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Exhibit 10.3    
    

 
 

FIRST AMENDMENT AND WAIVER    
    

        This FIRST AMENDMENT AND WAIVER (this "Amendment") dated as of
March 30, 2006 is entered into by and among Pinnacle Gas Resources, Inc., a Delaware corporation (the "Borrower"), Encore Bank, as
Administrative Agent (the "Agent"), and Texas Capital Bank, N.A., as Collateral Agent (the "Collateral
Agent"). The Agent and the Collateral Agent are also collectively referred to herein as the "Lenders." 

        WHEREAS, the Borrower, the Lenders, the Agent and Collateral Agent entered into that certain Credit Agreement dated October 22,
2004 (such Credit Agreement, as it may be amended from time to time, including by this Amendment, the "Credit Agreement"); and 

        WHEREAS, the Borrower has requested the Lenders to consent to certain actions of the Borrower and to amend, and waive compliance with,
certain terms of the Credit Agreement, and the Lenders have agreed to do so to the extent reflected in this Amendment; 

        NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration and the mutual benefits, covenants and
agreements herein expressed, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows, intending to be legally bound: 

        1.    Defined Terms.    All capitalized terms used in this Amendment and not otherwise defined herein shall have the
meanings ascribed to such terms in the Credit Agreement. 

        2.    Amendment.    Effective concurrently with the consummation of the Offering (hereinafter defined), the definition
of "Change of Control Event" in Section 1.1 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: 

        "Change of Control Event" means the failure of DLJ Merchant Banking Partners III, L.P., together with its Affiliates, or any Affiliate
thereof, to cease to have the power to vote or direct the voting of at least 25% of the securities entitled to vote in any meeting of the shareholders of the Borrower. 

        3.    Limited Consents and Waivers.    

        (a)   The
Lenders hereby waive compliance with the covenant contained in Section 7.2.1 of the Credit Agreement with
respect to the delivery of all required information and certificates prior to the date hereof, provided that such waiver shall only be to the extent required to avoid any Default of Event of Default,
and provided further that the Company delivers the (i) Compliance Certificates for the periods ended September 30, 2005 and December 31, 2005 and (ii) audited financials
for the year ended December 31, 2005. 

        (b)   The
Lenders hereby consent to the payment, immediately prior to or concurrently with the redemption of the outstanding shares of Series A Preferred Stock, of
accrued and unpaid cash dividends on such Series A Preferred Stock with respect to the first quarter of 2006 and the period beginning on April 1, 2006 and ending on the closing date of
the proposed private offering of the Borrower, with proceeds from such offering, provided that the net proceeds to the Borrower from such offering are at least $100.0 million (the
"Offering"). The Lenders hereby expressly agree that such payment and the Offering shall not constitute a Default or Event of Default under the Credit
Agreement. 

        (c)   The
Lenders hereby waive compliance with the covenant contained in Section 7.9.5 of the Credit Agreement with
respect to and in order to permit the following: 

          (i)  the
filing of a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Borrower with the Delaware Secretary of State on
March 28, 2005; 

 

         (ii)  the
filing of a Certificate of Amendment to the Certificate of Designations, Preferences and Rights of Series A Redeemable Preferred Stock of the Borrower with
the Delaware Secretary of State on March 28, 2005; 

in
each case, only to the extent required to avoid any Default or Event of Default. The Lenders hereby consent to each of the foregoing actions. 

        (d)   The
Lenders hereby consent to each of the following actions: 

          (i)  the
filing of a Second Amended and Restated Certificate of Incorporation of the Borrower with the Delaware Secretary of State on or about March 30, 2006; 

         (ii)  the
adoption of the Amended and Restated Bylaws of the Borrower on or about March 30, 2006; and 

        (iii)  the
filing of a Certificate of Cancellation with respect to the Series A Preferred Stock following the redemption and cancellation thereof. 

The
Lenders hereby expressly agree that such actions shall not constitute a Default or Event of Default under the Credit Agreement. 

        (e)   The
Lenders hereby consent to the termination of that certain AMI Agreement, dated as of June 23, 2003, by and among the Borrower, CCBM, Inc., Carrizo
Oil & Gas, Inc., Rocky Mountain Gas, Inc., U.S. Energy Corp. and the CSFB Parties (as defined therein). The Lenders hereby expressly agree that such termination shall not
constitute a Default or Event of Default under the Credit Agreement. 

        (f)    The
Lenders hereby consent to the termination of that certain Subscription Agreement, dated as of March 28, 2005, by and among the Borrower and each of the CSFB
Parties (as defined therein). The Lenders hereby expressly agree that such termination shall not constitute a Default or Event of Default under the Credit Agreement. 

        (g)   The
Lenders hereby waive compliance with the covenant contained in Section 7.12 of the Credit Agreement with
respect to and in order to permit the transactions contemplated by the following: 

          (i)  the
Subscription Agreement, dated as of March 28, 2005, by and among the Borrower and each of the CSFB Parties (as defined therein); 

         (ii)  the
Amendment to Contribution and Subscription Agreement, dated as of August 9, 2005, by and among the Borrower, CCBM, Inc., U.S. Energy Corp., Crested
Corp. and each of the CSFB Parties (as defined therein); 

        (iii)  the
Amendment to Securityholders Agreement, dated as of August 26, 2005, by and among the Borrower, CCBM, Inc., U.S. Energy Corp., Crested Corp., each of
the CSFB Parties (as defined therein), Peter G. Schoonmaker and Gary Uhland; 

        (iv)  the
Amendment to Subscription Agreement, dated as of August 30, 2005, by and among the Borrower and each of the CSFB Parties (as defined therein); and 

         (v)  the
Amended and Restated Securityholders Agreement, dated as of February 16, 2006, by and among the Borrower, CCBM, Inc., U.S. Energy Corp., Crested Corp.,
each of the CSFB Parties (as defined therein), Peter G. Schoonmaker and Gary Uhland; 

in
each case, only to the extent required to avoid any Default or Event of Default. The Lenders hereby consent to each of the transactions contemplated by the foregoing agreements. 

2

 

        4.     The
provisions hereof shall not in any way be construed to waive, nor shall this Amendment in any way serve as a waiver of, any other Default or Event of Default now or
hereafter existing under the Credit Agreement or other Loan Documents, except as expressly set forth herein. 

        5.    Notice Pursuant to Section 7.12 and Limited Consent.    The Borrower, pursuant to  Section 7.12 of the Credit
Agreement, hereby provides notice of the transactions contemplated by each of the following agreements (such
agreements having been heretofore provided to the Agent and the Lenders for their review): 

        (a)   the
Second Amendment to Contribution and Subscription Agreement to be entered into by and among the Borrower, CCBM, Inc., U.S. Energy Corp. and each of the CSFB
Parties in connection with the Offering; 

        (b)   the
Stock Repurchase Agreement to be entered into by and among the Borrower and the Holders (as defined therein) in connection with the Offering; 

        (c)   the
Securities Recapitalization Agreement to be entered into by and among the Borrower and the DLJMB Parties (as defined therein)in connection with the Offering; 

        (d)   the
agreement by which that certain AMI Agreement, dated as of June 23, 2003, by and among the Borrower, CCBM, Inc., Carrizo Oil & Gas, Inc.,
Rocky Mountain Gas, Inc., U.S. Energy Corp. and the CSFB Parties (as defined therein) will be terminated in connection with the Offering; and 

        (e)   the
agreement by which that certain Subscription Agreement, dated as of March 28, 2005, by and among the Borrower and each of the CSFB Parties (as defined
therein) will be terminated in connection with the Offering 

The
Lenders hereby consent to the transactions contemplated by the foregoing agreements and expressly agree that such transactions shall not constitute a Default or Event of Default under the Credit
Agreement. 

        6.    Ratification.    The Borrower hereby ratifies all of its Obligations under the Credit Agreement and each of the
Loan Documents to which it is a party, and agrees and acknowledges that the Credit Agreement and each of the Loan Documents to which it is a party shall continue in full force and effect giving effect
to this Amendment. Nothing in this Amendment extinguishes, novates or releases any right, claim, Lien, security interest or entitlement of any of the Lenders or the Agent created by or contained in
any of such documents nor is the Borrower released from any covenant, warranty or obligation created by or contained herein. Hereafter, the Credit Agreement shall mean the original Credit Agreement,
as amended by this Amendment. 

        7.    Representations and Warranties.    The Borrower hereby represents and warrants to the Agent and the Lenders that
(a) this Amendment has been duly executed and delivered on behalf of the Borrower (b) this Amendment constitutes a valid and legally binding agreement enforceable against the Borrower in
accordance with its terms and (c) the execution, delivery and performance of this Amendment has been duly authorized by the Borrower. 

        8.    Conditions to Effectiveness.    This Amendment shall be effective upon the execution and delivery hereof by all
parties to the Agent and receipt by the Agent of (i) this Amendment, (ii) $18,099 from the Borrower, comprised of a $10,000 fee under  Section 2.7.4 of the Credit Agreement and $8,099 of
unreimbursed legal expenses and (iii) the Compliance Certificates required to be
delivered under Section 7.2.1(iii) of the Credit Agreement for the periods ended September 30, 2005 and December 31, 2005. 

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        9.    Release and Indemnity.    

        (a)   The
Borrower shall and hereby does release and indemnify the Agent and each Lender and each Affiliate thereof and their respective directors, officers, employees and
agents against, and releases and holds each of them harmless from, any and all losses, liabilities, claims or damages (including reasonable legal fees and expenses) to which any of them may become
subject, insofar as such losses, liabilities, claims or damages arise out of or result from the Credit Agreement, any of the Loan Documents, this Amendment or any of the transactions contemplated
thereby (including any threatened investigation or proceeding) relating to the foregoing or any of the other Loan Documents, and the Borrower shall reimburse each Lender and each Affiliate thereof and
their respective directors, officers, employees and agents, upon demand, for any expenses (including legal fees) reasonably incurred in connection with any such investigation or proceeding; but
excluding any such losses liabilities claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified (the
"Indemnified Obligations"). 

        (b)   Without
limiting any provision of this Amendment, it is the express intention of the parties hereto that each Person to be indemnified hereunder shall be indemnified and
held harmless against any and all Indemnified Obligations arising out of or resulting from the ordinary sole or contributory negligence of such Person or imposed upon said party under any theory of
strict liability. Without prejudice to the survival of any other obligations of the Borrower hereunder and under the other Loan Documents, the obligations of the Borrower under this Section shall
survive the termination of this Amendment, the Credit Agreement and the other Loan Documents and the payment of the Obligations and the Notes. 

        10.    Counterparts.    This Amendment may be signed in any number of counterparts, which may be delivered in original
or facsimile form each of which shall be construed as an original, but all of which together shall constitute one and the same instrument. 

        11.    Additional Documents.    The parties hereto agree that they will execute such further documentation as may be
necessary to comply with or accomplish the agreements set forth herein. 

        12.    Governing Law.    This Amendment has been negotiated, is being executed and delivered, and will be performed in
whole or in part, in the State of Texas, and the substantive laws of such State and the applicable Federal laws of the United States of America shall govern the validity, construction, enforcement and
interpretation of the Loan Documents, except to the extent the laws of any jurisdiction where collateral is located require application of such laws with respect to such collateral. 

        13.    Final Agreement of the Parties.    THIS AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES. 

[Remainder of this page intentionally left blank.] 

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        IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as
of the date first above written. 

	 	 	BORROWER:
	

 	
 	
Pinnacle Gas Resources, Inc.
	

 	
 	

By:	

/s/  PETER G. SCHOONMAKER      

	 	 	 	Name:	Peter G. Schoonmaker
	 	 	 	Title:	Chief Executive Officer and President
	

 	
 	
ADMINISTRATIVE AGENT / LENDER:
	

 	
 	
Encore Bank
	

 	
 	

By:	

/s/  J. DAVID WEBSTER      

	 	 	 	Name:	J. David Webster
	 	 	 	Title:	Senior Vice President
	

 	
 	
COLLATERAL AGENT / LENDER:
	

 	
 	
Texas Capital Bank, N.A.
	

 	
 	

By:	

/s/  JONATHAN GREGORY      

	 	 	 	Name:	Jonathan Gregory
	 	 	 	Title:	Senior Vice President

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Exhibit 10.3

FIRST AMENDMENT AND WAIVERQuickLinks
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Exhibit 10.4    
    

 
 

PURCHASE AND SALE AGREEMENT    
    

THIS
PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into by and between Pennaco Energy, Inc., whose address is P. O. Box 3128, Houston, Texas 77253, hereinafter
referred to as "Seller", and Pinnacle Gas Resources, Inc., whose address is 1 East Alger, Suite 206, Sheridan, Wyoming 82801 hereinafter referred to as "Buyer". Seller and
Buyer are sometimes referred to individually as a "Party" or collectively as the "Parties". The terms and conditions of this Agreement are as follows: 

 
 

I. PURPOSE

Subject
to the other terms, conditions and provisions of this Agreement, Seller agrees to sell and Buyer agrees to purchase effective as of March 1, 2005, (the "Effective Date"),
(1) all of Seller's right, title and interest in and to the oil and gas leases identified on Exhibit "A", (hereinafter "Oil and Gas Leases"), (2) Seller's interest in the wells
described on Exhibit "C", including the equipment and any plugging obligation/liability associated therewith, together with core analyses based on cores or other data derived therefrom
(hereinafter "Wells"), and (3) all assignable rights and obligations arising under or from contracts, permits and other agreements, documents or licenses applicable to the Oil and Gas Leases
and/or the Wells, including but not limited to drilling permits, surface use/damage agreements, well location and/or archaeological surveys, rights-of-ways and easements, and
gas transportation and/or dedication agreements (hereinafter "Contracts"), (the Oil and Gas Leases, Wells and Contracts being hereinafter collectively referred to as "Assets"). 

 
 

II. EXHIBITS

	EXHIBIT A	 	Lease Schedule
	 	 	Exhibit A-1    Wyoming Leasehold
	 	 	Exhibit A-2    Montana Leasehold
	EXHIBIT B	 	Assignment Form
	EXHIBIT C	 	Wells Assigned
	EXHIBIT D	 	Lease Extensions
	EXHIBIT E	 	CMS Gas Gathering and Gas Purchase Contracts

 
 

III. ASSIGNMENT OF ASSETS

	A.
	Earnest Money. Upon execution of this Agreement by the Parties, Buyer has given Seller Two Million Dollars ($2,000,000)
(the "Escrow Amount") as earnest money hereunder.

	B.
	Closing. Except as otherwise mutually agreed, the Parties shall meet at a mutually approved location for a closing hereunder ("Closing")
on or before March 31, 2005 ("Closing Date"). If Closing does not occur hereunder by the Closing Date due to Seller's default, then the Escrow Amount will be returned to Buyer within five
(5) business days following Seller's receipt of Buyer's written request therefor. If Closing does not occur hereunder by the Closing Date due to Buyer's default hereunder, then Seller may
retain the Escrow Amount as liquidated damages. 

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	C.
	Actions at Closing. At the Closing,

	1.
	Seller
will deliver to Buyer an assignment of all of Seller's right, title and interest, in and to the Assets, such assignment to be in the form attached hereto as Exhibit "B." Seller
will, also, deliver executed governmental form assignments, as applicable, covering governmental leases included in the Oil and Gas Leases, such governmental form assignments to include the entirety
of what Seller owns in such applicable leases, whether that be solely record title or operating rights or combined record title and operating rights.

	2.
	Buyer
will deliver or caused to be delivered to Seller readily available funds in the amount of the Adjusted Purchase Price.

	D.
	Purchase Price. The Purchase Price is agreed to be Eleven Million Seven Hundred Fifty Thousand Dollars ($11,750,000). The Adjusted
Purchase Price is the Purchase Price minus the Escrow Amount and plus and/or minus adjustments made pursuant to Article III.E. and Article IV.

	E.
	Well to be Assigned. At least ten (10) days prior to the Closing Date set forth herein, Seller shall provide to Buyer the well
design and permit information pertaining to the Wells along with an accounting of the actual costs of drilling, completing, coring and core analysis of the Wells. The Wells and personal property
(surface and subsurface) assigned hereunder will be assigned "WHERE IS, AS IS, WITH ALL FAULTS", and without any warranties or representations of any kind or character, express, implied or statutory,
regarding the condition or state of repair or fitness for any purpose of any of such Wells, equipment and personal. After Closing, Buyer will promptly receive all available core and core analysis for
the core wells. Buyer agrees to pay the documented well, coring and core analysis costs on the Closing Date.

	F.
	Lease Files. After Closing Seller shall deliver to Buyer originals and/or copies of Seller's files and records pertaining to the Oil and
Gas Leases, including any amendments or ratifications or extensions thereof, evidence of the payment of bonus and delay rentals and lessors' last known address and social security/tax identification
numbers, along with files and records for any related contracts, surface use agreements, water well agreements, drilling permits, well location surveys and water discharge permits that are part of
the Assets. 

 
 

IV. TITLE EXAMINATION

	A.
	Due Diligence Period; Access to Title and Other Information. The "Due Diligence Period" is that period of time commencing with the
execution date of this Agreement and continuing until March 24, 2005. Seller shall make available to Buyer and its representatives Seller's Oil and Gas Lease files and all other lease
information relating to the acquisition, title and maintenance of the Oil and Gas Leases, such as ownership, encumbrance and all contracts that affect the Oil and Gas Leases and that will be
transferred hereunder, including all surface use agreements, water well agreements, and water discharge permits in its possession or available to it. The location for the due diligence review will be
at Seller's Houston, Texas office which is located at 5555 San Felipe. This location may be moved to such other place as is mutually acceptable to the Parties. All examination of these records
shall take place during normal business hours. Seller shall not be obligated to perform any title work, nor to bring abstracts or title opinions current. 

2

 
	B.
	Title Defects. A Title Defect under this Agreement is:

	1.
	When
Seller owns less than the net acres in any of the Oil and Gas Leases as set forth on Exhibit "A."

	2.
	When
Seller's net acres in any of the Oil and Gas Leases as shown on the Exhibit "A" is subject to reduction by virtue of the exercise by any other party of a reversionary
interest, back-in or similar right not disclosed on said Exhibit "A".

	3.
	When
Seller's net acres in any of the Oil and Gas Leases as shown on the Exhibit "A" is subject to any outstanding mortgage, deed of trust, security interest, lien or
encumbrance or other adverse claim.

	4.
	When
Seller has failed to provide Buyer with all waivers of any preferential rights and/or consents to assign affecting any of the Oil and Gas Leases being assigned hereunder.

	5.
	When
the average net revenue interest for the Oil and Gas leases on Exhibit "A" is less than eighty percent (80%).

	C.
	Notice of Title Defects. Upon discovery of any Title Defect, Buyer shall notify Seller in writing of the nature and extent and interest
affected by said defect. Any Title Defect not brought to Seller's attention on or before close of business at 5:00 P. M. CST, on March 24, 2005 shall be deemed waived by Buyer for all
purposes. Seller may elect to cure any Title Defect to the reasonable satisfaction of Buyer provided all such curative is accomplished prior to the Closing Date.

	D.
	Remedies for Title Defects. In the event of any title defect not timely cured to the reasonable satisfaction of Buyer, Buyer shall have
the unilateral right to:

	1.
	Adjust
the Purchase. Price downward by (a) Forty-five Dollars ($45) per net acre for lands located in Montana and Eighty Dollars ($80) per net acre for lands located
in Wyoming and affected by a Title Defect described in Article IV.B.1 or 4, (b) an amount mutually agreed between Seller and Buyer for Title Defects described in
Article IV.B.2, 3 or 5;

	2.
	Terminate
this agreement without penalty or further obligation if the total number of net acres affected by Title Defects described in Article IV.B.1 through 4 equals or
exceeds 20% of the total net acres as described on Exhibit "A," in which case the Escrow Amount will be returned to Buyer within five (5) business days after Seller's receipt of Buyer's written
notice of termination; or 

3

 

	3.
	Proceed
with the Closing without such Title Defect being cured to the Acquiring Party's satisfaction. 

 
 

V. ASSIGNMENTS; SPECIAL WARRANTY

All
assignments of oil and gas leases under this Agreement shall be on the form attached hereto as Exhibit "B" together with necessary governmental assignment forms, which shall be deemed to be
subject to the terms of this Agreement and the terms contained in the Exhibit "B" assignment form, whether or not expressly made subject thereto. The Parties shall also provide such other
supporting documents as may be necessary or convenient to effect the transfer of the interests contemplated herein. Seller specially warrants title against claims of persons claiming by, through or
under Seller only, but not otherwise, and with no other warranty of title, either express or implied. Any assignment hereafter executed shall specifically refer to, and be made subject to, the terms
and conditions hereof. 

 
 

VI. LEASE EXTENSIONS

Seller
agrees to extend the oil and gas leases described on Exhibit D prior to Closing. Such extensions will be done in accordance with the terms and conditions of the individual oil and
gas leases and the costs associated with extending these leases will be paid for by the Seller. 

 
 

VII. RENTAL OBLIGATIONS

Seller
agrees to continue to pay rentals, minimum royalties, surface use fees and similar payments associated with the Oil and Gas Leases and any surface use or other agreements to be assigned
hereunder through the end of April, 2005. The payments to be made by Seller pursuant to the previous sentence will be for applicable payments with due dates through May, 2005. Seller is agreeing to
make these payments solely as an accommodation to Buyer, so that Buyer will have time to update its records and accounting systems to incorporate the Oil and Gas Leases and Assets. Buyer hereby waives
any claim it may have against Seller for Seller's failure, if any, to timely or correctly make any payments agreed to hereunder, except any such failures arising from Seller's gross negligence; and
Seller shall not be liable to Buyer for any failure to timely or correctly make such payments, except for any failure arising from Seller's gross negligence or willful misconduct. 

Buyer
agrees, within thirty (30) days after receipt of an invoice from Seller, to reimburse Seller for any rental, minimum royalty, surface use fee or similar payments associated with the Oil
and Gas Leases or Assets, paid by Seller (pursuant to this Article VII or otherwise), the due date of which is on or after the Effective Date. 

 
 

VIII. NON-COMPETE OBLIGATION

Seller
agrees that it will not acquire any coal bed methane interests in the oil and gas leases described on Exhibits A-1 and A-2 without offering to
convey such interests to Buyer at Seller's actual costs, for a period of 2 years from March 31, 2005. Seller will retain the right to obtain oil and gas interest(s) in the remaining
geologic horizons for the future exploration and development of conventional oil and gas deposits associated with oil and gas leases described on Exhibits A-1
and A-2. 

4

 
 
 

IX. CONFIDENTIALITY

The
Parties shall maintain strict confidentiality as to the Purchase Price and further agree not to disclose to any person other than their respective Representatives the terms and conditions of
this Agreement. 

In
the event either Party or their Representatives are requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or
similar process from a governmental authority, agency or tribunal) to disclose the terms and conditions of this Agreement, the Party requested to provide such information shall provide prompt notice
of such request to the other Party so that either Party may seek an appropriate protective order and/or waive compliance with the provisions of this Agreement. Further, it is agreed that if, failing
the entry of a protective order or the receipt of a waiver hereunder, a Party or its Representatives are, in the opinion of counsel, compelled to disclose such information under pain of liability for
contempt or other censure or penalty, such information may be disclosed to the governmental authority, agency or tribunal without liability hereunder; provided, however, that the Parties agree to
exercise their best efforts to obtain other reliable assurance that confidential treatment will be accorded to such disclosed information. 

 
 

X. TERM OF AGREEMENT

This
Agreement shall be binding upon both Parties upon execution hereof and shall be effective as of the execution date and shall remain in full force and effect until Closing, with the exception of
Article V., Article VII, Article IX, and Article XI.K., which provisions shall survive Closing. 

 
 

XI. MISCELLANEOUS

	A.
	Titles for Convenience Only. The headings used in this Agreement are inserted for convenience only and shall be disregarded in
construing this Agreement.

	B.
	Severability. It is the intent of the Parties that the provisions contained in this Agreement shall be severable. Should the whole or
any portion of a condition be held void or invalid, as a matter of law, such holding shall not affect other portions thereof, which can be given effect without the invalid or void portion.

	C.
	Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and to their respective legal
representatives, successors and assigns.

	D.
	Compliance With Laws And Regulations. The Parties shall each comply with all laws, rules and regulations of government authority in its
operations hereunder.

	E.
	Errors and Omissions. The Parties agree that in the event an agreement or assignment that is subsequently prepared as a result of this
Agreement contain an omission or error the Party discovering the omission or error will promptly provide written notice of the omission or error to the other Party as provided for herein. Upon
receiving such written notice the Parties will work together to obtain a reasonable resolution to the matter in a timely manner. This provision will not apply to the terms and conditions of
this Agreement. 

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	F.
	Governing Law. This Agreement shall be governed by, construed, interpreted and applied in accordance with the laws of the State of
Wyoming excluding any choice of law rules, which would refer the matter to the laws of another jurisdiction.

	G.
	Like-Kind Exchange. Either Party shall have the option, until five (5) days prior to Closing, to structure the
Closing of this transaction in such a manner so as to qualify as part of a like-kind exchange pursuant to Section 1031 of the Internal Revenue Code. Each Party will cooperate with
the other Party to facilitate a "like-kind" exchange(s), including a three corner exchange(s). In the event either Party desires such an exchange(s), such Party shall timely notify the
other Party, in writing, of its intent, and the Party desiring the Section 1031 structuring shall be responsible for arrangement of the structure for the exchange(s), compliance with time
limits on like-kind exchange(s), the preparation of appropriate documents to complete the transaction, and all additional costs directly related thereto. The Party effectuating a
Section 1031 exchange hereunder shall defend, indemnify and hold harmless the other Party, its affiliates and subsidiary corporations, as well as its officers, directors, shareholders and
employees, from and against any and all claims, suits, causes of action, demands, liabilities, judgments, fines, penalties, expenses (including, without limitation, court costs and reasonable
attorney's fees), damages and losses of whatsoever kind or nature that relate to or are attributable to any actions taken pursuant to this Article X.G.

	H.
	Notices. Any notice given hereunder shall be in writing and shall be delivered personally, by facsimile (Fax), or by registered or
certified mail, postage prepaid to the Parties at the following addresses during normal business hours:

	

	SELLER:

Pennaco Energy, Inc:

c/o Marathon Oil Company

Attn: Jon Wilcox

P. O. Box 3128

Houston, TX 77253

Phone (713) 296-3337

Fax (713) 296-3396

	

	BUYER:

Pinnacle Gas Resources, Inc.

Attn: Karl M. Eppich

1 East Alger, Suite 206

Sheridan, WY 82801

Phone (307) 673-9710

Fax (307) 673-9711 

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Each
Party may change its address at any time and from time to time by giving written notice to the other Parties. 

	I.
	Entire Agreement. This Agreement and its Exhibits constitute the entire understanding between the Parties with respect to the subject
matter hereof, superseding all related negotiations, prior discussions and prior agreements and understandings. No amendment hereto shall be binding unless mutually agreed to in a written instrument
specifically made subject to this Agreement.

	J.
	Counterpart Execution. This Agreement may be executed in a number of counterparts, each of which shall be considered an original for all
purposes, but shall not be binding until fully executed by all Parties.

	K.
	Indemnity. Buyer agrees to indemnify, defend and hold harmless Seller, its employees, officers, directors and agents from and against
all claims, damages or causes of action arising from Buyer's, its successors and/or assigns ownership or operation of the Assets. 

IN
WITNESS WHEREOF, this Agreement is executed this 28th day of February 2005, but effective as of the date hereinabove provided. 

	SELLER:	 
	
 PENNACO ENERGY, INC.	

 
	
 /s/  GARY NEWBERRY      
 Garry Newberry

Attorney-in-Fact	

 
	
 BUYER:	

 
	
 PINNACLE GAS RESOURCES, INC.	

 
	
 /s/  PETER G. SCHOOMAKER      
 Peter G. Schoomaker

CEO

	

 

7

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Exhibit 10.4

PURCHASE AND SALE AGREEMENT

I. PURPOSE

II. EXHIBITS

III. ASSIGNMENT OF ASSETS

IV. TITLE EXAMINATION

V. ASSIGNMENTS; SPECIAL WARRANTY

VI. LEASE EXTENSIONS

VII. RENTAL OBLIGATIONS

VIII. NON-COMPETE OBLIGATION

IX. CONFIDENTIALITY

X. TERM OF AGREEMENT

XI. MISCELLANEOUS

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