	
  Title:

  	
  President

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  W.O. OPERATING COMPANY, LTD.

  	
   

  
	
  By: WO Energy, Inc., its general
  partner

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ S.
  Jeffrey Johnson

  	
   

  
	
  Name:

  	
  Jeff Johnson

  	
   

  
	
  Title:

  	
  President

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  W.O. PRODUCTION COMPANY, LTD.

  	
   

  
	
  By: WO Energy, Inc., its general
  partner

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ S.
  Jeffrey Johnson

  	
   

  
	
  Name:

  	
  Jeff Johnson

  	
   

  
	
  Title:

  	
  President

  	
   

  
						

 

3Exhibit 10.5

 

CONSENT AND AMENDMENT NO. 13

 

This
CONSENT AND AMENDMENT NO. 13 (“Amendment”) entered into and made
effective as of September 30, 2008 (“Effective Date”) is among Cano
Petroleum, Inc., a Delaware corporation (“Borrower”), the
Guarantors (as defined below), the Lenders (as defined below), and Union Bank
of California, N.A., as administrative agent for such Lenders (in such
capacity, the “Administrative Agent”) and as issuing lender (in such
capacity, the “Issuing Lender”).

 

RECITALS

 

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

 

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

 

C.                                     The Borrower also proposes to pay the
Subordinated Debt (as defined in the Credit Agreement) in full, including all
interest accrued thereon and premiums and fees owing in respect thereto, with
Advances (as defined in the Credit Agreement).

 

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

 

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

 

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

 

 

Section 1.                                          Defined
Terms; Other Definitional Provisions. As used in this Amendment,
each of the terms defined in the opening paragraph and the Recitals above shall
have the meanings assigned to such terms therein. Each term defined in the
Credit Agreement and used herein without definition shall have the meaning
assigned to such term in the Credit Agreement, unless expressly provided to the
contrary. The words “hereof”, “herein”, and “hereunder” and words of similar
import when used in this Amendment shall refer to this Amendment as a whole and
not to any particular provision of this Amendment. Paragraph headings have been
inserted in this Amendment as a matter of convenience for reference only and it
is agreed that such paragraph headings are not a part of this Amendment and
shall not be used in the interpretation of any provision of this Amendment.

 

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

 

Section 3.                                          Amendments to Credit Agreement.

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

“Pantwist Sale” means the sale
of 100% of the Equity Interest held by the Borrower in Pantwist LLC pursuant to
the terms of the Purchase and Sale Agreement dated as of September 5, 2008
among the Borrower, Pantwist LLC and Legacy Reserves Operating LP without
giving effect to any amendments, modification or supplements thereto.

 

Section 4.                                          Representations and Warranties. Each of the Borrower and
Guarantors represents and warrants that: (a) after giving effect to this
Amendment, the representations and warranties contained in the Credit Agreement
and the representations and warranties contained in the other Loan Documents
are true and correct in all material respects on and as of the Effective Date
as if made on as and as of such date except to the extent that any such
representation or warranty expressly relates solely to an earlier date, in
which case such representation or warranty is true and correct in all material
respects as of such earlier date; (b) after giving effect to this 

 

3

 

Amendment, no Default has occurred and is continuing; (c) the execution,
delivery and performance of this Amendment are within the corporate, limited
liability company, or partnership power and authority of such Person and have
been duly authorized by appropriate corporate, limited liability company, or
partnership action and proceedings; (d) this Amendment constitutes the
legal, valid, and binding obligation of such Person enforceable in accordance
with its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the rights of creditors
generally and general principles of equity; (e) there are no governmental
or other third party consents, licenses and approvals required in connection
with the execution, delivery, performance, validity and enforceability of this
Amendment; (f) the Liens under the Security Instruments are valid and
subsisting and secure the Borrower’s and such Person’s obligations under the
Loan Documents; and (g) as to each Guarantor, it has no defenses to the
enforcement of the Guaranty.

 

Section 5.                                          PSA. The Borrower hereby represents and
warrants that (a) the PSA attached hereto as Exhibit A is the true,
correct and complete copy of the PSA, including any and all amendments, supplements
or modifications thereto and (b) there are no other agreements, documents
and instruments
executed in connection therewith other than the agreements the forms of which
are attached as exhibits to the PSA.

 

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

 

Section 7.                                          Conditions to Effectiveness. This Amendment
and the amendments to the Credit Agreement provided herein shall become
effective on the Effective Date and enforceable against the parties hereto upon
the occurrence of the following conditions precedent: (a) the
Administrative Agent shall have received multiple original counterparts, as
requested by the Administrative Agent, of this Amendment duly and validly
executed and delivered by duly authorized officers of the Borrower, the
Guarantors, the Administrative Agent, and the Lenders, (b) no Default
shall have occurred and be continuing as of the Effective Date, (c) the  representations and warranties in this
Amendment shall be true and correct in all material respects, and (d) the Borrower shall have paid all fees and expenses of the Administrative Agent’s
outside legal counsel and other consultants pursuant to all invoices presented
for payment on or prior to the Effective Date.

 

Section 8.                                          Acknowledgments and Agreements.

 

(a)                                  The Borrower
acknowledges that on the date hereof all Obligations are payable without
defense, offset, counterclaim or recoupment.

 

(b)                                 The
Administrative Agent and the Lenders hereby expressly reserve all of their
rights, remedies, and claims under the Loan Documents. Nothing in this
Amendment shall constitute a waiver or relinquishment of (i) any Default
or Event of Default under any of the 

 

4

 

Loan
Documents, (ii) any of the agreements, terms or conditions contained in
any of the Loan Documents, (iii) any rights or remedies of the
Administrative Agent or any Lender with respect to the Loan Documents, or (iv) the
rights of the Administrative Agent or any Lender to collect the full amounts
owing to them under the Loan Documents.

 

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

 

(d)                                 From and after
the Effective Date, all references to the Credit Agreement and the Loan
Documents shall mean such Credit Agreement and such Loan Documents as amended
by this Amendment.

 

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

 

Section 9.                                          Reaffirmation of the Guaranty. Each Guarantor hereby
ratifies, confirms, acknowledges and agrees that its obligations under the
Guaranty are in full force and effect and that such Guarantor continues to
unconditionally and irrevocably guarantee the full and punctual payment, when
due, whether at stated maturity or earlier by acceleration or otherwise, all of
the Guaranteed Obligations (as defined in the Guaranty), as such Guaranteed
Obligations may have been amended by this Amendment, and its execution and delivery
of this Amendment does not indicate or establish an approval or consent
requirement by such Guarantor under the Guaranty in connection with the
execution and delivery of amendments, consents or waivers to the Credit
Agreement, the Notes or any of the other Loan Documents.

 

Section 10.                                   Counterparts;
Invalidity. This Amendment may be signed
in any number of counterparts, each of which shall be an original and all of
which, taken together, constitute a single instrument. This Amendment may be
executed by facsimile signature and all such signatures shall be effective as
originals. In the event that any one or more of the provisions contained in
this Amendment shall for any reason be held invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not
affect any other provision of this Amendment.

 

Section 11.                                   Successors
and Assigns. This Amendment shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns permitted pursuant to the Credit Agreement.

 

Section 12.                                   Governing
Law. This Amendment shall be deemed to be a contract made
under and shall be governed by and construed in accordance with the laws of the
State of Texas.

 

Section 13.                                   Entire
Agreement. THIS AMENDMENT, THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT, THE
NOTES, AND THE OTHER LOAN 

 

5

 

DOCUMENTS CONSTITUTE THE
ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT
MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT
THERETO.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[SIGNATURES BEGIN ON NEXT PAGE]

 

6

 

EXECUTED effective as of the date first above
written.

 

	
  BORROWER:

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  S. Jeffrey Johnson

  
	
   

  	
  Name:

  	
  S.
  Jeffrey Johnson

  
	
   

  	
  Title:

  	
  Chairman
  and Chief Executive Officer

  
	
   

  	
   

  
	
  GUARANTORS:

  	
  SQUARE
  ONE ENERGY, INC.

  
	
   

  	
  LADDER
  COMPANIES, INC.

  
	
   

  	
  W.O.
  ENERGY OF NEVADA, INC.

  
	
   

  	
  WO ENERGY,
  INC.

  
	
   

  	
  PANTWIST,
  LLC

  
	
   

  	
  CANO
  PETRO OF NEW MEXICO, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Each
  by:

  	
  /s/
  S. Jeffrey Johnson

  
	
   

  	
   

  	
  Name:

  	
  S.
  Jeffrey Johnson

  
	
   

  	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  
	
   

  	
  W.O.
  OPERATING COMPANY, LTD.

  
	
   

  	
  By: WO
  Energy, Inc., its general partner

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/
  S. Jeffrey Johnson

  
	
   

  	
   

  	
   

  	
  Name:

  	
  S.
  Jeffrey Johnson

  
	
   

  	
   

  	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  
	
   

  	
  W.O.
  PRODUCTION COMPANY, LTD.

  
	
   

  	
  By: WO
  Energy, Inc., its general partner

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/
  S. Jeffrey Johnson

  
	
   

  	
   

  	
   

  	
  Name:

  	
   S. Jeffrey Johnson

  
	
   

  	
   

  	
   

  	
  Title:

  	
  President

  
												

 

 

Signature Page to Consent
and Amendment No. 13

 

 

	
  ADMINISTRATIVE
  AGENT/

  	
   

  
	
  ISSUING
  LENDER/LENDER:

  	
  UNION
  BANK OF CALIFORNIA, N.A.,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/
  Randall Osterberg

  
	
   

  	
   

  	
        Randall
  Osterberg

  
	
   

  	
   

  	
        Senior
  Vice President

  

 

 

Signature Page to Consent
and Amendment No. 13

 

 

	
   

  	
  NATIXIS, as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/
  Donovan Broussard

  
	
   

  	
   

  	
        Donovan
  Broussard

  
	
   

  	
   

  	
        Managing
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Lian Tchernysheva

  
	
   

  	
   

  	
       Liana Tchernysheva

  
	
   

  	
   

  	
       Director

  
				

 

 

Signature Page to Consent and Amendment No. 13

 

 

Exhibit A

 

See Attached.

 

 

Execution Version

 

PURCHASE AND SALE AGREEMENT

 

BY AND AMONG

 

CANO PETROLEUM, INC.,

 

AS SELLER

 

AND

 

LEGACY RESERVES OPERATING LP,

 

AS BUYER

 

AND

 

PANTWIST, LLC,

 

AS THE COMPANY

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
  PAGE

  
	
  1.   PURCHASE
  AND SALE

  	
   

  	
  4

  
	
  1.1   Purchase of the Membership Interests

  	
   

  	
  4

  
	
  1.2   Excluded Assets and Liabilities

  	
   

  	
  4

  
	
  2.   PURCHASE
  PRICE

  	
   

  	
  4

  
	
  2.1   Base Purchase Price

  	
   

  	
  4

  
	
  2.2   Deposit

  	
   

  	
  4

  
	
  2.3   Certain Definitions

  	
   

  	
  5

  
	
  2.4   Adjustments to the Base Purchase Price

  	
   

  	
  6

  
	
  2.5   Allocation 

  	
   

  	
  7

  
	
  3.   CLOSING

  	
   

  	
  8

  
	
  3.1   Closing 

  	
   

  	
  8

  
	
  3.2   Delivery by Seller 

  	
   

  	
  8

  
	
  3.3   Delivery by Buyer

  	
   

  	
  8

  
	
  3.4   Further Cooperation 

  	
   

  	
  9

  
	
  4.   ACCOUNTING
  ADJUSTMENTS

  	
   

  	
  9

  
	
  4.1   Closing Adjustments 

  	
   

  	
  9

  
	
  4.2   Strapping and Gauging 

  	
   

  	
  9

  
	
  4.3   Taxes

  	
   

  	
  9

  
	
  4.4   Post-Closing Adjustments

  	
   

  	
  10

  
	
  4.5   Suspended Funds 

  	
   

  	
  11

  
	
  4.6   Audit Adjustments 

  	
   

  	
  11

  
	
  4.7   Cooperation 

  	
   

  	
  11

  
	
  5.   DUE
  DILIGENCE: TITLE MATTERS

  	
   

  	
  11

  
	
  5.1   General Access

  	
   

  	
  11

  
	
  5.2   Defensible Title 

  	
   

  	
  12

  
	
  5.3   Defect Letters

  	
   

  	
  13

  
	
  5.4   Effect of Title Defect

  	
   

  	
  15

  
	
  5.5   Consents 

  	
   

  	
  16

  
	
  6.   ENVIRONMENTAL
  ASSESSMENT

  	
   

  	
  17

  
	
  6.1   Physical Condition of the Oil and Gas Properties

  	
   

  	
  17

  
	
  6.2   Inspection and Testing

  	
   

  	
  18

  
	
  6.3   Notice of Adverse Environmental Conditions 

  	
   

  	
  19

  
	
  6.4   Rights and Remedies for Adverse Environmental
  Conditions

  	
   

  	
  19

  
	
  6.5   Remediation by Seller 

  	
   

  	
  21

  
	
  7.   REPRESENTATIONS
  AND WARRANTIES OF SELLER

  	
   

  	
  22

  
	
  7.1   Seller’s Representations and Warranties 

  	
   

  	
  22

  
	
  7.2   Scope of Representations of Seller

  	
   

  	
  29

  
	
  8.   REPRESENTATIONS
  AND WARRANTIES OF BUYER

  	
   

  	
  31

  
	
  8.1   Buyer’s Representations and Warranties 

  	
   

  	
  31

  
	
  9.   CERTAIN
  AGREEMENTS OF SELLER 

  	
   

  	
  32

  
	
  9.1   Maintenance of Oil and Gas Properties 

  	
   

  	
  32

  
	
  9.2   Conduct of Business of the Company

  	
   

  	
  32

  
	
  9.3   Records and Audit Rights 

  	
   

  	
  34

  
	
  9.4   Reasonable Efforts; Notification

  	
   

  	
  35

  
	
  9.5   Payment of Indebtedness 

  	
   

  	
  35

  
	
  9.6   Insider Debt and Liabilities 

  	
   

  	
  35

  
	
  9.7   Operation of Oil and Gas Properties 

  	
   

  	
  36

  
	
  10.   CERTAIN
  AGREEMENTS OF BUYER 

  	
   

  	
  36

  
	
  10.1   Plugging Obligation 

  	
   

  	
  36

  
	
  10.2   Plugging Bond 

  	
   

  	
  36

  
	
  10.3   Seller’s Logos 

  	
   

  	
  36

  
	
  10.4   Like-Kind Exchanges 

  	
   

  	
  36

  
	
  11.   CONDITIONS
  PRECEDENT TO OBLIGATIONS OF BUYER 

  	
   

  	
  37

  
	
  11.1   No Litigation 

  	
   

  	
  37

  
	
  11.2   Representations and Warranties 

  	
   

  	
  37

  
	
  11.3   Operations 

  	
   

  	
  37

  
	
  11.4   Due Diligence 

  	
   

  	
  37

  
	
  11.5   Releases 

  	
   

  	
  37

  
	
  11.6   Release of Indebtedness and Liens 

  	
   

  	
  37

  
	
  12.   CONDITIONS
  PRECEDENT TO THE OBLIGATIONS OF SELLER 

  	
   

  	
  37

  
	
  12.1   No Litigation 

  	
   

  	
  37

  
	
  12.2   Representations and Warranties 

  	
   

  	
  37

  

 

1

 

	
  13.   TERMINATION

  	
   

  	
  38

  
	
  13.1   Causes of Termination 

  	
   

  	
  38

  
	
  13.2   Effect of Termination

  	
   

  	
  38

  
	
  14.   INDEMNIFICATION

  	
   

  	
  39

  
	
  14.1   Indemnification
  by Seller 

  	
   

  	
  39

  
	
  14.2   Indemnification by Buyer 

  	
   

  	
  41

  
	
  14.3   Physical Inspection 

  	
   

  	
  41

  
	
  14.4   Notification 

  	
   

  	
  42

  
	
  15.   TAX
  MATTERS

  	
   

  	
  42

  
	
  16.   MISCELLANEOUS

  	
   

  	
  44

  
	
  16.1   Casualty Loss

  	
   

  	
  44

  
	
  16.2   Confidentiality

  	
   

  	
  44

  
	
  16.3   Notices 

  	
   

  	
  45

  
	
  16.4   Press Releases and Public Announcements 

  	
   

  	
  45

  
	
  16.5   Compliance with Express Negligence Test 

  	
   

  	
  45

  
	
  16.6   Governing Law 

  	
   

  	
  46

  
	
  16.7   Exhibits 

  	
   

  	
  46

  
	
  16.8   Fees and Expenses 

  	
   

  	
  46

  
	
  16.9   Assignment 

  	
   

  	
  46

  
	
  16.10   Entire Agreement 

  	
   

  	
  46

  
	
  16.11   Severability 

  	
   

  	
  46

  
	
  16.12   Captions 

  	
   

  	
  46

  
	
  16.13   Time of the Essence 

  	
   

  	
  46

  
	
  16.14   Counterpart Execution 

  	
   

  	
  46

  

 

2

 

EXHIBITS

 

	
  A

  	
  Leases and Land

  
	
  B

  	
  Wells and Allocation of the Purchase Price

  
	
  C

  	
  Equipment

  
	
  D

  	
  Excluded Assets

  
	
   

  	
   

  
	
  SCHEDULES

  
	
   

  	
   

  
	
  7.1(E)

  	
  AFE’s

  
	
  7.1(G)

  	
  Pending Litigation

  
	
  7.1(K)

  	
  Material Agreements

  
	
  7.1(M)

  	
  Consents and Preferential Purchase Rights

  
	
  7.1(AA)

  	
  Insurance

  
	
  7.1(BB)

  	
  Bank Accounts

  
	
  7.1(EE)

  	
  Related Party Transactions

  
	
  7.1(FF)

  	
  Payout Balances

  
	
  7.1(II)

  	
  Non-Competition Commitments

  
			

 

3

 

PURCHASE AND SALE AGREEMENT

 

This Purchase and Sale
Agreement (this “Agreement”) is entered into this
         day of September, 2008, by and
among CANO PETROLEUM, INC., a Delaware
corporation (“Seller”), LEGACY RESERVES OPERATING
LP, a Delaware limited partnership (“Buyer”), and PANTWIST, LLC, a Texas limited liability company (the “Company”).  Buyer, Seller and the Company are
collectively referred to herein as the “Parties” and sometimes individually
referred to as a “Party.”

 

RECITALS:

 

A.                                  The
Company is a Texas limited liability company with its principal executive
offices at801 Cherry Street, Unit 25, Suite 3200, Fort Worth, Texas.

 

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

 

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

 

WITNESSETH:

 

In
consideration of the mutual agreements contained in this Agreement and other
good and valuable consideration, Buyer and Seller agree as follows:

 

1.             PURCHASE AND SALE.

 

1.1           Purchase of the Membership
Interests.  Subject to the terms and conditions of this
Agreement, on the Closing Date, Seller agrees to sell and convey to Buyer, free
and clear of all Encumbrances, and Buyer agrees to purchase and accept from
Seller, all of the Membership Interests.

 

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

 

2.             PURCHASE PRICE.

 

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

 

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

 

4

 

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

 

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

 

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

 

(i)                  all of the
Company’s right, title and interest in, to and under the oil, gas and/or
mineral leases described on Exhibit A attached hereto (the “Leases”),
whether or not such interests are accurately or completely described on Exhibit A,
and all of the Company’s oil and gas leasehold, mineral, royalty, overriding
royalty, surface or other interests in the lands covered by the Leases or in
the lands described on Exhibit A (collectively, the “Land”),
together with all the property and rights incident thereto, including without
limitation all of the Company’s rights in, to and under all operating
agreements; pooling, communitization and unitization agreements; farmout
agreements; joint venture agreements; product purchase and sale contracts;
transportation, processing, treatment or gathering agreements; leases; permits
(the “Permits”); rights-of-way (the “Rights-of-Way”); surface use agreements;
surface leases; surface estates; easements (the “Easements”); licenses;
options; declarations; orders; contracts; and instruments in any way relating
to the Leases or Land;

 

(ii)               all of the Company’s
right, title and interest in and to the wells situated on or used in
conjunction with operations on the Leases and/or Land or on land pooled,
communitized or unitized therewith (“Pooled Land”), including, without
limitation, all producing, non-producing, injection, disposal and water supply
wells and the wells listed on Exhibit B attached hereto
(collectively, the “Wells”);

 

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

 

5

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(iv)    for all operated Wells, a
monthly overhead fee of $400, prorated for partial months, per active producing
Well while Seller or its affiliate is operating the Oil and Gas Properties from
and after the Effective Time;

 

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

 

(vi)    any other amount agreed upon
in writing by Seller and Buyer.

 

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

 

(i)       an amount equal to the
amount of proceeds derived from the sale of Oil and Gas, , net of royalties and
severance taxes paid by the Company, actually received by the Company and
directly attributable to the Wells which are, in accordance with generally
accepted accounting procedures, attributable to the period of time from and
after the Effective Time;

 

6

 

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

 

(iii)    all amounts related to Title
Defects as determined pursuant to Section 5.4, consents and preferential
rights as determined pursuant to Section 5.5, Adverse Environmental
Conditions as determined pursuant to Section 6.4, Exclusion Adjustments as
determined pursuant to Sections 5.5 or 6.4, and Casualty Losses as determined
pursuant to Section 15.1;

 

(iv)    Property Taxes and Severance
Taxes related to the Oil and Gas Properties to be paid by the Company after the
Effective Time but attributable to the period prior to the Effective Time as
determined pursuant to Section 4.3;

 

(v)     the amount of the Deposit;

 

(vi)    an amount equal to any and all
dividends, distributions or other payments of any kind made by the Company
after the Effective Time to or for the benefit, directly or indirectly, of
Seller or any of its Affiliates, including any costs or expenses related to
this Agreement or the transactions contemplated hereby;

 

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

 

(viii)  an amount equal to all other
liabilities of the Company not otherwise included in an adjustment to the Base
Purchase Price pursuant to this Section 2.4(B), excluding asset retirement
obligations paid or payable after the Effective Time but attributable to
periods on or prior to the Effective Time; and

 

(ix)     any other amount agreed upon
in writing by Seller and Buyer.

 

(C)          Seller shall have the right to collect any receivable,
refund or other amounts associated with periods prior to the Effective
Time.  To the extent that Buyer collects
any such receivable, refund or other amounts, then Buyer shall promptly remit
any such amounts to Seller.

 

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

 

7

 

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

 

3.             CLOSING.

 

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

 

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

 

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

 

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

 

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

 

(D)          Executed releases of any mortgages or financing statements
in favor of any third party that may be currently encumbering the Oil and Gas
Properties or any other assets of the Company;

 

(E)           An executed Closing Adjustment Statement;

 

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

 

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

 

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

 

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

 

8

 

(B)           An executed Closing Adjustment Statement.

 

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

 

4.             ACCOUNTING ADJUSTMENTS.

 

4.1           Closing Adjustments.  With respect to matters that can be
determined as of the Closing, Seller shall prepare, in accordance with the
provisions of this Article 4, a statement (the “Closing Adjustment
Statement”) with relevant supporting information setting forth each adjustment
to the Base Purchase Price submitted by Seller. 
Seller shall submit the Closing Adjustment Statement to Buyer, together
with all records or data supporting the calculation of amounts presented on the
Closing Adjustment Statement, no later than three (3) business days prior
to the scheduled Closing Date.  Prior to
the Closing, Buyer and Seller shall review the adjustments proposed by Seller
in the Closing Adjustment Statement.  Agreed
adjustments shall be taken into account in computing any adjustments to be made
to the Base Purchase Price at the Closing. 
When available, actual figures will be used for the adjustments at
Closing.  To the extent actual figures
are not available, estimates shall be used subject to final adjustments as
described in Section 4.4 below.

 

4.2           Strapping and Gauging.  Seller caused the Oil and Gas in the storage
facilities located on, or utilized in connection with, the Leases to be
measured, gauged or strapped as of the Effective Time.  Seller caused the production meter charts (or
if such do not exist, the sales meter charts) on the pipelines transporting Oil
and Gas from the Leases to be read as of such time.  The Oil and Gas in such storage facilities
above six inches or through the meters on the pipelines as of the Effective
Time shall be allocated to the Seller and shall be valued based on the price
actually paid for Oil and Gas produced from the Oil and Gas Properties for the
month prior to the Effective Time, and the Oil and Gas placed in such storage
facilities after the Effective Time and production upstream of the aforesaid
meters shall belong to the Company and become part of the Oil and Gas
Properties.  Buyer or Buyer’s
representative shall have the option to witness the gauging by Seller.  To the extent, but only to the extent, the
Company does not receive the sales proceeds from the sale of such stored Oil
and Gas prior to Closing, the value of such shared Oil and Gas shall be an
upward adjustment to the Base Purchase Price as provided in Section 2.4(A).  This provision should not apply to any Oil
and Gas Properties that are not operated by the Company.  There shall be no settlement for Stock in
Tanks on non-operated Oil and Gas Properties.

 

4.3           Taxes.

 

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

 

9

 

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

 

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

 

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

 

4.4           Post-Closing Adjustments.

 

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

 

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

 

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

 

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

 

10

 

paid pursuant to the Closing Adjustment Statement and the actual
Purchase Price set forth on the Post-Closing Adjustment Statement.

 

4.5           Suspended Funds.  At the Closing, Seller shall provide to Buyer
a listing showing all third party proceeds from production attributable to the
operated Leases which are currently held in suspense and shall transfer to
Buyer all of those suspended proceeds. 
The Company shall be responsible for proper distribution of all the
suspended proceeds, to the extent so identified by Seller, to the parties
lawfully entitled to them and any claims related thereto, and the Company
hereby agrees to indemnify, defend and hold harmless Seller from and against
any and all claims, liabilities, losses, costs and expenses arising out of or
relating to those suspended proceeds and any claims related thereto after the
Effective Time.  Seller shall be
responsible and liable for, any claims, liabilities, losses, costs and expenses
arising out of or relating to those suspended proceeds and any claims related
thereto through the Closing Date and related to any suspended funds not
identified by Seller as provided above.

 

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

 

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

 

5.             DUE DILIGENCE: TITLE MATTERS.

 

5.1           General Access.

 

(A)          During reasonable business hours, Seller and the Company
agree to grant Buyer physical access to the Oil and Gas Properties and other
assets of the Company to allow Buyer to conduct, at Buyer’s sole risk and
expense, on-site inspections and environmental assessments of the Oil and Gas
Properties and other assets of the Company. 
In connection with any such on-site inspections, Buyer agrees not to
interfere with the normal operation of the Oil and Gas Properties and other
assets of the Company and agrees to comply with all requirements of the
operators of the Wells.  If Buyer or its
agents prepares an environmental assessment of any of the Oil and Gas
Properties and other assets of the Company, Buyer agrees to keep such
assessment confidential.  In connection
with granting such access, Buyer represents that it is adequately insured and
waives, releases and agrees to indemnify the Seller and the Company against all
claims for injury to, or death of, persons or for damage to operations or
property arising in any way from the access afforded to Buyer hereunder or the
activities of Buyer, except to the extent caused by Seller’s or the Company’s
gross negligence or willful misconduct. 
This waiver, release and indemnity by Buyer shall survive termination of
this Agreement.

 

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

 

11

 

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

 

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

 

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

 

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

 

(B)           That title of the Company to the Oil and Gas Properties is
free and clear of liens, encumbrances and defects that materially and adversely
affect the ownership, operation or use of the Oil and Gas Properties, except
for Permitted Encumbrances.

 

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

 

(1)           Any
lessor’s royalties, overriding royalties, net profits interests, carried
interests, production payments, reversionary interests and similar burdens
reflected in the public records, if the net cumulative effect of the burdens
does not operate to reduce the Net Revenue Interest of the Company below the
interests described in Exhibit B;

 

(2)           Any
increase in lessor’s royalty occasioned by the repeal or suspension of any
governmental regulation providing for the reduction of royalty for wells
producing below defined threshold amounts;

 

(3)           Division
orders and production sales contracts terminable without penalty upon no more
than ninety (90) days notice to the purchaser;

 

(4)           Preferential
Rights and required third party consents to assignment and similar agreements
with respect to which waivers or consents are obtained from the appropriate
parties, or the appropriate time period for asserting any such right has
expired without an exercise of the right;

 

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

 

12

 

(6)                                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 therein if they are routinely obtained subsequent to the
sale or conveyance;

 

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

 

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

 

(9)                                Conventional
rights of reassignment prior to release or surrender requiring notice to the
holders of the rights;

 

(10)                          All
rights reserved to or vested in any governmental, statutory or public authority
to control or regulate any of the Oil and Gas Properties in any manner, and all
applicable laws, rules and orders of governmental authority;

 

(11)                        Defects
that are defensible by possession under applicable statutes of limitation for
adverse possession or for prescription;

 

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

 

(13)                          All
other liens, charges, encumbrances, contracts, agreements, instruments,
obligations, defects and irregularities affecting the Oil and Gas Properties
that individually or in the aggregate are not such as to materially interfere
with or affect the operation, value or use of any of the Oil and Gas Properties
and have not prevented, and cannot reasonably be expected to prevent, the
Company from receiving the proceeds of production from the affected Oil and Gas
Properties.

 

5.3                               Defect Letters.

 

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

 

13

 

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

 

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

 

(C)                              Upon timely delivery of a Notice
by Buyer:

 

(i)                   within three (3) business
days after Seller’s receipt of the Title Defects Notice, Seller shall notify
Buyer whether Seller agrees with Buyer’s claimed Title Defects and/or the
proposed Title Defect Values therefor (“Seller’s Response”).  If Seller does not agree with any claimed
Title Defect and/or the proposed Title Defect Value therefor, then the Parties
shall enter into good faith negotiations and shall attempt to agree on such
matters;

 

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

 

(iii)             if the Parties cannot
reach agreement concerning either the existence of a Title Defect, Seller’s
proposed cure of a Title Defect, or a Title Defect Value within ten (10) days
after Buyer’s receipt of Seller’s Response or Seller’s receipt of Buyer’s
Response, as applicable, upon either Party’s request, the Parties shall
mutually agree on and employ an attorney experienced in title examination in
the state where the Oil and Gas Properties are located (“Title Consultant”) to
resolve all points of disagreement relating to Title Defects and Title Defect
Values; provided that Seller or Buyer may elect to proceed to Closing with such
Oil and Gas Property subject to the Title Defect becoming an Excluded Asset and
adjust the Base Purchase Price in the amount of the Allocated Value and not
submit such matter to arbitration;

 

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

 

14

 

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

 

5.4                               Effect of Title Defect.

 

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

 

(i)                   adjust the Base
Purchase Price in the amount of the Title Defect Value of the Oil and Gas
Property to which such Title Defect relates and proceed to Closing on all Oil
and Gas Properties; or

 

(ii)                proceed with (a) Closing
on those Oil and Gas Properties not affected by the valid Title Defects and
such Oil and Gas Properties to which a Title Defect relates but for which
Seller has elected to proceed to Closing with an adjustment of the Base
Purchase Price in the amount of the Title Defect Value of such Oil and Gas
Properties, and (b) defer Closing on those other Oil and Gas Properties to
which a Title Defect relates and for which Seller has elected to attempt to
cure such Title Defect and to not proceed to Closing, for which Buyer shall
place into escrow an amount equal to the Allocated Values of the Oil and Gas
Properties affected by the valid Title Defects, which withheld amount shall be
paid to Seller when the Oil and Gas Property affected by any valid Title Defect
is cured or the Title Defect is waived by Buyer and the affected Oil and Gas
Property is conveyed from Seller to Buyer. 
If neither of the above occurs and if Seller later determines it will
not cure a Title Defect on or before thirty (30) days from the Closing Date, the
amount in the escrow account attributable to such Title Defect will be returned
to Buyer and such Oil and Gas Property affected by such Title Defect shall be
deemed an Excluded Asset and be transferred to Seller or Seller’s designee
pursuant to Section 1.2.

 

15

 

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

 

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

 

(ii)                if the valid Title
Defect represents an obligation, encumbrance, burden or charge upon the
affected Oil and Gas Property (including any increase in Working Interest for which
there is not a proportionate increase in Net Revenue Interest), the amount of
the Title Defect Value is to be determined by taking into account the Allocated
Value of such Oil and Gas Property, the portion of the Oil and Gas Property
affected by the Title Defect, the legal effect of the Title Defect, the
potential economic effect of the Title Defect over the life of the affected Oil
and Gas Property, and the Title Defect Values placed upon the Title Defect by
Buyer and Seller.

 

(iii)             Notwithstanding the
above, in no event shall the total of the Title Defect Values related to a
particular Oil and Gas Property exceed the Allocated Value of such Oil and Gas
Property.

 

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

 

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

 

Except for consents and approvals which are
customarily obtained post-Closing, if a necessary consent to assign any Lease
has not been obtained as of the Closing, then (i) the portion of the Oil
and Gas Properties for which such consent has not been obtained shall become an
Excluded Asset conveyed to Seller or Seller’s designee at the Closing, (ii) the
Allocated Value for that Oil and Gas Property shall not be paid to Seller, and (iii) Seller
shall use best efforts to obtain such consent as promptly as possible following
Closing.  If such consent has been
obtained as of the date on which the Post-Closing Adjustment Statement becomes
final, Seller shall convey the affected Oil and Gas 

 

16

 

Property to the
Company effective as of the Effective Time and Buyer shall pay Seller the
Allocated Value of the affected Oil and Gas Property, less any proceeds from
the affected Oil and Gas Property received by Seller attributable to the period
of time after the Effective Time (calculated in accordance with Section 2.3).  If such consent has not been obtained or has
not been waived by Buyer as of the date on which the Post-Closing Adjustment
Statement becomes final, Seller shall elect either to (i) challenge in
court the enforceability of such consent right, in which event the affected Oil
and Gas Property shall be assigned to Seller as an Excluded Asset and a portion
of the Purchase Price equal to the Allocated Value of the affected Oil and Gas
Property shall be withheld by Buyer until such legal challenge is finally
resolved by settlement or non-appealable court order, after which Seller shall
convey the affected Oil and Gas Property to the Company under the terms of this
Agreement and Buyer shall pay the Allocated Value for such Oil and Gas
Property, less any proceeds received by Seller attributable to such Oil and Gas
Property for the period from and after the Effective Time (calculated in
accordance with Section 2.3) or (ii)  deem the affected Oil and Gas
Property an Excluded Asset and the Base Purchase Price shall be reduced by an
amount equal to the Allocated Value of the affected Oil and Gas Property (with
such adjustment being an “Exclusion Adjustment”).  Buyer shall reasonably cooperate with Seller
in obtaining any required consent including providing assurances of reasonable
financial conditions, but Buyer shall not be required to expend funds or make
any other type of financial commitments a condition of obtaining such consent.

 

6.                                     ENVIRONMENTAL ASSESSMENT.

 

6.1                               Physical Condition of the Oil
and Gas Properties.

 

(A)                            Buyer acknowledges that the Oil
and Gas Properties have been used for oil and gas drilling and production
operations and possibly for the storage and disposal of waste materials or
hazardous substances related to standard oil field operations. Physical changes
in or under the Oil and Gas Properties or adjacent lands may have occurred as a
result of such uses.  The Oil and Gas
Properties also may contain previously plugged and abandoned wells, buried
pipelines, storage tanks and other equipment, whether or not of a similar
nature, the locations of which may not now be known by Seller or be readily
apparent by a physical inspection of the Oil and Gas Properties.  Upon consummation of the Closing Buyer shall
be deemed to have assumed the risk of expense, claim, damage or liability
arising from any such matter referred to in this section, including without
limitation the risk that the Oil and Gas Properties may contain waste or
contaminants and that adverse physical conditions, including the presence of
waste or contaminants, may not have been revealed by Buyer’s
investigation.  Upon consummation of the
Closing the Company shall retain all responsibility and liability related to
disposal, spills, waste or contamination on or below the Oil and Gas Properties.

 

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

 

17

 

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

 

6.2                               Inspection and Testing.

 

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

 

(B)                              Buyer waives and releases all
claims against Seller, the Company, their Affiliates, and each of their
respective directors, officers, employees, agents, and other representatives
and their successors and assigns (collectively, the “Seller’s Group”), for
injury to or death of persons, or damage to property, arising in any way from
the exercise of rights granted to Buyer in Section 6.2(A) above or
the activities of Buyer or its employees, agents or contractors on the Oil and
Gas Properties pursuant to Section 6.2(A) above.  EXCEPT TO THE EXTENT CAUSED BY THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF THE SELLER’S GROUP, BUYER SHALL INDEMNIFY
THE SELLER’S GROUP AGAINST AND HOLD THE MEMBERS OF THE SELLER’S GROUP HARMLESS
FROM ANY AND ALL REASONABLE LOSS, COST, DAMAGE, EXPENSE OR LIABILITY, INCLUDING
REASONABLE ATTORNEY’S FEES, WHATSOEVER ARISING OUT OF (I) ANY AND ALL
STATUTORY OR COMMON LAW LIENS OR OTHER ENCUMBRANCES FOR LABOR OR MATERIALS
FURNISHED IN CONNECTION WITH SUCH TESTS, SAMPLINGS, STUDIES OR SURVEYS AS BUYER
MAY CONDUCT WITH RESPECT TO THE OIL AND GAS PROPERTIES; AND (II) ANY
INJURY TO OR DEATH OF PERSONS OR DAMAGE TO PROPERTY OCCURRING IN, ON OR ABOUT
THE OIL AND GAS PROPERTIES AS A RESULT OF SUCH EXERCISE OR ACTIVITIES.

 

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

 

18

 

Substance Control Act, the Clean Air Act, the Clean Water Act, the Safe
Drinking Water Act, the National Environmental Policy Act, the Endangered
Species Act, the Oil Pollution Act of 1990, and all regulations promulgated
pursuant thereto.

 

6.3                               Notice of Adverse Environmental
Conditions.  No later than the Defect Notice Deadline,
Buyer shall notify Seller in writing of any Adverse Environmental Condition
with respect to the Oil and Gas Properties. 
Such notice shall describe in reasonable detail the Adverse
Environmental Condition and include the estimated Environmental Defect Value
attributable thereto (the “Environmental Defect Notice”) based on an estimate
of the cost to Remediate the Adverse Environmental Condition.  There shall be no adjustment to the Base
Purchase Price unless the aggregate Environmental Defect Values of all Adverse
Environmental Conditions exceeds one percent (1%) of the Base Purchase
Price (the “Environmental Defect Threshold”) (such amount being a threshold,
not a deductible).  The “Environmental
Defect Value” attributable to any Adverse Environmental Condition shall be the
estimated amount (net to the Company’s interest) of all reasonable costs and
claims necessary to Remediate the Adverse Environmental Conditions, as reasonably
determined and estimated by Buyer.  The
term “Adverse Environmental Condition” means (i) the failure of the Oil
and Gas Properties to be in material compliance with all applicable
Environmental Laws; (ii) the Oil and Gas Properties being subject to any
agreements, consent orders, decrees or judgments currently in existence based
on any Environmental Laws that negatively and materially impact the future use
of any portion of the Oil and Gas Properties or that require any material
change in the present conditions of any of the Oil and Gas Properties; or (iii) the
Oil and Gas Properties being subject to any material uncured violations of or
non-compliance with any applicable Environmental Laws or any Lease or
agreement.  Buyer shall be deemed to have
conclusively waived (i) all Adverse Environmental Conditions not contained
in an Environmental Defect Notice delivered to Seller on or before the Defect
Notice Deadline, and (ii) any remedy against Seller for Adverse
Environmental Conditions if the Environmental Defect Value of all Adverse
Environmental Conditions do not exceed the Environmental Defect Threshold.

 

6.4                               Rights and Remedies for Adverse
Environmental Conditions.

 

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

 

(B)                              Buyer waives any Adverse
Environmental Condition for which Buyer has received an adjustment to the Base
Purchase Price in accordance with Section 6.4(A).

 

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

 

19

 

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

 

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

 

(E)                               The term “Remediate” or “Remediation”
means, with respect to any valid Adverse Environmental Condition, causing the
Company at Seller’s expense to undertake and complete those actions and
activities necessary to eliminate or correct such Adverse Environmental
Condition to the degree sufficient that such Adverse Environmental Condition no
longer constitutes an Adverse Environmental Condition as defined above.  Seller shall promptly notify Buyer at such
time as it believes that it has Remediated an Adverse Environmental
Condition.  Buyer shall promptly notify
Seller whether it agrees such condition is Remediated.  If Buyer fails to notify Seller of its
determination with respect to such Remediation within ten (10) business
days following Seller’s notice, such Adverse Environmental Condition shall be
deemed Remediated.

 

(F)                               If Seller and Buyer are unable
to agree on the amount of the Environmental Defect Value within ten (10) business
days after Seller’s receipt of the Environmental Defect Notice or that an
Adverse Environmental Condition exists, has been Remediated or is required to
be Remediated, then the dispute will be submitted to a mutually acceptable
company with recognized expertise in the oil and gas environmental remediation
and regulation field (the “Environmental Consultant”) whose determination shall
be final and binding upon the Parties. 
Seller and Buyer shall each bear their respective costs and expenses
incurred in connection with any such dispute, and one-half (1/2) of the fees,
costs and expenses charged by the Environmental Consultant.  Each Party shall present a written statement
of its position on the Adverse Environmental Condition and/or the Environmental
Defect Value in question to the Environmental Consultant within five (5) business
days after the Environmental Consultant is selected, and the Environmental
Consultant shall make a determination of all points of disagreement in
accordance with the terms and conditions of this Agreement within ten (10) business
days of receipt of such position statements. 
If necessary, the Closing Date shall be deferred until the Environmental
Consultant has made a determination of the disputed issues with respect
thereto; provided, however, that, unless Seller and Buyer mutually agree to the
contrary, the Closing Date shall not be deferred in any event for more than
thirty (30) days beyond the scheduled Closing Date in Section 3.1.  Once the Environmental Consultant’s
determination has been expressed to both Parties, if applicable, Seller shall
have five (5) business days in which to advise Buyer in writing which of
the options available to Seller under Section 6.4(A) Seller elects
regarding each of the Oil and Gas Properties as to which the Environmental
Consultant has made a determination.

 

20

 

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

 

(A)                            Seller shall be responsible for
all negotiations and contacts with federal, state, and local agencies and
authorities.  Buyer may not make any
independent contacts with any agency, authority, or other third party with
respect to the Adverse Environmental Condition or Remediation and shall keep
all information regarding the Adverse Environmental Condition and Remediation
confidential, except in each instance to the extent required by applicable law.

 

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

 

(C)                              Buyer shall grant and warrant
access and entry to the Oil and Gas Properties after Closing to Seller and
third parties conducting assessments or Remediation, to the extent and as long
as necessary to conduct and complete the assessment or Remediation work, to
remove equipment and facilities, and to perform any other activities reasonably
necessary in connection with assessment or Remediation.

 

(D)                             Buyer shall facilitate Seller’s
ingress and egress or assessment or Remediation activities after the
Closing.  Seller shall make reasonable
efforts to perform the work so as to minimize disruption to Buyer’s and the
Company’s business activities.

 

(E)                               Seller shall continue
Remediation of the Adverse Environmental Condition until the first of the
following occurs:

 

(i)                   the appropriate
governmental authorities provide notice to Seller or Buyer that no further
Remediation of the Adverse Environmental Condition is required; or

 

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

 

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

 

(F)                               Until Seller completes
Remediation of an Adverse Environmental Condition, Seller and Buyer shall each
notify the other of any pending or threatened claim, action, or proceeding by
any authority or private party that relates to or would affect the
environmental condition, the assessment, or the Remediation of the Oil and Gas
Properties.

 

21

 

7.                                     REPRESENTATIONS AND WARRANTIES
OF SELLER.

 

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

 

(A)                            Status. The Company is a limited
liability company and Seller is a corporation, each duly organized, legally
existing and in good standing under the laws of the State of Texas, and duly
qualified to own its properties and assets and carry on its business as now
being conducted.

 

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

 

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

 

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

 

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

 

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

 

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

 

22

 

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

 

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

 

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

 

(J)                                 Taxes.   The Company has filed all federal, state,
local and foreign tax returns and reports required to be filed by it and has
paid and discharged, or established adequate reserves for, all taxes shown as
due thereon or otherwise owed by the Company when due (including without
limitation all Property Taxes, Severance Taxes, income, gross receipts,
payroll, employment, excise, franchise, withholding, social security,
unemployment, disability, sales, use, transfer or other taxes), and has made
all required estimated tax deposits, other than such payments as are being
contested in good faith by appropriate proceedings.  No taxing authority or agency is now asserting
or, to the best knowledge of the Company and the Sellers, threatening to assert
against the Company any deficiency or claim for additional taxes or interest
thereon or penalties in connection therewith. 
The Company has not granted any waiver of any statute of limitations
with respect to, or any extension of a period for the assessment of, any
federal, state, county, municipal or foreign income tax.

 

(K)                             Material Agreements.

 

(i)                   To the best of
Seller’s and Company’s knowledge, all material contracts, leases, plans and
other arrangements to which the Company is a party or by which it or its
assets, including without limitation the Oil and Gas Properties, are bound or
subject to, are listed on Schedule 7.1(K) (“Material
Agreements”).  Seller and the Company
have provided Buyer with access to true, correct and complete copies of all
written Material Agreements and all amendments, modifications and supplements
thereto.  All of the Material Agreements
are in writing.  To the knowledge of
Seller and the Company, the Company’s relationships are generally satisfactory
with its suppliers and vendors who are material to the conduct of the Company’s
business.  The Company does not have
outstanding any powers of attorney with any Person.  Each of the Material Agreements to which the
Company is a signatory has been duly executed by the Company and the Company is
not in breach of any Material Agreement.

 

(ii)                To the best of
Seller’s and Company’s knowledge, the Company has performed in all material
respects each material term, covenant and condition of each of the Material
Agreements to which it is a party or by which it is bound, and, to the
knowledge of Seller and the Company, no material event of default on the part
of 

 

23

 

any other party thereto exists under any of
the Material Agreements.  The Company is
current on all payment obligations under all Material Agreements to which it is
a party or by which it is bound.

 

(iii)             To the best of Seller’s
and Company’s knowledge, no event has occurred under any of the Material
Agreements that would constitute a material default thereunder on the part of
any other party thereto.  The
consummation of the transaction contemplated by this Agreement will not result
in a default, violation, termination or right to terminate under any of the
Material Agreements.

 

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

 

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

 

(M)                          Consents and Preferential
Purchase Rights.  To the best of Seller’s knowledge, Schedule 7.1(M) lists
all consents and preferential purchase rights contained in the Leases or
Material Agreements.

 

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

 

(O)                             Royalties.  All rentals, royalties and other payments due
under the Leases have been properly paid, except those amounts properly being
held in suspense.

 

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

 

(Q)                             Calls on Production.  There are no calls on production pertaining
to the Oil and Gas Properties that provide for payment at less than applicable
current market prices.

 

24

 

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

 

(S)                               No Subsidiaries.  The Company has no subsidiaries, and does not
own, directly or indirectly, any capital stock or other ownership,
participation or equity interest in any corporation, partnership, limited
liability company, association, joint venture or other entity , and (b) there
are no outstanding contractual obligations or commitments of the Company to
acquire or make any investment in any shares of capital stock or other
ownership, participation or equity interest in any corporation, partnership,
limited liability company, association, joint venture or other entity.

 

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

 

(U)                             Title to Membership Interests.  With the exception of the liens that will be
released at closing, Seller has legal, beneficial and record title to all of
the Membership Interests, free and clear of any and all liens, restrictions,
options, voting trusts or agreements, proxies, encumbrances, interests, claims
or charges of any kind whatsoever and all such Membership Interests are validly
issued, fully paid and nonassessable. 
Seller has or will have at the Closing physical custody of any
certificates evidencing all of the Membership Interests.  At Closing, Buyer will acquire good and
defensible title to the Membership 

 

25

 

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

 

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

 

(W)                         Oil and Gas Properties.  Subject to the title review process set forth
in Article 5, the Company has Good and Defensible Title to the Oil and Gas
Properties.  There is no pending
condemnation or similar proceeding affecting the Oil and Gas Properties or any
portion thereof, and, to the knowledge of Seller and the Company, no such
action is presently threatened. All oil and gas leases and agreements
constituting a part of the Oil and Gas Properties are valid and subsisting, in
full force and effect and, to the knowledge of Seller and the Company there
exists no default or event or circumstances which with the giving of notice or
the passage of time or both would give rise to a default under any such lease
or agreement which would materially interfere with the operation, value or use
of the Company’s assets or properties. The Company has performed in all
material respects each material term, covenant and condition of each of the
Leases.

 

(X)                             Financial Statements.  The Company and Sellers have provided to
Buyer true and complete copies of the unaudited balance sheets of the Company
as of December 31, 2006 and 2007 and as of June 30, 2008, and the
related unaudited statements of operations and changes in Members’ equity for
the two fiscal years and six month period then ended (collectively, the “Financial
Statements”). The Financial Statements (i) have been prepared utilizing
generally accepted accounting principles in the United States consistently
applied; (ii) present fairly, in all material respects, the financial
condition of the Company as of the dates thereof and the results of its
operations for the periods then ended; and (iii) are consistent with the
books and records of the Company, which books and records are true, correct and
complete in all material respects.

 

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

 

(Z)                              No Material Changes.  Since June 30, 2008 the Company has conducted
its business only in the ordinary course consistent with past practices and
there has not been: (a) any amendment or change in the organizational
documents or equity securities of the Company, (b) any repurchase,
redemption or other acquisition by the Company of any securities of, or other
ownership interests in the Company, (c) any change in any method of
accounting or accounting practice or any tax method, practice or election by
the Company, (d) any sale, assignment or other disposition of any material
asset, (e) any 

 

26

 

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

 

(AA)                    Insurance.  The Company has in full force and effect the
liability and casualty insurance, and workers compensation, as described in Schedule 7.1(AA).  The Company is not in default in any material
respect with respect to such insurance policies, and the Company has not failed
to give any notice or present any claim under any policies in due and timely
fashion.  All insurance claims currently
pending or made within two years prior to the date hereof are described on Schedule 7.1(AA).

 

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

 

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

 

27

 

dependent care plan, flexible benefit plan, cafeteria plan, employee
assistance program, scholarship program, employment contract, retention
incentive agreement, noncompetition agreement, consulting agreement,
confidentiality agreement, vacation policy, or other similar plan or agreement
or arrangement.

 

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

 

(i)                   the Company has
complied in all material respects with all Environmental Laws, and there is no
existing action, suit, proceeding, hearing, investigation, charge, complaint,
claim, demand, or notice filed, commenced or, to the knowledge of Seller and
the Company, threatened against the Company or any of its assets which: (a) asserts
or alleges that the Company violated any Environmental Laws; (b) asserts
or alleges that the Company is required to clean up, remove or take remedial or
other response action due to the disposal, depositing, discharge, leaking or
other release of any hazardous materials; or (c) asserts or alleges that
the Company is required to pay all or a portion of the cost of any past,
present or future cleanup, removal or remedial or other response action which
arises out of or is related to the disposal, depositing, discharge, leaking or
other release of any hazardous materials;

 

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

 

(iii)             there are no
conditions existing currently which would subject the Company to damages,
penalties, injunctive relief or cleanup costs under any Environmental Laws or
which require cleanup, removal, remedial action or other response pursuant to
Environmental Laws by the Company;

 

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

 

(v)               there are no
agreements with any person pursuant to which the Company would be required to
defend, indemnify, hold harmless, or otherwise be responsible for any violation
by or other liability or expense of such person, or alleged violation by or
other liability or expense of such person, arising out of any Environmental
Law; and

 

28

 

(vi)            the Company has
provided Buyer copies of all environmental audits, assessments or other
evaluations, if any, of the Company or any of its assets, properties or
business operations.

 

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

 

(FF)                         Payout Balances.  The Payout Balance for any Well is properly
reflected on Schedule 7.1(FF) as of the respective dates shown
thereon.  “Payout Balance(s)” means the
status, as of the dates of the Company’s calculations, of the recovery by the
Company or a third party of a cost amount specified in the contract relating to
a Well out of the revenue from such Well where the net revenue interest of the
Company therein will be increased or reduced when such amount has been
recovered.

 

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

 

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

 

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

 

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

 

7.2                               Scope of Representations of
Seller.

 

(A)                             Information About the Oil and
Gas Properties.  Except as expressly set forth in this
Agreement, Seller disclaims all liability and responsibility for any
representation, warranty, statements or communications (orally or in writing)
to Buyer regarding the Oil 

 

29

 

and Gas Properties, including any information contained in any opinion,
information or advice that may have been provided to Buyer by any employee,
officer, director, agent, consultant, engineer or engineering firm,
representative, partner, member, beneficiary, owner or contractor of Seller
wherever and however made, including those made in any data room or internet
site and any supplements or amendments thereto or during any negotiations with
respect to this Agreement or any confidentiality agreement previously executed
by the Parties with respect to the Asset. 
EXCEPT AS SET FORTH IN ARTICLE 7 OF THIS AGREEMENT, SELLER MAKES NO
WARRANTY OR REPRESENTATION, EXPRESS, STATUTORY OR IMPLIED, AS TO (i) THE
ACCURACY, COMPLETENESS OR MATERIALITY OF ANY DATA, INFORMATION OR RECORDS
FURNISHED TO BUYER IN CONNECTION WITH THE OIL AND GAS PROPERTIES; (ii) THE
PRESENCE, QUALITY AND QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO
THE OIL AND GAS PROPERTIES, INCLUDING WITHOUT LIMITATION SEISMIC DATA AND
SELLER’S INTERPRETATION AND OTHER ANALYSIS THEREOF; (iii) THE ABILITY OF
THE OIL AND GAS PROPERTIES TO PRODUCE HYDROCARBONS, INCLUDING WITHOUT
LIMITATION PRODUCTION RATES, DECLINE RATES AND RECOMPLETION OPPORTUNITIES; (iv) IMBALANCE
OR PAYOUT ACCOUNT INFORMATION, ALLOWABLES, OR OTHER REGULATORY MATTERS; (v) THE
PRESENT OR FUTURE VALUE OF THE ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY, TO
BE DERIVED FROM THE OIL AND GAS PROPERTIES; (vi) THE ENVIRONMENTAL
CONDITION OF THE OIL AND GAS PROPERTIES; (vii) ANY PROJECTIONS AS TO
EVENTS THAT COULD OR COULD NOT OCCUR; (viii) THE TAX ATTRIBUTES OF ANY OIL
AND GAS PROPERTY; (ix) ANY OTHER MATTERS CONTAINED IN OR OMITTED FROM ANY
INFORMATION OR MATERIAL FURNISHED TO BUYER BY SELLER OR OTHERWISE CONSTITUTING
A PORTION OF THE OIL AND GAS PROPERTIES; AND, (x) THE COMPLETENESS OR
ACCURACY OF THE INFORMATION CONTAINED IN ANY EXHIBIT HERETO REGARDING THE OIL
AND GAS PROPERTIES.  ANY DATA,
INFORMATION OR OTHER RECORDS FURNISHED BY SELLER REGARDING THE OIL AND GAS
PROPERTIES ARE PROVIDED TO BUYER AS A CONVENIENCE AND BUYER’S RELIANCE ON OR
USE OF THE SAME IS AT BUYER’S SOLE RISK.

 

(B)                              Independent Investigation.  Buyer agrees that it has, or by Closing will
have, made its own independent investigation, analysis and evaluation of the
Oil and Gas Properties and the transaction contemplated by this Agreement
(including Buyer’s own estimate and appraisal of the extent and value of the
Company’s Oil and Gas reserves attributable to the Oil and Gas Properties and
an independent assessment and appraisal of the environmental risks and
liabilities associated with the acquisition of the Oil and Gas
Properties).  Buyer agrees that it has
had, or will have prior to Closing, access to all information necessary to
perform its investigation and has not relied and will not rely on any
representations by Seller other than those expressly set forth in this
Agreement.

 

30

 

8.                                     REPRESENTATIONS AND WARRANTIES
OF BUYER.

 

8.1                               Buyer’s Representations and
Warranties.  Buyer represents and warrants to Seller as
follows as of the date hereof and the Closing:

 

(A)                            Status.  Buyer is a limited partnership duly
organized, validly existing and in good standing under the laws of the State of
Delaware.

 

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

 

(C)                              Validity of Obligations.  The consummation of the transactions
contemplated by this Agreement will not in any respect violate, nor be in
conflict with, any provision of Buyer’s partnership agreement or other
governing documents, or any agreement or instrument to which Buyer is a party
or is bound, or any judgment, decree, order, statute, rule or regulation
applicable to Buyer (subject to governmental consents and approvals customarily
obtained after the Closing).  This
Agreement and the documents executed and delivered by Buyer in connection with
the Closing shall constitute legal, valid and binding obligations of Buyer,
enforceable in accordance with their terms, subject, however, to the effects of
bankruptcy, insolvency, reorganization, moratorium and other laws for the
protection of creditors, as well as to general principles of equity, regardless
of whether such enforceability is considered in a proceeding in equity or at
law.

 

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

 

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

 

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

 

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

 

(H)                             Broker’s Fees.  Buyer has incurred no obligation or
liability, contingent or otherwise, for brokers’ or finders’ fees in respect of
the matters provided for in this Agreement for which Seller shall have any
responsibility.

 

31

 

9.                                     CERTAIN AGREEMENTS OF SELLER.  Seller and the Company agree and covenant
that, unless Buyer shall have otherwise agreed in writing, the following
provisions shall apply:

 

9.1                               Maintenance of Oil and Gas
Properties.  From the Effective Time until Closing, Seller
and the Company agree that they and their Affiliates shall:

 

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

 

(B)                              Not introduce any new methods of
management, operation or accounting with respect to any or all of the Oil and
Gas Properties.

 

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

 

(D)                             Except to the extent necessary
or advisable to avoid forfeiture or penalties, not enter into agreements to
drill new wells or to rework, plug back, deepen, plug or abandon any Well, nor
commence any drilling, reworking or completing or other operations on the
Leases which requires estimated expenditures exceeding Ten Thousand Dollars
($10,000.00), net to the working interest of the Company, for each operation
(except for emergency operations and operations required under presently
existing contractual obligations) without obtaining the prior written consent
of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned).

 

(E)                               Not voluntarily relinquish the
Company’s or its Affiliate’s position as operator to anyone other than Buyer
with respect to any of the operated Oil and Gas Properties or voluntarily
abandon any of the Wells other than as required pursuant to the terms of a
Lease or by regulation.

 

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

 

9.2                               Conduct of Business of the
Company.

 

(A)                            Ordinary Course.  During the period from the date of this
Agreement to the Closing Date (except as otherwise specifically contemplated by
the terms of this Agreement), the Company shall, and Seller shall use best
efforts to cause the Company to, carry on its businesses in the usual, regular
and ordinary course in substantially the same manner as conducted at the date
hereof, and, to the extent consistent therewith, use all reasonable efforts to
preserve intact its current business organization, keep available the services
of its current officers and employees and preserve its relationships with
customers, vendors, suppliers, licensors, licensees, distributors and others
having business dealings with the Company, in each case consistent with past
practice, to the end that their goodwill and 

 

32

 

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

 

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

 

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

 

(iii)             amend the Company’s
organizational documents;

 

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

 

(v)               except for
Permitted Encumbrances, sell, lease, mortgage, pledge, grant a lien on or
otherwise encumber or dispose of any of its properties or assets, except (a) the
sale of Oil and Gas in the ordinary course of business consistent with past
practice, or (b) other transactions involving not in excess of $50,000.00
in the aggregate;

 

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

 

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

 

(viii)      make any material election
relating to taxes or settle or compromise any material tax liability;

 

(ix)              pay, discharge or
satisfy any claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction, in the ordinary course of business consistent with past practice
and in accordance with their terms, of liabilities reflected or reserved
against in the most recent Financial Statement (as of June 30, 2008);

 

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

 

33

 

	
  (xi)

  	
  adopt a plan
  of complete or partial liquidation or resolutions providing for or
  authorizing such a liquidation or a dissolution, merger, consolidation,
  restructuring, recapitalization or reorganization;

  
	
   

  	
   

  
	
  (xii)

  	
  enter into
  or amend any material contract, agreement or lease, including any collective
  bargaining agreement;

  
	
   

  	
   

  
	
  (xiii)

  	
  change any
  accounting principle used by it, except for changes conforming to the
  Internal Revenue Code and to regulations and other pronouncements promulgated
  by the United States Treasury;

  
	
   

  	
   

  
	
  (xiv)

  	
  settle or
  compromise any litigation (whether or not commenced prior to the date of this
  Agreement) other than settlements or compromises: (a) of litigation
  where the amount paid in settlement or compromise does not exceed $50,000.00,
  or (b) in consultation and cooperation with Buyer, and, with respect to
  any such settlement, with the prior written consent of Buyer;

  
	
   

  	
   

  
	
  (xv)

  	
  approve any
  authority for expenditure (AFE) or otherwise make any commitment which might
  require the Company to make any capital expenditure or incur any expense
  other than ordinary operating expenses within industry standards; or

  
	
   

  	
   

  
	
  (xvi)

  	
  authorize
  any of, or commit or agree to take any of, the foregoing actions.

  

 

9.3                               Records and Audit Rights.  Seller shall have the right to make and
retain copies of the Records as Seller may desire prior to the delivery of the
Records to Buyer.  Buyer, for a period of
seven (7) years after the Closing Date, shall make available to Seller (at
the location of such Records in Buyer’s organization) access to such Records as
Buyer may have in its possession (or to which it may have access) upon written
request of Seller, during normal business hours; provided, however, that Buyer
shall not be liable to Seller for the loss of any Records by reason of clerical
error or inadvertent loss or destruction of Records.

 

Seller agrees to make available to Buyer prior to and for a period of
twelve (12) months following Closing any and all existing information and
documents in the possession of Seller that Buyer may reasonably require to
comply with Buyer’s tax and financial reporting requirements and audits.  Without limiting the generality of the
foregoing, Seller will use its commercially reasonable efforts after execution
of this Agreement and for twelve (12) months following Closing to cooperate
with the independent auditors chosen by Buyer (“Buyer’s Auditor”) in connection
with their audit of any financial statements of the Company that Buyer or any
of its Affiliates requires to comply with their tax and financial reporting
requirements, and their review of any interim quarterly financial statements of
the Company that Buyer requires to comply with such reporting
requirements.  Seller’s cooperation will
include (i) such reasonable access to Seller’s employees who were
responsible for preparing the financialstatements and work papers and other
supporting documents used in the preparation of such financial statements as
may be required by Buyer’s Auditor to perform an audit in accordance with
generally accepted auditing standards, and (ii) delivery of one or more
customary representation letters (in substantially the form previously approved
by Seller and Buyer) from Seller to Buyer’s Auditor that are requested by Buyer
to allow such auditors to complete an audit (or review of any interim quarterly

 

34

 

financials), and to issue an opinion that in Buyer’s experience is
acceptable with respect to an audit or review of those financialstatements
required pursuant to this Section.  Buyer
will reimburse Seller, within three (3) business days after demand
therefor, for any reasonable out-of-pocket and overhead costs with respect to
any costs incurred by Seller in complying with the provisions of this Section.

 

9.4                               Reasonable Efforts; Notification.

 

(A)                            Reasonable Efforts. Upon the terms and subject to
the conditions set forth in this Agreement, except to the extent otherwise
provided in this Section 9.4, each of the parties agrees to use
commercially reasonable efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, and to assist and cooperate with the other parties
in doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement, including (i) the obtaining of all
necessary actions or nonactions, waivers, consents and approvals from
governmental authorities and the making of all necessary registrations and
filings (including filings with governmental authorities, if any) and the
taking of all reasonable steps as may be necessary to obtain an approval or
waiver from, or to avoid an action or proceeding by, any governmental
authorities, (ii) the obtaining of all necessary consents, approvals or
waivers from third parties, (iii) the defending of any lawsuits or other
legal proceedings, whether judicial or administrative, challenging this
Agreement or the consummation of the transactions contemplated hereby,
including seeking to have any stay or temporary restraining order entered by
any court or other governmental authorities vacated or reversed, and (iv) the
execution and delivery of any additional instruments necessary to consummate
the transactions contemplated by this Agreement; provided, however, that
neither the Company nor Buyer shall be under any obligation to take any action
to the extent that the governing body of such party shall conclude in good
faith, after consultation with and based upon the written advice of their
respective outside legal counsel (which advice in each case need not constitute
an opinion), that such action would cause a breach of fiduciary obligations
under applicable law.

 

(B)                              Notification.  The Seller and the Company shall give prompt
notice to Buyer, and Buyer shall give prompt notice to the Seller and the
Company, of (i) any representation or warranty made by it contained in
this Agreement becoming untrue or inaccurate in any material respect or (ii) the
failure by it to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement; provided, however, that no such
notification shall affect the representations or warranties or covenants or
agreements of the parties or the conditions to the obligations of the parties
hereunder.

 

9.5                               Payment of Indebtedness.  Seller will cause all indebtedness owed to
the Company by Seller or any Affiliate of Seller, if any, to be paid in full
prior to Closing.

 

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

 

35

 

agrees to and agrees to cause its Affiliates
to waive and release the Company, from any and all such debts, liabilities and
obligations, by executing and delivering a release at Closing in a form
acceptable to Buyer (collectively, the “Releases”).  Seller shall deliver any documents evidencing
such debt, if any, marked paid, to Buyer at Closing.

 

9.7                               Operation of Oil and Gas
Properties.  Seller shall cause the transfer all
operations of the Oil and Gas Properties to Buyer or Buyer’s designee effective
as of Closing.

 

10.                               CERTAIN AGREEMENTS OF BUYER.  Buyer agrees and covenants that unless Seller
shall have consented otherwise in writing, the following provisions shall
apply:

 

10.1                         Plugging Obligation.  Upon consummation of the Closing, the Company
and Buyer shall perform all necessary and proper plugging and abandonment of
all Wells and all surface restoration and reclamation required by law or the
Leases, in each case to the extent the same relate to the Oil and Gas
Properties.

 

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

 

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

 

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

 

36

 

11.                               CONDITIONS PRECEDENT TO
OBLIGATIONS OF BUYER.  All obligations of Buyer under this Agreement
are, at Buyer’s election, subject to the fulfillment, prior to or at the
Closing, of each of the following conditions:

 

11.1                         No Litigation.  At the Closing, no suit, action or other
proceeding shall be pending before any court or governmental agency which
attempts to prevent the occurrence of the transactions contemplated by this
Agreement.

 

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

 

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

 

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

 

11.5                         Releases.  Seller and any of its Affiliates involved in
transactions with the Company shall have executed and delivered the Releases to
Buyer so long as said Releases comply with the terms of this Agreement.

 

11.6                         Release of Indebtedness and
Liens.  All indebtedness of the Company shall have
been paid in full and discharged and all of its assets shall have been released
from all liens, security interests and other encumbrances.

 

12.                               CONDITIONS PRECEDENT TO THE
OBLIGATIONS OF SELLER.  All obligations of Seller under this
Agreement are, at Seller’s election, subject to the fulfillment, prior to or at
the Closing, of each of the following conditions:

 

12.1                         No Litigation.  At the Closing, no suit, action or other
proceeding shall be pending before any court or governmental agency which
attempts to prevent the occurrence of the transactions contemplated by this
Agreement.

 

12.2                         Representations and Warranties.  All representations and warranties of Buyer
contained in this Agreement shall be true in all material respects as of the
Closing, as if such representations and warranties were made as of the Closing
Date (except for those representations or warranties that are expressly made
only as of another specific date, which representations and warranties shall be
true in all material respects as of such other date) and Buyer shall have
performed and satisfied in all material respects all covenants and fulfilled
all conditions required by this Agreement to be performed and satisfied by
Buyer at or prior to the Closing.

 

37

 

13.                               TERMINATION.

 

13.1                         Causes of Termination.  This Agreement and the transactions
contemplated herein may be terminated:

 

(A)                            At any time by mutual consent of
the Parties.

 

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

 

(C)                              By Buyer if, on the Closing
Date, any of the conditions set forth in Article 11 hereof shall not have
been satisfied or waived.

 

(D)                             By Seller if, on the Closing
Date, any of the conditions set forth in Article 12 hereof shall not have
been satisfied or waived.

 

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

 

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

 

13.2                         Effect of Termination.

 

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

 

(B)                              Seller’s Breach.  If Closing does not occur because Seller
wrongfully fails to tender performance at Closing or otherwise breaches this
Agreement prior to Closing, and Buyer is ready to close and is not in material
breach of this Agreement, Buyer may terminate this Agreement, in which event
Seller will return the Deposit, together with interest thereon, to Buyer
immediately after the determination that the Closing will not occur.  If Buyer elects not to terminate this
Agreement upon any such breach by Seller, Buyer shall retain all legal remedies
for Seller’s breach of this Agreement, including, without limitation, specific
performance of this Agreement.  Seller’s
failure to close shall not be considered wrongful if (i) conditions to
Seller’s conditions to close under Article 12 are not satisfied through no
fault of Seller and are not waived; or (ii) Seller has terminated this
Agreement as of right under Section 13.1.

 

38

 

(C)                              Termination Pursuant to Section 13.1.  If Buyer or Seller terminates this Agreement
pursuant to Section 13.1 in the absence of a breach by the other Party,
Seller shall return the Deposit and all accrued interest thereon to Buyer and
neither Buyer nor Seller shall have any liability to the other Party for
termination of this Agreement.  If Buyer
or Seller terminates this Agreement pursuant to Section 13.1 and asserts
that a breach of this Agreement has occurred, the notice of termination shall
include a statement describing the nature of the alleged breach together with
supporting documentation.

 

(D)                             Effect of Termination.  In the event of the termination of this
Agreement pursuant to the provisions of this Article 13 or elsewhere in
this Agreement, this Agreement shall become void and have no further force and
effect and, except as provided in this Article 13, for the indemnities
provided for in Sections 6.2(B) and 14.3, any breach of this Agreement
prior to such termination and any continuing confidentiality requirement,
neither Party shall have any further right, duty or liability to the other
hereunder.  Upon termination, Buyer
agrees to return to Seller or destroy all materials, documents and copies
thereof provided, obtained or discovered in the course of any due diligence
investigations of the Assets.

 

14.                               INDEMNIFICATION.

 

14.1                         Indemnification
by Seller.  UPON CLOSING, SELLER SHALL TO THE FULLEST
EXTENT PERMITTED BY LAW, RELEASE, DEFEND, INDEMNIFY, AND HOLD HARMLESS BUYER,
THE COMPANY, THEIR AFFILIATES, AND EACH OF THEIR RESPECTIVE OWNERS, PARTNERS,
MEMBERS, MANAGERS, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, OTHER
REPRESENTATIVES, SUCCESSORS AND ASSIGNS (COLLECTIVELY THE “BUYER GROUP”) FROM
AND AGAINST THE FOLLOWING:

 

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

 

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

 

(C)                              OWNERSHIP AND OPERATION.  ALL LOSSES ARISING FROM THE COMPANY’S
BUSINESS OR THE OWNERSHIP OR OPERATION OF THE COMPANY AND THE OIL AND GAS
PROPERTIES PRIOR TO THE EFFECTIVE TIME DIRECTLY ASSOCIATED WITH THE FOLLOWING
MATTERS:

 

(i)                   DAMAGES TO
PERSONS OR PROPERTY, OR DEATH, FOR CLAIMS ASSERTED BY ANY THIRD PARTY AND
ACCRUING PRIOR TO THE EFFECTIVE TIME;

 

39

 

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

 

(iii)             CLAIMS AGAINST THE
COMPANY OR ITS AFFILIATES BY CO-OWNERS, PARTNERS, JOINT VENTURERS AND OTHER
PARTICIPANTS IN THE WELLS;

 

(iv)            THE IMPROPER PAYMENT
OF ROYALTIES, RENTALS AND SIMILAR PAYMENTS BY THE COMPANY OR ITS AFFILIATES
UNDER THE LEASES PRIOR TO THE EFFECTIVE TIME;

 

(v)               THE LITIGATION
MATTERS SET FORTH ON SCHEDULE 7.1(G);

 

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

 

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

 

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

 

(ix)              ALL LOSSES RELATING
TO ANY OF THE EXCLUDED ASSETS OR EXCLUDED LIABILITIES OR THE ASSIGNMENT
THEREOF.

 

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

 

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

 

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

 

(2)                                With
regard to a breach of all of the other representations and warranties by Seller
in this Agreement for a period of one (1) year following the Closing;

 

40

 

(3)                                With
regard to a breach of a covenant by Seller, for a period or one (1) year
following the Closing; and

 

(4)                                With
regard to the matters covered by Section 14.1 (C), for one year following
the Closing.

 

(ii)                Seller shall have
no liability or obligation for any Losses, unless and until and only to the
extent that the aggregate Losses for which Buyer is entitled to recover under
this Agreement exceeds three percent (3%) of the Base Purchase Price (the “Indemnity
Deductible”) (such amount being a deductible and not a threshold).

 

(iii)             The amount of Losses
required to be paid by Seller to indemnify Buyer pursuant to this Agreement
shall be reduced to the extent of any amounts actually received by Buyer
pursuant to the terms of the insurance policies (if any) covering such claim
and any tax benefits received by Buyer.

 

(iv)            Except as specifically
provided in Section 14.1(C), Seller’s indemnification obligations shall
not cover any liabilities, duties and obligations relating to properly plugging
and abandoning wells, restoring and reclaiming the surface, removal of all
pipelines, equipment, and related facilities now or hereafter located on the
Oil and Gas Properties, and cleaning up, restoring and Remediation of the Oil
and Gas Properties in accordance with the Environmental Laws and the relevant
Leases, or any other violation or claimed violation of Environmental Laws
(including but not limited to the payment of fines, penalties, monetary
sanctions or other civil liabilities) or the presence, disposal, release or
threatened release of any hazardous substance or hazardous waste from the Oil
and Gas Properties into the atmosphere or into or upon land or any water course
or body of water, including groundwater, whether or not attributable to the
Company’s activities or the activities of third parties.  All such matters are covered exclusively by Article 6
of this Agreement.

 

14.2                         Indemnification by Buyer.  UPON CLOSING, BUYER SHALL TO THE FULLEST
EXTENT PERMITTED BY LAW, RELEASE, DEFEND, INDEMNIFY, AND HOLD HARMLESS SELLER’S
GROUP FROM AND AGAINST THE FOLLOWING:

 

(A)                            MISREPRESENTATIONS.  ALL LOSSES ARISING FROM THE BREACH BY BUYER
OF ANY REPRESENTATION OR WARRANTY SET FORTH IN THIS AGREEMENT THAT SURVIVES
CLOSING;

 

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

 

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

 

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

 

41

 

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

 

14.4                         Notification.  As soon as reasonably practical after
obtaining knowledge thereof, the indemnified Party shall notify the
indemnifying Party of any claim or demand which the indemnified Party has
determined has given or could give rise to a claim for indemnification under
this Article 14.  Such notice shall
specify the agreement, representation or warranty with respect to which the
claim is made, the facts giving rise to the claim and the alleged basis for the
claim, and the amount (to the extent then determinable) of liability for which
indemnity is asserted.  In the event any
action, suit or proceeding is brought with respect to which a Party may be
liable under this Article 14, the defense of the action, suit or
proceeding (including all settlement negotiations and arbitration, trial,
appeal, or other proceeding) shall be at the discretion of and conducted by the
indemnifying Party.  If an indemnified
Party shall settle any such action, suit or proceeding without the written
consent of the indemnifying Party (which consent shall not be unreasonably
withheld), the right of the indemnified Party to make any claim against the
indemnifying Party on account of such settlement shall be deemed conclusively
denied.  An indemnified Party shall have
the right to be represented by its own counsel at its own expense in any such
action, suit or proceeding, and if an indemnified Party is named as the
defendant in any action, suit or proceeding, it shall be entitled to have its
own counsel and defend such action, suit or proceeding with respect to itself
at its own expense.  Subject to the
foregoing provisions of this Article 14, neither Party shall, without the
other Party’s written consent, settle, compromise, confess judgment or permit
judgment by default in any action, suit or proceeding if such action would
create or attach any liability or obligation to the other Party.  The Parties agree to make available to each
other, and to their respective counsel and accountants, all information and
documents reasonably available to them which relate to any action, suit or
proceeding, and the Parties agree to render to each other such assistance as
they may reasonably require of each other in order to ensure the proper and
adequate defense of any such action, suit or proceeding.

 

15.                               TAX MATTERS.

 

(A)                            Except as otherwise expressly
provided in this Agreement, the parties agree that (i) Seller will be
responsible for and will pay all taxes attributable to or arising from the
ownership, sale, or other disposition of the Membership Interests on or prior
to the Effective Time, 

 

42

 

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

 

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

 

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

 

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

 

43

 

16.                               MISCELLANEOUS.

 

16.1                         Casualty Loss.

 

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

 

(B)                              If, prior to the Closing, a
Casualty occurs (or Casualties occur) which results in a reduction in the value
of any of the Oil and Gas Properties (“Casualty Loss”), (i) Seller shall
retain such Oil and Gas Property and such Oil and Gas Property shall be the
subject of an adjustment to the Base Purchase Price in the same manner set
forth in Section 5.4 hereof, or (ii) at the Closing, Seller shall
assign to Buyer or the Company, at Buyer’s election, the right to receive all
insurance proceeds or other sums payable to Seller or its Affiliates by reason
of such Casualty Loss, the Base Purchase Price shall not be adjusted by reason
of such payment, and the affected Oil and Gas Property will continue to be
owned by the Company.  In the event a
Casualty Loss results in a five percent (5%) or greater reduction in the value
of an affected Oil and Gas Property, Buyer shall have the right to exclude such
Oil and Gas Property from this transaction, receive a reduction of the Base
Purchase Price based on the Allocated Value of such Oil and Gas Property, and
the Company shall transfer the affected Oil and Gas Property to Seller or
Seller’s designee as an Excluded Asset.

 

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

 

16.2                         Confidentiality.

 

(A)                            Prior to Closing, to the extent
not already public, Buyer shall not disclose to any party that it is conducting
negotiations with Seller or has entered into this Agreement other than as
expressly provided herein or as permitted in the confidentiality agreement
executed by Buyer in Seller’s favor prior to the execution of this Agreement,
which shall continue to apply until the Closing and thereafter in the event of
termination of this Agreement prior to the Closing. Buyer shall exercise all
due diligence in safeguarding and maintaining secure all engineering,
geological and geophysical data, seismic data, reports and maps, the results
and findings of Buyer with regard to its due diligence associated with the
Assets (including without limitation with regard to due diligence associated
with environmental and title matters) and other data relating to the Assets
(collectively, the “Confidential Information”). 
Buyer acknowledges that, prior to Closing, all Confidential Information
shall be treated as confidential. Notwithstanding the foregoing, Seller
understands that Buyer has public reporting obligations that may require public
announcement of certain information relating to this Agreement.  Seller and Buyer shall consult with each
other with regard to all publicity and other releases at or prior to the
Closing concerning this Agreement and the transaction contemplated hereby and,
except as provided herein or as required by applicable law or other applicable rules or
regulations of any governmental body or stock exchange, neither party shall
issue any publicity or other release without the prior written consent of the
other party, such consent not to be unreasonably withheld.

 

44

 

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

 

(C)                              The undertaking of confidentiality
shall not diminish or take precedence over any separate confidentiality
agreement between the Parties.  Should
this Agreement terminate, such separate confidentiality agreement shall remain
in full force and effect.

 

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

 

	
  SELLER:

  
	
   

  
	
  Cano Petroleum, Inc.

  
	
  801 Cherry Street, Unit 25, Suite 3200

  
	
  Fort Worth, Texas 76102

  
	
  Attn:
  Phillip Feiner

  
	
  Tel: (817)
  698-0900

  
	
  Fax: (817)
  698-0763

  
	
   

  
	
  BUYER:

  
	
   

  
	
  Legacy Reserves Operating LP

  
	
  303 West Wall, Suite 1400

  
	
  Midland, Texas 79701

  
	
  Attn:  
  Mr. Steven H. Pruett

  
	
  Tel:  
  (432) 689-5200

  
	
  Fax:  
  (432) 689-5299

  

 

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

 

16.4                         Press Releases and Public
Announcements.  Buyer and Seller are permitted to issue a
press release and filing on Form 8-K with the Securities and Exchange
Commission related to the present transaction. 
Notwithstanding the foregoing, no press release or any public
announcement shall identify the principals of Buyer or Seller without the other
party’s prior written consent, which consent shall not be unreasonably
withheld.

 

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

 

45

 

16.6                           Governing Law.  This Agreement is governed by and must be
construed according to the laws of the State of Texas, excluding any
conflicts-of-law rule or principle that might apply the law of another jurisdiction.  All disputes related to this Agreement shall
be submitted exclusively to the jurisdiction of the courts of the State of
Texas.

 

16.7                           Exhibits.  The Exhibits attached to this Agreement are
incorporated into and made a part of this Agreement.

 

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

 

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

 

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

 

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

 

16.12                     Captions.  The captions in this Agreement are for
convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement.

 

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

 

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

 

Executed as of the day and year first above written.

 

46

 

	
   

  	
  SELLER:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ S. Jeffrey Johnson

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
    Chairman and Chief Executive
  Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PANTWIST, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ S. Jeffrey Johnson

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
    President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  BUYER:

  
	
   

  	
   

  
	
   

  	
  LEGACY RESERVES OPERATING LP

  
	
   

  	
  By:

  	
  Legacy
  Reserves Operating GP LLC,

  
	
   

  	
   

  	
  Its
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Legacy
  Reserves LP,

  
	
   

  	
   

  	
  Its sole
  member

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Legacy
  Reserves GP, LLC,

  
	
   

  	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Steven H. Pruett

  
	
   

  	
  Name: Steven H. Pruett

  
	
   

  	
  Title: 
  President & Chief Financial Officer

  
								

 

47

 

FIRST AMENDMENT TO PURCHASE AND SALE
AGREEMENT

 

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

 

W I T N E S S E T H:

 

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

 

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

 

Agreement

 

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

 

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

 

2.             Exhibit B to the Purchase
Agreement is hereby amended in its entirety to read as set forth on Exhibit B
attached to this Amendment.

 

3.             Except as specifically provided
herein, all terms and provisions of the Purchase Agreement shall remain
unchanged, and the Purchase Agreement, as modified by this Amendment, is hereby
ratified, acknowledged and reaffirmed by Seller, Buyer and the Company.

 

4.             This Amendment may be executed in any number of
counterparts and all such counterparts shall be taken together as one
document.  Signatures on this Amendment
transmitted by fax or other electronic means shall constitute and be deemed
original signatures and be binding for all purposes.

 

[Remainder of
Page Intentionally Left Blank]

 

 

EXECUTED
effective as of the date first above written.

 

	
   

  	
  SELLER:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
      Chairman and Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  THE COMPANY:

  
	
   

  	
   

  
	
   

  	
  PANTWIST, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
       /s/
  S. Jeffrey Johnson

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
      President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  BUYER:

  
	
   

  	
   

  
	
   

  	
  LEGACY RESERVES OPERATING LP

  
	
   

  	
  By:

  	
  Legacy Reserves Operating GP LLC,

  
	
   

  	
   

  	
  Its General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Legacy Reserves LP, Its Sole Member

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Legacy Reserves GP, LLC, Its

  
	
   

  	
   

  	
  General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Kyle A. McGraw

  
	
   

  	
  Name:

  	
   Kyle A. McGraw

  
	
   

  	
  Title: 

  	
  EVP

  
												

 

2

 

Exhibit A – Leases and Land

 

Exhibit B – Wells and Allocation of the Purchase Price

 

3

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