Document:

exv10w19

 

Exhibit 10.19

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

     THIS
AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this
“Agreement”) is dated as of February 8,
2005 (the “Effective Date”), and is entered into by and between THE HOUSTON EXPLORATION COMPANY, a
Delaware corporation (the “Company”), and STEVEN L. MUELLER (the “Executive”).

WITNESSETH:

     WHEREAS, the Company and the Executive entered into an employment agreement dated October 22,
2001 (the “Prior Agreement”), and

     WHEREAS, the Company and the Executive mutually agree to terminate the Prior Agreement, and
hereby covenant that the Prior Agreement shall be null and void and have no further effect, and

     WHEREAS, the Company and the Executive wish to enter in this Agreement setting forth the terms
and conditions of the Executive’s employment with the Company.

     NOW, THEREFORE, in consideration of the premises and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the
Executive hereby agree as follows:

     1. Termination of Prior Agreement. The Executive and the Company hereby agree to terminate
the Prior Agreement and relinquish all rights, obligations, payments and benefits provided therein
in consideration for the employment terms and conditions set forth in this Agreement. This
Agreement shall supersede any and all obligations (other than any obligations relating to accrued,
but unused vacation or Executive’s right, if any, to his 2004 bonus) and terms set forth in the
Prior Agreement.

     2. Employment and Term of Employment. Subject to the terms and conditions of this Agreement,
the Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve the
Company as Executive Vice President and Chief Operating Officer for a term (the “Term of
Employment”) beginning on the Effective Date and ending on the Expiration Date (defined below). As
used herein, “Expiration Date” means the third anniversary of the Effective Date, provided that on
the first anniversary of the Effective Date and on each subsequent anniversary of the Effective
Date (such first anniversary date and each such subsequent anniversary date being referred to as a
“Renewal Date”), the Expiration Date shall be automatically extended one additional year unless,
not less than ninety (90) days prior to the relevant Renewal Date, (i) either party shall have
given written notice to the other that no such automatic extension shall occur after the date of
such notice or (ii) either party shall have given a Notice of Termination to the other pursuant to
Section 9 hereof. Notwithstanding the foregoing, if either party gives a valid Notice of
Termination pursuant to Section 9 hereof, the Term of

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Employment shall not extend beyond the termination date specified in such Notice of
Termination.

       3. Scope of Employment.

     (a) During the Term of Employment, the Executive agrees to (i) serve as Executive Vice
President and Chief Operating Officer (or in such other position of equal or greater
authority) of the Company and shall have and may exercise all the powers, duties and
functions as are normal and customary to such positions and that are consistent with the
responsibilities set forth with respect to such positions in the Company’s bylaws and (ii)
perform such other duties not inconsistent with his position as are assigned to him, from
time to time, by the Company. During the Term of Employment, the Executive shall devote
substantially all of his business time, attention, skill and efforts to the faithful
performance of his duties hereunder. Subject to Section 8, the foregoing shall not be
construed to prevent the Executive from making investments in businesses or enterprises so
long as such investments do not require any services on the part of the Executive in the
operation of such business or enterprises of a nature or magnitude that would interfere
materially with the performance of his duties hereunder.

     (b) During the Term of Employment, the Executive agrees to serve, if elected, as an
officer or director of any subsidiary or affiliate of the Company so long as such service is
commensurate with the Executive’s duties and responsibilities to the Company.

     (c) The Executive’s place of employment hereunder shall be at the Company’s principal
executive offices in the greater Houston, Texas metropolitan area. Moreover, the Company
agrees that it will provide immunity and indemnity for the Executive to the fullest extent
allowed by law, that if necessary it will amend its certificate of incorporation and bylaws
to so provide, and that it will obtain errors and omissions insurance in the amount of no
less than Ten Million Dollars ($10,000,000) naming the Executive as an additional insured.

       4. Compensation. During the Term of Employment, in consideration of the Executive’s services
hereunder, including, without limitation, service as an officer or director of the Company or of
any subsidiary or affiliate thereof, and in consideration of the Executive’s covenants regarding
confidentiality in Section 7 hereof and noncompetition in Section 8 hereof, the Executive shall
receive the following compensation:

     (a) Base Salary. The Executive shall be paid a base salary at the rate of Three
Hundred Thousand Dollars ($300,000) per year (the “Base Salary”) (payable at such regular
intervals as other employees of the Company are compensated in accordance with the Company’s
employment practices), which amount shall be subject to review annually by the Board of
Directors of the Company (the “Board”) or the Compensation Committee of the Board (the
“Compensation Committee”) and may be adjusted at its discretion, provided that such Base
Salary may not be reduced at any time.

     (b) Target Bonus. During the Term of Employment, The Executive shall also be entitled
to an annual target bonus equal to fifty-five percent (55%) of the Executive’s

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Base Salary (the “Target Bonus”) upon the achievement of pre-established performance goals set by the
Board or the Compensation Committee of the Board. Any such bonus shall be paid at such
times as the Company customarily pays bonuses and shall be paid consistent with Company
policies.

       5. Additional Compensation and Benefits.

     (a) As additional compensation for the Executive’s services under this Agreement, the
Executive’s covenants regarding confidentiality in Section 7 hereof and noncompetition in
Section 8 hereof, during the Term of Employment, the Company agrees to provide the Executive
with such other benefits as it provides to its employees from time to time and subject to
the eligibility provisions of any such employee benefit plans and policies. Executive
shall be eligible for leave or vacation time (not less than five (5) weeks per year).

     (b) The Executive shall be eligible to participate in the Company’s Supplemental
Executive Retirement Plan (“SERP”), to the extent that the Board has adopted a SERP. The
Executive’s retirement benefits under the SERP shall be determined and paid in accordance
with the terms of the SERP plan document.

     (c) The Board shall have the discretion to make equity grants to Executive under the
Company’s Long Term Incentive Plan.

     (d) The Executive is authorized to incur reasonable business expenses for promoting the
business and reputation of the Company, including (without limitation) reasonable
expenditures for travel, lodging, club memberships, meals and client, patron, customer
and/or business associate entertainment. The Company shall reimburse within thirty (30)
days the Executive for reasonable expenses incurred by the Executive in furtherance of the
Company’s business, provided that such expenses are incurred in accordance with the
Company’s policies and upon presentation of documentation in accordance with expense
reimbursement policies of the Company as they may exist from time to time, and submission to
the Company of adequate documentation in accordance with federal income tax regulations and
administrative pronouncements.

     (e) During the Term of Employment, the Company shall pay to Executive an automobile
allowance of Seven Hundred Dollars ($700) per month.

       6. Contract Severance. In consideration for the termination of the Executive’s Prior
Agreement, the Company hereby agrees to provide the Executive with a cash payment and restricted
stock grant (the “Contract Severance”) according to the terms set forth below:

     (a) Cash Payment. The Company agrees to provide the Executive with a cash payment
equal to Three Hundred Fifty-Three Thousand Eight Hundred and Sixty-Six Dollars ($353,866),
less applicable withholding, to be paid to the Executive in a lump sum payment as soon as
administratively practicable following the Effective Date.

     (b) Restricted Stock Grant. As soon as administratively practicable following the
Effective Date, (the “Grant Date”), the Company hereby grants to the Executive

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6,553 shares of the Company’s common stock which shall be subject to certain restrictions (the
“Restricted Stock”). The Restricted Stock shall be granted subject to the terms of the
Company’s Long Term Incentive Plan and shall vested as provided therein.

       7. Confidentiality and Other Matters.

     (a) Confidentiality. The Executive shall hold in a fiduciary capacity for the benefit
of the Company all maps, data, reports, including results of exploration, drilling, drill
cores, cuttings, and other samples, and other information relating to the business of the
Company which comes into the possession of the Executive during the Term of Employment (such
information being collectively referred to herein as the “Confidential Information”).
During the Term of Employment and after termination of the Executive’s employment hereunder,
the Executive agrees: (i) to take all such precautions as may be reasonably necessary to
prevent the disclosure to any third party of any of the Confidential Information; (ii) not
to use for the Executive’s own benefit any of the Confidential Information; and (iii) not to
aid any other person or entity in the use of the Confidential Information in competition
with the Company, provided that nothing in this Agreement shall prohibit the Executive from
disclosing or using any Confidential Information (A) in the performance of his duties
hereunder, (B) as required by applicable law, (C) in connection with the enforcement of his
rights under this Agreement or any other agreement with the Company, (D) in connection with
the defense or settlement of any claim, suit or action brought or threatened against the
Executive by or in the right of the Company or (E) with the prior written consent of the
Board. Notwithstanding any provision contained herein to the contrary, the term
“Confidential Information” shall not be deemed to include any general knowledge, skills or
experience acquired by the Executive or any knowledge or information known or available to
the public in general. The Executive further agrees that, if requested by the Company in
writing at any time within ninety (90) days after termination of his employment for any
reason, he will surrender to the Company all Confidential Information, and any copies
thereof, in his possession and agrees that all such materials, and copies thereof, are at
all times the property of the Company. Notwithstanding the foregoing, the Executive shall be
permitted to retain copies of, or have access to, all such Confidential Information relating
to any disagreement, dispute or litigation (pending or threatened) involving the Executive.

     (b) Remedies. For purposes of this Section 7, the “Company” shall be defined as the
Company and its affiliated companies including (without limitation) its successors and
assigns and its subsidiaries and each of their respective successors and assigns. In the
event of a breach or threatened breach by the Executive of the provisions of this Section 7,
the Company shall be entitled to an injunction restraining the Executive from violating such
provisions without the necessity of posting a bond therefor. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies available to it at law
or in equity. Except as specifically set forth herein, the parties agree that the
provisions of this Section 7 shall survive the earlier termination of the
Executive’s employment with the Company, as the continuation of this covenant is
necessary for the protection of the Company.

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       8. Noncompetition.

     (a) Noncompetition Activities. The Executive acknowledges that the nature of the
employment under this Agreement is such as will bring the Executive in personal contact with
patrons or customers of the Company and will enable him to acquire valuable information as
to the nature and character of the business of the Company, thereby enabling him, by
engaging in a competing business in his own behalf, or for another, to take advantage of
such knowledge and thereby gain an unfair advantage. Accordingly, the Executive covenants
and agrees that he will not, without the prior written consent of the Company during the
Term of Employment, and for the period of one year thereafter, engage directly or indirectly
for himself, or as an agent, representative, officer, director or employee of others, in the
exploration for or production of oil and gas in Louisiana, Texas, Arkansas, Oklahoma,
Colorado, North Dakota, South Dakota and the coastal area of the Gulf of Mexico from the
Mexican border to the eastern boarder of Louisiana provided, that, the foregoing restriction
shall not apply at any time if the Executive’s employment is terminated during the Term of
Employment by the Executive for Good Reason (defined in Section 9 hereof) or by the Company
for any reason other than Cause (defined in Section 9 hereof) and, provided further, that
nothing in this Agreement shall prohibit the Executive from acquiring or holding any issue
of stock or securities of any entity registered under Section 12 of the Securities and
Exchange Act of 1934 (as amended), listed on a national securities exchange or quoted on the
automated quotation system of the National Association of Securities Dealers, Inc. so long
as the Executive is not deemed to be an “affiliate” of such entity as such term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act of 1933 (as amended).

     (b) Scope. In the event that the provisions of this Section 8 should ever be deemed to
exceed the time, geographic or activity related limitations permitted by applicable law,
then such provisions shall be reformed to the maximum time, geographic or activity related
limitations permitted by applicable law. In the event of a breach or threatened breach by
the Executive of the provisions of this Section 8, the Company shall be entitled to an
injunction restraining the Executive from violating such provisions without the necessity of
posting a bond therefor. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it at law or in equity. Except as specifically set
forth herein, the parties agree that this Section 8 shall remain in effect for its full term
notwithstanding the earlier termination of the Executive’s employment with the Company, as
the continuation of this covenant is necessary for the protection of the Company. For
purposes of this Section 8, the “Company” shall be defined as the Company and its affiliated
companies, including (without limitation) its successors and assigns and its subsidiaries
and each of their respective successors and assigns.

       9. Termination.

     (a) General. The Executive’s employment hereunder shall automatically terminate on the
earlier of his death or the Expiration Date. The Executive may, at any time prior to the
Expiration Date, terminate his employment hereunder for any reason by delivering a Notice of
Termination (defined below) to the Board. The Company may, at

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any time prior to the Expiration Date, terminate the Executive’s employment hereunder for any reason by delivering
a Notice of Termination to the Executive, provided that in no event shall the Company be
entitled to terminate the Executive’s employment prior to the Expiration Date unless the
Board shall duly adopt, by the affirmative vote of a least a majority of the entire
membership of the Board (excluding Executive if he should then be serving on the Board), a
resolution authorizing such termination and stating whether such termination is for Cause
(defined below). The giving of a notice pursuant to clause (i) of the proviso contained in
the penultimate sentence of Section 2 hereof shall not be deemed a termination of the
Executive’s employment by the party giving such notice. As used in this Agreement, “Notice
of Termination” means a notice in writing purporting to terminate the Executive’s employment
in accordance with this Section 9, which notice shall (i) specify the effective date of such
termination (not prior to the date of such notice) and (ii) in the case of a termination by
the Company for Cause or Disability or a termination by the Executive for Good Reason or
Disability, set forth in reasonable detail the reason for such termination and the facts and
circumstances claimed to provide a basis for such termination.

     (b) Automatic Termination on Expiration Date. In the event the Executive’s employment
hereunder shall automatically terminate on the Expiration Date for any reason, the Executive
shall only be entitled to receive (i) all unpaid Base Salary earned as of the termination
date (ii) all unused vacation time accrued by the Executive as of the termination date, and
(iii) those benefits which are required under the Employee Retirement Income Security Act of
1974, as amended (“ERISA”), or other laws or any other amounts due and owing to the
Executive under any of the Company’s employee benefit plans or policies on or following his
termination of employment (the “Accrued Obligation”). The amounts described in clauses (i)
and (ii) of the foregoing sentence shall be paid to the Executive in a lump sum payment
promptly after the Expiration Date.

     (c) Termination by Company for Cause or by Executive without Good Reason. If the
Company terminates the Executive’s employment for Cause or the Executive terminates his
employment without Good Reason, the Executive shall only be entitled to receive the Accrued
Obligations. Executive shall provide the Company at least thirty (30) days advance written
notice of his termination of employment without Good Reason. As used in this Agreement,
“Cause” shall mean (i) any failure of the Executive to (A) perform his principal duties
specified in Section 3 of this Agreement in any material respect (other than any such
failure resulting from the Executive’s incapacity due to illness or other disability), (B)
comply with any material provision of this Agreement (other than Section 7 or 8), or (C)
comply with any material provision of the Company’s ethics, code of conduct or other
employment policies, in each case in (A) through (C) above after written notice of such
failure has been given to the Executive by the Board and such failure shall have continued
for thirty (30) days after receipt of such notice, (ii) Executive’s grossly negligent or intentional misconduct which is either materially
detrimental to the Company’s financial interests and reputation, or which would legally
prevent the Executive from serving in the capacity he was hired to serve, (iii) a material
breach by the Executive of any material provision in Sections 7 or 8 of this Agreement, or
(iv) conviction of or plea of guilty or no contest by the Executive of a felony or any other
criminal offense involving moral turpitude any of which has or have a material adverse

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effect on the Executive’s ability to perform the duties of his position or on the financial
condition or profitability of the Company.

     (d) Death or Disability. To provide for the event the Executive’s employment is
automatically terminated on account of his death or is terminated by either the Company or
the Executive on account of Disability (defined below), the Company shall purchase and
provide for the Executive life insurance in the amount of one times annual salary and shall
purchase and provide for the Executive supplemental executive long-term disability benefits
(to the extent necessary to provide the total benefits described herein, net of the
Company’s existing group long-term disability plan) to provide salary replacement in the
amount of sixty percent (60%) of annual salary at the date of disability (to continue until
at least age sixty-five (65), or for life if reasonably practicable). As used herein,
“Disability” means any physical or mental condition of the Executive that (i) prevents the
Executive from being able to perform the services required under this Agreement, (ii) has
continued for at least one hundred eighty (180) consecutive days during any twelve (12)
month period and (iii) is reasonably expected to continue. The Company’s obligation to
provide to the Executive long-term disability benefits hereunder shall be defined by the
long-term disability benefits contract it is able to procure from an unrelated third party.
For that purpose, the definition of disability shall be as stated in the contract. The
Company and the Executive recognize that the definition of Disability hereunder may differ
from the contract definition and the benefits payable shall be those as stated in the
contract. The Company, however, agrees to use good faith efforts to obtain a contract with
a definition of disability as similar as possible to the definition stated hereunder.
Moreover, the Company and the Executive agree that for purposes of the other provisions of
this Agreement, including the right of the Company to terminate the Executive, the
definition of Disability as stated herein shall control.

In addition, upon the Executive’s termination of employment under this clause (d), the
Executive shall be paid and/or provided the Accrued Obligations, and any vesting, lapse of
time, performance condition, or similar requirement under any stock option plan, restricted
stock or other non-qualified deferred compensation plan shall be accelerated to the date of
such termination and any conditions to the Executive’s entitlement to any benefits under any
of such plans or programs shall be deemed to have been satisfied.

     (e) Termination by Company Without Cause or by the Executive with Good Reason. If
either the Company terminates the Executive’s employment for any reason other than for Cause
or on account of Disability or the Executive terminates his employment for Good Reason (as
hereinafter defined), the Company shall:

     (i) pay to the Executive, within thirty (30) days after the date of such
termination, a lump sum cash payment equal to 2.99 times the Executive’s then
current annual rate of Total Compensation;

     (ii) pay or provide the Executive the Accrued Obligations; and

     (iii) pay Executive’s COBRA premiums for continuation coverage under the
Company’s group health plan for the lesser of (a) twelve (12) months

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following the date of termination; (b) until such time as Executive is no longer eligible for
COBRA coverage; or (c) until such time as Executive becomes eligible for comparable
benefits from a subsequent employer.

In addition any vesting, lapse of time, performance condition or similar requirement under
any stock option plan, restricted stock or other non-qualified deferred compensation plan
shall be accelerated to the date of such termination and any conditions to the Executive’s
entitlement to any benefits under any of such plans or programs shall be deemed to have been
satisfied.

The Executive shall have “Good Reason” to terminate his employment hereunder within thirty
(30) days following his knowledge of any of the events set forth below which have not been
cured by the Company within fifteen (15) days following Executive’s written notice of the
occurrence of any such events: (A) a material and adverse change in the powers, duties,
responsibilities or functions of the Executive as described in Section 3 hereof; or (B)
subject to the last sentence of this paragraph, any material and adverse change in the
Executive’s relative position in the Company’s management structure; or (C) without the
Executive’s prior written consent, the relocation of the Company’s principal executive
offices outside the greater Houston, Texas metropolitan area or requiring the Executive to
be based other than at such principal executive offices, of the Company; or (D) the failure
of the Company to obtain any assumption agreement required by Section 18 hereof; or (E) any
reduction in the level of Executive’s Base Salary or Target Bonus, or the failure by the
Company to pay the Executive within ten (10) days after a written demand therefor any
installment of any previous award of or deferred compensation, if any, which he is due and
owing under any employee benefit plan or any deferred compensation program in effect in
which the Executive may have participated; or (F) any other material breach of this
Agreement by the Company. Notwithstanding anything to the contrary in this Section 9(e), no
change of Executive’s relative position in the Company’s management structure (which does
not otherwise materially and adversely change the powers, duties, responsibilities or
functions of the Executive as described in Section 3) shall constitute Good Reason unless
and until the occurrence of a Change in Control (as defined in the Company’s Long Term
Incentive Plan), it being understood that prior to a Change in Control, the Chief Executive
Officer shall have discretion to make organizational changes affecting the Executive in the
interest of effective corporate management as the Chief Executive Officer may determine from
time to time.

As used in this Agreement, the term “Total Compensation” shall mean the sum of the
following:

     (i) the current annual rate of Base Salary of the Executive and;

     (ii) the Executive’s Target Bonus for the year of termination; and

     (iii) the current annual car allowance provided by the Company to the
Executive.

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     (f) Certain Additional Payments by the Company. Anything in this Agreement to the
contrary notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive, whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement or otherwise (a
“Payment”), would be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”),
then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”)
in an amount such that after payment by the Executive of all taxes (including any interest
or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the
Gross Up Payment, the Executive retains an amount of the Gross Up Payment equal to the
Excise Tax imposed upon the Payments. Subject to the provisions of this Section 9(f), all
determinations required to be made hereunder, including whether a Gross Up Payment is
required and the amount of such Gross Up Payment, shall be made by the accounting firm which
at the time audits the financial statements of the Company (the “Accounting Firm”) at the
sole expense of the Company, which shall provide detailed supporting calculations both to
the Company and the Executive within fifteen (15) business days of the date of termination
of the Executive’s employment under this Agreement, if applicable, or such earlier time as
is requested by the Company. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, the Accounting Firm shall furnish the Executive with an opinion
that he has substantial authority not to report any Excise Tax on his federal income tax
return. Any determination by the Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of Section 4999 of the Code at
the time of the initial determination by the Accounting Firm hereunder, it is possible that
Gross Up Payments, which will not have been made by the Company should have been made (an
“Underpayment”), consistent with the calculations required to be made hereunder. If the
Company exhausts its remedies pursuant hereto and the Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.

     The Executive shall notify the Company in writing of any claim by the Internal Revenue
Service that, if successful, would require the payment by the Company of the Gross Up
Payment. Such notification shall be given as soon as practicable but no later than ten (10)
business days after the Executive knows of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the thirty (30) day period
following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall:

     (i) give the Company any information reasonably requested by the Company
relating to such claim,

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     (ii) take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including (without
limitation) accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company,

     (iii) cooperate with the Company in good faith to effectively contest such
claim, and

     (iv) permit the Company to participate in any proceedings relating to such
claim;

provided, that, the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or income tax, including interest and penalties with respect thereto, imposed as
a result of such representation and payment of costs and expenses. Without limitation on the
foregoing provisions hereof the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in respect of such
claim and may, at its sole option, either direct the Executive to pay the tax claimed and
sue for a refund or contest the claim in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall determine,
provided that if the Company directs the Executive to pay such claim and sue for a refund,
the Company shall advance the amount of such payment to the Executive, on an interest-free
basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect to such advance,
and further provided that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount. Furthermore, the Company’s
control of the contest shall be limited to issues with respect to which a Gross Up Payment
would be payable hereunder and the Executive shall be entitled to settle or contest, as the
case may be, any other issue raised by the Internal Revenue Service or any other taxing
authority.

     If, after the receipt by the Executive of an amount advanced by the Company pursuant
hereto, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the
requirements hereof) promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after taxes applicable thereto). If, after the receipt
by the Executive of an amount advanced by the Company pursuant hereto, a determination is
made that the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest such denial of
refund prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid

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and the amount of such advance shall offset, to the extent thereof, the amount of Gross Up Payment required to be
paid.

     (g) Either party may, within fifteen (15) days after receipt of a Notice of Termination
from the other party, provide notice to the other party that a dispute exists concerning the
termination, in which event the dispute shall be resolved in accordance with Section 11
hereof. If such dispute should commence during the one year period immediately following a
Change in Control, notwithstanding the pendency of any such dispute and notwithstanding any
provision of this Agreement to the contrary, the Company will (i) continue to pay the
Executive his Base Salary and (ii) continue the Executive as a participant in all
compensation and benefit plans in which the Executive was participating when the relevant
Notice of Termination was given, until the dispute is finally resolved or, with respect to a
Notice of Termination given by the Executive, the date of termination specified in such
Notice of Termination if earlier, but, in each case, not past the Expiration Date;
provided that, the Company may elect to terminate the Executive without
Cause at anytime and upon satisfying its obligations under Section 9(e) hereof, its
obligations under this Section 9(g) shall cease. If (i) the Company give a Notice of
Termination to the Executive, (ii) the Executive disputes the termination as contemplated by
this paragraph (g), and (iii) such dispute is resolved in favor of the Company, the
Executive shall be required to refund to the Company any amounts paid to the Executive under
this paragraph (g) but only if, and then only to the extent, the Executive is not otherwise
entitled to receive such amounts under this Agreement.

       10. Non-exclusivity of Rights.Nothing in this Agreement shall prevent or limit the
Executive’s continuing or future participation in any benefit, bonus, incentive or other plan or
program provided by the Company or any of its affiliated companies and for which the Executive may
qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have
under any stock option or other agreements with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any
plan or program of the Company or any of its affiliated companies at or subsequent to the date of
termination of the Executive’s employment under this Agreement shall be payable in accordance with
such plan or program.

       11. Resolution of Disputes.

     (a) Negotiation. The parties shall attempt in good faith to resolve any dispute
arising out of or relating to this Agreement promptly by negotiations between the Executive
and an executive officer of the Company who has authority to settle the controversy. Any
party may give the other party written notice of any dispute not resolved in the normal
course of business. Within ten (10) days after the effective date of such notice, the
Executive and an executive officer of the Company shall meet at a mutually acceptable time
and place within the Houston, Texas metropolitan area, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to attempt to resolve the
dispute. If the matter has not been resolved within thirty (30) days of the disputing
party’s notice, or if the parties fail to meet within ten (10) days, either party may
initiate arbitration of the controversy or claim as provided hereinafter. If

11

 

a negotiator intends to be accompanied at a meeting by an attorney, the other negotiator shall be given
at least three (3) business days’ notice of such intention and may also be accompanied by an
attorney. All negotiations pursuant to this Section 11(a) shall be treated as compromise
and settlement negotiations for the purposes of the federal and state rules of evidence and
procedure.

     (b) Arbitration. Any dispute arising out of or relating to this Agreement or the
breach, termination or validity thereof, which has not been resolved by nonbinding means as
provided in Section 11(a) within sixty (60) days of the initiation of such procedure, shall
be finally settled by arbitration conducted expeditiously in accordance with the Center for
Public Resources, Inc. (“CPR”) Rules for Non Administered Arbitration of Business Disputes
by three (3) independent and impartial arbitrators, of whom each party shall appoint one,
provided that if one party has requested the other to participate in a nonbinding procedure
and the other has failed to participate, the requesting party may initiate arbitration
before the expiration of such period. Any such arbitration shall take place in Harris
County, Texas. Any arbitrator not appointed by a party shall be appointed from the CPR
Panels of Neutrals. The arbitration shall be governed by the United States Arbitration Act
and any judgment upon the award decided upon by the arbitrators may be entered by any court
having jurisdiction thereof. Each party hereby acknowledges that compensatory damages
include (without limitation) any benefit or right of indemnification given by another party
to the other under this Agreement.

       12. Expenses. The losing party shall pay all reasonable costs and expenses, including,
without limitation, court costs and attorneys’ fees, incurred by the other party as a result of any
claim, action or proceeding, arising out of, or challenging the validity or enforceability of, this
Agreement or any provision hereof; provided, that, if any such claim, action or
proceeding shall commence within the one year period immediately following a Change in Control, the
Company shall pay all expenses and legal fees incurred by the Executive in such dispute, regardless
of outcome, unless it is determined that the Executive acted in bad faith and without a reasonable
belief that he would prevail in such claim, action or proceeding.

       13. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the
State of Texas. Venue and jurisdiction of any act on relating to this agreement shall lie in
Harris County, Texas.

       14. Notice. Any notice, payment, demand or communication required or permitted to be given by
this Agreement shall be deemed to have been sufficiently given or served for all purposes if
delivered personally or if sent by registered or certified mall, return receipt requested, postage
prepaid, addressed to such party at its address set forth below such party’s signature to this
Agreement or to such other address as shall have been furnished in writing by such party for whom
the communication is intended. Any such notice shall be deemed to be given on the date so
delivered.

12

 

     15. Severability. In the event any provisions hereof shall he modified or held ineffective by
any court, such adjudication shall not invalidate or render ineffective the balance of the
provisions hereof.

     16. Entire Agreement. This Agreement constitutes the sole agreement between the parties with
respect to the employment of the Executive by the Company and supersedes any and all other
agreements, including the Prior Agreement and any other oral or written agreement, between the
parties.

     17. Amendment and Waiver. This Agreement may not be modified or amended except by a writing
signed by the parties. Any waiver or breach of any of the terms of this Agreement shall not
operate as a waiver of any other breach of such terms or conditions, or any other terms or
conditions, nor shall any failure to enforce any provisions hereof operate as a waiver of such
provision or any other provision hereof.

     18. Assignment. This Agreement is a personal employment contract and the rights and interests
of the Executive hereunder may not be sold, transferred, assigned or pledged. The Company may
assign its rights under this Agreement to (i) any entity into or with which the Company is merged
or consolidated or to which the Company transfers all or substantially all of its assets or (ii)
any entity, which at the time of such assignment, controls, is under common control with, or is
controlled by the Company, provided that the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to perform it if not such
succession had taken place.

     19. Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and his heirs,
executors, administrators and legal representatives. This Agreement shall be binding upon and
inure to the benefit of the Company and its successors and assigns.

     20. Section Headings. The section headings in this Agreement have been inserted for
convenience and shall not be used for interpretive purposes or to otherwise construe this
Agreement.

     21. No Mitigation or Set-off. The provisions of this Agreement are not intended to, nor shall
they be construed to, require that the Executive mitigate the amount of any payment provided for in
this Agreement by seeking or accepting other employment, nor shall the amount of any payment
provided for in this Agreement be reduced by any compensation earned by the Executive as a result
of his employment by another employer or otherwise. The Company’s obligations to make the payments
to the Executive required under this Agreement and otherwise to perform its obligations hereunder
shall not be affected by any set off, counterclaim,

13

 

recoupment, defense or other claim, right or action that the Company may have against the Executive.

[Remainder of page intentionally left blank]

14

 

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first
written above and intend that this Agreement have the effect of a sealed instrument.

	 	 	 	 	 	 
	 	 	EXECUTIVE
	 
	 	 	 	 
	 	 	/s/ STEVEN L. MUELLER

	 	 	STEVEN L. MUELLER
	 
	 	 	 	 
	 	 	THE HOUSTON EXPLORATION COMPANY
	 
	 	 	 	 
	

	 	By: 	 	/s/ WILLIAM G. HARGETT
	

	 	 	 	
 
	

	 	Name: 	 	William G. Hargett
	

	 	Title: 	 	Chairman, President and Chief
Executive Officer

15exv10w20

 

Exhibit 10.20

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

     THIS
AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is dated as of February 8,
2005 (the “Effective Date”), and is entered into by and between THE HOUSTON EXPLORATION COMPANY, a
Delaware corporation (the “Company”), and JOHN H. KARNES (the “Executive”).

WITNESSETH:

     WHEREAS, the Company and the Executive entered into an employment agreement dated November 18,
2002 (the “Prior Agreement”), and

     WHEREAS, the Company and the Executive mutually agree to terminate the Prior Agreement, and
hereby covenant that the Prior Agreement shall be null and void and have no further effect, and

     WHEREAS, the Company and the Executive wish to enter in this Agreement setting forth the terms
and conditions of the Executive’s employment with the Company.

     NOW, THEREFORE, in consideration of the premises and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the
Executive hereby agree as follows:

     1. Termination of Prior Agreement. The Executive and the Company hereby agree to terminate
the Prior Agreement and relinquish all rights, obligations, payments and benefits provided therein
in consideration for the employment terms and conditions set forth in this Agreement. This
Agreement shall supersede any and all obligations (other than any obligations relating to accrued,
but unused vacation or Executive’s right, if any, to his 2004 bonus) and terms set forth in the
Prior Agreement.

     2. Employment and Term of Employment. Subject to the terms and conditions of this Agreement,
the Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve the
Company as Senior Vice President and Chief Financial Officer for a term (the “Term of Employment”)
beginning on the Effective Date and ending on the Expiration Date (defined below). As used herein,
“Expiration Date” means the third anniversary of the Effective Date, provided that on the first
anniversary of the Effective Date and on each subsequent anniversary of the Effective Date (such
first anniversary date and each such subsequent anniversary date being referred to as a “Renewal
Date”), the Expiration Date shall be automatically extended one additional year unless, not less
than ninety (90) days prior to the relevant Renewal Date, (i) either party shall have given written
notice to the other that no such automatic extension shall occur after the date of such notice or
(ii) either party shall have given a Notice of Termination to the other pursuant to Section 9
hereof. Notwithstanding the foregoing, if either party gives a valid Notice of Termination
pursuant to Section 9 hereof, the Term of

1

 

Employment shall not extend beyond the termination date specified in such Notice of
Termination.

     3.    Scope of Employment.

     (a) During the Term of Employment, the Executive agrees to (i) serve as Senior Vice
President and Chief Financial Officer of the Company (or in such other position of equal or
greater authority) and shall have and may exercise all the powers, duties and functions as
are normal and customary to such positions and that are consistent with the responsibilities
set forth with respect to such positions in the Company’s bylaws and (ii) perform such other
duties not inconsistent with his position as are assigned to him, from time to time, by the
Company. During the Term of Employment, the Executive shall devote substantially all of his
business time, attention, skill and efforts to the faithful performance of his duties
hereunder. Subject to Section 8, the foregoing shall not be construed to prevent the
Executive from making investments in businesses or enterprises so long as such investments
do not require any services on the part of the Executive in the operation of such business
or enterprises of a nature or magnitude that would interfere materially with the performance
of his duties hereunder.

     (b) During the Term of Employment, the Executive agrees to serve, if elected, as an
officer or director of any subsidiary or affiliate of the Company so long as such service is
commensurate with the Executive’s duties and responsibilities to the Company.

     (c) The Executive’s place of employment hereunder shall be at the Company’s principal
executive offices in the greater Houston, Texas metropolitan area. Moreover, the Company
agrees that it will provide immunity and indemnity for the Executive to the fullest extent
allowed by law, that if necessary it will amend its certificate of incorporation and bylaws
to so provide, and that it will obtain errors and omissions insurance in the amount of no
less than Ten Million Dollars ($10,000,000) naming the Executive as an additional insured.

     4.    Compensation. During the Term of Employment, in consideration of the Executive’s services
hereunder, including, without limitation, service as an officer or director of the Company or of
any subsidiary or affiliate thereof, and in consideration of the Executive’s covenants regarding
confidentiality in Section 7 hereof and noncompetition in Section 8 hereof, the Executive shall
receive the following compensation:

     (a) Base Salary. The Executive shall be paid a base salary at the rate of Two Hundred
Ninety-Five Thousand Dollars ($295,000) per year (the “Base Salary”) (payable at such
regular intervals as other employees of the Company are compensated in accordance with the
Company’s employment practices), which amount shall be subject to review annually by the
Board of Directors of the Company (the “Board”) or the Compensation Committee of the Board
(the “Compensation Committee”) and may be adjusted at its discretion, provided that such
Base Salary may not be reduced at any time.

     (b) Target Bonus. During the Term of Employment, The Executive shall also be entitled
to an annual target bonus equal to fifty-five percent (55%) of the Executive’s

2

 

Base Salary (the “Target Bonus”) upon the achievement of pre-established performance goals set by the
Board or the Compensation Committee of the Board. Any such bonus shall be paid at such
times as the Company customarily pays bonuses and shall be paid consistent with Company
policies.

     5.    Additional Compensation and Benefits.

     (a) As additional compensation for the Executive’s services under this Agreement, the
Executive’s covenants regarding confidentiality in Section 7 hereof and noncompetition in
Section 8 hereof, during the Term of Employment, the Company agrees to provide the Executive
with such other benefits as it provides to its employees from time to time and subject to
the eligibility provisions of any such employee benefit plans and policies. Executive
shall be eligible for leave or vacation time (not less than five (5) weeks per year).

     (b) The Executive shall be eligible to participate in the Company’s Supplemental
Executive Retirement Plan (“SERP”), to the extent that the Board has adopted a SERP. The
Executive’s retirement benefits under the SERP shall be determined and paid in accordance
with the terms of the SERP plan document.

     (c) The Board shall have the discretion to make equity grants to Executive under the
Company’s Long Term Incentive Plan.

     (d) The Executive is authorized to incur reasonable business expenses for promoting the
business and reputation of the Company, including (without limitation) reasonable
expenditures for travel, lodging, club memberships, meals and client, patron, customer
and/or business associate entertainment. The Company shall reimburse within thirty (30)
days the Executive for reasonable expenses incurred by the Executive in furtherance of the
Company’s business, provided that such expenses are incurred in accordance with the
Company’s policies and upon presentation of documentation in accordance with expense
reimbursement policies of the Company as they may exist from time to time, and submission to
the Company of adequate documentation in accordance with federal income tax regulations and
administrative pronouncements.

     (e) During the Term of Employment, the Company shall pay to Executive an automobile
allowance of Seven Hundred Dollars ($700) per month.

     6.    Contract Severance. In consideration for the termination of the Executive’s Prior
Agreement, the Company hereby agrees to provide the Executive with a restricted stock grant (the
“Contract Severance”) as soon as administratively practicable following the Effective Date, (the
“Grant Date”) consisting of 12,892 shares of the Company’s common stock which shall be subject to
certain restrictions (the “Restricted Stock”). The Restricted Stock shall be granted subject to
the terms of the Company’s Long Term Incentive Plan and shall vested as provided therein.

3

 

     7.    Confidentiality and Other Matters.

     (a) Confidentiality. The Executive shall hold in a fiduciary capacity for the benefit
of the Company all maps, data, reports, including results of exploration, drilling, drill
cores, cuttings, and other samples, and other information relating to the business of the
Company which comes into the possession of the Executive during the Term of Employment (such
information being collectively referred to herein as the “Confidential Information”).
During the Term of Employment and after termination of the Executive’s employment hereunder,
the Executive agrees: (i) to take all such precautions as may be reasonably necessary to
prevent the disclosure to any third party of any of the Confidential Information; (ii) not
to use for the Executive’s own benefit any of the Confidential Information; and (iii) not to
aid any other person or entity in the use of the Confidential Information in competition
with the Company, provided that nothing in this Agreement shall prohibit the Executive from
disclosing or using any Confidential Information (A) in the performance of his duties
hereunder, (B) as required by applicable law, (C) in connection with the enforcement of his
rights under this Agreement or any other agreement with the Company, (D) in connection with
the defense or settlement of any claim, suit or action brought or threatened against the
Executive by or in the right of the Company or (E) with the prior written consent of the
Board. Notwithstanding any provision contained herein to the contrary, the term
“Confidential Information” shall not be deemed to include any general knowledge, skills or
experience acquired by the Executive or any knowledge or information known or available to
the public in general. The Executive further agrees that, if requested by the Company in
writing at any time within ninety (90) days after termination of his employment for any
reason, he will surrender to the Company all Confidential Information, and any copies
thereof, in his possession and agrees that all such materials, and copies thereof, are at
all times the property of the Company. Notwithstanding the foregoing, the Executive shall be
permitted to retain copies of, or have access to, all such Confidential Information relating
to any disagreement, dispute or litigation (pending or threatened) involving the Executive.

     (b) Remedies. For purposes of this Section 7, the “Company” shall be defined as the
Company and its affiliated companies including (without limitation) its successors and
assigns and its subsidiaries and each of their respective successors and assigns. In the
event of a breach or threatened breach by the Executive of the provisions of this Section 7,
the Company shall be entitled to an injunction restraining the Executive from violating such
provisions without the necessity of posting a bond therefor. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies available to it at law
or in equity. Except as specifically set forth herein, the parties agree that the
provisions of this Section 7 shall survive the earlier termination of the Executive’s
employment with the Company, as the continuation of this covenant is necessary for the
protection of the Company.

     8.    Noncompetition.

     (a) Noncompetition Activities. The Executive acknowledges that the nature of the
employment under this Agreement is such as will bring the Executive in personal

4

 

contact with patrons or customers of the Company and will enable him to acquire
valuable information as to the nature and character of the business of the Company, thereby
enabling him, by engaging in a competing business in his own behalf, or for another, to take
advantage of such knowledge and thereby gain an unfair advantage. Accordingly, the
Executive covenants and agrees that he will not, without the prior written consent of the
Company during the Term of Employment, and for the period of one year thereafter, engage
directly or indirectly for himself, or as an agent, representative, officer, director or
employee of others, in the exploration for or production of oil and gas in Louisiana, Texas,
Arkansas, Oklahoma, Colorado, North Dakota, South Dakota and the coastal area of the Gulf of
Mexico from the Mexican border to the eastern boarder of Louisiana provided, that, the
foregoing restriction shall not apply at any time if the Executive’s employment is
terminated during the Term of Employment by the Executive for Good Reason (defined in
Section 9 hereof) or by the Company for any reason other than Cause (defined in Section 9
hereof) and, provided further, that nothing in this Agreement shall prohibit the Executive
from acquiring or holding any issue of stock or securities of any entity registered under
Section 12 of the Securities and Exchange Act of 1934 (as amended), listed on a national
securities exchange or quoted on the automated quotation system of the National Association
of Securities Dealers, Inc. so long as the Executive is not deemed to be an “affiliate” of
such entity as such term is used in paragraphs (c) and (d) of Rule 145 under the Securities
Act of 1933 (as amended).

     (b) Scope. In the event that the provisions of this Section 8 should ever be deemed to
exceed the time, geographic or activity related limitations permitted by applicable law,
then such provisions shall be reformed to the maximum time, geographic or activity related
limitations permitted by applicable law. In the event of a breach or threatened breach by
the Executive of the provisions of this Section 8, the Company shall be entitled to an
injunction restraining the Executive from violating such provisions without the necessity of
posting a bond therefor. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it at law or in equity. Except as specifically set
forth herein, the parties agree that this Section 8 shall remain in effect for its full term
notwithstanding the earlier termination of the Executive’s employment with the Company, as
the continuation of this covenant is necessary for the protection of the Company. For
purposes of this Section 8, the “Company” shall be defined as the Company and its affiliated
companies, including (without limitation) its successors and assigns and its subsidiaries
and each of their respective successors and assigns.

     9.    Termination.

     (a) General. The Executive’s employment hereunder shall automatically terminate on the
earlier of his death or the Expiration Date. The Executive may, at any time prior to the
Expiration Date, terminate his employment hereunder for any reason by delivering a Notice of
Termination (defined below) to the Board. The Company may, at any time prior to the
Expiration Date, terminate the Executive’s employment hereunder for any reason by delivering
a Notice of Termination to the Executive, provided that in no event shall the Company be
entitled to terminate the Executive’s employment prior to the Expiration Date unless the
Board shall duly adopt, by the affirmative vote of a least a

5

 

majority of the entire membership of the Board (excluding Executive if he should then
be serving on the Board), a resolution authorizing such termination and stating whether such
termination is for Cause (defined below). The giving of a notice pursuant to clause (i) of
the proviso contained in the penultimate sentence of Section 2 hereof shall not be deemed a
termination of the Executive’s employment by the party giving such notice. As used in this
Agreement, “Notice of Termination” means a notice in writing purporting to terminate the
Executive’s employment in accordance with this Section 9, which notice shall (i) specify the
effective date of such termination (not prior to the date of such notice) and (ii) in the
case of a termination by the Company for Cause or Disability or a termination by the
Executive for Good Reason or Disability, set forth in reasonable detail the reason for such
termination and the facts and circumstances claimed to provide a basis for such termination.

     (b) Automatic Termination on Expiration Date. In the event the Executive’s employment
hereunder shall automatically terminate on the Expiration Date for any reason, the Executive
shall only be entitled to receive (i) all unpaid Base Salary earned as of the termination
date (ii) all unused vacation time accrued by the Executive as of the termination date, and
(iii) those benefits which are required under the Employee Retirement Income Security Act of
1974, as amended (“ERISA”), or other laws or any other amounts due and owing to the
Executive under any of the Company’s employee benefit plans or policies on or following his
termination of employment (the “Accrued Obligation”). The amounts described in clauses (i)
and (ii) of the foregoing sentence shall be paid to the Executive in a lump sum payment
promptly after the Expiration Date.

     (c) Termination by Company for Cause or by Executive without Good Reason. If the
Company terminates the Executive’s employment for Cause or the Executive terminates his
employment without Good Reason, the Executive shall only be entitled to receive the Accrued
Obligations. Executive shall provide the Company at least thirty (30) days advance written
notice of his termination of employment without Good Reason. As used in this Agreement,
“Cause” shall mean (i) any failure of the Executive to (A) perform his principal duties
specified in Section 3 of this Agreement in any material respect (other than any such
failure resulting from the Executive’s incapacity due to illness or other disability), (B)
comply with any material provision of this Agreement (other than Section 7 or 8), or (C)
comply with any material provision of the Company’s ethics, code of conduct or other
employment policies, in each case in (A) through (C) above after written notice of such
failure has been given to the Executive by the Board and such failure shall have continued
for thirty (30) days after receipt of such notice, (ii) Executive’s grossly negligent or
intentional misconduct which is either materially detrimental to the Company’s financial
interests and reputation, or which would legally prevent the Executive from serving in the
capacity he was hired to serve, (iii) a material breach by the Executive of any material
provision in Sections 7 or 8 of this Agreement, or (iv) conviction of or plea of guilty or
no contest by the Executive of a felony or any other criminal offense involving moral
turpitude any of which has or have a material adverse effect on the Executive’s ability to
perform the duties of his position or on the financial condition or profitability of the
Company.

6

 

     (d) Death or Disability. To provide for the event the Executive’s employment is
automatically terminated on account of his death or is terminated by either the Company or
the Executive on account of Disability (defined below), the Company shall purchase and
provide for the Executive life insurance in the amount of one times annual salary and shall
purchase and provide for the Executive supplemental executive long-term disability benefits
(to the extent necessary to provide the total benefits described herein, net of the
Company’s existing group long-term disability plan) to provide salary replacement in the
amount of sixty percent (60%) of annual salary at the date of disability (to continue until
at least age sixty-five (65), or for life if reasonably practicable). As used herein,
“Disability” means any physical or mental condition of the Executive that (i) prevents the
Executive from being able to perform the services required under this Agreement, (ii) has
continued for at least one hundred eighty (180) consecutive days during any twelve (12)
month period and (iii) is reasonably expected to continue. The Company’s obligation to
provide to the Executive long-term disability benefits hereunder shall be defined by the
long-term disability benefits contract it is able to procure from an unrelated third party.
For that purpose, the definition of disability shall be as stated in the contract. The
Company and the Executive recognize that the definition of Disability hereunder may differ
from the contract definition and the benefits payable shall be those as stated in the
contract. The Company, however, agrees to use good faith efforts to obtain a contract with
a definition of disability as similar as possible to the definition stated hereunder.
Moreover, the Company and the Executive agree that for purposes of the other provisions of
this Agreement, including the right of the Company to terminate the Executive, the
definition of Disability as stated herein shall control.

In addition, upon the Executive’s termination of employment under this clause (d), the
Executive shall be paid and/or provided the Accrued Obligations, and any vesting, lapse of
time, performance condition or similar requirement under any stock option plan, restricted
stock or other non-qualified deferred compensation plan shall be accelerated to the date of
such termination and any conditions to the Executive’s entitlement to any benefits under any
of such plans or programs shall be deemed to have been satisfied.

     (e) Termination by Company Without Cause or by the Executive with Good Reason. If
either the Company terminates the Executive’s employment for any reason other than for Cause
or on account of Disability or the Executive terminates his employment for Good Reason (as
hereinafter defined), the Company shall:

     (i) pay to the Executive, within thirty (30) days after the date of such
termination, a lump sum cash payment equal to 2.99 times the Executive’s then
current annual rate of Total Compensation;

     (ii) pay or provide the Executive the Accrued Obligations; and

     (iii) pay Executive’s COBRA premiums for continuation coverage under the
Company’s group health plan for the lesser of (a) twelve (12) months following the
date of termination; (b) until such time as Executive is no longer eligible for
COBRA coverage; or (c) until such time as Executive becomes eligible for comparable
benefits from a subsequent employer.

7

 

In addition, any vesting, lapse of time, performance condition or similar requirement under
any stock option plan, restricted stock or other non-qualified deferred compensation plan
shall be accelerated to the date of such termination and any conditions to the Executive’s
entitlement to any benefits under any of such plans or programs shall be deemed to have been
satisfied.

The Executive shall have “Good Reason” to terminate his employment hereunder within thirty
(30) days following his knowledge of any of the events set forth below which have not been
cured by the Company within fifteen (15) days following Executive’s written notice of the
occurrence of any such events: (A) a material and adverse change in the powers, duties,
responsibilities or functions of the Executive as described in Section 3 hereof; or (B)
subject to the last sentence of this paragraph, any material and adverse change in the
Executive’s relative position in the Company’s management structure; or (C) without the
Executive’s prior written consent, the relocation of the Company’s principal executive
offices outside the greater Houston, Texas metropolitan area or requiring the Executive to
be based other than at such principal executive offices, of the Company; or (D) the failure
of the Company to obtain any assumption agreement required by Section 18 hereof; or (E) any
reduction in the level of Executive’s Base Salary or Target Bonus, or the failure by the
Company to pay the Executive within ten (10) days after a written demand therefor any
installment of any previous award of or deferred compensation, if any, which he is due and
owing under any employee benefit plan or any deferred compensation program in effect in
which the Executive may have participated; or (F) any other material breach of this
Agreement by the Company. Notwithstanding anything to the contrary in this Section 9(e), no
change of Executive’s relative position in the Company’s management structure (which does
not otherwise materially and adversely change the powers, duties, responsibilities or
functions of the Executive as described in Section 3) shall constitute Good Reason unless
and until the occurrence of a Change in Control (as defined in the Company’s Long Term
Incentive Plan), it being understood that prior to a Change in Control, the Chief Executive
Officer shall have discretion to make organizational changes affecting the Executive in the
interest of effective corporate management as the Chief Executive Officer may determine from
time to time.

As used in this Agreement, the term “Total Compensation” shall mean the sum of the
following:

     (i) the current annual rate of Base Salary of the Executive and;

     (ii) the Executive’s Target Bonus for the year of termination; and

     (iii) the current annual car allowance provided by the Company to the
Executive.

     (f) Certain Additional Payments by the Company. Anything in this Agreement to the
contrary notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive, whether

8

 

paid or payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (a “Payment”), would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter collectively referred to as
the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a
“Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes), including any
Excise Tax imposed upon the Gross Up Payment, the Executive retains an amount of the Gross
Up Payment equal to the Excise Tax imposed upon the Payments. Subject to the provisions of
this Section 9(f), all determinations required to be made hereunder, including whether a
Gross Up Payment is required and the amount of such Gross Up Payment, shall be made by the
accounting firm which at the time audits the financial statements of the Company (the
“Accounting Firm”) at the sole expense of the Company, which shall provide detailed
supporting calculations both to the Company and the Executive within fifteen (15) business
days of the date of termination of the Executive’s employment under this Agreement, if
applicable, or such earlier time as is requested by the Company. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, the Accounting Firm shall furnish
the Executive with an opinion that he has substantial authority not to report any Excise Tax
on his federal income tax return. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross Up Payments, which will not have been made by the
Company should have been made (an “Underpayment”), consistent with the calculations required
to be made hereunder. If the Company exhausts its remedies pursuant hereto and the
Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such Underpayment
shall be promptly paid by the Company to or for the benefit of the Executive.

     The Executive shall notify the Company in writing of any claim by the Internal Revenue
Service that, if successful, would require the payment by the Company of the Gross Up
Payment. Such notification shall be given as soon as practicable but no later than ten (10)
business days after the Executive knows of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the thirty (30) day period
following the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period that it
desires to contest such claim, the Executive shall:

     (i) give the Company any information reasonably requested by the Company
relating to such claim,

     (ii) take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including

9

 

(without limitation) accepting legal representation with respect to such claim
by an attorney reasonably selected by the Company,

     (iii) cooperate with the Company in good faith to effectively contest such
claim, and

     (iv) permit the Company to participate in any proceedings relating to such
claim;

provided, that, the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or income tax, including interest and penalties with respect thereto, imposed as
a result of such representation and payment of costs and expenses. Without limitation on the
foregoing provisions hereof the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in respect of such
claim and may, at its sole option, either direct the Executive to pay the tax claimed and
sue for a refund or contest the claim in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall determine,
provided that if the Company directs the Executive to pay such claim and sue for a refund,
the Company shall advance the amount of such payment to the Executive, on an interest-free
basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect to such advance,
and further provided that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount. Furthermore, the Company’s
control of the contest shall be limited to issues with respect to which a Gross Up Payment
would be payable hereunder and the Executive shall be entitled to settle or contest, as the
case may be, any other issue raised by the Internal Revenue Service or any other taxing
authority.

     If, after the receipt by the Executive of an amount advanced by the Company pursuant
hereto, the Executive becomes entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company’s complying with the requirements hereof) promptly
pay to the Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant hereto, a determination is made that the Executive shall
not be entitled to any refund with respect to such claim and the Company does not notify the
Executive in writing of its intent to contest such denial of refund prior to the expiration
of thirty (30) days after such determination, then such advance shall be forgiven and shall
not be required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross Up Payment required to be paid.

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     (g) Either party may, within fifteen (15) days after receipt of a Notice of Termination
from the other party, provide notice to the other party that a dispute exists concerning the
termination, in which event the dispute shall be resolved in accordance with Section 11
hereof. If such dispute should commence during the one year period immediately following a
Change in Control, notwithstanding the pendency of any such dispute and notwithstanding any
provision of this Agreement to the contrary, the Company will (i) continue to pay the
Executive his Base Salary and (ii) continue the Executive as a participant in all
compensation and benefit plans in which the Executive was participating when the relevant
Notice of Termination was given, until the dispute is finally resolved or, with respect to a
Notice of Termination given by the Executive, the date of termination specified in such
Notice of Termination if earlier, but, in each case, not past the Expiration Date;
provided that, the Company may elect to terminate the Executive without
Cause at anytime and upon satisfying its obligations under Section 9(e) hereof, its
obligations under this Section 9(g) shall cease. If (i) the Company give a Notice of
Termination to the Executive, (ii) the Executive disputes the termination as contemplated by
this paragraph (g), and (iii) such dispute is resolved in favor of the Company, the
Executive shall be required to refund to the Company any amounts paid to the Executive under
this paragraph (g) but only if, and then only to the extent, the Executive is not otherwise
entitled to receive such amounts under this Agreement.

     10.  Non-exclusivity of Rights.11. Nothing in this Agreement shall prevent or limit the
Executive’s continuing or future participation in any benefit, bonus, incentive or other plan or
program provided by the Company or any of its affiliated companies and for which the Executive may
qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have
under any stock option or other agreements with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any
plan or program of the Company or any of its affiliated companies at or subsequent to the date of
termination of the Executive’s employment under this Agreement shall be payable in accordance with
such plan or program.

     11.  Resolution of Disputes.

     (a) Negotiation. The parties shall attempt in good faith to resolve any dispute
arising out of or relating to this Agreement promptly by negotiations between the Executive
and an executive officer of the Company who has authority to settle the controversy. Any
party may give the other party written notice of any dispute not resolved in the normal
course of business. Within ten (10) days after the effective date of such notice, the
Executive and an executive officer of the Company shall meet at a mutually acceptable time
and place within the Houston, Texas metropolitan area, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to attempt to resolve the
dispute. If the matter has not been resolved within thirty (30) days of the disputing
party’s notice, or if the parties fail to meet within ten (10) days, either party may
initiate arbitration of the controversy or claim as provided hereinafter. If a negotiator
intends to be accompanied at a meeting by an attorney, the other negotiator shall be given
at least three (3) business days’ notice of such intention and may also be accompanied by an attorney. All negotiations pursuant to this Section 11(a) shall be

11

 

treated as compromise and settlement negotiations for the purposes of the federal and state
rules of evidence and procedure.

     (b) Arbitration. Any dispute arising out of or relating to this Agreement or the
breach, termination or validity thereof, which has not been resolved by nonbinding means as
provided in Section 11(a) within sixty (60) days of the initiation of such procedure, shall
be finally settled by arbitration conducted expeditiously in accordance with the Center for
Public Resources, Inc. (“CPR”) Rules for Non Administered Arbitration of Business Disputes
by three (3) independent and impartial arbitrators, of whom each party shall appoint one,
provided that if one party has requested the other to participate in a nonbinding procedure
and the other has failed to participate, the requesting party may initiate arbitration
before the expiration of such period. Any such arbitration shall take place in Harris
County, Texas. Any arbitrator not appointed by a party shall be appointed from the CPR
Panels of Neutrals. The arbitration shall be governed by the United States Arbitration Act
and any judgment upon the award decided upon by the arbitrators may be entered by any court
having jurisdiction thereof. Each party hereby acknowledges that compensatory damages
include (without limitation) any benefit or right of indemnification given by another party
to the other under this Agreement.

     12. Expenses. The losing party shall pay all reasonable costs and expenses, including,
without limitation, court costs and attorneys’ fees, incurred by the other party as a result of any
claim, action or proceeding, arising out of, or challenging the validity or enforceability of, this
Agreement or any provision hereof; provided, that, if any such claim, action or
proceeding shall commence within the one year period immediately following a Change in Control, the
Company shall pay all expenses and legal fees incurred by the Executive in such dispute, regardless
of outcome, unless it is determined that the Executive acted in bad faith and without a reasonable
belief that he would prevail in such claim, action or proceeding.

     13. Governing Law. This Agreement shall be governed by and construed in accordance with the
internal laws of the State of Texas. Venue and jurisdiction of any act on relating to this
agreement shall lie in Harris County, Texas.

     14. Notice. Any notice, payment, demand or communication required or permitted to be given by
this Agreement shall be deemed to have been sufficiently given or served for all purposes if
delivered personally or if sent by registered or certified mall, return receipt requested, postage
prepaid, addressed to such party at its address set forth below such party’s signature to this
Agreement or to such other address as shall have been furnished in writing by such party for whom
the communication is intended. Any such notice shall be deemed to be given on the date so
delivered.

     15. Severability. In the event any provisions hereof shall he modified or held ineffective by any court, such
adjudication shall not invalidate or render ineffective the balance of the provisions hereof.

12

 

     16. Entire Agreement. This Agreement constitutes the sole agreement between the parties with
respect to the employment of the Executive by the Company and supersedes any and all other
agreements, including the Prior Agreement and any other oral or written agreement, between the
parties.

     17. Amendment and Waiver. This Agreement may not be modified or amended except by a writing
signed by the parties. Any waiver or breach of any of the terms of this Agreement shall not
operate as a waiver of any other breach of such terms or conditions, or any other terms or
conditions, nor shall any failure to enforce any provisions hereof operate as a waiver of such
provision or any other provision hereof.

     18. Assignment. This Agreement is a personal employment contract and the rights and interests
of the Executive hereunder may not be sold, transferred, assigned or pledged. The Company may
assign its rights under this Agreement to (i) any entity into or with which the Company is merged
or consolidated or to which the Company transfers all or substantially all of its assets or (ii)
any entity, which at the time of such assignment, controls, is under common control with, or is
controlled by the Company, provided that the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to perform it if not such
succession had taken place.

     19. Successors. This Agreement shall be binding upon and inure to the benefit of the
Executive and his heirs, executors, administrators and legal representatives. This Agreement shall
be binding upon and inure to the benefit of the Company and its successors and assigns.

     20. Section Headings. The section headings in this Agreement have been inserted for
convenience and shall not be used for interpretive purposes or to otherwise construe this
Agreement.

     21. No Mitigation or Set-off. The provisions of this Agreement are not intended to, nor shall
they be construed to, require that the Executive mitigate the amount of any payment provided for in
this Agreement by seeking or accepting other employment, nor shall the amount of any payment
provided for in this Agreement be reduced by any compensation earned by the Executive as a result
of his employment by another employer or otherwise. The Company’s obligations to make the payments to the Executive required under this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set off, counterclaim, recoupment, defense or
other claim, right or action that the Company may have against the Executive.

[Remainder of page intentionally left blank]

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first
written above and intend that this Agreement have the effect of a sealed instrument.

	 	 	 	 	 	 
	 	 	EXECUTIVE
	 
	 	 	 	 
	 	 	/s/ JOHN H. KARNES

	 	 	JOHN H. KARNES
	 
	 	 	 	 
	 	 	THE HOUSTON EXPLORATION COMPANY
	 
	 	 	 	 
	

	 	By: 	 	/s/ WILLIAM G. HARGETT
	

	 	 	 	
 
	

	 	Name: 	 	William G. Hargett
	

	 	Title: 	 	Chairman, President and Chief
Executive Officer

14

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