Document:

Exhibit 10.2

 

Carry and
Earning Agreement 

By and Among 

ST. MARY LAND & EXPLORATION COMPANY

and 

ENCANA OIL & GAS (USA) INC.

Dated April 29, 2010

 

CARRY AND EARNING AGREEMENT

 

This
CARRY AND EARNING AGREEMENT (this “Agreement”), executed as of April 29,
2010, effective as of the date of signing hereof (the “Effective Date”), is by
and among ST. MARY LAND & EXPLORATION COMPANY, a Delaware corporation
(“STML”) and ENCANA OIL & GAS (USA) INC., a Delaware corporation (“EnCana”).
STML and EnCana may each also be referred to herein as a “Party” or
collectively as the “Parties.”

 

BACKGROUND

 

1 STML is the current owner
and holder of approximately 31,738 net acres of oil, gas and mineral leases
covering lands in Shelby and San Augustine Counties, Texas, and the leasehold
interest in the lands covered thereby, limited, however, to the Assigned
Interval (individually, a “Lease” and collectively, the “Leases,” as identified
by name and STML property number on Exhibits A-1 and A-2). Each
portion of Exhibit A also sets forth, for each Lease, STML’s
Working Interest and associated Net Revenue Interest therein, as well as the
number of Net Mineral Acres covered by the Lease.

 

2 The Leases will be
developed in two blocks, as depicted on the plat attached hereto as Exhibit B:
(i) a northern block consisting of a supposed 8,375 Net Mineral Acres of
Leases (the “North Block”); and (ii) a southern block consisting of a
supposed 23,363 Net Mineral Acres of Leases (the “South Block”).  The Leases within the North Block are described
on Exhibit A-1 and the Leases within South Block are described on Exhibit A-2.
Either the North Block or the South Block may be referred to individually as a
Block or collectively as the “Blocks.”

 

3 The Parties desire to
enter into this Agreement in order to provide the terms and conditions under
which EnCana will earn an undivided 5% interest in the Assets in the South
Block and an undivided 95% interest in the Assets in the North Block, through
the payment for the drilling of horizontal wells in the South Block, as further
provided herein. As to each respective Block, these ownership interests to be
assigned shall be referred to herein as the “Assigned Interest.”

 

4 Capitalized terms used
herein will have the meaning given to such terms herein. A list of the
capitalized terms and all Exhibits and Schedules is set forth in the Schedule
of Definitions attached hereto as Schedule 1.

 

NOW,
THEREFORE, in consideration of the mutual promises and covenants contained
herein, the Parties agree as follows:

 

ARTICLE I 

PROPERTIES SUBJECT TO AGREEMENT

 

1.1
Assigned Interval.

 

(a) The rights to be
earned by EnCana are limited to the undivided interests assigned in the 

 

 

Leases insofar and only insofar as those
rights pertain to the correlative interval corresponding to the depths from the
top of the Bossier Shale Formation to the base of the Haynesville Formation
(the “Assigned Interval”).

 

(b) The Assigned
Interval is defined as the stratigraphic equivalent of the interval from 11,570
feet to 12,882 feet as shown on the electrical log of the St. Mary Land &
Exploration, Black Stone PB#1 well (API No. 42-419-31498), Shelby County,
Texas.

 

1.2
Description of the Assets. To the extent associated with the respective
Assigned Interest in the Assigned Interval, and further subject to the Excluded
Assets and the other express limitations and reservations set forth herein and
on Exhibits A-1 and A-2, the respective Assigned Interest shall
include the following which together with the Assigned Interest in the Leases
shall be collectively referred to herein as the “Assets:”

 

(a) the Leases and all
rights resulting from the pooling, unitizing or communitizing of the Leases;

 

(b) an undivided 95% of
STML’s interest in the four wells operated by XH, LLC whose units include North
Block Leases and in which operations have either commenced or there exists an
approved AFE therefor, and an undivided 5% of STML’s interest in that certain
well also operated by XH, LLC whose unit includes South Block Leases, such five
wells being more fully described on Exhibit A-3, such five wells
being referred to herein as the “XTO Drilling Wells,”  with the interest to be assigned in these
five wells each being subject to separate operating agreements dated December 1,
2009(being a portion of the XTO Agreements, as such term is hereafter defined);

 

(c) to the extent
related to the Assigned Interval, the Assigned Interest in the North Block
share of all rights, titles and interest of STML in and to the seven operating
agreements each dated December 1, 2009, and an eighth operating agreement
dated February 1, 2009, each naming XH, LLC as operator with each of these
operating agreements being described on the attached Exhibit A-4
(the “XTO Agreements”);

 

(d) to the extent
related to the Assigned Interest in the North Block, an undivided 95% of STML’s
rights, titles and interest in and to that certain wellbore for the Hinton 1-H
well located in the James English Survey A-186, Shelby County, Texas (API #
42-419-31554), which well is currently being drilled by STML, together with
EnCana’s proportionate share of all equipment, personal property and fixtures
associated with this assigned wellbore, it being understood and agreed by and
between the Parties that STML will operate the drilling of this well until the Effective
Date at which point, EnCana shall assume the role of Operator for such well
with the understanding that EnCana shall operate this well thereafter including
any Completion operations (as hereinafter defined), and to the extent related
to the Assigned Interest in the South Block, an undivided 5% of STML’s rights,
titles and interest in and to those certain wellbores for the Ironosa No. 1
well (API #42-405-30308), which well has been drilled as a vertical well but
not Completed, and the Crockett No. 1-H well (API #42-419-31570), which
well was recently commenced, which three wells are more fully described on Exhibit A-3,
and which three wells may be referred to herein as the “STML Drilling Wells;”

 

(e) equal rights with
STML to the right of ingress and egress and use of the surface of the lands
covered by the Leases in the North Block to the same extent currently owned or
enjoyed by STML;

 

(f) a subsurface
easement through, over and across the Leases to the extent reasonably necessary
for EnCana to transit the rights retained by STML hereunder to allow EnCana to
enjoy the rights to be granted to it in the Assigned Interval;

 

(g) To the extent
related to the Assigned Interval, the respective Assigned Interest in all
rights, titles and interests of STML in and to, or otherwise derived from, all
presently existing and valid oil, gas and/or mineral unitization, pooling,
and/or communitization agreements, declarations and/or orders (including,
without limitation, all units formed under orders, rules, regulations, or 

 

 

other official acts of any federal, state or
other authority having jurisdiction, and voluntary unitization agreements,
designations and/or declarations);

 

(h) To the extent
related to and binding upon the Assigned Interval, the respective Assigned
Interest in the Material Contracts (as hereafter defined); and

 

(i) To the extent
related to the Assigned Interval, the respective Assigned Interest in all
right, title and interest of STML in and to all existing and valid, enforceable
contracts and agreements to the extent such are binding on the Leases or lands
covered thereby.

 

1.3
Excluded Assets. STML reserves to itself, and there is hereby excepted
from this Agreement (collectively, the “Excluded Assets”):

 

(a) All rights in and
to the Leases to the extent not associated with the Assigned Interests in the
Assigned Interval;

 

(b) The wellbore and
the production therefrom, together with the equipment, personal property and
fixtures associated therewith, but not the Leases insofar as such pertain to
the Assigned Interests in the Assigned Interval (except as such Lease rights
pertain to these wellbores) associated with the two existing vertical wells
producing from the Assigned Interval in the South Block, the Cabot-King Gas
Unit 1-H well located in a pooled area including a portion of the Leases in the
South Block and, the two wells described in Section 1.3(d) all
such wells being referred to as the “Excluded Wells” and each of them being
described with particularity on Exhibit A-5 attached hereto and
made a part hereof;

 

(c) all STML field offices
and yards and equipment stored therein;

 

(d) STML will
specifically except and reserve from the Assigned Interest in the North Block (i) all
of its overriding royalty interest in the Ellora-Ellington No. 1-H well
located in the James English Survey, A-186, Shelby County, Texas (API
#42-419-31505) and (ii) all of its overriding royalty interest and
conversion rights associated therewith in the Raymond No. 1 well located
in the Benjamin Odell Heirs Survey, A-534 Shelby County, Texas (API
#42-419-31432); and

 

(e) any gas gathering
system owned and operated by STML within the South Block.

 

1.4
Additional Assets. Subject to Section 3.8(c)(i), STML will
assign to EnCana all of STML’s interest in the rights of way it has acquired in
the North Block that are related to a proposed pipeline relating to the Hinton
1-H well, which rights-ofway are described on Exhibit A-6 attached
hereto and made a part hereof and will be a part of the Assets.

 

ARTICLE II 

INITIAL OBLIGATIONS

 

2.1 Deliveries.

 

(a) Simultaneously with
the execution of this Agreement, STML and EnCana will each execute and deliver
to the other:

 

(i) the JOA attached
hereto as Exhibit C, including the Tax Partnership Agreement
attached thereto (the “JOA”);

 

(ii) an
executed and acknowledged Memorandum of the JOA for recording in the counties
in which the Assets are located; and

 

(iii) such
other instruments, agreements and other documents as either may reasonably
request in conjunction with the consummation of the closing contemplated
herein.

 

(b) Simultaneously with
the execution of this Agreement, STML will execute and deliver to EnCana: (i) assignments
of the Assigned Interest in the Leases limited to the Assigned Interval, in
substantially the form attached hereto as Exhibits D-1 (North Block) and
D-2 (South Block) (collectively, the “Assignments”); and (ii) the
assignment provided for in Section 1.4, on a mutually agreeable
form of assignment based upon the Assignments.

 

 

(c) STML will deliver,
within 30 days of the execution of this Agreement, copies of their land files
related to the Leases. Notwithstanding this delivery requirement, STML shall
make all of its land files related to the Leases available to EnCana for title
review purposes from and after the Effective Date and the payments required
upon signing this Agreement have been made.

 

(d) STML will deliver a
summary with appropriate back-up of the costs incurred as of the Effective Date
in the STML Drilling Wells.

 

(e) Simultaneously with
the execution of this Agreement, EnCana will deliver to STML $45,649,933.00
(the “Initial Payment”), in immediately available funds by wire transfer to an
account designated by STML.

 

(f) STML and EnCana
will each execute and deliver the Letter Agreement between each of them and
Scandrill Inc. that acts to substitute EnCana as Operator under the drilling
contract for the Hinton 1-H well.

 

2.2
Existing Wells.

 

(a) With regard to the
eight wells described in Sections 1.2(b) and 1.2(d), which
wells are described on Exhibit A-3 (being the XTO Drilling Wells
and the STML Drilling Wells), within thirty (30) days of the Effective Date,
EnCana will deliver to STML in immediately available funds by wire transfer to
an account designated by STML, EnCana’s Proportionate Share of all actual costs
incurred in and related to the STML Drilling Wells. Schedule 2.2(a) sets
forth the current estimate of the costs of the STML Drilling Wells to be
reimbursed pursuant to the preceding sentence. 
It is assumed by STML that if the costs incurred as of the Effective
Date in the XTO Drilling Wells have not been billed to STML on or before the
Effective Date, that such billings will be received by STML shortly
thereafter.  If this occurs before EnCana
is added to the joint interest billing process for the XTO Drilling Wells, STML
will remit payment to the operator and will promptly invoice EnCana for its
Proportionate Share of such costs. EnCana will remit its Proportionate Share of
such invoices to STML with thirty (30) days of EnCana’s receipt thereof.  From and after the Effective Date, with
regard to the XTO Drilling Wells, STML shall endeavor to have EnCana billed
directly for costs incurred, and for the wells operated by STML, STML shall
bill EnCana for its Proportionate Share of costs incurred after those reflected
in these payments. The eight wells are: (i) the XTO Drilling Wells, namely
the five operated by XH, LLC, being the Bruins, Lumberjacks, Ducks, Badgers,
and Jayhawks, all described more fully on Exhibit A-3; and (ii) the
STML Drilling Wells, namely the Hinton 1-H, Crockett No. 1-H, and Ironosa No. 1,
each operated by STML. EnCana shall be responsible for its Proportionate Share
of all actual, direct costs related to these eight wells insofar as its
Assigned Interest is concerned from commencement of operations, including any
title examination, permitting, surveying, site preparation, or other costs or
expenses related to the drilling of these wells and EnCana shall thereafter
remain responsible for its Proportionate Share of the costs associated with
these wells as an undivided interest owner therein; provided, however, that,
with respect to the Hinton 1-H and the Ironosa No. 1, EnCana will not
reimburse STML for any costs associated with the evaluation of zones outside
the Assigned Interval (including the costs of cores and drilling rig time to
obtain cores). Within 60 days of the Completion of any of these eight wells,
STML and EnCana shall use their best efforts to true-up their respective
Proportionate Share of costs based on actual costs incurred and paid to insure
that each Party has paid its appropriate Proportionate Share of costs in these
eight wells. With regard to the Crockett No. 1-H well and the Ironosa No. 1
well, EnCana shall pay only its Proportionate Share of costs incurred prior to
the Effective Date; thereafter, the provisions of Article III
pertaining to Carried Well Costs in a Commitment Well shall apply to the
Crockett No. 1-H well and the Ironosa No. 1 well.

 

(b) Subject to this
Agreement becoming fully effective as between the Parties, EnCana agrees to
Complete the Hinton 1-H well referred to in the preceding paragraph if such
well would be Completed by a reasonably prudent operator under the same or
similar circumstances.  STML shall turn
over operation of this well to EnCana as of the Effective Date such that EnCana
shall 

 

 

complete the drilling operations which
include determining the landing depth for the horizontal section of this well,
the total lateral length, running production casing and its attendant cementing,
and Completing the well as either a dry hole or as a well capable of producing
hydrocarbons.

 

2.3
The Assignment. The Assignment will occur in two separate documents, one
pertaining to the North Block and the other to the South Block, and each will deliver
the Assigned Interest in the Assigned Interval in the affected Leases to EnCana
with the same Net Revenue Interest in each such Lease as owned by STML as of
the Effective Date prior to delivery of the Assignment, reserving no overriding
royalty interest or other burden on production (other than the overriding
royalty interest noted in Section 1.3(d)) not existing of record as
of the Effective Date, and will be made without warranty of title whatsoever
except by, through and under STML and its affiliates, but to no further
extent.  The Assignment will provide that
the Party owning the undivided 95% interest in the Leases in the respective
Blocks shall have the right to pool the interests of the undivided 5% owner
consistent with the terms of the affected Leases, such pooling rights limited
to the Assigned Interval only.

 

2.4
Title and Other Information Held By STML. To the extent not limited or
precluded by operation of any valid third party licensing or confidentiality
agreement, STML will make available to EnCana copies of its oil and gas lease
files, including, but not limited to, all title data, such as broker’s run
sheets, title opinions and abstracts, covering the Leases.  STML will make available to EnCana all other
information in STML’s or any of its Affiliates’ possession relating to the
Assets, including geological, geophysical and engineering information.  EnCana may examine such information and
materials at EnCana’s sole cost and expense during regular business hours at
the location at which STML makes the materials available.  Also, to the extent available, STML will
transmit to EnCana such information and materials in electronic form.  Except as is otherwise expressly provided
herein, all information is provided without warranty of any kind, including any
regarding the completeness or accuracy of this information.  STML will not be required to make available
any information covered by existing agreements of confidentiality to which it
is bound; provided, however, that STML will make commercially reasonable
efforts to obtain the release of any such information.  Subject to the foregoing, EnCana shall have
the right to examine all title with respect to the Assets as described in Section 4.2
and EnCana and STML shall handle any Title Defects as described in Article IV.

 

ARTICLE III 

CARRY AMOUNT, INTEREST, COMMITMENT WELLS

 

3.1
Proportionate Share. The term “Proportionate Share” means:

 

(a) With respect to
EnCana: an undivided 5% in the South Block and an undivided 95% in the North
Block of the interest STML owns in the Assets as of the Effective Date
immediately prior to the delivery of the Assignment of the Assigned Interest in
each Block to EnCana; and

 

(b) With respect to
STML: an undivided 95% in the South Block and an undivided 5% in the North
Block of the interest STML owns in the Assets as of the Effective Date
immediately prior to the delivery of the Assignment of the Assigned Interest in
each Block to EnCana.

 

3.2
The Carry.

 

(a) The term “Carry
Amount” means a total of $91,299,866 (subject to adjustment as provided in Section 3.2(a)(ii))
paid as follows:

 

(i) the Initial Payment; and

 

 

(ii)   a subsequent
payment equal to the difference between (x) and (y) with (x) being
$91,299,866 less the amount for any Title Defects determined in accordance with
Article IV and Section 3.9; and (y) being the
Initial Payment. This subsequent payment must be made by wire transfer within
thirty days of the Completion of the fourth Commitment Well or November 1,
2010, whichever last occurs, in immediately available funds to an account
designated in writing by STML, such designation to be made at least three days
prior to the date the payment will be made.

 

(b) The term “Carried
Well Costs” means 100% of the costs to drill and Complete (as each are
hereafter defined) a Commitment Well. 
The Carry Amount will be used solely to pay Carried Well Costs.

 

(c) The “Carry Period”
is the period of time between the Effective Date and the date that the Carried
Well Costs equal the Carry Amount.  If
the Carry Amount is expended during the pendency of either drilling or
Completion operations on a Commitment Well, all future costs and expenses
incurred in such well shall thereafter be paid by the Parties in their
respective Proportionate Shares.

 

(d) Costs incurred
after Completion operations in a Commitment Well shall not be included in
Carried Well Costs, and such costs shall be borne by the Parties in their
respective Proportionate Shares.

 

3.3
Commitment Wells.

 

(a) Beginning on the
Effective Date, EnCana will be responsible for paying 100% of the Carried Well
Costs attributable to the interests of the Parties, up to the Carry Amount, to
drill and Complete (or plug and abandon with the drilling rig), horizontal
wells landed in the Assigned Interval at locations of STML’s choice in the
South Block in accordance with the provisions of this Article III
and the AFEs (each such well, subject to the terms hereof, a “Commitment Well”
and collectively, the “Commitment Wells”).

 

(b) STML will be the
operator of the Commitment Wells.

 

(c) EnCana may not
non-consent the drilling or Completion of a Commitment Well.

 

(d) The terms “Complete,”
“Completing” or “Completion” means, with respect to a Commitment Well:

 

(i) running
production casing, testing, logging, coring, surveying, or any other type of
testing or diagnostic procedure that a reasonably prudent operator would
conduct;

 

(ii) attempting
a fracture stimulation that a reasonable and prudent operator would conduct in
the well that is based on generally accepted engineering practices appropriate
for the area, including, but without any obligation to do so, any operation
necessary to conduct a micro seismic survey pertaining to the fracture
stimulation, and further including the conducting of simul-fracture stimulation
; and

 

(iii) procuring
and installing flowlines, wellheads, tanks and other production equipment,
through and including the well production meter that is located on the wellsite
for the affected well downstream of any production treating equipment or
facilities located at the wellsite for each Commitment Well, but not including
the construction of any pipelines or other facilities downstream of the well
production meter.

 

(e) The terms “drill”
or “drilling” with respect to a Commitment Well means:

 

(i) All
activity and operations necessary to drill a Commitment Well to its final total
length, including the drilling of any pilot hole down through the Assigned
Interval to allow for an evaluation of the Assigned Interval, and including any
title examination,

 

permitting,
surveying, site preparation, casing, cementing, testing, logging, coring, or
other work or operations necessary or incident to preparing the Commitment Well
for Completion operations, or if a dry hole, through the plugging and
abandonment of the Commitment Well and abandonment of the surface location;

 

(ii) with
regard to the existing two vertical wells that STML has included in the
Excluded Assets as two of the Excluded Wells from and after the dated this
Agreement is signed by 

 

 

both Parties, STML is specifically
granted the right by EnCana to utilize either of these existing wellbores as a
Commitment Well, and in such event, the drilling component of any such
Commitment Well will include any and all permitting and all operations
necessary to convert either of the two existing vertical wells (being the USABL
No.1 and the Black Stone PB#1) from a vertical well to a horizontal well in the
Assigned Interval, and, if necessary, STML will assign the appropriate Assigned
Interest to EnCana in either or both of these two vertical wellbores not
assigned to EnCana upon the signing of this Agreement once production from the
affected vertical well has been terminated, if the well is then a producing
well, and operations incident to converting this vertical well to a horizontal
well have been commenced.  All costs
associated in any manner with converting either of these two vertical wells to
a Commitment Well shall be Carried Well Costs until such time as the Carry
Amount has been expended.

 

(iii) with regard to the Ironosa No. 1 and the Crockett No. 1-H
wells from and after the date this Agreement is signed by both Parties, STML is
specifically granted the right by EnCana to utilize either or both of these
existing wellbores as a Commitment Well, and in such event, the drilling
component of any such Commitment Well will include any and all permitting and
all operations necessary to convert the Ironosa No. 1 from a vertical well
to a horizontal well in the Assigned Interval. 
All costs associated in any manner with converting this vertical well to
a Commitment Well and the costs incurred after signing this Agreement in the
Crockett No. 1-H well shall be Carried Well Costs until such time as the
Carry Amount has been expended.

 

3.4 Procedure
for Drilling Commitment Wells. From and after the execution of this
Agreement, if STML desires to drill a Commitment Well, it will notify EnCana of
such decision by sending a written notice, including:

 

(a) An Authorization
for Expenditure (an “AFE”) detailing the estimated cost of drilling and
Completing the Well;

 

(b) The location of the
well; and

 

(c) Any other
information it desires to provide concerning the geology, title and prospects
for the well.

 

3.5 Drilling Schedule.

 

(a) The Commitment
Wells must be drilled within two years of the Effective Date. If the Carried
Well Costs incurred as of the second anniversary of the Effective Date are less
than the Carry Amount as adjusted by operation of this Agreement, STML shall
promptly refund to EnCana the difference between the incurred Carried Well
Costs as of this date and the adjusted Carry Amount. Further, this Agreement
shall terminate and be of no further force or effect two years from the
Effective Date except that obligations existing as of this date of termination
shall remain binding obligations of the Party subject to such obligations in
accordance with the terms hereof.

 

(b) STML will use its
best efforts consistent with sound engineering and financial practices to
commence Completion operations on each Commitment Well within 90 days of the
date the drilling rig is released from the applicable well.

 

3.6 Third
Party Wells. The Carry Amount may be applied to wells drilled by third
parties in the South Block on the Leases or lands pooled therewith upon the
mutual agreement of EnCana and STML, which agreement shall not be unreasonably
withheld.

 

 

3.7 Information Rights.

 

(a) STML shall maintain
with respect to each Commitment Well, as and when drilled, all drilling
reports, logs, drillstem test data, and geological and geophysical maps and all
other relevant data.  EnCana will be
entitled, at all reasonable times, upon reasonable notice and subject to
compliance with STML’s reasonable health, safety, and environmental rules and
regulations, at EnCana’s sole risk and expense, to access to the rig floor and
location of all Commitment Wells.

 

(b) EnCana shall have
the right to audit the books and records of STML in connection with its
operations in connection with the Commitment Wells in accordance with the audit
provisions of the JOA.

 

3.8 Gas Gathering.

 

(a) Tenaska
Agreement. The Parties understand and acknowledge that STML has entered
into that certain Gas Gathering Agreement dated February 8, 2010, by and
between TPF II East Texas Gathering, LLC as “Gatherer” and STML as “Shipper” (herein
the “Tenaska Agreement”). This Tenaska Agreement is attached hereto as Exhibit E.
In accordance with the terms of the Tenaska Agreement, there are various
rights, benefits, duties and obligations imposed on Gatherer and Shipper.  Subject to the provisions of Section XV
of the Tenaska Agreement, STML agrees to assign to EnCana a partial interest in
the rights, benefits, duties and obligations as created by the Tenaska
Agreement, such interest being a fraction the numerator of which is the Net
Mineral Acres acquired by EnCana in the North Block and South Block combined
and the denominator of which are the total number of Net Mineral Acres owned by
STML in the North Block and the South Block combined as of the Effective Date
immediately preceding the Assignment, with such determination of this numerator
and denominator to be made after EnCana has conducted its title review as
allowed by Article IV hereof.

 

(b) Gathering
Systems.

 

(i) EnCana
System. The Parties recognize that it will be necessary for EnCana to
construct, own, maintain and operate a gathering system to move production from
the North Block from EnCana operated wells to the facilities contemplated by
the Tenaska Agreement.  Assuming the
existence of this EnCana operated or controlled gathering system, EnCana agrees
that STML shall have the right, but not the obligation, to transport gas on
this gathering system from wells in which STML owns an interest and that
produce from an interval outside of the Assigned Interval.  This right by STML shall be on a space
available basis with no obligation on the part of EnCana to provide space on
the gathering system, unless such space is readily available.  EnCana will also allow STML the right to use
its rights-of-way related to the gathering system provided such use is not
prohibited by the terms of the particular right-of-way grant.  If STML moves gas on the EnCana gathering
system in accordance with this paragraph, EnCana shall charge STML a reasonable
market-based fee to which the Parties mutually agree acting in a commercially
reasonable manner.  In addition, EnCana
agrees that STML shall have the right, but not the obligation, to transport gas
on this gathering system from wells in the North Block in which STML owns an
interest within the Assigned Interval. 
If STML moves gas produced from the Assigned Interval in the North Block
on the EnCana gathering system in accordance with this paragraph, EnCana shall
charge STML a reasonable market-based fee to which the Parties mutually agree
acting in a commercially reasonable manner.

 

(ii) STML
North Block System. EnCana will have the right, but not the obligation, to
transport gas on STML’s existing 8 inch pipeline in the North Block from wells
in which EnCana owns an interest, provided that such right cannot be exercised
if such use by EnCana will cause the existing STML wells to go off-line on such
gathering system.  This right by EnCana
shall be on a space available basis with no obligation on the part of STML to
provide space on the gathering system, unless such space is readily
available.  STML will also allow EnCana
the right to use its rights-of-way related to the 8 inch pipeline provided such
use is not prohibited by the terms of the particular right-of-way grant.  If EnCana

 

 

moves gas on the STML 8 inch
pipeline in accordance with this paragraph, STML shall charge EnCana a
reasonable market-based fee to which the Parties mutually agree acting in a
commercially reasonable manner.

 

(iii) STML
South Block System. The Parties recognize that it will be necessary for
STML to construct, own, maintain and operate a gathering system to move
production from the South Block from STML operated wells to the facilities
contemplated by the Tenaska Agreement. 
Assuming the existence of this STML operated or controlled gathering
system, STML agrees that EnCana shall have the right, but not the obligation,
to transport gas on this gathering system from wells in the South Block in
which EnCana owns an interest within the Assigned Interval.  If EnCana moves gas on the STML gathering
system in accordance with this paragraph, STML shall charge EnCana a reasonable
market-based fee to which the Parties mutually agree acting in a commercially
reasonable manner.

 

3.9 Consents to
Assign. In the context of preparing this Agreement, various consents to
assign have been reviewed affecting a portion of the Leases.  The Leases affected by these consents to
assign are set forth on Schedule 3.9 attached hereto. While the Parties
expect that all necessary consents to assign will be granted in due course, it
is recognized that some or all of these may not have been obtained prior to the
Effective Date.  For all consents to
assign not obtained prior to the Effective Date: (i) the Parties
acknowledge that EnCana is claiming all such consents to assign as Title
Defects pursuant to Section 4.4(a)(iv); (ii) STML will have
until the date that is ninety (90) days following the Effective Date in which
to procure the necessary consent for each such Lease (the “Cure Period”); and (iii) the
affected Lease will be excluded from the respective assignment.  Within a reasonable time of obtaining the
consent to assign, the affected Lease will be assigned to EnCana in accordance
with the terms and conditions of this Agreement.  During the interim between the Effective Date
and the assignment of an affected Lease to EnCana or the end of the Cure
Period, whichever is earlier, STML shall not encumber or burden the affected
Lease in any manner so as to prevent STML from assigning the affected Lease to
EnCana with the unencumbered working interest and net revenue interest as
described for such Lease on Exhibit A-1 or A-2, as
applicable.  Once the affected Lease or
Leases are assigned to EnCana, they shall be subject to the same title review
process as described in Article IV subject to modifying the dates
of the Examination Period so that EnCana retains its full review rights as
otherwise prescribed by Article IV of this Agreement as to such
Lease or Leases.  If STML is unable to
secure a necessary consent to assign by the end of the Cure Period, it shall
retain such Lease and the Carry Amount will be reduced by an amount calculated
by multiplying the Net Mineral Acres included in the affected Lease times the
Per Acre Value. This reduction in the Carry Amount shall be taken into account
in the determination of the payment due pursuant to Section 3.2(a)(ii).

 

ARTICLE IV 

TITLE MATTERS

 

4.1 Title Procedure.
From the Effective Date until 5:00 p.m. Central Time on the date that is
45 days following the Effective Date (the “Examination Period”), STML will
afford to EnCana and its representatives reasonable access during normal
business hours to the offices, personnel and books and records of STML in order
for EnCana to conduct a title examination as it may in its sole discretion
choose to conduct with respect to the Assets in order to determine whether
Title Defects exist.

 

4.2 Accessible
Information; Expenses; Confidential Information; Indemnification. EnCana
and its representatives may examine all abstracts of title, title opinions,
title files, ownership

 

 

maps, lease files,
assignments, division orders, operating records and agreements, well files,
financial and accounting records, geological, geophysical, engineering and
environmental records pertaining to the Leases, in each case insofar as the
same may now be in existence and in the possession of STML, provided, however,
that STML may withhold access to (a) all legally privileged documents and (b) information
that STML is prohibited from disclosing by bona fide third party
confidentiality restrictions; provided further that STML will use its
reasonable efforts to obtain a waiver of any such restrictions in favor of
EnCana. The cost and expense of EnCana’s review of the title to the Assets will
be borne solely by EnCana.

 

4.3 Notice of
Asserted Title Defects.

 

(a) If EnCana discovers
any Title Defect affecting any portion of the Leases, EnCana may notify STML of
such alleged Title Defect from time to time prior to the expiration of the
Examination Period.  To be effective,
such notice (“Title Defect Notice”) must:

 

(i) be
in writing;

 

(ii) be
received by STML prior to the expiration of the Examination Period;

 

(iii) describe
the Title Defect in reasonable detail including the basis therefor (including
any alleged variance in the Net Revenue Interest or Working Interest of any
Lease) and provide any supporting documents in EnCana’s possession;

 

(iv) identify
the specific Lease to which such Title Defect relates; and

 

(v) include
the Title Defect Amount attributable to such Title Defect, as determined by
EnCana in good faith.

 

(b) Except for EnCana’s
remedies for any breach by STML of its special warranty of title under the
Assignment, at the end of the Examination Period, any matters that may
otherwise constitute a Title Defect, but of which STML has not been
specifically notified by EnCana in accordance with the foregoing, will be
deemed to have been waived by EnCana for all purposes.

 

4.4 Title
Defects, Title Defect Amounts.

 

(a) The term “Title
Defect” means:

 

(i) STML
has defensible title to less than the number of Net Mineral Acres in any Lease
than the number of Net Mineral Acres shown for the applicable Lease on either Exhibit A-1
or A-2;

 

(ii) STML
has defensible title to a lesser Net Revenue Interest in a Lease than the Net
Revenue Interest shown for such Lease on either Exhibit A-1 or A-2;

 

(iii) STML
has defensible title to a lesser Working Interest in a Lease than the Working
Interest shown for such Lease on either Exhibit A-1 or A-2
(and there is a corresponding decrease in STML’s Net Revenue Interest in such
Lease);

 

(iv) A
Lease is subject to a consent to assign that would materially affect the value
of the Lease, and such consent has not been obtained by the end of the
Examination Period;

 

(v) A
Lease in the North Block has less than six months from the Effective Date
remaining in the primary term or is subject to commitments to drill a well
thereon within six months of the Effective Date in order to preserve the Lease
or the rights therein to the Assigned Interval with the understanding that this
Title Defect shall not be asserted with regard to any Lease in the pooled area
for the Hinton 1-H well; or

 

(vi) A
Lease is subject to a lien, charge, encumbrance, claim, easement, servitude,
right, burden or defect, other than a Permitted Encumbrance.

 

(b) Without limiting
STML’s right to dispute the existence of a Title Defect, the value of each
asserted Title Defect (the “Title Defect Amount”) shall be determined as
follows:

 

(i) If
the Title Defect results from a lien or similar encumbrance, other than a
Permitted

 

 

Encumbrance, the Title
Defect Amount will be the amount of money required to remove the Lien or
similar encumbrance;

 

(ii) If
the Title Defect relates to the failure of title to the entirety of a Lease,
the Title Defect Amount shall be an amount equal to: (i) the number of Net
Mineral Acres shown for such Lease on either Exhibit A-1 or A-2;
times (ii) $9,506.00 per Net Mineral Acre (the “Per Acre Value”);

 

(iii) If
the Title Defect results in STML having defensible title to less than the
number of Net Mineral Acres shown for such Lease on either Exhibit A-1
or A-2, the Title Defect Amount will be an amount equal to: (i) the
reduction in the number of Net Mineral Acres below the amount shown for such
Lease on either Exhibit A_1 or A-2; times (ii) the Per
Acre Value;

 

(iv) If
the Title Defect results in STML having a lesser Net Revenue Interest in a
Lease than that set forth for such Lease on either Exhibit A-1or A-2,
the Title Defect Amount will be an amount of money calculated by multiplying
the number of Net Mineral Acres affected by the Title Defect by the Per Acre
Value and multiplying the result by a fraction, the numerator of which is STML’s
actual Net Revenue Interest in the affected Lease, and the denominator of which
is the Net Revenue Interest set forth for such Lease on either Exhibit A-1
or A-2;

 

(v) If
the Title Defect results from STML having defensible title to a lesser Working
Interest in a Lease than the Working Interest shown for such Lease on either Exhibit A-1
or A-2 (with a corresponding decrease in Seller’s Net Revenue Interest),
the Title Defect Amount will be calculated as in subparagraph (iv), above;

 

(vi) If
the Title Defect results from any matter described in subparagraph (a)(v) above,
and such Lease is not renewed or extended for a period of at least six months
beyond its stated termination date, or a well is not commenced that extends the
affected Lease, and the Lease terminates, STML shall reimburse EnCana by
multiplying the number of Net Mineral Acres shown for such Lease on either Exhibit A-1
or A-2 times the Per Acre Value.

 

(vii) If
an unsatisfied or unwaived consent to assignment affecting any Lease is
discovered during the Examination Period, the affected Lease or Leases shall,
if necessary, be reconveyed to STML, and the Carry Amount reduced by the amount
derived by multiplying the number of Net Mineral Acres by the Per Acre Value if
this Title Defect remains uncured.  STML
shall have the right to cure within ninety days as provided in Section 4.6(a).

 

4.6 Procedures
for Title Defects.

 

(a) Upon the receipt of
an effective Title Defect Notice, STML will have the option, but not the
obligation, to attempt to cure such Title Defect at STML’s sole cost and
expense, which cure shall be accomplished to EnCana’s reasonable satisfaction
within 90 days of STML’s receipt of an effective Title Defect Notice.

 

(b) The Carry Amount
will be reduced by an amount of money equal to the aggregate Title Defect
Amounts of all Title Defects agreed-upon by the Parties or not cured by STML as
provided in Section 4.6(a).

 

(c) If, as of the date
set forth in paragraph (a), above, there are any Title Defects or Title Defect
Amounts claimed by EnCana, but not agreed to by STML, such defects and/or the
amounts therefor will be submitted to binding arbitration as set forth in Section 4.8.

 

4.7 Title Benefits.
If during the Examination Period it should be discovered that STML owns a
greater number of Net Mineral Acres in either the North Block or the South
Block affecting any portion of the Leases, and including any oil and gas leases
that are discovered to be owned by STML as of the Effective Date, such
additional leasehold Net Mineral Acres 

 

 

shall be referred to as a
Title Benefit. Such Title Benefits can exist as a result of any survey
affecting any of the existing Leases, clerical errors, title matters such as
succession, among other reasons, and notice of such shall be given to EnCana by
STML in accordance with the provisions of Section 4.3 hereof. The
value for any Title Benefit shall be calculated as the increase in the number
of Net Mineral Acres either shown for an existing Lease or the Net Mineral
Acres for a new oil and gas lease times Per Acre Value.  If the Parties cannot agree upon either the
existence of a Title Benefit or the value therefor, such dispute shall be
subject to the arbitration provisions contained in Section 4.8
hereof.

 

4.8 Arbitration.

 

(a) If any Party hereto
elects to submit any dispute to arbitration as specifically provided in this Section 4.8,
then such Party will notify the other Party in writing. Within 15 days
following such notice, STML and EnCana agree to jointly select an arbitrator.
For disputes regarding Title Defects or Title Defect Amounts, the arbitrator
will be an experienced oil and gas attorney, familiar by training and
experience with U.S. oil and gas legal and business matters including titles
and oil and gas transactions.  This
person will be the sole arbitrator (the “Title Arbitrator”) to hear and decide
all existing disputes regarding asserted Title Defects and Title Defect
Amounts.  If STML and EnCana are unable
to agree on the Title Arbitrator within 15 day period, any Party hereto may
apply to a Texas court for the selection of a Title Arbitrator with the
qualifications set forth in this Section.

 

(b) Any arbitration
hearing, if one is desired by the Title Arbitrator, will be held in Dallas,
Texas, or such other location acceptable to both STML and EnCana and the Title
Arbitrator.  The proceeding shall be
conducted by written submissions from STML and EnCana with exhibits, including
interrogatories, supplemented with appearances by EnCana and STML as the Title
Arbitrator may desire.  The arbitration
proceeding, subject only to the terms hereof, will be conducted informally and
expeditiously and in such a manner as to result in a good faith resolution as
soon as reasonably possible under the circumstances.  The decision of the Title Arbitrator with
respect to such remaining disputed matters will be reduced to writing, binding
on the Parties and not appealable. 
Judgment upon the award(s) rendered by the Title Arbitrator may be
entered and execution had in any court of competent jurisdiction, or
application may be made to such court for a judicial acceptance of the award
and an order of enforcement.  STML and EnCana,
respectively, will bear its own legal fees and other costs incurred in
presenting its respective case.  The
charges and expenses of the Title Arbitrator will be shared equally by STML and
EnCana.

 

(c) The arbitration
will commence as soon as possible after the Title Arbitrator is selected in
accordance with the provisions of this Section 4.8. In fulfilling
his or her duties with respect to determining the amount of a Title Defect
Amount, the Title Arbitrator, as applicable, may consider such matters as, in
the opinion of the Title Arbitrator, are necessary or helpful to make a proper
valuation; however, the Title Arbitrator will be bound by those factors set
forth in Sections 4.3 and 4.4. Furthermore, the Title Arbitrator
may consult with and engage disinterested third parties to advise the Title
Arbitrator including, without limitation, geologists, geophysicists, petroleum
engineers, title and oil and gas lawyers, accountants and consultants, and the
fees and expenses of such third parties will be considered to be charges and
expenses of the Title Arbitrator.  The
sole remedy in any arbitration award will be resolution of alleged Title
Defects, and Title Defect Amounts which will then be applied as provided in Section 4.5
and the Title Arbitrator will not award any other remedy, including,
without limitation, equitable relief, actual damages, consequential, exemplary
or punitive damages, attorneys’ fees or interest reflecting the time value of
money.

 

(d) Any replacement
Title Arbitrator, should one become necessary, will be selected in accordance
with the procedure provided above for the initial selection of the Title
Arbitrator.

 

(e) As to any
determination of amounts owing under the terms of this Section 4.8,
no 

 

 

lawsuit based on such claimed amounts owing
will be instituted by either EnCana or STML, other than to compel arbitration
proceedings or enforce the award of the Title Arbitrator.

 

(f) All privileges
under state and federal law, including attorney-client and work-product
privileges, will be preserved and protected to the same extent that such
privileges would be protected in a federal or state court proceeding applying
state or federal law, as the case may be.

 

4.9 Certain Defined Terms.

 

(a) “Net Mineral Acres”
means with respect to any Lease, STML’s undivided ownership interest in that
Lease as lessee only as to the Assigned Interval, multiplied by the number of
acres in the leased premises within the Assigned Interval that are in fact
leased by that particular Lease.

 

(b) “Net Revenue Interest”
means the percentage ownership of the lessee in production from a well on a
Lease after deducting the lessee’s share of all applicable royalties,
overriding royalties and other burdens on production affecting such Lease.

 

(c) “Permitted
Encumbrances” means:  (i) lessors’
royalties, overriding royalties, and similar burdens that do not operate to
reduce the Net Revenue Interest of STML below that Net Revenue Interest set
forth on Exhibit A-1 or A-2 or increase the Working Interest
of STML above that Working Interest set forth on Exhibit A-1 or A-2
(without a proportionate increase in the corresponding Net Revenue Interest); (ii) all
rights to consent by, required notices to, and filings with or other actions by
governmental authorities, if any, in connection with the change of ownership or
control of an interest in any Lease; (iii) any required third-party
consent to change of ownership or control of the Lease or similar agreements; (iv) materialmen’s,
mechanics’, repairmen’s, employees’, contractors’, operators’, tax and other
similar liens or charges arising pursuant to operations or in the ordinary
course of business incidental to construction, maintenance, or operation of the
Leases if they are not now due and payable; (v) easements in respect of
surface operations, pipelines, or the like and easements on, over, or in
respect of the Leases that are not such as to interfere materially with the
operation, value or use of the Leases; (vi) all other inchoate liens,
charges, encumbrances, contracts, agreements, instruments, obligations, defects
and irregularities, affecting any of the Leases that individually or in the
aggregate are customary in the industry and are not such as to interfere
materially with the operation, value or use of any of the Leases, that do not
operate to reduce the Net Revenue Interest of STML in a Lease below that Net
Revenue Interest set forth on Exhibit A-1 or A-2 or increase
the Working Interest of STML in a Lease above that Working Interest set forth
on Exhibit A-1 or A-2 (without a proportionate increase in
the corresponding Net Revenue Interest); (vii) all applicable laws, rules and
orders of any governmental authority; and (viii) liens for Taxes not due
and payable.

 

(d) “Working Interest”
means that interest which bears a share of all costs and expenses proportionate
to the interest owned associated with the exploration, development and
operation of a Lease that the owner thereof is required to bear and pay by
reason of such ownership, expressed as a percentage.

 

ARTICLE V 

OTHER COVENANTS

 

5.1 Joint Operations.

 

(a) There will be a
single JOA covering both the North Block and the South Block. Notwithstanding
that there is only one JOA, however, the JOA will provide that STML will be the
operator of the South Block and EnCana will be operator of the North Block.
Each Party will be entitled to the rights, and subject to the obligations, of
the Operator under the JOA, with respect to the Block of which they are the
Operator. With regard to wells in the North Block proposed by EnCana, STML
recognizes and agrees that it must participate in the first nine wells proposed
by EnCana; but may thereafter elect to not participate in compliance with the
terms of the JOA.  Likewise, to the
extent a well in the South Block proposed by STML is a Commitment Well, EnCana
may not elect to not participate in any such well; but thereafter may elect to
participate or 

 

 

not in accordance with the terms and
provisions of the JOA.

 

(b) In the event of any
conflict or inconsistency between the terms of this Agreement and a JOA, this
Agreement shall prevail to the extent of such conflict. The fact that a matter
is addressed in this Agreement but not the JOA, or vice versa, shall not in and
of itself create a conflict between the respective agreements.

 

(c) Except as expressly
provided otherwise in this Agreement, the JOA will govern all operations on the
Blocks including each of the Commitment Wells.

 

(d) Only STML may
propose the drilling of a well in the South Block and only EnCana may propose
the drilling of a well in the North Block.

 

(e) Except as to the
XTO Agreements, if a well is drilled by pooling any of the Leases with other
oil and gas leases or mineral interests which are not subject to the JOA, as
between STML and EnCana, the JOA will still control operations as between the
Parties, even if STML or EnCana is also a party to a separate joint operating
agreement due to the existence of leases not included in the Leases being
included in the pooled area for such well. The XTO Agreements will control
operations of the applicable portion of the Leases included in the contract
areas described in the XTO Agreements.

 

5.2 Lease Administration.

 

(a) STML must pay 100%
of all lease renewals and extensions due for Leases within the North Block that
are expiring within 6 months of the Effective Date, without reimbursement by
EnCana.

 

(b) STML shall pay, or
cause to be paid, all delay rentals, shut-in royalties, minimum royalties and
lease extensions that may be required or permitted under the terms of the Leases.  Except as provided in paragraph (a) of
this Section 5.2, EnCana shall be responsible for paying, upon
invoice by STML, its Proportionate Share of such payments applicable to periods
of time on and after the Effective Date.

 

5.3 Indemnity for
Existing Production and Wells. STML agrees to defend, indemnify and hold
harmless EnCana, its parent, affiliate and subsidiary companies and its and
their officers, directors, shareholders and employees from and against any and
all claims, demands, damages, losses, costs (including court costs,
consultants, experts and reasonable attorneys fees), liabilities, suits and
penalties (including civil fines) relating to, arising out of or in connection
with all wells that were drilled and completed on the Leases (including the
Excluded Wells) as of the Effective Date and which are now operated, or were
ever operated, by STML. This indemnity will not apply to any of the Excluded
Wells that are converted to a Commitment Well for matters accruing from and
after the time EnCana is entitled to its Assigned Interest in such well.

 

5.4 Existing Pooled
Units in the North Block.

 

(a) To the extent that
STML has formed pooled units that include the Leases in the North Block, and
such units include the Assigned Interval and other depths, STML will
participate with EnCana to amend such units to exclude the Assigned Interval
provided that such amendment does not constitute a violation of an express
provision of any affected Lease. EnCana agrees to defend, indemnify and hold
harmless STML, its parent, affiliate and subsidiary companies and its and their
officers, directors, shareholders and employees from and against any and all
claims, demands, damages, losses, costs (including court costs, consultants,
experts and reasonable attorneys fees), liabilities, suits and penalties
(including civil fines) relating to, arising out of or in connection with the
amendment of these existing units pursuant to this Section 5.4(a).

 

(b) In addition to the
rights provided in Section 2.2, the owner of the 95% Proportionate
Share in each Block may form pooled units at its sole discretion, including
forming pooled units that include leases other than the Leases, or lease owned
by third parties consistent with the terms 

 

 

of the affected Leases and all applicable
laws, orders, rules, and regulations.

 

5.5 Production
Reporting. STML will provide EnCana, in writing or by electronic mail, with
respect to its wells in the North Block producing from zones outside the
Assigned Interval: (i) on a monthly basis, information on such wells’
production; and (ii) notification that any such well has ceased producing
within two weeks of such cessation. 
EnCana will provide STML, in writing or by electronic mail, with respect
to EnCana’s wells in the North Block producing from zones inside the Assigned
Interval notification that any such well has ceased producing within two weeks
of such cessation.

 

ARTICLE VI

AMI

 

6.1 Area
of Mutual Interest.

 

(a) There is hereby
created an Area of Mutual Interest (the “AMI”) which shall consist of the lands
covered by the Leases in the North Block. The Parties acknowledge that to the
extent that they are currently parties to any existing area of mutual interest
that affects any of the lands covered by the Leases, then the Parties will comply
with any area of mutual interest to which they are a party (including the AMI
created hereby) in the order in which each area of mutual interest was created.

 

(b) If, during the
period of time beginning with the execution of this Agreement and ending two
years later, either EnCana or STML or an affiliate of any such Party acquires
(including by extension or renewal) an oil, gas and mineral lease, mineral
interest, overriding royalty interest, royalty interest or any other interest
in oil or gas or any contractual right to acquire interests in oil and gas
leases, such as through farmin agreements (any of which is referred to herein
as an “Interest” or collectively as “Interests”) within the AMI, the acquiring
Party shall, within 30 days of finalizing the acquisition, offer to the
non-acquiring Party the right to purchase its Proportionate Share of such
Interest by paying its Proportionate Share of the acquiring Party’s actual
third party costs incurred in connection with the acquisition of such Interest
(such costs to include, but are not necessarily limited to, the acquiring Party’s
land work with respect to the Interest, the lease bonus, option payments,
broker fees, filing fees and cost of third party title examination).  If two or more Interests are included in a
single notice, the non-acquiring Party will have the right to make separate
elections as to each of the acquired Interests.

 

(c) An offer made
pursuant to this AMI must be in writing and include sufficient information for
such non-acquiring Party to reasonably evaluate the offer, including a complete
description of the acquired Interest and information (to the extent known)
specifying the number of gross and net lease acres, existing overriding
royalties or other burdens affecting the Interest, the purchase price and the
terms of the acquisition, as well as the actual acquisition costs, the
obligations required to earn such interest, including bonus considerations or
equivalent if other than cash, broker’s fees, recording fees, and rentals, and
any other information the acquiring Party deems relevant to the acquisition of
the Interest. The offer should be made in the manner for giving any other
notices under this Agreement.  The Party
receiving the offer shall have 30 days (the “Acceptance Period”) following
receipt of such notice in which to elect to participate in the acquisition, and
if such an election is made within the Acceptance Period, payment for such
Party’s Proportionate Share shall be made within 30 days of such Party’s
acceptance.

 

(d) If such
non-acquiring Party elects to participate, the acquiring Party shall assign the
applicable percentage interest in the Interest to such non-acquiring Party
within 10 business days of receiving such non-acquiring Party’s payment, free
and clear of any burdens created by the acquiring Party other than those
burdens placed on such Interest by the transferor of the Interest to such
acquiring Party. Any Interest acquired after the date of this Agreement,
including any Interest in which both STML and EnCana participate, shall be
subject to the provisions of the JOA but such Interest shall not be part of the
Leases or Assets hereunder or subject to the terms 

 

 

of this Agreement (other than this Article VI)
and the costs and expenses attributable to such Interest shall be borne by STML
and EnCana in proportion to their Proportionate Shares in such Interest.  Failure of the non-acquiring Party to (i) respond
in writing to an acquisition notice within the Acceptance Period, or (ii) pay
for its share of costs within five business days of the Party’s election to
take its Proportionate Share of the Interest will be deemed an election not to
acquire a share of the Interest.

 

(e) If an Interest is
to be earned by drilling wells or shooting seismic, the non-acquiring Party
must ratify all appropriate agreements within the Acceptance Period and agree
to participate in and pay for its share of such required operations. If the
non-acquiring Party turns down any Interest or fails to timely pay for its
share of such Interest, the acquiring Party shall hold such interest free and
clear of any further obligations under this Agreement and the JOA.

 

(f) Notwithstanding
anything herein to the contrary, the provisions set forth in this Article will
not apply to any (i) acquisitions which (A) result from a merger,
consolidation, reorganization with, by, or between a Party (or such Party’s
affiliate) and another party, or (B) result from a merger or acquisition
of the stock or equity of another EnCana, entity or partnership or an acquisition
of at least 51% of all of the assets of an entity by the acquiring Party (or
such Party’s affiliate), whether by cash, like-kind exchange, stock purchase or
otherwise; (ii) transfers between a Party and any of its affiliates; or (iii) transfers
between the parties to any operating agreement binding on the Interests.

 

ARTICLE VII 

REPRESENTATIONS AND WARRANTIES

 

7.1 Mutual
Representations. Each Party, with respect to itself only, hereby represents
and warrants to the other Parties the following:

 

(a) Corporate
Existence. It is duly organized, validly existing and in good standing
under the applicable laws of its state of incorporation or formation, and is
qualified to do business and is in good standing in the State of Texas and in
every other jurisdiction where the failure to so qualify would have a material
adverse effect on its ability to execute, deliver and perform this Agreement
and the other agreements contemplated herein;

 

(b) Authority.  It has all requisite power and authority to (i) own,
lease or operate its assets and properties and to carry on the business as now
conducted, and (ii) enter into and perform its obligations under this
Agreement and to carry out the transactions contemplated hereby;

 

(c) Authorization.
It has taken (or caused to be taken) all acts and other proceedings required to
be taken by such Party to authorize the execution, delivery and performance by
such Party of this Agreement and the other agreements contemplated herein.  This Agreement has been duly executed and delivered
by such Party and constitutes the valid and binding obligation of such Party,
enforceable against such Party in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, moratorium,
reorganization or similar laws affecting the rights of creditors generally and
by principles of equity, whether considered in a proceeding at law or in
equity;

 

(d) Litigation.  There are no actions, suits or proceedings
pending or, to such Party’s knowledge, threatened against such Party which if
decided unfavorably to such Party could have a material adverse effect on the
ability of such Party to execute, deliver or perform this Agreement or the
other agreements contemplated herein or have a material adverse effect on the
Assets;

 

(e) Broker Fees.  It has not incurred any obligation or
liability, contingent or otherwise, for any fee payable to a broker or finder
with respect to the matters provided for in this Agreement or the other
agreements contemplated herein which could be attributable to or charged to any
other Party. Each of STML and EnCana shall indemnify, defend and hold harmless
the other from any 

 

 

claims, damages, liabilities, costs and
expenses, including reasonable attorney’s fees in the event the prior sentence
should be or become untrue as to such Party;

 

(f) Disclaimer.  It is not a “consumer” within the meaning of
such term in the Texas Deceptive Trade Practices Consumer Protection Act, by
virtue of being a corporation which seeks or acquires by purchase or lease,
goods for commercial or business use and which has assets of $25 million or
more, or is owned or controlled by a corporation or entity with assets of $25
million or more; and

 

(g) Non-contravention.
The execution, delivery and performance of this Agreement by it will not, in
any material respect, violate, nor be in conflict with, any provisions of any
such Party’s governing documents or any agreement or instrument to which such
Party is a party or is bound, or any judgment decree, order, statute, rule or
regulation applicable to such Party (assuming the receipt of all consents and
approvals applicable to the transactions contemplated hereby).

 

7.2 STML
Representations. For a period of time ending twelve months following the
Effective Date, STML makes the following representations and warranties to
EnCana:

 

(a) Contractual
Restrictions. Except as set forth on Schedule 7.2(a), STML has not
entered into any contracts: (i) for or received prepayments under or
pursuant to take-or-pay arrangements, buydowns, buyouts or similar agreements
for hydrocarbons, or storage of the same relating to the Assets which EnCana
shall be obligated to honor and make deliveries of hydrocarbons or pay refunds
of amounts previously paid under such contracts or arrangements or which otherwise
relate to deliveries of hydrocarbons or payments of refunds on or after the Effective
Date; or (ii) dedicating the Leases or any portion thereof to a gas sales,
gathering, transportation, treating or processing agreement.

 

(b) Imbalances.
Except as set forth on Schedule 7.2(b) or for normal immaterial
pipeline imbalances that are adjusted by the pipeline each month, there are no
wellhead imbalances or other imbalances attributable to the Assets as of the
Effective Date which require payment from EnCana to a third party or for which
EnCana would otherwise be responsible.

 

(c) Preferential
Rights. Except as set forth on Schedule 7.2(c), there are no
preferential rights to purchase attributable or with respect to any of the
Assets that are applicable to the transactions contemplated hereby.

 

(d) Consents.
Except as set forth on Schedule 3.9, there are no required consents,
approvals or authorizations of, or notification to, any person or entity
(excluding any of the foregoing customarily obtained following assignment of
the Assets), in each case, that are applicable to the transactions contemplated
hereby.

 

(e) Taxes. (i) all
Taxes owed with respect to the Assets have been timely paid in full, (ii) none
of such Taxes with respect to the Assets is now under audit or examination by
any Taxing authority and there is no claim pending or, to the knowledge of
STML, threatened by any Taxing authority in connection with any such tax, (iii) there
are no liens on any of the Assets that arose in connection with any alleged
failure to pay any tax, (iv) none of the Assets is “Tax-exempt use
property” (within the meaning of section 168(h) of the Internal Revenue
Code) or “Tax-exempt bond financed property” (within the meaning of section
168(g)(5) of the Internal Revenue Code), and (v) to the knowledge of
STML, all of the Assets have been properly listed and described on the property
Tax rolls for the Taxing units in which the Assets are located and no portion
of the Assets constitutes omitted property for property Tax purposes.  For purposes of this Agreement, “Tax” means
any federal, state or local sales, use, ad valorem, property, production,
severance or similar taxes or assessments based upon or measured by the
ownership or operations of the Assets or the production of hydrocarbons
therefrom or revenue or income derived therefrom, including any interest,
penalty, or addition thereto.

 

(f) Non-Foreign
Representation. STML is not a non-resident alien, foreign corporation, 

 

 

foreign partnership, foreign trust or foreign
estate (as those terms are defined in Internal Revenue Code and Income Tax
Regulations).

 

(g) Hydrocarbon
Sales Contracts. Except as set forth on Schedule 7.2(g), no
hydrocarbons produced from the Assets are subject to a sales contract other
than division orders or sales agreements terminable on no more than 30 days
notice. Proceeds from the sale of hydrocarbons produced from the Assets are
being received in all respects by STML in a timely manner and are not being
held in suspense by the purchaser for any reason.  To the knowledge of STML, STML is presently
receiving a price for all production from, or attributable to, each Property
covered by a hydrocarbon sales contract in accordance with the terms of such
contract.

 

(h) Material
Contracts. Schedule 7.2(h) lists all of the contracts and
agreements that (i) involve expenditures by or revenues to STML in the
aggregate in excess of $100,000.00, (ii) that are included in the Assets
and that constitute (A) any indenture, mortgage, loan, credit or similar
contract for borrowed money or any hedge or derivative contract (in each case)
for which EnCana will be responsible or which affects any revenues or expenses
attributable to the Assets on or after the Effective Date, (B) any
guaranty of any obligation, bond or letter of credit for which EnCana will be
responsible or be bound, (C) any contract with STML or any affiliate of
STML which affects any revenues or expenses attributable to the Assets on or
after the Effective Date, (D) any agreement for the gathering, treatment,
processing, refining, handling, storage or transportation of hydrocarbons that
is not terminable without penalty upon 60 days’ notice or less, (E) any
agreement for the use or sharing of drilling rigs, (F) any purchase
agreement, farmin and farmout agreement, exploration agreement, participation
agreement, agreement of development, or similar agreement providing for the
earning of an ownership interest, (G) any non-competition agreement or any
agreement that purports to restrict, limit or prohibit the manner in which, or
the localities in which, EnCana conducts its business, or (H) any
agreement respecting any partnership or joint venture, or (iii) are
confidentiality agreements or agreements relating to areas of mutual interest (“Material
Contracts”).  All Material Contracts are
in full force and effect and STML is not, and to the knowledge of STML, no
other party is, in default with respect to any of the obligations thereunder.

 

(i) Tax Partnerships.
Except as created pursuant to this Agreement, none of the Assets is held in an
arrangement treated as a partnership for Income Tax purposes.

 

(j) No Written
Notice of Adverse Environmental Conditions. None of STML or STML’s
affiliates has received written notice from any person or entity of any
release, disposal, event, condition, circumstance, activity, practice or
incident concerning any land, facility or property included in the Assets that
constitutes a violation of, interferes with or prevents compliance by STML, or
after assignment, EnCana, with, any environmental law or the terms of any
permit issued pursuant thereto.

 

(k) No Expenses Owed
and Delinquent. No material expenses (including bills for labor, materials
and supplies used or furnished for use in connection with the Assets,
royalties, overriding royalties and other burdens on production and amounts
payable to co-owners of the Assets) are owed and delinquent in payment by STML
or an operator of the Assets that relate to the ownership or operation of the
Assets.

 

(l) Maintenance of
Uniform Interest Provisions. Schedule 7.2(l) sets forth all
agreements burdening the Assets that contain maintenance of uniform interest or
similar provisions.

 

(m) Lease Extensions.
Schedule 7.2(m) sets forth a list of all Leases which contain
options to extend the primary term.

 

(n) Proper Pooling.
All of the Leases that are, as of the Effective Date, included in pooled units,
have been properly pooled under the terms of the applicable Leases, and there
are no claims by the Lessors thereof that: (i) a Lease has terminated as
to some or all of the Lease due to improper 

 

 

pooling; or (ii) that the lessor thereof
is entitled to a share of the unit production that is greater than the lessor’s
proportionate share of the surface acreage of the unit.

 

7.3 EnCana
Representations. For a period of time ending twelve months following the
Effective Date, EnCana makes the following representations and warranties to
STML:

 

(a) Independent
Evaluation. EnCana acknowledges that it is an experienced and knowledgeable
investor in the oil and gas business, and the business of purchasing, owning,
developing, and operating oil and gas properties such as the Assets. If Closing
occurs, EnCana represents, warrants, and acknowledges to STML that it has had
full access to the Assets, the officers and employees of STML, and to the
books, records, and files of STML relating to the Assets. In making the
decision to enter into this Agreement and to consummate the transactions
contemplated hereby, EnCana has relied solely upon the representations, warranties,
covenants, and agreements of EnCana and STML set forth in this Agreement and
EnCana’s own independent due diligence and investigation of the Assets, and has
been advised by and has relied solely on its own expertise and its own legal,
tax, operations, environmental, reservoir engineering, and other professional
counsel and advisors concerning this transaction, the Assets and the value
thereof. In addition, EnCana acknowledges and agrees that EnCana will be or has
been advised by and relies solely on its own expertise, and its legal counsel
and any advisors or experts concerning matters relating to Title Defects, Title
Benefits, and Environmental Defects.

 

(b) Qualification.
As of the Closing, EnCana or one of its affiliates shall be, and thereafter shall
continue to be, qualified with all applicable governmental authorities to own
and operate the Assets, including meeting all bonding requirements.

 

(c) Securities Laws.
EnCana is acquiring the Assets for its own account or that of its affiliates
and not with a view to, or for offer of resale in connection with, a
distribution thereof, within the meaning of the Securities Act of 1933, 15 U.S.C.
§ 77a et seq., and any other
rules, regulations, and laws pertaining to the distribution of securities.
EnCana has not sought or solicited, nor is EnCana participating with,
investors, partners, or other third parties other than its lenders in order to
fund the Carry Amount and to close this transaction, and all funds to be used
by EnCana in connection with this transaction are EnCana’s own funds or those
borrowed from its lenders.

 

(d) No Investment
Company. EnCana is not (a) an investment company or a company
controlled by an investment company within the meaning of the Investment
Company Act of 1940, as amended, or (b) subject in any respect to the
provisions of that Act.

 

(e) Funds.
EnCana has arranged to have available by the Closing Date immediately available
funds to enable EnCana to pay in full the Purchase Price as herein provided and
otherwise to perform its obligations under this Agreement.

 

7.4 No Other
Representations. Other than the representations and warranties expressly
set forth in this Agreement and the assignments delivered pursuant hereto, no
Party hereto makes any representations or warranties to the other Parties
concerning the subject matter of this Agreement.

 

 

ARTICLE VIII 

MISCELLANEOUS

 

8.1 Force
Majeure. If any Party is rendered unable, wholly or in part
by force majeure, to carry out its obligations under this Agreement, other than
any obligation to make any money payments (which obligation will never be
extended or suspended due to force majeure), such Party must give to the other
Parties prompt written notice of the force majeure, with reasonably full
particulars, and thereupon the obligations of the Party giving the notice, so
far as they are affected by the act of force majeure, will be suspended, and
the running of all time periods within which certain actions must be completed
will be tolled, during, but not longer, than the continuance of the force
majeure, plus such reasonable further period of time, if any, required to
resume the suspended operation.  The
affected Party must use all reasonable diligence to remove the force majeure
situation as quickly as practicable; provided, that it will not be required to
settle strikes, lockouts or other labor difficulty contrary to its wishes.  All such difficulties are to be handled
entirely within the discretion of the Party concerned. “Force majeure” means an
act of nature, strike, lock-out or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood or
other adverse weather condition, explosion, inability to obtain surface access,
governmental action, governmental inaction, restraint or delay, or any other
cause, whether of the kind specifically enumerated above or otherwise, which is
not reasonably within the control of the Party claiming force majeure, but not
the unavailability of drilling rigs.

 

8.2 Monetary Amounts.
All monetary amounts stated in this Agreement are cited in, and must be paid
in, United States dollars.

 

8.3 Further
Assurances. As necessary, the Parties shall execute any all documents
including, but not limited to, any documents, forms, etc. and take all
actions, (in each case) that are necessary to effectuate the terms and
provisions of this Agreement and/or the JOA, whichever is applicable,
including, but not limited to, the execution of designation of operator forms
and other governmental forms and other similar matters.

 

8.4 Partnership
Disclaimer/Creation of Tax Partnership. The rights, duties, obligations and
liabilities of the Parties shall be several, not joint or collective.  It is not the purpose or intention to create
any mining partnership, joint venture, general partnership or other partnership
relation and none shall be inferred. Notwithstanding the foregoing, the Parties
agree that the agreements and undertakings herein will be treated as the
formation of a partnership for purposes of federal income taxation.  Therefore, the Parties agree to be governed,
for federal income tax purposes only, by the tax partnership agreement attached
to the JOA. For every purpose other than the above described income tax
purposes, however, and notwithstanding any other provision of this Agreement to
the contrary, the Parties understand and agree that their relationship
hereunder is not one of partnership, association, trust, joint venture, mining
partnership or entity of any kind.

 

8.5 Press Releases.
A Party to this Agreement shall not issue any media release or make a public
announcement relating to this Agreement without the prior written approval of
the other unaffiliated Party, which approval shall not be unreasonably
withheld; provided, however, that any Party may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly traded securities (in which case the
disclosing Party agrees to use its reasonable efforts to consult with and
obtain the consent of the other unaffiliated Party prior to making the
disclosure).

 

8.6 Taxes and
Recording Fees. Any sales taxes, transfer taxes, documentary taxes and
recording fees relating to an assignment hereunder shall be paid by the
assignee.  Subject

 

 

to the terms of the JOA,
each Party shall be responsible for its own local, state and federal income tax
reporting, recognition of gain or loss, if any, and the taxes, if any, payable
with respect to the transactions effected and to be effected pursuant to this
Agreement. All taxes, including ad valorem taxes, imposed with respect to
periods or portions of periods prior to the Effective Date shall be the burden
of STML and all such taxes imposed with respect to periods or portions of
periods after the Effective Date shall be the burden of STML and EnCana with
each paying its Proportionate Share of such taxes.  Any such Party which pays any such taxes
which are the responsibility of such other Party shall be entitled to prompt
reimbursement upon evidence of such payment. 
STML shall be entitled to all refunds or rebates of taxes paid
pertaining to those taxable periods ending on or prior to the Effective Date.

 

8.7 Governing Law.
This Agreement shall be governed, construed, and enforced in all respects,
including validity, interpretation, and effect, 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 .

 

8.8 Waiver of
Consequential Damages. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS
AGREEMENT, THE PARTIES EXPRESSLY AGREE THAT NO PARTY SHALL BE LIABLE FOR ANY
EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE, OR
SPECULATIVE DAMAGES, INCLUDING LOST PROFITS, SUFFERED BY THE OTHER PARTY
IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

 

8.9 Inherent Risk.
Each Party hereby acknowledges its understanding and acceptance of the inherent
risks associated with the exploration for oil and gas.

 

8.10 Confidentiality.
Except as expressly set forth herein and except as required by applicable laws,
the Parties hereto acknowledge and agree that this Agreement, their
negotiations in connection herewith and all information obtained by or provided
to any of them in connection with the matters contemplated herein or as it
relates to the Assets will be maintained as confidential, except for
disclosures to:

 

(a) Representatives of
the Parties;

 

(b) Disclosures by
EnCana to ExxonMobil Corporation in conjunction with its area of mutual
interest obligations to ExxonMobil corporation; or

 

(c) Disclosures by
EnCana to a third party that may be interested in participating in the drilling
of any Commitment Well or other well (to the extent permitted hereunder) on the
Leases.  The term “Representatives” as
used herein shall mean (a) partners, employees, officers, directors,
members, equity owners and counsel of a Party or any of its affiliates or any
prospective purchaser of a Party or an interest in a Party; (b) any
consultant or agent retained by a Party or the parties listed in subsection (a) above;
and (c) any bank, other financial institution or entity funding, or
proposing to fund, such Party’s operations in connection with the Leases,
including any consultant retained by such bank, other financial institution or
entity.

 

8.11 Notices.

 

(a) All notices
required or permitted under this Agreement shall be in writing and delivered in
person, by overnight courier, by certified or registered mail return receipt
requested, by 

 

 

facsimile, or by electronic transmission,
delivered or addressed to the persons and at the addresses as provided
below.  When a response to another Party
is required, each Party’s response shall be in writing to such other Party.

 

(b) A notice is deemed
to have been delivered upon actual receipt.

 

(c) Notwithstanding the
foregoing, unless otherwise specifically provided herein, if a Notice is
received after 5:00 P.M. on a business day where the addressee is located,
or on a day that is not a business day where the addressee is located, such
notice is deemed received at 9:00 A.M. on the next business day where the
addressee is located.

 

ADDRESSES:

 

	
  STML

  	
  ST.
  MARY LAND & EXPLORATION COMPANY

  
	
   

  	
  330
  Marshall Street, Suite 1200

  
	
   

  	
  Shreveport,
  LA 71101

  
	
   

  	
  Attention:
  David Dubiel

  
	
   

  	
  Fax
  No.: 318-226-5554

  
	
   

  	
  Tel.
  No.: 318-226-5536

  
	
   

  	
  Email:
  ddubiel@stmaryland.com

  
	
   

  	
   

  
	
  ENCANA:

  	
  EnCana
  Oil & Gas (USA) Inc.

  
	
   

  	
  14001
  N. Dallas Parkway

  
	
   

  	
  Suite 1100

  
	
   

  	
  Dallas,
  TX 75240

  
	
   

  	
  Attn:
  Mark A. Virant

  
	
   

  	
  Tel.
  No.: 214-987-7156

  
	
   

  	
  Fax:
  214-242-7204

  
	
   

  	
  Email:
  mark.virant@encana.com

  

 

8.12 Electronic
Transmissions. Each of the Parties hereto agrees that: (i) any notice
transmitted by electronic transmission shall be treated in all manner and
respects as an original written document; (ii) any such notice shall be
considered to have the same binding and legal effect as a notice sent by other
approved means.  Each of the parties
further agrees that they will not raise the transmission of a consent or
document by electronic transmission as a defense in any proceeding or action in
which the validity of such consent or document is at issue and hereby forever
waives such defense. For purposes of this Agreement, the term “electronic
transmission” means any form of communication not directly involving the
physical transmission of paper, that creates a record that may be retained,
retrieved and reviewed by a recipient thereof, and that may be directly
reproduced in paper form by such a recipient through an automated process.  With respect to any notice delivered by
electronic transmission and involving a time-sensitive matter, the addressee
covenants and agrees to use its reasonable efforts to promptly respond to any
such notice such that the notice shall be deemed to have been received as set
forth in Section 8.11 above.

 

8.13 Headings for
Convenience. All captions, numbering sequences, and headings used in this
Agreement are inserted for convenience only and shall in no way define, limit
or describe 

 

 

the
scope or intent of this Agreement or any part thereof, nor have any legal
effect other than to aid a reasonable interpretation of this Agreement.  A reference to “Article” or “Section” is to
an Article or Section of this Agreement.

 

8.14 Amendment.
No provision of this Agreement shall be modified or amended except by the
written agreement of the Parties.

 

8.15 Severance
of Invalid Provisions. In case of a conflict between the provisions of this
Agreement and the provisions of any applicable laws or regulations, the
provisions of the laws or regulations shall govern over the provisions of this
Agreement.  If, for any reason and for so
long as, any clause or provision of this Agreement is held by a court of
competent jurisdiction to be illegal, invalid, unenforceable or unconscionable
under any present or future law (or interpretation thereof), the remainder of
this Agreement shall not be affected by such illegality or invalidity.  Any such invalid provision shall be deemed
severed from this Agreement as if this Agreement had been executed with the
invalid provisions eliminated.  The
surviving provisions of this Agreement shall remain in full force and effect
unless the removal of the invalid provisions destroys the legitimate purposes
of this Agreement; in which event this Agreement shall no longer be of any
force or effect.  The Parties shall negotiate
in good faith for any required modifications to this Agreement required as a
result of this provision.

 

8.16 Binding
Effect. This Agreement shall be binding upon and inure to the benefit of
the Parties and their respective heirs, successors and assigns and shall
constitute a covenant running with the lands covered by the Leases.

 

8.17 Entire
Agreement. This Agreement and the documents referred to herein and to be
delivered pursuant hereto constitute the entire agreement between the parties
pertaining to the subject matter hereof, and supersede all prior and
contemporaneous agreements, understandings, negotiations and discussions of the
parties, whether oral or written, and there are no warranties, representations
or other agreements between the parties in connection with the subject matter
hereof, except as specifically set forth herein or therein.

 

8.18 Counterparts:
Facsimile Signature. The Parties may execute this Agreement in any number
of duplicate originals, each of which constitutes an original, and all of
which, collectively, constitute only one Agreement.  The Parties may execute this Agreement in
counterparts, each of which constitutes an original, and all of which,
collectively, constitute only one Agreement. 
Delivery of an executed counterpart signature page by facsimile or
electronic transmission is as effective as executing and delivering this
Agreement in the presence of the Parties hereto. This Agreement is effective
upon delivery of one executed counterpart from each Party to the other Parties.  In proving this Agreement, a Party must
produce or account only for the executed counterpart of the Party to be
charged.

 

8.19 Binding
on Successors and Assigns. This Agreement will extend to, inure to the
benefit of, and be binding upon the Parties and each of their successors and
permitted assigns.  Without obtaining the
prior written consent of the other Party hereto, no Party shall have the right
to assign its rights and obligations under this Agreement; provided that (a) any
Party shall be permitted to assign its rights and obligations hereunder in
connection with a sale by such Party of all or substantially all of its assets,
(b) any Party shall be permitted to mortgage or pledge all or any part of
interests under this Agreement, and (c) EnCana shall be permitted to
assign one-half of its interest in the South Block to ExxonMobil corporation in
connection with its pre-existing area of mutual interest obligations. Any
request for a 

 

 

consent
to assign shall not be unreasonably withheld and unless the Party from whom the
consent is requested shall show good cause for withholding its consent, such
consent shall be granted in writing to the requesting Party within 30 days of
any request therefor.  Once the Carry
Amount has been spent by STML in accordance with the terms of this Agreement,
either Party may assign all or a portion of its interest in the Leases without
the consent of the other Party except as may be limited by the JOA.

 

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

 

 

IN
WITNESS WHEREOF, this Agreement is executed as of the date first above written,
effective as of the Effective Date.

 

	
  ENCANA
  OIL & GAS (USA) INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  PAUL SANDER

  	
   

  
	
  Name:
  Paul Sander

  	
   

  
	
  Title:
  Vice President – Mid-Continent

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  ST.
  MARY LAND & EXPLORATION COMPANY

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  MILAM RANDOLPH PHARO

  	
   

  
	
  Name:
  Milam Randolph Pharo

  	
   

  
	
  Title:
  Senior Vice President and General Counsel

  	
   

  

 

 

SCHEDULE 1

 

SCHEDULE OF DEFINITIONS 

LIST OF EXHIBITS AND SCHEDULES

 

 

	
  Defined Term

  	
   

  	
  Section/Schedule
  Where Defined

  
	
  Acceptance Period

  	
   

  	
  6.1(c)

  
	
  AFE

  	
   

  	
  3.4(a)

  
	
  Agreement

  	
   

  	
  Introductory Paragraph

  
	
  AMI

  	
   

  	
  6.1(a)

  
	
  Article

  	
   

  	
  8.13

  
	
  Assets

  	
   

  	
  1.2

  
	
  Assigned Interest

  	
   

  	
  Background 3.

  
	
  Assigned Interval

  	
   

  	
  1.1(a)

  
	
  Assignment

  	
   

  	
  2.1(b)

  

 

 

	
  Block/Blocks

  	
   

  	
  Background 2.

  
	
  Carried Well Costs

  	
   

  	
  3.2(b)

  
	
  Carry Amount

  	
   

  	
  3.2(a)

  
	
  Carry Period

  	
   

  	
  3.2(c)

  
	
  Commitment Well/Wells

  	
   

  	
  3.3(a)

  
	
  Complete, Completing,
  Completion

  	
   

  	
  3.3(d)

  
	
  Cure Period

  	
   

  	
  3.9

  
	
  Drill, drilling

  	
   

  	
  3.3(e)

  
	
  Effective Date

  	
   

  	
  Introductory Paragraph

  
	
  Electronic transmission

  	
   

  	
  8.12

  
	
  EnCana

  	
   

  	
  Introductory Paragraph

  
	
  Examination Period

  	
   

  	
  4.1

  
	
  Excluded Assets

  	
   

  	
  1.2

  
	
  Excluded Wells

  	
   

  	
  1.3(b)

  
	
  Force Majeure

  	
   

  	
  8.1

  
	
  Initial Payment

  	
   

  	
  2.1(e)

  
	
  Interest/Interests

  	
   

  	
  6.1(b)

  
	
  JOA

  	
   

  	
  2.1(a)

  
	
  Lease, Leases

  	
   

  	
  Background 1.

  
	
  Material Contracts

  	
   

  	
  7.2(h)

  
	
  Net Mineral Acres

  	
   

  	
  4.9(a)

  
	
  Net Revenue Interest

  	
   

  	
  4.9(b)

  
	
  North Block

  	
   

  	
  Background 2.

  
	
  Party, Parties

  	
   

  	
  Introductory Paragraph

  
	
  Per Acre Value

  	
   

  	
  4.4(b)(ii)

  
	
  Permitted Encumbrances

  	
   

  	
  4.9(c)

  
	
  Proportionate Share

  	
   

  	
  3.1

  
	
  Representatives

  	
   

  	
  8.10

  
	
  Section

  	
   

  	
  8.13

  
	
  South Block

  	
   

  	
  Background 2.

  
	
  STML

  	
   

  	
  Introductory Paragraph

  
	
  STML Drilling Wells

  	
   

  	
  1.2(d)

  
	
  Tax

  	
   

  	
  7.2(e)

  
	
  Tenaska Agreement

  	
   

  	
  3.8(a)

  
	
  Time-sensitive matter

  	
   

  	
  8.11(a)(v)

  
	
  Title Arbitrator

  	
   

  	
  4.8(a)

  
	
  Title Defect

  	
   

  	
  4.4(a)

  
	
  Title Defect Amount

  	
   

  	
  4.4(b)

  
	
  Title Defect Notice

  	
   

  	
  4.3(a)

  
	
  Working Interest

  	
   

  	
  4.9(d)

  
	
  XTO Agreements

  	
   

  	
  1.2(c)

  
	
  XTO Drilling Wells

  	
   

  	
  1.2(b)

  

 

 

LIST OF EXHIBITS AND SCHEDULES

 

	
  Exhibit A-1

  	
   

  	
  North Block Leases

  
	
  Exhibit A-2

  	
   

  	
  South Block Leases

  
	
  Exhibit A-3

  	
   

  	
  XTO Drilling Wells and
  STML Drilling Wells

  
	
  Exhibit A-4

  	
   

  	
  XTO Agreements

  
	
  Exhibit A-5

  	
   

  	
  Excluded Wells

  
	
  Exhibit A-6

  	
   

  	
  Assigned Rights of Way

  
	
  Exhibit B

  	
   

  	
  Plat of Blocks

  
	
  Exhibit C

  	
   

  	
  JOA

  
	
  Exhibit D-1 and D-2

  	
   

  	
  Assignments (Form of)

  
	
  Exhibit E

  	
   

  	
  Tenaska Agreement

  
	
  Schedule 1

  	
   

  	
  Schedule of Defined Terms

  
	
  Schedule 2.2(a)

  	
   

  	
  STML Drilling Wells Costs

  
	
  Schedule 3.9

  	
   

  	
  Consents

  
	
  Schedule 7.2(a)

  	
   

  	
  Contractual Restrictions

  
	
  Schedule 7.2(b)

  	
   

  	
  Imbalances

  
	
  Schedule 7.2(c)

  	
   

  	
  Preferential Rights

  
	
  Schedule 7.2(g)

  	
   

  	
  Hydrocarbon Sales
  Contracts

  
	
  Schedule 7.2(h)

  	
   

  	
  Material Contracts

  
	
  Schedule 7.2(l)

  	
   

  	
  Maintenance of Uniform
  Interest Provisions

  
	
  Schedule 7.2(m)

  	
   

  	
  Lease ExtensionsEXHIBIT 10.3

 

SM ENERGY COMPANY

 

PERFORMANCE SHARE AND
RESTRICTED STOCK UNIT AWARD AGREEMENT

 

This
Performance Share and Restricted Stock Unit Award Agreement (the “Agreement”)
is made effective as of [Award Date] (1) (the “Award Date”), by and
between SM Energy Company, a Delaware corporation formerly named St. Mary Land &
Exploration Company (the “Company”), and [Name of Participant] (the “Participant”)
to whom performance shares and restricted stock units have been awarded
pursuant to the Company’s long term incentive program (“LTIP”) under the
Company’s Equity Incentive Compensation Plan, as amended (the “Plan”).

 

Pursuant
to the terms of the Plan and this Agreement, as of the Award Date the Company
has made an award (the “Award”) to the Participant of [Amount] performance
shares (the “Performance Shares”) and [Amount] restricted stock units (the “Units”).  Capitalized terms used but not defined in
this Agreement shall have the meanings given to them in the Plan.

 

ARTICLE I

 

PERFORMANCE SHARES

 

1.1 Performance
Shares and Performance Period.  The
Performance Shares represent the right to receive, upon the payment of the
Performance Shares pursuant to Section 1.4 hereof after the completion of
the Performance Period (as defined below), a number of shares of the Company’s
common stock, $.01 par value per share (sometimes referred to herein as the “Common
Stock”), that will be calculated as set forth in Section 1.2 below based
on the extent to which the Company’s Performance Criteria (as defined in Section 1.2)
have been achieved and the extent to which the Performance Shares have
vested.  Any Common Stock that is issued
pursuant to any provision of this Agreement may be referred to in this
Agreement as a “Share” or “Shares.”  Such
actual number of Shares that may be issued upon payment of the Performance
Shares may be from zero (0) to two (2.0) times the number of Performance Shares
granted on the Award Date.  The number of
Performance Shares granted herein may be referred to as the “target” number of
Shares.  The performance period (the “Performance
Period”) for the Performance Shares shall be the three-year period set forth in
the attached Performance Share and Restricted Stock Unit Award Notice (the “Award
Notice”).

 

1.2 Determination of Number of Shares Earned.

 

(a) Performance Criteria.  The actual number of Shares that may be
earned from the Performance Shares and issued upon payment of the Performance
Shares after completion of the Performance Period shall be based upon the
Company’s achievement of performance criteria (the “Performance Criteria”)
established by the 

 

(1)                                  Items in brackets are
features that may vary among individual awards.

 

 

Compensation Committee of
the Board of Directors of the Company (the “Committee”) for the Performance
Period in accordance with the terms of the Plan and as set forth below and
reflected in the payout matrix (the “Payout Matrix”) attached as Appendix A
hereto and discussed further in subsection (d) hereof.  The Performance Criteria for the calculation
of the actual number of Shares to be issued upon payment of the Performance
Shares as reflected in the Payout Matrix are based on a combination of (i) the
absolute measure of the cumulative total shareholder return (“TSR”) and
associated Compound Annual Growth Rate (“CAGR”) of the Company for the
Performance Period, and (ii) the relative measure of the Company’s TSR and
CAGR for the Performance Period compared with the cumulative TSR and CAGR of
the Peer Companies (as defined below) for the Performance Period as reflected
in the Company’s Performance Share Plan Peer Group Custom Index (the “Custom
Index”) to be specifically prepared by Standard & Poor’s, a division
of The McGraw-Hill Companies, Inc. (“S&P”), for the purpose of
administering the LTIP.

 

(b) Calculation
of TSR and CAGR.  The TSR and CAGR of
the Company and the Peer Companies for the Performance Period shall be
calculated in accordance with the methodology utilized by S&P with respect
to the Custom Index.

 

(c) Peer Companies and Custom Index.  The “Peer Companies” to be reflected in the
Custom Index shall consist of the constituents of the Oil & Gas
Exploration & Production GIC Sub-Industry Group in the S&P
SmallCap 600 Index and the S&P MidCap 400 Index, excluding the
Company.  The Custom Index will be
equally weighted, and will be adjusted to include the dividend payments of the
constituents of the Custom Index.  The
Custom Index will be rebalanced on a quarterly basis, and will also be
rebalanced whenever there are additions and deletions to the S&P SmallCap 600
and the S&P MidCap 400 indices.  The
Custom Index is the exclusive property of S&P.  The Company has contracted with S&P to
maintain and calculate the Custom Index. 
S&P shall have no liability for any errors or omissions in
calculating the Custom Index.

 

(d) Payout Matrix.  The Payout Matrix attached as Appendix A
hereto sets forth the possible multipliers, which range from zero percent (0%)
to two hundred percent (200%), which may be applied to the number of vested
Performance Shares to determine the actual number of Shares to be issued upon
payment of the vested Performance Shares after the completion of the
Performance Period.  The final multiplier
(the “Final Multiplier”) shall be determined by the Committee after the
completion of the Performance Period based on the two variables that comprise
the Performance Criteria, related to (i) the Company’s TSR and CAGR for
the Performance Period, and (ii) the Peer Companies’ TSR and CAGR for the
Performance Period as reflected in the Custom Index.  The number of Shares, if any, that shall be
issued to the Participant upon payment of the Performance Shares shall be
calculated as the number of Performance Shares that have vested in accordance
with Section 1.3 or Section 1.6 hereof, multiplied by the Final
Multiplier, as determined by the Committee in accordance with the Payout
Matrix.  There shall be no rounding of
variables or extrapolation of variables between data points within the Payout
Matrix, and the data point for which the associated variables equal or exceed
the target variables for such data point, but do not result in qualification
for another 

 

2

 

higher data point, shall
be utilized with respect to the Final Multiplier.  Any fractional Shares which would otherwise
result from application of the Final Multiplier shall be rounded up to the
nearest whole share of Common Stock.

 

1.3 Vesting of Performance Shares.

 

(a) Vesting.  Subject to the provisions contained herein,
the Performance Shares shall vest over the Performance Period as set forth in
the vesting schedule for Performance Shares contained in the Award Notice (the “PSA
Vesting Schedule”).  As of the Award
Date, the Participant must be an employee of the Company or a subsidiary
thereof.  If the Participant ceases to be
an employee of the Company or a subsidiary thereof prior to the vesting of all
of the Performance Shares pursuant to the PSA Vesting Schedule, the Participant
shall forfeit the remaining unvested Performance Shares under the Award, except
as otherwise provided in this Section 1.3 and Section 1.6.

 

(b) Continued Vesting Upon Early Retirement.  The Performance Shares shall, notwithstanding
any other provisions of this Section 1.3, continue to vest according to
the PSA Vesting Schedule after the termination of the Participant’s employment
with the Company or a subsidiary thereof if (i) such termination is the
result of the Participant’s retirement from the Company or a subsidiary thereof
upon the Participant’s having both reached the age of sixty (60) and completed
twelve (12) years of service with the Company or a subsidiary thereof, and (ii) the
Participant does not after such early retirement become employed on a full-time
basis by a competitor of the Company prior to the earlier of the payment of the
Performance Shares or the Participant’s reaching the age of sixty-five
(65).  Any such continued vesting of the
Performance Shares pursuant to this Section 1.3(b) will not result in
an acceleration of the PSA Payment Date (as defined in Section 1.4), since
the number of Shares earned from the Performance Shares shall be calculated
after the completion of the Performance Period.

 

(c) Acceleration Upon Death, Total Disability or Normal Retirement.  The Performance Shares shall
become fully vested, notwithstanding any other provisions of this Section 1.3,
upon termination of the Participant’s employment with the Company or a
subsidiary thereof because of death, Total Disability (as defined below), or
retirement upon reaching the Company’s normal retirement age of sixty-five
(65).  Any such acceleration of the
vesting of the Performance Shares pursuant to this Section 1.3(c) will
not result in an acceleration of the PSA Payment Date, since the number of
Shares earned from the Performance Shares shall be calculated after the
completion of the Performance Period. 
For purposes of this Agreement, “Total Disability” means a medically
determinable physical or mental impairment that can be expected to result in
death or can be expected to last for a continuous period of not less than 12
months, by reason of which the Participant is unable to engage in any
substantial gainful activity or is receiving income replacement benefits for a
period of not less than three months under an accident and health plan covering
employees of the Company.

 

3

 

(d) Termination for Cause.  Notwithstanding any other provisions of this Section 1.3,
the Participant shall forfeit all Performance Shares under this Award,
including those that have previously vested, upon the termination of the
employment of the Participant by the Company or a subsidiary thereof for Cause
(as defined below) prior to the completion of the Performance Period. As used
in this Agreement with respect to the Performance Shares, the term Cause shall
have the meaning defined in Section 1.6(a), and shall also include the
termination of the employment of the Participant by the Company or a subsidiary
thereof due to the Participant’s having committed (i) a wrongful taking of
money, property, goods, services, or other items of value from the Company,
whether or not such wrongful taking is prosecuted in a civil or criminal
proceeding, (ii) any act of fraud or willful misconduct in connection with
the performance of the Participant’s duties for the Company, or (iii) a
significant violation of the Company’s written policies and procedures, in each
case which is demonstrably harmful to the Company.

 

1.4 Payment of Performance Shares.  Following the last day of the Performance
Period and prior to the payment of the earned and vested Performance Shares on
or about the PSA Payment Date, the Committee shall determine, and certify in
writing to the extent deemed necessary or advisable or as required to comply
with Section 162(m) of the Internal Revenue Code of 1986, as amended
(the “Code”),  (i) the extent
to which the Performance Criteria have been achieved over the Performance
Period, and (ii) the Final Multiplier. 
The Final Multiplier shall then be applied to the number of vested
Performance Shares to determine the number of Shares (the “Earned Shares”), if
any, to be issued to the Participant in payment of the Performance Shares.  The determination of the Earned Shares by the
Committee shall be binding on the Participant and conclusive for all
purposes.  The Earned Shares, if any,
shall be issued to the Participant in payment of the Performance Shares on or
about the payment date set forth in the Award Notice (the “PSA Payment Date”).  Upon the payment of the Performance Shares,
the Company shall deliver to the Participant evidence of book-entry Shares or a
certificate for the number of Shares issued to the Participant in payment of
the Performance Shares.  The Earned
Shares shall not be subject to any holding or transfer restrictions after
payment of the Performance Shares.

 

1.5 Transfer Restrictions for Unpaid Performance Shares.  Performance Shares that have not
been paid shall not be transferable by the Participant, and the Participant
shall not be permitted to sell, transfer, pledge, assign, or otherwise alienate
or encumber such Performance Shares or the Shares issuable in payment thereof,
other than (i) to the person or persons to whom the Participant’s rights
under such Performance Shares pass by will or the laws of descent and
distribution, (ii) to the spouse or the descendants of the Participant or
to trusts for such persons to whom or which the Participant may transfer such
Performance Shares by gift, (iii) to the legal representative of any of
the foregoing, or (iv) pursuant to a qualified domestic relations order as
defined under Section 414(p) of the Code or a similar order or
agreement pursuant to state domestic relations law (including a community
property law) relating to the provision of child support, alimony payments, or
marital property rights to a spouse, former spouse, child, or other dependent
of the Participant.  Any such transfer
shall be made only in compliance with the Securities Act of 1933 and the
requirements therefor as set forth by the 

 

4

 

Company.  Any attempted transfer in contravention of
the foregoing provisions shall be null and void and of no effect.

 

1.6 Change of Control Termination.

 

(a) Vesting upon Change of Control Termination.  Notwithstanding any other provision of this
Agreement, the Performance Shares shall become fully vested upon a Change of
Control Termination.  For purposes of
this Agreement, a “Change of Control Termination” occurs upon the termination
of the Participant’s employment with the Company or a subsidiary thereof in the
event that (i) a Change of Control (as defined in the Plan) of the Company
occurs, and (ii) the Participant’s employment with the Company or a
subsidiary thereof is subsequently terminated without Cause (as defined below)
or the Participant terminates his or her employment with the Company or a
subsidiary thereof for Good Reason (as defined below), and such termination of
employment occurs (x) within 30 months of the Change of Control and (y) with
respect to Performance Shares, prior to the normal completion of vesting of the
Performance Shares at the end of the Performance Period, or, with respect to
Units, prior to the normal completion of vesting of the Units.  The normal vesting and payment provisions in Article I
of this Agreement shall not be affected by the first sentence of this
subsection if a Change of Control of the Company occurs but there is not also a
Change of Control Termination with respect to the Participant’s employment with
the Company or a subsidiary thereof.  If
the Participant has entered into a separate written Change of Control Executive
Severance Agreement or Change of Control Severance Agreement (with either to be
subsequently referred to herein as a “Change of Control Severance Agreement”)
with the Company, the terms “Cause” and “Good Reason” used herein shall have
the meanings set forth in such Change of Control Severance Agreement, with the
definition of the term “Cause” to be as modified in Section 1.3(d) of
this Agreement.  If the Participant has
not entered into a separate written Change of Control Severance Agreement, the
terms “Cause” and “Good Reason” used herein shall have the meanings set forth
in the Company’s Change of Control Severance Plan (the “Change of Control
Severance Plan”), with the definition of the term “Cause” to be as modified in Section 1.3(d) of
this Agreement.

 

(b) Payment upon Change of Control Termination.  Notwithstanding any other provisions of this
Agreement to the contrary, in the event of a Change of Control Termination with
respect to the Participant’s employment with the Company or a subsidiary
thereof as set forth in Section 1.6(a) above, the vested Performance
Shares shall be paid in accordance with this Section 1.6(b).  In the event of a Change of Control
Termination, the Committee shall determine the extent to which the Performance
Criteria have been achieved and the Final Multiplier to apply to the vested
Performance Shares by utilizing the same method as set forth in Section 1.2
hereof; provided, however, that the Performance Period for the calculation of
the TSR and CAGR of the Company and the Peer Companies to obtain the Final
Multiplier shall be shortened to end as of the effective date of the Change of
Control.  The Final Multiplier shall then
be applied to the number of vested Performance Shares to calculate the number
of Earned Shares, if any, that the Participant is entitled to in payment of the
Performance Shares.  In the event of a
Change 

 

5

 

of Control Termination,
any Earned Shares shall be paid to the Participant in payment of the
Performance Shares either in Shares or in cash of equivalent value, as
determined by the Committee or other duly authorized administrator of the Plan,
in its discretion, within thirty (30) days following the effective date of the
Change of Control Termination; provided, however, that the time and manner of
such payment shall comply with Section 409A of the Code as referred to in Section 3.11
of this Agreement.

 

(c) Controlling Documents for Change of Control Termination.  To the extent that the
Participant is subject to either a written Change of Control Severance
Agreement or the Change of Control Severance Plan, the terms and conditions of
such Change of Control Severance Agreement or Change of Control Severance Plan,
as applicable, shall also apply to this Award in the event of a Change of
Control Termination; provided, however, that with respect to the Performance
Shares under this Award, the terms of the Plan and this Agreement shall control
in the event of any inconsistency between their terms and the terms of the
Change of Control Severance Agreement or the Change of Control Severance Plan.

 

ARTICLE II

 

RESTRICTED STOCK UNITS

 

2.1 Units.  Each Unit represents the right to receive one
Share of Common Stock to be delivered upon settlement of the Units as set forth
in Section 2.3 below, subject to the terms and conditions set forth in the
Plan and this Agreement.

 

2.2 Vesting of Units.

 

(a) Vesting.  Subject to the provisions contained herein,
the Units shall vest as set forth in the vesting schedule for Units contained
in the Award Notice (the “RSU Vesting Schedule”).  As of the Award Date, the Participant must be
an employee of the Company or a subsidiary thereof.  If the Participant ceases to be an employee of
the Company or a subsidiary thereof prior to the vesting of all of the Units
pursuant to the RSU Vesting Schedule, the Participant shall forfeit the
remaining unvested Units under the Award, except as otherwise provided in this Section 2.2
and Section 2.5.

 

(b) Continued Vesting Upon Early Retirement.  The Units shall, notwithstanding any other
provisions of this Section 2.2, continue to vest according to the RSU
Vesting Schedule after the termination of the Participant’s employment with the
Company or a subsidiary thereof if (i) such termination is the result of
the Participant’s retirement from the Company or a subsidiary thereof upon the
Participant’s having both reached the age of sixty (60) and completed twelve
(12) years of service with the Company or a subsidiary thereof, and (ii) the
Participant does not after such early retirement become employed on a full-time
basis by a competitor of the Company prior to the earlier of the settlement of
the Units or the Participant’s reaching the age of sixty-five (65).

 

6

 

(c) Acceleration Upon Death, Total Disability or Normal Retirement.  The Units shall become fully
vested, notwithstanding any other provisions of this Section 2.2, upon
termination of the Participant’s employment with the Company or a subsidiary
thereof because of death, Total Disability, or retirement upon reaching the
Company’s normal retirement age of sixty-five (65).  In the event of such acceleration of the
vesting of the Units, the RSU Settlement Date (as defined in Section 2.3)
shall also be accelerated to permit prompt settlement of the Units.

 

(d) Termination for Cause.  Notwithstanding any other provisions of this Section 2.2,
the Participant shall forfeit any unvested and unsettled Units under this Award
upon the termination of the employment of the Participant by the Company or a
subsidiary thereof for cause, which term is specifically not capitalized as
such term was in Sections 1.3(d) and 1.6(a) of this Agreement, it
being the specific intent of the Company and the Participant that “cause” in
this instance shall be broadly defined as any event, action, or inaction by the
Participant that would reasonably be the basis for an employer to terminate the
employment of the affected individual.

 

2.3 Settlement of Units.  The portion of the Units that vest on a
particular vesting installment date as set forth in the RSU Vesting Schedule in
the Award Notice shall be settled on such vesting installment date (the “RSU
Settlement Date”), provided that such portion of the Units has not been
previously terminated.  Settlement of the
vested Units may be made (a) solely through the issuance of Shares or (b) at
the mutual election of the Participant and the Company, in a combination of
Shares and cash.  The cash value of Units
settled in cash shall be based on the closing price of a Share as reported on
the New York Stock Exchange or other applicable public market on the trading
day corresponding to the RSU Settlement Date. 
In no event shall the total value of Unit settlements with the
Participant under the Plan during any calendar year exceed the value at the
time of settlement of the maximum number of Shares issuable to any one
participant under the Plan during any calendar year pursuant to
Section 4.1 of the Plan.  Upon the
settlement of the Units through the issuance of Shares, the Company shall
deliver to the Participant evidence of book-entry Shares or a certificate for
the number of Shares issued to the Participant in settlement of the Units.  The Shares shall not be subject to any
holding or transfer restrictions after settlement of the Units.  The Participant shall not be permitted to
elect to further defer settlement beyond the RSU Settlement Date pursuant to Section 6.1(b)(ii) of
the Plan.

 

2.4 Transfer Restrictions.  Outstanding Units that have not been settled
shall not be transferable by the Participant, and the Participant shall not be
permitted to sell, transfer, pledge, assign, or otherwise alienate or encumber
such Units or the Shares issuable in settlement thereof, other than (i) to
the person or persons to whom the Participant’s rights under such Units pass by
will or the laws of descent and distribution, (ii) to the spouse or the
descendants of the Participant or to trusts for such persons to whom or which
the Participant may transfer such Units by gift, (iii) to the legal
representative of any of the foregoing, or (iv) pursuant to a qualified domestic relations order as defined under Section 414(p) of
the Code or a similar order or agreement pursuant to state domestic relations
law (including a community property law) relating to the provision of child
support, alimony payments, or marital property rights to a spouse, former
spouse, child, or other dependent of the Participant.  Any such transfer shall be 

 

7

 

made only in compliance
with the Securities Act of 1933 and the requirements therefor as set forth by
the Company.  Any attempted transfer in contravention
of the foregoing provisions shall be null and void and of no effect.

 

2.5 Change of Control Termination.

 

(a) Vesting upon Change of Control Termination.  Notwithstanding any other provisions of this
Agreement, the Units shall become fully vested upon a Change of Control
Termination (as defined in Section 1.6(a)).  The normal vesting and settlement provisions
in Article II of this Agreement shall not be affected by the immediately
foregoing sentence if a Change of Control of the Company occurs but there is
not also a Change of Control Termination with respect to the Participant’s
employment with the Company or a subsidiary thereof.  For purposes of determining whether a Change
of Control Termination has occurred with respect to this section, the term “Cause”
shall be as defined in Section 1.6(a); provided, however, in the context
of a Change of Control Termination, the term “Cause” shall be as modified in Section 1.3(d),
and not as set forth in Section 2.2(d).

 

(b) Settlement upon Change of Control Termination.  Notwithstanding any other
provisions of this Agreement to the contrary, in the event of a Change of
Control Termination with respect to the Participant’s employment with the
Company or a subsidiary thereof as set forth in Section 2.5(a) above,
the vested Units shall be settled either in Shares or in cash of equivalent
value, as determined by the Committee or other duly authorized administrator of
the Plan, in its discretion, within thirty (30) days following the effective
date of the Change of Control Termination; provided, however, that the time and
manner of such settlement shall comply with Section 409A of the Code as
referred to in Section 3.11 of this Agreement.

 

(c) Controlling Documents for Change of Control Termination.  To the extent that the
Participant is subject to either a written Change of Control Severance
Agreement or the Change of Control Severance Plan, the terms and conditions of
such Change of Control Severance Agreement or Change of Control Severance Plan,
as applicable, shall also apply to this Award in the event of a Change of
Control Termination; provided, however, that with respect to the Units under
this Award, the terms of the Plan and this Agreement shall control in the event
of any inconsistency between their terms and the terms of the Change of Control
Severance Agreement or the Change of Control Severance Plan.

 

ARTICLE III

 

GENERAL PROVISIONS

 

3.1 Adjustments Upon Changes in Capitalization.  In the event that a stock split,
stock dividend, or other similar change in capitalization of the Company
occurs, the number and kind of Shares that may be issued under this Agreement
and that have not yet been issued shall be proportionately and appropriately
adjusted.

 

8

 

3.2 No Dividend Equivalents or Stockholder Rights Until Shares Issued.  The Performance Shares and Units
shall not be credited with Dividend Equivalents.  In addition, the Participant shall have no
voting, transfer, liquidation, or other rights of a holder of Shares with
respect to the Performance Shares or Units until such time as Shares, if any,
have been issued by the Company to the Participant in payment of the
Performance Shares or settlement of the Units. 
Until the Performances Shares or Units are paid or settled or
terminated, they will represent only bookkeeping entries by the Company to
evidence unfunded and unsecured obligations of the Company.

 

3.3 Notices.  Any notice relating to this Agreement shall
be in writing and delivered in person or by mail, fax, or email transmission to
the address or addresses on file with the Company.  Any notice to the Company shall be addressed
to it at its principal office, and be specifically directed to the attention of
the Secretary.  Anyone to whom a notice
may be given under this Agreement may designate a new address by notice to that
effect.

 

3.4 Benefits of Agreement.  This Agreement shall inure to the benefit of
and be binding upon each successor of the Company and the Participant’s heirs,
legal representatives, and permitted transferees.  This Agreement and the Plan shall be the sole
and exclusive source of any and all rights that the Participant and the
Participant’s heirs, legal representatives, and permitted transferees may have
with respect to this Award, the Performance Shares and Units, and the Plan.

 

3.5 Resolution of Disputes.  Any dispute or disagreement which arises
under, or is a result of, or in any way relates to, the interpretation,
construction, or applicability of this Agreement shall be resolved as
determined by the Committee, or the Board of Directors of the Company (the “Board”),
or by any other committee appointed by the Board for such purpose.  Any determination made hereunder shall be
final, binding, and conclusive for all purposes.

 

3.6 Controlling Documents.  The provisions of the Plan are hereby
incorporated into this Agreement by reference. 
In the event of any inconsistency between this Agreement and the Plan,
the Plan shall control.  The provisions
of the Award Notice are also hereby incorporated into this Agreement by
reference.  In the event of any
inconsistency between this Agreement and the Award Notice, this Agreement shall
control.

 

3.7 Amendments.  This Agreement may be amended only by a
written instrument executed by both the Company and the Participant.

 

3.8 No Right of Participant to Continued Employment.  Nothing contained in this
Agreement or the Plan shall confer on the Participant any right to continue to
be employed by the Company or any subsidiary thereof, or shall limit the
Company’s right to terminate the employment of the Participant at any time;
provided, however, that nothing contained in this Agreement shall affect any
separate contractual provisions that exist between the Participant and the
Company or its subsidiaries with respect to the employment of the Participant.

 

3.9 Vesting Dates, Payment Dates and Settlement Dates.  In the event that any vesting
date, payment date, settlement date, or any other measurement date with respect
to this 

 

9

 

Award, does not fall on a
normal business day, such date shall be deemed to occur on the next following
normal business day.

 

3.10 Tax Withholding.  The Company may make such provisions and take
such steps as it deems necessary or appropriate for the withholding of any
taxes that the Company is required by law or regulation of any governmental
authority, whether Federal, state, or local, to withhold in connection with the
Performance Shares, Units, or Shares subject to this Agreement.  The Participant shall elect, prior to any tax
withholding event related to this Award and at a time when the Participant is
not aware of any material nonpublic information about the Company and the
Participant would be permitted to engage in a transaction in the Company’s
securities under the Company’s Securities Trading Policy, whether the
Participant will satisfy all or part of such tax withholding requirement by
paying the taxes in cash or by having the Company withhold Shares having a fair
market value equal to the minimum statutory withholding that may be imposed on
the transaction (based on minimum statutory withholding rates for Federal,
state, and local tax purposes, as applicable, that are applicable to such
transaction).  The Participant’s election
shall be irrevocable, made in writing, signed by the Participant, and shall be
subject to any restrictions or limitations that the Committee, in its sole
discretion, deems appropriate.

 

3.11 Compliance with Section 409A of the Code.  Notwithstanding any provision in
this Agreement to the contrary, to the extent that this Agreement constitutes a
nonqualified deferred compensation plan or arrangement to which Section 409A
of the Code applies, the administration of this Award (including the time and
manner of payments under the Award and this Agreement) shall comply with Section 409A
of the Code.  In connection therewith,
any settlement or payment to the Participant with respect to the Award under
this Agreement which Section 409A(a)(2)(B)(i) of the Code indicates
may not be made before the date which is six months after the date of the
Participant’s separation from employment service (the “Section 409A
Six-Month Waiting Period”), as a result of the fact that the Participant is a
specified key employee referred to in Section 409A(a)(2)(B)(i) of the
Code, shall not occur or be made during the Section 409A Six-Month Waiting
Period but rather shall be delayed, if such settlement or payment would
otherwise occur during the Section 409A Six-Month Waiting Period, until
the expiration of the Section 409A Six-Month Waiting Period.

 

3.12 Personal Data.  The Participant hereby consents to the
collection, use, and transfer, in electronic or other form, of the Participant’s
personal data as described in this Agreement by and among, as applicable, the
Company and its affiliates for the exclusive purpose of implementing,
administering, and managing the Participant’s participation in the Plan.  The Company holds, or may receive from any
agent designated by the Company, certain personal information about the
Participant, including, but not limited to, the Participant’s name, home
address and telephone number, date of birth, social security insurance number
or other identification number, salary, nationality, job title, any shares of
Common Stock held, details of this Award and any other rights to shares of
Common Stock awarded, canceled, exercised, vested, unvested, or outstanding in
the Participant’s favor, for the purpose of implementing, administering, and
managing the Plan, including complying with applicable tax and securities laws
(the “Personal Data”).  The Personal Data
may be transferred to any third parties assisting in the implementation,
administration, and management of the Plan. 
The Participant authorizes such recipients of the Personal Data to
receive, possess, use, retain, and transfer the Personal 

 

10

 

Data, in electronic or
other form, for the purposes described above. 
The Participant may, at any time, view the Personal Data, request
additional information about the storage and processing of the Personal Data,
require any necessary amendments to the Personal Data, or refuse or withdraw
the consents herein, in any case without cost, by contacting the Secretary of the
Company in writing.  Any such refusal or
withdrawal of the consents herein may affect the Participant’s ability to
participate in the Plan.

 

3.13 Electronic Delivery of Documents.  The Company may, in its sole discretion,
deliver any documents related to this Award, or any future awards that may be
granted under the Plan, by electronic means, or request the Participant’s
consent to participate in the Plan or other authorizations from the Participant
in connection therewith by electronic means. 
The Participant hereby consents to receive such documents by electronic
delivery and, if requested, to participate in the Plan through an on-line or
electronic system established and maintained by the Company or another third
party designated by the Company.

 

3.14 Execution and Counterparts.  This Agreement may be executed in
counterparts and signature pages may be delivered by email or fax
transmission.  Execution of a written
instrument for this Agreement may be evidenced by any appropriate form of
electronic signature or affirmative email or other electronic response attached
to or logically associated with such written instrument, which is executed or
adopted by a party with an indication of the intention by such party to execute
or adopt such instrument for purposes of execution thereof.

 

*     *     *    
*     *

 

[Signature page follows]

 

11

 

IN
WITNESS WHEREOF, the Company and the Participant have caused this Performance
Share and Restricted Stock Unit Award Agreement to be entered into effective as
of the Award Date.

 

 

COMPANY:

 

	
  SM
  ENERGY COMPANY,

  	
   

  
	
  a
  Delaware corporation

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Printed
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date
  Signed:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
  PARTICIPANT:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Signature:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Printed
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date
  Signed:

  	
   

  	
   

  

 

12

 

APPENDIX A

 

PAYOUT MATRIX FOR PERFORMANCE SHARES

 

2010 PAYOUT MATRIX

Simple Matrix - Add result in Column A and Column B

TOTAL CANNOT BE GREATER THAN 2.0 OR LESS THAN ZERO

 

Column A

 

Absolute St. Mary
TSR

 

	
  Annual

  TSR

  	
   

  	
  EARNED

  MULTIPLIER

  	
   

  
	
  0

  	
  %

  	
  —

  	
   

  
	
  1

  	
  %

  	
  0.050

  	
   

  
	
  2

  	
  %

  	
  0.100

  	
   

  
	
  3

  	
  %

  	
  0.150

  	
   

  
	
  4

  	
  %

  	
  0.200

  	
   

  
	
  5

  	
  %

  	
  0.275

  	
   

  
	
  6

  	
  %

  	
  0.350

  	
   

  
	
  7

  	
  %

  	
  0.425

  	
   

  
	
  8

  	
  %

  	
  0.500

  	
   

  
	
  9

  	
  %

  	
  0.575

  	
   

  
	
  10

  	
  %

  	
  0.650

  	
   

  
	
  11

  	
  %

  	
  0.725

  	
   

  
	
  12

  	
  %

  	
  0.800

  	
   

  
	
  13

  	
  %

  	
  0.875

  	
   

  
	
  14

  	
  %

  	
  0.950

  	
   

  
	
  15

  	
  %

  	
  1.025

  	
   

  
	
  16

  	
  %

  	
  1.100

  	
   

  
	
  17

  	
  %

  	
  1.200

  	
   

  
	
  18

  	
  %

  	
  1.300

  	
   

  
	
  19

  	
  %

  	
  1.400

  	
   

  
	
  20

  	
  %

  	
  1.500

  	
   

  
	
  21

  	
  %

  	
  1.600

  	
   

  
	
  22

  	
  %

  	
  1.700

  	
   

  
	
  23

  	
  %

  	
  1.800

  	
   

  
	
  24

  	
  %

  	
  1.900

  	
   

  
	
  25

  	
  %

  	
  2.000

  	
   

  

 

Column B

 

St. Mary Annual TSR
vs Peer Index

 

	
  Annual % Point

  Deviation From

  Peers

  	
   

  	
  MULTIPLIER

  MODIFIER

  	
   

  
	
  -10%

  	
   

  	
  (0.80

  	
  )

  
	
  -8%

  	
   

  	
  (0.60

  	
  )

  
	
  -6%

  	
   

  	
  (0.40

  	
  )

  
	
  -4%

  	
   

  	
  (0.20

  	
  )

  
	
  -2%

  	
   

  	
  —

  	
   

  
	
  0% (Index TSR)

  	
   

  	
  0.20

  	
   

  
	
  +2%

  	
   

  	
  0.40

  	
   

  
	
  +4%

  	
   

  	
  0.60

  	
   

  
	
  +6%

  	
   

  	
  0.80

  	
   

  
	
  +8%

  	
   

  	
  1.00

  	
   

  

 

TABULAR
EXPRESSION OF PAYOUT MATRIX

 

	
  St. Mary

  	
   

  	
  Percentage Point Deviation From Peer Index

  	
   

  
	
  TSR (%)

  	
   

  	
  -10%

  	
   

  	
  -8%

  	
   

  	
  -6%

  	
   

  	
  -4%

  	
   

  	
  -2%

  	
   

  	
  0%

  	
   

  	
  2%

  	
   

  	
  4%

  	
   

  	
  6%

  	
   

  	
  8%

  	
   

  
	
  0

  	
  %

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  0

  	
   

  	
  0.20

  	
   

  	
  0.40

  	
   

  	
  0.60

  	
   

  	
  0.80

  	
   

  	
  1.00

  	
   

  
	
  1

  	
  %

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  0.05

  	
   

  	
  0.25

  	
   

  	
  0.45

  	
   

  	
  0.65

  	
   

  	
  0.85

  	
   

  	
  1.05

  	
   

  
	
  2

  	
  %

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  0.10

  	
   

  	
  0.30

  	
   

  	
  0.50

  	
   

  	
  0.70

  	
   

  	
  0.90

  	
   

  	
  1.10

  	
   

  
	
  3

  	
  %

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  0.15

  	
   

  	
  0.35

  	
   

  	
  0.55

  	
   

  	
  0.75

  	
   

  	
  0.95

  	
   

  	
  1.15

  	
   

  
	
  4

  	
  %

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  0

  	
   

  	
  0.20

  	
   

  	
  0.40

  	
   

  	
  0.60

  	
   

  	
  0.80

  	
   

  	
  1.00

  	
   

  	
  1.20

  	
   

  
	
  5

  	
  %

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  0.08

  	
   

  	
  0.28

  	
   

  	
  0.48

  	
   

  	
  0.68

  	
   

  	
  0.88

  	
   

  	
  1.08

  	
   

  	
  1.28

  	
   

  
	
  6

  	
  %

  	
   

  	
   

  	
   

  	
   

  	
  0

  	
   

  	
  0.15

  	
   

  	
  0.35

  	
   

  	
  0.55

  	
   

  	
  0.75

  	
   

  	
  0.95

  	
   

  	
  1.15

  	
   

  	
  1.35

  	
   

  
	
  7

  	
  %

  	
   

  	
   

  	
   

  	
   

  	
  0.03

  	
   

  	
  0.23

  	
   

  	
  0.43

  	
   

  	
  0.63

  	
   

  	
  0.83

  	
   

  	
  1.03

  	
   

  	
  1.23

  	
   

  	
  1.43

  	
   

  
	
  8

  	
  %

  	
   

  	
   

  	
   

  	
   

  	
  0.10

  	
   

  	
  0.30

  	
   

  	
  0.50

  	
   

  	
  0.70

  	
   

  	
  0.90

  	
   

  	
  1.10

  	
   

  	
  1.30

  	
   

  	
  1.50

  	
   

  
	
  9

  	
  %

  	
   

  	
   

  	
  0

  	
   

  	
  0.18

  	
   

  	
  0.38

  	
   

  	
  0.58

  	
   

  	
  0.78

  	
   

  	
  0.98

  	
   

  	
  1.18

  	
   

  	
  1.38

  	
   

  	
  1.58

  	
   

  
	
  10

  	
  %

  	
   

  	
   

  	
  0.05

  	
   

  	
  0.25

  	
   

  	
  0.45

  	
   

  	
  0.65

  	
   

  	
  0.85

  	
   

  	
  1.05

  	
   

  	
  1.25

  	
   

  	
  1.45

  	
   

  	
  1.65

  	
   

  
	
  11

  	
  %

  	
   

  	
   

  	
  0.13

  	
   

  	
  0.33

  	
   

  	
  0.53

  	
   

  	
  0.73

  	
   

  	
  0.93

  	
   

  	
  1.13

  	
   

  	
  1.33

  	
   

  	
  1.53

  	
   

  	
  1.73

  	
   

  
	
  12

  	
  %

  	
  0

  	
   

  	
  0.20

  	
   

  	
  0.40

  	
   

  	
  0.60

  	
   

  	
  0.80

  	
   

  	
  1.00

  	
   

  	
  1.20

  	
   

  	
  1.40

  	
   

  	
  1.60

  	
   

  	
  1.80

  	
   

  
	
  13

  	
  %

  	
  0.07

  	
   

  	
  0.28

  	
   

  	
  0.48

  	
   

  	
  0.68

  	
   

  	
  0.88

  	
   

  	
  1.08

  	
   

  	
  1.28

  	
   

  	
  1.48

  	
   

  	
  1.68

  	
   

  	
  1.88

  	
   

  
	
  14

  	
  %

  	
  0.15

  	
   

  	
  0.35

  	
   

  	
  0.55

  	
   

  	
  0.75

  	
   

  	
  0.95

  	
   

  	
  1.15

  	
   

  	
  1.35

  	
   

  	
  1.55

  	
   

  	
  1.75

  	
   

  	
  1.95

  	
   

  
	
  15

  	
  %

  	
  0.23

  	
   

  	
  0.43

  	
   

  	
  0.63

  	
   

  	
  0.83

  	
   

  	
  1.03

  	
   

  	
  1.23

  	
   

  	
  1.43

  	
   

  	
  1.63

  	
   

  	
  1.83

  	
   

  	
  2.00

  	
   

  
	
  16

  	
  %

  	
  0.30

  	
   

  	
  0.50

  	
   

  	
  0.70

  	
   

  	
  0.90

  	
   

  	
  1.10

  	
   

  	
  1.30

  	
   

  	
  1.50

  	
   

  	
  1.70

  	
   

  	
  1.90

  	
   

  	
   

  	
   

  
	
  17

  	
  %

  	
  0.40

  	
   

  	
  0.60

  	
   

  	
  0.80

  	
   

  	
  1.00

  	
   

  	
  1.20

  	
   

  	
  1.40

  	
   

  	
  1.60

  	
   

  	
  1.80

  	
   

  	
  2.00

  	
   

  	
   

  	
   

  
	
  18

  	
  %

  	
  0.50

  	
   

  	
  0.70

  	
   

  	
  0.90

  	
   

  	
  1.10

  	
   

  	
  1.30

  	
   

  	
  1.50

  	
   

  	
  1.70

  	
   

  	
  1.90

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19

  	
  %

  	
  0.60

  	
   

  	
  0.80

  	
   

  	
  1.00

  	
   

  	
  1.20

  	
   

  	
  1.40

  	
   

  	
  1.60

  	
   

  	
  1.80

  	
   

  	
  2.00

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  20

  	
  %

  	
  0.70

  	
   

  	
  0.90

  	
   

  	
  1.10

  	
   

  	
  1.30

  	
   

  	
  1.50

  	
   

  	
  1.70

  	
   

  	
  1.90

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  21

  	
  %

  	
  0.80

  	
   

  	
  1.00

  	
   

  	
  1.20

  	
   

  	
  1.40

  	
   

  	
  1.60

  	
   

  	
  1.80

  	
   

  	
  2.00

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  22

  	
  %

  	
  0.90

  	
   

  	
  1.10

  	
   

  	
  1.30

  	
   

  	
  1.50

  	
   

  	
  1.70

  	
   

  	
  1.90

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  23

  	
  %

  	
  1.00

  	
   

  	
  1.20

  	
   

  	
  1.40

  	
   

  	
  1.60

  	
   

  	
  1.80

  	
   

  	
  2.00

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  24

  	
  %

  	
  1.10

  	
   

  	
  1.30

  	
   

  	
  1.50

  	
   

  	
  1.70

  	
   

  	
  1.90

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  25

  	
  %

  	
  1.20

  	
   

  	
  1.40

  	
   

  	
  1.60

  	
   

  	
  1.80

  	
   

  	
  2.00

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

RED= MINIMUMS

BLUE = MAXIMUMS

 

A-1

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00176-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00176-of-00352.parquet"}]]