EXHIBIT 10.2
December 8, 2003
Pannonian Energy, Inc.
14 Inverness Drive East,
Building H, Suite 236
Englewood, CO 80112
Attention: King Grant, Chief Financial Officer
Ladies and Gentlemen:
This letter confirms our understanding and agreement (the "Agreement")
that Pannonian Energy, Inc. (together with its subsidiaries and affiliates, the
"Company") has engaged Red Oak Capital Management LLC ("Red Oak"), during the
duration of this Agreement, to act as the Company's project financing arranger
with respect to financing drilling programs, as further defined hrein, in the
Company's oil and gas leasehold interests covering lands within portions of
Carbon, Duschene and Uintah Counties, Utah ("Contract Area"). The Contract Area
will be further described in an exhibit to the Joint Value Enhancement Agreement
("JVEA") that the Company proposes to enter into with M-I, LLC ("M-I"), Nabors
Drilling USA, LP ("Nabors"), Schlumberger Technology Corporation
("Schlumberger") and, collectively with M-I and Nabors, the "Service Providers")
and one or more partnerships to be formed by Red Oak ("Investment Partnership").
Capitalized terms used in this Agreement and not otherwise defined have the
meaning assigned to such terms in the JVEA.
The Company has identified two Evaluation Wells and, pursuant to the
JVEA, ten additional Project Wells will be identified as the initial Bundle
("Bundle"). Thereafter, in accordance with the JVEA, each additional Bundle will
consist of 10 Project Wells. Pursuant to the JVEA, the Service Providers will
render services to the Company in connection with the development of the
Contract Area as described in the Field Development Plan in exchange for net
profits or similar interests in the Bundles ("NPIs"). In connection with the
drilling of each Project Well, the Company will incur obligations to third
parties other than the Service Providers. Red Oak proposes to arrange for the
Investment Partnership to agree to purchase NPIs on the same terms as the
Service Providers in an amount sufficient to fund up to 35% of the AFE for each
Project Well included in Bundles in which the Investment Partnership elects to
participate ("Financing").
The Investment Partnership will be an "accredited investor" as such
term is defined in Regulation D under the Securities Act of 1933, as amended
("Securities Act"). Red Oak will comply with applicable securities laws in
forming the Investment Partnership and otherwise in connection with the
transactions contemplated hereunder.
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The Company has agreed to grant Red Oak the exclusive right to arrange
all Financing needed for each Bundle during the term of the JVEA. Red Oak will
provide the Company with a written commitment executed by the Investment
Partnership ("Investment Election") stating that the Investment Partnership is
willing to invest an aggregate of $35,000,000 or more ("Election Amount") in the
Contract Area within 120 days ("Due Diligence Period") after the execution of
this Agreement. The Investment Partnership will not be required to invest more
than 35% of the AFE for a particular Bundle and the Investment Partnership's
obligation to fund pursuant to the Investment Election will be subject to
receipt of satisfactory conveyance documents, legal opinions and other customary
conditions, and satisfaction of the conditions to funding in the JVEA.
As compensation for the services to be provided by Red Oak hereunder,
the Company agrees to pay Red Oak a non-refundable fee of $10,000 per month,
payable in advance on the first day of each month ("Work Fee"). In addition, the
Company agrees to pay the Investment Partnership a facilities fee equal to 3.25%
of the Election Amount ("Facilities Fee"). The Work Fee shall be payable by the
Company until the execution of the Investment Election by the Investment
Partnership; provided, however, that the maximum amount of Work Fee payable by
the Company shall be $30,000. All amounts previously paid as Work Fees will be
subtracted from the amount of the Facilities Fee. The Facilities Fee will be
payable out of cash advances made to the Company by the Investment Partnership
pursuant to the JVEA as follows:
- The Investment Partnership will reduce the amount of each advance to
the Company by 3.25% which amounts shall be retained by the Investment
Partnership as Facilities Fees.
If the Company terminates the JVEA or other agreements with Red Oak or
the Investment Partnership regarding the Financing following the acceptance by
the Company of an Investment Election or sells all or substantially all of the
properties that constitute the Contract Area, and the Investment Partnership has
not defaulted in its obligations under the JVEA or other agreements with the
Company, notwithstanding the prior paragraph, the Company shall immediately pay
to the Investment Partnership an amount equal to the difference, if any, between
$1,137,500 and the sum of all of the Facilities Fee paid prior to such
termination or sale.
The Company agrees to provide to Red Oak all financial and other
information regarding the development of the Contract Area reasonably requested
by Red Oak and reasonably available to the Company for the purpose of Red Oak's
assignment hereunder. The Company agrees and represents that (except to the
extent it notifies Red Oak) information furnished to Red Oak pursuant to this
Agreement shall be accurate and complete in all material respects at the time
provided, and that if such information becomes inaccurate, incomplete, or
misleading during the term of Red Oak's engagement hereunder, the Company shall
notify Red Oak in writing. In performing its services hereunder, Red Oak shall
be entitled to rely upon and assume, without assuming any responsibility for
independent verification, the accuracy and completeness of all information that
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is publicly available and of all information that has been furnished to it by
the Company or otherwise reviewed by Red Oak, and Red Oak shall not assume any
responsibility or have any liability therefor. Red Oak shall have no obligation
to conduct any valuation or appraisal of any assets or liabilities.
Any financial advice or services rendered by Red Oak pursuant to this
Agreement is intended solely for the benefit and use of the Company, is not on
behalf of, and shall not confer rights or remedies upon, any person other than
the Company, and may not be used or relied upon for any other purpose. No such
financial advice or services may be disclosed publicly in any manner without Red
Oak's prior written approval unless required by law, and all such advice will be
treated by the Company as confidential. Red Oak understands that Gasco Energy,
Inc., the Company's parent company, may be required to describe this transaction
in its filings under the Securities Act and the Securities Exchange Act of 1934,
as amended, and may be required to file this Agreement and certain other
documents executed in connection with this Agreement as exhibits to such
filings.
In order to coordinate our efforts with respect to possible Financing,
during the Due Diligence Period neither the Company nor any representative
thereof (other than Red Oak) will initiate discussions regarding a transaction
to finance obligations to third parties who render services or provide goods in
connection with the development of the Contract Area, other than the Service
Providers, using, in whole or in part, directly or indirectly, the sale of NPIs.
The Company agrees to reimburse Red Oak promptly upon request from time
to time for all reasonable, documented expenses (including, without limitation,
travel, communication, legal and document production expenses) incurred by Red
Oak in performing its engagement hereunder, whether or not any Investment
Elections are accepted by the Company; provided, however, that such reimbursable
expenses shall not exceed a total of $5,000 without the prior consent of the
Company. The Company also agrees to indemnify Red Oak and certain other entities
and persons as set forth on Exhibit A attached hereto.
In addition, if this Agreement is terminated by the Company prior to
the end of the Due Diligence Period, the Company will pay to Red Oak an early
termination fee of $50,000, in addition to the reimbursement of expenses
provided for in the preceding paragraph and any amounts of the Work Fee
previously paid or payable to Red Oak.
This Agreement will automatically terminate upon the payment of the
full amount of the Facilities Fee due to the Investment Partnership and may be
terminated by either the Company or Red Oak at any time upon giving written
notice to the other party. No such termination will affect (i) Red Oak's or the
Investment Partnership's rights to receive fees accrued prior to such
termination or to receive reimbursement of its expenses as set forth above, (ii)
the rights of Red Oak or any other Indemnified Person (as defined in Exhibit A
hereto) to receive indemnification and contribution, or (iii) the Company's
confidentiality obligations hereunder. In addition, if at any time and from time
to time prior to the expiration of 12 months after a termination of this
Agreement by the Company that is not a Permitted Termination, the Company
finances obligations to third parties who render services or provide goods in
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connection with the development of the Contract Area, other than the Service
Providers, using, in whole or in part, directly or indirectly, the sale of NPIs.
(or similar payments or interests in properties), the Company will promptly pay
Red Oak, in full, the fees contemplated by this Agreement and payable to Red Oak
and the Investment Partnership as if Red Oak delivered and funded an Investment
Election in the amount so financed. For purposes of this Agreement, a "Permitted
Termination" is a termination of this Agreement by the Company following the
expiration of the Due Diligence Period if Red Oak does not provide Investment
Elections sufficient to provide the full amount of the Financing for the initial
or subsequent Bundles prior to the expiration of the Due Diligence Period or if
the Investment Partnership fails to perform any of its obligations under any
such Investment Election.
This Agreement (including Exhibit A hereto) and any claims related
directly or indirectly to this Agreement shall be governed by Texas law.
Very truly yours,
RED OAK CAPITAL MANAGEMENT LLC
By: /s/ James M. Whipkey
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Name: J.M. Whipkey
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Title: Managing Director
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Accepted as of the date first above written:
PANNONIAN ENERGY, INC.
By: /s/ W. King Grant
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Name: W. King Grant
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Title: CFO & EVP
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Exhibit A
Pannonian Energy, Inc. (the "Company") agrees to indemnify and hold
harmless Red Oak Capital Management LLC ("Red Oak") and its affiliates, and the
respective directors, officers, agents, and employees of Red Oak and its
affiliates and each other entity or person, if any, controlling Red Oak or any
of its affiliates (Red Oak and each such entity or person being referred to as
an "Indemnified Person") from and against any losses, claims, demands, damages,
or liabilities (or actions or proceedings in respect thereof) of any kind
relating to or arising out of activities performed or services furnished
pursuant to the attached engagement letter between the Company and Red Oak (the
"Agreement"), the transactions contemplated thereby or Red Oak's role in
connection therewith, and to reimburse Red Oak and any other Indemnified Person
for all expenses (including, without limitation, reasonable fees and
disbursements of counsel) reasonably incurred by Red Oak or any such other
Indemnified Person in connection with investigating, preparing, or defending any
investigative, administrative, judicial, or regulatory action or proceeding in
any jurisdiction, whether or not in connection with pending or threatened
litigation to which Red Oak (or any other Indemnified Person) or the Company or
any of its securityholders is a party, in each case as such expenses are
incurred or paid. The Company will not, however, be responsible for any such
losses, claims, demands, damages, liabilities, or expenses of any Indemnified
Person to the extent they are determined by final and nonappealable judgment of
a court of competent jurisdiction to have resulted from actions taken or omitted
to be taken by such Indemnified Person in violation of this Agreement, in bad
faith or from such Indemnified Person's gross negligence or willful misconduct.
The Company also agrees that no Indemnified Person shall have any liability
(whether direct or indirect, in contract, tort or otherwise) to the Company or
any of its securityholders or creditors for or in connection with the Agreement,
any transactions contemplated thereby or Red Oak's role or services in
connection therewith, except to the extent that any such liability for losses,
claims, demands, damages, liabilities or expenses incurred by the Company is
determined by final and nonappealable judgment of a court of competent
jurisdiction to have resulted from actions taken or omitted to be taken by such
Indemnified Person in violation of this Agreement, in bad faith or from such
Indemnified Person's gross negligence or willful misconduct.
Upon receipt by an Indemnified Person of actual notice of a claim,
action or proceeding against such Indemnified Person in respect of which
indemnity may be sought hereunder; such Indemnified Person shall promptly notify
the Company with respect thereto. In addition, an Indemnified Person shall
promptly notify the Company after any action is commenced (by way of service
with a summons or other legal process giving information as to the nature and
basis of the claim) against such Indemnified Person in respect of which
indemnity may be sought hereunder. In any event, failure to notify the Company
shall not relieve the Company from any liability which the Company may have on
account of this indemnity or otherwise, except to the extent the Company shall
have been materially prejudiced by such failure. The Company will, if requested
by any Indemnified Person, assume the defense of any litigation or proceeding in
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respect of which indemnity may be sought hereunder, including the employment of
counsel reasonably satisfactory to Red Oak and the payment of the fees and
expenses of such counsel, in which event, except as provided below, the Company
shall not be liable for the fees and expenses of any other counsel retained by
any Indemnified Person in connection with such litigation or proceeding. In any
such litigation or proceeding the defense of which the Company shall have so
assumed, any Indemnified Person shall have the right to participate in such
litigation or proceeding and to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Person
unless (i) the Company and such Indemnified Person shall have mutually agreed in
writing to the retention of such counsel, or (ii) the named parties to any such
litigation or proceeding (including any impleaded parties) include the Company
and such Indemnified Person and representation of both parties by the same
counsel would, in the opinion of counsel to such Indemnified Person, be
inappropriate due to actual or potential differing interests between the Company
and such Indemnified Person. The Company shall not be liable for any settlement
of any litigation or proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment against an Indemnified
Person, the Company agrees to indemnify the Indemnified Person from and against
any loss or liability by reason of such settlement or judgment. The Company will
not settle any claim, action or proceeding in respect of which indemnity may be
sought hereunder without Red Oak's written consent, which shall not be
unreasonably withheld, provided that if Red Oak withholds such consent, the
maximum liability of the Company under the indemnification agreement shall be
limited to the amount of such proposed settlement.
If the foregoing indemnification is for any reason unavailable to an
Indemnified Person (other than by reason of the terms hereof, the Company shall
contribute to the losses, claims, demands, damages, liabilities and expenses
referred to herein that are paid or payable by such Indemnified Person in such
proportion as is appropriate to reflect the relative economic interests of the
Company, on the one hand, and of Red Oak, on the other hand, in the transactions
contemplated by the Agreement (whether or not consummated) and any other
relevant equitable considerations. For purposes of this paragraph, the relative
interests of the Company, on the one hand, and Red Oak, on the other hand, in
the transactions contemplated by the Agreement shall be deemed to be in the same
proportion as (a) the total value paid or received or contemplated to be paid or
received by the Company in the transactions contemplated by the Agreement
(whether or not any such transaction is consummated), bears to (b) the fees paid
or to be paid to Red Oak and its affiliates under the Agreement; provided,
however, that to the extent permitted by applicable law, in no event shall Red
Oak or any other Indemnified Person be required to contribute an aggregate
amount for all Indemnified Persons in excess of the aggregate fees actually paid
to Red Oak and its affiliates for financial advisory services under the
Agreement.
The provisions contained in this Exhibit IV shall be in addition to any
liability which the Company may otherwise have to Red Oak, shall not be limited
by any rights of Red Oak or any other Indemnified Person that they may otherwise
have, shall be governed by the laws of the State of Texas, and shall remain
operative and in full force and effect regardless of the expiration or any
termination of the Agreement or of Red Oak's engagement thereunder.
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