EXHIBIT 2.1
NET PROFITS PURCHASE AGREEMENT
This NET PROFITS PURCHASE AGREEMENT dated as of August 6, 2004 (the
"Agreement") is made by Gasco Production Company (formerly known as Pannonian
Energy, Inc.), a Delaware corporation (the "Company"), Red Oak Capital
Management, LLC, a Delaware limited liability company ("Red Oak"), MBG, LLC, a
Delaware limited liability company ("MBG"), and MBGV Partition, LLC, a Delaware
limited liability company ("MBG Partition" and, collectively with MBG and, to
the extent provided in Section 2.5(e), Red Oak, "NPI Purchaser"). Company, NPI
Purchaser and Red Oak may be referred to individually as a "Party" and
collectively as the "Parties."
WHEREAS, Schlumberger Technology Corporation, a Texas corporation
("Schlumberger"), M-I, LLC, a Delaware limited liability company ("M-I"), Nabors
Drilling USA, LP, a Delaware limited partnership ("Nabors"), Pool Well Services
Co., a Delaware corporation ("Pool"), Red Oak and the Company are parties to
that certain Joint Value Enhancement Agreement entered into as of January 16,
2004, as amended (the "JVEA");
WHEREAS, the Parties intend for NPI Purchaser to constitute an "Investment
Partnership" as that term is defined in the Engagement Letter dated December 8,
2003 between the Company and Red Oak attached as Exhibit D to the JVEA
("Engagement Letter"); and
WHEREAS, NPI Purchaser desires to commit funds to purchase a Net Profits
Interests in the Offered Bundles pursuant to the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises, conditions and
agreements herein contained, the sufficiency of which are hereby acknowledged,
the Parties agree as follows:
ARTICLE I - Definitions
1.1 Defined Terms and References. Capitalized terms used in this Agreement
but not otherwise defined herein have the meanings given assigned to such terms
in the JVEA. For purposes of this Agreement, unless the context otherwise
requires, the following terms shall have the following meanings:
"Accepted Bundle" shall have the meaning assigned in Section 2.2(c).
"Accepted Well" shall have the meaning assigned in Section 2.2(c).
"AFE" means an Authority for Expenditure prepared for the purpose of
estimating the costs to be incurred in connection with a proposal to drill,
deepen, plug back, complete, recomplete, sidetrack or rework an Offered
Well.
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"Affiliate" means, with respect to any Person, any other Person
controlling or controlled by or under common control with such Person, with
the concept of control in such context meaning the possession, directly or
indirectly, of the power to direct the management and policies of another,
whether by ownership of voting securities, contract or otherwise. With
respect to a corporation, partnership or limited liability company, control
is conclusively deemed to exist where a Person owns fifty percent (50%) or
more of the voting stock in such corporation or of the voting interest as a
partner in such partnership or as a member of such limited liability
company.
"Agreed Rate" means the prime rate as published in the Wall Street
Journal plus one (1) percentage point.
"Agreement" has the meaning assigned to such term in the Preamble.
"Approved Independent Engineer" means Netherland, Sewell & Associates,
Inc., Ryder Scott Company, L.P. or such other independent petroleum reserve
engineer acceptable to NPI Purchaser and Company.
"Bundle" means a specific group of Project Wells approved by the
Executive Committee and the Oilfield Services Parties pursuant to Section
3.3.2 of the JVEA, consisting of the first 12 Project Wells (the two
Evaluation Wells and the next ten Project Wells that are completed
thereafter, whether as producers or dry holes) in the first Bundle; the
next 10 Project Wells that are completed, whether as producers or dry
holes, in the second Bundle, and successive groups of the following 10
Project Wells that are completed, whether as producers or dry holes, in
each of the following Bundles; provided, however, that if for any reason
the full ten Project Wells are not drilled in the final Bundle, then the
final Bundle shall consist only of such lesser number of Project Wells as
were actually commenced.
"Business Day" means any day other than a Saturday, a Sunday, or a day
on which the United States Postal Service is not scheduled to deliver
ordinary first class mail.
"Company" shall have the meaning assigned to such term in the
Preamble, and includes the Company's successors and assigns.
"Contract Area" means the oil and gas leasehold interests covering
lands within portions of Carbon, Duchesne and Uintah Counties, Utah, as
depicted in Exhibit A of the JVEA.
"Conveyance" means the Conveyance of a Net Profits Interest made by
the Company to each NPI Purchaser, substantially in the form of Exhibit A
to this Agreement (appropriately completed).
"Effective Date" shall have the meaning assigned in the Conveyance.
"Engagement Letter" shall have the meaning assigned to such term in
the Recitals.
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"Environmental Laws" means all laws, rules, regulations, statutes,
ordinances, decrees or orders of any governmental entity, tribal entity,
quasi-governmental entity, or other governmental instrumentality relating
to (a) the control of any potential pollutant or protection of the air,
water or land, (b) solid, gaseous or liquid waste generation, handling,
treatment, storage, disposal, discharge, release, emission or
transportation, and (c) exposure to hazardous, toxic or other substances
alleged to be harmful, and includes without limitation, (1) the terms and
conditions of any license, permit, approval, or other authorization by any
governmental or tribal entity, and (2) judicial, administrative, or other
regulatory decrees, judgments, and orders of any governmental or tribal
entity. The term "Environmental Laws" shall include, but not be limited to
the following statutes and the regulations promulgated thereunder: the
Clean Air Act, 42 U.S.C. ss.7401 et seq., the Clean Water Act, 33 U.S.C.
ss.1251 et seq., the Resource Conservation Recovery Act, 42 U.S.C. ss.6901
et seq., the Superfund Amendments and Reauthorization Act, 42 U.S.C.
ss.11011 et seq., the Toxic Substances Control Act, 15 U.S.C. ss.2601 et
seq., the Water Pollution Control Act, 33 U.S.C. ss.1251, et seq., the Safe
Drinking Water Act, 42 U.S.C. ss.300f et seq., the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C.
ss.9601 et seq., and any state, county, or local regulations similar
thereto.
"Evaluation Wells" means the Lytham Federal #22-22-9-19 and the
Federal #32-31-9-19 wells completed by Schlumberger pursuant to that
certain Joint Value Enhancement Agreement by and between the Company and
Schlumberger dated November 3, 2003.
"Executive Committee" means the committee established pursuant to
Section 3.4 of the JVEA consisting of two members appointed by the Company
and two members appointed by Schlumberger.
"Good and Defensible Title" shall mean such record title, or equitable
title under the terms of a valid and enforceable farmout agreement pursuant
to which Company will earn an assignment of record title (hereafter
"Equitable Title"), as shall render to the holder thereof throughout the
life of a Subject Interest burdened by the Net Profits Interest, without
suspension, reduction or termination, a percentage share of Hydrocarbon
Production from each such Subject Interest, and proceeds attributable
thereto, of not less than the Net Revenue Interest(s) set forth in Schedule
1 of the Conveyance or the Memorandum and Security Agreement, as
applicable, and shall obligate the holder thereto to bear a percentage of
the costs and expenses attributable to the Subject Interest of not greater
than the working interest(s) therefor set forth in Schedule 1 of the
Conveyance or the Memorandum and Security Agreement, as applicable, (unless
there is a proportionate increase in the Net Revenue Interest attributable
thereto), that, except for Permitted Encumbrances, is free and clear of all
liens, security interests, pledges, collateral assignments, charges,
Hydrocarbon sales or processing contracts or options, options or calls on
production, preferential purchase rights or options, restrictions,
conditions, reservations, encumbrances, encroachments, defaults,
irregularities, deficiencies, and defects.
"Hazardous Substances" shall mean any substances defined as or
included in the definition of "hazardous substances," "hazardous wastes,"
"hazardous materials," "extremely hazardous wastes," "restricted hazardous
waters," "toxic substances," "toxic pollutants," "contaminants" or
"pollutants," or words of similar import, under any Environmental Law and
any other substance exposure to which is regulated under any Environmental
Law.
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"Hydrocarbon Production" means all crude oil, natural gas, condensate
and other liquid and gaseous hydrocarbons produced, saved and sold from the
Contract Area.
"Initial Bundle" shall have the meaning assigned in Section 2.5(a).
"Initial Closing" shall have the meaning assigned in Section 4.1.
"Initial Closing Date" shall have the meaning assigned in Section 4.1.
"Initial Well Purchase Price Payment" shall have the meaning assigned
in Section 2.5(a).
"Invoice Date" shall have the meaning assigned in Section 2.5(b).
"JVEA" shall have the meaning assigned to such term in the Recitals.
"Laws" shall have the meaning assigned in Section 5.1(f).
"MBG" shall have the meaning assigned to such term in the Preamble,
and includes MBG's successors and assigns.
"MBGV Partition" shall have the meaning assigned to such term in the
Preamble, and includes MBGV Partition's successors and assigns.
"Memorandum and Security Agreement" shall have the meaning assigned in
Section 3.2.
"M-I" shall have the meaning assigned to such term in the Preamble,
and includes M-I's successors and assigns.
"Nabors" shall have the meaning assigned to such term in the Preamble,
and includes Nabors' successors and assigns.
"Net Profits Documents" means this Agreement, the JVEA, the Purchase
Supplements, each Conveyance and supplement thereto, and each Security
Agreement and supplement thereto.
"Net Profits Interest" means a net profits interest conveyed pursuant
to the Conveyance and computed in accordance with the terms of the JVEA.
"Net Revenue Interest or NRI" means Company's interest in Hydrocarbon
Production from a tract (expressed as a decimal or a percentage), after
deduction of all landowner royalties, overriding royalties and other
burdens payable out of such production that are shown in the public records
on the Effective Date and as shown on Schedule 1 of the Conveyance or the
Memorandum and Security Agreement, as applicable, (but without regard to
the net profits interests contemplated by the JVEA).
"NPI Payments" has the meaning assigned in Section 3.1.
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"NPI Purchaser" shall have the meaning assigned to such term in the
Preamble, and includes NPI Purchaser's successors and assigns.
"Offered Bundle" means a Bundle consisting of 10 Offered Wells, or, in
the case of the first Bundle, 12 Offered Wells, and in the case of the last
Bundle, such number of Offered Wells as are included in such Bundle.
"Offered Well" means the Evaluation Wells and each Project Well that
is included in a Bundle approved pursuant to Article 3.3.2 of the JVEA.
"Oilfield Services Parties" means M-I, Nabors, Pool and Schlumberger.
"Party" or "Parties" shall have the meaning assigned to such term in
the Preamble.
"Permitted Encumbrances" means:
(i) the contracts, agreements, burdens, encumbrances and other
matters set forth as being applicable to certain of the Company's
interests set forth in Schedule 1.1, but only for so long as Company
is not in default thereunder or in breach thereof;
(ii) liens for taxes or assessments which are not yet delinquent
or which (in the case of taxes hereafter coming due) are being
contested in good faith by appropriate proceedings and for the payment
of which Company has reserved adequate funds;
(iii) liens under operating agreements, pooling orders and
unitization agreements, and mechanics' and materialmen's liens, with
respect to obligations incurred in the ordinary course of business
which are not yet due or which (in the case of obligations hereafter
coming due) are being contested in good faith by appropriate
proceedings for the payment of which Company has reserved adequate
funds; and
(iv) easements, rights-of-way, zoning, similar restrictions and
other similar encumbrances incurred in the ordinary course of business
which do not in any case materially detract from the value or use of
the property subject thereto.
The listing of Permitted Encumbrances herein is made for the purpose of
limiting the warranties of Company made herein, and it is not intended that the
listing herein of any Permitted Encumbrances shall subordinate any Net Profits
Interest to such Permitted Encumbrance or otherwise cause the Conveyance, or any
rights of NPI Purchaser hereunder to be made subject to, or encumbered by, such
Permitted Encumbrance.
"Person" means any individual, governmental agency, corporation,
partnership, joint venture, trust, estate, unincorporated organization, or
other entity or organization.
"Pool" shall have the meaning assigned to such term in the Preamble,
and includes Pool's successors and assigns.
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"Production Unit" means a tract of land of at least 40 acres, unless
the Utah Board of Oil, Gas and Mining has approved smaller drilling or
spacing units for the area, in each case specified as to both area and
depths and meeting the following conditions:
(i) Company owns Good and Defensible Title (subject only to
Permitted Encumbrances) to an undivided fee or leasehold interest in
and to the oil, gas, and all other liquid and gaseous hydrocarbons
which may be produced from such tract, including the right to produce,
save and market production from any well located thereon.
(ii) Such tract satisfies all drilling and spacing regulations of
the Utah Division of Oil, Gas & Mining, the Bureau of Land Management,
if applicable, or any other governmental authority having
jurisdiction.
(iii) Company's Net Revenue Interest shall be not less than
75%, proportionally reduced if Company owns less than 100%
working interest, in the respective tract.
"Project Well" means a well commenced under the terms of the JVEA in
the Wasatch, Mesaverde, Castlegate or Blackhawk formations, starting at a
depth below the Green River formation and ending at a depth equivalent to
the top of the Mancos formation.
"Purchase Price Payment" means a payment to be made by NPI Purchaser
to Company under Section 2.1 in consideration of the Conveyance covering an
Offered Well.
"Purchase Supplement" means a supplemental document substantially in
the form attached hereto as Exhibit B.
"Red Oak" shall have the meaning assigned to such term in the
Preamble, and includes Red Oak's successors and assigns.
"Red Oak Payment" shall have the meaning assigned in Section 2.5(e).
"Reserve Report" shall have the meaning assigned in Section 5.1(r).
"Schlumberger" shall have the meaning assigned to such term in the
Preamble, and includes Schlumberger's successors and assigns.
"Security Agreement" shall have the meaning assigned in Section 3.2.
"Subject Interests" has the meaning assigned in the Conveyance.
"Subsequent Closing" shall have the meaning assigned in Section 4.1.
"Subsequent Closing Date" shall have the meaning assigned in Section
4.1.
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"Third Party" means a Person who is not a Party or an Affiliate of a
Party.
"Title Claim" shall have the meaning assigned in Section 6.1(c).
"Total Well Construction and Completion Costs" means the actual
charges to the Company, in its capacity as working interest owner in
connection with the drilling, testing and completing of a Project Well;
provided, however, that no portion of Total Well Construction and
Completion Costs shall ever duplicate amounts that have been included in
the Production Costs (as defined and calculated in the JVEA) or
Recompletion Costs (as defined and calculated in the JVEA) for that same
well.
ARTICLE II -- Purchase and Sale
2.1. Agreement of Purchase and Sale. Upon the terms and conditions of this
Agreement, Company agrees to sell a Net Profits Interest in and to each Offered
Well included in an Offered Bundle accepted by NPI Purchaser hereunder, and NPI
Purchaser agrees to purchase the same from Company and to pay the Purchase Price
Payment as the purchase price therefor.
2.2 Offering of Wells and Bundles. (a) Within 10 days of approval by the
Executive Committee of a Bundle, the Company shall provide to NPI Purchaser the
following with respect to the Offered Wells and Offered Bundles:
(i) the AFE approved by the Executive Committee for each Offered
Well in the Offered Bundle;
(ii) the following information regarding each Offered Well in an
Offered Bundle: well location, working interests, commercial terms,
whether the Offered Well is a lease exploration well or an earnings
well to acquire additional acreage, and a plat of the wells; and
(iii) subject to confidentiality obligations, any evaluation
materials provided to the Executive Committee such as drilling
opinions, well logs, geological reports, production date, cores,
cuttings, reserve reports, and maps.
(b) Each such presentation of an Offered Bundle by Company shall be
deemed an offer and request by Company to NPI Purchaser that each Offered
Well in the Offered Bundle be made subject to the Conveyance in
consideration of NPI Purchaser's payment of a Purchase Price Payment
specified by Company equal to 25% of the documented and verifiable Total
Well Construction and Completion Costs for each Offered Well in the Offered
Bundle, subject to Section 2.5 below. NPI Purchaser has no obligation to
accept any such offer, and NPI Purchaser may in its discretion either
accept such offer at such Purchase Price Payment, or decline such offer.
NPI Purchaser shall have 25 days to notify Company in writing of its
acceptance or rejection of an Offered Bundle and the failure to so notify
the Company by such time shall be deemed a rejection of such Offered
Bundle. If NPI Purchaser rejects an Offered Bundle, Company shall be free
to pursue other investors with respect to such Offered Bundle and NPI
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Purchaser shall have no right, title or interest with respect to such
Offered Bundle or any future Bundles.
(c) After NPI Purchaser has accepted an Offered Bundle (an "Accepted
Bundle"), Offered Wells included in such Accepted Bundle (each an "Accepted
Well") cannot be changed without the written consent of the NPI Purchaser.
2.3. Closing Procedures. Whenever NPI Purchaser becomes obligated to pay a
Purchase Price Payment with regard to an Accepted Bundle:
(a) Company and NPI Purchaser shall in connection therewith execute
and deliver a Purchase Supplement, which shall specify the amount of the
Purchase Price Payment which they have agreed upon for each Accepted Well
in the Accepted Bundle, the amount of the Purchase Price Payment which the
Company desires to receive on the Subsequent Closing Date, the amount of
the aggregate 25% Net Profits Interest to be conveyed to each NPI
Purchaser, the Subject Interests and related Production Units to be covered
by the Conveyance and which shall contain any exceptions to representations
and warranties, or additional representations, warranties, covenants or
other matters, as Company and NPI Purchaser may agree upon; and
(b) Company and NPI Purchaser shall prepare a Conveyance and a
Security Agreement or, if Company owns only Equitable Title to the Subject
Interest, then a Memorandum and Security Agreement, which shall contain a
legal description for the Subject Interests, and the related Production
Units that make up each Accepted Well in the Accepted Bundle, and set out
Company's Net Revenue Interest and working interest therein and the amount
of any Purchase Price Payments which Company will concurrently receive. The
Conveyance or Memorandum and Security Agreement, as the case may be, for
each Accepted Well shall be filed in the county real property records in
the county where each Accepted Well is located prior to the commencement of
operations for drilling such Accepted Well.
2.4. Use of Proceeds. Unless otherwise specified in the Purchase Supplement
for such Accepted Bundle, the Company will use the Purchase Price Payment paid
by NPI Purchaser for each Accepted Well in an Accepted Bundle solely to pay any
unpaid Total Well Construction and Completion Costs (billed or yet to be billed)
related to such Accepted Well.
2.5. Payment of Purchase Price Payments. (a) The Purchase Price Payment for
the Evaluation Wells and the first ten Project Wells ("Initial Bundle") is
$7,675,877.00. At the Initial Closing, NPI Purchaser shall make a Purchase Price
Payment of $1,328,427.00 for the Evaluation Wells and the first six Project
Wells of $3,461,959.00 ("Initial Well Purchase Price Payment"), and in
consideration of such Purchase Price Payment, to be paid at the Initial Closing,
NPI Purchaser shall receive an aggregate 25% Net Profits Interest in and to the
Initial Bundle. NPI Purchaser shall deliver the Initial Well Purchase Price
Payment by wire transfer of immediately available funds to such accounts or
account as the Company may designate in writing to the NPI Purchaser prior to
the Initial Closing. A Conveyance covering the Initial Bundle shall be executed
and delivered to NPI Purchaser at the Initial Closing. The Initial Well Purchase
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Price Payment shall be reduced by an amount equal to all NPI Payments that would
have been due and payable to the NPI Purchaser through the Initial Closing Date
assuming that the Conveyance covering the Initial Bundle had been made to the
NPI Purchaser effective on the date of commencement of production of each
Accepted Well included in the Initial Bundle.
(b) The amount of the Purchase Price Payment agreed to be paid
pursuant to the applicable Purchase Supplement shall be billed to the NPI
Purchaser by the Company as final AFE's for each Accepted Well are approved
by the Company on or before the 15th calendar day of each month (or, if
such day is not a Business Day, the next succeeding Business Day) (the
"Invoice Date"). NPI Purchaser will make each payment of a Purchase Price
Payment (or any portion thereof) within 5 Business Days of the Invoice Date
by wire transfer of immediately available funds to such banks and bank
accounts as the Company shall specify in the applicable Purchase
Supplement. As the Company accrues actual Total Well Construction and
Completion Costs for an Accepted Well, the Company will, on the Invoice
Date following such accrual of actual costs, provide the NPI Purchaser of a
reconciliation of amounts reflected in the AFE for each Accepted Well for
which the NPI Purchaser has previously made a Purchase Price Payment and
the actual Total Well Construction and Completion Costs for such Accepted
Well. To the extent that the actual Total Well Construction and Completion
Costs for an Accepted Well exceed the amounts reflected in the AFE, the NPI
Purchaser will, subject to Section 2.5(c) pay its portion of the excess;
and, to the extent that the actual Total Well Construction and Completion
Costs for an Accepted Well are less than the amounts reflected in the AFE,
the Company will refund to the NPI Purchaser the amounts overpaid. The NPI
Purchaser and the Company agree that any such overpayments or underpayments
will be reflected on the invoice provided to the NPI Purchaser on the next
succeeding Invoice Date that follows 90 days after first production from an
Accepted Well by decreasing, or increasing, the amount billed to the NPI
Purchaser. Not withstanding the preceding sentence, any of the Parties may
elect in writing, in lieu of offsetting any overpayment or underpayment
against amounts billed on the next Invoice Date, to have the Company refund
any overpayments, or the NPI Purchaser to make any underpayments, within 5
Business Days of the Invoice Date on which such overpayments or
underpayments are reflected by wire transfer of immediately available funds
to such banks and bank accounts as the Company, or the NPI Purchaser, shall
specify in the applicable Purchase Supplement or in such written request.
(c) In addition to the limitations on the amount Red Oak is required
to expend on any Accepted Bundle pursuant to Section 4.3.1 of the JVEA,
which limits shall also be deemed to limit the maximum aggregate Purchase
Price Payments (net of any NPI Payments as described in the JVEA) that NPI
Purchaser is required to make with respect to any Accepted Bundle, NPI
Purchaser shall not be obligated to pay Total Well Construction and
Completion Costs that exceed the lesser of (i) 130% of the estimates
reflected on the AFE's for an Accepted Well, or (ii) $3,500,000.00. If the
Total Well Construction and Completion Costs for an Accepted Bundle exceed
the limits specified in Section 4.3.1 of the JVEA or the Total Well
Construction and Completion Costs for an Accepted Well exceed the estimates
reflected on the respective AFE by more than 30% or are in excess of
$3,500,000.00, and NPI Purchaser elects not to fund any portion of such
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excess, then such event, NPI Purchaser's aggregate Net Profits Interest in
such Accepted Bundle or Accepted Well shall be less than 25%, and NPI
Purchaser's Percentage in that Accepted Well or Accepted Bundle shall be
determined in accordance with Section 1.23 of the JVEA.
(d) Under no circumstances shall NPI Purchaser be liable to Company or
any Third Party for the payment of any portion of the Total Well
Construction and Completion Costs. It is the agreement of the Parties
hereto that NPI Purchaser shall (to the extent otherwise specified
hereunder) purchase the Net Profits Interest by making Purchase Price
Payments in amounts which may be determined, among other things, by
reference to documented and verifiable Total Well Construction and
Completion Costs, but that Company (and not NPI Purchaser) is responsible
for paying all the Total Well Construction and Completion Costs.
(e) The amount of all Purchase Price Payments paid to the Company
shall be reduced by 3.25% as provided in the Engagement Letter ("Red Oak
Payment"). The Red Oak Payment shall be paid by MBG and MBGV Partition
directly to Red Oak by (i) wiring 2.25% of the Purchaser Price Payment to
the account specified by Red Oak at the time the Purchase Price Payment is
paid to the Company, and (ii) directing the Company to reduce MBG and MBGV
Partition's collective 25% Net Profits Interest to a 24.75% Net Profits
Interest and to convey, pursuant to the Conveyance, a .25% Net Profits
Interest to Red Oak. For all other purposes of this Agreement, including
calculating the Net Profits Interest, the Red Oak Payment will be deemed to
constitute part of the Purchase Price Payments. Red Oak will be entitled to
the Conveyance of the Net Profits Interest specified in this Section 2.5(e)
and the rights of an NPI Purchaser under Sections 3.1, 3.2, and 6.1(a),
(c), (d), (e), (g), (h), (i), and (k), through (p) of this Agreement, and
subject to the obligations of an NPI Purchaser under Section 3.3 of this
Agreement, but will not be required to pay any portion of the Purchase
Price Payments or any other amounts pursuant to this Agreement and does not
have any rights to terminate this Agreement pursuant to Article VII other
than with respect to itself.
ARTICLE III - Payments
3.1. Payments to NPI Purchaser. Company will pay any amounts owing to NPI
Purchaser under the Net Profits Documents ("NPI Payments") to NPI Purchaser by
wire transfer of immediately available funds to such banks and accounts as NPI
Purchaser shall from time to time specify in writing at least five (5) Business
Days prior to the effective date for any such change of accounts. The NPI
Payments for each month shall be paid to NPI Purchaser on or before the 28th
calendar day of the following month, or if such day is not a Business Day, then
on the next Business Day thereafter. Pending receipt of any NPI Payment due to
NPI Purchaser, the same shall be held by the Company in trust for the benefit of
NPI Purchaser.
3.2. Memorandum and Security Agreement. If the Company owns Equitable Title
to the Subject Interests, then upon the Initial Closing, and each Subsequent
Closing, Company shall execute, acknowledge and deliver a Memorandum and
Security Agreement, a form of which is attached as Exhibit C ("Memorandum and
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Security Agreement"), describing the Subject Interests and the related
Production Unit(s) to be included in the Conveyance and naming NPI Purchaser as
secured party covering a percentage of the Company's rights, titles and interest
in and to all personal property, equipment and fixtures included in the Subject
Interests that are burdened by, or are to be burdened by, each Net Profits
Interest, in an amount equal to each NPI Purchaser's Net Profits Interest in the
Subject Interests, together with a percentage of the as-extracted oil, gas and
other hydrocarbon collateral attributable to the Production Units for the
Accepted Wells equal to each NPI Purchaser's Net Profits Interest in the Subject
Interests. If Company owns record title to the Subject Interests, then upon the
Initial Closing, and each Subsequent Closing, Company shall execute, acknowledge
and deliver a Security Agreement, a form of which is attached as Exhibit C
("Security Agreement") contemporaneous with the Conveyance. Within 10 days of
the Company acquiring record title with respect to any Subject Interests for
which a Memorandum and Security Agreement has been filed, the Company will file
a Conveyance for such Subject Interests and any necessary amendments to the
Memorandum and Security Agreement reflecting the filing of the Conveyance.
3.3 Reconveyance. Within 10 days of an adjustment of NPI Purchaser's Net
Profits Interest pursuant to Section 2.5(c), NPI Purchaser will execute and
deliver to Company a recordable amendment to the Conveyance or Memorandum and
Security Agreement reflecting the revised Net Profits Interest in such Accepted
Wells. In addition, within 10 days of termination of this Agreement by (i)
Company pursuant to Section 7.1 or Section 7.2, or (ii) NPI Purchaser pursuant
to Section 7.3, NPI Purchaser will execute and deliver a Conveyance or partial
termination of Memorandum and Security Agreement with respect to all Accepted
Wells for which drilling has not commenced prior to such termination and for
which no portion of the Purchase Price Payments for such Accepted Wells have
been made. If (x) the Company terminates this Agreement pursuant to Section 7.2
as a result of the NPI Purchaser's failure to pay any portion of the Purchase
Price Payment for any Accepted Wells when due, or (y) NPI Purchaser fails to pay
any portion of the Purchase Price Payment for any Accepted Wells within ten (10)
Business Days after such Purchase Price Payment becomes due and payable
following a termination of this Agreement, then NPI Purchaser's aggregate Net
Profits Interest in such Accepted Wells shall be less than 25%, and NPI
Purchaser's Percentage in that Accepted Well shall be determined in accordance
with Section 1.23 of the JVEA. Within 10 days of determination of NPI Purchasers
Percentage in any Accepted Wells pursuant to the preceding sentence, NPI
Purchaser will execute and deliver to Company a recordable amendment to the
Conveyance or Memorandum and Security Agreement reflecting the revised Net
Profits Interest in such Accepted Wells
ARTICLE IV - Closing Dates and Closings
4.1. Times and Places of Closings. The closing for the consummation of the
sale and purchase of the first Net Profits Interest (the "Initial Closing")
shall take place at 10:00 a.m. on August 18, 2004 at the offices of Haynes and
Boone, LLP, 1221 McKinney Street, Suite 2100, Houston, Texas 77010 or at such
place (or places) and on such date as may be agreed to by Company and NPI
Purchaser (the "Initial Closing Date"). The closing for the consummation of the
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sale and purchase of each subsequent Net Profits Interest, if any (each a
"Subsequent Closing"), shall take place at such place (or places) and on such
date as may be agreed to by Company and NPI Purchaser (each a "Subsequent
Closing Date").
4.2. Conditions to Closing. The obligation of NPI Purchaser to pay the
Purchase Price Payment for the Net Profits Interest at the Initial Closing is
subject to NPI Purchaser's receipt of each of the following:
(a) An "Omnibus Certificate" of the Secretary or Assistant Secretary
of Company, which shall contain the names and signatures of the officers of
Company authorized to execute the Net Profits Documents and each
certificate, agreement, document, or instrument now or hereafter
contemplated by the Net Profits Documents and which shall certify to the
truth, correctness and completeness of the following exhibits attached
thereto: (i) a copy of resolutions duly adopted by the Board of Directors
of Company and in full force and effect at the time this Agreement is
entered into, authorizing the execution of the Net Profits Documents and
each certificate, agreement, document, or instrument now or hereafter
contemplated by the Net Profits Documents, and the consummation of the
transactions contemplated therein, (ii) a copy of the charter documents of
Company and all amendments thereto, certified by the appropriate official
of Company's state of incorporation, and (iii) a copy of the bylaws of
Company.
(b) A certificate (or certificates) of the due formation, valid
existence and good standing of Company in its state of incorporation,
issued by the appropriate authorities of such state, and certificates of
Company's good standing and due qualification to do business in Utah.
(c) A Compliance Certificate of the Chief Financial Officer of
Company, dated as of the Initial Closing Date, in which such officer shall
certify to the satisfaction of the conditions set out in Section 4.4.
(d) A drilling title opinion or opinions, or such other assurances of
title (supplied by counsel acceptable to NPI Purchaser in its sole
discretion) demonstrating to the reasonable satisfaction of NPI Purchaser
that (i) Company has Good and Defensible Title to the Subject Interests and
that (ii) after the Closing the NPI Purchaser will own the Net Profits
Interest, free and clear of all liens, security interests, pledges,
collateral assignments, charges, and encumbrances, and (iii) the
Conveyance, or, if Company owns only Equitable Title to the Subject
Interests to be burdened by the Net Profits Interest, then a Memorandum and
Security Agreement, has been duly recorded in the real property records of
the appropriate jurisdiction(s). If the Conveyance or the Memorandum and
Security Agreement has not been filed at the time of the Initial Closing
Date, the opinion in clause (iii) of the preceding sentence does not need
to be provided on the Initial Closing Date; provided, however, that NPI
Purchaser may require Company to update any specified title opinions,
including the addition of clause (iii) of the proceeding sentence, through
the recording of the Conveyance or the Memorandum and Security Agreement or
to otherwise provide assurances reasonably acceptable to NPI Purchaser that
NPI Purchaser owns its Net Profits Interest of record, free and clear of
all liens, security interests, pledges, collateral assignments, charges,
12
and encumbrances (it being understood that NPI Purchaser may require these
assurances to be given after, as well as at, the Initial Closing, and that
no title deficiencies learned of by NPI Purchaser at any time shall in any
way be deemed to qualify any of Company's warranties of title or
indemnities with respect to title in any of the Net Profits Documents).
(e) A legal opinion of Vinson & Elkins L.L.P., as counsel to Company,
dated the Closing Date, substantially in the form attached as Exhibit D.
(f) A Conveyance, or, if Company owns only Equitable Title to the
Subject Interests to be burdened by the Net Profits Interest, a Memorandum
and Security Agreement.
(g) A Security Agreement.
4.3. Conditions to Subsequent Closings. The obligation of NPI Purchaser to
pay each Purchase Price Payment in connection with a Subsequent Closing on the
related Subsequent Closing Date is subject to NPI Purchaser's receipt of each of
the following:
(a) Supplements to the "Omnibus Certificate" of Company delivered
under Section 4.2(a) and (b), confirming the matters specified therein and
containing any amendments or supplements to the resolutions, charter
documents and bylaws attached thereto.
(b) To the extent, if any, requested by NPI Purchaser, certificates of
the valid existence and good standing of Company in its state of
incorporation, issued by the appropriate authorities of such state, and
certificates of Company's good standing and due qualification to do
business in Utah.
(c) A Compliance Certificate of the Chief Financial Officer of
Company, dated as of such Closing Date, in which such officer shall certify
to the satisfaction of the conditions set out in Section 4.4.
(d) A drilling title opinion or opinions, or such other assurances of
title (supplied by counsel acceptable to NPI Purchaser in its sole
discretion) demonstrating to the reasonable satisfaction of NPI Purchaser
that (i) Company has Good and Defensible Title to the Subject Interests and
that (ii) after the Closing the NPI Purchaser will own the Net Profits
Interest, free and clear of all liens, security interests, pledges,
collateral assignments, charges, and encumbrances, and (iii) the
Conveyance, or, if Company owns only Equitable Title to the Subject
Interests to be burdened by the Net Profits Interest, then a Memorandum and
Security Agreement in the form of Exhibit C, has been duly recorded in the
real property records of the appropriate jurisdiction(s). If the Conveyance
or the Memorandum and Security Agreement has not been filed at the time of
the Subsequent Closing Date, the opinion in clause (iii) of the preceding
sentence does not need to be provided on the Subsequent Closing Date;
provided, however, that NPI Purchaser may require Company to update any
specified title opinions, including the addition of clause (iii) of the
13
proceeding sentence, through the recording of the Conveyance or the
Memorandum and Security Agreement or to otherwise provide assurances
reasonably acceptable to NPI Purchaser that NPI Purchaser owns its Net
Profits Interest of record, free and clear of all liens, security
interests, pledges, collateral assignments, charges, and encumbrances, (it
being understood that NPI Purchaser may require these assurances to be
given after, as well as at, the Initial Closing, and that no title
deficiencies learned of by NPI Purchaser at any time shall in any way be
deemed to qualify any of Company's warranties of title or indemnities with
respect to title in any of the Net Profits Documents).
(e) A legal opinion of Vinson & Elkins L.L.P., as counsel to Company,
dated the Closing Date, substantially in the form attached as Exhibit D.
(f) A Purchase Supplement, and any documents called for thereunder.
(g) A Conveyance, or a supplement to an existing Conveyance, or, if
Company owns only Equitable Title to the Subject Interests to be burdened
by the Net Profits Interest, a Memorandum and Security Agreement.
(h) A Security Agreement, or a supplement to an existing Security
Agreement.
4.4. Other Conditions to All Closings. In addition to the receipt of the
foregoing documents and instruments under Section 4.2 or 4.3, as appropriate,
the obligation of each Party to consummate the transactions to be performed by
it on the related Closing Date is subject to the satisfaction (or waiver by such
Party) of the following conditions precedent (other than paragraph (b) below
which is solely a condition precedent to the obligations of the NPI Purchaser
and paragraph (e) which is solely a condition precedent to the obligations of
the Company) prior to or in connection with such closing:
(a) All representations and warranties made by the other Party
hereto in any Net Profits Document then or previously delivered shall
be true and correct as of such Closing Date (unless such
representations and warranties are expressly limited to an earlier
date, in which case such representations and warranties shall be true
and correct as of such earlier date).
(b) There must have occurred no material adverse change in the
condition of the Accepted Wells or in the business or financial
condition of Company from that previously described to NPI Purchaser.
(c) The other Party shall have performed and satisfied all
agreements, covenants, and conditions which each it is required to
perform or satisfy on or prior to such Closing Date under the terms of
any Net Profits Document.
(d) The consummation of the Closing on such Closing Date shall
not (i) be prohibited by any law or any regulation or order of any
court or governmental agency or authority applicable to Company or NPI
14
Purchaser or (ii) subject Company or NPI Purchaser to any penalty or
other onerous condition under or pursuant to any such law, regulation
or order, and each of Company and NPI Purchaser must have any court or
governmental approvals or authorizations necessary to consummate such
Closing.
(f) A legal opinion of Haynes and Boone, LLP, as counsel to
Company, dated the Closing Date, substantially in the form attached as
Exhibit E.
ARTICLE V - Representations and Warranties
5.1. Representations and Warranties of Company. Company hereby represents
and warrants to NPI Purchaser as of the date of this Agreement and as of the
Initial Closing Date and each Subsequent Closing Date that:
(a) Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the state of its incorporation and duly
qualified to do business and in good standing as a foreign corporation in
the State of Utah. Company has all requisite power and authority, corporate
or otherwise, to own and operate its assets in Utah and to execute and
deliver, and perform all of its obligations under, the Net Profits
Documents. Company is not a "foreign person" within the meaning of Sections
1445 and 7701 of the Internal Revenue Code, as amended (i.e., Company is
not a non resident alien, foreign corporation, foreign partnership, foreign
trust or foreign estate as those terms are defined in the Internal Revenue
Code and any regulations promulgated thereunder).
(b) The execution, delivery and performance by Company of the Net
Profits Documents, and the consummation of the transactions contemplated
herein and in the other Net Profits Documents, have been duly authorized by
all necessary corporate action and do not and will not (i) violate any
material provision of any law, rule, regulation, order, writ, judgment,
decree, determination or award presently in effect having applicability to
Company or of the Certificate of Incorporation, By-laws or other charter
documents of Company, or (ii) result in a breach of, or constitute a
default under, any material contract, indenture, instrument, or agreement
to which Company is a party or by which it or its property may be presently
bound or affected (including the leases under which Company holds the
interests in the Subject Interests), or result in or require the creation
or imposition of any lien or encumbrance on any assets of Company. Company
has obtained or has caused to be obtained all consents, authorizations and
waivers necessary under any such material contract, indenture, instrument
or agreement or under any such material provision of law, rule, regulation,
order, writ, judgment, decree, determination or award in order to permit
the valid execution, delivery and performance by Company of the Net Profits
Documents.
(c) The Net Profits Documents have been duly executed and delivered by
Company and constitute the legal, valid and binding acts and obligations of
Company, enforceable against Company in accordance with the respective
15
terms of such Net Profits Documents, except as such enforcement may be
limited by bankruptcy, insolvency, moratorium and other similar laws
applicable to creditors' rights generally or by general principles of
equity.
(d) As of the date of this Agreement, there is no suit, action or
other proceeding pending for which Company is a party or, to the best of
Company's knowledge threatened, before any court or governmental body,
authority or agency which relates to the Contract Area or to Company's
ability to consummate the transactions contemplated by this Agreement.
(e) Except as could not reasonably be expected to have a material
adverse effect, Company possesses all licenses, permits, variances,
exemptions, consents, certificates, orders, approvals and authorizations
necessary to own its interests in the Contract Area, and to carry on its
business as now being conducted including, but not limited to, drilling,
equipping, completing and operating Accepted Wells (other than such permits
which customarily are not obtained until a drillsite has been identified or
until an operator is ready to commence drilling operations; provided, that
Company will possess all such permits as and when required by applicable
law).
(f) Company is in compliance with all laws, ordinances, rules,
regulations, judgments, decrees and orders (collectively, "Laws")
applicable to the Contract Area, except to the extent that any
non-compliance is not reasonably expected to result in a material adverse
effect on Company's interests or any Accepted Wells and Company has not
received any notice of any claimed noncompliance therewith. To the
knowledge of Company, there are no facts, conditions or circumstances in
connection with, related to or associated with Company's interests and
Accepted Wells that could reasonably be expected to give rise to any claim
or assertion that Company, any leases or the ownership or operation of any
Accepted Wells is not in material compliance with any applicable Law.
(g) To the best of Company's knowledge the data, information,
exhibits, memoranda and reports furnished by or on behalf of Company to NPI
Purchaser in connection with the negotiation of the Net Profits Documents
(taken as a whole, and taking into account all corrections and supplements
to such information heretofore delivered) are true and correct in all
material respects and no statement of the Company contained in any
document, certificate, or other writing furnished or to be furnished by the
Company pursuant hereto contains or will contain, at the time of delivery,
any untrue statement of a material fact or omits, or will omit at the time
of delivery, to state any fact necessary in order to make the statements
contained therein, in light of the circumstances under which they are made,
not misleading. The Company knows of no matter which has not been disclosed
to the NPI Purchaser pursuant to this Agreement, which has or is reasonably
likely to have a material adverse effect on the ownership of the Net
Profits Interest. Except for effects relating to the economy in general,
changes in hydrocarbon prices, or other changes affecting the hydrocarbon
industry generally, or for oil and gas production from the Contract Area in
the ordinary course of business or for matters disclosed to NPI Purchaser
in writing, no material adverse change in the condition or aggregate value
16
of Company's interest in the Contract Area has occurred since the date of
the last reserve engineering report delivered by Company to NPI Purchaser
with respect to the Contract Area.
(h) Company will be the owner (or have appropriate operational rights
under a farmout or earning agreement with the owner) of the leasehold
interests constituting the Production Unit of each Accepted Well, but only
to the extent indicated in the drilling opinion furnished by Company to NPI
Purchaser with the AFE for the Accepted Well.
5.2. Representations and Warranties of NPI Purchaser. MBG, MBG Partition
and Red Oak hereby represent and warrant to Company severally, and not jointly,
as of the date of this Agreement that:
(a) Such NPI Purchaser is a Delaware limited liability company duly
formed, validly existing and in good standing under the laws of the state
of its formation and duly qualified to do business and in good standing as
a foreign entity in the State of Utah.
(b) The execution, delivery and performance by such NPI Purchaser of
the Net Profits Documents, and the consummation of the transactions
contemplated herein and in the other Net Profits Documents, have been duly
authorized by all necessary corporate or similar action and do not and will
not (i) violate any material provision of any law, rule, regulation, order,
writ, judgment, decree, determination or award presently in effect having
applicability to such NPI Purchaser or of the formation or governing
documents of such NPI Purchaser, or (ii) result in a breach of, or
constitute a default under, any material contract, indenture, instrument,
or agreement to which such NPI Purchaser is a party or by which it or its
property may be presently bound or affected.
(c) The Net Profits Documents have been duly executed and delivered by
such NPI Purchaser and constitute the legal, valid and binding acts and
obligations of such NPI Purchaser, enforceable against such NPI Purchaser
in accordance with the respective terms of such Net Profits Documents,
except as such enforcement may be limited by bankruptcy, insolvency,
moratorium and other similar laws applicable to creditors' rights generally
or by general principles of equity.
(d) Such NPI Purchaser is purchasing the Net Profits Interest for its
own account and not with a view to resale and has such knowledge, skill and
experience in business, financial and oil and gas matters so that it is
capable of evaluating the risks of entering into the Net Profits Documents
and the transactions contemplated herein. To the extent necessary, such NPI
Purchaser has retained, at its own expense, and relied upon appropriate
professional advice regarding the investment, tax and legal merits and
consequences of the Net Profits Documents and the transactions contemplated
herein.
(e) Such NPI Purchaser is an "accredited investor" as defined in
Regulation D under the Securities Act of 1933, as amended.
17
ARTICLE VI - Covenants
6.1. Covenants of Company. Company covenants and agrees that until the full
and final payment of all payments due to NPI Purchaser under the Net Profits
Documents and the termination of this Agreement and the Net Profits Interest,
unless NPI Purchaser has previously agreed otherwise:
(a) Company will perform all of its covenants and duties under the Net
Profits Documents all as fully as if they were set out in full herein.
(b) In addition to any reports and information specifically required
by the terms of this Agreement or the Conveyance, Company agrees to furnish
to NPI Purchaser full information, at all reasonable times, which NPI
Purchaser may request concerning any covenant, provision or condition of
the Net Profits Documents or any matter or records in connection with such
documents or, subject to confidentiality undertakings with Third Parties,
with the operation of, reserve engineering for, production from, or
accounting for the Subject Interests. Subject to any restrictions on
Company's right to do so under applicable operating agreements or similar
contracts, Company will permit representatives designated by NPI Purchaser,
including independent accountants, agents, attorneys, and other Persons, to
visit and inspect the Subject Interests and Company's books and records
pertaining to the Subject Interests (and to make copies and photocopies
from such records and to write down and record such information as such
representatives may request, provided that no copies may be made of
geological or seismic data), and Company shall permit NPI Purchaser and its
designated representatives reasonably to investigate and verify the
accuracy of information furnished to NPI Purchaser hereunder or in
connection herewith and to discuss all such matters with its officers,
employees and representatives.
(c) If any Person ever challenges or attacks (i) the validity or
priority of any Net Profits Document or of any rights, titles, or interests
created or evidenced thereby or (ii) the title of Company to any portion of
the Subject Interests or of NPI Purchaser to any part of a Net Profits
Interest ("Title Claim"), then upon learning thereof Company will give
prompt written notice thereof to NPI Purchaser and at Company's own cost
and expense will defend the NPI Purchaser and diligently endeavor to defeat
such challenge or attack and to cure any defect that may be developed or
claimed, and Company will take all necessary and proper steps for the
defense of any legal proceedings with respect thereto, including the
employment of counsel (at reasonable fees) to represent Company and NPI
Purchaser, the prosecution or defense of litigation, and the release or
discharge of all adverse claims. The Company shall not settle any Title
Claim in a manner that would in any way affect the validity or priority of
any Net Profits Document or of any of NPI Purchaser's rights, titles, or
interests created or evidenced thereby or NPI Purchaser's Net Profits
Interest without the prior written consent of the NPI Purchaser. Unless the
Company notifies the NPI Purchaser, (whether or not named as a party to
legal proceedings with respect thereto), in writing within 30 days of the
Company learning of a Title Claim that the Company will defend NPI
Purchaser against any such Title Claim, then NPI Purchaser is hereby
authorized and empowered to take such steps as in its judgment and
18
discretion may be necessary or proper for the defense of any such legal
proceedings or the protection of the validity or priority of the Net
Profits Documents and the rights, titles, and interests created or
evidenced thereby, including the employment of one independent counsel at
reasonable fees to represent all of the NPI Purchasers, the prosecution or
defense of litigation, the compromise or discharge of any adverse claims
made with respect to a Net Profits Interest, the purchase of any tax title
and the removal of prior liens or security interests, and all expenditures
so made of every kind and character shall be reimbursed by Company (which
obligation Company hereby expressly promises to pay on demand) owing by
Company to NPI Purchaser and shall bear interest from the date demanded
until paid at the Agreed Rate. After notice from the Company to the NPI
Purchaser of its assumption of the defense of such Title Claim, the Company
shall not be liable to the NPI Purchaser under this Section 6.1(c) for any
legal expenses subsequently incurred by the NPI Purchaser in connection
with the defense thereof, except for such expenses incurred in connection
with cooperation with, or at the request of, the Company; provided,
however, that the NPI Purchaser shall have the right to employ one counsel
to represent all of the NPI Purchasers if, in the NPI Purchaser's
reasonable judgment, based upon the advice of counsel, it is advisable, in
light of the separate interests of the NPI Purchaser and the Company, for
the NPI Purchaser to be represented by separate counsel, and in that event
the reasonable fees and expenses of such separate counsel shall be paid by
the Company.
(d) Company will, on request of NPI Purchaser, (i) promptly correct
any defect, error or omission which may be discovered in the contents,
execution or acknowledgment of any Net Profits Document that materially
affects or that may materially affect NPI Purchaser's right to purchase Net
Profits Interests in the Offered Bundles pursuant to this Agreement, its
title to the Net Profits Interest or its right to receive NPI Payments;
(ii) execute, acknowledge, deliver and record or file such further
instruments and do such further acts as may be necessary, desirable or
proper for the specific and exclusive purpose of providing a proper
conveyance of the Net Profits Interest to carry out more effectively the
purposes of the Net Profits Documents and to more fully identify and make
subject to the Conveyance any property intended to be covered thereby,
including any renewals, additions, substitutions, replacements, or
appurtenances to the Subject Interests; and (iii) execute, acknowledge,
deliver, and file or record any document or instrument reasonably requested
by NPI Purchaser to protect its rights, title and interests under the Net
Profits Documents against the rights or interests of any Third Party.
Company shall pay all reasonable costs connected with any of the foregoing.
(e) Company will not cause or permit any portion of the Subject
Interests or Company to be in material violation of any Environmental Laws
or do anything or permit anything to be done which will subject Company or
any portion of the Subject Interests to any material remedial obligations
under any Environmental Laws, assuming in each case disclosure to the
applicable governmental authorities of all relevant facts, conditions and
circumstances, and Company will promptly notify NPI Purchaser in writing of
any existing, pending or, to the best knowledge of Company, threatened
investigation or inquiry by any private party or governmental authority in
19
connection with any Environmental Laws. Company will take all steps
necessary to determine that no Hazardous Substances are disposed of or
otherwise released or being released on or to any portion of the Subject
Interests in violation of any Environmental Laws. Company will not cause or
permit the disposal or other release of any Hazardous Substance on or to
the Subject Interests in violation of any Environmental Law and covenants
and agrees to remove or remediate any Hazardous Substance on the Subject
Interests. NPI Purchaser has no responsibility for compliance with any
Environmental Laws and the Company shall indemnify the NPI Purchaser from
any and all liabilities, costs, expenses (including, without limitation,
litigation costs and attorney fees), damages, or liens incurred by NPI
Purchaser with respect to any demands, judgments, suits, causes of action,
and claims of any kind or character arising or to arise from the presence
of any adverse environmental condition or damage located on or attributable
to the Subject Interests.
(f) Prior to commencement of drilling operations on any Accepted Well,
Company will obtain a drilling title opinion or, in the case of a drillsite
which is on lands held by production, conduct such other title review and
related due diligence acceptable to NPI Purchaser and as would be
consistent with sound oil and gas field practices for the location and
nature of such drillsite and related Accepted Well demonstrating to the
reasonable satisfaction of NPI Purchaser that (i) Company has Good and
Defensible Title to the Subject Interests and that (ii) the NPI Purchaser
owns or will own the Net Profits Interest, free and clear of all liens,
security interests, pledges, collateral assignments, charges, and
encumbrances, and (iii) the Conveyance, or, if Company owns only Equitable
Title to the Subject Interests to be burdened by the Net Profits Interest,
then a Memorandum and Security Agreement, has been duly recorded in the
real property records of the appropriate jurisdiction(s). If the Conveyance
or the Memorandum and Security Agreement has not been filed at the time the
opinion contemplated by the preceding sentence is provided, the opinion in
clause (iii) of the preceding sentence does not need to be provided on such
date; provided, however, that NPI Purchaser may require Company to update
any specified title opinions, including the addition of clause (iii) of the
proceeding sentence, through the recording of the Conveyance or the
Memorandum and Security Agreement or to otherwise provide assurances
reasonably acceptable to NPI Purchaser that the NPI Purchaser owns its Net
Profits Interest of record, free and clear of all liens, security
interests, pledges, collateral assignments, charges, and encumbrances, (it
being understood that no title deficiencies learned of by NPI Purchaser at
any time shall in any way be deemed to qualify any of Company's warranties
of title or indemnities with respect to title in any of the Net Profits
Documents).
(g) Company will at all times obtain and possess (or cause to be
obtained and possessed) all consents, authorizations and waivers necessary
under any material contract, indenture, instrument or agreement binding on
or affecting Company or any of Company's assets or under any material
provision of law, rule, regulation, order, writ, judgment, decree,
determination or award binding on or affecting Company or any of Company's
assets, in order to permit the performance by Company of the Net Profits
Documents.
20
(h) Company will maintain Good and Defensible Title to the Subject
Interests and the Accepted Wells, free and clear of all liens, security
interests, and encumbrances except for Permitted Encumbrances, subject only
to Net Profits Interests and to other net profits interests contemplated by
the JVEA.
(i) Company shall maintain, or cause to be maintained, during the life
of the Net Profits Interest, insurance coverage in such amounts, with
provisions for such deductible amounts, and for such purposes as are
consistent with prudent operating standards and the requirements of any
joint operating agreement applicable to the concerned Subject Interests.
Notwithstanding the foregoing, the Company shall maintain the minimum
insurance coverages specified in Schedule 6.1(i).
(j) Company will use its best efforts to cause the Oilfield
Services Parties to provide services with respect to each Accepted
Well in accordance with the terms of the JVEA and related documents
and each other person or entity providing services with respect to any
Accepted Well to provide such services at the best price and terms
available, and in any event, at rates consistent with each provider's
then current bidding practices and contract rates with similarly
situated operators for similar equipment and services in the area.
(k) All Accepted Wells in which Company does not own 100% of the
working interest will be operated by Company pursuant to customary
joint operating agreements. Company will conduct and carry on the
exploration, development, maintenance and operation of the Accepted
Wells with reasonable and prudent business judgment and in accordance
with sound oil and gas field practices.
(l) Except (i) to safeguard life or property, (ii) to maintain or
repair, (iii) for operations to restore or enhance Hydrocarbon
Production from an Accepted Well, or (iv) in the event of force
majeure or as required by government action, Company shall not shut
in, temporarily abandon or abandon any Accepted Well capable of
producing Hydrocarbon Production and equipped to so produce, nor in
any way intentionally reduce the production from any Accepted Well
below its capability without the prior written approval of NPI
Purchaser.
(m) All gas produced from any Accepted Well shall be sold
pursuant to gas sales agreements that are comparable with other gas
sales agreements in the Contract Area; provided, that in the case
sales of any production from any Accepted Well to Company or any of
its Affiliates, such purchase shall be on terms comparable to or
better than those received by Company from non-Affiliates for purchase
of production from the Contract Area or on terms comparable with other
contemporaneous non-affiliated purchases in the same general area. If
any gathering, transportation, compression or processing charges used
in the calculation of the Production Costs (as defined and calculated
in the JVEA) includes payments to Affiliates, such payment shall be
comparable to or lower than payments made by Company to non-Affiliates
for similar services or shall be comparable to or lower than
contemporaneous payments made by other operators in the same general
area for similar services.
21
(n) Company will not enter into any transaction, including,
without limitation, any purchase, sale, lease or exchange of property,
the rendering of any service or the payment of any management,
advisory or similar fees, with any Affiliate with regard to the
Subject Interests unless (i) such transaction is evidenced by a
written agreement between the parties, (ii) such transaction is
otherwise permitted under this Agreement, (iii) the terms of such
transaction are comparable to and competitive with that of unrelated
Third Parties rendering comparable services or selling or leasing
equipment or supplies in the same geographical area, (iv) such
transaction involves payment only for services, equipment or supplies
reasonably necessary for the prudent operation of, and actually
furnished with respect to, the Subject Interests, and (v) except for
the gas sales agreements contemplated by Section 6.1(m), in the event
the aggregate fair market value of the consideration paid or received
in any such transactions exceeds $50,000, NPI Purchaser shall have
approved of such transaction in writing after full disclosure of all
of the material terms thereof.
(o) Except for Permitted Encumbrances, Company will not, without
the prior written consent of NPI Purchaser, encumber, mortgage, or
make any disposition of its interest in the Subject Interests except
for such encumbrances as are expressly subject to this Agreement and
the other Net Profits Documents, or the JVEA.
(p) Company will promptly notify NPI Purchaser of any suit,
action, claim, proceeding or investigation, commenced or threatened,
relating to, or which may affect, the Subject Interests, Project
Wells, any Net Profits Document or the Company's interest in any
Accepted Wells.
(q) Upon request, Company shall, subject to their reasonable
availability and the limitations of confidentiality undertakings with
co-owners or other Third Parties, furnish NPI Purchaser and its
respective duly authorized agents and representatives, including its
advisers and consultants, copies of all electric and other logs of the
Accepted Wells. In addition and subject to the same confidentiality
limitations, NPI Purchaser and its advisers and consultants shall also
have access to all records regarding all seismic data (subject to
limitations of confidentiality undertakings with co-owners or Third
Parties), cores, cuttings, and other geological, well and production
data secured from operations on the Subject Interests.
(r) Company will furnish or cause to be furnished to NPI
Purchaser the following reserve reports:
(i) Promptly after December 31 of each calendar year
(commencing with the calendar year 2004), and in any event not
later than March 31 of the next succeeding calendar year, a
reserve report, prepared by the Approved Independent Engineer
(a "Reserve Report") with respect to the Project Wells, as of
December 31 of such calendar year;
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(ii) any quarterly or other reserve reports covering
the Project Wells prepared by the Company to update the
Reserve Report in the form prepared by the Company; and
(iii) The Reserve Report shall conform to the
standards prescribed by Rule 4-10 of Regulation S-X
promulgated by the Securities and Exchange Commission under
the Securities Act of 1933 for financial accounting and
reserve reporting purposes applicable to registrants employing
the full cost method of accounting.
6.2. Reporting Covenants of Company. Company covenants and agrees that,
upon written request by NPI Purchaser, copies of all reports to Schlumberger or
a Service Party required by the JVEA shall be made directly to NPI Purchaser on
the schedule required by the JVEA.
6.3. Confidentiality.
(a) Confidential Information. "Confidential Information" means
information unavailable from public sources that any of the Parties considers
confidential and proprietary information, including, but not limited to, the
terms of the Net Profits Documents, all seismic records and tapes, interpreted
well logs, maps, engineering date and financial information relating to the
Project Wells or the Contract Area, together with nonproprietary seismic data
that has been licensed from Third Parties under terms which restrict the
licensee's use, disclosure, or display of such data.
(b) Nondisclosure. Each Party agrees that any Confidential Information
obtained by it from any other Party under the terms of the Net Profits Documents
will be held in strict confidence and will not be disclosed by it to any Third
Party without written authorization from the originating Party, unless such
information (i) is in the public domain through no fault of the disclosing
Party, or (ii) is required to be publicly disclosed under applicable laws. Each
Party agrees to limit access to such Confidential Information only to those
affiliates and representatives who have a need under or in furtherance of this
Agreement or the Net Profits Documents to review such Confidential Information.
Each Party further agree that any Confidential Information obtained by it from
the other Parties will not be used by such Party or its representatives,
directly or indirectly, for any purpose other than in connection with carrying
out the purposes of this Agreement or the other Net Profits Documents.
ARTICLE VII - Termination
Notwithstanding provisions elsewhere herein provided, this Agreement may also be
terminated as follows:
7.1. Insolvency. Upon written notice from the terminating Party to the
other Parties, the terminating Party, may, without prejudice to any of its other
rights, immediately terminate this Agreement if another Party becomes insolvent,
makes a general assignment for the benefit of its creditors, applies for or
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consents to the appointment of a receiver, trustee or liquidation of all or
substantially all of its assets, has an involuntary petition in bankruptcy filed
against it which is not dismissed within forty-five (45) days or fails to pay
its debts and obligations as they become due, or if such terminating Party
reasonably believes that any of the above events is likely to occur.
7.2. Breach. Upon written notice from the terminating Party to the
other Parties, the terminating Party, may, without prejudice to any of its other
rights, immediately terminate this Agreement, if another Party fails to pay any
obligation under this Agreement within ten (10) Business Days after the same
becomes due and payable, or if another Party fails to duly observe, perform or
comply with any other covenant, agreement, condition or provision of this
Agreement and such failure remains unremedied for a period of thirty (30) days
after notice of such failure is given by the terminating Party to the defaulting
Party.
7.3. NPI Purchaser Termination. This Agreement may be terminated by MBG
or MBG Partition providing thirty (30) days advance written notice to the
Company and the other Parties.
7.4. Company Termination. Within 30 days of NPI Purchaser rejecting an
Offered Bundle, Company may, without prejudice to any of its other rights,
immediately terminate this Agreement effective upon delivery of written notice
of same to Company. In the event that Company does not elect to terminate this
Agreement pursuant to this Section 7.4, the Company will have no further rights
to terminate the Agreement pursuant to this Section 7.4 unless the NPI Purchaser
declines an additional subsequently Offered Bundle.
7.5. Effect of Termination. Except as provided in Section 3.3, no
termination of this Agreement shall affect the rights or obligations of NPI
Purchaser with respect to Accepted Wells that have been commenced prior to such
termination, including, without limitation, NPI Purchaser's Net Profits Interest
in, and obligation to make Purchase Price Payments with respect to, Accepted
Wells for which drilling commenced prior to such termination, and the right to
receive payment under the Net Profits Documents accruing to such Net Profits
Interests.
ARTICLE VIII - Miscellaneous
8.1. Waivers and Amendments. No failure or delay (whether by course of
conduct or otherwise) by Company or NPI Purchaser in exercising any right, power
or remedy which Company or NPI Purchaser may have under any of the Net Profits
Documents shall operate as a waiver thereof or of any other right, power or
remedy, nor shall any single or partial exercise by Company or NPI Purchaser of
any such right, power or remedy preclude any other or further exercise thereof
or of any other right, power or remedy. No waiver of any provision of any Net
Profits Document and no consent to any departure therefrom shall ever be
effective unless it is in writing and signed by NPI Purchaser and Company, and
then such waiver or consent shall be effective only in the specific instances
and for the purposes for which given and to the extent specified in such
writing. No notice to or demand on NPI Purchaser or Company shall in any case of
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itself entitle NPI Purchaser or Company to any other or further notice or demand
in similar or other circumstances. This Agreement and the other Net Profits
Documents set forth the entire understanding and agreement of the Parties hereto
and thereto with respect to the transactions contemplated herein and therein and
supersede all prior discussions and understandings with respect to the subject
matter hereof and thereof, and no modification or amendment of or supplement to
this Agreement or the other Net Profits Documents shall be valid or effective
unless the same is in writing and signed by the party against whom it is sought
to be enforced. To the extent of any conflict between the terms of this
Agreement and the JVEA, the terms of this Agreement shall govern to the extent
of such conflict.
THIS WRITTEN AGREEMENT AND THE OTHER NET PROFITS DOCUMENTS REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
8.2. Survival of Agreements; Cumulative Nature. All of the various
representations, warranties, indemnities, covenants and agreements in the Net
Profits Documents shall survive the execution and delivery of this Agreement and
the other Net Profits Documents and the performance hereof and thereof,
including the granting of the Net Profits Interest and the delivery of the
Conveyance. The representations, warranties, indemnities, and covenants made by
the parties in the Net Profits Documents, and the rights, powers, and privileges
granted to the parties in the Net Profits Documents, are cumulative, and, except
for expressly specified waivers and consents, no Net Profits Document shall be
construed in the context of another to diminish, nullify, or otherwise reduce
the benefit to either party of any such representation, warranty, indemnity,
covenant, right, power or privilege. In particular and without limitation, no
exception set out in this Agreement to any representation, warranty, indemnity,
or covenant herein contained shall apply to any similar representation,
warranty, indemnity, or covenant contained in any other Net Profits Document,
and each such similar representation, warranty, indemnity, or covenant shall be
subject only to those exceptions which are expressly made applicable to it by
the terms of the various Net Profits Documents.
8.3. Notices. All notices, requests, consents, demands and other
communications (in this section, collectively called "notices") which are
required or permitted under any Net Profits Document shall be in writing, unless
otherwise specifically provided in such Net Profits Document, and shall be
deemed sufficiently given or furnished if delivered by personal delivery, by
telecopy, by delivery service with proof of delivery, or by registered or
certified United States mail, postage prepaid, to Company or NPI Purchaser at
its address specified on the signature pages hereto. Any such notice shall be
deemed to have been given (a) in the case of personal delivery or delivery
service, as of the date of first attempted delivery at the address and in the
manner provided herein, (b) in the case of telecopy, upon receipt, or (c) in the
case of registered or certified United States mail, three days after deposit in
the mail. Company and NPI Purchaser may change its address from time to time by
sending a notice of the new address, in the manner provided for in this section,
to the other parties hereto.
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8.4. Parties in Interest. All grants, covenants and agreements
contained in the Net Profits Documents shall bind and inure to the benefit of
the parties thereto and their respective successors and assigns.
8.5. Governing Law. Except to the extent that the law of another
jurisdiction may be expressly elected in a Net Profits Document or the real
property laws of the state in which the Subject Interests are mandatorily
applicable, the Net Profits Documents shall be deemed contracts and instruments
made under the laws of the State of Colorado and shall be construed and enforced
in accordance with and governed by the laws of the State of Colorado and the
laws of the United States of America, without regard to principles of conflicts
of law.
8.6. Limitation on Interest. Although the Net Profits Documents provide
for the sale and purchase of a real property interest and not a loan, there are
certain provisions of the Net Profits Documents which provide for the charging
and payment of interest. NPI Purchaser and Company intend to contract in strict
compliance with applicable usury law from time to time in effect. In furtherance
thereof they hereby stipulate and agree that none of the terms and provisions
contained in the Net Profits Documents shall ever be construed to create a
contract to pay, for the use, forbearance or detention of money, interest in
excess of the maximum amount of interest permitted to be charged by applicable
law from time to time in effect. No party to any Net Profits Document shall ever
be liable for unearned interest or shall ever be required to pay interest in
excess of the maximum amount that may be lawfully charged under applicable law
from time to time in effect, and the provisions of this section shall control
over all other provisions of the Net Profits Documents which may be in conflict
or apparent conflict herewith. In determining whether or not the interest paid
or payable, under any specific circumstance, exceeds the maximum amount
permitted under applicable law, the parties to the Net Profits Documents shall
to the greatest extent permitted under applicable law: (a) characterize any
non-principal payment as an expense, fee or premium rather than as interest, (b)
exclude voluntary prepayments and the effects thereof, and (c) amortize,
prorate, allocate, and spread the total amount of interest throughout the entire
contemplated term of the interest bearing obligation in accordance with the
amounts thereof outstanding from time to time and the maximum legal rate of
interest from time to time in effect under applicable law in order to lawfully
charge the maximum amount of interest permitted under applicable law. In the
event applicable law provides for an interest ceiling under Chapter 303 of the
Texas Finance Code, that ceiling shall be the "weekly ceiling" as defined in the
Texas Finance Code. As used in this section the term "applicable law" means the
laws of the State of Texas or the laws of the United States of America,
whichever laws allow the greater interest, as such laws now exist or may be
changed or amended or come into effect in the future.
8.7. Severability. If any term or provision of any Net Profits Document
shall be determined to be illegal or unenforceable, all other terms and
provisions of the Net Profits Documents shall nevertheless remain effective and
shall be enforced to the fullest extent permitted by applicable law.
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8.8. No Third Party Beneficiaries. No Person other than the Parties
hereto is an intended beneficiary of this Agreement or any portion hereof, and
there are no Third Party beneficiaries.
8.9. Dispute Resolution. Any dispute or controversy between the Parties
arising out of or related to this Agreement or the transactions contemplated
hereunder shall be finally settled by binding arbitration between the Parties
pursuant to commercial arbitration rules of the American Arbitration
Association. The arbitration shall be conducted in Denver, Colorado, before a
single arbitrator. In the event the disputing Parties are unable to agree upon
an arbitrator within fifteen (15) days of the notice of arbitration, the
American Arbitration Association shall select an arbitrator for the Parties. The
arbitration award may be enforced by application to any court of competent
jurisdiction. Except as may otherwise be awarded by the arbitrator, the
prevailing party in any such proceeding shall be entitled to recover, its
reasonable attorneys' fees incurred in connection with such proceeding.
8.10 Development of Formations Outside the JVEA. Subject to any
limitations contained in the JVEA, Company shall have the right in its sole
discretion at any time and from time to time to drill, complete and operate oil
and gas wells in the Contract Area, free and clear of the terms of this
Agreement; provided, however that this Section 8.10 shall not permit the
drilling by the Company of a well within the Production Unit of either an
Accepted Well or an anticipated Offered Well, unless Company's well is drilled
solely to test and produce formations that are not subject to the JVEA or this
Agreement and such testing or drilling does not affect Hydrocarbon Production
from any Accepted Well.
8.11 Assignment. None of the Parties shall assign this Agreement or any
of its rights or obligations hereunder without the prior written consent of the
other Parties and any assignment made without such consent shall be void.
Company acknowledges and agrees that the restrictions in this Section shall not
apply to the Net Profits Interest after execution and delivery of the
Conveyance.
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IN WITNESS WHEREOF, this Agreement is executed as of the date first
written above.
Address: Gasco Production Company,
a Delaware corporation
14 Inverness Drive East
Englewood, CO 80112
By: /s/ W. King Grant
Name: W. King Grant
Title: EVP and CFO
Address: MBG, LLC
a Delaware limited liability company,
4415 Electric Road
Roanoke, VA 24014
By: /s/ John G. Rocovich, Jr.
Name: John G. Rocovich, Jr.
Title: Chairman
Address: MBGV Partition, LLC
a Delaware limited liability company,
4415 Electric Road
Roanoke, VA 24014
By: /s/ John G. Rocovich, Jr.
Name: John G. Rocovich, Jr.
Title: Chairman
Address: Red Oak Capital Management, LLC,
Three Riverway a Delaware limited liability company
Suite 1550
Houston, TX77056
By: /s/ James M. Whipkey
Name: James M. Whipkey
Title: Managing Director
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