AGREEMENTOF SALE AND PURCHASE BYAND AMONG PETROHAWKPROPERTIES, LP, KCSRESOURCES, LLC AND HAWKFIELD SERVICES, LLC TOGETHER,AS SELLER AND EVPROPERTIES, L.P. ASPURCHASER AUGUST9, 2010 TABLEOF CONTENTS

 

 

"1031 Assets" has the meaning set forth in Section 7.8(c).

 

"Actual Knowledge" has the meaning set forth in Section 5.1(a).

 

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

 

"Adjustment Period" has the meaning set forth in Section 2.2(a).

 

"AFE" means authority for expenditure.

 

"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. The concept of control, controlling or controlled as used in the aforesaid context means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of another, whether through the ownership of voting securities, by contract or otherwise. No Person shall be deemed an Affiliate of any Person by reason of the exercise or existence of rights, interests or remedies under this Agreement.

 

"Aggregate Benefit Deductible" has the meaning set forth in Section 3.4(j).

 

"Aggregate Defect Deductible" has the meaning set forth in Section 3.4(j).

 

"Aggregate Indemnity Deductible" has the meaning set forth in Section 11.4(c).

 

"Agreed Accounting Firm" has the meaning set forth in Section 9.4(b).

 

"Agreement" means this Agreement of Sale and Purchase.

 

"Allocated Value" has the meaning set forth in Section 3.4(a).

 

"Assets" has the meaning set forth in Section 1.2.

 

"Assumed Seller Obligations" has the meaning set forth in Section 11.3.

 

"Business Day" means each calendar day except Saturdays, Sundays, and federal holidays.

 

"Calculation Date" has the meaning set forth in Section 7.10(d).

 

"CERCLA" has the meaning set forth in the definition of Environmental Laws.

 

"Claim Notice" has the meaning set forth in Section 11.4(b).

 

"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" means the United States Internal Revenue Code of 1986, as amended.

 

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

 

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

 

"Conveyance" has the meaning set forth in Section 3.1(b).

 

"COPAS" has the meaning set forth in Section 1.4.

 

"Core Assets” means that portion of the Assets which are identified on Exhibit A, Exhibit A-1 and Exhibit A-2 as Core Assets.

 

"Cure Period" has the meaning set forth in Section 3.4(c).

 

"Defensible Title" has the meaning set forth in Section 3.2.

 

"DTPA" has the meaning set forth in Section 11.10(a).

 

"Earned" has the meaning set forth in Section 1.4(b).

 

"Effective Time" has the meaning set forth in Section 1.4(a).

 

"Environmental Claim Date" has the meaning set forth in Section 4.3.

 

"Environmental Defect" has the meaning set forth in Section 4.3.

 

"Environmental Defect Amount" has the meaning set forth in Section 4.3.

 

"Environmental Defect Notice" has the meaning set forth in Section 4.3.

 

"Environmental Laws" means, as the same may have been amended, any federal, state or local law relating to (i) the control of any potential pollutant or protection of the environment, including air, water or land, (ii) the generation, handling, treatment, storage, disposal or transportation of waste materials, or (iii) the regulation of or exposure to hazardous, toxic or other substances alleged to be harmful, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq. ("CERCLA"); the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq. ("RCRA"); the Federal Water Pollution Control Act, 33 U.S.C. § 1251 et seq.; the Clean Air Act, 42 U.S.C. § 7401 et seq. the Hazardous Materials Transportation Act, 49 U.S.C. § 1471 et seq.; the Toxic Substances Control Act, 15 U.S.C. §§ 2601 through 2629; the Oil Pollution Act, 33 U.S.C. § 2701 et seq.; the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. § 11001 et seq.; the Safe Drinking Water Act, 42 U.S.C. §§ 300f through 300j; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. § 136 et seq.; the Occupational Safety and Health Act, 29 U.S.C. § 651 et seq.; the Atomic Energy Act, 42 U.S.C. § 2011 et seq. (“AEA”); and all applicable related law, whether local, state, territorial, or national, of any Governmental Body having jurisdiction over the property in question addressing pollution or protection of human health, safety, natural resources or the environment and all regulations implementing the foregoing. The term "Environmental Laws" includes all judicial and administrative decisions, orders, directives, and decrees issued by a Governmental Body pursuant to the foregoing.

"Environmental Liabilities" shall mean any and all environmental response costs (including costs of remediation), damages, natural resource damages, settlements, consulting fees, expenses, penalties, fines, orphan share, prejudgment and post-judgment interest, court costs, attorneys' fees, and other liabilities incurred or imposed (i) pursuant to any order, notice of responsibility, directive (including requirements embodied in Environmental Laws), injunction, judgment or similar act (including settlements) by any Governmental Body to the extent arising out of any violation of, or remedial obligation under, any Environmental Laws which are attributable to the ownership or operation of the  Assets prior to the Effective Time or (ii) pursuant to any claim or cause of action by a Governmental Body or other Person for personal injury, property damage, damage to natural resources, remediation or response costs to the extent arising out of any violation of, or any remediation obligation under, any Environmental Laws which is attributable to the ownership or operation of the  Assets prior to the Closing.

 

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

 

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.

 

"Event" has the meaning set forth in definition of Material Adverse Effect.

 

"Exchange Act" means the Securities Exchange Act of 1934, as amended, together with the rules and regulations of the SEC promulgated thereunder.

 

"Excluded Assets" has the meaning set forth in Section 1.3.

 

"Excluded Seller Obligations" has the meaning set forth in Section 11.3.

 

"Final Purchase Price" has the meaning set forth in Section 9.4(b).

 

"Final Settlement Date" has the meaning set forth in Section 9.4(b).

 

"Fundamental Representations" has the meaning set forth in Section 11.4(a).

 

"Future Well" means a well that may be drilled in the future on a Future Well Location, which (for the purposes of determining Defensible Title thereto and any Title Defects associated therewith pursuant to this Agreement) shall be treated as if such well had been drilled and completed and was in existence at or prior to the date of this Agreement.

 

"Future Well Location" means each drilling location identified on Exhibit A-1, subject to any depth restriction set forth in such Exhibit A-1 with respect to such location.

"GAAP" means generally accepted accounting principles in effect in the United States as amended from time to time.

 

"Governmental Authorizations" has the meaning set forth in Section 5.12.

 

"Governmental Body" or "Governmental Bodies" means any federal, state, local, municipal, or other government; any governmental, regulatory or administrative agency, commission, body, arbitrator or arbitration panel or other authority exercising or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power; and any court or governmental tribunal.

 

"Hazardous Material" means (i) any "hazardous substance," as defined by CERCLA, (ii) any "hazardous waste" or "solid waste," in either case as defined by RCRA, and any analogous state statutes, and any regulations promulgated thereunder, (iii) any solid, hazardous, dangerous or toxic chemical, material, waste or substance, within the meaning of and regulated by any applicable Environmental Laws, (iv) any radioactive material, including any naturally occurring radioactive material, and any source, special or byproduct material as defined in AEA and any amendments or authorizations thereof, (v) any regulated asbestos-containing materials in any form or condition, (vi) any regulated polychlorinated biphenyls in any form or condition, and (vii) petroleum, petroleum hydrocarbons or any fraction or byproducts thereof.

 

"HFS” means Hawk Field Services, LLC, an Oklahoma limited liability company.

 

"Hydrocarbons" means oil, gas, casinghead gas, condensate, natural gas liquids, and other gaseous and liquid hydrocarbons or any combination thereof and sulphur and other minerals extracted from or produced with the foregoing.

 

"Imbalance" or "Imbalances" means any over-production, under-production, over-delivery, under-delivery or similar imbalance of Hydrocarbons produced from or allocated to the Assets, regardless of whether such over-production, under-production, over-delivery, under-delivery or similar imbalance arises at the wellhead, pipeline, gathering system, transportation system, processing plant or other location.

 

"incurred" has the meaning set forth in Section 1.4(b).

 

"Indemnified Party" has the meaning set forth in Section 11.7(a).

 

"Indemnifying Party" has the meaning set forth in Section 11.7(a).

 

"Indemnity Agreement" has the meaning set forth in Section 3.4(d)(ii).

 

"Independent Expert" has the meaning set forth in Section 4.3.

 

"Individual Indemnity Threshold” has the meaning set forth in Section 11.4(c)

 

"Individual Benefit Threshold" has the meaning set forth in Section 3.4(j).

 

"Individual Environmental Threshold" has the meaning set forth in Section 4.3.

"Individual Title Threshold" has the meaning set forth in Section 3.4(j).

 

"KCS” means KCS Resources, LLC, a Delaware limited liability company.

 

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

 

"Laws" means all statutes, laws, rules, regulations, ordinances, orders, decrees and codes of Governmental Bodies.

 

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

 

"Like-Kind Exchange" has the meaning set forth Section 7.8(c).

 

"Losses" means any and all debts, obligations and other liabilities (whether absolute, accrued, contingent, fixed or otherwise, or whether known or unknown, or due or to become due or otherwise), diminution in value, monetary damages, fines, fees, Taxes, penalties, interest obligations, deficiencies, losses and expenses (including amounts paid in settlement, interest, court costs, costs of investigators, reasonable fees and expenses of attorneys, accountants, financial advisors and other experts, and other actual out of pocket expenses incurred in investigating and preparing for or in connection with any Proceeding); however, excluding special, punitive, exemplary, consequential or indirect damages, except to the extent a party is required to pay such damages to a third party in connection with a matter for which such party is entitled to indemnification under Article 11.

 

"Lowest Cost Response" means the response required or allowed under Environmental Laws that addresses the condition present at the lowest cost (considered as a whole taking into consideration any material negative impact such response may have on the operations of the relevant assets and any potential material additional costs or liabilities that may likely arise as a result of such response) as compared to any other response that is required or allowed under Environmental Laws.

 

"Material Adverse Effect" means, with respect to Seller, any change, inaccuracy, circumstance, effect, event, result, occurrence, condition or fact (each an "Event") (whether or not (i) foreseeable or known as of the date of this Agreement or (ii) covered by insurance) that has had, or could reasonably be expected to have, a material adverse effect on (i) the ownership, operation or value of the Assets, taken as a whole, or (ii) the ability of Seller to consummate the transactions contemplated hereby. “Material Adverse Effect” means, with respect to Purchaser, any Event (whether or not (i) foreseeable or known as of the date of this Agreement or (ii) covered by insurance) that has had, or could reasonably be expected to have, a material adverse effect on the ability of Purchaser to consummate the transactions contemplated hereby. Excluded from such Events for the purposes of determining whether a "Material Adverse Effect" has occurred or could reasonably be expected to occur are (A) Events resulting from entering into this Agreement or the announcement of the transactions contemplated by this Agreement, (B) Events resulting from changes in general market, economic, financial or political conditions or any outbreak of hostilities or war or terrorist events, (C) Events that affect the Hydrocarbon exploration, production, development, processing, gathering and/or transportation industry generally (including changes in commodity prices or general market prices in the Hydrocarbon exploration, production, development, processing, gathering and/or transportation industry generally), (D) any effect resulting from a change in Laws or regulatory policies, and (E) the consequences of drilling and production operations (including but not limited to depletion, the watering out of any Well(s), collapsed casing or sand infiltration of any Well(s), sidetrack drilling operations on any Well(s), drilling results of any Well(s), and the depreciation of personal property due to ordinary wear and tear with respect to the Assets).

"Material Contracts" has the meaning set forth in Section 5.10.

 

"Net Revenue Interest" has the meaning set forth in Section 3.2(a).

 

"Non-Core Assets” means the portion of the Assets which are identified on Exhibit A, Exhibit A-1 and Exhibit A-2 as Non-Core Assets.

 

"NORM" means naturally occurring radioactive material.

 

"Notice Period" has the meaning set forth in Section 11.7(a).

 

"PEC" means Petrohawk Energy Corporation, a Delaware corporation and ultimate parent of Seller.

 

"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, Governmental Body or any other entity.

 

"Petrohawk Properties” means Petrohawk Properties, LP, a Texas limited partnership.

 

"Personal Property" has the meaning set forth in Section 1.2(g).

 

"Pipelines" has the meaning set forth in Section 1.2(g).

 

"Preference Property" has the meaning set forth in Section 7.7(b).

 

"Preference Right" means any right or agreement that enables any Person to purchase or acquire any Asset or any interest therein or portion thereof as a result of or in connection with (i) the sale, assignment or other transfer of any Asset or any interest therein or portion thereof or (ii) the execution or delivery of this Agreement or the consummation or performance of the terms and conditions contemplated by this Agreement.

 

"Proceeding" or "Proceedings" has the meaning set forth in Section 5.7.

 

"Properties" has the meaning set forth in Section 1.2(c).

 

"Property Costs" has the meaning set forth in Section 1.4(b).

 

"Purchase Price" has the meaning set forth in Section 2.1.

 

"Purchaser" has the meaning set forth in the preamble hereto.

"Purchaser Indemnified Persons" has the meaning set forth in Section 11.5.

 

"Qualified Intermediary" has the meaning set forth in Section 7.8(c).

 

"RCRA" has the meaning set forth in the definition of Environmental Laws.

 

"Records" has the meaning set forth in Section 1.2(i).

 

"REGARDLESS OF FAULT" means WITHOUT REGARD TO THE CAUSE OR CAUSES OF ANY CLAIM, INCLUDING, WITHOUT LIMITATION, EVEN THOUGH A CLAIM IS CAUSED IN WHOLE OR IN PART BY:

 

 

 

 

"Retained Asset" has the meaning set forth in Section 7.7(c).

 

"Retained Employee Liabilities" shall mean any liabilities of Seller (i) to employees of Seller arising under the Worker Adjustment Retraining Notification Act of 1988 as a result of actions taken by Seller prior to the Closing, (ii) arising out of claims by Seller employees with respect to events that occur prior to the Closing and that relate to their employment with, or the terminations of their employment from, Seller, (iii) with respect to employees of Seller arising under any "employee benefit plan" (as defined in Section 3(3) of ERISA) that is sponsored by, contributed to, or maintained by, Seller, or (iv) arising under ERISA for which Purchaser may have any liability under ERISA solely as a result of the consummation of the transaction contemplated by this Agreement.

 

"Retention Notice" has the meaning set forth in Section 7.10(d).

 

"SEC” means the U.S. Securities and Exchange Commission.

 

"Securities Act" means the Securities Act of 1933, as amended, together with the rules and regulations of the SEC promulgated thereunder.

 

"Seller" has the meaning set forth in the preamble hereto.

"Seller Indemnified Persons" has the meaning set forth in Section 11.6.

 

"Seller Operated Assets" means Assets operated by Seller or an Affiliate of Seller.

 

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

 

"Taxes" 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 Governmental Body, 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(a).

 

"Termination Date" has the meaning set forth in Section 10.1(b)(i).

 

"Termination Cost" has the meaning set forth in Section 7.10(d).

 

"Third Party Claim" has the meaning set forth in Section 11.7(a).

 

"Title Benefit" has the meaning set forth in Section 3.2(d).

 

"Title Benefit Amount" has the meaning set forth in Section 3.4(e).

 

"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(d).

 

"Title Defect Amount" has the meaning set forth in Section 3.4(d)(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).

 

"Title Expert" has the meaning set forth in Section 3.4(i).

 

"Transfer Requirement" means any consent, approval, authorization or permit of, or filing with or notification to, any Person which is required to be obtained, made or complied with for or in connection with any sale, assignment or transfer of any Asset or any interest therein; provided, however, that "Transfer Requirement" shall not include any consent of, notice to, filing with, or other action by any Governmental Body in connection with the sale or conveyance of oil and/or gas leases or interests therein or Surface Contracts or interests therein, if they are not required prior to the assignment of such oil and/or gas leases, Surface Contracts or interests or they are customarily obtained subsequent to the sale or conveyance (including consents from state agencies).

 

"Transfer Taxes" has the meaning set forth in Section 12.3.

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

 

"Unwind Notice" has the meaning set forth in Section 7.10(d).

 

"Warranty Well" means a Well or a Future Well, as the context requires.

 

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

 

"Wytex Case" has the meaning set forth in Section 12.21.

 

"Young Case" has the meaning set forth in Section 12.21.

 

This Agreement of Sale and Purchase is executed on August 9, 2010, by and among Petrohawk Properties, LP, a Texas limited partnership, KCS Resources, LLC, a Delaware limited liability company and Hawk Field Services, LLC, an Oklahoma limited liability company (together "Seller"), and EV Properties, L.P., a Delaware limited partnership ("Purchaser").

 

 

A. Seller owns the Assets as more fully described in Section 1.2 and the exhibits hereto.

 

B. Seller desires to sell to Purchaser and Purchaser desires to purchase from Seller the properties and rights of Seller hereafter described, in the manner and upon the terms and conditions hereafter set forth.

 

NOW, THEREFORE, in consideration of the premises and of the mutual promises, representations, warranties, covenants, conditions and agreements contained herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound by the terms hereof, agree as follows:

 

 

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, transfer and convey the Assets to Purchaser and Purchaser agrees to purchase, accept and pay for the Assets and to assume the Assumed Seller Obligations.

 

Section 1.2       Assets.  As used herein, the term "Assets" means, subject to the terms and conditions of this Agreement, all of Seller's right, title, interest and estate, in and to the following (but excluding the Excluded Assets):

 

(a)           All of the oil and gas leases; subleases and other leaseholds; interests in fee; carried interests; reversionary interests; net profits interests; royalty interests; overriding royalty interests; forced pooled interests; farmout rights; options; mineral interests and other properties and interests described on Exhibit A, subject to such depth limitations and other restrictions as may be set forth in the oil and gas leases or other agreements of record (collectively, the "Leases"), together with each and every kind and character of right, title, claim, and interest that Seller has in and to the lands covered by the Leases and the interests currently pooled, unitized, communitized or consolidated therewith (the "Lands");

 

(b)           All oil, gas, water or injection wells located on the Lands, whether producing, shut-in, or temporarily abandoned, including but not limited to the interests in the wells shown on Exhibit A-1 attached hereto (collectively, the "Wells");

(c)           All leasehold interests of Seller in or to any currently existing pools or units which include any Lands or all or a part of any Leases or include any Wells, including those pools or units related to the Properties and associated with the Wells shown on Exhibit A-1 (the "Units"; the Units, together with the Leases, Lands and Wells, being hereinafter referred to as the "Properties"), and including all leasehold interests of Seller in production of Hydrocarbons from any such Unit, whether such Unit production of Hydrocarbons comes from Wells located on or off of a Lease, and all tenements, hereditaments and appurtenances belonging to the Leases and Units;

 

(d)           All contracts, agreements and instruments by which the Properties are bound or subject, or that relate to or are otherwise applicable to the Properties, only to the extent applicable to the Properties rather than Seller's or any of its Affiliates' other properties, including but not limited to, operating agreements, unitization, pooling and communitization agreements, declarations and orders, joint venture agreements, farmin and farmout agreements, exploration agreements, participation agreements, area of mutual interest agreements, exchange agreements, transportation or gathering agreements, agreements for the sale and purchase of oil, gas or casinghead gas and processing agreements to the extent applicable to the Properties or the production of Hydrocarbons produced in association therewith from the Properties, including those identified on Schedule 1.2(d)  (hereinafter collectively referred to as "Contracts"), but excluding any contracts, agreements and instruments to the extent transfer would result in a violation of applicable Law or is restricted by any Transfer Requirement that is not waived by Purchaser or satisfied pursuant to Section 7.7 and provided that "Contracts" shall not include the instruments constituting the Leases;

 

(e)           All easements, permits, licenses, servitudes, rights-of-way, surface leases and other surface rights ("Surface Contracts") appurtenant to, and used or held for use in connection with the Properties (including those identified on Schedule 1.2(e)), but excluding any permits and other rights to the extent transfer would result in a violation of applicable Law or is restricted by any Transfer Requirement that is not waived by Purchaser or satisfied pursuant to Section 7.7;

 

(f)            All treatment and processing plants and equipment, machinery, fixtures and other tangible personal property and improvements located on the Properties or used or held for use in connection with the operation of the Properties, including those identified on Exhibit A-2 ("Equipment");

 

(g)           All flow lines, pipelines, gathering systems and appurtenances thereto located on the Properties or used, or held for use, in connection with the operation of the Properties, including those identified on Schedule 1.2(g) ("Pipelines" and, together with the Equipment and Wells, "Personal Property");

 

(h)           All Hydrocarbons produced from or attributable to the Leases, Lands, and Wells from and after the Effective Time, together with Imbalances associated with the Properties;

(i)            All lease files, land files, well files, gas and oil sales contract files, gas processing and transportation files, division order files, abstracts, title opinions, land surveys, logs, maps, engineering data and reports, interpretive data, technical evaluations and technical outputs, and other books, records, data, files, and accounting records, including but not limited to records showing all funds 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, in each case to the extent related to the Properties, or used or held for use in connection with the maintenance or operation thereof, but excluding (i) any books, records, data, files, logs, maps, evaluations, outputs, and accounting records to the extent disclosure or transfer would result in a violation of applicable Law or is restricted by any Transfer Requirement that is not satisfied pursuant to Section 7.7, (ii) computer or communications software or intellectual property (including tapes, codes, data and program documentation and all tangible manifestations and technical information relating thereto), (iii) attorney-client privileged communications and work product of Seller's or any of its Affiliates' legal counsel (other than title opinions), (iv) third party reserve reports and evaluations, and (v) records relating to the marketing, negotiation, and consummation of the sale of the Assets (subject to such exclusions, the "Records"); provided, however, that Seller may retain the originals of such Records as Seller has reasonably determined may be required for existing litigation, tax, accounting, and auditing purposes;

 

(j)            To the extent transferable, and subject to payment by Purchaser of all third party transfer and license fees, all geological and geophysical data (including all seismic data, as well as reprocessed data) related exclusively to the Properties, including those items identified in Schedule 1.2(j);

 

(k)           All vehicles identified on Schedule 1.2(k); and

 

(l)            All funds 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.

 

Section 1.3       Excluded Assets.  Notwithstanding the foregoing, the Assets shall not include, and there is excepted, reserved and excluded from the transaction contemplated hereby (collectively, the "Excluded Assets"):

 

(a)           except to the extent necessary to satisfy Seller's obligations under Section 7.1, (i) all 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), (ii) all books, records and files that relate to the Excluded Assets, (iii) those records retained by Seller pursuant to Section 1.2(i) and (iv) copies of any other Records retained by Seller pursuant to Section 1.5;

 

(b)           all rights to any refund related to the Excluded Seller Obligations or 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;

 

(c)           Seller's area-wide bonds, permits and licenses or other permits, licenses or authorizations used in the conduct of Seller's business generally;

 

(d)           those items listed in Schedule 1.3(d);

 

(e)           all trade credits, accounts receivable, notes receivable, take-or-pay amounts receivable, pre-paid expenses and deposits, and other receivables attributable to the Assets with respect to any period of time prior to the Effective Time;

 

(f)            all right, title and interest of Seller in and to vehicles used in connection with the Assets, other than those identified on Schedule 1.2(k);

(g)           all rights, titles, claims and interests of Seller or any Affiliate of Seller (i) to or under any policy or agreement of insurance or any insurance proceeds; except to the extent provided in Section 3.5, and (ii) to or under any bond or bond proceeds;

 

(h)           subject to Section 12.5, any patent, patent application, logo, service mark, copyright, trade name or trademark of or associated with Seller or any Affiliate of Seller or any business of Seller or of any Affiliate of Seller;

 

(i)            a nonexclusive right to freely use any copies of any logs, interpretive data, technical outputs, technical evaluations, maps, engineering data and reports, and other data and information being transferred as a part of the Assets that Seller is entitled to retain pursuant to Section 1.5; and

 

(j)            all Retained Assets not conveyed to Purchaser pursuant to Section 7.7 and any Property excluded pursuant to Section 3.4(d)(iii)

 

Section 1.4       Effective Time; Proration of Costs and Revenues.

 

(a)           Subject to Section 1.5, possession of the Assets shall be transferred from Seller to Purchaser at the Closing, but certain financial benefits and burdens of the Assets shall be transferred effective as of 7:00 A.M., local time, where the respective Assets are located, on July  1, 2010 (the "Effective Time"), as described below.

 

(b)           Purchaser shall be entitled to all Hydrocarbon production from or attributable to the Properties at and after the Effective Time (and all products and proceeds attributable thereto), and to all other income, proceeds, receipts and credits earned with respect to the Assets at or after the Effective Time, and shall be responsible for (and entitled to any refunds with respect to) all Property Costs incurred at and after the Effective Time. Seller shall be entitled to all Hydrocarbon production from or attributable to the Properties prior to the Effective Time (and all products and proceeds attributable thereto), and to all other income, proceeds, receipts and credits earned with respect to the Assets prior to the Effective Time, and shall be responsible for (and entitled to any refunds with respect to) all Property Costs incurred prior to the Effective Time. "Earned" and "incurred", as used in this Agreement, shall be interpreted in accordance with GAAP and Council of Petroleum Accountants Society (COPAS) standards, as applicable. "Property Costs" means all costs attributable to the ownership and operation of the Assets (including without limitation costs of insurance relating specifically to the Assets and ad valorem, property, severance, Hydrocarbon 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) and capital expenditures incurred in the ownership and operation of the Assets and, where applicable, in accordance with the relevant operating or unit agreement, if any, and overhead costs charged to the Assets under the relevant operating agreement or unit agreement, if any, and regardless of whether charged by an Affiliate of Seller or by a third party, or, if none, the amounts shown under Schedule 1.4 shall be the overhead amounts deemed charged to the Assets.  For purposes of this Section 1.4, determination of whether Property Costs are attributable to the period before or after the Effective Time shall be based on when services are rendered, when the goods are delivered, or when the work is performed. For clarification, the date an item or work is ordered is not the date of a pre-Effective Time transaction for settlement purposes, but rather the date on which the item ordered is delivered to the job site, or the date on which the work ordered is performed, shall be the relevant date. For purposes of allocating Hydrocarbon production (and accounts receivable with respect thereto), under this Section 1.4, (i) liquid Hydrocarbons shall be deemed to be "from or attributable to" the Properties when they are placed into the storage facilities and (ii) gaseous Hydrocarbons shall be 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 Hydrocarbon production when exact meter readings or gauging and strapping data is not available. Seller shall provide to Purchaser, no later than five (5) 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. Property Costs that are paid periodically 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, except that Hydrocarbon 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.

Section 1.5       Delivery and Maintenance of Records.  Seller shall deliver the Records (FOB Seller's office) to Purchaser within fifteen (15) days following Closing. Other than any original Records retained by Seller pursuant to Section 1.2(i), Purchaser shall be entitled to all original Records maintained by Seller. Seller shall be entitled to keep a copy or copies of all Records; provided, however, that Seller shall not sell or otherwise allow third parties to review, copy or otherwise use any Records retained by Seller except as required by law or permitted in connection with a transfer pursuant to Section 12.10. Purchaser shall preserve the Records for a period of seven (7) years following the Closing and will allow Seller and its representatives, consultants and advisors reasonable access, during normal business hours and upon reasonable notice, to the Records for any legitimate business reason of Seller, including in order for Seller to comply with a Tax or other legally required reporting obligation or Tax or legal dispute.  Any such access shall be at the sole cost and expense of Seller. Unless otherwise consented to in writing by Seller, for a period of seven (7) years following the Closing Date, Purchaser shall not and shall cause its Affiliates not to, destroy, alter or otherwise dispose of the Records, or any portions thereof, without first giving at least thirty (30) days prior written notice to Seller and offering to surrender to Seller the Records or such portions thereof.

 

 

Section 2.1       Purchase Price.  The purchase price for the Assets (the "Purchase Price") shall be $123,000,000 adjusted as provided in Section 2.2.

 

Section 2.2       Adjustments to Purchase Price.  The Purchase Price for the Assets shall be adjusted in the manner specified below (without duplication), with all such amounts being determined in accordance with GAAP and COPAS standards, as applicable, in order to reach the Adjusted Purchase Price:

(a)           Reduced by the aggregate amount of the following proceeds received by Seller between (and including) the Effective Time and the Closing Date (with the period between the Effective Time and the Closing Date referred to as the "Adjustment Period"): (i) proceeds from the sale of Hydrocarbons (net of any royalties, overriding royalties or other burdens on or payable out of production, gathering, processing and transportation costs and any production, severance, sales, excise or similar Taxes not reimbursed to Seller by the purchaser of production) produced from or attributable to the Properties during the Adjustment Period, and (ii) other proceeds earned with respect to the Assets during the Adjustment Period;

 

(b)           Reduced to the extent provided in Section 7.7 with respect to Preference Rights and Retained Assets;

 

(c)           (i) If the parties make the election under Section 3.4(d)(i) with respect to a Title Defect, subject to the Individual Title Threshold and the Aggregate Defect Deductible, reduced by the Title Defect Amount with respect to such Title Defect if the Title Defect Amount has been determined prior to Closing and (ii) subject to the Individual Benefit Threshold and the Aggregate Benefit Deductible, increased by the Title Benefit Amount with respect to each Title Benefit for which the Title Benefit Amount has been determined prior to Closing;

 

(d)           Increased by the amount of all Property Costs and other costs attributable to the ownership and operation of the Assets which are paid by Seller and incurred during the Adjustment Period (including any overhead costs under Schedule 1.4 deemed charged to the Assets with respect to the Adjustment Period even though not actually paid), except any Property Costs and other such costs already deducted in the determination of proceeds in Section 2.2(a);

 

(e)           Reduced to the extent provided in Section 3.4(d)(iii) for any Properties excluded from the Assets pursuant to Section 3.4(d)(iii) and reduced to the extent provided in Section 4.3 for Environmental Defects;

 

(f)            Increased or reduced as mutually agreed upon in writing prior to Closing by Seller and Purchaser;

 

(g)           Increased by the value of the amount of any and all Hydrocarbons stored in tanks and pipelines attributable to the ownership and operation of the Assets that belong to Seller as of the Effective Time (which value shall be computed at the applicable third-party contract prices for the month of June 2010 for such stored Hydrocarbons);

 

(h)           Reduced or increased, as the case may be, by the actual net aggregate Imbalances, if any, owed by Seller to third parties, or third parties to Seller, as of the Effective Time, multiplied by a price of $3.00 per MMBtu;

 

(i)            Increased by the amount of the funds transferred pursuant to Section 1.2(l); and

 

Each adjustment made pursuant to Section 2.2(a) shall serve to satisfy, up to the amount of the adjustment, Purchaser's entitlement under Section 1.4 to Hydrocarbon production from or attributable to the Properties during the Adjustment Period, and to the value of other income, proceeds, receipts and credits earned with respect to the Assets during the Adjustment Period, and as such, Purchaser shall not have any separate rights to receive any Hydrocarbon production or income, proceeds, receipts and credits with respect to which an adjustment has been made. Similarly, the adjustment described in Section 2.2(d) shall serve to satisfy, up to the amount of the adjustment, Purchaser's obligation under Section 1.4 to pay Property Costs and other costs attributable to the ownership and operation of the Assets which are incurred during the Adjustment Period.

Section 2.3       Allocation of Purchase Price.  The Allocated Values are contained in Exhibit A-1.  Purchaser shall be responsible for assigning the Allocated Values, subject to Seller’s right to review the Allocated Values for reasonableness.

 

 

Section 3.1       Seller's Title.

 

(a)           PURCHASER ACKNOWLEDGES THAT THE SOLE AND EXCLUSIVE REMEDY FOR TITLE DEFECTS SHALL BE AS SET FORTH IN SECTION 3.4.

 

(b)           The assignment and conveyance documents to be delivered by Seller to Purchaser shall be substantially in the form of Exhibit B hereto (the "Conveyance"), which shall disclaim warranty of title except for those claiming by, through or under Seller.

 

(c)            Notwithstanding anything herein provided to the contrary, if a Title Defect under this Article 3 results from any matter which could also result in the breach of any representation or warranty of Seller set forth in Article 5, then Purchaser shall only be entitled to assert such matter as a Title Defect to the extent permitted by this Article 3, and shall be precluded from also asserting such matter as the basis of the breach of any representation or warranty.

 

Section 3.2       Definition of Defensible Title.  As used in this Agreement, the term "Defensible Title" means that title of Seller with respect to the Units, Warranty Wells or other Assets shown in Exhibit A-1 that, except for and subject to Permitted Encumbrances:

 

(a)           Entitles Seller to receive a share of the Hydrocarbons produced, saved and marketed from any Unit, Warranty Well or other Asset shown in Exhibit A-1 throughout the duration of the productive life of such Unit, Warranty Well or other Asset (after satisfaction of all royalties, overriding royalties, net profits interests or other similar burdens on or measured by production of Hydrocarbons) (a "Net Revenue Interest"), of not less than the Net Revenue Interest shown in Exhibit A-1 for such Unit, Warranty Well or other Asset, except (solely to the extent that such actions do not cause a breach of Seller's covenants under Section 7.6) for decreases in connection with those operations in which Seller may from and after the Effective Time become a non-consenting co-owner, decreases resulting from the establishment or amendment from and after the Effective Time of pools or units, and decreases required to allow other working interest owners to make up past underproduction of Hydrocarbons or pipelines to make up past under deliveries of Hydrocarbons, and except as stated in such Exhibit A-1;

 

(b)           Obligates Seller to bear a percentage of the costs and expenses for the maintenance and development of, and operations relating to, (i) any Unit, Warranty Well or other Asset shown in Exhibit A-1 not greater than the "working interest" shown in Exhibit A-1 for such Unit, Warranty Well or other Asset without increase throughout the productive life of such Unit, Warranty Well or other Asset, except as stated in Exhibit A-1 and except for increases resulting from contribution requirements with respect to non-consenting or 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, irregularities, pledges, or other defects.

 

(d)           As used in this Agreement, the term "Title Defect" means any lien, charge, encumbrance, obligation (including contract obligation), defect, or other matter (including without limitation a discrepancy in Net Revenue Interest or working interest) that causes Seller not to have Defensible Title in and to the Units, Warranty Wells or other Assets shown on Exhibit A-1 as of the Effective Time and the Closing. As used in 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 Unit, Warranty Well or other Asset shown on Exhibit A-1, without causing a greater than proportionate increase in Seller's working interest above that shown in Exhibit A-1 as of the Effective Time. Notwithstanding the foregoing, the following shall not be considered Title Defects:

 

(i)

defects based solely on (1) lack of information in Seller's files, or (2) references to a document(s) if such document(s) is not in Seller's files;

 

(ii)

defects arising out of lack of corporate or other entity authorization unless Purchaser provides affirmative written evidence that the action was not authorized and results in another Person’s superior claim of title;

 

(iii)

defects based on failure to record Leases issued by any state or federal Governmental Body, or any assignments of such Leases, in the real property, conveyance or other records of the county in which such Property is located;

 

(iv)

Intentionally Deleted.

 

(v)

defects arising out of lack of survey, unless a survey is expressly required by applicable Laws;

 

(vi)

defects in the chain of title consisting of the failure to recite marital status in a  document or omissions of successions of heirship or estate proceedings, unless Purchaser provides affirmative evidence that such failure or omission has resulted in another Person’s superior claim of title; and

 

(vii)

defects that have been cured by applicable Laws of limitation or prescription.,

Section 3.3       Definition of Permitted Encumbrances.

 

As used herein, the term "Permitted Encumbrances" means any or all of the following:

 

(a)           Royalties and any overriding royalties, reversionary interests, net profit interests, production payments, carried interests, and other burdens, to the extent that any such burden does not reduce Seller's Net Revenue Interest below that shown in Exhibit A-1 or increase Seller's working interest above that shown in Exhibit A-1 without a proportionate increase in the Net Revenue Interest;

 

(b)           All Leases, unit agreements, pooling agreements, operating agreements, Hydrocarbon production sales contracts, division orders and other contracts, agreements and instruments 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 A-1 or increase Seller's working interest above that shown in Exhibit A-1 without a proportionate increase in the Net Revenue Interest;

 

(c)           Preference Rights applicable to this or any future transaction, to the extent such Preference Right is exercised, waived or otherwise terminated prior to Closing;

 

(d)           Transfer Requirements applicable to this or any future transaction, to the extent such Preference Right is exercised, waived or otherwise terminated prior to Closing;

 

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

 

(f)            Materialman's, mechanic's, repairman's, employee's, contractor's, operator's and other similar 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 the Assets or interests therein pursuant to this or to any future transaction if they are not required or customarily obtained 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 (i) reduce Seller's Net Revenue Interest below that shown in Exhibit A-1, (ii) increase Seller's working interest above that shown in Exhibit A-1 without a proportionate increase in Net Revenue Interest, or (iii) detract in any material respect from the value of, or interfere in any material respect with the use, ownership or operation of, the Assets subject thereto or affected thereby (as currently used, owned and operated) and which would be acceptable by a reasonably prudent purchaser engaged in the business of owning and operating oil and gas properties;

 

(j)            Calls on Hydrocarbon production under existing Contracts that are listed on Schedule 1.2(d);

(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 or under any franchise, grant, license or permit issued by any such Governmental Body;

 

(l)            Any encumbrance on or affecting the Assets which is discharged by Seller at or prior to Closing;

 

(m)          Any matters shown on Exhibit A-1;

 

(n)           Intentionally Deleted.

 

(o)           Matters that would otherwise be considered Title Defects but that do not meet the Individual Title Threshold set forth in Section 3.4(j);

 

(p)           Imbalances associated with the Assets;

 

(q)           Liens granted under applicable joint operating agreements and similar agreements;

 

(r)            The matters disclosed in Schedules 5.7(a) and 5.7(b);

 

(s)           Any other liens, charges, encumbrances, defects or irregularities which do not, individually or in the aggregate, detract in any material respect from the value of, or interfere in any material respect 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 properties, and which do not reduce Seller's Net Revenue Interest below that shown in Exhibit A-1, or increase Seller's working interest above that shown in Exhibit A-1 without a proportionate increase in Net Revenue Interest; and

 

(t)            Any lien or trust arising in connection with workers’ compensation, unemployment insurance, pension, employment, or child support laws or regulations.

 

Section 3.4       Notice of Title Defect Adjustments.

 

(a)           To assert a claim of a Title Defect prior to Closing, Purchaser must deliver claim notices to Seller (each a "Title Defect Notice") on or before 5:00 pm C.D.T. on September 20, 2010,  (the "Title Claim Date"); provided, however, that Purchaser agrees that it shall furnish Seller once every two (2) weeks until the Title Claim Date with a Title Defect Notice if any officer of Purchaser or its Affiliates discover or learn of any Title Defect during such two (2) week period; provided further that Purchaser’s failure to provide such notice every 2 weeks shall not constitute a waiver of Purchaser’s right to assert a claim on the Title Claim Date. Each Title Defect Notice shall be in writing and shall include (i) a description of the alleged Title Defect(s), (ii) the Units, Warranty Wells or other Assets in Exhibit A-1 affected by the Title Defect (each a "Title Defect Property"), (iii) the Allocated Value 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 Value of each Title Defect Property is reduced by the alleged Title Defect(s) and the computations and information upon which Purchaser's belief is based. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT TO THE CONTRARY, PURCHASER SHALL BE DEEMED TO HAVE WAIVED ITS RIGHT TO ASSERT TITLE DEFECTS OF WHICH SELLER HAS NOT BEEN GIVEN NOTICE ON OR BEFORE THE TITLE CLAIM DATE. For purposes hereof, the "Allocated Value" of an Asset shall mean the portion of the Purchase Price that has been allocated to a particular Unit, Warranty Well or other Asset in Exhibit A-1 as prepared by Purchaser and reviewed for reasonableness by Seller.

(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 Units, Warranty Wells or other Assets in Exhibit A-1 affected, (iii) the Allocated Values of the Units, Warranty Wells or other Assets in Exhibit A-1 subject to such Title Benefit and (iv) the amount by which Seller reasonably believes the Allocated Value of those Units, Warranty Wells or other Assets 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 to Purchaser on or before the Title Claim Date.

 

(c)           Seller shall have the right, but not the obligation, to attempt, at its sole cost, to cure or remove Title Defects at any time prior to Closing (the "Cure Period"), unless the parties otherwise agree, any Title Defects of which it has been advised in writing by Purchaser.

 

(d)           Remedies for Title Defects.

 

In the event that any Title Defect is not waived by Purchaser or cured on or before Closing, Purchaser and Seller shall mutually elect to have one of the following remedies apply:

 

(i)

subject to the Individual Title Threshold and the Aggregate Defect Deductible, have the Purchase Price reduced by an amount agreed upon ("Title Defect Amount") pursuant to Section 3.4(g) or Section 3.4(i) 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; provided, however, that the methodology, terms and conditions of Section 3.4(g) shall control any such determination;

 

(ii)

have Seller retain the entirety of the Property that is subject to such Title Defect, together with all associated Assets, in which event the Purchase Price shall be reduced by an amount equal to the Allocated Value of such Property; or

(iii)

at Closing, the affected Asset shall be held back from the Assets to be transferred and conveyed to Purchaser at Closing and the Purchase Price to be paid at Closing shall be reduced by the Allocated Value of such Retained Asset pursuant to Section 7.7(b).  Seller shall then have 180 days after Closing in which to cure the Title Defect.  Any Property so held back from the initial Closing will be conveyed to Purchaser at a delayed Closing within ten (10) days following the date that the Title Defect is cured, at which time Seller shall be entitled to withdraw the full Allocated Value of the Property from escrow, and provided further that if multiple delayed Closings are contemplated as a result of this provision and/or Section 7.7(c), the delayed Closings may be consolidated on dates mutually agreeable to the parties, but shall not be less than once every sixty (60) days.  In the event that Seller is unable to cure the Title Defect within 180 days of the initial Closing, then Seller shall, at its sole election, select the remedy set forth in subsection (i) or (ii) above as the remedy for such Title Defect.  Should Seller’s choice ultimately lead to application of Section 3.4(i), the Title Expert shall be selected within fifteen (15) Business Days of the end of this 180 day cure period.  All other provisions of Section 3.4(i) shall apply as written.

 

In the event that Purchaser and Seller cannot mutually agree upon one of the foregoing remedies with respect to a Title Defect asserted by Purchaser pursuant to Section 3.4(a) prior to Closing, then Seller shall, at its sole election, select the remedy set forth in subsection (i) (ii) or (iii) above as the remedy for such Title Defect.

 

(e)           With respect to each Unit, Warranty Well or other Asset in Exhibit A-1 affected by Title Benefits reported under Section 3.4(b), subject to the Individual Benefit Threshold and the Aggregate Defect Deductible, the Purchase Price shall be increased by an amount (the "Title Benefit Amount") equal to the increase in the Allocated Value for such Unit, Warranty Well or other Asset in Exhibit A-1 caused by such Title Benefits, as determined pursuant to Section 3.4(h).

 

(f)            Section 3.4(d) shall be the exclusive right and remedy of Purchaser with respect to Title Defects asserted by Purchaser pursuant to Section 3.4(a).  Section 3.4(e) shall be the exclusive right and remedy of Seller with respect to Title Benefits asserted by Seller pursuant to Section 3.4(b).

 

(g)           The Title Defect Amount resulting from a Title Defect shall be the amount by which the Allocated Value of the Title Defect Property is reduced as a result of the existence of such Title Defect and shall be determined in accordance with the following methodology, terms and conditions:

 

(i)

if Purchaser and Seller agree on 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 liquidated in amount, 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 and (B) the Net Revenue Interest stated on Exhibit A-1 and causes a proportionate decrease to Seller’s working interest shown on Exhibit A-1, then the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction, the numerator of which is the Net Revenue Interest decrease and the denominator of which is the Net Revenue Interest stated on Exhibit A-1;

 

(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; and

 

(v)

notwithstanding anything to the contrary in this Article 3, 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.

 

(h)           The Title Benefit Amount for any Title Benefit shall be the product of the Allocated Value of the affected Unit, Warranty Well or other Asset in Exhibit A-1 multiplied by a fraction, the numerator of which is the Net Revenue Interest increase and the denominator of which is the Net Revenue Interest stated on Exhibit A-1.

 

(i)            Seller and Purchaser shall attempt in good faith to agree on all Title Defect Amounts and Title Benefit Amounts prior to Closing. If Seller and Purchaser are unable to agree by Closing, the Title Defect Amounts and Title Benefit Amounts in dispute shall be exclusively and finally resolved pursuant to this Section 3.4(i). There shall be a single arbitrator, who shall be a title attorney with at least ten (10) years experience in oil and gas titles involving properties in the regional area in which the Properties are located, as selected by mutual agreement of Purchaser and Seller within fifteen (15) Business Days after the end of the Cure Period (the "Title Expert"). The Title Expert's determination shall be made within fifteen (15) Business Days after submission of the matters in dispute and shall be final and binding upon both parties, without right of appeal. In making his determination, the Title Expert shall be bound by the rules set forth in Section 3.4(g) and Section 3.4(h) and may consider such other matters as in the opinion of the Title Expert are necessary or helpful to make a proper determination. The Title Expert may allow the parties to make written submissions of their positions in the manner and to the extent the Title Expert deems appropriate, and the Title Expert may call on the parties to submit such other materials as the Title Expert deems helpful and appropriate to resolution of the dispute.  Additionally, the Title Expert may consult with and engage disinterested third parties to advise the arbitrator, including without limitation petroleum engineers. The Title Expert shall act as an expert for the limited purpose of determining the specific disputed Title Defect Amounts and Title Benefit Amounts submitted by either party and may not award damages, interest or penalties to either party with respect to any matter. Seller and Purchaser shall each bear its own legal fees and other costs of presenting its case. Each party shall bear one-half of the costs and expenses of the Title Expert, including any costs incurred by the Title Expert that are attributable to such third party consultation. Within ten (10) days after the Title Expert delivers written notice to Purchaser and Seller of his award with respect to a Title Defect Amount or a Title Benefit Amount, (i) Purchaser shall pay to Seller the amount, if any, so awarded by the Title Expert to Seller and (ii) Seller shall pay to Purchaser the amount, if any, so awarded by the Title Expert to Purchaser.

(j)            Notwithstanding anything to the contrary, (i) in no event shall there be any adjustments to the Purchase Price or other remedies provided by Seller for any individual uncured Title Defect for which the Title Defect Amount therefor does not exceed $15,000 ("Individual Title Threshold"); and (ii) in no event shall there be any adjustments to the Purchase Price or other remedies provided by Seller for uncured Title Defects unless the aggregate Title Defect Amounts attributable to all uncured Title Defects, taken together with the aggregate Environmental Defect Amounts attributable to all uncured Environmental Defects, exceeds a deductible in an amount equal to 1.5% of Purchase Price ("Aggregate Defect Deductible"), after which point adjustments to the Purchase Price or other remedies shall be made or available to Purchaser only with respect to uncured Title Defects and uncured Environmental Defects where the aggregate Title Defect Amounts and Environmental Defect Amounts attributable are in excess of such Aggregate Defect Deductible. Notwithstanding anything to the contrary, (i) in no event shall there be any adjustments to the Purchase Price for any individual Title Benefit for which the Title Benefit Amount does not exceed $15,000 ("Individual Benefit Threshold"); and (ii) in no event shall there be any adjustments to the Purchase Price for any Title Benefit unless the aggregate Title Benefit Amounts attributable to all such Title Benefits, exceeds a deductible in an amount equal to 1.5% of Purchase Price ("Aggregate Benefit Deductible"), after which point adjustments to the Purchase Price shall be made only with respect to such Title Benefit Amounts in excess of such Aggregate Benefit Deductible.

 

Section 3.5       Casualty or Condemnation Loss.

 

(a)           From and after the Effective Time, but subject to the provisions of Section 3.5(b) and (c) below, Purchaser shall assume all risk of loss with respect to and any change in the condition of the Assets and for production of Hydrocarbons through normal depletion (including but not limited to the watering out of any Well, collapsed casing or sand infiltration of any Well) and the depreciation of personal property due to ordinary wear and tear with respect to the Assets.

 

(b)           If, after the date of this Agreement but prior to the Closing Date, any portion of the Assets is destroyed by fire or other casualty or is taken in condemnation or under right of eminent domain, and the loss as a result of such individual casualty or taking, taken together with all other casualty losses and takings, equals or exceeds twenty percent (20%) of the Purchase Price, unless this Agreement is terminated pursuant to Section 10.1, the transactions evidenced by this Agreement shall nevertheless be consummated and Seller shall elect by written notice to Purchaser prior to Closing either (i) to cause the Assets affected by any casualty or taking 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) to treat such casualty or taking as a Title Defect with respect to the affected Property or Properties under Section 3.4.  In each case, Seller shall retain all rights to insurance and other claims against third parties with respect to the casualty or taking except to the extent the parties otherwise agree in writing.

(c)           If, after the date of this Agreement but prior to the Closing Date, any portion of the Assets is destroyed by fire or other casualty or is taken in condemnation or under right of eminent domain, and the loss to the Assets as a result of such individual casualty or taking, taken together with all other casualty losses and takings, is less than twenty percent (20%) of the Purchase Price, the transaction evidenced by this Agreement shall nevertheless be consummated and Seller shall, at Closing, pay to Purchaser all sums paid to Seller by third parties by reason of such casualty or 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 Affiliates of Seller and its and their directors, officers, employees and agents) arising out of the casualty or taking.

 

Section 3.6       Limitations on Applicability.  The right of Purchaser to assert a Title Defect under this Agreement and Seller’s right to assert a Title Benefit under this Agreement shall terminate as of the Title Claim Date, provided there shall be no termination of Purchaser's or Seller's rights under Section 3.4 with respect to any bona fide Title Defect properly reported in a Title Defect Notice or bona fide Title Benefit Claim properly reported in a Title Benefit Notice on or before the Title Claim Date.

 

Section 3.7       Government Approvals Respecting Assets.

 

(a)           Federal and State Approvals. Purchaser shall, within thirty (30) days after Closing and at Purchaser's own expense, file for approval with the applicable Governmental Bodies all assignment documents and other state and federal transfer documents required to effectuate the transfer of the Assets. Purchaser further agrees, promptly after Closing, to take all other actions reasonably required of it by federal or state agencies having jurisdiction to obtain all requisite regulatory approvals with respect to this transaction, and to use its commercially reasonable efforts to obtain the approval by such federal or state agencies, as applicable, of Seller's assignment documents requiring federal or state approval in order for Purchaser to be recognized by the federal or state agencies as the owner of the Assets. Purchaser shall provide Seller with approved copies of the assignment documents and other state and federal transfer documents, as soon as they are available.

 

(b)           Title Pending Governmental Approvals. Until all of the governmental approvals provided for in Section 3.7(a) have been obtained, the following shall occur with respect to the affected portion of the Assets:

 

(i)

Seller shall continue to hold record title to the affected Leases and other affected portion of the Assets as nominee for Purchaser;

 

(ii)

Purchaser shall be responsible for all Assumed Seller Obligations with respect to the affected Leases and other affected portion of the Assets as if Purchaser was the record owner of such Leases and other portion of the Assets as of the Effective Time; and

(iii)

Seller shall act as Purchaser's nominee but shall be authorized to act only upon and in accordance with Purchaser's instructions, and Seller shall have no authority, responsibility or discretion to perform any tasks or functions with respect to the affected Leases and other affected portion of the Assets other than those which are purely administrative or ministerial in nature, unless otherwise specifically requested and authorized by Purchaser in writing.

 

 

Section 4.1       Assessment.  Subject to this Section 4.1, from and after the date of execution of this Agreement until the Closing Date, Seller shall afford to Purchaser and its officers, employees, agents and authorized representatives reasonable access to the Assets, including the Records in accordance with Section 7.1. Purchaser shall be entitled to conduct a Phase I environmental property assessment with respect to the Assets that satisfies the basic assessment requirements set forth under the current American Society for Testing and Material Standard Practice for Phase I environmental property assessments (Designation E1527-00) but such Phase I environmental property assessment shall not include on-site testing of any non-scope issues as such issues are described in Article 12 of such Standard Practice.  The Phase I and Purchaser’s other diligence activities shall be conducted at the sole cost and expense of Purchaser, and shall be subject to the indemnity provisions of Section 4.4.  Seller or its designee shall have the right to accompany Purchaser and Purchaser’s representatives whenever they are on site on Assets and also to collect split test samples if any are collected.  Notwithstanding anything herein to the contrary, Purchaser shall not have access to, and shall not be permitted to conduct any environmental due diligence (including any Phase I environmental property assessments) with respect to any Assets where Seller or its Affiliates do not have the authority to grant access for such due diligence (provided, however, Seller and its Affiliates shall use their commercially reasonable efforts to obtain permission from any other Person to allow Purchaser and Purchaser’s representatives such access and as long as Seller and its Affiliates have exercised such commercially reasonable efforts, Seller shall have no liability to Purchaser for failure to obtain any such other Person’s permission).  Provided, however, in the event Purchaser requests access to an Asset for the purpose of conducting such due diligence, if Purchaser is denied reasonable access for any reason, Purchaser may exclude the affected Asset from the Assets to be transferred and conveyed to Purchaser at Closing and the Purchase Price to be paid at Closing shall be reduced by the Allocated Value of such Retained Asset pursuant to Section 7.7(b). In the event that Purchaser’s Phase I environmental property assessments identify actual or potential “recognized environmental concerns,” then Purchaser may request Seller’s consent to conduct additional Phase II environmental property assessments, which consent shall not be unreasonably withheld.  The additional Phase II environmental property assessment procedures relating to any additional investigation shall be submitted to Seller in a Phase II environmental property assessment plan, and shall be reasonable based on the recognized environmental concerns identified by the Phase I assessment.  Thereafter, Seller may, in its sole discretion, approve said Phase II environmental property assessment plan, in whole or in part, and Purchaser shall not have the right to conduct any activities set forth in such plan until such time that Seller has approved such plan in writing, provided, however, if such plan is not approved, Purchaser may terminate this Agreement and such termination shall be considered a termination by mutual consent under Section 10.1(a) of this Agreement.  Any such approved Phase II environmental property assessment plan shall be performed in accordance with this Article 4 and in compliance with all Laws. Purchaser shall maintain, and shall cause its officers, employees, representatives, consultants and advisors to maintain, all information obtained by Purchaser pursuant to any Phase I or other due diligence activity as strictly confidential until the Closing occurs, unless disclosure of any facts discovered through such Phase I is required under applicable Law. Purchaser shall provide Seller with a copy of the final version of all environmental reports prepared by, or on behalf of, Purchaser with respect to any Phase I or other environmental due diligence activity conducted on the Properties. In the event that any necessary disclosures under applicable Laws are required with respect to matters discovered by any Phase I or other environmental due diligence conducted by, for or on behalf of Purchaser, Purchaser agrees that Seller shall be the responsible party for disclosing such matters to the appropriate Governmental Bodies; provided that, if Seller fails to promptly make such disclosure and Purchaser or any of its Affiliates is legally obligated to make such disclosure, such Person shall have the right to fully comply with such legal obligation. 

Section 4.2       NORM, Wastes and Other Substances.  Purchaser acknowledges that the Assets have been used for the exploration, development, and production of Hydrocarbons and that there may be petroleum, produced water, wastes, or other substances or materials located in, on or under the Properties or associated with the Assets. Equipment and sites included in the Assets may contain Hazardous Materials, including NORM. NORM may affix or attach itself to the inside of wells, materials, and equipment as scale, or in other forms. The wells, materials, and equipment located on the Properties or included in the Assets may contain Hazardous Materials, including NORM. Hazardous Materials, including NORM, may have come in contact with various environmental media, including without limitation, water, soils or sediment. Special procedures may be required for the assessment, remediation, removal, transportation, or disposal of environmental media and Hazardous Materials, including NORM, from the Assets.

Section 4.3       Environmental Defects.  If, as a result of its investigation pursuant to Section 4.1, Purchaser determines that with respect to the Assets, there exists a violation of an Environmental Law (other than with respect to NORM) (in each case, an "Environmental Defect"), then on or prior to 5:00 pm C.D.T. on September 20, 2010 (the "Environmental Claim Date"), Purchaser may notify Seller in writing of such Environmental Defect (an "Environmental Defect Notice"). FOR ALL PURPOSES OF THIS AGREEMENT, PURCHASER SHALL BE DEEMED TO HAVE WAIVED ANY ENVIRONMENTAL DEFECT WHICH PURCHASER FAILS TO ASSERT AS AN ENVIRONMENTAL DEFECT BY AN ENVIRONMENTAL DEFECT NOTICE RECEIVED BY SELLER ON OR BEFORE THE ENVIRONMENTAL CLAIM DATE. To be effective, each such notice shall set forth (i) a description of the matter constituting the alleged Environmental Defect, (ii) the Units/Warranty Wells and associated Assets affected by the Environmental Defect, (iii) the estimated Lowest Cost Response to eliminate the Environmental Defect in question (the "Environmental Defect Amount"), and (iv) supporting documents reasonably necessary for Seller to verify the existence of the alleged Environmental Defect and the Environmental Defect Amount.  Seller shall have the right, but not the obligation, to cure any Environmental Defect before Closing or, provided that the parties shall have agreed to the general plan of remediation with respect to such Environmental Defect and the time period by which such remediation shall take place, after Closing. If Seller disagrees with any of Purchaser's assertions with respect to the existence of an Environmental Defect or the Environmental Defect Amount, Purchaser and Seller will attempt to resolve the dispute prior to Closing. If the dispute cannot be resolved within ten (10) days of the first meeting of Purchaser and Seller, either party may submit the dispute to an environmental consultant approved in writing by Seller and Purchaser that is experienced in environmental corrective action at oil and gas properties in the relevant jurisdiction and that shall not have performed professional services for either party or any of their respective Affiliates during the previous three years (the "Independent Expert"). The Independent Expert may elect to conduct the dispute resolution proceeding by written submissions from Purchaser and Seller with exhibits, including interrogatories, supplemented with appearances by Purchaser and Seller, if necessary, as the Independent Expert may deem necessary. After the parties and Independent Expert have had the opportunity to review all such submissions, the Independent Expert shall call for a final, written offer of resolution from each party. The Independent Expert shall render its decision within fifteen (15) Business Days of receiving such offers by selecting one or the other of the offers, or by crafting a decision that represents a compromise between the two offers. The Independent Expert may not award damages, interest or penalties to either party with respect to any matter. The decision of the Independent Expert shall be final and binding upon both parties, without right of appeal. Seller and Purchaser shall each bear its own legal fees and other costs of presenting its case to the Independent Expert. Each party shall bear one-half of the costs and expenses of the Independent Expert. The parties shall adjust the Purchase Price to reflect the Environmental Defect Amounts, as agreed by the parties or as determined by the Independent Expert, for all uncured Environmental Defects; provided, that notwithstanding anything to the contrary, (a) in no event shall there be any adjustments to the Purchase Price for any individual uncured Environmental Defect for which the Environmental Defect Amount therefor does not exceed $15,000 ("Individual Environmental Threshold"); and (b) in no event shall there be any adjustments to the Purchase Price for any uncured Environmental Defect unless the aggregate Environmental Defect Amount attributable to all such Environmental Defects, taken together with the aggregate Title Defect Amounts attributable to all uncured Title Defects, exceeds the Aggregate Defect Deductible, after which point Purchaser shall be entitled to adjustments to the Purchase Price or other remedies only with respect to uncured Title Defects and uncured Environmental Defects where the aggregate Title Defect Amounts and Environmental Defect Amounts attributable thereto are in excess of such Aggregate Defect Deductible. To the extent the Independent Expert fails to determine any disputed Environmental Defect Amounts prior to Closing, then, within ten (10) days after the Independent Expert delivers written notice to Purchaser and Seller of his award with respect to an Environmental Defect Amount, Seller shall pay to Purchaser the amount, if any, so awarded by the Independent Expert.  Notwithstanding anything to the contrary contained herein, if the Lowest Cost Response of an affected Asset equals or exceeds the Allocated Value of such Asset, either Seller or Buyer may exclude the affected Asset from the Assets to be transferred and conveyed to Purchaser at Closing and the Purchase Price to be paid at Closing shall be reduced by the Allocated Value of such Retained Asset pursuant to Section 7.7(b).

Section 4.4       Inspection Indemnity.  PURCHASER HEREBY AGREES TO DEFEND, INDEMNIFY, RELEASE, PROTECT, SAVE AND HOLD HARMLESS THE SELLER INDEMNIFIED PERSONS FROM AND AGAINST ANY AND ALL LOSSES ARISING OUT OF OR RELATING TO ANY DUE DILIGENCE ACTIVITY CONDUCTED BY PURCHASER OR ITS AGENTS, WHETHER BEFORE OR AFTER THE EXECUTION OF THIS AGREEMENT, REGARDLESS OF FAULT. The indemnity obligation set forth in this Section 4.4 shall survive the Closing or termination of this Agreement.

 

 

Section 5.1       Generally.

 

(a)           Any representation or warranty qualified "to the knowledge of Seller" or "to Seller's knowledge" or with any similar knowledge qualification is limited to matters within the Actual Knowledge of the officers and employees of Seller who have direct responsibility for the Assets and who have the titles specified on Schedule 5.1.  "Actual Knowledge" for purposes of this Agreement means information actually personally known by the individuals who have the titles specified on Schedule 5.1.

 

(b)           The disclosure of any fact or item on any Schedule shall, should the existence of such fact or item be relevant to any other Schedule, be deemed to be disclosed with respect to that other section to the extent the text of such disclosure is made in a manner that makes the relevance to the other Schedule reasonably apparent.  Subject to the foregoing provisions of this Section 5.1, the disclaimers and waivers contained in Sections 11.9 and 11.10 and the other terms and conditions of this Agreement, Seller represents and warrants to Purchaser the matters set out in the remainder of this Article 5.

 

Section 5.2       Existence and Qualification.  Petrohawk Properties is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Texas and is duly qualified to do business as a foreign limited partnership where the Assets it owns are located.  KCS is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to do business as a foreign limited liability company where the Assets it owns are located.  HFS is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Oklahoma and is duly qualified to do business as a foreign limited liability company where the Assets it owns are located.

 

Section 5.3       Power.  Petrohawk Properties has the limited partnership power to enter into and perform this Agreement and consummate the transactions contemplated by this Agreement.  KCS has the limited liability company power to enter into and perform this Agreement and consummate the transactions contemplated by this Agreement.  HFS has the limited liability company power to enter into and perform this Agreement and consummate the transactions contemplated by this Agreement.

Section 5.4       Authorization and Enforceability.  The execution, delivery and performance of this Agreement, and the performance of the transactions contemplated hereby, have been duly and validly authorized by all necessary  limited partnership or limited liability company (as applicable) 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, and at the Closing such documents will constitute, the valid and binding obligations of Seller, enforceable against Seller 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).

 

Section 5.5       No Conflicts.  Subject to compliance with the Preference Rights and Transfer Requirements set forth in Schedule 5.13, the execution, delivery and performance of this Agreement by Seller, and the transactions contemplated by this Agreement will not (i) violate any provision of the certificate of partnership or articles of organization, partnership agreement, limited liability agreement of Petrohawk Properties, KCS or HFS, (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, indenture, license or agreement to which Seller is a party or which affect the Core Assets, (iii) violate any judgment, order, ruling, or decree applicable to Seller as a party in interest, (iv) violate any Laws applicable to Seller or any of the Assets, except for (a) rights to consent by, required notices to, filings with, approval or authorizations of, or other actions by any Governmental Body where the same are not required prior to the assignment of the related Asset or they are customarily obtained subsequent to the sale or conveyance thereof and (b) any matters described in clauses (ii), (iii) or (iv) above which would not have a Material Adverse Effect on Seller.

 

Section 5.6       Liability for Brokers' Fees.  Purchaser shall not directly or indirectly have any responsibility, liability or expense, as a result of undertakings or agreements of Seller or its Affiliates, 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.  With respect to the Assets and Seller's or any of its Affiliates' ownership, operation, development, maintenance, or use of any of the Assets, except as set forth in: (i)  Schedule 5.7(a), no proceeding, arbitration, action, suit, pending settlement, or other legal proceeding of any kind or nature before or by any Governmental Body (each, a "Proceeding," and collectively "Proceedings") (including any take-or-pay claims) to which Seller or any of its Affiliates is a party and which relates to the Assets is pending or, to Seller's knowledge, threatened against Seller or any of its Affiliates; (ii)  Schedule 5.7(b), to Seller's knowledge, no Proceeding or investigation to which Seller is not a party which relates to the Assets is pending or threatened.

 

Section 5.8       Taxes and Assessments.

 

(a)           With respect to all Taxes related to the Assets, (i) 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 by Seller with respect to such Taxes have been timely filed with the appropriate Governmental Body in all jurisdictions in which such Tax Returns are required to be filed; and (ii) such Tax Returns are true and correct in all material respects, and (iii) all Taxes due with respect to such Tax Returns have been paid, except those being contested in good faith.

(b)           With respect to all Taxes related to the Assets, except as set forth on Schedule 5.8, (i) there are not currently in effect any extensions or waivers of any statute of limitations of any jurisdiction regarding the assessment or collection of any such Tax; (ii) there are no Proceedings against the Assets or Seller by any Governmental Body; and (iii) there are no Tax liens on any of the Assets except for liens for Taxes not yet due.

 

Section 5.9       Compliance with Laws.  Except as disclosed on Schedule 5.9, the Assets are, and the ownership, operation, development, maintenance, and use of any of the Assets are, in material compliance with the provisions and requirements of all Laws of all Governmental Bodies having jurisdiction with respect to the Assets, or the ownership, operation, development, maintenance, or use of any of the Assets, except where the failure to so comply would not have a Material Adverse Effect on Seller. Notwithstanding the foregoing, Seller makes no representation or warranty, express or implied, under this Section 5.9 relating to any Environmental Liabilities or Environmental Law, except that Seller has not received any written notice from any Governmental Body of any current alleged violation of Environmental Liability or Environmental Law affecting the Assets.

 

Section 5.10     Contracts.  All Material Contracts relating to the Core Assets have been identified among the Contracts listed in Schedule 1.2(d).  Seller is in compliance and, to Seller's knowledge, all counterparties are in compliance under all Material Contract relating to the Core Assets, except as disclosed on Schedule 5.10(a) and except for such non-compliance as would not, individually or in the aggregate, have a Material Adverse Effect on Seller.  "Material Contracts" means any Contract (other than any joint operating agreement included within the Contracts) that could reasonably be expected to result in aggregate payments by Purchaser with respect to the Assets of more than $500,000 during the current or any subsequent year (based solely on the terms thereof and without regard to any expected increase in volumes or revenues) and which requires more than ninety (90) days notice by Purchaser in order to terminate the Contract.

 

Section 5.11     Payments for Hydrocarbon Production.  Except as set forth on Schedule 5.11,

 

(a)           to the knowledge of Seller, all rentals, royalties, excess royalty, overriding royalty interests, Hydrocarbon production payments, and other payments due and payable by Seller to overriding royalty interest holders and other interest owners under or with respect to the Core Assets and the Hydrocarbons produced therefrom or attributable thereto, have been paid, or if not paid, (i) are being contested in good faith in the normal course of business; or (ii) Seller is otherwise entitled to withhold payment while resolving questions of title, obtaining division orders, or resolving other matters in the ordinary course of business; and

 

(b)           Seller is not obligated under any contract or agreement for the sale of gas from the Core 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 5.12     Governmental Authorizations.  To Seller's knowledge, except as disclosed on Schedule 5.12, Seller has obtained and is maintaining all material 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 as currently owned and operated (excluding Governmental Authorizations required by Environmental Law).  To Seller's knowledge, except as disclosed in Schedule 5.7(a), Schedule 5.7(b) or Schedule 5.12, (i) Seller has operated the Seller Operated Assets in all material respects in accordance with the conditions and provisions of such Governmental Authorizations, and (ii) no written notices of material violation have been received by Seller, and no Proceedings are pending or, to Seller's knowledge, threatened in writing that might result in any material modification, revocation, termination or suspension of any such Governmental Authorizations or which would require any material corrective or remediation action by Seller.

 

Section 5.13     Preference Rights and Transfer Requirements.  To Seller’s knowledge, Schedule 5.13 sets forth all Preference Rights and Transfer Requirements applicable to the Core Assets, including Preference Rights and Transfer Requirements contained in easements, rights-of-way or equipment leases included in the Core Assets. None of the Core Assets, or any portion thereof, is subject to any Preference Right or Transfer Requirement which may be applicable to the transactions contemplated by this Agreement, except for Preference Rights and Transfer Requirements as are set forth on Schedule 5.13.

 

Section 5.14     Payout Balances.  To Seller's knowledge, Schedule 5.14 contains a complete and accurate list of the status of any "payout" balance for the Wells and Units listed on Exhibit A-1 which are Core Assets that are subject to a reversion or other adjustment at some level of cost recovery or payout (or passage of time or other event other than termination of a Lease by its terms).

 

Section 5.15     Outstanding Capital Commitments.  As of the date hereof, there are no outstanding AFEs or other commitments to make capital expenditures which are binding on the Assets and which Seller reasonably anticipates will individually require expenditures by the owner of the Assets after the Effective Time in excess of $50,000 other than those shown on Schedule 5.15.

 

Section 5.16     Imbalances.  To Seller's knowledge, Schedule 5.16 accurately sets forth in all material respects all of Seller's Imbalances arising with respect to the Core Assets and, except as disclosed in Schedule 5.16, (i) no Person is entitled to receive any material portion of Seller's Hydrocarbons produced from the Core Assets or to receive material cash or other payments to "balance" any disproportionate allocation of Hydrocarbons produced from the Core 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 material quantities of gas or to pay any material penalties or other material amounts, in connection with the violation of any of the terms of any gas contract or other agreement with shippers with respect to the Core Assets, and (iii) Seller is not obligated to pay any material penalties or other material payments under any gas transportation or other agreement as a result of the delivery of quantities of gas from the Wells which constitute a portion of the Core Assets in excess of the contract requirements. Except as set forth on Schedule 5.16, Seller has not received, or is not obligated to receive, prepayments (including payments for gas not taken pursuant to "take or pay" arrangements) for any of Seller's share of the Hydrocarbons produced from the Properties which constitute a portion of the Core Assets, as a result of which the obligation exists to deliver Hydrocarbons produced from the Properties which constitute a portion of the Core Assets after the Effective Time without then or thereafter receiving payment therefor.

Section 5.17     Condemnation.  There is no actual or, to Seller’s knowledge, threatened taking (whether permanent, temporary, whole or partial) of any part of the Properties by reason of condemnation or the threat of condemnation.

 

Section 5.18     Bankruptcy.  There are no bankruptcy, reorganization, or receivership proceedings pending against, or, to Seller's knowledge, being contemplated by or threatened against Seller.

 

Section 5.19     Production Allowables.  Seller has not received written notice that there has been any change proposed in the production allowables for any Wells which constitute a portion of the Core Assets listed on Exhibit A-1.

 

Section 5.20     Foreign Person.  Seller is not a "foreign person" within the meaning of Section 1445 of the Code.

 

Section 5.21     Collective Bargaining Agreements.  Neither Seller or any of its Affiliates has agreed to recognize any labor union or other collective bargaining representative of, nor has any labor union or other collective bargaining representative been certified as the exclusive bargaining representative of, any individual employed or otherwise engaged by Seller (or an Affiliate thereof) who is primarily involved in the business associated with the Assets.

 

 

Purchaser represents and warrants to Seller the following:

 

Section 6.1       Existence and Qualification.  Purchaser is a limited partnership duly formed, validly existing and in good standing under the laws of the state of its formation; and Purchaser is duly qualified to do business as a foreign limited partnership in every jurisdiction in which it is required to qualify in order to conduct its business, except where the failure to so qualify would not have a Material Adverse Effect on Purchaser; and Purchaser is or will be as of Closing duly qualified to do business as a foreign limited partnership in the respective jurisdictions where the Assets are located.

 

Section 6.2       Power.  Purchaser has the power to enter into and perform this Agreement and consummate the transactions contemplated by this Agreement.

Section 6.3       Authorization and Enforceability.  The execution, delivery and performance of this Agreement, and the performance of the transaction contemplated hereby, have been duly and validly authorized by all necessary limited partnership 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, and at the Closing such documents will constitute, the valid and binding obligations of Purchaser, enforceable against Purchaser 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).

 

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 organizational documents of Purchaser, (ii) result in a 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 applicable to Purchaser or any of its assets, or (v) require any filing with, notification of or consent, approval or authorization of any Governmental Body or authority, except any matters described in clauses (ii), (iii), (iv) or (v) above which would not have a Material Adverse Effect on Purchaser or the transactions contemplated hereby.

 

Section 6.5       Liability for Brokers' Fees.  Seller shall not directly or indirectly have any responsibility, liability or expense, as a result of undertakings or agreements of Purchaser or its Affiliates, 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.  There are no Proceedings pending, or to the Actual Knowledge of Purchaser, threatened in writing before any Governmental Body against Purchaser or any Affiliate of Purchaser which are reasonably likely to impair materially Purchaser's ability to perform its obligations under this Agreement.

 

Section 6.7       Limitation and Independent Evaluation.  Except for the representations and warranties expressly made by Seller in Article 5 of this Agreement, or in the Conveyance or in any certificate furnished or to be furnished to Purchaser pursuant to this Agreement, Purchaser represents and acknowledges that (i) there are no representations or warranties, express, statutory or implied, as to the Assets or prospects thereof, and (ii) Purchaser has not relied upon any oral or written information provided by Seller. Without limiting the generality of the foregoing, subject to Section 5.7, Purchaser represents and acknowledges that Seller has made and will make no representation or warranty regarding any matter or circumstance relating to Environmental Laws, Environmental Liabilities, the release of materials into the environment or protection of human health, safety, natural resources or the environment or any other environmental condition of the Assets. Purchaser further represents and acknowledges that it is knowledgeable of the oil and gas business and of the usual and customary practices of producers such as Seller, and that it has retained and taken advice concerning the Assets and transactions herein from advisors and consultants which are knowledgeable about the oil and gas business, and that is aware of the risks inherent in the oil and gas business.  Except as set forth in this Agreement, Purchaser represents that it has relied solely on the basis of its own independent evaluation and due diligence investigation of the Assets, and its own independent evaluation of the business, economic, legal, tax, or other consequences of this transaction including its own estimate and appraisal of the extent and value of the oil, natural gas, and other reserves attributable to the Properties.

Section 6.8       SEC Disclosure.  Purchaser is acquiring the Assets for its own account for use in its trade or business, and not with a view toward or for sale associated with any distribution thereof, nor with any present intention of making a distribution thereof within the meaning of the Securities Act and applicable state securities laws.

 

Section 6.9       Bankruptcy.  There are no bankruptcy, reorganization or receivership proceedings pending against, or, to the knowledge of Purchaser, being contemplated by, or threatened against Purchaser.  Purchaser is, and will be immediately after giving effect to the transaction contemplated by this Agreement, solvent.

 

Section 6.10     Qualification.  As of Closing, Purchaser will be qualified to own and assume operatorship of federal and state oil, gas and mineral leases in all jurisdictions where the Assets to be transferred to it are located, and the consummation of the transactions contemplated in this Agreement will not cause Purchaser to be disqualified as such an owner or operator. To the extent required by the applicable Law, as of the Closing, Purchaser will have lease bonds, area-wide bonds or any other surety bonds as may be required by, and in accordance with, such state or federal regulations (or other requirements) governing the ownership and operation of the Assets.

 

Section 6.11     Financing.  Purchaser has sufficient cash, available lines of credit or other sources of immediately available funds to enable it to pay the Purchase Price to Seller at Closing.

 

 

Section 7.1       Access.  From the date of this Agreement until the Closing, Seller shall cooperate with Purchaser and provide Purchaser and its representatives, consultants and advisors, reasonable access to the Assets and access to the Records, 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 legally binding on Seller. Purchaser shall conduct all such inspections and other information gathering described above only (i) (x) during regular business hours and (y) during any weekends and after hours requested by Purchaser that can be reasonably accommodated by Seller, and (ii) in a manner which will not unduly interfere with Seller's operation of the Assets. All information obtained by Purchaser and its representatives pursuant to this Section 7.1 shall be subject to the terms of that certain confidentiality agreement dated July 8, 2010 (the "Confidentiality Agreement"), by and between Seller and Purchaser and any applicable Contracts or Surface Contracts, in accordance with their terms.

Section 7.2       Government Reviews.  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 Body as to which such filings, applications or negotiations are necessary or appropriate in the consummation of the transactions contemplated hereby and (b) provide such information as each may reasonably request to make such filings, prepare such applications and conduct such negotiations. Each party shall cooperate with and use all commercially 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, as applicable, 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 any material respect.

 

(c)           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, then such breach shall be considered not to have occurred for all purposes of this Agreement. No such notification shall affect the representations or warranties of the parties or the conditions to their respective obligations hereunder.

(d)           There shall be no breach of the covenants in this Section as a result of a party's failure to report a breach of any representation or warranty or a failure to perform or observe any covenant or agreement of which it had knowledge if the party subject to the breach or failure also had knowledge thereof prior to Closing.

Section 7.4       Letters-in-Lieu; Assignments; Operatorship.

 

(a)           Seller will execute on the Closing Date letters in lieu of division and transfer orders relating to the Assets, on forms prepared by Seller and reasonably satisfactory to Purchaser, to reflect the transaction contemplated hereby.

 

(b)           Seller will prepare and execute, and Purchaser will execute, on the Closing Date, all assignments necessary to convey to Purchaser all federal and state Leases in the form as prescribed by the applicable Governmental Body and otherwise acceptable to Purchaser and Seller.

SELLER:
PETROHAWK PROPERTIES, LP
By:	P-H Energy, LLC, its general partner
	By:	/s/ David S. Elkouri
		David S. Elkouri
		Executive Vice President-General Counsel and Secretary
KCS RESOURCES, LLC
By:	/s/ David S. Elkouri
	David S. Elkouri
	Executive Vice President-General Counsel and Secretary
HAWK FIELD SERVICES, LLC
By:	/s/ David S. Elkouri
	David S. Elkouri
	Executive Vice President-General Counsel and Secretary
PURCHASER
EV PROPERTIES, L.P.
By:	/s/ Mark A. Houser
Name:	Mark A. Houser
Title:	President and Chief Operating Officer