Document:

ex10-3.htm

EXHIBIT 10.3

 

 

SINGLE OWNER TURNKEY DRILLING & OPERATING AGREEMENT 

This agreement is made and entered into as of the 31st day of March, 2012 (“Effective Date”) by and between ROCKDALE RESOURCES, INC., (“Owner”), a Colorado corporation, and KINGMAN OPERATING COMPANY, INC., (“Operator”), a Texas corporation.

Owner has acquired, or expects to acquire, oil and gas leasehold interests in the lands described in Addendum A hereto and desires by this agreement to engage Operator for the development and operation of said lands for the production of oil and gas. It is, therefore, agreed as follows:

1.  Definitions. As used in this agreement, the following terms shall have the following definitions:

“AFE” shall mean an authority for expenditure prepared by Operator for the purpose of estimating the costs to be incurred in conducting an operation hereunder.

“Completion” or “Complete” shall mean a single operation intended to complete a well as a producer of oil and gas in one or more Zones, including, but not limited to, the setting of production casing, perforating, well stimulation and production testing conducted in such operation.

“Contract Area” shall mean all of the lands described in Addendum “A” hereto, all of the oil and gas leases covering such lands or fee interests in oil and gas therein now owned or hereafter acquired by Owner and intended to be developed and operated for Oil and Gas purposes under this agreement.

“Deepen” means a single operation whereby a well is drilled to an objective Zone below the deepest Zone in which the well was previously drilled, or below the deepest Zone proposed in the associated AFE, whichever is the lesser.

“First Level Supervisors” shall mean those employees whose primary function in Operations is the direct supervision of other employees and/or contract labor directly employed on the Contract Area in a field operating capacity.

“Oil and Gas” shall mean oil, gas, casinghead gas, gas condensate and/or all other liquid or gaseous hydrocarbons and other marketable substances produced therewith.

“Operations” means all operations necessary or proper for the development, operation, protection and maintenance of the wells and facilities in the Contract Area.

“Plug Back” shall mean a single operation whereby a deeper Zone is abandoned in order to attempt a Completion in a shallower zone.

“Recompletion” or “Recomplete” shall mean an operation whereby a Completion in one Zone is abandoned in order to attempt a Completion in a different Zone within the existing wellbore.

“Rework” shall mean an operation conducted in the wellbore of a well after it is Completed to secure, restore or improve production in a Zone which is currently open to production in the wellbore. Such operations include, but are not limited to, well stimulation operations but exclude any routine repair or maintenance work or drilling, Sidetracking, Deepening, Completing, Recompleting or Plugging Back of a well.

“Sidetrack” shall mean the directional control and intentional deviation of a well from vertical so as to change the bottom hole location unless done to straighten the hole or to drill around junk in the hole or overcome other mechanical difficulties.

“Technical Employees” shall mean those employees having special and specific engineering, geological or other professional skills, and whose primary function in Operations is the handling of specific operating conditions and problems for the benefit of the Contract Area.

 

  

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“Turnkey” or “Turnkey Basis” means Contractor shall furnish the equipment, labor, and perform the services as herein provided, to drill a well to the specified depth.

“Zone” means a stratum of earth containing or thought to contain a common accumulation of Oil and Gas separately producible from any other common accumulation of Oil and Gas.

2.  Responsibilities of Operator. Operator shall conduct and direct and have full control of all Operations on the Contract Area as permitted and required by, and within the limits of this agreement. In its performance of services hereunder for Owner, Operator shall be an independent contractor not subject to the control or direction of Owner except as to the type of operation to be undertaken and the objective thereof in accordance with the notification and approval procedures contained in this agreement. Operator shall not be deemed, or hold itself out as, the agent of Owner with authority to bind Owner to any obligation or liability assumed or incurred by Operator as to any third party. Operator shall conduct its activities under this agreement as a reasonable and prudent operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulation, but in no event shall Operator have any liability as such to Owner for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct.

3.  Rights and Duties of Operator.

(a)  Employees and Contractors. The number of employees or contractors used by Operator in conducting Operations hereunder, their selection, and the hours of labor and the compensation for services performed shall be determined by Operator, and all such employees or contractors shall be the employees or contractors of Operator.

(b)  Turnkey Basis. All wells drilled on the Contract Area shall be drilled on a Turnkey Basis at the rate set forth below in Section 4, unless otherwise agreed in writing between Owner and Operator.

(c)  Discharge of Obligations. Except as herein otherwise specifically provided, Operator shall promptly pay and discharge expenses incurred in the development and operation of the Contract Area pursuant to this agreement and shall charge Owner for reimbursement as provided in this agreement. Operator shall keep an accurate record of all expenses incurred and charges and credits made and received.

(d)  Protection from Liens. Operator shall pay, or cause to be paid, as and when they become due and payable, all accounts of contractors and suppliers and wages and salaries for services rendered or performed, and for materials supplied on, to or in respect of the Contract Area or any Operations thereon or therefor, and shall keep the Contract Area free from liens and encumbrances resulting therefrom except for those resulting from a bona fide dispute as to the services rendered or materials supplied.

(e)  Custody of Funds. Operator shall hold for the account of Owner any funds of Owner advanced or paid to Operator, either for the conduct of Operations hereunder or as a result of the sale of production from the Contract Area, and such funds shall remain the funds of Owner until used for their intended purpose or otherwise delivered to Owner or applied toward the payment of debts as provided herein. Nothing in this subparagraph shall be construed to establish a fiduciary relationship between Operator and Owner for any purpose other than to account for Owner funds as herein specifically provided. Nothing in this paragraph shall require the maintenance by Operator of separate accounts for the funds of Owner unless the parties otherwise specifically agree.

(f)  Access to Contract Area and Records. Operator shall, except as otherwise provided herein, permit Owner or Owner’s duly authorized representative, at Owner’s sole risk and cost, full and free access at all reasonable times to all Operations of every kind and character being conducted on the Contract Area and to the records and Operations conducted thereon or production therefrom, including Operator’s books and records relating thereto. Such access rights shall not be exercised in a manner interfering with Operator’s conduct of an operation hereunder. Operator will furnish Owner upon request copies of any and all reports and information obtained by Operator in connection with production and related items, including, without limitation, meter and chart reports, production purchaser statements, run tickets and monthly gauge reports.

(g)  Filing and Furnishing Governmental Reports. Operator will file, and upon written request promptly furnish copies to Owner, all operational notices, reports or applications required to be filed by local, state or federal agencies or authorities having jurisdiction over Operations hereunder. Owner shall provide to Operator on a timely basis all information necessary to Operator to make such filings.

 

  

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(h)  Drilling and Testing Operations. The following provisions shall apply to each well drilled hereunder:

(i)  Operator will promptly advise Owner of the date on which the well is spudded, or the date on which drilling operations are commenced.

(ii)  Operator will send to Owner such reports, test results and notices regarding the progress of Operations on the well as Owner shall reasonably request, including, but not limited to, daily drilling reports, completion reports, and well logs.

(iii)  Operator shall adequately test all strata and horizons encountered which may reasonably be expected to be capable of producing oil and gas in paying quantities as a result of examination of any logs or cores or tests conducted hereunder.

(i)  Insurance. At all times while Operations are conducted hereunder, Operator shall comply with the worker compensation laws of the state where the Operations are being conducted. Operator shall also carry or provide insurance as follows:

(i)  General Liability, including contract, with limits of not less than $1,000,000 Per Occurrence, $2,000,000 General Aggregate, and $1,000,000 Products/Completed Operations Aggregate;

(ii)  Automobile Liability with limits of not less than $1,000,000 Combined Single Limit; and

(iii) Workers’ Compensation as required by applicable law or, in the absence of a statute governing workers’ compensation insurance, with limits of not less than $1,000,000 Each Accident, $1,000,000 Disease Policy Limit, and $1,000,000 Disease Each Employee.

Operator shall require all contractors engaged in work on or for the Contract Area to comply with the worker compensation laws of the state where the Operations are being conducted and to maintain such other insurance as Operator may require.

4.  Drilling Operations & Turnkey Rate.

(a)  Initial Drilling Operations. Within 30 days after Operator’s receipt of the Turnkey Rate stated below in Section 4(c), Operator shall commence the drilling of the first well on the Contract Area at a well site to be determined by the mutual agreement of Operator and Owner and shall thereafter continue the drilling with due diligence to a depth of 2,000 feet below the surface or a depth sufficient to adequately test the Navarro B Formation to the extent the depth of the Navarro B Formation is shallower than 2,000 feet below the surface.

(b)  Subsequent/Additional Drilling Operations. Thereafter, Operator will not drill any well in the Contract Area and will not Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a well no longer capable of producing in paying quantities on the Contract Area without first obtaining the approval of Owner. Before any such operation is performed, the following procedure will be followed unless otherwise agreed in writing:

(i)  When and as requested by Owner, or whenever Operator deems it necessary or advisable, Operator will prepare and submit to Owner a proposal for the operation, specifying the location, proposed depth, and objective Zone or Zones. Owner will respond in writing to such proposal, either approving it with any modifications that Owner may direct or rejecting the proposal. Owner’s approval of any such proposal will represent Owner’s agreement to bear and pay the Turnkey Rate for each such well and all other necessary expenditures in conducting the proposed operation pursuant to Section 5 below.

(ii)  When a well that has been proposed to be drilled, Deepened or Sidetracked under this agreement has reached its authorized depth, and all logs, cores and other tests have been completed, and the results thereof furnished to Owner, Operator shall give immediate notice to Owner whether or not Operator recommends attempting to Complete the well. Owner will thereupon (within 48 hours exclusive of Saturday, Sunday and legal holidays) either direct that an attempt be made to Complete the well or that the well be plugged and abandoned.

 

  

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(iii)  Notwithstanding the foregoing, if Owner shall so direct at any time during the conduct of an operation approved pursuant to this Section 4, Operator will cease the operation and will incur no further expenditure for such operation, except that Operator will take such actions as are reasonably necessary, as expeditiously as reasonably possible, to plug and abandon the well or to conduct such other or further operation in such well as may be approved by Owner in the manner herein provided.

(c)  Turnkey Rate.  For work performed on a Turnkey Basis, as herein provided, Owner will pay Operator the sum of $275,000.00 per well, prior to and as a condition precedent to Operator’s commencing drilling operations.

(d)  Operator’s Monthly Management Fee. Upon completion of a well, and in addition to the Turnkey rate specified herein, Owner shall pay Operator a monthly management fee of $1,000.00 per well (the “Monthly Management Fee”) for its continued operation of the well(s).

(e)  Costs Due to Catastrophe. In addition to direct costs incurred in connection with a Catastrophe, Operator shall be paid the following rate in excess of the expenditure limit set forth in Section 5 to compensate Operator for overhead costs:

5% of total costs if such costs are less than $100,000; plus

3% of total costs in excess of $100,000 but less than $1,000,000; plus

2% of total costs in excess of $1,000,000.

Overhead costs for Catastrophe shall be applied as follows:

(i)  Catastrophe is defined as a sudden calamitous event bringing damage, loss or destruction to property or the environment, such as an oil spill, blowout, explosion, fire, storm, hurricane or other disaster. The overhead rate shall be applied to those costs necessary to restore the Contract Area to the equivalent condition that existed prior to the event.

(ii) Total cost shall mean the gross cost of any one project, and the rates shall be applied to all costs associated with each single occurrence or event.

(iii) For the purpose of calculating Catastrophe overhead, the cost of drilling relief wells or substitute wells, or conducting other well operations directly resulting from the catastrophic event shall be included. Expenditures to which these rates apply shall not be reduced by salvage or insurance recoveries. Expenditures that qualify for Catastrophe overhead shall not qualify for overhead under any other overhead provisions.

5.  Other Operations. Operator may, without first obtaining the express approval of Owner, perform routine maintenance, repairs and other tasks in the operation of wells and facilities on the Contract Area, and Owner shall bear the cost in the manner herein provided. However, Operator shall not undertake any single project reasonably estimated to require an expenditure in excess of $50,000.00 without Owner’s approval, either separately or in connection with the drilling, Sidetracking, Reworking, Deepening, Completing, Recompleting or Plugging Back of a well that has previously been authorized by or pursuant to this agreement; provided that in the case of explosion, fire, flood or other sudden emergency, whether of the same or different nature, Operator may take such steps and incur such expenses as in Operator’s opinion are required to deal with the emergency to safeguard life and property, but Operator, as promptly as possible, shall report the emergency to Owner. Operator may also take such steps and incur such expenses as it may be ordered to take by governmental authority. If Operator prepares an AFE for its own use, Operator shall furnish Owner an information copy thereof.

6.  Taking Production. Owner shall take in kind or separately dispose of the Oil and Gas produced from the Contract Area, exclusive of production which may be used in development and producing operations and in preparing and treating Oil and Gas for marketing purposes and production unavoidably lost. Owner shall execute such division orders and contracts as may be necessary for the sale of its interest in production from the Contract Area and shall be entitled to receive payment directly from the purchaser thereof for all production. If Owner fails to make the arrangements necessary to take in kind or separately dispose of the Oil and Gas produced from the Contract Area, Operator shall have the right, subject to the revocation at will by Owner, and if Owner so requests Operator shall have the obligation, to sell such Oil and Gas to others at any time and from time to time, for the account of Owner, subject always to the right of Owner upon ten days written notice to Operator to exercise at any time its right to take in kind, or separately dispose of, its share of all Oil and Gas not previously delivered to a purchaser. Unless Owner shall expressly direct otherwise in writing, any purchase or sale by Operator of Owner’s Oil and Gas shall be only for such reasonable periods of time as are consistent with the minimum needs of the industry under the particular circumstances, but in no event for a period in excess of one year. Any such sale by Operator shall be in a manner commercially reasonable under the circumstances, but Operator shall have no duty to share any existing market or to obtain a price equal to that received under any existing market. The sale or delivery by Operator of Owner’s share of Oil and Gas under the terms of any existing contract of Operator shall not give Owner any interest in or make Owner a party to said contract. No purchase shall be made by Operator without first giving Owner at least ten days written notice of such intended purchase and the price to be paid or the pricing basis to be used. Operator shall maintain records of all marketing arrangements and of volumes actually sold or transported, which records shall be made available to Owner upon reasonable request.

 

  

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7.  Expenditures and Liability.

(a)  Direct Charges. Owner shall be responsible for, and shall be liable to Operator for reimbursement of, the direct costs of developing and operating the Contract Area beyond work performed on a Turnkey Basis, including the following items:

(i)  Ecological and Environmental. Costs incurred for the benefit of the Contract Area as a result of governmental or regulatory requirements to satisfy environmental considerations applicable to Operations. Such costs may include survey of an ecological or archaeological nature and pollution control procedures that are required by applicable laws and regulations.

(ii) Rentals and Royalties. Lease rentals and royalties paid by Operator for Operations on the Contract Area.

(iii)  Damages and Losses to Property. All costs or expenses necessary for the repair or replacement of equipment and personal property made necessary because of damages or losses incurred by fire, flood, storm, theft, accident, or other cause, except those resulting from Operator’s gross negligence or willful misconduct. Operator shall furnish Owner written notice of damages or losses incurred as soon as practicable after a report thereof has been received by Operator.

(iv)  Legal Expense. Expense of handling, investigating and settling litigation or claims, discharging of liens, payment of judgments and amounts paid for settlement of claims incurred in or resulting from Operations under this agreement or necessary to protect or recover real or personal property interests related to the Contract Area, except that no charge for services of attorneys shall be made unless previously agreed to by Owner.

(v)  Taxes. All taxes of every kind and nature assessed or levied upon or in connection with the Contract Area, the operation thereof, or the production therefrom, and which taxes have been paid by Operator for the benefit of Owner.

(vi)  Insurance. Net premiums paid for insurance carried for the Operations on the Contract Area for the protection of Owner and Operator.

(vii)  Abandonment and Reclamation. Costs incurred for abandonment of wells and facilities on the Contract Area, including costs required by governmental or other regulatory authority.

(viii)  Other Expenditures. Any other expenditure not covered or dealt with in the foregoing provisions of this Section 7(a) and which is of direct benefit to the Contract Area and is incurred by Operator in the necessary and proper conduct of Operations on or for the Contract Area.

 

  

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(b)  Statement and Billings. Operator shall bill Owner on or before the last day of each month for all of the direct costs of Operations on the Contract Area for the preceding month and for the following month’s Monthly Management Fee. Such bills will be accompanied by statements identifying the AFE, lease or facility, and all charges and credits summarized by appropriate classifications of investment and expense, except that unusual charges and credits shall be separately identified and fully described in detail.  Owner will pay all bills within fifteen (15) days after receipt. If payment is not made within such time, the unpaid balance shall bear interest monthly at the prime rate published by the Wall Street Journal as of the first day of the month in which the delinquency occurs plus 1%, or the maximum contract rate permitted by applicable law, whichever is the lesser, plus attorney’s fees, court costs, and other costs in connection with the collection of unpaid amounts.  Payment of any such bills shall not prejudice the right of Owner to protest or question the correctness thereof; provided, however, all bills and statements rendered to Owner by Operator during any calendar year shall conclusively be presumed to be true and correct after 24 months following the end of any such calendar year, unless within said 24-month period Owner takes written exception thereto and makes claim on Operator for adjustment. No adjustment favorable to Operator shall be made unless it is made within the same prescribed period.

(c)  Liens and Security Interests. Owner grants to Operator a lien upon any interest it now owns or hereafter acquires in the Contract Area, and a security interest and/or purchase money security interest in any interest it now owns or hereafter acquires in the personal property and fixtures on or used or obtained for use in connection therewith, to secure performance of all of its obligations under this agreement including but not limited to payment of expense, interest and fees. Such lien and security interest shall include Owner’s leasehold interests, working interests, operating rights, and royalty and overriding royalty interests in the Contract Area now owned or hereafter acquired and in lands pooled or unitized therewith or otherwise becoming subject to this agreement, the Oil and Gas when extracted therefrom and equipment situated thereon or used or obtained for use in connection therewith (including, without limitation, all wells, tools, and tubular goods), and accounts (including, without limitation, accounts arising from gas imbalances or from the sale of Oil and/or Gas at the wellhead), contract rights, inventory and general intangibles relating thereto or arising therefrom, and all proceeds and products of the foregoing.

To perfect the lien and security agreement provided herein, Owner shall execute and acknowledge a recording supplement and/or any financing statement prepared and submitted by Owner in conjunction herewith or at any time following execution hereof, and Operator is authorized to file this agreement or the recording supplement executed herewith, if any, as a lien or mortgage in the applicable real estate records and as a financing statement with the proper officer under the Uniform Commercial Code (the “Code”) in the state in which the Contract Area is situated and such other states as Operator shall deem appropriate to perfect the security interest granted hereunder. Owner may file this agreement, any recording supplement executed herewith, or such other documents as it deems necessary as a lien or mortgage in the applicable real estate records and/or a financing statement with the proper officer under the Code.

Owner represents and warrants to Operator that the lien and security interest granted hereby shall be a first and prior lien, and Owner hereby agrees to maintain the priority of said lien and security interest against all persons acquiring an interest in oil and gas leases and interests covered by this agreement by, through or under Owner. All parties acquiring an interest in oil and gas leases and oil and gas interests covered by this agreement, whether by assignment, merger, mortgage, operation of law, or otherwise, shall be deemed to have taken subject to the lien and security interest granted by this Section 7(c) as to all obligations attributable to such interest hereunder whether or not such obligations arise before or after such interest is acquired.

To the extent that Operator has a security interest under the Uniform Commercial Code of the state in which the Contract Area is situated, Operator shall be entitled to exercise the rights and remedies of a secured party under the Code. The bringing of a suit and the obtaining of judgment by Operator for the secured indebtedness shall not be deemed an election of remedies or otherwise affect the lien rights or security interest as security for the payment thereof. In addition, upon default by Operator in the payment of expenses, interest or fees, Operator shall have the right, without prejudice to other rights or remedies, to collect from the purchaser the proceeds from the sale of Owner’s share of Oil and Gas until the amount owed by Owner, plus interest as provided in Section 7(b), has been received, and shall have the right to offset the amount owed against the proceeds from the sale of Owner’s Oil and Gas. All purchasers of production may rely on a notification of default from Operator stating the amount due as a result of the default, and Owner waives any recourse available against purchasers for releasing production proceeds as provided in this paragraph.

 

  

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If Owner does not perform all of its obligations hereunder, and the failure to perform subjects Owner to foreclosure or execution proceedings pursuant to the provisions of this agreement, to the extent allowed by governing law, Owner waives any available right of redemption from and after the date of judgment, any required valuation or appraisement of the mortgaged or secured property prior to sale, any available right to stay execution or to require a marshalling of assets and any required bond in the event a receiver is appointed. In addition, to the extent permitted by applicable law, Owner hereby grants to Operator a power of sale as to any property that is subject to the lien and security rights granted hereunder, such power to be exercised in the manner provided by applicable law or otherwise in a commercially reasonable manner and upon reasonable notice.

Owner agrees that Operator shall be entitled to utilize the provisions of Oil and Gas lien law or other lien law of any state in which the Contract Area is situated to enforce the obligations of each party hereunder. Without limiting the generality of the foregoing, to the extent permitted by applicable law, Owner agrees that Operator may invoke or utilize the mechanics’ or materialmen’s lien law of the state in which the Contract Area is situated in order to secure the payment to Operator of any sum due hereunder for services performed or materials supplied by Operator.

8.  Claims and Lawsuits. Operator may settle any single uninsured third-party damage claim or suit arising from Operations hereunder if the expenditure does not exceed $50,000.00 and if the payment is in complete settlement of such claim or suit. If the amount required for settlement exceeds the above amount, Owner shall assume and take over the further handling of the claim or suit, unless such authority is delegated to Operator. All costs and expenses of handling, settling or otherwise discharging such claim or suit shall be borne by Owner. Operator shall immediately notify Owner of any claim or suit arising from Operations hereunder.

9.  Term of Agreement. The term of this agreement shall be for an initial period of five (5) years and shall continue thereafter until terminated on sixty (60) days notice by either party to the other. However, Owner shall have the right to remove Operator and terminate this agreement at any time if Operator is in material breach of this agreement and remains in material breach sixty (60) days after notice by Owner to Operator, specifying the nature of Operator’s breach and the necessary action to remedy the breach. The termination of this agreement shall not relieve any party from any obligation or any remedy therefor that has accrued or attached prior to the date of termination.

10.  Miscellaneous:

(a)  Notices: Except as otherwise expressly provided in this agreement to the contrary, any notice required or permitted to be given under this agreement shall be in writing (including facsimile or similar electronic transmission, provided that such notice will only be deemed effective upon the sender’s receipt of a non-automated reply) and sent to the address of the person to be notified as set forth below, or such other more recent address of which the sending person has actually received written notice.

If to Owner:

Rockdale Resources, Inc.

ATTN: Chief Financial Officer

11044 Research Blvd.

Suite A-200

Austin, Texas 78759

If to Operator:

Kingman Operating Company, Inc.

ATTN: President

11044 Research Blvd.

Suite A-200

Austin, Texas 78759

 

  

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With a copy to:

Jim E. Bullock, Esq.

Christiansen Davis Bullock, LLC

4100 Spring Valley Road

Suite 450

Dallas, Texas 75244

Each such notice or other communication shall be effective, if given by registered or certified mail, return receipt requested, as of the third day after the date indicated on the mailing certificate, or if given by any other means, when such notice or other communication is actually received.

(b)  Force Majeure: If a party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other than the obligation to indemnify or make money payments, that party will give to the other party prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the continuance of the force majeure. The term “force majeure,” as here employed, shall mean an act of God, strike, lockout, or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood or other act of nature, explosion, governmental action, governmental delay, restraint or inaction, unavailability of equipment, and any other cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party claiming suspension. The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes, lockouts, or other labor difficulty by the party involved, contrary to its wishes; how all such difficulties shall be handled shall be entirely within the discretion of the party concerned.

(c)  Laws, Regulations and Orders: This agreement shall be subject to the applicable laws of the State of Texas, to the valid rules, regulations and orders of any duly constituted regulatory body of said state, and to all other applicable federal, state, and local laws, ordinances, rules, regulations and orders. Nothing herein contained shall grant, or be construed to grant, Operator the right or authority to waive or release any rights, privileges or obligations Owner may have under federal or state laws or under rules, regulations or orders promulgated under such laws in reference to oil, gas and mineral operations, including the location, operation or production of wells on tracts offsetting or adjacent to the Contract Area. With respect to the Operations hereunder, Owner agrees to release Operator from any and all losses, damages, injuries, claims and causes of action arising out of, incident to or arising directly or indirectly from Operator’s interpretation or application of rules, rulings, regulations or orders of the Department of Energy or Federal Energy Regulatory Commission or predecessor or successor agencies to the extent such interpretation or application was made in good faith and does not constitute gross negligence. Owner further agrees to reimburse Operator for any refund, fine, levy or other governmental sanction that Operator may be required to pay as a result of such incorrect interpretation or application, together with interest and penalties thereon owing by Operator as a result of such incorrect interpretation or application.

(d)  Governing Law: This agreement and all matters pertaining hereto, including but not limited to matters of performance, nonperformance, breach, remedies, procedures, rights, duties and interpretation or construction, shall be governed and determined by the law of the State of Texas.

(e)  Successors and Assigns: This agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, and the terms hereof shall be deemed to run with the oil and gas leases or other interests of Owner in the Contract Area.

[SIGNATURE PAGE FOLLOWS]

 

 

  

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OPERATOR:

KINGMAN OPERATING COMPANY, INC.

By: /s/ Michael D. Smith                                   

Printed Name:  Michael D. Smith                     

Title:   President  Date:  3/22/12 

STATE OF TEXAS                                                      §

COUNTY OF DALLAS                                               §

On this day, appeared before me, Michael Smith, known to me to be the President and CEO of Kingman Operating Company, Inc., who, after being duly sworn, on his oath deposed and said that he executed the foregoing instrument, in the capacity stated, of his own free will and accord, with knowledge of the content and scope thereof, for the purposes set forth therein, and with authority to do so.  SUBSCRIBED AND SWORN TO BEFORE ME, the undersigned Notary Public, to which witness my hand and official seal.

By: /s/ Jeremy R. Hallford 

       NOTARY PUBLIC IN AND FOR

	
  

	
[SEAL]

	
     THE STATE OF TEXAS

Date:  3/22/12 

	  	  	
OWNER

	  	  	  
	  	  	
ROCKDALE RESOURCES, INC.

	  	  	  
	  	
By:

	
_____________________________________________

	  	  	
Printed Name:_________________________________

	  	  	
Title:_________________________________________

	  	  	
Date:_________________________________________

STATE OF COLORADO                                                      §

COUNTY OF __________                                                  §

On this day, appeared before me, John P. Barton, known to me to be the Chairman of the Board of Rockdale Resources, Inc., who, after being duly sworn, on his oath deposed and said that he executed the foregoing instrument, in the capacity stated, of his own free will and accord, with knowledge of the content and scope thereof, for the purposes set forth therein, and with authority to do so.  SUBSCRIBED AND SWORN TO BEFORE ME, the undersigned Notary Public, to which witness my hand and official seal.

	  	
By:

	
_____________________________________________

	
_____________________________________________

	  	
NOTARY PUBLIC IN AND FOR

	
[SEAL]

	  	
THE STATE OF COLORADO

	  	  	
Date:______________________________________

  

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ADDENDUM A TO

SINGLE OWNER TURNKEY DRILLING & OPERATING AGREEMENT

The Contract Area means that certain 200-acre tract defined as the “Leased Premises” in the Assignment of Paid-Up Oil and Gas Lease between Owner and Operator dated March ___, 2012 and filed of record at Volume ___, Page ___, of the Deed Records of Milam County, Texas.

In the event Owner exercises its option to farmout that certain 300-acre tract referenced in that certain letter agreement between Owner and Operator dated March 21, 2012, then the Contract Area shall also include that certain 300-acre tract defined as the “Leased Premises” in the Assignment of Paid-Up Oil and Gas Lease between Owner and Operator dated March ___, 2012 and filed of record at Volume ___, Page ___, of the Deed Records of Milam County, Texas.

  

10ex10-4.htm

EXHIBIT 10.4

 

 

CHIEF EXECUTIVE EMPLOYMENT AGREEMENT

THIS AGREEMENT is made the 31st day of March 2012 (the “Effective Date”) by and between Rockdale Resources, Inc., a Colorado corporation, (the “Company”), and Michael D. Smith (“Smith”).

WHEREAS, the Company has been formed by individuals with a long history of success with the capital formation, operation, growth and sale of oil and gas companies to utilize the energy capital markets to raise equity and debt for oil and gas exploration and to create significant shareholder value through oil and gas drilling and production; and

WHEREAS, Smith has been engaged as an executive in the oil and gas industry for more than a decade and has extensive experience in oil and gas operations in Texas, including developing, marketing and selling oil and gas investments, horizontal drilling and numerous other projects in Texas; and

WHEREAS, Smith is the President, Chief Executive Officer, sole shareholder and director of Kingman Operating Company, Inc., and the President and sole member of Kingman Energy, LLC (Kingman Operating Company, Inc., and Kingman Energy, LLC, are collectively referred to herein as “Kingman”); and

WHEREAS, with such disclosure and knowledge of Smith’s ownership of, obligations and duties to, and continuing participation in Kingman, the Company desires that Smith also serve as President and Chief Executive Officer of the Company and as a director on its Board of Directors; and

WHEREAS, Smith is willing to serve as President and Chief Executive Officer of the Company and as a director on its Board of Directors in conjunction with his obligations and duties to and continued participation in Kingman;

NOW, THEREFORE, the Company and Smith (collectively the “Parties”, each a “Party”) hereby agree as follows:

I.  EMPLOYMENT 

(1) Employment. The Company hereby employs Smith, and Smith hereby agrees to serve the Company, as its President and Chief Executive Officer with such responsibilities and authority as may from time to time be prescribed by the Company’s Board of Directors and to perform the tasks incident to these positions being accountable only to the Company’s Board of Directors.  Additionally, Smith will serve as a voting member (i.e., a director) on the Company’s Board of Directors.

(2) Term.  Smith’s employment with the Company shall begin on April 1, 2012 and continue until March 31, 2013, and from year-to-year thereafter (the “Term”), unless terminated sooner as provided below.

(3) Time & Effort. Smith shall devote as much time and effort as may be reasonable and necessary, in consultation with the Company’s Board of Directors, but in no event less than 70% of normal business hours, to perform the duties incident to his role as President and Chief Executive Officer.

II. COMPENSATION 

(1) Salary. The Company agrees to pay Smith, during the Term, a salary at the initial fixed rate of US$120,000.00 per year, payable in accordance with the Company’s standard payroll process or, in the absence thereof, on the first (1st) day of each month, less such deductions or amounts to be withheld as required by applicable law.  Smith may be entitled to receive, in addition to the annual base salary referenced above, an annual bonus in an amount to be determined by the Company’s Board of Directors in its sole discretion.  Nothing contained here will be construed to prevent the Company from increasing Smith’s salary during the Term, or from paying bonuses to him, in the discretion of the Company’s Board of Directors.

(2) Insurance. Smith shall be entitled to receive such health, dental, personal disability, life insurance, and flexible time-off benefits as are provided for other employees of the Company and as may be authorized and adopted from time to time in the future by the Company.

  

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(3) Benefit Plans. During the Term, Smith is entitled to participate in all employee incentive plans, such as extra compensation plan, pension plan, stock option, stock purchases, stock appreciation plan, or equivalent successor plans that may be adopted by the Company or other so-called “fringe” benefits which the Board of Directors may, in its sole discretion, provide for the Company’s employees generally, both those that are in effect now and those that may thereafter be adopted.  Any stock options will be designated as incentive stock options to the extent permitted under the plan and applicable law.

(4) Vacation. Smith is entitled to six (6) weeks of paid vacation days in each calendar year, or greater number of weeks as may be determined by the Company’s Board of Directors from time to time during the Term, and to compensation in respect of earned but unused vacation days, and to all paid holidays given by the Company to its employees or those observed by the New York Stock Exchange, whichever is more.

(5) Disability Pay. In the absence of disability insurance provided or offered by the Company and in the event of Smith’s illness or disability for a continuous period of six (6) months during which he is unable to render the services required herein, Smith’s compensation will continue during such period at the rates provided for hereinabove, and, at the end of such period, the Company may terminate the Term on 30 days’ prior written notice.  In the event of a dispute as to Smith’s disability, such question must be submitted to an impartial and reputable physician selected by the mutual agreement of Smith and the Company or in the absence of mutual agreement by the president of the Medical Society of Travis County, Texas, and the determination of the question of disability by such physician will be final and binding on the parties.

III. EXPENSE REIMBURSEMENT 

During the Term, Smith shall be authorized to incur necessary and reasonable travel and other business expenses in connection with his executive duties hereunder and for promoting the business of the Company, pursuant to and consistent with the written policies and procedures established by the Company and as may be modified from time to time. The Company shall reimburse Smith for such expenses in accordance with the Company’s written policy and procedures.

IV. TERMINATION 

(1) Termination for Cause. The Company may terminate this Agreement prior to the expiration of its Term for Cause. For purposes of this Agreement, “Cause” means:  (i) a willful act by Smith that is financially materially inimical to the best interests of the Company; (ii) a willful failure by Smith to follow the reasonable, prudent and lawful direction of the Company’s Board of Directors; or (iii) a failure by Smith to substantially perform his duties hereunder within 30 days after demand for substantial performance thereof in writing delivered by the Chairman of the Board of Directors that specifically identifies the manner in which the Board of Directors believes that Smith has not substantially performed.  For purposes of this paragraph, no act or failure to act on Smith’s part is deemed “willful” unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company.  Notwithstanding the foregoing, Smith will not be deemed to have been terminated for Cause unless and until there has been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the entire membership of the Board of Directors at a meeting thereof called and held for such purpose (after reasonable notice to Smith and an opportunity for him, together with his counsel, to be heard before the Board of Directors) finding that, in the good faith opinion of the Board of Directors, Smith was guilty of the conduct set forth above and specifying the particulars in detail.

(2) Termination by the Executive.  Smith may terminate his employment prior to the Term: (i) for Good Reason or (ii) for convenience on 90 days’ prior written notice.  For purposes of this Agreement, “Good Reason” means: (A) a Change-in-Control of the Company; (B) a failure by the Company to comply with any material provision of this Agreement which has not been cured within 10 days after notice of such noncompliance has been

 

  

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given by Smith to the Company; or (C) any purported termination of Smith’s employment other than for Cause.  For purposes of this Agreement, a “Change-in-Control” of the Company means a change in control of a nature that would be required to be reported in response to Item 5(f) of schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (15 U.S.C. §§78a et seq.) as amended (the “Exchange Act”); provided that, without limitation, a Change-in-Control is deemed to have occurred if: (y) any “person” (as the term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company or any “person” who on this date is a director or officer of the Company, is or becomes the “beneficial owner” (as the term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing a percentage interest of the combined voting power of the Company’s then outstanding securities which is greater than that of the majority-in-interest of the Company’s shareholders as of the date of this Agreement; or (z) during any period of two consecutive years during the Term, those individuals who at the beginning of such period constitute the Company’s Board of Directors cease for any reason to constitute at least a majority of the Company’s Board of Directors, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least three-fourths of the entire membership of the Board of Directors then in office who were directors at the beginning of the period.

V. PAYMENT ON TERMINATION 

(1) Termination Following the Executive’s Death.  In the event of Smith’s death during the Term, this Agreement will terminate, and the Company will pay to his widow or other beneficiary designated in writing by him, as a death benefit, an amount equal to the monthly rate of Smith’s salary then in effect for a period of six months after his death.

(2) Termination Following Change-of-Control. If, within one year following a Change-in-Control, Smith resigns for Good Reason or the Company terminates his employment without Cause, Smith shall receive: (i) a lump-sum severance payment equal to one hundred percent (100%) of his then current base salary, less applicable deductions and withholdings; (ii) the full amount of any bonus for the fiscal year in which he is terminated, less applicable deductions and withholdings; (iii) immediate vesting of the unvested shares under all outstanding stock options; and (iv) should he be eligible for and elect to continue health insurance pursuant to COBRA, payment of COBRA premiums for twelve (12) months following the termination date of his employment.

(3) Termination for Cause. If Smith’s employment is terminated for Cause, the Company must pay him his full salary through the date of termination at the rate in effect at the time of termination and thereafter has no further obligations to him under this Agreement.

(4) No Duty to Mitigate. Smith is not required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor must the amount of any payment provided for under this Agreement be reduced by any compensation he earns as the result of employment by another employer after the termination of his employment or otherwise.

(5) Lump Sum Payment. On Smith’s (or his estate’s) written request, the Company’s Board of Directors may, in its sole discretion, irrevocably agree that the Company will make payment of the above amounts to Smith (or his estate) in one lump sum equal to the present value of any amount remaining to be paid under this section. The present value of the amount to be paid shall be determined by assuming monthly payments on the last day of each month and by discounting those payments at the applicable federal rate, as set forth in Section 1274 of the Internal Revenue Code of 1986, as amended, or any successor statute then in effect (the “Code”), most recently published prior to the date of calculation of the date of termination of employment. The lump-sum payment shall be made within two days after the date of termination.

(6) Excess Parachute Limitation. If the Company’s certified public accounting firm (the “Accounting Firm”) determines that any payment by the Company to Smith under this Section would be considered to be an “excess parachute payment” under Sections 4999 or 280G of the Code and subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect thereto (“Excise Tax”), the Company shall make an additional payment to Smith (a “Gross-Up Payment”) in an amount, as calculated by the Accounting Firm, that places Smith in 

 

  

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the same after-tax economic position that he would have enjoyed if the Excise Tax had not applied to such payment.  The Company shall pay the Gross-Up Payment within five (5) days of the Accounting Firm’s determination. If the Accounting Firm determines that no Excise Tax is payable, the Company shall cause the Accounting Firm to provide Smith with an opinion that the Accounting Firm has substantial authority under the Code not to report an Excise Tax on his federal income tax return. If the initial Gross-Up Payment is insufficient to cover the amount of the Excise Tax ultimately determined to be owed by Smith (“Underpayment”), the Company shall promptly pay Smith an additional Gross-Up Payment in respect of the Underpayment.  The Company shall pay all fees and expenses of the Accounting Firm, including, without limitation, those related to the opinion referred to herein.

VI. CONFIDENTIALITY & CONFLICTS OF INTEREST 

(1) Confidentiality.  During the Term and for two (2) years thereafter, Smith will not without authorization by the Company’s Board of Directors publish or disclose, or authorize anyone else to publish or disclose, any confidential information or trade secrets relating to the business of the Company obtained by Smith during the Term, or any business record, paper, or document, any correspondence, cost data, customer list, or market survey containing confidential information or trade secrets of the Company. All business records, papers, and documents kept or made by Smith relating to the business of the Company must be surrendered to the Company on termination of the Employment Term.  The foregoing shall not apply to records, papers, documents, correspondence or other information that is (i) owned or created by any employee or agent of Kingman (other than Smith) or by any third party independent of the Company without access to and reliance on the Company’s confidential information or trade secrets, (ii) obtained or received by Smith from a third party without an obligation of confidentiality to the Company, (iii) independently developed or derived without aid of or access to the Company’s confidential information or trade secrets, or (iv) authorized for publication by the Company’s Board of Directors.

(2) Continued Participation in Kingman. It is further understood and agreed that Smith shall continue to have an ownership interest in, to have obligations and duties to, and to participate in the activities and operations of Kingman and, as such, may engage in other oil and gas activities, for his own account and for the account of others, that are unrelated to the Company’s endeavors.  Because Kingman may provide various services to the Company that are directly related to the Company’s endeavors (for example, serving as operator for the Company’s oil and gas wells), Smith, by virtue of his continued involvement with Kingman, may have dual interests in certain of the Company’s endeavors and may have conflicting interests with regard to certain of the Company’s endeavors.  It is, therefore, further understood and agreed that the consideration paid to Smith hereunder is far less than that which the market would normally bare for an executive of his caliber in order to (a) avoid any appearance of self-dealing on Smith’s part and (b) account for compensation Smith may receive by virtue of his continued involvement with Kingman.  It is, further, understood and agreed that, in the event Smith’s performance of a duty or obligation to the Company and his duties or obligations to, or interest in, Kingman give rise to a conflict of interests, Smith temporarily may excuse himself from performance of such duty or obligation to the Company, instead deferring such matter to the discretion of the Company’s Board of Directors, and in so doing shall not breach or violate the provisions of this Agreement or be deemed to have abandoned his duties or employment hereunder.

(3) Conflicts of Interest.  During the Term, Smith will not engage as owner, stockholder, employee, officer, or director, directly or indirectly, for his own account, or for any person, firm, or corporation, anywhere in the world, in the business now conducted by the Company; provided, however, (i) the foregoing shall in no way restrict Smith’s ability to participate as owner, stockholder, employee, officer, or director, directly or indirectly, for his own account, or for any person, firm, or corporation, anywhere in the world, in the business conducted by Kingman, and (ii) Smith may invest in the securities traded on a national securities exchange or in the over-the-counter market of any corporation engaged in the business now conducted by the Company and those of any corporation not engaged in the business now conducted by the Company.

(4) Disclosures.  The Company shall make disclosures regarding the foregoing provisions of Subsections VI(2)-(3) in filings with the Securities & Exchange Commission (“SEC”) and states securities regulators and in documents provided to investors and potential investors as reasonably prudent under (at a minimum, as required by) applicable law.

 

 

  

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VII. INDEMNIFICATION 

The Company will, and does hereby, indemnify and hold harmless, to the extent permitted by law, Smith from and against any and all losses, claims, damages, liabilities (joint or several), penalties, fines, interest, costs and expenses (“Losses”) which Smith may incur and to which Smith may become subject under federal or state statute, common law, or otherwise (“Proceedings”) relating to (a) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which the Company’s securities were registered under the Securities Act or applicable state law; (b) any misleading, untrue or allegedly misleading or untrue statement or omission to state a material fact in any preliminary, final, or summary prospectus, offering memorandum, or other document provided to investors, potential investors, the SEC or state securities regulators, including any amendments or supplements thereto; (c) the Company’s failure to make disclosures as reasonably prudent under or as required by the Securities Act or applicable state securities or consumer protection laws; (d) the Company’s violation of applicable law or regulation; (e) the Company’s decision to contest a determination under Sections 4999 or 280G of the Code relative to any payment to Smith under Section V of this Agreement or imputed income resulting from any Gross-Up Payment; or (f) any other action or omission to act by the Company.  Smith shall have the right to be represented in Proceedings by counsel of his choosing, and the Company will reimburse Smith for any legal and other expenses incurred by him in connection with Proceedings.  Such indemnity remains in full force and effect regardless of, and shall survive, the termination of the Term or this Agreement.

X. MISCELLANEOUS 

(1) Successors. This Agreement (a) shall be binding upon any successor (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation, or otherwise) to all or substantially all of the Company’s business and/or assets and (b) shall inure to the benefit of, and be enforceable by, Smith’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees.

(2) Notices. Any notice required or desired to be given under this Agreement will be deemed given if in writing sent by certified mail and hand delivered (a) if to Smith, to his residence, or (b) if to the Company, to its principal office or its registered agent.

(3) Modification; Waiver. No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by Smith and such officer of the Company as designated by its Board of Directors.  Waiver by either Party of a breach of any provision does not operate as or will be construed a waiver of any subsequent breach.

(4) Savings Clause. The invalidity or unenforceability of any provision or provisions of this Agreement does not affect the validity or enforceability of any other provision of this Agreement which remains in full force and effect.

(5) Interpretation. This Agreement has been submitted to the scrutiny of, and has been negotiated by, all Parties hereto and their counsel, and shall be given a fair and reasonable interpretation in accordance with the terms hereof, without consideration or weight being given to its having been drafted by any Party hereto or its counsel.  Titles or captions of sections contained in this Agreement are inserted only as a matter of convenience and for reference, and in no way define, limit, extend, or describe the scope of this Agreement or the intent of any provisions hereof.

(6) Governing Law; Disputes; Remedies Cumulative. This Agreement is governed by and construed in accordance with the laws of the State of Texas.  Any disputes under this Agreement shall be brought in the state or federal courts located in Travis County, Texas, and the Parties irrevocably submit to the jurisdiction of said courts.  The rights and remedies of the Parties hereunder shall not be mutually exclusive, and the exercise of one or more of the provisions hereof shall not preclude the exercise of any other provisions hereof.

(7) Entire Agreement. This Agreement has been approved by the Company’s Board of Directors and contains the Parties’ full and complete Agreement concerning Smith’s employment with the Company, to the exclusion of any other agreements, representations or discussion (oral or written).

 

  

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman of the Board, and the Parties have executed this Agreement as of the day and year first above written.

Rockdale Resources, Inc.                                                                                 Michael D. Smith

By: /s/ John P. Barton                                                                                                          By: /s/ Michael D. Smith                               

[signature]                                                                                                                    [signature]

Name:    John P. Barton                                                                                                        Name:  Michael D. Smith                               

[printed name]                                                                                                               [printed name]

Title:   Director                                                                                                                        

Rockdale Chief Exec. Employ Agree Smith 3-31-12

 

  

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