Coulter Limited Partnership Agreement dated January 10, 2012

This Coulter Limited Participation Agreement ("Agreement") is made and entered into as of January 10th, 2012, by and between La Sal Energy, LLC, a Texas limited liability company ("La Sal"), and Torchlight Energy Resources, Inc., a Nevada corporation ("Torchlight"). La Sal and Torchlight are hereinafter referred to collectively as "Parties" and individually as a "Party".

 

WHEREAS, La Sal is the owner of (i) a One Hundred Percent (100%) Working Interest and a Seventy-Five Percent (75%) Net Revenue Interest (the "La Sal Interest") in and to those certain Oil, Gas and Mineral Leases attached as "Exhibit A" hereto (collectively, the "Lease") upon which the following well exists: John Coulter #1-R drilled to 11,406 TD (the "Well"); and

 

WHEREAS, the Parties desire to set forth the terms and conditions pursuant to which Torchlight can acquire an interest in the Well;

 

Now THEREFORE, in consideration of the mutual benefits and obligations hereunder, the Parties agree as follows:

 

1.             Definitions :

 

1.1           "Closing" means the later of the date on which La Sal and Torchlight sign this Agreement or Torchlight initiates a wire transfer to La Sal's account in the amount of the Purchase Price defined in Paragraph 2.1 below, which transfer shall initiate no later than 2 days after signature of this Agreement.

 

1.2           "Production" means completion of operations on the Well resulting in first gas sold following Closing.

 

2.             Closing Obligations; Torchlight Options:

 

2.1           At Closing, Torchlight will pay La Sal $350,000.00 (the "Purchase Price") by cashier's check.

 

2.2           In exchange for the Purchase Price, La Sal will assign and convey to Torchlight a Thirty-Four Percent (34%) Working Interest and a Thirty-Four Percent (34%) Net Revenue Interest in the La Sal Interest in the Well pursuant to an Assignment of Oil and Gas Interests and Bill of Sale ("Assignment") substantially in the form attached hereto as "Exhibit B".

 

2.3          Torchlight Option No. 1. At Closing and thereafter, Torchlight may pay up to an additional $75,000 in 3 tranches ("Option") in exchange for La Sal's assignment and conveyance to Torchlight of up to an additional Six Percent (6%) interest in the La Sal Interest in the Wells pursuant to an Assignment(s): (i) $15,000 paid at Closing as a deposit towards acquisition of an additional Two Percent (2%) interest ("Option 1"); (ii) $25,000 paid within 45 days after Closing for an additional Two Percent (2%) interest ("Option 2"); and (iii) $35,000 paid within 75 days after Closing for a final additional Two Percent (2%) interest and to complete acquisition of the initial additional Two Percent (2%) interest ("Option 3"). If any Option payment deadline is missed, Torchlight may not exercise its Option with respect to any remaining 2% tranches. If Torchlight declines to exercise Option 2 or Option 3, then Torchlight shall either pay to La Sal within three (3) days thereafter the remaining $10,000 to complete Option 1, or La Sal shall return to Torchlight the $15,000 deposit to Torchlight. Torchlight shall not acquire any additional Two Percent (2%) interests until a tranche is paid for in full. For example, until the entire $25,000 is paid by Torchlight for Option 1, La Sal shall remain the owner of the Two Percent interest associated with Option1 and shall be entitled to all benefits and revenue therefrom. The first revenue paid with respect to any Two Percent (2%) interest after acquisition by Torchlight shall be apportioned pro rata between the Parties based on the length of ownership during that revenue period. Any amount of the $75,000 that Torchlight may pay to La Sal is for La Sal's sole benefit and is not for use in the Wells' operations unless La Sal in its sole discretion so decides.

2.4          Torchlight Option No. 2. Torchlight also may purchase up to an additional Five Percent (5%) interest in the La Sal Interest in the Wells pursuant to an Assignment(s) in full percentage points at $10,000 per point, the total number of full percentage points times $10,000 per point totaling the "Purchase Price". Torchlight must exercise this option to purchase within 30 days from the first date of Production by notifying La Sal in writing of the number of points, if any, Torchlight will acquire and by paying La Sal (i) fifty percent of the Purchase Price within thirty (30) days and (ii) the remaining fifty percent of the Purchase Price within 60 days from election.

La Sal has right to keep the points, or sell the points in full or part to a third party, if Torchlight has not made its election in writing to La Sal within the 30 days and paid as described above. La Sal will assign and convey percentage points purchased by Torchlight pursuant to an Assignment pro rata in accordance with each fifty percent payment. Until receipt of payment, however, La Sal shall remain the owner of the additional full percentage points and shall be entitled to all benefits and revenue therefrom.

2.5           The rights granted by La Sal to Torchlight pursuant to the terms hereof are without warranty, either express or implied. Upon request, La Sal will furnish to Torchlight, at Torchlight's cost, such abstracts or evidence of title as it has in its files, but there shall be no obligation on the part of La Sal to purchase new or supplemental abstracts or to do any curative work in connection with title to the Well or the Lease. Any Assignment shall be subject to the reservations, obligations to reassign, depth limitations and other terms and provisions set forth in this Agreement. Torchlight acknowledges that it has completed and is satisfied with its due diligence review of the Well and has no reservations with respect to the same and that due diligence is not a condition precedent to the Closing.

3.          Performance Obligations:

3.1           Operator Position. Evergreen Energy, Inc. is the current Operator. La Sal will at all times have sole authority to appoint the Operator under the Joint Operating Agreement (" JOA" ), and all JOAs will include a provision to this effect.

 

3.2           Drilling and Costs. Upon Closing, the Parties will cause the Operator to frac the John Coulter #1-R well. The Parties anticipate that the initial Purchase Price will fund the fracing, but if there is a shortfall, the Parties shall pay for additional costs out of pocket in accordance with their actual percentage interests in the Well.

 

 

4.1           Each Party shall deliver at Closing certified resolutions of its Board of Directors approving this Agreement.

 

4.2           All of the Parties shall execute, acknowledge, and deliver or cause to be executed, acknowledged and delivered such instruments and take such other actions as may be necessary or advisable to carry out their obligations under this Agreement and under any document, certificate, or other instrument delivered pursuant hereto.

 

 

5.1           Upon Production, the net revenue split shall be 80% to Torchlight and 20% to La Sal until net revenue is an accumulated $437,500.

 

5.2           While net revenue split is 80%/20%, expenses above the $350,000 initiall paid in shall be split according to actual percentage interests in the Well.

 

 

5.3          After net revenue is an accumulated $437,500, net revenue shall be split according to the actual percentage interests in the Well.

 

6.            Remedies on Default.

 

6.1          If Closing does not occur on or before January 16, 2012, then this Agreement shall be null and void and neither Party shall be liable to the other for failure to close.

 

7.            Additional Terms.

 

7.1          Confidential Information: The Parties agree that all geophysical, geological, engineering, technical, and production tests or other data obtained from the Well shall be the property of the Parties to this Agreement and shall be maintained as confidential information for a period of two (2) years from the termination of this Agreement, unless all parties agree in writing to a lesser period of time. However, any Party may disclose without the consent of the other Party to this Agreement such confidential information (a) to an outside party with which it is engaged in a bona fide negotiation to contract for an oil and/or gas sale contract; (b) to a governmental agency when required by such agency; (c) to reputable financial institutions or similar entities in connection with a bona fide financial transaction; (d) to accredited engineering firms for the purpose of evaluation on a confidential basis; (e) to a parent, subsidiary, and affiliated companies of a Party; and (f) to reputable and financially responsible third parties with whom a Party is engaged in a bona fide effort to (1) sell all or a portion of the property subject to this Agreement, (2) effect a merger or consolidation or other transaction in which such third party proposes to acquire all or a controlling share of the stock in a Party hereto, or (3) purchased all or substantially all of the assets of a Party hereto or affiliated of a Party hereto, provided that any third party permitted access to confidential data shall agree in writing not to communicate such information to anyone and shall further agree to make no use of such information adverse to the Parties hereto within the area covered by such information during the period of time that such information remains confidential hereunder.

 

7.2          Publicity: Neither Party shall distribute any information or photographs concerning the Lease, the Well, the rights and obligations under this Agreement or the JOA to the press or other media without the approval of the other Party, which shall not be unreasonably withheld.

 

7.3           Assignment: Torchlight shall not assign its interest in the Well to a third party without first offering said interest to La Sal with the same terms and conditions as the assigning Party's bona fide written offer to or from such third party, and subject in all cases to the prior written consent of the other Party, which consent shall not be unreasonably withheld, and any such assignment shall only be made in compliance with the terms of the JOA and any consent requirements of the Lease, and shall further expressly provide that the terms and conditions of this Agreement and the JOA shall extend to and be binding upon the assigning Party's successors, legal representatives and assigns. Such right of first offering and consent to assignment shall not be required on any assignment such as a mortgage or volumetric production payment or similar arrangement given to secure an indebtedness of the assigning Party.

 

 

8.1           Torchlight represents and warrants to La Sal as follows:

 

a.           Torchlight is validly existing and, as applicable, in good standing under the laws of the jurisdiction of its incorporation. Torchlight has the power and authority to carry on its business as now conducted and to enter into and to carry out the terms of this Agreement.

 

b.           Torchlight is duly qualified or licensed to conduct business as a corporation, as applicable, in the jurisdiction in which the Well are located.

 

c.           The execution and delivery of this Agreement by Torchlight and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action.

 

d.           Torchlight is not a party to, or in any way obligated under, nor does Torchlight have any knowledge of, any contact or outstanding claim for the payment of any broker's or finder's fee which Torchlight is obligated to pay in connection with the origin, negotiation, execution, or performance of this Agreement.

 

e.           No authorization, consent or approval of any third party is required to be obtained by Torchlight for the execution and delivery of this Agreement or the consummation by Torchlight of the transaction contemplated hereunder, and except for such authorizations, consents, approval or filings which, if not obtained or made (as applicable) would not, individually or in the aggregate, have a material adverse effect.

 

f.           There are no claims, disputes or litigation pending or, to the Torchlight's knowledge, threatened, in which Torchlight is or may be a party affecting the execution and delivery of this Agreement by Torchlight or the consummation of the transactions contemplated hereby by Torchlight. There are no bankruptcy, reorganization or arrangements pending, being contemplated by or, to Torchlight's knowledge, threatened against Torchlight.

 

8.2          La Sal represents and warrants to Torchlight as follows:

 

a.          La Sal is validly existing and, as applicable, in good standing under the laws of the jurisdiction of its formation. La Sal has the power and authority to carry on its business as now conducted and to enter into and to carry out the terms of this Agreement.

 

b.          La Sal is duly qualified or licensed to conduct business as a corporation, as applicable, in the jurisdiction in which the Well are located.

 

c.          The execution and delivery of this Agreement by La Sal and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action.

 

d.          No authorization, consent or approval of any third party is required to be obtained by Torchlight for the execution and delivery of this Agreement or the consummation by Torchlight of the transaction contemplated hereunder, and except for such authorizations, consents, approval or filings which, if not obtained or made (as applicable) would not, individually or in the aggregate, have a material adverse effect.

 

e.          There are no claims, disputes or litigation pending or, to La Sal's knowledge, threatened, in which La Sal is or may be a party affecting the execution and delivery of this Agreement by La Sal or the consummation of the transactions contemplated hereby by La Sal. There are no bankruptcy, reorganization or arrangements pending, being contemplated by or, to La Sal's knowledge, threatened against La Sal.

 

f.          To La Sal's knowledge, all necessary governmental permits, licenses, approvals, consents, certificates and other authorizations required by applicable laws with regard to the ownership or operations of the Well have been obtained and maintained in effect and no violations exist in respect of such permits, licenses, approvals, consents, certificates or authorizations except for such permits, licenses, approvals, consents, certificates or authorizations the absence of which are not material.

 

9.           Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision in such jurisdiction, and this Agreement shall be reformed, construed and enforced in such jurisdiction to the fullest extent permitted to give effect to the intention of the parties, and as if such invalid, illegal or unenforceable provision had never been contained herein.

10.          No Partnership. Nothing herein is intended to create or shall be construed as creating a partnership or employment relationship between the Parties. It is expressly agreed that the relationship between the Parties shall not constitute a partnership, joint venture, agency or other unincorporated organization with respect to this Agreement. The Agreement and the exchange of consideration and compensation hereunder shall not be construed as a right to share in the net profits of another Party, and no Party shall have an obligation to share losses hereunder.

 

11.          Governing Law; Jurisdiction. THE CONSTRUCTION, PERFORMANCE, EXECUTION AND ENFORCEMENT OF THIS AGREEMENT AND ANY DISPUTE, WHETHER IN CONTRACT OR TORT, SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. THE PARTIES AGREE AND STIPULATE THAT THE SOLE AND EXCLUSIVE VENUE FOR ANY CAUSE OF ACTION WHATSOEVER NATURE ARISING HEREUNDER IS HEREBY FIXED IN HARRIS COUNTY, TEXAS. THE CONSTRUCTION, PERFORMANCE, EXECUTION AND ENFORCEMENT OF THIS AGREEMENT, THE ASSIGNMENT HEREUNDER, AND THE JOA SHALL BE DETERMINED IN ACCORDANC E WITH THE LAWS OF THE STATE OF TEXAS, EXCLUSIVELY IN HARRIS COUNTY, TEXAS.

 

12.          Notices. All notices and communications required or permitted under this Agreement shall be in writing, and any communication or delivery hereunder shall be deemed to have been duly made when personally delivered to the individual indicated below, or if mailed or sent by facsimile transmission (provided such facsimile is confirmed by proof of delivery), when received by the party charged with such notice and addressed as follows:

13.          Entire Agreement. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof, being the limited participation in the Well. This Agreement supersedes all prior written agreements, arrangements, communications and understandings and all prior and contemporaneous oral agreements, arrangements, communications and understandings. No term or provision of this agreement may be amended, discharged or modified in any respect except in writing signed by the parties hereto. In the event of conflict between the terms of this Agreement and the JOA, this Agreement shall control.

 

14.          No Presumption Against Drafting Party. Each Party acknowledges that it has been, or has the opportunity to be, represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the drafting Party has no application and is expressly waived.

 

15.          Counterpart Execution. This Agreement may be executed in any number of counterparts and each counterparty so executed shall have the same force and effect as an original instrument; however, this agreement shall not be effective unless and until signed by all the parties.