Document:

exv10w3

 

Exhibit 10.3

OMNIBUS AGREEMENT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	 	(i)	 	an Oil & Gas Opportunity that is not a Definitive Oil & Gas Opportunity shall
be classified as a “Potential Oil & Gas Opportunity”;
	 
	 	(ii)	 	an Oil & Gas Opportunity, the terms of which are set forth in complete,
definitive documentation, the execution and delivery of which would create an
enforceable agreement among the parties thereto, shall be classified as a
“Definitive Oil & Gas Opportunity”.

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

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

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

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

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

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

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

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

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

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

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

     4. Operations.

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

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

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

(a) Right of First Offer.

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

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

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

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

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

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

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

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

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

(b) Co-Investment Right.

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

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

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

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

     The following table illustrates operation of such participation levels:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Purchase Price	 	 	Sourcing Member Participation Level
	 	From	 	To	 	Up to Percentage	 	Participation	 	Aggregate
	$
	—	 	$	25,000,000	 	 	 	70.00	%	 	$	17,500,000	 	 	$	17,500,000	 
	 	25,000,000
	 	 	50,000,000	 	 	 	7.33	%	 	 	1,833,333	 	 	 	19,333,333	 
	 	50,000,000
	 	 	75,000,000	 	 	 	7.33	%	 	 	1,833,333	 	 	 	21,166,667	 
	$	75,000,000
	 	$	100,000,000	 	 	 	7.33	%	 	$	1,833,333	 	 	$	23,000,000	 
	$	100,000,000
	+	 	 	 	 	 	23	%	 	 	 	 	 	 	 	 

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

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

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

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

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

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

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

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

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

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

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     6. Non-Disclosure Agreement.

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

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

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

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

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

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

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

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

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

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

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

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

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

	 	 	 	 
	 	If to the Company:

	 	Sabine Production Operating, LLC
	 	 

	 	Attn: Governing Board of Managers
	 	 

	 	512 Main Street, Suite 1200
	 	 

	 	Fort Worth, TX 76102
	 	 

	 	Facsimile: (817) 885-8391
	 	 
	 	 
	 	If to Cano:

	 	Cano Petroleum, Inc.
	 	 

	 	Attn: S. Jeffrey Johnson, CEO
	 	 

	 	The Oil & Gas Commerce Building
	 	 

	 	309 West Seventh Street, Suite 1600
	 	 

	 	Fort Worth, TX 76102
	 	 

	 	Facsimile: (817) 698-0762
	 	 
	 	 
	 	If to Carlile:

	 	Carlile Management, LLC
	 	 

	 	Attn: Dr. Kenneth Q. Carlile, Manager
	 	 

	 	2615 East End Blvd. South
	 	 

	 	Marshall, TX 75672
	 	 

	 	Facsimile: (903) 935-0521
	 	 
	 	 
	 	If to Haddock:

	 	Haddock Enterprises, LLC
	 	 

	 	Attn: Gerald W. Haddock, President
	 	 

	 	512 Main Street, Suite 1200
	 	 

	 	Fort Worth, TX 76102
	 	 

	 	Facsimile: (817) 885-8391

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

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

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

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

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

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

	 	 	 	 	 
	 	 	CANO PETROLEUM, INC.
	 
	 	 	 	 
	 

	 	By:	 	/s/ S. JEFFREY JOHNSON
	 

	 	 	 	 
	 

	 	 	 	S. Jeffrey Johnson, CEO
	 
	 	 	 	 
	 	 	CARLILE MANAGEMENT, LLC
	 
	 	 	 	 
	 

	 	By:	 	/s/ DR. KENNETH Q. CARLILE
	 

	 	 	 	 
	 

	 	 	 	Dr. Kenneth Q. Carlile, Manager
	 
	 	 	 	 
	 	 	HADDOCK ENTERPRISES, LLC
	 
	 	 	 	 
	 

	 	By:	 	/s/ GERALD W. HADDOCK
	 

	 	 	 	 
	 

	 	 	 	Gerald W. Haddock, President

ACCEPTED:

SABINE PRODUCTION OPERATING, LLC

	 	 	 	 	 
	By:	 	          /s/ GERALD W. HADDOCK	 
	 

	 	 	 	 
	 

	 	 	          Gerald W. Haddock, Chairman	 

14

 

EXHIBIT A

Terms of Indemnity

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

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

15

 

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

16exv10w4

 

Exhibit 10.4

COMPENSATION REIMBURSEMENT AGREEMENT

     This
Compensation Reimbursement Agreement (this
“Agreement”) is made as of the 31st
day of October, 2005, but is effective as of the Transaction Closing Date (as defined hereinbelow)
by and between Sabine Production Operating, LLC, a Texas limited liability company
(“Sabine”), and Cano Petroleum, Inc., a Delaware corporation (“Cano”).

RECITALS

     WHEREAS, Cano and Sabine Production Partners, LP (the “Company”) are parties to that certain
Omnibus Agreement entered into as of October 31, 2005, but effective as of the Transaction Closing
Date (the “Omnibus Agreement”) which contemplates the parties entering into this Agreement.
“Transaction Closing Date” means the date on which the Company completes the acquisition of assets
of Sabine Royalty Trust as described in the Company’s Registration Statement No. 333-1273203 on
Form S-4 filed with the Securities and Exchange Commission;

     WHEREAS, S. Jeffrey Johnson (“Johnson”) and Thomas D. Cochrane (“Cochrane”)
(Johnson and Cochrane may hereinafter be referred to herein collectively as “Employees” and
individually as an “Employee”) are officers and employees of Cano under the terms of their
respective employment agreements with Cano (as such employment agreements may be amended, modified
or replaced, the “Cano Employment Agreements”);

     WHEREAS, upon the request of and with the consent and approval of the Board of Directors of
Cano, Johnson and Cochrane have agreed to become a member of the Office of Chief Executive and
Vice President, Engineering, respectively, of Sabine;

     WHEREAS, Employees, Sabine and Cano anticipate that Employees will devote a portion of their
time and effort in the performance of their obligations to Sabine;

     WHEREAS, to induce Cano to allow Employees to devote such time and effort to Sabine, Sabine
has offered to reimburse Cano, up to a maximum annualized amount of $85,000 for the services of
Cochrane and $110,000 for the services of Johnson, for a portion of the salary that Cano extends to
such Employees pursuant to the Cano Employment Agreements (the “Cano Employee
Compensation”); and

     WHEREAS, the parties wish to memorialize their agreement with respect to Sabine’s
reimbursement to Cano of the Cano Employee Compensation.

     NOW, THEREFORE, in consideration of the premises and of other good and valuable
consideration, the receipt and sufficiency of which the parties hereby acknowledge, Sabine and Cano
hereby agree as follows:

     1. (a) Subject to the limitations established in Paragraph 1(b) and the exception established
in Paragraph 1(c) , by the tenth business day of each month during the term of this Agreement,
Sabine will reimburse Cano for the Sabine Portion of the Cano Employee

 

 

Compensation for each
Employee applicable to the immediately preceding month. The “Sabine Portion” shall mean:

(i) with respect to Johnson, an amount calculated by multiplying (x) $9,167.00 (being
one-twelveth of $110,000), times (y) a fraction, the numerator of which is the number of
hours devoted by Johnson during such immediately preceding month on business of Sabine and
the denominator of which is the amount calculated by dividing (I) the aggregate number of
hours devoted by the members of the Office of Chief Executive of Sabine other than Johnson
during such immediately-preceding month on the business of Sabine by (II) the number of
members of the Office of Chief Executive minus one; and

(ii) with respect to Cochrane, an amount calculated by multiplying (x) Seventy and
No/Dollars ($70.00) (which the parties hereto agree to use as representing the hourly value
of his services based upon his Cano Employee Compensation as of the date of this Agreement),
times (y) the number of hours devoted by Cochrane during such immediately-preceding month on
the business of Sabine.

     (b) The aggregate amounts which Sabine shall be required to reimburse to Cano during any
consecutive twelve-month period shall not exceed $85,000 for the services of Cochrane and $110,000
for the services of Johnson.

     (c) Sabine shall not be obligated to reimburse Cano for any amount for such Employees for
which Cano is reimbursed by the Company pursuant to the Omnibus Agreement.

     2. This Agreement shall continue in full force and effect as to a particular Employee until
the earliest of (a) the date two years from the Transaction Closing Date, (b) the date that
Employee’s employment by Cano terminates for any reason, (c) the date that Employee ceases to be an
officer of Sabine, and (d) December 31, 2006 in the event the Transaction Closing Date has not
occurred. Additionally, this Agreement shall terminate upon the termination of this Agreement as
to both Employees pursuant to the immediately preceding sentence. Upon any such termination,
Sabine shall pay to Cano any accrued but unpaid Sabine Portion of the Cano Employee Compensation
through the date of termination. Sabine and Cano expressly acknowledge and agree that the Cano
Employee Compensation does not, and shall not be deemed to, include any severance or other similar
payments that may be due to an Employee
upon his termination as a Cano employee.

     3. This Agreement represents the entire agreement and understanding of Sabine and Cano with
respect to the subject matter hereof and supersedes any and all prior or contemporaneous agreements
or understandings with respect thereto.

     4. This Agreement may be amended only by a writing executed by both Cano and Sabine.

     5. This Agreement may be executed in one or more counterparts and delivered by facsimile, each
of which shall be an original and all of which taken together shall constitute one and the same
instrument.

 

 

     6. This Agreement shall be governed by and construed and enforced in accordance with the laws
of the State of Texas without regard to any conflicts of laws provisions which would apply the law
of another jurisdiction.

     7. This Agreement may not be assigned in whole or in part without the written consent of the
non-assigning party, which consent may be withheld for any reason. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective successors and
permitted assigns.

     8. If any provision of this Agreement is held invalid or unenforceable, the remaining
provisions of this Agreement shall not be affected thereby. No failure or delay by any party in
exercising any right hereunder will operate as a waiver thereof.

     IN WITNESS WHEREOF, the parties have entered into this Compensation Reimbursement Agreement as
of the date first above written, but effective as set forth above.

	 	 	 	 	 	 	 
	 	 	SABINE PRODUCTION OPERATING, LLC
	 
	 	 	 	 	 	 
	 

	 	 	 	By:	 	/s/ GERALD W. HADDOCK
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	Gerald W. Haddock, Chairman
	 
	 	 	 	 	 	 
	 	 	CANO PETROLEUM, INC.
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ S. JEFFREY JOHNSON
	 	 	 	 	 
	 

	 	Title:	 	Chairman and CEO

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