Document:

Exhibit
10.2

EXECUTION
COPY

PURCHASE AND SALE AGREEMENT

BETWEEN

SMITH PRODUCTION INC.

AS SELLER

AND

EDGE PETROLEUM EXPLORATION
COMPANY

AS PURCHASER

 

TABLE OF CONTENTS

	
  

  	
   

  	
  PAGE

  
	
   

  	
   

  	
   

  
	
  ARTICLE I PURCHASE AND SALE

  	
   

  	
  5

  
	
  Section 1.1
  Purchase and Sale

  	
   

  	
  5

  
	
  Section 1.2
  Assets

  	
   

  	
  6

  
	
  Section 1.3
  Excluded Assets

  	
   

  	
  7

  
	
  Section 1.4
  Effective Time

  	
   

  	
  8

  
	
  Section 1.5
  Delivery and Maintenance of Records

  	
   

  	
  8

  
	
  Section 1.6 Proration
  of Costs and Revenues

  	
   

  	
  8

  
	
   

  	
   

  	
   

  
	
  ARTICLE II PURCHASE PRICE

  	
   

  	
  9

  
	
  Section 2.1
  Purchase Price

  	
   

  	
  9

  
	
  Section 2.2
  Adjustments to Purchase Price

  	
   

  	
  9

  
	
  Section 2.3
  Allocation of Purchase Price

  	
   

  	
  10

  
	
  Section 2.4
  Deposit

  	
   

  	
  10

  
	
   

  	
   

  	
   

  
	
  ARTICLE III TITLE MATTERS

  	
   

  	
  10

  
	
  Section 3.1
  Seller’s Title

  	
   

  	
  10

  
	
  Section 3.2
  Defensible Title

  	
   

  	
  11

  
	
  Section 3.3
  Permitted Encumbrances

  	
   

  	
  12

  
	
  Section 3.4
  Notice of Title Defects

  	
   

  	
  13

  
	
  Section 3.5
  Remedies for Title Defects

  	
   

  	
  14

  
	
  Section 3.6
  Consents to Assignment and Preferential Rights to Purchase

  	
   

  	
  16

  
	
  Section 3.7
  Casualty Loss

  	
   

  	
  17

  
	
  Section 3.8
  Condemnation Loss

  	
   

  	
  17

  
	
  Section 3.9
  Limitations on Applicability

  	
   

  	
  17

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV ENVIRONMENTAL MATTERS

  	
   

  	
  18

  
	
   

  	
   

  	
   

  
	
  ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER

  	
   

  	
  18

  
	
  Section 5.1
  Disclaimers

  	
   

  	
  18

  
	
  Section 5.2
  Existence and Qualification

  	
   

  	
  19

  
	
  Section 5.3
  Power

  	
   

  	
  20

  
	
  Section 5.4 Authorization
  and Enforceability

  	
   

  	
  20

  
	
  Section 5.5 No
  Conflicts

  	
   

  	
  20

  
	
  Section 5.6
  Purchaser’s Liability for Brokers’ Fees

  	
   

  	
  20

  
	
  Section 5.7
  Litigation

  	
   

  	
  20

  
	
  Section 5.8 Taxes
  and Assessments

  	
   

  	
  21

  
	
  Section 5.9 Outstanding
  Capital Commitments

  	
   

  	
  21

  
	
  Section 5.10
  Compliance with Laws

  	
   

  	
  21

  
	
  Section 5.11
  Contracts

  	
   

  	
  21

  
	
  Section 5.12
  Payments

  	
   

  	
  21

  
	
  Section 5.13 Gas
  Imbalances

  	
   

  	
  21

  
	
  Section 5.14
  Governmental Authorizations

  	
   

  	
  22

  
	
  Section 5.15
  Consents to Assignments and Preferential Purchase Rights

  	
   

  	
  22

  
	
  Section 5.16
  Non-foreign Person

  	
   

  	
  22

  
	
  Section 5.17
  Payout Balances

  	
   

  	
  22

  

 

 i
 

 

 

	
  

  	
   

  	
  PAGE

  
	
   

  	
   

  	
   

  
	
  Section 5.18 Condemnation

  	
   

  	
  22

  
	
  Section 5.19
  Bankruptcy

  	
   

  	
  23

  
	
  Section 5.20 NGA

  	
   

  	
  23

  
	
  Section 5.21
  Investment Company

  	
   

  	
  23

  
	
  Section 5.22
  Suspense Accounts

  	
   

  	
  23

  
	
  Section 5.23
  Material Changes

  	
   

  	
  23

  
	
  Section 5.24
  Calls on Production

  	
   

  	
  23

  
	
  Section 5.25 No
  Forward Sales

  	
   

  	
  23

  
	
  Section 5.26
  Wells to Be Plugged and Abandoned

  	
   

  	
  24

  
	
  Section 5.27 No
  Sale or Hypothecation

  	
   

  	
  24

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI REPRESENTATIONS AND WARRANTIES OF
  PURCHASER

  	
   

  	
  24

  
	
  Section 6.1
  Existence and Qualification

  	
   

  	
  24

  
	
  Section 6.2
  Power

  	
   

  	
  24

  
	
  Section 6.3 Authorization
  and Enforceability

  	
   

  	
  24

  
	
  Section 6.4 No
  Conflicts

  	
   

  	
  25

  
	
  Section 6.5
  Seller’s Liability for Brokers’ Fees

  	
   

  	
  25

  
	
  Section 6.6
  Litigation

  	
   

  	
  25

  
	
  Section 6.7
  Financing

  	
   

  	
  25

  
	
  Section 6.8
  Texas Deceptive Trade Practices-Consumer Protection Act

  	
   

  	
  25

  
	
  Section 6.9 No
  Reliance

  	
   

  	
  26

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII COVENANTS OF THE PARTIES

  	
   

  	
  26

  
	
  Section 7.1
  Access

  	
   

  	
  26

  
	
  Section 7.2
  Government Reviews

  	
   

  	
  27

  
	
  Section 7.3
  Notification of Breaches

  	
   

  	
  27

  
	
  Section 7.4
  Assignments and Bills of Sale

  	
   

  	
  27

  
	
  Section 7.5
  Public Announcements

  	
   

  	
  28

  
	
  Section 7.6
  Operation of Business Pending Closing

  	
   

  	
  28

  
	
  Section 7.7
  Indemnity Regarding Access

  	
   

  	
  29

  
	
  Section 7.8 Gas
  Imbalances and Take-or-Pay Make-up Obligations

  	
   

  	
  30

  
	
  Section 7.9 Consents
  and Preferential Rights

  	
   

  	
  30

  
	
  Section 7.10 Tax
  Matters

  	
   

  	
  32

  
	
  Section 7.11
  Further Assurances

  	
   

  	
  32

  
	
  Section 7.12
  Replacement of Bonds, Letters of Credit and Guarantees

  	
   

  	
  32

  
	
  Section 7.13
  Like-Kind Exchange

  	
   

  	
  32

  
	
  Section 7.14
  Arbitration

  	
   

  	
  33

  
	
  Section 7.15
  Delivery of Financial Statements and Reserve Information

  	
   

  	
  34

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII CONDITIONS TO CLOSING

  	
   

  	
  34

  
	
  Section 8.1 Conditions
  of Seller to Closing

  	
   

  	
  34

  
	
  Section 8.2 Conditions
  of Purchaser to Closing

  	
   

  	
  35

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX CLOSING

  	
   

  	
  36

  
	
  Section 9.1 Time
  and Place of Closing

  	
   

  	
  36

  
	
  Section 9.2 Obligations
  of Seller at Closing

  	
   

  	
  37

  

 

 ii
 

 

 

	
  

  	
   

  	
  PAGE

  
	
   

  	
   

  	
   

  
	
  Section 9.3 Obligations of
  Purchaser at Closing

  	
   

  	
  37

  
	
  Section 9.4
  Closing Payment and Post-Closing Purchase Price Adjustments

  	
   

  	
  37

  
	
   

  	
   

  	
   

  
	
  ARTICLE X TERMINATION

  	
   

  	
  38

  
	
  Section 10.1
  Termination

  	
   

  	
  38

  
	
  Section 10.2
  Effect of Termination

  	
   

  	
  38

  
	
  Section 10.3
  Distribution of Deposit Upon Termination

  	
   

  	
  39

  
	
   

  	
   

  	
   

  
	
  ARTICLE XI POST -CLOSING OBLIGATIONS;
  INDEMNIFICATION; LIMITATIONS; DISCLAIMERS AND WAIVERS

  	
   

  	
  39

  
	
  Section 11.1
  Receipts

  	
   

  	
  39

  
	
  Section 11.2
  Expenses

  	
   

  	
  40

  
	
  Section 11.3
  Assumption and Indemnification

  	
   

  	
  40

  
	
  Section 11.4
  Indemnification Actions

  	
   

  	
  44

  
	
  Section 11.5
  Survival

  	
   

  	
  46

  
	
  Section 11.6
  Recording

  	
   

  	
  47

  
	
  Section 11.7
  Independent Investigation

  	
   

  	
  47

  
	
  Section 11.8
  Disclaimer Regarding Information

  	
   

  	
  48

  
	
  Section 11.9
  Waiver of Trade Practices Acts

  	
   

  	
  48

  
	
  Section 11.10
  Post-Closing Audit Rights

  	
   

  	
  48

  
	
   

  	
   

  	
   

  
	
  ARTICLE XII MISCELLANEOUS

  	
   

  	
  48

  
	
  Section 12.1
  Counterparts

  	
   

  	
  48

  
	
  Section 12.2
  Notice

  	
   

  	
  48

  
	
  Section 12.3
  Binding Agreement

  	
   

  	
  49

  
	
  Section 12.4
  Expenses

  	
   

  	
  49

  
	
  Section 12.5
  Change of Name

  	
   

  	
  49

  
	
  Section 12.6
  Construction

  	
   

  	
  50

  
	
  Section 12.7
  Governing Law

  	
   

  	
  50

  
	
  Section 12.8
  Captions

  	
   

  	
  50

  
	
  Section 12.9
  Waivers

  	
   

  	
  50

  
	
  Section 12.10
  Assignment

  	
   

  	
  50

  
	
  Section 12.11
  Entire Agreement

  	
   

  	
  50

  
	
  Section 12.12
  Amendment

  	
   

  	
  50

  
	
  Section 12.13 No
  Third-Party Beneficiaries

  	
   

  	
  51

  
	
  Section 12.14
  References

  	
   

  	
  51

  
	
  Section 12.15
  Severability

  	
   

  	
  51

  

 

 iii

 

PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement is executed on this
the 16th day of November, 2006, to be effective as of the Effective Time, by
and between Smith Production Inc., a Texas corporation, and Edge Petroleum
Exploration Company, a Delaware corporation.

In consideration of the mutual promises and other
valuable consideration recited herein, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:

DEFINITIONS

“AFE” shall mean authority for expenditure as used in
Section 5.9.

“Adjustment Period” shall mean the period of time
commencing at the Effective Time and ending on the Closing Date as discussed in
Section 2.2.

“Adjusted Purchase Price” shall mean the Purchase
Price after calculating and applying the adjustments set forth in Section 2.2.

“Affiliates” with respect to any Person, means any
person that directly or indirectly controls, is controlled by or is under
common control with such Person.

“Agreement” shall mean this Purchase and Sale Agreement.

“Allocated Value” shall mean the allocation of the
unadjusted Purchase Price among each of the Assets as described in Section 2.3.

“Assets” shall mean the property and property rights
set forth in Section 1.2.

“Assignment and Bill of Sale” shall mean the
conveyance document by which Seller conveys the Assets to Purchaser as
described in Section 3.1(b).

“Assumed Obligations” has the meaning set forth in
Section 11.3(a).

“Business Day” means each calendar day except
Saturdays, Sundays, and Federal holidays.

“Closing” has the meaning set forth in Section 9.1(a).

“Closing Date” has the meaning set forth in Section
9.1(b).

“Closing Payment” has the meaning set forth in Section
9.4(a).

“Code” has the meaning set forth in Section 2.3.

“Confidentiality Agreement” has the meaning set forth
in Section 7.1(a).

“Contracts” has the meaning set forth in Section
1.2(d).

 

“Damages” has the meaning set forth in Section
11.3(e).

“Defensible Title” has the meaning set forth in
Section 3.2.

“Deposit” has the meaning set forth in Section 2.4.

“DTPA” has the meaning set forth in Section 6.8.

“Drilling Unit” shall mean the lands described on
Railroad Commission of Texas Form W-1 for each Well.  If no W-1 has been filed for a Well, Drilling
Unit shall mean forty (40) acres in the shape of a square around the well bore
of the Well.

“Effective Time” has the meaning set forth in Section
1.4.

“Environmental Laws” means, as the same have been
amended as of the Effective Time, the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 et seq.; the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.; the Federal
Water Pollution Control Act, 33 U.S.C. Section 1251 et seq.; the Clean Air Act,
42 U.S.C. Section 7401 et seq.; the Hazardous Materials Transportation Act, 49
U.S.C. Section 1471 et seq.; the Toxic Substances Control Act, 15 U.S.C.
Sections 2601 through 2629; the Oil Pollution Act, 33 U.S.C. Section 2701 et
seq.; the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Section
11001 et seq.; and the Safe Drinking Water Act, 42 U.S.C. Sections 300f through
300j; and all similar Laws as of the Effective Time of any Governmental Body
having jurisdiction over the Properties addressing pollution or protection of
the environment and all regulations implementing the foregoing.

“Environmental Liabilities” shall mean, with respect
to the Properties, any and all environmental response costs, costs to cure,
restoration costs, costs of remediation, settlements, penalties, fines,
attorney fees, and Damages (i) related to a Material Adverse Environmental
Condition regardless of whether same occurred PRIOR TO, AT OR AFTER THE
EFFECTIVE TIME and/or (ii) incurred or imposed pursuant to any claim or cause
of action by a Governmental Body or other Person for remediation or response
costs or any remediation obligation or Damages arising out of any violation of
any Environmental Law which is attributable to the ownership or operation of
the Properties PRIOR TO, AT OR AFTER THE EFFECTIVE TIME.

“Equipment” has the meaning set forth in Section
1.2(f).

“Excluded Assets” has the meaning set forth in Section
1.3.

“Governmental Authorization” has the meaning set forth
in Section 5.14.

“Governmental Body” means any federal, state, local,
municipal or other governmental regulatory agency, administrative agency,
commission, court, tribunal, body or other authority exercising or entitled to
exercise any administrative, executive, judicial, legislative, police,
regulatory or taxing powers.

 2
 

 

“HSR Act” means the Hart-Scott Rodino Antitrust
Improvements Act of 1976 as discussed in Section 7.2.

“Hydrocarbons” shall mean oil, gas, condensate, other
gaseous and liquids products and all products attributable thereto, produced
from or attributable to the Properties.

“Indemnification Notice” has the meaning set forth in
Section 11.4(b).

“Indemnify” has the meaning set forth in Section
11.3(b).

“Indemnified Party” has the meaning set forth in
Section 11.4(a).

“Indemnifying Party” has the meaning set forth in
Section 11.4(a).

“Lands” has the meaning set forth in Section 1.2(a).

“Laws” means all statutes, rules, regulations,
ordinances, orders, and codes of Governmental Bodies.

“Leases” has the meaning set forth in Section 1.2(a).

“Litigation Expenses” has the meaning set forth in
Section 11.3(b)(ix).

“Material Adverse Environmental Condition” shall mean,
with respect to the Properties, any violations of Environmental Laws; any
condition that is required to be remediated or cured under applicable
Environmental Laws in effect at the Effective Time; the failure to remediate or
cure any condition that is required to be remediated or cured under applicable
Environmental Laws in effect at the Effective Time; any action or proceeding
before any Governmental Body alleging potential liability arising out of or
resulting from any actual or alleged violation of, or any remedial obligation
under, any Environmental Law with respect to the Properties or notice of same
to Seller by any Person.

“Net Revenue Interest” shall mean an ownership
interest, expressed either as a decimal or percentage, in the stream of
revenues attributable to the Assets, net of all burdens, as discussed in
Section 3.2(a).

“Permitted Encumbrances” has the meaning set forth in
Section 3.3.

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

“Properties” shall mean the Units, Leases, Lands and
Wells.

“Property Costs” shall mean all operating expenses and
capital expenditures incurred in the ownership and operation of the Assets and,
where applicable, in accordance with the relevant operating or unit agreement,
and overhead costs charged to the Assets under the relevant operating agreement
or unit agreement, if any. Property Costs shall include costs of insurance 

 3
 

 

and ad valorem, property,
severance, production and similar Taxes based upon or measured by the ownership
or operation of the Assets or the production of Hydrocarbons therefrom, but
excluding any other Taxes.  Property
Costs shall not include liabilities and expenses attributable to (i) claims,
investigations, administrative proceedings or litigation directly or indirectly
arising out of or resulting from actual or claimed personal injury or death,
property damage or violation of any Law, (ii) obligations to plug wells,
dismantle facilities, close pits and restore the surface around such wells,
facilities and pits, (iii) obligations to remediate or cure any contamination
of groundwater, surface water, soil or Equipment under applicable Environmental
Laws, (iv) obligations to furnish make-up gas according to the terms of
applicable gas sales, gathering or transportation contracts, (v) gas balancing
obligations, (vi) obligations related to the Excluded Assets and (vii)
obligations to pay Working Interests, royalties, overriding royalties or other
interests held in suspense.

“Primary Purchase and Sale Agreement” shall mean that
certain Purchase and Sale Agreement between Seller and Purchaser having an
Effective Time of January 1, 2007 at 12:01 a.m. local time at the location of
the Properties covering all of Seller’s interest in the Assets described
therein which was prepared and executed contemporaneously with the preparation
and execution of this Agreement.

“PUD” shall mean a geographic area on lands covered by
the Leases which is a potential drilling location to be determined by Seller
containing the greater of (i) the lands described in an applicable Railroad
Commission of Texas Form W-1, or (ii) forty (40) acres; provided, however, such
location shall not be more than one and one-half miles from the surface
location of a well listed on Exhibit 1.2(b). 
There are eight (8) PUDs set forth on Exhibit 1.2(b).

“Purchase Price” has the meaning set forth in Section
2.1.

“Purchaser” shall mean Edge Petroleum Exploration
Company.

“Purchaser Indemnitees” shall mean Purchaser, its
officers, directors, shareholders, members, employees, agents, representatives,
Affiliates and subsidiaries.

“Purchaser’s Indemnification Obligations” shall mean
those obligations described in Section 11.3(b).

“Records” has the meaning set forth in Section 1.2(h).

“Seller” shall mean Smith Production Inc.

“Seller Operated Assets” shall mean Assets operated by
Seller.

“Seller Indemnitees” shall mean Seller, its officers,
directors, shareholders, members, employees, agents, representatives,
Affiliates and subsidiaries.

“Seller’s Indemnification Obligations” shall mean
those obligations described in Section 11.3(c).

“Surface Contracts” has the meaning set forth in
Section 1.2(e).

 4
 

 

“Tax(es)” means all federal, state, local and foreign
income, profits, franchise, sales, use, ad valorem, property, severance,
production, excise, stamp, documentary, real property transfer or gain, gross
receipts, goods and services, registration, capital, transfer, or withholding
Taxes or other governmental fees or charges imposed by any taxing authority,
including any interest, penalties or additional amounts which may be imposed
with respect thereto.

“Tax Returns” has the meaning set forth in Section
5.8.

“Third Party Claim” has the meaning set forth in
Section 11.4(b).

“Title Benefit” shall mean any right or condition that
operates to increase the Net Revenue Interest of Seller in any Property above
the Net Revenue Interest shown on Exhibit 1.2(b), without causing a
proportionate increase in Seller’s Working Interest as shown in Exhibit 1.2(b)
as discussed in Section 3.2.

“Title Benefit Amount” has the meaning set forth in
Section 3.5(c).

“Title Benefit Notice” has the meaning set forth in
Section 3.4(b).

“Title Claim Date” has the meaning set forth in
Section 3.4(a).

“Title Defect” has the meaning set forth in Section
3.2.

“Title Defect Amount” has the meaning set forth in
Section 3.5(a)(i).

“Title Defect Notice” has the meaning set forth in
Section 3.4(a).

“Title Defect Property” has the meaning set forth in
Section 3.4(a).

“Units” has the meaning set forth in Section 1.2(c).

“Wells” has the meaning set forth in Section 1.2(b).

“Working Interest” shall mean the gross leasehold
ownership interest in the Leases, or, as the case may be, the gross ownership
interest in fee minerals or other types of interests which are included within
the Assets, as discussed in Section 3.2(b).

ARTICLE I

PURCHASE AND SALE

Section 1.1             Purchase and Sale.

At the Closing, and upon the
terms and subject to the conditions of this
Agreement, Seller agrees to sell and convey the Assets to Purchaser and
Purchaser agrees to purchase, accept and pay for the Assets.

 5
 

 

Section 1.2             Assets.

As used herein, “Assets” means an undivided
twenty-five per cent (25%) of 8/8th in
the following property rights described in 1.2(a) through 1.2(h), inclusive, as
follows:

(a)         Oil, gas and mineral
leases; subleases and other leaseholds; royalties, overriding royalties, net
profit interests, mineral fee interests, carried interests; farmout rights;
options; and other properties and interests (collectively, the “Leases”) as
more particularly described on Exhibit 1.2(a) attached hereto, subject to such
depth limitations, exclusions and other restrictions as described on Exhibit
1.2 (a) and all tenements, hereditaments and appurtenances belonging to the
Leases, together with each and every kind and character of right, title, claim,
and interest that Seller has in and to the Leases and the lands covered
thereby, pooled, unitized or communitized therewith (the “Lands”);

(b)        Oil, gas, water,
disposal, or injection wells located on the Lands, whether producing, not
producing, shut-in, temporarily abandoned or permanently abandoned, including
the interests in the wells as described on Exhibit 1.2(b) attached hereto (the “Wells”);

(c)         Units which include
all or portions of the Leases, Lands or Wells as described on Exhibit 1.2(c)
attached hereto (the “Units”) including production from any such Unit, whether
such Unit production comes from Wells located on or off of a Lease, and all
tenements, hereditaments and appurtenances belonging to the Units;

(d)        Contracts, agreements,
orders and instruments by which the Assets are bound or to which the Assets are
subject, or that relate to or are otherwise applicable to the Assets, to the
extent applicable to the Assets rather than Seller’s other properties,
including, without limitation, operating agreements, unitization, pooling and
communitization agreements, declarations and orders, joint venture agreements,
farmin and farmout agreements, water rights agreements, exploration agreements,
participation agreements, exchange agreements, transportation or gathering
agreements, agreements for the sale and purchase of oil, gas, casinghead gas or
processing agreements to the extent applicable to the Assets or the production
of oil and gas and other minerals and products produced in association therewith
from the Assets (all of which are hereinafter collectively referred to as “Contracts”)
but excluding any Contracts to the extent transfer is restricted by third-party
agreement or applicable law and the necessary consents to transfer are not obtained
pursuant to Section 7.9; provided that “Contracts” shall not include the
Leases;

(e)         Easements, permits,
licenses, servitudes, rights-of-way, surface leases and other surface rights (“Surface
Contracts”) appurtenant to, and used or held for use primarily in connection
with the Properties, excluding any Surface Contracts to the extent transfer is
restricted by third-party agreement or applicable law and the necessary
consents to transfer are not obtained pursuant to Section 7.9;

(f)         Equipment, machinery,
fixtures, facilities and improvements located on the Properties including,
without limitation, all tanks, boilers, injection facilities, saltwater
disposal facilities, compression facilities, pumping units and engines, flow 

 6
 

 

lines,
pipelines, gathering systems, gas and oil treating facilities, machinery, power
lines, telephone and telegraph lines, roads, and other appurtenances, but
excluding (i) vehicles, (ii) computers and related peripheral equipment, (iii)
communications equipment and (iv) communications licenses granted by the
Federal Communications Commission or other governmental agency (subject to such
exclusions, the “Equipment”);

(g)        Hydrocarbons produced
from or attributable to the Properties from and after the Effective Time and
all oil, gas, condensate and imbalances with co-owners and with pipelines and
all make-up rights with respect to take-or-pay payments; and

(h)        To the extent
transferable, copies all lease files; land files; well files; gas and oil sales
contract files; gas processing files; division order files; abstracts; title
opinions; land surveys; and non-confidential logs related to the Assets listed
above in subsections (a)-(g), inclusive, but excluding (i) any books, records,
data, files, maps and accounting records to the extent disclosure or transfer
is restricted by third-party agreement or applicable law and the necessary
consents to transfer are not obtained pursuant to Section 7.9, (ii) proprietary
engineering data, maps and reserve studies, (iii) computer software, (iv) work
product of Seller’s legal counsel (other than title opinions), (v) records and
documents relating to the negotiation and consummation of the sale of the
Assets and (vi) corporate, financial, income and franchise tax and legal
records of Seller that relate to Seller’s business generally (whether or not
relating to the Assets) (subject to such exclusions, the “Records”); provided,
however, that Seller may retain the originals of such files and other records
as Seller has determined may be required for litigation, Tax, accounting, and
auditing purposes and provide Purchaser with copies thereof, excluding,
however, the Excluded Assets (as defined in Section 1.3).

Section 1.3             Excluded
Assets.  Notwithstanding the
foregoing, the Assets shall not include the following listed items which are
excepted and reserved to Seller and excluded from this Agreement (collectively,
the “Excluded Assets”):

(a)         The documents, files,
records and information excluded in 1.2(h) above;

(b)        The equipment,
machinery, licenses, fixtures and other tangible personal property excluded in
1.2(f) above;

(c)         All rights to any
refund of Taxes or other costs or expenses borne by Seller or Seller’s
predecessors in interest and title attributable to periods prior to the
Effective Time;

(d)        All rights relating to
the existing claims and causes of action described in Exhibit 5.7 hereto;

(e)         Seller’s bonds,
letters of credit, guarantees, permits and licenses;

(f)         All trade credits,
account receivables, note receivables, take-or-pay amounts receivable, and
other receivables attributable to the Assets with respect to any period of time
prior to the Effective Time;

 7
 

 

(g)        All seismic,
geological, and geophysical data covering the Properties; and

(h)        All surface estate fee
located on the Properties, including, without limitation, all buildings,
structures, and improvements located on the surface estate fee.

(i)          All other items
listed in Exhibit 1.3.

Section 1.4             Effective
Time.  Seller shall transfer
possession of the Assets to Purchaser at the Closing, but the effective time of
the transfer of the Assets shall be January 1, 2007, at 12:01 a.m., local time
at the location of the Properties (the “Effective Time”).

Section 1.5             Delivery
and Maintenance of Records.  Seller
shall deliver copies of the Records to Purchaser within thirty (30) days
following Closing. Seller may retain original Records as set forth in Section
1.2(h) and copies of any Records. 
Purchaser shall pay the reasonable cost of copying the Records.

Section 1.6             Proration
of Costs and Revenues.

(a)         Purchaser shall be
entitled to all (i) Hydrocarbons produced from or attributable to the
Properties at and after the Effective Time, (ii) proceeds from the sale of
Hydrocarbons at and after the Effective Time and (iii) other income, proceeds,
receipts and credits earned with respect to the Assets at or after the
Effective Time. Purchaser shall be liable and responsible for (and entitled to
any refunds with respect to) all Property Costs incurred at and after the
Effective Time.

(b)        Seller shall be entitled
to all (i) Hydrocarbons produced from or attributable to the Properties prior
to the Effective Time, (ii) proceeds from the sale of Hydrocarbons prior to the
Effective Time and (iii) other income, proceeds, receipts and credits earned
with respect to the Assets prior to the Effective Time. Seller shall be liable
and responsible for (and entitled to any refunds with respect to) all Property
Costs incurred prior to the Effective Time.

(c)         Right-of-way fees,
insurance premiums and other Property Costs that are paid periodically and
cannot be accurately identified as being incurred when paid shall be prorated
based on the number of days in the applicable period falling before and the
number of days in the applicable period falling at or after the Effective Time.

(d)        Ad valorem, production,
severance and similar Taxes shall be prorated based on the number of units
actually produced, purchased or sold or proceeds of sale, as applicable,
before, and at or after, the Effective Time. In each case, Purchaser shall be
responsible for the portion allocated to the period at and after the Effective
Time, and Seller shall be responsible for the portion allocated to the period
before the Effective Time.

(e)         For purposes of
allocating production (and accounts receivable with respect thereto), under
this Section 1.6, (i) liquid Hydrocarbons shall be deemed to be “from or
attributable to” the Properties when they pass through the pipeline connecting
into the storage facilities into which they are run and (ii) gaseous Hydrocarbons
shall be 

 8
 

 

deemed to be “from
or attributable to” the Properties when they pass through the delivery point
sales meters on the pipelines through which they are transported. Seller shall
utilize reasonable interpolative procedures to arrive at an allocation of
production when exact meter readings or gauging and strapping data is not
available. Seller shall provide to Purchaser, no later than four (4) Business
Days prior to Closing, all data necessary to support any estimated allocation,
for purposes of establishing the adjustment to the Purchase Price pursuant to
Section 2.2 hereof that will be used to determine the Closing Payment.

ARTICLE
II

PURCHASE PRICE

Section 2.1             Purchase
Price.  The purchase price for the
Assets (the “Purchase Price”) shall be Twenty Four Million One Hundred Twenty
Thousand Dollars (U.S. $24,120,000.00) adjusted as provided in Section 2.2.

Section 2.2             Adjustments
to Purchase Price.  The Purchase
Price for the Assets shall be adjusted as follows:

(a)         Reduced by the
aggregate amount of the proceeds received by Seller from the sale of
Hydrocarbons and other proceeds earned and attributable to the Assets during
the Adjustment Period;

(b)        Reduced in accordance
with Section 3.5, by an amount equal to the Allocated Value of those Properties
(i) with respect to which preferential purchase rights have been exercised
prior to Closing or (ii) that cannot be transferred at Closing because consents
to the assignments of those Properties have not been obtained;

(c)         Reduced by the
aggregate amounts payable to owners of working interests, royalties and
overriding royalties and other interests in the Properties held in suspense by
Seller as of the Closing Date unless the suspended funds are transferred by
Seller to Purchaser on the Closing Date;

(d)        Reduced by Seller’s
pro-rata share of ad valorem taxes;

(e)         Reduced in accordance
with Article 3 by amounts as remedies for Title Defects;

(f)         Increased by the
amount of all Property Costs which have been paid by Seller and incurred during
the Adjustment Period, except for any Property Costs and other such costs
already deducted in the determination of proceeds in Section 2.2(a);

(g)        Increased or decreased,
as appropriate, pursuant to the provisions of Section 7.8 dealing with gas
imbalances and/or take-or-pay make-up obligations; and

(h)        Increased by the amount
of any Title Benefit pursuant to Section 3.5(c).

 9
 

 

(i)          Increased or
decreased by other amounts mutually agreed to by Seller and Purchaser.

All such adjustments shall be determined in accordance
with generally accepted accounting principles and Council of Petroleum
Accountants Society (COPAS) standards.

The adjustment described in Section 2.2(a) shall serve
to satisfy, up to the amount of the adjustment, Purchaser’s entitlement under
Section 1.6 to Hydrocarbon production from or attributable to the Properties
during the Adjustment Period, and to the other income, proceeds, receipts and
credits earned with respect to the Assets during the Adjustment Period.
Purchaser shall not have any separate rights to receive any production or
income, proceeds, receipts and credits with respect to which an adjustment has
been made.  Similarly, the adjustment
described in Section 2.2(f) shall serve to satisfy, up to the amount of the
adjustment, Purchaser’s obligation under Section 1.6 to pay Property Costs and
other costs attributable to the ownership and operation of the Assets which are
incurred during the Adjustment Period. Purchaser shall not be separately
obligated to pay for any Property Costs or other such costs with respect to
which an adjustment has been made.

Section 2.3             Allocation
of Purchase Price.

Attached hereto as Exhibit 2.3 is an agreed
allocation of the unadjusted Purchase Price among the Assets, which has been
made in compliance with the principles of Section 1060 of the Internal Revenue
Code of 1986, as amended (the “Code”), and the Treasury regulations
thereunder.  The “Allocated Value” for
any Asset shall equal the portion of the unadjusted Purchase Price allocated to
such Asset on Exhibit 2.3, increased or decreased by its respective
proportionate share of the price adjustments described in Section 2.2.  Seller, however, makes no representation or
warranty to Purchaser as to the accuracy of such values.  Seller and Purchaser agree (i) that the
Allocated Values shall be used by Seller and Purchaser as the basis for notices
to holders of preferential rights to purchase and (ii) that neither Seller nor
Purchaser will take positions inconsistent with the Allocated Values in notices
to government authorities, in audit or other proceedings with respect to Taxes,
in notices to holders of preferential rights to purchase.

Section 2.4             Deposit.  Concurrently with the execution of this
Agreement, Purchaser shall wire transfer to Seller an earnest money deposit an
amount equal to Nine Hundred Ninety Thousand Dollars ($990,000.00) (the “Deposit”).
The Deposit shall be applied against the Purchase Price if the Closing occurs
or shall be otherwise distributed in accordance with the terms of this
Agreement.

ARTICLE
III

TITLE MATTERS

Section 3.1             Seller’s
Title.

(a)         Seller represents and
warrants to Purchaser that Seller’s title to the Wells and PUDs shown on
Exhibit 1.2(b) as of the Effective Time is (and as of the Closing Date shall
be) Defensible Title.  Seller’s representation
and warranty regarding Defensible Title is expressly limited to the Drilling
Units of the Wells and the lands covered by the PUDs described on Exhibit
1.2(b) and Seller expressly disclaims and 

 10
 

 

negates all
other warranties of any title whatsoever, express, implied, statutory or
otherwise.

(b)        The Assignment and Bill
of Sale to be delivered by Seller to Purchaser shall be in form identical to
the assignment shown on Exhibit 3.1(b) attached hereto, subject to the
Permitted Encumbrances. The Assignment and Bill of Sale shall be without
warranty of title, express, implied, statutory or otherwise.  The Assignment and Bill of Sale shall
transfer to Purchaser all rights or actions on title warranties given or made
by Seller’s predecessors (other than Affiliates of Seller), to the extent
Seller may legally transfer such rights.

Section 3.2             Defensible
Title.

As used in this Agreement, the term “Defensible Title”
means that title of Seller limited to the Wells shown in Exhibit 1.2(b) only
which, subject to Permitted Encumbrances: 
For purposes of this Article 3, references to Wells shall include both
Wells and PUDs.

(a)         Entitles Seller to
receive a share of the Hydrocarbons produced, saved and marketed from any Unit
or Well throughout the duration of the productive life of such Unit or Well
after satisfaction of all royalties, overriding royalties, nonparticipating
royalties, net profits interests or other similar burdens on or measured by
production of Hydrocarbons (“Net Revenue Interest”) of not less than the Net
Revenue Interest share shown in Exhibit 1.2(b) for the Wells, except decreases
in connection with those operations in which Seller may after the Effective
Time be a non-consenting co-owner, decreases resulting from the establishment
or amendment after the Effective Time of units, and decreases required to allow
other working interest owners to make up past underproduction or pipelines to
make up past under deliveries;

(b)        Obligates Seller to
bear a percentage of the Property Costs relating to any Unit or Well not
greater than the “Working Interest” shown in Exhibit 1.2(b) for Wells without
increase throughout the productive life of such Wells or Units except increases
resulting from contribution requirements with respect to defaulting co-owners
under applicable operating agreements and increases that are accompanied by at
least a proportionate increase in Seller’s Net Revenue Interest; and

(c)         Is free and clear of
liens, encumbrances, obligations, security interests, pledges or other defects.

The term “Title Defect” shall mean any liens,
encumbrances, obligations, security interests, pledges, insufficient or
defective legal description, lease termination, gaps in the chain of title or
other defects, including, without limitation, discrepancies in Net Revenue
Interest or Working Interest, that cause or if asserted would cause a breach of
Seller’s representation and warranty of Defensible Title in Section
3.1(a).  For purposes hereof, if any Well
or Unit is in an illegal or unauthorized location, then such condition shall be
treated as a Title Defect for purposes of this Agreement.

The term “Title Benefit” shall mean any right,
circumstance or condition that operates to increase the Net Revenue Interest of
Seller in any Property above that shown on Exhibit 1.2(b), 

 11
 

 

without causing a greater
than proportionate increase in Seller’s Working Interest above that shown in
Exhibit 1.2(b).

Section 3.3             Permitted
Encumbrances.

As used herein, the term “Permitted Encumbrances”
shall mean any or all of the following:

(a)         Royalties and any
overriding royalties, reversionary interests and other burdens to the extent
that they do not, individually or in the aggregate, reduce Seller’s Net Revenue
Interest below that shown in Exhibit 1.2(b) and Exhibit 1.2(c) or increase
Seller’s Working Interest above that shown in Exhibit 1.2(b) and Exhibit 1.2(c)
without a corresponding increase in the Net Revenue Interest;

(b)        All Leases, unit
agreements, pooling agreements, operating agreements, production sales
contracts, division orders and other Contracts applicable to the Assets, to the
extent that they do not, individually or in the aggregate, reduce Seller’s Net
Revenue Interest below that shown in Exhibit 1.2(b) and Exhibit 1.2(c) or
increase Seller’s Working Interest above that shown in Exhibit 1.2(b) and
Exhibit 1.2(c) without a corresponding increase in the Net Revenue Interest;

(c)         Preferential rights to
purchase the Assets with respect to which, prior to Closing, (i) waivers are
obtained from the holders of such preferential rights to purchase and/or (ii)
the appropriate time period for asserting such rights has expired without an
exercise of such rights;

(d)        Third-party consent to
assignment requirements and similar restrictions with respect to which waivers
or consents are obtained by Seller from the appropriate parties prior to the
Closing Date or the appropriate time period for asserting the right has expired
or which need not be satisfied prior to a transfer;

(e)         Liens for current
Taxes or assessments not yet delinquent or, if delinquent, being contested in
good faith by appropriate actions;

(f)         Liens or charges
arising in the ordinary course of business for amounts not yet delinquent
(including any amounts being withheld as provided by law), or if delinquent,
being contested in good faith by appropriate actions;

(g)        All rights to consent,
by required notices to, filings with, or other actions by Governmental Bodies
in connection with the sale or conveyance of oil and gas leases or interests
therein if they are not required prior to the sale or conveyance;

(h)        Rights of reassignment
arising upon final intention to abandon or release the Assets, or any of them;

(i)          Easements,
rights-of-way, servitudes, permits, surface leases and other rights in respect
of surface operations to the extent that they do not, individually or in the
aggregate, reduce Seller’s Net Revenue Interest below that shown in Exhibits
1.2(b) and 

 12
 

 

Exhibit 1.2(c)
or increase Seller’s Working Interest above that shown in Exhibits 1.2(b) and
Exhibit 1.2(c) without a corresponding increase in Net Revenue Interest;

(j)          To the extent
disclosed on Exhibit 5.24, calls on production under existing Contracts;

(k)         All rights reserved to
or vested in any Governmental Body to control or regulate any of the Assets in
any manner and all obligations and duties under all applicable laws, rules and
orders of any such Governmental Body or under any franchise, grant, license or
permit issued by any such Governmental Body;

(l)          Any encumbrance
affecting the Assets which is discharged by Seller prior to or at Closing or
which is expressly assumed, bonded or paid by Purchaser prior to or at Closing;

(m)        Any matters shown on
Exhibit 1.2(a), Exhibit 1.2(b) and Exhibit 1.2(c); and

(n)        Any other liens,
charges, encumbrances, defects or irregularities which do not, individually or
in the aggregate, materially detract from the value of or materially interfere
with the use or ownership of the Assets subject thereto or affected thereby (as
currently used or owned), which would be accepted by a reasonably prudent
Purchaser engaged in the business of owning and operating oil and gas Assets,
and which do not reduce Seller’s Net Revenue Interest below that shown in
Exhibit 1.2(b) and Exhibit 1.2(c), or increase Seller’s Working Interest above
that shown in Exhibit 1.2(b) and Exhibit 1.2(c) without a corresponding
increase in Net Revenue Interest.

Section 3.4             Notice
of Title Defects.

(a)         To assert a claim
arising out of a breach of Seller’s representation and warranty of Defensible
Title in Section 3.1(a), Purchaser must deliver claim notices to Seller (each a
“Title Defect Notice”) on or before twelve (12) Business Days prior to the
Closing Date (the “Title Claim Date”), except as otherwise provided in Sections
3.5, 3.6, 3.7 or 3.8. Each Title Defect Notice shall be in writing and shall
include (i) a description of the alleged Title Defect(s), (ii) the Wells
affected by the Title Defect (each a “Title Defect Property”), (iii) the
Allocated Values of each Title Defect Property, (iv) supporting documents reasonably
necessary for Seller (as well as any title attorney or examiner hired by
Seller) to verify the existence of the alleged Title Defect(s) and (v) the
amount by which Purchaser reasonably believes the Allocated Values of each
Title Defect Property are reduced by the alleged Title Defect(s) and the
computations and information upon which Purchaser’s belief is based. Purchaser
shall be deemed to have waived all breaches of Seller’s representation and
warranty of Defensible Title in Section 3.1(a) of which Seller has not been
given notice on or before the Title Claim Date.

(b)        Seller shall have the
right, but not the obligation, to deliver to Purchaser on or before the Title
Claim Date with respect to each Title Benefit a notice (a “Title Benefit Notice”)
including (i) a description of the Title Benefit, (ii) the Leases, Units or 

 13
 

 

Wells
affected, (iii) the Allocated Values of the Units or Wells subject to such
Title Benefit and (iv) the amount by which the Seller reasonably believes the
Allocated Value of those Units or Wells is increased by the Title Benefit, and
the computations and information upon which Seller’s belief is based.  Seller shall be deemed to have waived all
Title Benefits of which it has not given notice on or before the Title Claim
Date.

(c)         In the event that
Seller receives a Title Defect Notice, Seller shall have the right, but not the
obligation, to attempt, at its sole cost, to cure or remove any Title Defects
of which it has been advised by Purchaser in the Title Defect Notice prior to Closing.

Section 3.5             Remedies
for Title Defects.

(a)         In the event that any
Title Defect is not waived by Purchaser or cured on or before Closing Seller
shall, at its sole election, select one of the following options which shall
apply regarding uncured Title Defects:

(i)            The Purchase Price
shall be reduced by an amount agreed upon (“Title Defect Amount”) pursuant to
Section 3.5(d) or 3.5(f) by Purchaser and Seller as being the value of such
Title Defect, taking into consideration the Allocated Value of the Property
subject to such Title Defect, the portion of the Property subject to such Title
Defect, and the legal effect of such Title Defect on the Property affected
thereby; or

(ii)           Seller may retain
the affected Property, in which event the affected Property shall be deleted
from this Agreement and the Purchase Price shall be reduced by an amount equal
to the Allocated Value of such affected Property; provided, however, that if
the Title Defect affecting the affected Property is cured within six (6) months
of Closing and Seller gives written notice to Purchaser of its election within
such time period, Seller shall have the option to sell the affected Property to
Purchaser and Purchaser shall have the obligation to buy the affected Property
for the Allocated Value thereof, subject to the terms and conditions of this
Agreement as if the transaction had occurred at Closing; or

(b)        If after a reasonable
time for good faith negotiation, Purchaser and Seller have failed to agree on
the amount by which the Purchase Price should be reduced pursuant to Section
3.5(d)(i), and Seller has not selected the option provided for in 3.5(a)(ii)
prior to two Business Days prior to Closing, the dispute shall be submitted to
binding arbitration as provided in Section 7.14.

(c)         With respect to each
Unit or Well affected by Title Benefits reported under Section 3.4(b), the
Purchase Price shall be increased by an amount (the “Title Benefit Amount”)
equal to the increase in the Allocated Value for such Unit or Well caused by
such Title Benefits, as determined pursuant to Section 3.5(e).  The Closing Payment shall be increased by
such Title Benefit Amount.

(d)        Section 3.5(d) shall be
the exclusive right and remedy of Purchaser with respect to Seller’s breach of
its warranty and representation of Defensible Title in 

 14
 

 

Section
3.1(a).  The Title Defect Amount
resulting from a Title Defect shall be determined as follows:

(i)            if Purchaser and
Seller mutually agree upon the Title Defect Amount, that amount shall be the
Title Defect Amount;

(ii)           if the Title Defect
is a lien, encumbrance or other charge which is undisputed and the amount of
same can be exactly determined and agreed upon by Purchaser and Seller, then
the Title Defect Amount shall be the amount necessary to be paid to remove the
Title Defect from the Title Defect Property;

(iii)          if the Title Defect
represents a discrepancy between (A) the Net Revenue Interest for any Title
Defect Property (which has been agreed to by Seller and Purchaser) and (B) the
Net Revenue Interest or percentage stated on Exhibit 1.2(b) and Exhibit 1.2(c),
then the Title Defect Amount shall equal the following:  The Allocated Value of such Title Defect
Property minus the product of the Allocated Value of such Title Defect Property
multiplied by a fraction, the numerator of which is the Net Revenue Interest
for the Title Defect Property and the denominator of which is the Net Revenue
Interest or percentage ownership stated on Exhibit 1.2(b) and Exhibit 1.2(c);
and

(iv)          if the Title Defect
represents an obligation, encumbrance, burden or charge upon or other defect in
title to the Title Defect Property of a type not described in subsections (i),
(ii) or (iii) above, the Title Defect Amount shall be determined by taking into
account the Allocated Value of the Title Defect Property, the portion of the
Title Defect Property affected by the Title Defect, the legal effect of the
Title Defect, the potential economic effect of the Title Defect over the life
of the Title Defect Property, the values placed upon the Title Defect by
Purchaser and Seller and such other factors as are necessary to make a proper
evaluation.

(e)         The Title Benefit
Amount for any Title Benefit shall be the product of (a) the Allocated Value of
the affected Unit or Well multiplied by (b)(i) a fraction, the numerator of
which is the upwardly revised Net Revenue Interest and the denominator of which
is the Net Revenue Interest stated on Exhibit 1.2(b) and Exhibit 1.2(c) minus
(ii) one.

(f)         Seller and Purchaser
shall attempt to agree on all Title Defect Amounts and Title Benefit Amounts
prior to Closing. If Seller and Purchaser are unable to agree by no later than
two (2) Business Days prior to Closing, the dispute shall be submitted to
binding arbitration as provided in Section 7.14.

(g)        Notwithstanding anything
to the contrary, there shall be no adjustments to the Purchase Price or other
remedies provided by Seller for Title Defects unless (i) each individual Title
Defect exceeds $25,000.00 and (ii) the aggregate amount of all uncured Title
Defects exceeds a deductible in an amount equal to one percent (1%) of the
Purchase Price, after which point Purchaser shall be entitled to adjustments to
the 

 15
 

 

Purchase Price
or other remedies only with respect to Title Defects in excess of such
deductible. Notwithstanding anything to the contrary contained herein, the
aggregate Title Defect Amounts attributable to the effects of all Title Defects
upon any Title Defect Property shall not exceed the Allocated Value of the
Title Defect Property.  Notwithstanding
anything to the contrary contained herein, in the event that the cumulative
reduction to the Purchase Price for Title Defects pursuant to Article 3 exceeds
three percent (3%) of the unadjusted Purchase Price, Purchaser may unilaterally
terminate this Agreement without liability to Seller. If Purchaser terminates
this Agreement pursuant to this section, Purchaser shall be entitled to a
prompt refund of the full amount of the Deposit from Seller.

Section 3.6             Consents
to Assignment and Preferential Rights to Purchase.

(a)         Seller shall exercise
reasonable efforts to obtain all such permissions, approvals and consents by
governmental authorities and others which are reasonably obtainable by Closing
and are required to vest Defensible Title to the Assets in Purchaser.  Seller shall notify Purchaser at least five
(5) Business Days prior to Closing of all required third-party consents to the
assignment of the Assets to Purchaser which have not been obtained and the
Assets to which they pertain. In no event shall there be included in the
Assignment and Bill of Sale at Closing any Asset subject to a consent
requirement that provides that transfer of the Asset without consent will
result in a termination or other material impairment of any rights in relation
to such Asset.  In cases where the Asset
subject to such a requirement is a Contract and Purchaser is assigned the
Assets to which the Contract relates, but the Contract is not transferred to
Purchaser due to the unwaived consent requirement, Seller shall continue after
Closing to use reasonable efforts to obtain such consent so that such Contract
can be transferred to Purchaser upon receipt of such consent. In cases where
the Asset subject to such a requirement is a Property and the third-party
consent to the sale and transfer of the Property is not obtained prior to the
Closing Date, Purchaser may elect to treat the unsatisfied consent requirement
as a Title Defect by giving Seller notice thereof in accordance with Section
3.4(a), except that such notice must be given at least two (2) Business Days
prior to the Closing Date.  In such
event, the failure to obtain such consent to assignment shall be treated as if
the affected Assets were subject to a Title Defect that resulted in the complete
loss of title to such Assets, the affected Assets shall be excluded from the
Assignment and Bill of Sale and the Purchase Price shall be reduced under
Section 2.2(b) by the Allocated Value for such Assets. If a consent requirement
with respect to which a Purchase Price adjustment is made under Section 3.4 is
subsequently satisfied prior to the date of the final adjustment to the
Purchase Price under Section 9.4(b), subject to the same terms and provisions
hereof as if such Property had been conveyed at Closing, Purchaser shall pay to
Seller the amount of the previous reduction in the Purchase Price and the
affected Assets shall be assigned to Purchaser.

(b)        If any preferential
rights to purchase any Assets are exercised prior to Closing, those Assets
transferred to a holder of preferential right to purchase as a result of the
exercise of such preferential rights shall be treated as if those Assets were
subject to a Title Defect that resulted in the complete loss of title to such
Assets, and the 

 16
 

 

Purchase Price
shall be reduced under Section 2.2(b) by the Allocated Value for such Assets.
Seller shall convey such Assets to the holder of preferential right to purchase
exercising the preferential right to purchase, and Seller shall retain the
consideration paid by the holder of preferential right to purchase for such
Assets.

Section 3.7             Casualty
Loss.

After the date this Agreement is executed but prior to
the Closing Date, if any portion of the Assets is destroyed by fire or other
casualty, this transaction shall nevertheless close.  In the event that the loss resulting from the
casualty is an amount less than five percent (5%) of the unadjusted Purchase
Price, this transaction shall nevertheless close and Seller shall have no
obligation regarding the casualty. In the event that the resulting loss is an
amount equal to or greater than five percent (5%) of the unadjusted Purchase
Price, Seller, at Seller’s sole election, shall select one of the following
options which shall apply to the casualty: (i) Seller shall cause the Assets
affected by such casualty to be repaired or restored to at least its condition
prior to such casualty, at Seller’s sole cost, as promptly as reasonably
practicable (which work may extend after the Closing Date); or (ii) Seller
shall, at Closing, pay to Purchaser all sums paid to Seller by third parties by
reason of such casualty and shall assign to Purchaser all of Seller’s right,
title and interest (if any) in insurance claims, unpaid awards, and other
rights against third parties other than Seller Indemnitees arising out of the
casualty; or (iii) Seller may treat such casualty as a Title Defect with
respect to the affected Assets. In the event that Seller elects (i) or (iii)
above, Seller shall retain all rights to insurance and other claims against
third parties with respect to the casualty.

Section 3.8             Condemnation
Loss.

After the date this Agreement is executed but prior to
the Closing Date, if any portion of the Assets is taken in condemnation or
under right of eminent domain, this transaction shall nevertheless close.  In such event, Seller, at Seller’s sole
election, shall select one of the following options which shall apply to the
taking: (i) Seller shall, at Closing, pay to Purchaser all sums paid to Seller
by third parties by reason of such taking and shall assign, transfer and set
over to Purchaser all of Seller’s right, title and interest (if any) in
insurance claims, unpaid awards, and other rights against third parties other
than Seller Indemnitees arising out of the taking; or (ii) Seller shall treat
the taking as if the affected Assets were subject to a Title Defect that
resulted in the complete loss of title to such Assets, and the Purchase Price
shall be reduced under Section 2.2 by the Allocated Value for such Assets.  In the case of (ii) above, Seller shall retain
all rights to insurance and other claims against third parties with respect to
the taking.

Section 3.9             Limitations
on Applicability.

The Seller’s representation and warranty of Defensible
Title in Section 3.1(a) shall terminate as of the Title Claim Date and shall
have no further force and effect thereafter. 
Thereafter, Purchaser’s sole and exclusive remedies with regard to title
to the Assets shall be the special warranty of title to the Leases contained in
the Assignment and Bill of Sale.

 17

 

ARTICLE
IV

ENVIRONMENTAL MATTERS

(a)         Purchaser, on behalf of itself and each
of the other Purchaser Indemnitees, hereby fully releases and discharges the
Seller Indemnitees from any and all claims at Law or in equity, known or
unknown, whether occurring before the Effective Time, existing at the Effective
Time or arising after the Effective Time, contingent or otherwise, with respect
to all matters relating to Material Adverse Environmental Conditions,
Environmental Liabilities, Environmental Laws, the release of materials into
the environment, the protection of the environment or health EVEN IF SUCH
DAMAGES OR CLAIMS ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER
SOLE, JOINT OR CONCURRENT) OF SELLER INDEMNITEES OR THE STRICT LIABILITY OF
SELLER INDEMNITEES.

(b)        Purchaser acknowledges that Seller has
not made and will not make any representation or warranty regarding any matter
or circumstance relating to Material Adverse Environmental Conditions,
Environmental Laws, the release of materials into the environment or protection
of the environment or health, and that nothing in Article 5 or otherwise shall
be construed as such a representation or warranty.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF SELLER

Section 5.1             Disclaimers.

(a)         Except as set forth in Articles 3 and 5
of this Agreement, the certificate of Seller to be delivered pursuant to
Section 9.2(c) or in the Assignment and Bill of Sale to be delivered by Seller
to Purchaser hereunder, (i) SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS
OR IMPLIED, STATUTORY OR OTHERWISE AND (ii) SELLER EXPRESSLY DISCLAIMS ALL
LIABILITY AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY, STATEMENT OR
INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO PURCHASER OR ANY OF
ITS AFFILIATES, EMPLOYEES, AGENTS, CONSULTANTS OR REPRESENTATIVES (INCLUDING,
WITHOUT LIMITATION, ANY OPINION, INFORMATION, PROJECTION OR ADVICE THAT MAY
HAVE BEEN PROVIDED TO PURCHASER BY ANY OFFICER, DIRECTOR, EMPLOYEE, AGENT,
ATTORNEY, CONSULTANT, REPRESENTATIVE OR ADVISOR OF SELLER OR ANY OF SELLER’S
AFFILIATES).

(b)        EXCEPT AS EXPRESSLY REPRESENTED
OTHERWISE IN ARTICLE 3 OR THIS ARTICLE 5, WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE AS TO (i) TITLE TO ANY OF THE
ASSETS, (ii) THE CONTENTS, CHARACTER OR NATURE OF ANY DESCRIPTIVE MEMORANDUM,
DOCUMENTS, REPORTS OF ANY PETROLEUM ENGINEERING CONSULTANT OR ANY GEOLOGICAL,
GEOPHYSICAL OR SEISMIC DATA OR INTERPRETATION RELATING TO THE 

 18
 

 

ASSETS, (iii) THE QUANTITY, QUALITY OR
RECOVERABILITY OF HYDROCARBONS OR PETROLEUM SUBSTANCES IN OR FROM THE ASSETS,
(iv) ANY ESTIMATES OF THE VALUE OF THE ASSETS OR FUTURE REVENUES THAT MAY BE
ATTRIBUTABLE TO THE ASSETS, (v) THE PRODUCTION OF HYDROCARBONS OR PETROLEUM
SUBSTANCES FROM THE ASSETS, (vi) THE MAINTENANCE, STATE OR REPAIR OR LACK
THEREOF, PHYSICAL CONDITION, QUALITY, SUITABILITY FOR ANY PURPOSE, DESIGN OR
MARKETABILITY OF THE ASSETS, (vii) THE CONTENT, CHARACTER OR NATURE OF ANY
DESCRIPTIVE MEMORANDUM, REPORTS, BROCHURES, CHARTS OR STATEMENTS PREPARED BY
THIRD PARTIES, (viii) THE ACCURACY AND/OR THE COMPLETENESS OF ANY OTHER
MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO
PURCHASER, ITS AFFILIATES OR ITS EMPLOYEES, AGENTS, CONSULTANTS,
REPRESENTATIVES OR ADVISORS IN CONNECTION WITH THIS AGREEMENT OR ANY DISCUSSION
OR PRESENTATION RELATING THERETO, (ix) ANY REPRESENTATION OR WARRANTY, EXPRESS
OR IMPLIED, STATUTORY OR OTHERWISE, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY EQUIPMENT OR (x)
ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM PATENT OR TRADEMARK
INFRINGEMENT.  IT IS EXPRESSLY UNDERSTOOD
AND AGREED BY THE PARTIES HERETO THAT PURCHASER SHALL BE DEEMED TO BE
PURCHASING THE EQUIPMENT AND PERSONAL PROPERTY IN ITS PRESENT STATUS, CONDITION
AND STATE OF REPAIR, “AS IS” AND “WHERE IS,” WITH ALL FAULTS.

(c)         Any representation “to the knowledge of
Seller” or “to Seller’s knowledge” is limited to matters within the actual
knowledge of the officers or management employees, including, without
limitation those with titles of “Manager”, “Vice President” and “President,” of
Seller. Actual knowledge includes information actually personally known or
information which should have been ascertained had a reasonable inquiry or
investigation been undertaken.  The
standard of reasonableness is that which would be exercised by a reasonably
prudent person who has been advised that the person is expected to make
representations and warranties with respect to conditions and information
relating to the Assets which are to be conveyed.

(d)        Subject to the foregoing provisions of
this Section 5.1, Seller represents and warrants to Purchaser the matters set
out in this Article 5.

Section 5.2             Existence and Qualification.

Seller is a corporation duly
organized, validly existing and in good standing
under the Laws of the State of Texas. 
Seller is duly qualified to do business as a corporation in the
respective jurisdictions where the Assets are located.

 19
 

 

Section 5.3             Power.

Seller has the corporate power to enter into this
Agreement, perform the terms of this Agreement and consummate the transactions
contemplated by this Agreement.

Section 5.4             Authorization and Enforceability.

The execution, delivery and performance of this
Agreement have been or by Closing will have been duly authorized by all
necessary corporate action on the part of Seller.  This Agreement has been duly executed and
delivered by Seller (and all documents required hereunder to be executed and
delivered by Seller at Closing will be duly executed and delivered by Seller)
and this Agreement constitutes the valid and binding obligation of Seller,
enforceable in accordance with its terms except as such enforceability may be
limited by applicable bankruptcy or other similar laws affecting the rights and
remedies of creditors generally as well as to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). As evidence of the foregoing, Seller has delivered to
Purchaser simultaneous with the execution of this Agreement a unanimous consent
executed, adopted and approved by the board of directors of Seller which
specifically approves the terms of this Agreement, the execution of this
Agreement by Seller and the completion of the transaction contemplated by this
Agreement.

Section 5.5             No Conflicts.

The execution, delivery
and performance of this Agreement by Seller will not (i) violate any provision
of the certificate of incorporation or bylaws of Seller, (ii) result in default
(with due notice or lapse of time or both) or the creation of any lien or
encumbrance or give rise to any right of termination, cancellation or
acceleration under any of the terms, conditions or provisions of any note,
bond, mortgage or indenture to which Seller is a party or which affect the
Assets, (iii) violate any judgment, order, ruling, or decree applicable to
Seller as a party in interest or (iv) violate any Laws, rule or decree applicable
to Seller or any of the Assets, except for rights to consent by, required
notices to, and filings with or other actions by Governmental Bodies where the
same are not required prior to the assignment of oil and gas interests.

Section 5.6             Purchaser’s
Liability for Brokers’ Fees.

Purchaser shall not have any responsibility, liability
or expense, as a result of undertakings or agreements of Seller, for brokerage
fees, finder’s fees, agent’s commissions or other similar forms of compensation
in connection with this Agreement or any agreement or transaction contemplated
hereby.

Section 5.7             Litigation.

Except as set forth in Exhibit 5.7, (a) no
investigation, proceeding, action, suit, or other legal proceeding of any kind
or nature before any Governmental Body or arbitrator (including any take-or-pay
claims) is pending and (b) no written notice from any Governmental Body or any
other Person has been received by Seller claiming any violation of or
noncompliance with any Laws with respect to the Assets.

 20
 

 

Section 5.8             Taxes and Assessments.

With respect to all Taxes related to the Assets,
Seller warrants and represents that (a) all reports, returns, statements
(including estimated reports, returns or statements), and other similar filings
(the “Tax Returns”) relating to the Assets required to be filed on or before
the Closing Date by Seller with respect to any Taxes have been or will be
timely filed with the appropriate Governmental Body in all jurisdictions in
which such Tax Returns are required to be filed; (b) such Tax Returns are true
and correct in all material respects, and all Taxes reported on such Tax
Returns have been paid; (c) there are not currently in effect any extension or
waiver of any statute of limitations of any jurisdiction regarding the
assessment or collection of any Tax; (d) there are no administrative
proceedings or lawsuits pending against the Assets or Seller by any taxing
authority; and (e) there are no liens on any of the Assets except for liens for
Taxes not yet due.

Section 5.9             Outstanding Capital Commitments.

As of the Effective Time,
there were no outstanding AFEs or other commitments, either singly or in the
aggregate, to make capital expenditures in excess of $200,000.00 which are
binding on the Assets.

Section 5.10           Compliance with Laws.

To the knowledge of
Seller, the Assets operated by Seller have been and are currently in
substantial compliance with the provisions and requirements of all Laws of all
Governmental Bodies having jurisdiction with respect to the Assets.

Section 5.11           Contracts.

Exhibit 5.11 contains a list of all material Contracts
pertaining to the Assets.  Seller has
paid its share of all costs including without limitation, Property Costs,
payable by Seller and is not in default under any Leases and Contracts, except
those being contested in good faith.

Section 5.12           Payments.

With respect to all Seller Operated Assets, all
rentals, royalties, overriding royalty interests, production payments, and
other payments due and/or payable by Seller to mineral, royalty and other interest
owners prior to the Effective Time with respect to the Assets and the
Hydrocarbons produced therefrom or attributable thereto have been properly and
timely paid. Seller is not obligated under any contract or agreement for the
sale of gas from the Assets containing a take-or-pay, advance payment,
prepayment, or similar provision, or under any gathering, transmission, or any
other contract or agreement with respect to any of the Assets to gather,
deliver, process, or transport any gas without then or thereafter receiving
full payment therefor.

Section 5.13           Gas Imbalances.

Exhibit 5.13 sets forth all of Seller’s pipeline and
production imbalances and penalties as of the Effective Time arising with
respect to the Assets. Except as disclosed in Exhibit 5.13, as of 

 21
 

 

the Effective Time, (i)
no Person is entitled to receive any portion of the Seller’s Hydrocarbons
produced from the Assets or to receive cash or other payments to “balance” any
disproportionate allocation of Hydrocarbons produced from the Assets under any
operating agreement, gas balancing or storage agreement, gas processing or
dehydration agreement, gas transportation agreement, gas purchase agreement, or
other agreements, whether similar or dissimilar, (ii) Seller is not obligated
to deliver any quantities of gas or to pay any penalties or other amounts, in
connection with the violation of any of the terms of any gas contract or other
agreement with shippers with respect to the Assets, and (iii) Seller is not
obligated to pay any penalties or other payments under any gas transportation
or other agreement as a result of the delivery of quantities of gas from the
Wells in excess of the contract requirements.

Section 5.14           Governmental Authorizations.

Seller has obtained and
is maintaining all federal, state and local governmental licenses, permits,
franchises, orders, exemptions, variances, waivers, authorizations,
certificates, consents, rights, privileges and applications therefor (the “Governmental
Authorizations”) that are presently necessary or required for the ownership and
operation of the Seller Operated Assets. Seller has operated the Seller
Operated Assets in accordance with the conditions and provisions of such
Governmental Authorizations, and Seller has not received any notices of violations.
No proceedings are pending or, to Seller’s knowledge, threatened, that might
result in any modification, revocation, termination or suspension of any such
Governmental Authorizations or which would require any corrective or
remediation action by Seller.

Section 5.15           Consents to Assignments and
Preferential Purchase Rights.

Except as set forth on Exhibit 5.15, none of the
Assets are subject to any preferential rights to purchase, restrictions on
assignment or required third-party consents to assignment, which may be
applicable to the transactions contemplated by this Agreement, except for
governmental consents and approvals of assignments that are customarily
obtained after Closing.

Section 5.16           Non-foreign Person.

Seller is not a “foreign Person” within the meaning of
Sections 1445 and 7701 of the Code.

Section 5.17           Payout Balances.

Exhibit 5.17 contains a complete and accurate list of
the status of any “payout” balances, as of the Effective Time, for the Wells
and Units subject to any reversion, adjustment at some level of cost recovery,
payout or other event other than termination of a Lease by its terms.

Section 5.18           Condemnation.

To Seller’s knowledge, there is no actual or
threatened taking of any part of the Assets by reason of condemnation or
eminent domain proceeding.

 22
 

 

Section 5.19           Bankruptcy.

There are no bankruptcy, reorganization, or similar
arrangement proceedings pending, being contemplated by or, to Seller’s
knowledge, threatened against Seller or any Affiliate of Seller.

Section 5.20           NGA.

No consent is required in connection with the
transaction contemplated hereby under the Natural Gas Policy Act of 1978, as
amended. Seller is not an interstate pipeline company within the meaning of the
Natural Gas Act of 1938.

Section 5.21           Investment Company.

Seller is not (a) an
investment company or a company controlled by an investment company within the
meaning of the Investment Company Act of 1940, as amended, or (b) subject in
any respect to the provisions of said act.

Section 5.22           Suspense Accounts.

Except as described on Exhibit 5.22 attached hereto,
there are no obligations to pay any interests of any kind held by Seller in
suspense.

Section 5.23           Material
Changes.

Except as provided for or disclosed in Exhibit 5.23
attached hereto and made a part hereof, between the date of execution of this
Agreement and the Closing Date, there has not been and will not be any material
adverse changes in the operations of the Properties by Seller, which change was
not the result of an industry-wide development affecting other companies in the
oil or gas industries.

Section 5.24           Calls on Production.

Except as disclosed on
Exhibit 5.24 there are no calls upon, option to purchase, or similar
right with respect to any portion of Seller’s production from the Assets and
there are no contracts or agreements providing for the sale, transportation,
gathering or other marketing related contracts with respect to any portion of
Seller’s production from the Assets, except that may be cancelled on less than
thirty-one (31) days written notice.

Section 5.25           No Forward Sales.  

Except as disclosed in Exhibit 5.25, Seller is not
obligated by virtue of a take-or-pay payment, advance payment or other similar
payment (other than royalties, overriding royalties and similar arrangements
applicable to the Properties reflected on Exhibit 1.2(a)), to deliver
hydrocarbons, or proceeds from the sale thereof, attributable to the Lease at
some future time without receiving payment therefore at or within 60 days after
delivery.

 23
 

 

Section 5.26           Wells to Be Plugged and Abandoned.

Except as set forth in Exhibit 5.26, to Seller’s
knowledge as of the Effective Time, there are no Wells that Seller is currently
obligated by applicable law, or contract to plug and abandon because they are
incapable of producing.  Seller has not
received any notification stating that Wells have been plugged and abandoned in
a manner that does not comply with all applicable requirements of each
Governmental Authority having jurisdiction over the Properties.

Section 5.27           No Sale or Hypothecation.  

Prior to Closing Seller
shall not sell, convey, transfer or encumber the Properties without the written
consent of Purchaser.

ARTICLE
VI

REPRESENTATIONS AND WARRANTIES OF PURCHASER.

Purchaser represents and warrants to Seller the
following:

Section 6.1             Existence and Qualification.

Purchaser is a corporation organized, validly existing
and in good standing under the laws of the state of its incorporation.  Purchaser is duly qualified to do business as
a corporation in the respective jurisdictions where the Assets are located.

Section 6.2             Power.

Purchaser has the corporate power to enter into this
Agreement, perform the terms of this Agreement and consummate the transactions
contemplated by this Agreement.

Section 6.3             Authorization and Enforceability.

The execution, delivery and performance of this
Agreement have been or by Closing will have been duly authorized by all
necessary corporate action on the part of Purchaser.  This Agreement has been duly executed and delivered
by Purchaser (and all documents required hereunder to be executed and delivered
by Purchaser at Closing will be duly executed and delivered by Purchaser) and
this Agreement constitutes the valid and binding obligations of Purchaser,
enforceable in accordance with their terms except as such enforceability may be
limited by applicable bankruptcy or other similar laws affecting the rights and
remedies of creditors generally as well as to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). As evidence of the foregoing, Purchaser has delivered to
Seller simultaneous with the execution of this Agreement either a resolution or
a unanimous consent executed, adopted and approved by the board of directors of
Purchaser which specifically approves the terms of this Agreement, the
execution of this Agreement by Purchaser and the completion of the transaction
contemplated by this Agreement.

 24
 

 

Section 6.4             No Conflicts.

The execution, delivery and performance of this
Agreement by Purchaser, and the transactions contemplated by this Agreement
will not (i) violate any provision of the certificate of incorporation or
bylaws of Purchaser, (ii) result in a material default (with due notice or
lapse of time or both) or the creation of any lien or encumbrance or give rise
to any right of termination, cancellation or acceleration under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license
or agreement to which Purchaser is a party, (iii) violate any judgment, order,
ruling, or regulation applicable to Purchaser as a party in interest, or (iv)
violate any Law, rule or decree applicable to Purchaser or any of the Assets,
except for rights to consent by, required notices to, and filings with or other
actions by Governmental Bodies where the same are not required prior to the
assignment of oil and gas interests.

Section 6.5             Seller’s Liability for Brokers’
Fees.

Seller shall not have any
responsibility, liability or expense, as a result of undertakings or agreements
of Purchaser, for brokerage fees, finder’s fees, agent’s commissions or other
similar forms of compensation in connection with this Agreement or any
agreement or transaction contemplated hereby.

Section 6.6             Litigation.

As of the date of the execution of this Agreement
there are (and as of the Closing Date there will be) no actions, suits or
proceedings pending, or to Purchaser’s knowledge, threatened in writing, before
any Governmental Body or brought by any Person against Purchaser or any Affiliate
of Purchaser with respect to this Agreement, the transaction contemplated by
this Agreement or the Assets.

Section 6.7             Financing.

Purchaser has sufficient cash, available lines of
credit or other sources of immediately available funds in United States dollars
to enable it to pay the Closing Payment to Seller at the Closing.

Section 6.8             Texas Deceptive Trade
Practices-Consumer Protection Act.

With respect to the Texas Deceptive Trade
Practices-Consumer Protection Act, Tex. Bus. & Com. Code Ann. Section 17.41
et seq. (the “DTPA”), Purchaser acknowledges, represents and warrants that
Purchaser is purchasing the goods and/or services covered by this Agreement for
commercial or business use; that Purchaser has assets of $5 million or more
according to its most recent financial statement prepared in accordance with
generally accepted accounting principles; that Purchaser has knowledge and
experience in financial and business matters that enable Purchaser to evaluate
the merits and risks of a transaction such as this; and that Purchaser is not
in a significantly disparate bargaining position with Seller.

 25
 

 

Section 6.9             No Reliance.

Purchaser represents and warrants that Purchaser is
knowledgeable of the oil and gas business and of the usual and customary
practices of producers such as Seller. 
Purchaser has been granted access to the Assets and the Records of
Seller relating to the Assets. In making the decision to enter into this
Agreement and consummate the transactions contemplated hereby, Purchaser has
relied exclusively on Purchaser’s own investigation and analysis of the
condition, value, characteristics and qualities of the Assets. Accordingly,
Purchaser acknowledges that Seller has not made and Purchaser shall not rely
upon any representation or warranty, express, implied, at common law, by
statute or otherwise, other than the warranty made in Section 3.1, the express
representations and warranties made in Article 5, the certificate of Seller to
be delivered pursuant to Section 9.2(c) and the special warranty of title in
the Assignment and Bill of Sale relating to the Assets.

ARTICLE
VII

COVENANTS OF THE PARTIES

Section 7.1             Access.

(a)         Between the date of execution of this
Agreement and the Closing Date, Seller will give Purchaser and its
representatives access to the Assets and the right to copy, at Purchaser’s
expense, the Records in Seller’s possession, for the purpose of conducting an
investigation of the Assets, but only to the extent that Seller may do so
without violating any obligations to any third party and to the extent that
Seller has authority to grant such access without breaching any restriction
binding on Seller. Such access by Purchaser shall be limited to Seller’s normal
business hours, and any weekends and after hours requested by Purchaser that
can be reasonably accommodated by Seller, and Purchaser’s investigation shall
be conducted in a manner that minimizes interference with the operation of the
Assets. All information obtained by Purchaser and its representatives under
this Section 7.1 shall be subject to the terms of Section 7.7 and the terms of
that certain confidentiality agreement between Seller and Purchaser dated
February 2, 2005 (the “Confidentiality Agreement”).

(b)        PURCHASER ACKNOWLEDGES THAT EXCEPT TO
THE EXTENT CONTAINED IN AN EXPRESS REPRESENTATION IN ARTICLES 3 AND 5 OF THIS
AGREEMENT, THE CERTIFICATE OF SELLER TO BE DELIVERED PURSUANT TO SECTION 9.2(c)
OR THE ASSIGNMENT AND BILL OF SALE, SELLER HAS MADE NO REPRESENTATIONS OR
WARRANTIES, WHETHER ORAL OR WRITTEN. 
SELLER DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, STATUTORY OR
OTHERWISE AS TO THE ACCURACY OR COMPLETENESS OF INFORMATION OBTAINED BY
PURCHASER FROM SELLER OR AS TO SELLER’S TITLE TO THE ASSETS. IN ENTERING INTO
AND PERFORMING THIS AGREEMENT, PURCHASER HAS RELIED AND WILL RELY SOLELY UPON
ITS INDEPENDENT INVESTIGATION OF, AND JUDGMENT WITH RESPECT TO, THE ASSETS, THE
VALUE OF THE ASSETS, AND SELLER’S TITLE THERETO AND UPON THOSE REPRESENTATIONS
AND WARRANTIES EXPRESSLY SET FORTH IN ARTICLES 3 AND 5 OF THIS 

 26
 

 

AGREEMENT, THE CERTIFICATE OF SELLER TO BE
DELIVERED PURSUANT TO SECTION 9.2(c) OR THE ASSIGNMENT AND BILL OF SALE.

Section 7.2             Government Reviews.

If applicable, this Agreement is subject to and
conditioned upon compliance by Seller and Purchaser with the HSR Act.  If required, Seller and Purchaser shall in a
timely manner (a) make all required filings, if any, with and prepare
applications to and conduct negotiations with, each governmental agency as to
which such filings, applications or negotiations are necessary or appropriate
in the consummation of the transactions contemplated hereby specifically
including but not limited to the HSR Act, (b) provide such information as each
may reasonably request to make such filings, prepare such applications and
conduct such negotiations and (c) request early termination or waiver of any
applicable waiting period under the HSR Act. 
Purchaser shall bear the cost of the HSR Act filing fee made in
connection with this Agreement.  Each
party shall cooperate with and use all reasonable efforts to assist the other
with respect to such filings, applications and negotiations.

Section 7.3             Notification of Breaches.

Until the Closing,

(a)         Purchaser shall notify Seller promptly
after Purchaser obtains actual knowledge that any representation or warranty of
Seller contained in this Agreement is untrue in any material respect or will be
untrue in any material respect as of the Closing Date or that any covenant or
agreement to be performed or observed by Seller prior to or on the Closing Date
has not been so performed or observed in any material respect.

(b)        Seller shall notify Purchaser promptly
after Seller obtains actual knowledge that any representation or warranty of
Purchaser contained in this Agreement is untrue in any material respect or will
be untrue in any material respect as of the Closing Date or that any covenant
or agreement to be performed or observed by Purchaser prior to or on the
Closing Date has not been so performed or observed in a material respect.

If any of Purchaser’s or Seller’s representations or
warranties is untrue or shall become untrue in any material respect between the
date of execution of this Agreement and the Closing Date, or if any of
Purchaser’s or Seller’s covenants or agreements to be performed or observed prior
to or on the Closing Date shall not have been so performed or observed in any
material respect, but if such breach of representation, warranty, covenant or
agreement shall (if curable) be cured by the Closing (or, if the Closing does
not occur, by the date set forth in Section 9.1), then such breach shall be
considered not to have occurred for all purposes of this Agreement.

Section 7.4             Assignments and Bills of Sale.

On the Closing Date, Seller shall execute and deliver
to Purchaser Assignments and Bills of Sale in sufficient number of originals to
facilitate recording in each county in which the Properties are located and
Assignments and Bills of Sale necessary to convey to Purchaser all 

 27
 

 

federal or state leases,
if any, in the form as prescribed by the applicable Governmental Body and
otherwise acceptable to Purchaser and Seller.

Section 7.5             Public Announcements.

Neither party shall make any press release, public
announcement or public disclosure regarding the existence of this Agreement,
the contents hereof or the transaction contemplated hereby until this Agreement
has been signed by Seller and Purchaser. 
In such event, either party may make a press release, public
announcement or public disclosure regarding this Agreement after the form and
contents of the press release, public announcement or public disclosure have
been approved in writing by the other party. 
In the event that the transaction contemplated by this Agreement closes,
either party may make a press release, public announcement or public disclosure
regarding this Agreement after the form and contents of the press release,
public announcement or public disclosure have been approved in writing by the
other party.  The foregoing provision
shall not restrict disclosures by Purchaser or Seller which are required by
applicable securities or other Laws or regulations of the applicable rules of
any stock exchange having jurisdiction over the disclosing party or its
Affiliates.

Section 7.6             Operation of Business Pending
Closing.

Prior to the Closing Date, Seller will (except as
consented to in writing by Purchaser or otherwise permitted under this
Agreement):

(a)         operate its business in the ordinary
course of business consistent with recent past practices, and will use
reasonable efforts to cause the operator of any Property (if not the Seller) to
operate the same in substantially the same manner as they have been operated
previously;

(b)        not terminate, materially amend, or
extend any material Contracts or liens affected the Properties, or enter into
or commit to enter into any new material Contracts or liens relating to the
Properties, or settle, compromise or waive any material right relating to the
Properties;

(c)         maintain insurance coverage on the
Properties in amounts and of the types presently in force;

(d)        use reasonable efforts to (or cause the
operator to, if Seller is not the operator) maintain in full force and effect
the Leases, and pay all costs and expenses and perform all material obligations
of the owner of the Properties promptly when due;

(e)         use reasonable efforts to (or cause the
operator to, if Seller is not the operator) to maintain all permits, not
transfer, sell, hypothecate, encumber, or otherwise dispose of any Properties
except for sales and dispositions of hydrocarbons in the ordinary course of
business consistent with past practices;

(f)         not grant or create any preferential
right to purchase, right of first refusal opportunity or other transfer
restriction or requirement with respect to the Properties except in connection
with the renewal or extension of Leases after the Effective Time if 

 28
 

 

granting or creating such right or
requirement is a condition of such renewal or extension;

(g)        use reasonable efforts to (or cause the
operator to, if Seller is not the operator) maintain the Equipment associated
with the Properties;

(h)        not make any change in any method of
accounting or accounting practices or policy with the respect to the
Properties;

(i)          not incur or enter into any forward
sales of gas or other sales out of the ordinary course of business or suffer or
permit to be created any gas imbalances affecting the Properties;

(j)          not incur any indebtedness or take or
omit to take any action that would cause a lien or encumbrance to arise or
exist on the Properties or otherwise allow a lien to attach or encumber the
Properties;

(k)         not commit to participate in any
operation on the Properties estimated to exceed $200,000 without first
consulting with Purchaser in good faith and after first furnishing Purchaser
will all available technical, economical, and other factual support for Seller’s
recommendation and attempting to reach an agreement as to the election to be
made which is in the best interest of the Parties.

Section 7.7             Indemnity Regarding Access.

PURCHASER, ON BEHALF OF ITSELF AND THE PURCHASER
INDEMNITEES, SHALL INDEMNIFY, HOLD HARMLESS, DEFEND, SAVE, RELEASE AND
COVENANTS NOT TO SUE SELLER INDEMNITEES, THE OTHER OWNERS OF INTERESTS IN THE
ASSETS, AND ALL SUCH PERSONS’ DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND
REPRESENTATIVES, FROM AND AGAINST ANY AND ALL DAMAGES ARISING FROM OR RELATED
TO ACCESS TO THE ASSETS BY THE PURCHASER INDEMNITEES PURSUANT TO SECTION 7.1.

WITHOUT LIMITING THE FOREGOING, PURCHASER’S
INDEMNIFICATION OF SELLER INDEMNITEES, THE OTHER OWNERS OF INTERESTS IN THE
ASSETS, AND ALL SUCH PERSONS’ DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND
REPRESENTATIVES, SHALL INCLUDE INDEMNIFICATION AGAINST DAMAGES ARISING FROM OR
RELATED TO PERSONAL INJURIES, DEATH, PROPERTY DAMAGE AND CLAIMS MADE BY
LANDOWNERS WHO OWN LAND ADJACENT TO THE PROPERTIES ARISING FROM OR IN
CONNECTION WITH ACTIVITIES, TESTS, ENVIRONMENTAL ASSESSMENTS OR OTHER
OPERATIONS CONDUCTED BY PURCHASER OR PURCHASER’S REPRESENTATIVES RELATED TO
THIS AGREEMENT.

PURCHASER’S INDEMNIFICATION OF SELLER INDEMNITEES, THE
OTHER OWNERS OF INTERESTS IN THE ASSETS, AND ALL SUCH PERSONS’ DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS AND REPRESENTATIVES, SHALL BE PURSUANT TO AND IN
ACCORDANCE WITH ALL OF THE INDEMNIFICATION PROVISIONS SET 

 29
 

 

OUT IN SECTION 11.3(b)
AND SHALL INCLUDE, WITHOUT LIMITATION, INDEMNIFICATION AGAINST DAMAGES AND
LITIGATION EXPENSES.

Section 7.8             Gas Imbalances and Take-or-Pay
Make-up Obligations.

Subject to the adjustment to the Purchase Price as
provided in this Section 7.8, Purchaser expressly assumes Purchaser’s
proportionate share of any and all obligations attributable to gas production
imbalances with co-owners of the Properties and gas take-or-pay make-up
obligations with purchasers or sellers of natural gas from the Properties.  Should Purchaser (i) determine that the gas
imbalance information set out on Exhibit 5.13 is inaccurate and (ii) deliver a
written notice regarding the gas imbalance to Seller at least five (5) Business
Days prior to Closing, Seller shall review Purchaser’s information regarding
the alleged gas imbalance.  If it is
determined that there is an inaccuracy as of the Effective Time in the gas
imbalance set forth on Exhibit 5.13, then the Purchase Price shall be either
increased (if there is aggregate underproduction) or decreased (if there is
aggregate overproduction) on the basis of $4.00 per MMBtu. This adjustment to
the Purchase Price shall be in full settlement of all production imbalances on
the Assets. Notwithstanding anything to the contrary contained in this Section
7.8, there shall be no adjustment to the Purchase Price if it is determined
that actual imbalance volumes are within 15% above or below those shown on
Exhibit 5.13.

The adjustment to the Purchase Price as set forth in
this Section 7.8 is Purchaser’s exclusive remedy for (i) any gas imbalance,
(ii) any breach of Seller’s representation in Section 5.13 and (iii) any
affirmation of such representations in the certificate of Seller to be
delivered pursuant to Section 9.2(c), and, at Closing, Purchaser shall assume
Purchaser’s proportionate share of Seller’s overproduced or underproduced
position in the Wells as of the Effective Date, including the responsibility
for the payment of royalties with respect to any imbalance and any obligation
to balance, whether in cash or in kind. Purchaser shall be deemed to have
waived any breaches of Section 5.13 if Purchaser fails to give timely written
notice to Seller as provided above.

Section 7.9             Consents and Preferential Rights.

(a)         Seller shall promptly prepare and send
notices to the holders of any required consents to assignment of any Assets
requesting such consents. Seller shall use reasonable efforts to obtain all
such consents which are reasonably obtainable by Closing and are required to
vest Defensible Title to the Assets in Purchaser.  Purchaser shall cooperate with Seller in
seeking to obtain such consents. In the event that Seller is unable to obtain
such consents that are required to vest Defensible Title to the Assets,
Purchaser may elect to treat the unsatisfied consent requirement as a Title
Defect and the procedures set forth in Section 3.5(a) shall apply.

(b)        Seller shall promptly prepare and send
notices to the holders of any applicable preferential rights to purchase any
Asset requesting waivers of such preferential rights to purchase. The
consideration payable under this Agreement for any particular Assets for
purposes of preferential purchase right notices shall be the Allocated Value
for such Assets. Seller shall use reasonable efforts to cause such waivers of
preferential rights to purchase (or the exercise thereof) to be obtained and 

 30
 

 

delivered prior to Closing. Purchaser shall
cooperate with Seller in seeking to obtain such waivers of preferential rights.

If the holder of a preferential right to purchase
exercises such right, Seller shall tender to such third party the required
interest in the affected Asset at a price equal to the Allocated Value (reduced
appropriately, as determined by mutual agreement of Purchaser and Seller, if
less than the entire Asset must be tendered), and to the extent that such
preferential right to purchase is exercised and such interest in such Asset is
actually sold to the third party so exercising such right, the Assets
transferred will be treated as if subject to a Title Defect and the procedures
set forth in Section 3.5(d) shall apply.

Should a holder of a preferential right to purchase
fail to exercise its preferential right to purchase as to any portion of the
Assets prior to Closing and the time for exercise or waiver has not yet expired
prior to Closing, subject to the remaining provisions of this Section 7.9, such
Assets shall be included in the transaction contemplated by this Agreement at
Closing and the following procedures shall be applicable:

(i)            An Assignment and Bill of Sale from
Seller to Purchaser of the Assets affected by such preferential right to
purchase shall be delivered into an escrow account, Purchaser shall take
beneficial possession of the affected Assets and Purchaser shall be entitled to
all production, income, proceeds, receipts and credits to which Purchaser would
be entitled under Section11.1. Purchaser shall Indemnify Seller Indemnitees
against Damages for which Purchaser would be liable under the terms of Sections
11.2 and 11.3 with respect to the affected Assets. Record title to the affected
Assets shall not be transferred and the Assignment and Bill of Sale shall not
be released to Purchaser from the escrow account until such preferential right
to purchase has been waived or has expired. PURCHASER’S INDEMNIFICATION OF
SELLER INDEMNITEES SHALL BE PURSUANT TO AND IN ACCORDANCE WITH THE
INDEMNIFICATION PROVISIONS SET OUT IN SECTION 11.3(b) AND SHALL INCLUDE,
WITHOUT LIMITATION, INDEMNIFICATION AGAINST DAMAGES AND LITIGATION EXPENSES.

(ii)           Seller shall continue to use
reasonable efforts to obtain the waiver of the preferential right to purchase
and shall continue to be responsible for the compliance with the preferential
right to purchase.

(iii)          Should the holder of the preferential
right to purchase exercise same, Purchaser and Seller agree to cause the
affected Assets to be transferred to such holder on the terms and provisions
set out herein and in the applicable preferential right to purchase provision.
In such event, Seller shall pay the Allocated Value, subject to applicable
adjustments, for such Asset to Purchaser, and Seller shall be entitled to
retain the consideration paid for the affected Asset by the holder of the
preferential right to purchase.

(iv)          If the preferential right to purchase
is waived after the Closing Date or if the time limit for the exercise of the
preferential right to purchase 

 31
 

 

expires without being exercised, Seller and
Purchaser shall take all reasonable actions necessary to ensure that the
affected Assets are promptly conveyed out of escrow to Purchaser.

(v)           Once the provisions of subparagraph
(iv) have been satisfied and all obligations in connection therewith have been
fulfilled, the Closing shall be deemed to have occurred for all purposes
hereunder with respect to the affected Assets.

Should any third party bring any suit, action or other
proceeding seeking to restrain, enjoin or otherwise prohibit the consummation
of the transactions contemplated hereby in connection with a claim to enforce
preferential rights, the Assets affected by such suit, action or other
proceeding shall be excluded from the Assets transferred at Closing and the
Purchase Price shall be reduced by the Allocated Value of such excluded
Assets.  Promptly after the suit, action
or other proceeding is dismissed or settled or a judgment is rendered, Seller
shall sell to Purchaser and Purchaser shall purchase from Seller all such
Assets not being sold to the third party for a purchase price equal to the
Allocated Value of such Assets, adjusted as provided in Section 2.2.

Section 7.10           Tax Matters.

(a)         Subject to the provisions below, Seller
shall be responsible for all Taxes attributable to all times prior to Effective
Time, including without limitation, income Taxes arising as a result of the
gain recognized on the transfer of the Assets. Purchaser shall be responsible
for Purchaser’s proportionate share of all such Taxes attributable to all
periods of time at and after the Effective Time.

(b)        Purchaser shall pay any sales, use,
excise, registration, documentary, stamp or transfer Taxes, recording fees
incurred and imposed with respect to the conveyance of the Properties
contemplated hereby.

Section 7.11           Further Assurances.

After Closing, Seller and Purchaser shall take such
further actions and execute, acknowledge and deliver all such further documents
as are reasonably requested by the other party for carrying out the purposes of
this Agreement or of any document delivered pursuant to this Agreement.

Section 7.12           Replacement of Bonds, Letters of
Credit and Guarantees.

None of the bonds,
letters of credit and guarantees, if any, posted by Seller with Governmental
Bodies and relating to the Assets shall be transferred to Purchaser.

Section 7.13           Like-Kind Exchange.

Purchaser and Seller agree to use reasonable
cooperation so that the transfer of the Properties shall, at either party’s
election, be accomplished in a manner enabling the transfer of the Properties
to qualify as a like-kind exchange of property within the meaning of Section
1031 

 32
 

 

of the Code.  If such an election is made, the parties
shall reasonably cooperate to effect such like-kind exchange, which cooperation
shall include (i) having any cash payment be paid directly from a 1031 account
which has been established with a qualified intermediary, as that term is
defined in Section 1031 of the Code, in a manner which enables such transfer of
the Properties to qualify as part of a like-kind exchange of property within
the meaning of Section 1031 of the Code and (ii) assigning rights to the
Properties to a qualified intermediary or an escrow agent acting as a qualified
intermediary for the purpose of receiving an assignment of the Properties in a
manner which enables such transfer of the Properties to qualify as part of a
like-kind exchange of property within the meaning of Section 1031 of the Code.
In such events, the parties shall cooperate in the negotiation and execution of
such additional documents.

Section 7.14           Arbitration.

Disputed matters related to Allocated Values in
Section 2.3, remedies for Title Defect Amounts in Section 3.5(d), Title
Benefits Amounts in Section 3.5(e) and the final settlement statement in
Section 9.4(b) may be submitted, as provided in the respective Sections listed
above, to arbitration pursuant to the following provisions:

(a)         The parties shall jointly select a
mutually acceptable person as the sole arbitrator under this Agreement.  If the parties are unable to agree upon the
designation of one person as arbitrator, then each party shall appoint one
arbitrator and the two arbitrators so chosen shall appoint a third arbitrator
and the three arbitrators shall arbitrate any dispute.

(b)        Any arbitration hearing shall be held in
Houston, Texas at a location acceptable to the arbitrator.

(c)         The arbitrator shall settle disputes in
accordance with the Texas General Arbitration Act and the Rules of the American
Arbitration Association. The decision of the arbitrator shall be binding upon
the parties and may be enforced in any court of competent jurisdiction.  Seller and Purchaser, respectively, shall
bear their own legal fees and other costs incurred in presenting their
respective cases.  The charges and
expenses of the arbitrator shall be shared equally by Seller and Purchaser.

(d)        In fulfilling his duties hereunder, the
arbitrator shall be bound by the terms of this Agreement. In fulfilling any of
his arbitration duties, the arbitrator may consider such other matters as in
the opinion of the arbitrator are necessary or helpful to make a proper
evaluation.  Additionally, the arbitrator
may consult with and engage disinterested third parties, including, without
limitation, petroleum engineers, attorneys and consultants, to advise the
arbitrator.

(e)         If any arbitrator selected hereunder
should die, resign or be unable to perform his duties hereunder, the parties
selecting such arbitrator shall select a replacement arbitrator. The aforesaid
procedure shall be followed from time to time as necessary.

 33
 

 

Section 7.15           Delivery of Financial Statements
and Reserve Information.

(a)         To the extent requested by Purchaser,
Seller shall provide to Purchaser as promptly as reasonably practical any
financial statements, schedules or information (including without limitation
access to the work papers of Seller’s accountants related to the financial
statements described in this Section 7.16) relating to the Assets that are
required to be included in any filing by Purchaser or its Affiliates under the
Securities Exchange Act of 1934, registration statement filed or to be filed by
Purchaser or any of its Affiliates under the Securities Act of 1933 and any
additional financial or operating data relating to any of the financial
statements, schedules or information referred to in this Section 7.15 or
relating to any of the Assets.

(b)        Seller shall use reasonable efforts to cause
to be delivered to Purchaser (or its Affiliates) “comfort letters” of Seller’s
accountants and Seller’s independent reserve engineers dated as of the
Effective Time and the Closing Date and addressed to the underwriters in any
offering of securities for which such comfort letters are required by
underwriters with regard to certain financial information regarding the Assets
or the reserves relating to the Assets as the case may be, in form reasonably
satisfactory to Purchaser and customary in scope and substance for “comfort”
letters delivered by independent public accountants and reserve engineers in
connection with registration statements similar to Purchaser’s or its
Affiliates registration statement and to use reasonable efforts to cause Seller’s
accountant and Seller’s reserve engineer to consent to inclusion of the
information described in this Section 7.15 and to be named in Purchaser’s and
its Affiliates filings with the Securities and Exchange Commission as is
customary for such consents.

(c)         Seller shall use reasonable efforts to
provide any relevant historical accounting or financial information in Seller’s
possession, custody or control related to the Assets that Purchaser may
reasonably request.

(d)        Purchaser shall bear all out-of-pocket
costs paid to any third party for preparation of any of the items described in
Section 7.15(a), Section 7.15(b) and Section 7.15(c) above.

ARTICLE VIII

CONDITIONS TO CLOSING

Section 8.1             Conditions
of Seller to Closing.

The obligations of Seller to consummate the
transactions contemplated by this Agreement are subject, at the option of
Seller, to the satisfaction on or prior to Closing of each of the following
conditions:

(a)         Representations.  The representations and warranties of
Purchaser set forth in Article 6 shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as though
made on and as of the Closing Date;

 34
 

 

(b)        Performance.  Purchaser shall have performed and observed,
in all material respects, all covenants and agreements to be performed or
observed by it under this Agreement prior to or on the Closing Date;

(c)         Pending Litigation.  No suit, action or other proceeding by a
third party, including any Governmental Body, seeking to restrain, enjoin or
otherwise prohibit the conveyance of the Assets or the consummation of the
transactions contemplated by this Agreement shall be pending;

(d)        Deliveries.  Purchaser shall have delivered to Seller duly
executed counterparts of the Assignment and Bill of Sale and the other
documents and certificates to be delivered by Purchaser under Section 9.3;

(e)         Payment.  Purchaser shall have paid the Closing
Payment;

(f)         HSR Act.  Only if applicable, any waiting period
applicable to the consummation of the transaction contemplated by this
Agreement under the HSR Act shall have lapsed or terminated (by early
termination or otherwise);

(g)        Approval by Board of
Directors.  Purchaser shall have
delivered to Seller either (i) a certified copy of a resolution of the board of
directors of Purchaser which approves the terms of this Agreement, the
execution of this Agreement by Purchaser, and the completion of the transaction
contemplated by this Agreement or (ii) a unanimous consent of the board of
directors of Purchaser which approves the terms of this Agreement, the
execution of this Agreement by Purchaser, and the completion of the transaction
contemplated by this Agreement; and

(h)        Primary Purchase and Sale Agreement.  Contemporaneously with the preparation and
execution of this Agreement, Purchaser and Seller have prepared and executed a
second Purchase and Sale Agreement referred to herein as the Primary Purchase
and Sale Agreement.  The Closing of the
transaction contemplated by this Agreement shall occur simultaneously with the Closing
of the transaction contemplated by the Primary Purchase and Sale Agreement or
not at all.

Section 8.2             Conditions of Purchaser to
Closing.

The obligations of Purchaser to consummate the
transactions contemplated by this Agreement are subject, at the option of
Purchaser, to the satisfaction on or prior to Closing of each of the following
conditions:

(a)         Representations.  The representations and warranties of Seller
set forth in Article 5 shall be true and correct as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date (other than any representations and warranties that refer to a specified
date which need only be true and correct on and as of such specified date);

 35
 

 

(b)        Performance.  Seller shall have performed and observed, in
all material respects, all covenants and agreements to be performed or observed
by it under this Agreement prior to or on the Closing Date;

(c)         Pending Litigation.  No suit, action or other proceeding by a
third party (including any Governmental Body) seeking to restrain, enjoin or
otherwise prohibit the conveyance of the Assets or the consummation of the
transactions contemplated by this Agreement shall be pending;

(d)        Deliveries.  Seller shall have delivered to Purchaser duly
executed counterparts of the Assignment and Bill of Sale and the other
documents and certificates to be delivered by Seller under Section 9.2;

(e)         HSR Act.  Only if applicable, any waiting period
applicable to the consummation of the transaction contemplated by this
Agreement under the HSR Act shall have lapsed or terminated (by early
termination or otherwise);

(f)         Approval
by Board of Directors.  Seller shall
have delivered to Purchaser either (i) a certified copy of a resolution of the
board of directors of Seller which approves the terms of this Agreement, the
execution of this Agreement by Seller, and the completion of the transaction
contemplated by this Agreement or (ii) a unanimous consent of the board of
directors of Seller which approves the terms of this Agreement, the execution
of this Agreement by Seller, and the completion of the transaction contemplated
by this Agreement.

(g)        Primary Purchase and
Sale Agreement.  Contemporaneously
with the preparation and execution of this Agreement, Purchaser and Seller have
prepared and executed a second Purchase and Sale Agreement referred to herein
as the Primary Purchase and Sale Agreement. 
The Closing of the transaction contemplated by this Agreement shall
occur simultaneously with the Closing of the transaction contemplated by the
Primary Purchase and Sale Agreement or not at all.

ARTICLE IX

CLOSING

Section 9.1             Time and Place of Closing.

(a)         Consummation of the
purchase and sale transaction as contemplated by this Agreement (the “Closing”),
shall take place at the offices of Seller located at 14425 Torrey Chase, Suite
190 Houston, Texas 77014, at 10:00 a.m., local time, on or before January 31,
2007 unless otherwise agreed to in writing by Purchaser and Seller.

(b)        The date on which the
Closing occurs is herein referred to as the “Closing Date.”

 36
 

 

Section 9.2             Obligations
of Seller at Closing.

At the Closing, Seller shall deliver or cause to be
delivered to Purchaser, among other things, the following:

(a)         Assignment and Bill of
Sale of the Assets, in sufficient number of originals to allow recording in all
counties in which the Properties are located and other appropriate
jurisdictions and offices, as applicable, duly executed by Seller;

(b)        assignments, on
appropriate forms, of state and of federal leases, if any, comprising portions
of the Assets, duly executed by Seller; and

(c)         a certificate duly
executed by an authorized corporate officer of Seller, dated as of Closing,
certifying on behalf of Seller that the conditions set forth in Sections 8.2(a)
and 8.2(b) have been fulfilled.

Section 9.3             Obligations
of Purchaser at Closing.

At the Closing, Purchaser shall deliver or cause to be
delivered to Seller, among other things, the following:

(a)         a wire transfer of the
Closing Payment in immediately available U.S. dollars;

(b)        copies of the
Assignment and Bill of Sale of the Assets, duly executed by Purchaser; and

(c)         a certificate duly
executed by an authorized corporate officer of Purchaser dated as of Closing,
certifying on behalf of Purchaser that the conditions set forth in Sections
8.1(a) and 8.1(b) have been fulfilled.

Section 9.4             Closing
Payment and Post-Closing Purchase Price Adjustments.

(a)         Not later than two (2)
Business Days prior to the Closing Date, Seller shall prepare and deliver to
Purchaser, based upon the best information available to Seller, a preliminary
settlement statement estimating the Adjusted Purchase Price after giving effect
to all Purchase Price adjustments set forth in Section 2.2 and the Deposit. The
preliminary settlement statement delivered in accordance with this Section
9.4(a) shall constitute the dollar amount to be paid by Purchaser to Seller at
the Closing (the “Closing Payment”).

(b)        As soon as reasonably
practicable after the Closing but not later than one hundred twenty (120) days
following the Closing Date, Seller shall prepare and deliver to Purchaser a
final settlement statement setting forth the final calculation of the Adjusted
Purchase Price and showing the calculation of each adjustment, based, to the
extent possible on actual credits, charges, receipts and other items before and
after the Effective Time and taking into account all Title Defect and Title
Benefit adjustments under Section 3.5. Seller shall, at Purchaser’s request,
supply reasonable documentation 

 37
 

 

available to
support any credit, charge, receipt or other item. Not later than the thirty
(30) days following receipt of the final settlement statement, Purchaser shall
deliver to Seller a written report containing any changes that Purchaser
proposes be made to the final settlement statement. The parties shall undertake
to agree on the final statement of the Adjusted Purchase Price no later than
one hundred eighty (180) days after the Closing Date. In the event that the
parties cannot reach agreement within such period of time, either party may
refer the remaining matters in dispute to arbitration as provided in Section
7.14.

(c)         All payments made or
to be made hereunder to Seller shall be by electronic transfer of immediately
available funds in U.S. dollars to:

JPMorgan Chase Bank

For account of Smith Production Inc.

Account No. 034 000 25957

ABA No. 113 0006 09

All payments made or to be made hereunder to Purchaser
shall be by electronic transfer of immediately available funds to a bank and
account specified by Purchaser in writing to Seller.

ARTICLE X

TERMINATION

Section 10.1           Termination.

This Agreement may be terminated as follows:

(a)         by the mutual prior
written consent of Seller and Purchaser prior to Closing;

(b)        by Seller in the events
that (i) Closing has not occurred on the Closing Date; (ii) Seller is not
otherwise in default under the provisions of this Agreement; and (iii) the
Conditions of Seller to Closing in Section 8.1 have not been satisfied; and

(c)         by Purchaser in the
events that (i) Closing has not occurred on the Closing Date; (ii) Purchaser is
not otherwise in default under the provisions of this Agreement; and (iii) the
Conditions of Purchaser to Closing in Section 8.2 have not been satisfied.

Section 10.2           Effect
of Termination.

If this Agreement is terminated pursuant to Section
10.1, this Agreement shall become void and of no further force or effect except
for the provisions of Section 5.6 (Purchaser’s Liability for Brokers’ Fees),
Section 6.5 (Seller’s Liability for Brokers’ Fees), Section 7.7 (Indemnity
Regarding Access) and Section 12.4 (Expenses) and the Confidentiality
Agreement. The provisions and agreements listed in the preceding sentence shall
survive the termination of this Agreement and shall continue in full force and
effect. Seller shall be free immediately to enjoy all rights of ownership of
the Assets and to sell, transfer, encumber or otherwise dispose of the Assets
to any party without any restriction under this Agreement.

 38
 

 

Section 10.3           Distribution of Deposit Upon
Termination.  

(a)         If Seller terminates
this Agreement pursuant to Section 10.1(b), then Seller may retain the Deposit
as liquidated damages free of any claims by Purchaser. Purchaser and Seller
agree that the actual amount of damages resulting from such a termination would
be difficult if not impossible to determine accurately because of the unique
nature of this Agreement, the unique nature of the Assets, the uncertainties of
applicable commodity markets and differences of opinion with respect to such
matters, and the liquidated damages provided for herein are a reasonable
estimate by the parties of such damages.

(b)        If this Agreement is
terminated for any reason other than the reasons set forth in Section 10.1(b),
then Seller shall deliver the Deposit to Purchaser immediately free of any
claims by Seller.

(c)         Notwithstanding
anything to the contrary in this Agreement, Purchaser shall not be entitled to
receive interest on the Deposit, whether the Deposit is applied against the
Purchase Price or returned to Purchaser pursuant to this Section 10.3.

(d)        The retention of the
Deposit by Seller as described above shall constitute the only remedies of
Seller in the event of termination or breach of this Agreement. Seller hereby
waives all other remedies that might be available to Seller, including, without
limitation, remedies available in equity, at common law and by statute
including litigation and specific performance.

(e)           The return of the
Deposit to Purchaser as described above shall be in addition to all other
remedies available to Purchaser in the event of termination or breach of this
Agreement.  Purchaser expressly reserves
all other remedies that might be available to it, including, without
limitation, remedies available in equity, at common law and by statute
including litigation and specific performance.

ARTICLE XI

POST -CLOSING OBLIGATIONS; INDEMNIFICATION; LIMITATIONS; 

DISCLAIMERS AND WAIVERS

Section 11.1           Receipts.

(a)         All production from or
attributable to the Assets (and all products and proceeds attributable thereto)
and all other income, proceeds, receipts and credits earned with respect to the
Assets which are not reflected in the final settlement statement to which
Purchaser is entitled under Section 1.6 shall be the sole property and
entitlement of Purchaser, and, to the extent received by Seller, Seller shall
fully disclose, account for and remit the same promptly to Purchaser.

(b)        All production from or
attributable to the Assets (and all products and proceeds attributable thereto)
and all other income, proceeds, receipts and credits earned with respect to the
Assets which are not reflected in the final settlement statement to which
Seller is entitled under Section 1.6 shall be the sole property and entitlement
of 

 39
 

 

Seller and, to
the extent received by Purchaser, Purchaser shall fully disclose, account for
and remit the same promptly to Seller.

Section 11.2           Expenses.

(a)         All Property Costs
which are not reflected in the final settlement statement for which Seller is
responsible under Section 1.6 shall be the sole obligation of Seller, and
Seller shall promptly pay same, or if same have been paid by Purchaser, Seller
shall promptly reimburse Purchaser for and hold Purchaser harmless from and
against same.

(b)        All Property Costs
which are not reflected in the final settlement statement for which Purchaser
is responsible under Section 1.6 shall be the sole obligation of Purchaser, and
Purchaser shall promptly pay same, or if same have been paid by Seller,
Purchaser shall promptly reimburse Seller for and hold Seller harmless from and
against same.

(c)         Seller is entitled to
resolve all joint interest audits and other audits of Property Costs covering
periods prior to the Effective Time.

Section 11.3           Assumption
and Indemnification.

(a)         In the event of
Closing, as of the Effective Time, Purchaser shall become liable for, assume,
perform and discharge all of the obligations and liabilities of Seller, known
or unknown, with respect to the Assets, regardless of whether such obligations
or liabilities arose prior to the Effective Time, at the Effective Time or
after the Effective Time. Said obligations and liabilities are referred to as
the “Assumed Obligations.” Purchaser, however, does not assume any obligations
or liabilities of Seller to the extent that they are attributable to or arise
out of the:

(i)            Excluded Assets; or

(ii)           claims for wrongful
death and/or personal injury related to the Properties which claims arose
before the Effective Time; or

(iii)          continuing
responsibility of the Seller under Section 11.2 or matters for which Seller is
required to Indemnify Purchaser under this Article 11.

(b)        PURCHASER SHALL INDEMNIFY, COVENANT NOT TO
SUE, SAVE, RELEASE, DEFEND, DISCHARGE AND HOLD SELLER INDEMNITEES HARMLESS
(COLLECTIVELY, “INDEMNIFY”) FROM AND AGAINST DAMAGES, INCURRED OR SUFFERED BY
SELLER INDEMNITEES THAT ARE CAUSED BY, OR ARISE OUT OF OR RESULT FROM:

(i)            THE ASSUMED
OBLIGATIONS; OR

(ii)           THE OWNERSHIP, USE
OR OPERATION OF THE ASSETS AT AND AFTER THE EFFECTIVE TIME; OR

 40
 

 

(iii)          ENVIRONMENTAL
LIABILITIES; OR

(iv)          ACCESS TO THE ASSETS
IN SECTION 7.7; OR

(v)           PREFERENTIAL RIGHTS
TO PURCHASE IN SECTION 7.9(b)(i); OR

(vi)          PURCHASER’S
OBLIGATIONS UNDER THIS AGREEMENT; OR

(vii)         THE BREACH OF ANY OF
PURCHASER’S COVENANTS OR AGREEMENTS CONTAINED IN ARTICLE 7 OF THIS AGREEMENT,
SAVE AND EXCEPT FOR COVENANTS OR AGREEMENTS CONTAINED IN SECTION 7.1 (ACCESS)
AND SECTION 7.9(b)(i)(RELATED TO PREFERENTIAL RIGHTS TO PURCHASE) WHICH ARE
COVERED ABOVE; OR

(viii)        THE BREACH OF ANY
REPRESENTATION OR WARRANTY MADE BY PURCHASER IN ARTICLE 6 OF THIS AGREEMENT OR
IN THE CERTIFICATE DELIVERED BY PURCHASER AT CLOSING PURSUANT TO SECTION
9.3(c)(CERTIFICATE OF CORPORATE OFFICER OF PURCHASER); OR

(ix)           TO EXTENT
ATTRIBUTABLE TO PURCHASER’S PROPORTIONATE INTEREST IN THE ASSETS, THE MATTERS
SET FORTH ON EXHIBIT 5.7 FROM THE EFFECTIVE TIME; OR

(x)            THE LITIGATION
EXPENSES (DEFINED BELOW).

THE INDEMNIFICATION OBLIGATIONS OF PURCHASER IN THIS
PARAGRAPH SHALL BE REFERRED TO HEREIN AS “PURCHASER’S INDEMNIFICATION
OBLIGATIONS.”

PURCHASER SHALL INDEMNIFY SELLER INDEMNITEES AGAINST
DAMAGES FOR MATTERS COVERED BY PURCHASER’S INDEMNIFICATION OBLIGATIONS ARISING
OUT AND RESULTING FROM:

1.             THE NEGLIGENCE OF
SELLER, WHETHER THE NEGLIGENCE IS ORDINARY, ACTIVE, PASSIVE, JOINT, CONCURRENT
OR SOLE BUT EXCLUDING CLAIMS BASED ON GROSS NEGLIGENCE AND WILLFUL MISCONDUCT;
AND

2.             THE STRICT
LIABILITY OF SELLER, BUT EXCLUDING CLAIMS BASED ON THE GROSS NEGLIGENCE AND
WILLFUL MISCONDUCT OF SELLER.

COSTS OF ATTORNEY FEES, COSTS OF COURT, EXPENSES FOR
HIRING INVESTIGATORS AND INVESTIGATING, DEFENDING LITIGATION, PROSECUTING 

 41
 

 

LITIGATION, HIRING EXPERT
WITNESSES, COSTS OF SETTLEMENT AND ANY AND ALL COSTS AND EXPENSES PERTAINING TO
ANY LITIGATION SHALL COLLECTIVELY BE REFERRED TO AS THE “LITIGATION EXPENSES.”  PURCHASER SHALL INDEMNIFY SELLER INDEMNITEES
FROM AND AGAINST ALL LITIGATION EXPENSES ARISING FROM, BASED UPON, RELATED TO
OR IN ANY WAY CONNECTED WITH PURCHASER’S INDEMNIFICATION OBLIGATIONS

IT IS UNDERSTOOD AND AGREED THAT PURCHASER’S
OBLIGATION TO INDEMNIFY SELLER INDEMNITEES FROM AND AGAINST THE LITIGATION
EXPENSES IS (I) SEPARATE AND APART FROM PURCHASER’S OBLIGATION TO INDEMNIFY
SELLER INDEMNITEES FROM DAMAGES AND (II) IS NOT DEPENDENT UPON PURCHASER’S
SUBSTANTIVE OBLIGATION TO INDEMNIFY SELLER INDEMNITEES FROM AND AGAINST DAMAGES.
PURCHASER’S OBLIGATION TO INDEMNIFY SELLER INDEMNITEES FROM AND AGAINST THE
LITIGATION EXPENSES SHALL APPLY IRRESPECTIVE OF WHETHER THE SUBSTANTIVE
INDEMNITY OBLIGATION COMPLIES IN ALL RESPECTS WITH THE EXPRESS NEGLIGENCE RULE.
PURCHASER AND SELLER BOTH AGREE AND STIPULATE THAT THIS INDEMNIFICATION
AGREEMENT COMPLIES WITH AND SATISFIES ALL OF THE REQUIREMENTS SET FORTH IN ETHYL CORP. V. DANIEL CONSTRUCTION CO., 725 S.W.2d 705
(TEX.1987) AND ALL SUBSEQUENT CASES, DRESSER INDUSTRIES, INC.
V. PAIGE PETROLEUM, INC., 853 S.W. 2d 505 (TEX. 1993) AND ALL
SUBSEQUENT CASES AND ALL OTHER APPLICABLE REQUIREMENTS OF TEXAS LAW.

PURCHASER’S INDEMNITY OBLIGATIONS TO SELLER
INDEMNITEES HEREUNDER SHALL BE LIMITED TO THE EXTENT OF PURCHASER’S
PROPORTIONATE INTEREST IN ANY AFFECTED ASSETS.

PURCHASER AND SELLER BOTH AGREE AND STIPULATE THAT
THIS INDEMNIFICATION AGREEMENT COMPLIES WITH THE EXPRESS NEGLIGENCE TEST, AND
THAT THE PARTIES CLEARLY INTEND TO TRANSFER THE RISK OF LOSS FOR THE INDEMNITEE’S
NEGLIGENCE.

PURCHASER AND SELLER BOTH AGREE AND STIPULATE THAT
THESE INDEMNIFICATION PROVISIONS ARE CONSPICUOUS.

(c)         SELLER SHALL INDEMNIFY PURCHASER
INDEMNITEES AGAINST AND FROM ALL DAMAGES INCURRED OR SUFFERED BY PURCHASER
INDEMNITEES THAT ARE CAUSED BY, OR ARISE OUT OF OR RESULT FROM:

(i)            THE OBLIGATIONS AND
LIABILITIES DESCRIBED IN SECTION 11.3(a)(i) AND 11.3(a)(ii) AND 11.3(a)(iii);
OR

(ii)           SELLER’S BREACH OF
ANY OF SELLER’S COVENANTS OR AGREEMENTS CONTAINED IN ARTICLE 7 OF THIS
AGREEMENT; OR

 42
 

 

(iii)          THE BREACH OF ANY
REPRESENTATION OR WARRANTY MADE BY SELLER IN ARTICLE 5 OF THIS AGREEMENT OR IN
THE CERTIFICATE DELIVERED BY SELLER AT CLOSING PURSUANT TO SECTION
9.2(d)(CERTIFICATE OF CORPORATE OFFICER OF SELLER); OR

(iv)          SELLER’S OBLIGATIONS
UNDER THIS AGREEMENT; OR

(v)           LITIGATION EXPENSES.

THE INDENMIFICATION OBLIGATIONS OF SELLER IN THIS
PARAGRAPH SHALL BE REFERRED TO HEREIN AS “SELLER’S INDEMNIFICATION OBLIGATIONS.”

SELLER SHALL INDEMNIFY PURCHASER INDEMNITEES AGAINST
DAMAGES FOR MATTERS COVERED BY SELLER’S INDEMNIFICATION OBLIGATIONS ARISING OUT
OF AND RESULTING FROM:

1.             THE NEGLIGENCE OF
PURCHASER, WHETHER THE NEGLIGENCE IS ORDINARY, ACTIVE, PASSIVE, JOINT,
CONCURRENT OR SOLE BUT EXCLUDING CLAIMS BASED ON GROSS NEGLIGENCE AND WILLFUL
MISCONDUCT; AND

2.             THE STRICT
LIABILITY OF PURCHASER, BUT EXCLUDING CLAIMS BASED ON THE GROSS NEGLIGENCE AND
WILLFUL MISCONDUCT OF PURCHASER.

SELLER SHALL INDEMNIFY PURCHASER INDEMNITEES FROM AND
AGAINST THE LITIGATION EXPENSES ARISING FROM, BASED UPON, RELATED TO OR IN ANY
WAY CONNECTED WITH SELLER’S INDEMNIFICATION OBLIGATIONS.

IT IS UNDERSTOOD AND AGREED THAT SELLER’S OBLIGATION
TO INDEMNIFY PURCHASER INDEMNITEES FROM AND AGAINST THE LITIGATION EXPENSES IS
(I) SEPARATE AND APART FROM SELLER’S OBLIGATION TO INDEMNIFY PURCHASER
INDEMNITEES FROM DAMAGES AND (II) IS NOT DEPENDENT UPON SELLER’S SUBSTANTIVE
OBLIGATION TO INDEMNIFY PURCHASER INDEMNITEES FROM AND AGAINST DAMAGES.  SELLER’S OBLIGATION TO INDEMNIFY PURCHASER
INDEMNITEES FROM AND AGAINST THE LITIGATION EXPENSES SHALL APPLY IRRESPECTIVE
OF WHETHER THE SUBSTANTIVE INDEMNITY OBLIGATION COMPLIES IN ALL RESPECTS WITH
THE EXPRESS NEGLIGENCE RULE. PURCHASER AND SELLER BOTH AGREE AND STIPULATE THAT
THIS INDEMNIFICATION AGREEMENT COMPLIES WITH AND SATISFIES ALL OF THE
REQUIREMENTS SET FORTH IN ETHYL CORP. V. DANIEL
CONSTRUCTION CO., 725 S.W.2d 705 (TEX.1987) AND ALL SUBSEQUENT
CASES, DRESSER INDUSTRIES, INC. V. PAIGE PETROLEUM, INC.,
853 S.W. 2d 505 (TEX. 1993) AND ALL SUBSEQUENT CASES AND ALL OTHER APPLICABLE
REQUIREMENTS OF TEXAS LAW.

 43
 

 

SELLER’S INDEMNITY OBLIGATIONS TO PURCHASER
INDEMNITEES HEREUNDER SHALL BE LIMITED TO THE EXTENT OF SELLER’S PROPORTIONATE
INTEREST IN ANY AFFECTED ASSETS.

SELLER AND PURCHASER BOTH AGREE AND STIPULATE THAT
THIS INDEMNIFICATION AGREEMENT COMPLIES WITH THE EXPRESS NEGLIGENCE TEST AND
THAT THE PARTIES CLEARLY INTEND TO TRANSFER THE RISK OF LOSS FOR THE INDEMNITEE’S
NEGLIGENCE.

SELLER AND PURCHASER BOTH AGREE AND STIPULATE THAT
THESE INDEMNIFICATION PROVISIONS ARE CONSPICUOUS.

(d)        Notwithstanding
anything to the contrary contained in this Agreement, in the event that Closing
occurs, thereafter, this Section 11.3 shall be deemed to contain the parties’
exclusive remedies against each other with respect to breaches of the
representations, warranties, covenants and agreements of the parties contained
in Articles 5, 6 and 7 and the affirmations of such representations,
warranties, covenants and agreements contained in the certificate delivered by
each party at Closing pursuant to Sections 9.2(c) or 9.3(c), as applicable.

The parties shall have all other remedies at law or in
equity for breaches of all provisions of this Agreement other than Articles 5,
6 and 7. Notwithstanding anything to the contrary contained herein, none of
Purchaser, Seller or any of their respective Affiliates shall be entitled to
either punitive or consequential damages as a remedy in connection with a
breach of any provision of this Agreement and/or the transactions contemplated
hereby, and each of Purchaser and Seller, for itself and on behalf of its
Affiliates, hereby expressly waives any right to punitive or consequential
damages in connection with a breach of any provision of this Agreement and/or
the transactions contemplated hereby.

(e)         “Damages” shall mean
the amount of any and all liability, loss, cost, diminution in value, expense,
claim, demand, notice of violation, investigation by any Governmental Body,
cause of action, administrative proceeding, payment, charge, obligation, fine,
penalty, deficiency, award or judgment incurred or suffered by any Indemnified
Party arising out of or resulting from the indemnified matter, including
reasonable fees and expenses of attorneys, consultants, accountants or other
agents and experts reasonably incident to matters indemnified against, and the
costs of investigation and/or monitoring of such matters, and the costs of
enforcement of the indemnity.

Section 11.4           Indemnification
Actions.

All claims for indemnification under Section 11.3
shall be asserted and resolved as follows:

(a)         For purposes of this
Article 11, the term “Indemnifying Party” shall mean the party having an
obligation to indemnify the other party pursuant to this Article 11, and the
term “Indemnified Party” shall mean the party having the right to be
indemnified by the other party pursuant to this Article 11.

 44
 

 

(b)        To make a claim for
indemnification under Section 11.3, an Indemnified Party shall provide to the
Indemnifying Party a written notice (the “Indemnification Notice”) which
specifies the basis of the Indemnified Party’s entitlement to indemnification
under this Agreement.  In the event that
the Indemnification Notice is based upon a claim by a third party against the
Indemnified Party (a “Third Party Claim”), the Indemnified Party shall provide
its Indemnification Notice promptly after the Indemnified Party has actual
knowledge of the Third Party Claim and shall enclose a copy of all papers (if
any) served with respect to the Third Party Claim; provided that the failure of
any Indemnified Party to give notice of a Third Party Claim as provided in this
Section 11.4 shall not relieve the Indemnifying Party of its obligations under
Section 11.3 except to the extent such failure results in insufficient time
being available to permit the Indemnifying Party to effectively defend against
the Third Party Claim or otherwise prejudices the Indemnifying Party’s ability
to defend against the Third Party Claim.

(c)         The Indemnifying Party
shall have thirty (30) days from its receipt of an Indemnification Notice to
notify the Indemnified Party whether it will assume the defense of the
Indemnified Party against such Third Party Claim at the sole cost and expense
of the Indemnifying Party.  The
Indemnified Party is authorized, prior to and during such thirty (30) day
period, to file any motion, answer or other pleading that it shall deem
necessary or appropriate to protect its interests or those of the Indemnifying
Party and that is not prejudicial to the Indemnifying Party.

(d)        If the Indemnifying
Party assumes the defense of a Third Party Claim pursuant to an Indemnification
Notice, the Indemnifying Party shall diligently defend, at its sole cost and
expense, the Indemnified Party against the Third Party Claim. The Indemnifying
Party shall have full control of such defense and proceedings, including any
compromise or settlement thereof.  If
requested by the Indemnifying Party, the Indemnified Party agrees to cooperate
in contesting any Third Party Claim which the Indemnifying Party elects to
contest.  The Indemnified Party may
participate in, but not control, any defense or settlement of any Third Party
Claim controlled by the Indemnifying Party pursuant to this Section
11.4(d).  An Indemnifying Party shall
not, without the written consent of the Indemnified Party, (i) settle any Third
Party Claim or consent to the entry of any judgment with respect thereto which
does not include an unconditional written release of the Indemnified Party from
all liability in respect of such Third Party Claim or (ii) settle any Third
Party Claim or consent to the entry of any judgment with respect thereto in any
manner that may materially and adversely affect the Indemnified Party (other
than as a result of money damages covered by the indemnity).

(e)         If the Indemnifying
Party does not assume the defense of the Indemnified Party against a Third
Party Claim or assumes the defense, but fails to diligently prosecute or settle
the Third Party Claim, then the Indemnified Party shall have the right to
defend against the Third Party Claim at the sole cost and expense of the
Indemnifying Party, with counsel of the Indemnified Party’s choice, subject to
the right of the Indemnifying Party to assume the defense of the Third Party
Claim at any time prior to settlement or final determination thereof. If the
Indemnifying Party has not yet assumed 

 45
 

 

the defense of
the Indemnified Party, the Indemnified Party shall send written notice to the
Indemnifying Party of any proposed settlement or final determination of the
Third Party Claim and the Indemnifying Party shall have the option for ten (10)
days following receipt of such notice to (i) assume defense against the Third
Party Claim in writing and (ii) if so assumed, reject, in its reasonable
judgment, the proposed settlement or final determination of the Third Party
Claim.

(f)         In the event that the
Indemnification Notice sets forth a claim for Damages based upon an inaccuracy
or breach of a representation, warranty or covenant or obligation in this
Agreement, the Indemnification Notice shall specify the representation,
warranty, covenant or obligation which was inaccurate or breached. In such
case, the Indemnifying Party shall have thirty (30) days from its receipt of
the Indemnification Notice to (i) cure the Damages complained of, (ii) accept
the claim for such Damages or (iii) dispute the claim for such Damages. If the
Indemnifying Party does not notify the Indemnified Party within such thirty
(30) day period that it has cured the Damages or that it disputes the claim for
such Damages, the amount of such Damages shall conclusively be deemed a
liability of the Indemnifying Party hereunder.

Section 11.5           Survival.

In the event of
Closing:

(a)         The representation and
warranty of Seller in Section 3.1(a)(Defensible Title) shall terminate on the
Title Claim Date (3.4(a)). The remainder of the representations, warranties,
covenants and agreements provided for in this Agreement shall terminate upon
Closing except as may otherwise be expressly provided herein.

(b)        Purchaser’s
Indemnification Obligations in Section 11.3(b) shall terminate as of the times
set out below except in each case as to matters for which a specific written
claim for indemnity has been delivered to the Indemnifying Party on or before
such termination date: 9.4, 11.3(b)(i), 11.3(b)(ii), 11.3(b)(iii) and
11.3(b)(iv) shall not terminate and shall continue without time limit;
11.3(b)(v) shall terminate six months after the end of the term of the escrow
described in 7.9(b)(i); 11.3(b)(vi), 11.3(b)(vii) and 11.3(b)(viii) shall
terminate six months after Closing; and 11.3(b)(ix) shall continue in force and
effect until the termination of the survival period of each of the other
Purchaser’s Indemnification Obligations in 11.3(b)(i)-11.3(b)(viii), inclusive.

(c)         Seller’s
Indemnification Obligations in Section 11.3(c) shall terminate as of the times
set out below except as to matters for which a specific written claim for
indemnity has been delivered to the Indemnifying Party on or before such
termination date: 11.3(c)(i) and 11.3(c)(v) shall not terminate and shall
continue without time limit; 11.3(c)(ii), 11.3(c)(iii) and 11.3(c)(iv) shall
terminate six months after Closing; and 11.3(c)(vi) shall continue in force and
effect until the termination of the survival period of each of the other Seller’s
Indemnification Obligations in 11.3(c)(i)-11.3(c)(v), inclusive.

(d)        The Confidentiality
Agreement shall survive Closing.

 46
 

 

(e)         Except as provided
above, all other provisions in this Agreement shall terminate at Closing except
for the following provisions which shall survive Closing:

(i)            Section 7.5 -
Prohibition against Public Announcements

(ii)           Section 7.11 -
Further Assurances

(iii)          Section 9.4 –
Closing Payment and Post-Closing Purchase Price Adjustments

(iv)          Section 11.1 -
Receipts

(v)           Section 11.2 -
Expenses

(vi)          Section 11.4 -
Indemnification Actions

(vii)         Section 11.7 -
Independent Investigation

(viii)        Section 11.8 -
Disclaimer Regarding Information

(ix)           Section 11.9 -
Waiver of Trade Practices Acts

(x)            Section 11.10 -
Post-Closing Audit Rights

(xi)           Section 12.5 -
Change of Name

(xii)          Section 12.7 -
Governing Law

Section 11.6           Recording.

As soon as practicable after Closing, Purchaser shall
record the (i) Assignment and Bill of Sale in the appropriate counties as well
as with all appropriate governmental agencies and (ii)  assignments necessary to convey to Purchaser
all federal or state leases, if any, in the form as prescribed by the
applicable Governmental Body and provide Seller with copies of all recorded or
approved instruments.

Section 11.7           Independent
Investigation.

In making the decision to enter into this Agreement
and consummate the transactions contemplated hereby, Purchaser has relied
exclusively on Purchaser’s own investigation and analysis of the condition,
value, characteristics and qualities of the Assets. Seller hereby expressly
disclaims and negates any representation or warranty, express, implied, at
common law, by statute or otherwise, other than the warranty made in Section
3.1, the express representations and warranties made in Article 5, the
certificate of Seller to be delivered pursuant to Section 9.2(c) and the
special warranty of title in the Assignment and Bill of Sale relating to the
Assets.

 47
 

 

Section 11.8           Disclaimer
Regarding Information.

Except as set forth in this Agreement, Seller hereby
expressly negates and disclaims, and Purchaser hereby waives and acknowledges
that Seller has not made, any representation or warranty, express or implied,
relating to (a) the accuracy, completeness or materiality of any information,
Records, data or other materials (written or oral) now, heretofore, or
hereafter furnished to Purchaser by or on behalf of Seller or (b) production
rates, recompletion or rework opportunities, decline rates, geological or
geophysical data or interpretations, the quality, quantity, recoverability or
cost of recovery of any Hydrocarbon reserves, any product pricing assumptions,
or the ability to sell or market any Hydrocarbons after Closing.

Section 11.9           Waiver
of Trade Practices Acts.

(a)         The Purchaser’s rights
and remedies with respect to this Agreement and with respect to all acts or
practices of Seller, past, present or future, in connection with this Agreement
shall be governed by legal principles other than the DTPA. Purchaser hereby
waives the applicability of the DTPA to this Agreement and any and all duties,
rights or remedies that might be imposed by the DTPA, whether such duties,
rights and remedies are applied directly by the DTPA itself or indirectly in
connection with other statutes; provided, however, Purchaser does not waive
Section 17.555 of the DTPA.

(b)        Purchaser expressly
recognizes that the price for which Seller has agreed to perform Seller’s
obligations under this Agreement has been predicated upon the inapplicability
of the DTPA and Purchaser’s agreement to waive the applicability of the DTPA.
Purchaser further recognizes that Seller, in determining to proceed with the
entering into of this Agreement, has expressly relied on such waiver by
Purchaser and the inapplicability of the DTPA.

Section 11.10         Post-Closing
Audit Rights.

Following Closing, Seller shall have the same rights
of a non-operator as Purchaser has under joint operating agreements covering
the Assets to audit the books and records of the operators of any of the
Assets. Seller shall be entitled to collect from operators all amounts claimed
due for any period of time prior to the Effective Time as a result of audits.

ARTICLE XII

MISCELLANEOUS

Section 12.1           Counterparts.

This Agreement may be executed in counterparts, each
of which shall be deemed an original instrument, but all such counterparts together
shall constitute but one agreement.

Section 12.2           Notice.

All notices which are required or may be given
pursuant to this Agreement shall be sufficient in all respects if given in
writing and delivered personally, by facsimile or by registered or certified
mail, postage prepaid, as follows:

 48
 

 

If to Seller:

Smith Production
Inc.

14425 Torrey Chase, Suite 190

Houston, Texas 77014

Attention: Glenn R. Smith

Telephone: 281.583.0196

Facsimile: 281.893.6396

If to Purchaser:

Edge Petroleum Exploration Company

Attention: Robert C. Thomas

1301 Travis, Suite 2000

Houston, TX  77002

Telephone: (713) 427-8814

Telecopy: (713) 654-8910

Either Party may change its address by notice to the
other in the manner set forth above. All notices shall be deemed to have been
duly given at the time of receipt by the party to which such notice is
addressed.

Section 12.3           Binding
Agreement.

This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.

Section 12.4           Expenses.

All expenses incurred by Seller in connection with or
related to the authorization, preparation or execution of this Agreement, the
Assignment and Bill of Sale delivered hereunder and the Exhibits hereto, and
all other matters related to the Closing, including without limitation, all
fees and expenses of counsel, accountants and financial advisers, shall be
borne solely and entirely by the party incurring same.

Section 12.5           Change
of Name.

As promptly as practicable, but in any case within
thirty (30) days after the Closing Date, Purchaser shall eliminate Seller’s
name and any variants thereof from the Assets acquired pursuant to this
Agreement and, except with respect to such grace period for eliminating
existing usage, Purchaser shall have no right to use any logos, trademarks or
trade names belonging to Seller or any of its Affiliates.

 49
 

 

Section 12.6           Construction.

Both Seller and Purchaser have had (i) substantial
input into the drafting and preparation of this Agreement and (ii) the
opportunity to exercise business discretion in relation to the negotiation of
the details of the transaction contemplated hereby. This Agreement is the
result of arm’s-length negotiations from equal bargaining positions and shall
not be construed against either party.

Section 12.7           Governing
Law.

This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Texas without regard to principles of conflicts of laws otherwise
applicable to such determinations.

Section 12.8           Captions.

The captions in this Agreement are for convenience
only and shall not be considered a part of or affect the construction or
interpretation of any provision of this Agreement.

Section 12.9           Waivers.

Any failure by any party or parties to comply with any
of its or their obligations, agreements or conditions herein contained may be
waived in writing, but not in any other manner, by the party or parties to whom
such compliance is owed. No waiver of, or consent to a change in, any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of,
or consent to a change in, other provisions hereof (whether or not similar),
nor shall such waiver constitute a continuing waiver unless otherwise expressly
provided.

Section 12.10         Assignment.

No party shall assign all or any part of this
Agreement, nor shall any party assign or delegate any of its rights or duties
hereunder, without the prior written consent of the other party and any
assignment or delegation made without such consent shall be void.

Section 12.11         Entire
Agreement.

The Confidentiality Agreement, this Agreement and the
documents to be executed hereunder and the Exhibits attached hereto constitute
the entire agreement between the parties pertaining to the subject matter
hereof, and supersede all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties pertaining to the subject
matter hereof.

Section 12.12         Amendment.

(a)         This Agreement may be
amended or modified only by an agreement in writing executed by both parties.

 50
 

 

(b)        No waiver of any right
under this Agreement shall be binding unless executed in writing by the party
to be bound thereby.

Section 12.13         No
Third-Party Beneficiaries.

Nothing in this Agreement shall entitle any Person
other than Purchaser and Seller to any claims, cause of action, remedy or right
of any kind.

Section 12.14         References.

In this Agreement:

(a)         References to any
gender include a reference to all other genders;

(b)        References to the
singular include the plural, and vice versa;

(c)         Reference to any
Article or Section means an Article or Section of this Agreement;

(d)        Reference to any
Exhibit means an Exhibit that is incorporated into and made a part of this
Agreement;

(e)         Unless expressly provided
to the contrary, “hereunder”, “hereof”, “herein” and words of similar import
are references to this Agreement as a whole and not any particular Section or
other provision of this Agreement; and

(f)         “Include” and “including”
shall mean include or including without limiting the generality of the
description preceding such term.

Section 12.15         Severability

The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.

 51
 

 

IN WITNESS WHEREOF, this Agreement has been executed
by each of the undersigned as of the date first written above, to be effective
as of the Effective Time.

	
  SELLER:

  	
   

  	
  PURCHASER:

  
	
   

  	
   

  	
   

  
	
  Smith Production
  Inc.

  	
   

  	
  Edge Petroleum Exploration Company

  
	
   

  	
   

  	
   

  
	
  /s/ GLENN R. SMITH

  	
   

  	
   

  	
  /s/ JOHN W.
  ELIAS

  	
   

  
	
  By:  GLENN R. SMITH

  	
   

  	
  By:  John W.
  Elias

  
	
  Printed Name:  Glenn R. Smith

  	
   

  	
  Title:  Chairman,
  President and CEO

  
	
  Title:  President

  	
   

  	
  Date:

  	
  November 16,
  2006

  	
   

  
	
  Date:

  	
  November 16, 2006

  	
   

  	
   

  	
   

  	
   

  
							

 

 52Exhibit 10.3

FIRST AMENDMENT OF PURCHASE AND SALE AGREEMENT

WHEREAS,
on November 16, 2006, Smith Production Inc. (“Smith”), a Texas corporation, as
seller, and Edge Petroleum Exploration Company (“Edge”), a Delaware
corporation, as purchaser, entered into that certain Purchase and Sale
Agreement (the “Agreement”)  covering
certain oil and gas properties (the “Properties”) described therein dated
effective as of January 1, 2007 (the “Effective Date”).  The Agreement is attached hereto.

WHEREAS, the Agreement was prepared to reflect only the working
interests and the net revenue interests owned by Smith in the Properties;

WHEREAS, subsequent to
the execution of the Agreement,
other owners of interests in the Properties elected to sell their respective
interests to Smith and  Smith elected to
sell those respective interests to Edge pursuant to the Agreement;

WHEREAS, Smith and Edge desire to amend the Agreement to include the working interests and the net revenue interests
owned by such other sellers by executing this First Amendment of Purchase and Sale Agreement (the “Amendment”).

NOW THEREFORE, for
valuable consideration received, Smith and Edge
hereby amend the Agreement as
follows:

1.
In Section 2.1, the Purchase Price is increased from $295,880,000.00 to
$360,894,000.00.

2. In Exhibit 1.2(b)
Wells, the working
interests and the net revenue interests are replaced with new interests which
are equal to the sum of (i) the working
interests and the net revenue interests that are set forth in Exhibit 2.3 under
the heading “SPI” added to (ii) the working
interests and the net revenue interests set forth in Exhibit 2.3 under the
heading “ET ALS.”

3. In Exhibit 2.3
Allocated Values, the allocated values are replaced with new allocated values which are equal to the
sum of (i) the allocated values under the heading “SPI” added to (ii) the
allocated values set forth under the heading “ET ALS.” for a total allocated
value equal to $360,894,000.

4. In Sections
9.1(a) and 12.2, the address of Seller is changed from 14425 Torrey Chase, Suite 190 Houston, Texas
77014 to 8708 Technology Forest
Place, Suite 150, The Woodlands, TX 
77381.

To the extent that any other provisions in the Agreement require amendment in order to make
the context of such provisions correct as the result of the foregoing
amendments, all such provisions in the Agreement that require amendment are deemed to be amended.

As
amended herein, the Agreement is hereby adopted, ratified and confirmed as
being in full force and effect.

 

This Amendment
shall be binding on each party that executes same, regardless of whether the
Amendment is executed by all of the parties who are named below. The provisions
of this Amendment shall be binding upon and inure to the benefit of each
signatory party and their respective successors and assigns.

This Amendment may
be executed in one or more counterparts, each of which shall have the same
force and effect as an original, and each counterpart shall be binding upon the
parties executing the same.

IN WITNESS WHEREOF, this
Amendment is executed as of the dates shown below to be effective as of the
Effective Date.

Smith Production Inc.

	
  By:

  	
     /s/
  GLENN R. SMITH

  	
   

  
	
  Glenn R. Smith,
  President

  	
   

  
	
  Date: December
  15, 2006

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Edge Petroleum
  Exploration Company

  	
   

  
	
   

  	
   

  
	
  By:

  	
     /s/
  JOHN W. ELIAS

  	
   

  
	
  John W. Elias

  	
   

  
	
  Chairman,
  President and CEO

  	
   

  
	
  Date: December
  15, 2006

  	
   

  

 

 2

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