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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to _______
COMMISSION FILE NO. 0-21411
-------------------
COSTILLA ENERGY, INC.
(Exact name of registrant as specified in its charter)
-------------------
DELAWARE 75-2658940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 WEST ILLINOIS, SUITE 1000
MIDLAND, TEXAS 79701
(Address of principal executive offices) (Zip code)
(915) 683-3092
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
AS OF NOVEMBER 12, 1998 . . . . .. . . . . . . . . . . . . . . . . . 9,610,615
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COSTILLA ENERGY, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- -------
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 1998 and 1997 (unaudited) . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the three and nine months
ended September 30, 1998 and 1997 (unaudited) . . . . . . . . . . . 5
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
- -------
Condition and Results of Operations . . . . . . . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 19
- -------
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COSTILLA ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,361 $ 3,615
Accounts receivable:
Trade, net 4,229 5,241
Oil and gas sales 7,295 9,312
Prepaid and other current assets 1,111 912
--------- ---------
Total current assets 18,996 19,080
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties 277,108 199,355
Unproved properties 46,762 35,971
Accumulated depletion, depreciation and amortization (91,961) (71,152)
--------- ---------
231,909 164,174
Other property and equipment, net 3,506 3,766
--------- ---------
Total property, plant and equipment 235,415 167,940
--------- ---------
OTHER ASSETS:
Deferred charges 6,658 4,212
Other 2,162 2,856
--------- ---------
Total other assets 8,820 7,068
--------- ---------
$ 263,231 $ 194,088
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 98 $ 98
Trade accounts payable 22,433 22,490
Undistributed revenue 3,545 4,566
Other current liabilities 10,381 3,437
--------- ---------
Total current liabilities 36,457 30,591
--------- ---------
LONG-TERM DEBT, LESS CURRENT MATURITIES 207,362 163,087
--------- ---------
OTHER NONCURRENT LIABILITIES -- --
--------- ---------
STOCKHOLDERS' EQUITY :
Preferred stock, $.10 par value (3,000,000 shares authorized; 50,000
shares outstanding at September 30, 1998 and
no shares outstanding at December 31, 1997) 5 --
Common stock, $.10 par value (20,000,000 shares authorized;
9,665,115 shares outstanding at September 30, 1998 and
10,150,500 shares outstanding at December 31, 1997) 967 1,015
Additional paid-in capital 80,016 37,425
Retained deficit (61,576) (38,030)
--------- ---------
Total stockholders' equity 19,412 410
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
--------- ---------
$ 263,231 $ 194,088
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $ 16,809 $ 19,339 $ 48,824 $ 54,231
Interest and other 150 (38) 510 882
Gain on sale of assets -- -- 337 --
-------- -------- -------- --------
16,959 19,301 49,671 55,113
-------- -------- -------- --------
EXPENSES:
Oil and gas production 6,982 6,875 21,208 21,038
General and administrative 2,786 2,172 7,857 5,543
Exploration and abandonments 2,108 634 7,336 3,748
Depreciation, depletion and amortization 7,533 6,038 21,896 15,758
Interest 4,789 3,340 14,622 8,856
-------- -------- -------- --------
24,198 19,059 72,919 54,943
-------- -------- -------- --------
Income (loss) before federal income taxes
and extraordinary item (7,239) 242 (23,248) 170
PROVISION FOR FEDERAL INCOME TAXES
Current -- -- -- 62
Deferred -- 90 -- 90
-------- -------- -------- --------
Income (loss) before extraordinary item (7,239) 152 (23,248) 18
Extraordinary loss resulting from early
extinguishment of debt -- (219) (299) (219)
-------- -------- -------- --------
NET LOSS $ (7,239) $ (67) $(23,547) $ (201)
======== ======== ======== ========
CUMULATIVE PREFERRED STOCK DIVIDEND $ 1,000 $ -- $ 1,307 $ --
======== ======== ======== ========
LOSS BEFORE EXTRAORDINARY ITEM
APPLICABLE TO COMMON EQUITY $ (8,239) $ 152 $(24,555) $ 18
======== ======== ======== ========
NET LOSS APPLICABLE TO COMMON EQUITY $ (8,239) $ (67) $(24,854) $ (201)
======== ======== ======== ========
LOSS PER SHARE:
Loss before extraordinary item $ (0.83) $ 0.01 $ (2.46) $ 0.00
Extraordinary loss resulting from early
extinguishment of debt -- (0.02) (0.03) (0.02)
-------- -------- -------- --------
NET LOSS $ (0.83) $ (0.01) $ (2.49) $ (0.02)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 9,870 10,340 9,974 10,425
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (7,239) $ (67) $ (23,547) $ (201)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization 7,533 6,038 21,896 15,758
Exploration and abandonments 61 78 323 136
Amortization of deferred charges 156 604 637 1,214
Deferred income tax expense -- (39) -- (39)
Allowance for doubtful accounts -- -- -- 208
Gain (loss) on sale of oil and gas properties -- -- (337) 30
Extraordinary loss resulting from early extinguishment of debt -- 348 299 348
Gain (loss) on investment transactions (1) 447 (5) (534)
--------- --------- --------- ---------
510 7,409 (734) 16,920
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (489) (3,181) 3,028 (1,317)
Decrease (increase) in other assets 359 (3,240) 518 (3,669)
Increase (decrease) in accounts payable 6,367 5,707 (1,286) 9,142
Increase (decrease) in other liabilities 4,701 2,555 6,945 2,747
--------- --------- --------- ---------
Net cash provided by (used in) operating activities 11,448 9,250 8,471 23,823
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (43,342) (61,854) (91,816) (97,732)
Proceeds from sale of oil and gas properties -- 2,460 3,158 5,169
Additions to other property and equipment (202) (378) (698) (1,663)
--------- --------- --------- ---------
Net cash used in investing activities (43,544) (59,772) (89,356) (94,226)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 25,000 72,704 136,000 87,304
Payments of long-term debt (21) (19,923) (91,562) (19,960)
Proceeds from issuance of preferred stock, net (30) -- 47,927 --
Proceeds from issuance of common stock, net -- -- -- 14
Purchase of common stock (3,539) (1,203) (5,379) (2,451)
Deferred loan and financing costs (42) (481) (3,355) (542)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 21,368 51,097 83,631 64,365
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,728) 575 2,746 (6,038)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,089 6,005 3,615 12,618
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,361 $ 6,580 $ 6,361 $ 6,580
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information as of September 30, 1998, and for
the nine months ended September 30, 1998 and 1997, is unaudited. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in this Form 10-Q pursuant to the rules and regulations of
the Securities and Exchange Commission. However, in the opinion of management,
these interim financial statements include all the necessary adjustments to
fairly present the results of the interim periods and all such adjustments are
of a normal recurring nature. The interim consolidated financial statements
should be read in conjunction with the audited financial statements for the
year ended December 31, 1997.
Costilla Energy, Inc. ("Costilla" or the "Company") was incorporated in
Delaware in June 1996 to consolidate and continue the activities previously
conducted by Costilla Energy, L.L.C., a Texas limited liability company (the
"LLC"), and its wholly owned subsidiaries, to acquire the assets of CSL
Management Corporation (which owned certain office equipment used by the
Company), and to acquire the stock of Valley Gathering Company. Costilla was
formed for the purpose of conducting a $60 million initial public offering of
common stock and a $100 million senior notes offering (the "Offerings"), which
Offerings were completed in early October 1996.
The Company is an oil and gas exploration and production concern with
properties located principally in the Gulf Coast region, the Rocky Mountain
region and the Permian Basin area of Texas and New Mexico.
2. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage
well-defined commodity price and interest rate risks. The Company is exposed to
credit losses in the event of nonperformance by the counterparties to its
commodity hedges and its interest rate swap agreements. The Company only deals
with reputable financial institutions as counterparties and anticipates that
such counterparties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to support
financial instruments subject to credit risk but monitors the credit standing of
the counterparties.
Commodity Hedges. The Company utilizes put option contracts, costless
collars and fixed price swap contracts ("swaps") to hedge the effect of price
changes on a portion of its future oil and gas production. Premiums paid and
amounts receivable under the put option contracts are amortized and accrued to
oil and gas sales, respectively. If market prices of oil and gas exceed the
strike price of put options, the options will expire unexercised, therefore,
reducing the effective price received for oil and gas sales by the cost of the
related option. Conversely, if market prices of oil and gas decline below the
strike price of put options, the options will be exercised, therefore,
increasing the effective price received for oil and gas sales by the proceeds
received from the related option.
A costless collar establishes both a floor price and a ceiling for the
commodity through the simultaneous purchase of a put option contract and the
sale of a call option contract. Since the value of the put option and the call
option offset at the time of their purchase, the collar is costless, therefore
there are no premiums to amortize. If market prices of oil and gas decline
below the strike price of put options, the options will be exercised,
therefore, increasing the effective price received for oil and gas sales by the
proceeds received from the related option. Conversely, if market prices of oil
and gas exceed the strike price of call options, the Company is obligated to
pay
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the counterparty the difference between the market price and the strike price
for the contract volumes, therefore, reducing the effective price received for
oil and gas sales by the amount paid to the counterparty.
Swaps establish a fixed price for the commodity. No premiums are paid
for these swaps and therefore there are no premiums to amortize. If market
prices of oil and gas decline below the swap price, the counterparty pays the
Company the difference between the swap price and the market price for the
contract volumes, therefore, increasing the effective price received for oil
and gas sales by the proceeds received under the swaps. Conversely, if market
prices of oil and gas exceed the swap price, the Company is obligated to pay
the counterparty an amount equal to the difference between the market price and
the swap price for the contract volumes, therefore, reducing the effective
price received for oil and gas sales by the amount paid to the counterparty.
The Company had established a costless collar for oil by purchasing
put options in August 1997 on 6,500 Bbls of oil per day which established a
floor price of $18.50 per Bbl and selling call options on 6,500 Bbls of oil per
day at $22.55 per Bbl. These oil option contracts expired August 31, 1998. In
August 1998, the Company entered into swaps for the remainder of 1998 and for
the calendar year 1999 covering 5,000 Bbls of oil per day. The swaps provide
for a price of $16.25 per Bbl from September 1, 1998 through December 31, 1998
and $16.40 per Bbl from January 1, 1999 through December 31, 1999. The
referenced prices are based upon the price at which WTI trades on the NYMEX.
These contracts do not apply and do not provide a hedge for each trading day
during the periods covered on which the NYMEX price for WTI closes at less than
$13.25 per Bbl for the contract period during 1998 and $13.50 per Bbl during
1999.
The Company has established a costless collar for gas by purchasing
put options on 40,000 Mmbtu of gas per day which establish a floor price of
$2.40 per Mmbtu and selling call options on 40,000 Mmbtu of gas per day at
$2.55 per Mmbtu. These gas option contracts continue through October 1998.
The referenced gas prices are based upon the index price for Houston Ship
Channel gas sales. As of September 30, 1998 the Company had sold a put option
on 40,000 Mmbtu of gas per day at $2.00 per Mmbtu based upon the index price
for Houston Ship Channel gas sales during the months of September and October
1998.
Interest Rate Swap Agreements. The Company had an interest rate swap
agreement in place as of September 30, 1998 with a notional amount of $24
million, a fixed rate of 7.5% and which will expire in January, 1999. As a
result of the Company's borrowings against its line of credit, which bears
interest on a floating rate basis, the interest rate swap agreement again
qualifies as a hedge during the third quarter of 1998.
3. LONG TERM DEBT
In August 1997, the Company entered into a credit agreement (the
"Revolving Credit Facility") with Bankers Trust Company, as agent, to refinance
its existing bank indebtedness and to finance a portion of the Ballard
Acquisition purchase price. The Revolving Credit Facility provides for a
maximum availability of $75.0 million, $25.5 million of which was borrowed at
September 30, 1998 against an available borrowing base of $40.0 million at such
date. Borrowings under the Revolving Credit Facility bear interest, at the
Company's option, at a floating rate which is at or above the Lender's prime
rate or above the applicable Eurodollar rate, depending on the percentage of
committed funds which have been borrowed. Interest is payable quarterly as to
base rate loans, and at the end of the applicable interest period as to
Eurodollar loans. The borrowing base of the Revolving Credit Facility is
automatically reduced by 5% each quarter beginning in August 1999, and payments
of principal are required in each quarter in which the outstanding principal
balance is greater than the reduced borrowing base. The remaining balance is
payable on August 28, 2002, the maturity date of the Revolving Credit Facility.
Under the Revolving Credit Facility, the Company is obligated to pay certain
fees to the lender, including a commitment fee based on the unused portion of
the commitment. The Revolving Credit Facility contains customary restrictive
covenants (including restrictions on the payment of dividends and the
incurrence of additional indebtedness) and requires the Company to maintain (i)
a current ratio of not less than 1.0 to 1.0, including amounts available under
the Revolving Credit Facility and excluding current maturities under the
Revolving Credit Facility and the Acquisition Credit Facility, (ii) a ratio of
EBITDA to interest expense, for the last twelve months as of the end of each
quarter, of not less than 1.75 to 1 through December 31, 1998, 2.3 to 1 through
December 31, 1999 and 2.5 to 1 thereafter and (iii) a minimum tangible net
worth. At September 30, 1998, the Company was not in compliance with the
financial ratios. The Company sought and obtained a waiver from the Lenders
under the Revolving Credit Facility permitting the Company's non-compliance at
September 30, 1998. The Company believes that it is probable that the
acquisition described in Note 5 will be consummated and, in that case, the
Company will enter into a new credit facility. The Company anticipates that it
will be in compliance with all covenants required by the new credit facility.
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However, if the Acquisition is not consummated, the Company does not
anticipate that it will be in compliance with any of the financial ratios
currently required by the Revolving Credit Facility at December 31, 1998.
There is no assurance that the Lenders under the Revolving Credit Facility
would grant further waivers of the Company's non-compliance and, as a result,
the Lenders would have the ability to accelerate the maturity of all amounts
due under the Revolving Credit Facility. Borrowings under the Revolving Credit
Facility are secured by substantially all of the assets of the Company.
Contemporaneous with entering into the Revolving Credit Facility, the
Company also entered into a second credit agreement (the "Acquisition Credit
Facility") to provide the remaining financing for the Ballard Acquisition. The
Acquisition Credit Facility was a term loan in the amount of $30.0 million
which was repaid in full in connection with the sale of the 1998 Notes.
In October 1996, the Company issued $100 million aggregate principal
amount of 10.25% Senior Notes due October 1, 2006 (the "Notes"). The Notes
were sold at par and interest is payable April 1 and October 1, commencing
April 1, 1997. The Notes may not be redeemed prior to October 1, 2001, and
thereafter at a premium reducing to par, plus interest, by maturity. There is
no mandatory redemption of the Notes required prior to maturity. The Notes are
general unsecured senior obligations of the Company and rank equally in right
of payment with all other senior indebtedness of the Company and senior in
right of payment of all existing future subordinated indebtedness of the
Company. The Notes are subject to an Indenture between the Company and a
trustee. The Indenture restricts, among other things, the Company's ability to
incur additional indebtedness, pay dividends or make certain other restricted
payments, incur liens, engage in any sale and leaseback transaction, sell stock
of subsidiaries, apply net proceeds from certain assets sales, merge or
consolidate with any other person, sell, assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of the company, or enter
into certain transactions with affiliates. Net proceeds from the sale of the
Notes of approximately $96.1 million were used to repay existing indebtedness.
In January 1998, the Company issued an additional $80 million
aggregate principal amount of 10.25% Senior Notes due October 1, 2006 (the "
1998 Notes"). The notes were sold at a premium (102.5%) and interest is
payable April 1 and October 1, commencing April 1, 1998. The 1998 Notes may
not be redeemed prior to October 1, 2001, and thereafter at a premium reducing
to par, plus interest, by maturity. The 1998 Notes are subject to the same
terms and conditions as the Notes. Net proceeds from the sale of the 1998
Notes of approximately $78.8 million were used to repay the Acquisition Credit
Facility in full, all but $500,000 of the Revolving Credit Facility and the
remainder was used for general corporate working capital needs.
4. CONVERTIBLE PREFERRED STOCK
On June 3, 1998 the Company closed a private placement of 50,000
shares of its 7% (8% Paid in Kind) Series A Cumulative Convertible Preferred
Stock (the "Preferred Stock") to Enron Capital & Trade Resources Corp. and
Joint Energy Development Investments II Limited Partnership for a purchase
price of $50.0 million (the "Convertible Preferred Stock Offering"). Dividends
accrue and are payable quarterly, commencing September 15, 1998, in cash, or in
certain instances in shares of the Company's Common Stock. The dividend rate
is 7% for dividends paid in cash and 8% for dividends paid in shares of Common
Stock. The holders of the Preferred Stock may, at any time, convert shares of
Preferred Stock into shares of the Company's Common Stock at a conversion price
of $12.39 which, subject to certain adjustments, would result in the issuance
of 4,035,513 shares of Common Stock upon conversion of the Preferred Stock.
The Registrant may, at its option, redeem the shares of Preferred Stock after
June 15, 2001, subject to certain limitations, for a premium reducing to par on
June 15, 2004 and thereafter. Net proceeds from the Convertible Preferred
Stock Offering were $48.0 million, of which $29.0 million was used to repay all
but $0.5 million of the Revolving Credit Facility and the remainder was used
for general corporate purposes.
5. PENDING ACQUISITION
On September 4, 1998 the Company entered into a purchase and sale
agreement with Pioneer Natural Resources U.S.A., Inc. ("Pioneer") for the
purchase of certain oil and gas assets of Pioneer for $410.0 million,
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subject to certain adjustments. The assets to be purchased include producing
oil and gas properties, undeveloped mineral acres, undeveloped leasehold acres,
a license to use certain seismic data and gas plants, pipelines and processing
facilities. The Company paid a $25.0 million performance deposit to Pioneer
which may be subject to forfeiture if the Acquisition is not consummated, due
to a breach by the Company, and the Company may be liable for an additional $16
million in liquidated damages. The Company intends to fund the purchase price,
which is estimated to be approximately $390.0 million after adjustments,
through the sale of common stock, convertible preferred stock and borrowings
under a new bank credit facility. The acquisition is scheduled to close on
December 15, 1998.
6. REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Accounting Standards No.
130 "Reporting Comprehensive Income" ("FAS 130") which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Specifically, FAS 130 requires
that an enterprise (i) classify items of other comprehensive income by their
nature in a financial statement and (ii) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
This statement is effective for fiscal years beginning after December 15, 1997.
The Company has adopted the provisions of FAS 130 in its consolidated financial
statements for periods ending after December 31, 1997. The Company had no
financial instruments giving rise to comprehensive income during the three and
nine month periods ended September 30, 1998.
Comprehensive income consists of the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. Specifically, this includes net income and other
comprehensive income, which is made up of certain changes in assets and
liabilities that are not reported in a statement of operations but are included
in the balances within a separate component of equity in a statement of
financial position. Such changes include, but are not limited to, unrealized
gains for marketable securities and future contracts, foreign currency
translation adjustments and minimum pension liability adjustments.
9
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COSTILLA ENERGY, INC.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of Costilla to be materially different
from any future results, performance, or achievements expressed or implied by
such forward- looking statements. Such factors include, among others, the
following: the volatility of oil and gas prices, the Company's drilling
results and ability to replace oil and gas reserves, the availability of
capital resources, the reliance upon estimates of proved reserves, operating
hazards and uninsured risks, competition, government regulation, and the
ability of the Company to implement its business strategy, and other factors
referenced in the Company's public filings with the Securities and Exchange
Commission.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. From January 1, 1993 to
September 30, 1998, the Company closed nine acquisitions for an aggregate
purchase price of approximately $149.0 million. Two of those transactions
involved acquisitions from Pioneer's predecessor in 1995 and 1996 for a total
purchase price of approximately $85.0 million.
The Company's strategy is to utilize its technical staff and
technological advances to increase its oil and gas reserves, production and
cash flow from operations through an active exploration program and the
acquisition and development of proved reserves. In addition, Costilla
continues to evaluate the acquisition of undeveloped acreage for its
exploration efforts. Costilla has in-house exploration expertise using 3-D
seismic technology to identify new drilling opportunities as well as for the
development of acquired properties.
The Company has grown primarily through acquisitions which impacted
its reported financial results in a number of ways. Properties sold by others
frequently have not received focused attention prior to sale. After
acquisition, certain of these properties are in need of maintenance, workovers,
recompletions and other remedial activity not constituting capital
expenditures, which substantially increase lease operating expenses. The
increased production and revenue resulting from these expenditures is
predominately realized in periods subsequent to the period of expense.
The following table sets forth certain operating data of Costilla for
the periods presented:
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OIL AND GAS PRODUCTION:
Oil (Mbbls) 461 565 1,510 1,601
Gas (Mmcf) 4,814 4,824 12,376 11,545
MMCFE (1) 7,580 8,214 21,436 21,151
AVERAGE SALES PRICES (2):
Oil (per Bbbl) $ 14.96 $ 16.91 $ 15.26 $ 18.08
Gas (per Mcf) 2.06 2.03 2.08 2.19
COSTS PER MCFE (1):
Production cost $ 0.92 $ 0.84 $ 0.99 $ 0.99
Depreciation, depletion and amortization 0.99 0.74 1.02 0.75
General and administrative expenses 0.37 0.26 0.37 0.26
</TABLE>
- ----------
(1) MCFE represents equivalent Mcf of gas. In reference to oil, natural gas
equivalents are determined using the ratio of one barrel of crude oil,
condensate or natural gas liquids to six Mcf of natural gas. MMCFE
represents one thousand Mcf of gas equivalent.
(2) Before deduction of production taxes and including hedging results.
Costilla uses the successful efforts method of accounting for its oil
and gas activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that result in proved
reserves, and to drill and equip development wells are capitalized. Costs to
drill exploratory wells that do not result in proved reserves, geological,
geophysical and seismic costs, and costs of carrying and retaining unproved
properties are expensed. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted using the
unit-of-production method. Unproved oil and gas properties that are
individually significant are periodically reviewed for impairment of value, and
a loss is recognized at the time of impairment by providing an impairment
allowance. Other unproved properties are amortized based on the Company's
experience of successful drilling and average holding period.
The Company utilizes put option contracts, costless collars and swaps
to hedge the effect of price changes on a portion of its future oil and gas
production. Premiums paid and amounts receivable under the put option
contracts are amortized and accrued to oil and gas sales, respectively. If
market prices of oil and gas exceed the strike price of put options, the
options will expire unexercised, therefore, reducing the effective price
received for oil and gas sales by the cost of the related option. Conversely,
if market prices of oil and gas decline below the strike price of put options,
the options will be exercised, therefore, increasing the effective price
received for oil and gas sales by the proceeds received from the related
option.
A costless collar establishes both a floor price and a ceiling for the
commodity through the simultaneous purchase of a put option contract and the
sale of a call option contract. Since the value of the put option and the call
option offset at the time of their purchase, the collar is costless, therefore
there are no premiums to amortize. If market prices of oil and gas decline
below the strike price of put options, the options will be exercised,
therefore, increasing the effective price received for oil and gas sales by the
proceeds received from the related option. Conversely, if market prices of oil
and gas exceed the strike price of call options, the Company is obligated to
pay the counterparty the difference between the market price and the strike
price for the contract volumes, therefore, reducing the effective price
received for oil and gas sales by the amount paid to the counterparty.
Swaps establish a fixed price for the commodity. No premiums are paid
for these price swap contracts and therefore there are no premiums to amortize.
If market prices of oil and gas decline below the swap price, the counterparty
pays the Company the difference between the swap price and the market price for
the contract volumes, therefore, increasing the effective price received for
oil and gas sales by the proceeds received under the
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swaps. Conversely, if market prices of oil and gas exceed the swap price, the
Company is obligated to pay the counterparty an amount equal to the difference
between the market price and the swap price for the contract volumes,
therefore, reducing the effective price received for oil and gas sales by the
amount paid to the counterparty.
The net effect of the Company's commodity hedging activities increased
oil and gas revenues by $3,163,000 and $7,299,923 for the three and nine month
periods ended September 30, 1998 and reduced oil and gas revenues by $338,950
and $1,085,280 for the comparable periods in 1997. The Company had established
a costless collar for oil by purchasing put options on 6,500 Bbls of oil per
day which establish a floor price of $18.50 per Bbl and selling call options on
6,500 Bbls of oil per day at $22.55 per Bbl. These oil option contracts
expired August 1998. In August 1998, the Company entered into price swap
contracts for the remainder of 1998 and for the calendar year 1999 covering
5,000 Bbls of oil per day. The contracts provide for a price of $16.25 per Bbl
from September 1, 1998 through December 31, 1998 and $16.40 per Bbl from
January 1, 1999 through December 31, 1999. The referenced prices are based
upon the price at which WTI trades on the NYMEX. These contracts do not apply
and do not provide a hedge for each trading day during the period covered on
which the NYMEX price for WTI closes at less than $13.25 per Bbl for the
contract period during 1998 and $13.50 per Bbl during 1999. For the three
months and nine months ended September 30, 1998, the Company has received a
gross wellhead sales price for oil of approximately 74 % and 75 %,
respectively, of the NYMEX price.
The Company has established a costless collar for gas by purchasing
put options on 40,000 Mmbtu of gas per day which establish a floor price of
$2.40 per Mmbtu and selling call options on 40,000 Mmbtu of gas per day at
$2.55 per Mmbtu. These gas option contracts continue through October 1998.
The referenced gas prices are based upon the index price for Houston Ship
Channel gas sales, which is approximately 100% of NYMEX. For the three months
and nine months ended September 30, 1998, the Company has received a gross
wellhead sales price for gas of approximately 93% of NYMEX. As of September
30, 1998 the Company had sold a put option on 40,000 Mmbtu of gas per day at
$2.00 per Mmbtu based upon the index price for Houston Ship Channel gas sales
during the months of September and October 1998. In November 1998, the Company
entered into fixed price swap contracts for a period of three years, beginning
January 1, 1999, covering 25,000 Mmbtu of gas at prices of $2.60 per Mmbtu for
the months of November through March and $2.25 per Mmbtu for the months of
April through October, resulting in a blended price of $2.40 per Mmbtu. The
referenced gas prices are based upon the price at which gas trades on the
NYMEX. The counterparty has certain rights to extend the contracts for up to
25,000 Mmbtu per day for up to two years through December 2003 at the above
noted prices.
The Company utilizes interest rate swap agreements to reduce the
potential impact of increases in interest rates on floating-rate, long term
debt. If market rates of interest experienced during the applicable swap term
are below the rate of interest effectively fixed by the swap agreement, the
rate of interest incurred by the Company will exceed the rate that would have
been experienced under its then outstanding floating-rate indebtedness. The
net effect of the Company's interest rate hedging activities decreased interest
expense by $17,000 for the three months and by $25,000 for the nine months
ended September 30, 1998. The Company had an interest rate swap agreement in
place as of September 30, 1998 with a notional amount of $24 million, a fixed
rate of 7.5% and which will expire in January, 1999. As a result of the
Company's borrowings against its line of credit, which bears interest on a
floating rate basis, the interest rate swap agreement again qualifies as a
hedge during the third quarter of 1998.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
The Company's oil and gas revenues for the three months ended
September 30, 1998 were $16,809,000, representing an decrease of $2,530,000
(13%) from revenues of $19,339,000 in 1997. Revenues increased approximately
$5,510,000 due to successful new drilling activities and the net effect of
revenues related to properties purchased exceeded revenues from properties
sold. Lower oil prices offset in part by higher gas prices combined to account
for $1,580,000 of the decrease in revenues. Revenues attributable to gas
imbalances accounted for $2,743,000 of revenue in 1997, for which there were no
comparable amounts in 1998. The average net oil price per barrel received in
1998 was $14.96 compared to $16.91 in 1997, a 12% decrease, and the average net
gas price received in 1998 was $2.06 per Mcf compared to $2.03 in 1997, a 1%
increase. Revenues received from oil and gas hedges accounted for $4.58 per
barrel and $0.22 per Mcf for the three months ended September 30, 1998. Oil
and gas hedges cost $0.37 per barrel and $0.03 per Mcf for the comparable
period in 1997.
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Oil and gas production was 7,580 MMCFE in 1998 compared to 8,214 MMCFE
in 1997, an 8% decrease. Volumes related to gas imbalances were responsible
for 1,644 MMCFE in 1997. Excluding the volumes from gas imbalances in 1997,
1998 production increased 15% due to additional production from a combination
of successful drilling activities and acquired properties, partially offset by
production related to properties sold.
Oil and gas production costs for the three month period ended
September 30, 1998 were $6,982,000 ($0.92 per MCFE), compared to $6,875,000 in
1997 ($0.84 per MCFE), representing an increase of $107,000 (2%). Excluding
the effect of gas imbalance volumes on 1997 production costs per MCFE,
production costs in 1998 were $0.92 compared to $1.05 in 1997, or $0.13 (12%)
lower on a per MCFE basis due to a combination of lower production costs on
both newly completed wells and acquired properties and the sale of certain oil
and gas properties.
General and administrative expenses for the three months ended
September 30, 1998 were $2,786,000, representing an increase of $614,000 (28%)
from 1997 of $2,172,000. The increase is primarily due to an increase in
personnel and related costs necessary to accommodate the increase in the
Company's oil and gas activities, including the Acquisition and Exploration
Agreement with Ballard Petroleum, and an increase from 50% to 100% in its
Moldova operations.
Exploration and abandonment expense increased to $2,108,000 for the
three months ended September 30, 1998 compared to $634,000 in 1997. Dry hole
and abandonment costs increased to $1,468,000 in 1998 from $343,000 in 1997.
The Company incurred $177,000 of seismic costs for the three months ended
September 30, 1998, compared to $91,000 in the comparable period in 1997. The
Company incurred $463,000 of other geological and geophysical costs during the
three month period ended September 30, 1998 compared to $200,000 for the same
period in 1997.
Depreciation, depletion and amortization ("D D & A") expense for the
three month period ended September 30, 1998 was $7,533,000 compared to
$6,038,000 for 1997, representing an increase of $1,495,000 (25%). During the
1998 period, D D & A on oil and gas production was provided at an average rate
of $0.99 per MCFE compared to $0.74 per MCFE for 1997. Of the $1,495,000
increase, $1,642,000 was due to the $0.25 per MCFE increase in D D & A rate
necessitated by lower oil prices at September 30, 1998 than those experienced
at September 30, 1997.
Interest expense was $4,789,000 for the three months ended September
30, 1998, compared to $3,340,000 for the comparable period in 1997. The
$1,449,000 (43%) increase was attributable to a combination of higher levels of
average outstanding indebtedness and the issuance in January 1998 of an
additional $80 million of 10.25% senior notes due in 2006. The average amounts
of applicable interest-bearing debt in 1998 and 1997 were $187,837,000 and
$134,352,000, respectively. The effective annualized interest rate in 1998 was
10.2%, as compared to 9.9% in 1997.
Nine months ended September 30, 1998 Compared to Nine months ended September
30, 1997
The Company's oil and gas revenues for the nine months ended September
30, 1998 were $48,824,000, representing a decrease of $5,407,000 (10%) from
revenues of $54,231,000 in 1997. Lower commodity prices accounted for a
decrease in revenues of $4,818,000 which was partially offset by a combination
of successful drilling activities and revenues related to properties purchased
or sold. The average net oil price per barrel received in 1998 was $15.26
compared to $18.08 in 1997, an 16% decrease, and the average net gas price
received in 1998 was $2.08 compared to $2.19 in 1997, a 5% decrease. Revenues
received from oil and gas hedges accounted for $3.88 per barrel and $0.12 per
Mcf for the nine months ended September 30, 1998. Oil and gas hedges cost
$0.50 per barrel and $0.02 per Mcf for the comparable period in 1997.
Oil and gas production was 21,436 MMCFE in 1998 compared to 21,151
MMCFE in 1997, a 1% decrease. Volumes related to gas imbalances were
responsible for 1,644 MMCFE in 1997. Additional production from a combination
of successful drilling activities and acquired properties was largely offset by
production related to properties sold.
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Gain on sale of assets was $337,000 for the nine months ended
September 30, 1998. There were no similar transactions in 1997.
Oil and gas production costs for the nine month period ended September
30, 1998 were $21,208,000 ($0.99 per MCFE), compared to $21,038,000 in 1997
($0.99 per MCFE), representing an increase of $170,000. Oil and gas production
costs in 1997 would have been $1.08 without the volumes related to gas
imbalances. Production costs in 1998 were $0.09 lower on a per MCFE basis due
to a combination of lower production costs on both newly completed wells and
acquired properties and the sale of certain oil and gas properties.
General and administrative expenses for the nine months ended
September 30, 1998 were $7,857,000, representing an increase of $2,314,000
(42%) from 1997 of $5,543,000. The increase is primarily due to an increase in
personnel and related costs necessary to accommodate the increase in the
Company's oil and gas activities, including the Acquisition and Exploration
Agreement with Ballard Petroleum.
Exploration and abandonment expense increased to $7,336,000 for the
nine months ended September 30, 1998 compared to $3,748,000 in 1997. Dry hole
and abandonment costs increased to $5,461,000 in 1998 from $2,256,000 in 1997.
The Company incurred $801,000 of seismic costs for the nine months ended
September 30, 1998, compared to $983,000 in the comparable period in 1997. The
Company incurred $1,073,000 of other geological and geophysical costs during
the nine month period ended September 30, 1998 compared to $509,000 for the
same period in 1997.
Depreciation, depletion and amortization ("D D & A") expense for the
nine month period ended September 30, 1998 was $21,896,000 compared to
$15,758,000 for 1997, representing an increase of $6,138,000 (39%). During the
1998 period, D D & A on oil and gas production was provided at an average rate
of $1.02 per MCFE compared to $0.75 per MCFE for 1997. Of the $6,138,000
increase, $5,711,000 was due to the $0.27 per MCFE increase in D D & A rate
necessitated by lower oil and gas prices at September 30, 1998 than those
experienced at September 30, 1997.
Interest expense was $14,622,000 for the nine months ended September
30, 1998, compared to $8,856,000 for the comparable period in 1997. The
$5,766,000 (65%) increase was attributable to a combination of higher levels of
average outstanding indebtedness and the issuance in January 1998 of an
additional $80 million of 10.25% senior notes due in 2006. The average amounts
of applicable interest-bearing debt in 1998 and 1997 were $188,995,000 and
$113,077,000, respectively. The effective annualized interest rate in 1998 was
10.3%, as compared to 10.4% in 1997.
Results of operations for the nine months ended September 30, 1998 and
1997 include extraordinary charges of $299,000 and $219,000, respectively.
These extraordinary charges related to the early extinguishment of the
Acquisition Credit Facility and consisted of previously capitalized debt
issuance costs. A portion of the proceeds from the 1998 Notes was used to
repay the Acquisition Credit Facility.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Provided By Operating Activities
For the nine months ended September 30, 1998, net cash provided by
operating activities decreased to $8.5 million from $23.8 million for 1997.
Cash provided by operations, before changes in operating assets and
liabilities, decreased to a negative $0.7 million from $16.9 million for the
comparable period in 1997 due to a combination of lower oil and gas prices and
increased general and administrative expense, exploration and abandonments and
interest expense. Oil and gas revenues decreased by $5.4 million for the nine
months ended September 30, 1998 as compared to the same period in 1997 because
of lower oil and gas prices. Oil and gas revenues attributable to commodity
hedges amounted to $7.3 million for the nine months ended September 30, 1998.
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Net Cash Used in Investing Activities
Net cash used in investing activities for the nine months ended
September 30, 1998 was $89.4 million. Approximately $12.1 million was used for
the acquisition of oil and gas properties, with $10.4 million going to Manti
Resources ("Manti Acquisition"), $25.0 million was used for the performance
deposit to Pioneer Natural Resources U.S.A. Inc. ("Pioneer") with respect to
the transaction described under "Capital Resources", $52.5 million was used for
exploration and development activities, $2.2 was used to acquire the remaining
membership interest in the limited liability company through which the
Company's Moldovan oil and gas operations are conducted and $0.7 million for
other property and equipment. Proceeds from the sale of various oil and gas
assets resulted in net cash provided from investing activities of approximately
$3.2 million. For the nine months ended September 30, 1997, net cash used in
investing activities was $94.2 million. Approximately $41.2 million was used
for the Ballard Acquisition, $56.5 million was used for exploration and
development activities and $1.7 million was used for other property and
equipment and $5.2 million was provided by sales of oil and gas properties.
Financing Activities
For the nine months ended September 30, 1998, the Company incurred
$136.0 million of bank debt and issued $50.0 million of its 7% Series A
Cumulative Convertible Preferred Stock which resulted in net proceeds therefrom
of approximately $48.0 million, bringing total combined proceeds to $184.0
million. Approximately $91.5 million was used to repay certain prior bank
debt, $25.0 million was used for the performance deposit to Pioneer, $14.3
million was used for the acquisition of oil and gas properties, approximately
$5.4 million was for the purchase of shares of its common stock, approximately
$3.4 was used for financing costs and the remainder was used in connection with
its exploration and development activities. During the nine months ended
September 30, 1997, the Company incurred $87.3 million of new debt of which
approximately $20.0 million was used to repay certain prior bank debt, $41.2
million was used for the Ballard Acquisition, approximately $2.5 million, was
used for the purchase of shares of its common stock and the balance was used in
connection with its exploration and development activities.
The Company entered into the Revolving Credit Facility in August 1997.
Approximately $19.9 million of the funds initially borrowed were used for the
extension and refinancing of a prior senior credit facility and $11.2 million
was used as a portion of the purchase price in the Ballard Acquisition. The
Revolving Credit Facility provides for a maximum availability of $75.0 million,
with an current borrowing base of $40.0 million, $25.5 million of which was
borrowed at September 30, 1998. Borrowings under the Revolving Credit Facility
bear interest, at the Company's option, at a floating rate which is at or above
the lender's prime rate or above the applicable Eurodollar rate, depending on
the percentage of committed funds which have been borrowed. Interest is
payable quarterly as to base rate loans, and at the end of the applicable
interest period as to Eurodollar rate loans. The borrowing base of the
Revolving Credit Facility is automatically reduced by 5% each quarter beginning
in August 1999, and payments of principal are required in each such quarter in
which the outstanding principal balance is greater than the reduced borrowing
base. The remaining balance is payable on August 31, 2002, the maturity date
of the Revolving Credit Facility.
Contemporaneous with entering into the Revolving Credit Facility, the
Company also entered into the Acquisition Credit Facility to provide the
remaining financing for the Ballard Acquisition. The Acquisition Credit
Facility was a term loan in the amount of $30.0 million which was repaid in
full in connection with the sale of notes by the Company described in the
following paragraph.
In January 1998 the Company issued $80 million of 10.25% Senior Notes
due 2006 (the "Supplemental Notes Offering"). The net proceeds of the
Supplemental Notes Offering were approximately $78.8 million. The Company used
$30.0 million to repay the Acquisition Credit Facility and $32.5 million to
repay all but $0.5 million of the Revolving Credit Facility. In mid-January
1998 approximately $10.0 million of the remaining proceeds were used to fund
the Manti Acquisition.
On June 3, 1998 the Company closed a private placement of 50,000
shares of its 7% (8% Paid in Kind) Series A Cumulative Convertible Preferred
Stock (the "Preferred Stock") to Enron Capital & Trade Resources Corp. and
Joint Energy Development Investments II Limited Partnership for a purchase
price of $50.0 million (the "Convertible Preferred Stock Offering"). Dividends
accrue and are payable quarterly, commencing September 15,
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1998, in cash, or in certain instances in shares of the Company's Common Stock.
The dividend rate is 7% for dividends paid in cash and 8% for dividends paid in
shares of Common Stock. The holders of the Preferred Stock may, at any time,
convert shares of Preferred Stock into shares of the Company's Common Stock at
a conversion price of $12.39 which , subject to certain adjustments, would
result in the issuance of 4,035,513 shares of Common Stock upon conversion of
the Preferred Stock. The Registrant may, at its option, redeem the shares of
Preferred Stock after June 15, 2001, subject to certain limitations, for a
premium reducing to par on June 15, 2004 and thereafter. Net proceeds from the
Convertible Preferred Stock Offering were $48.0 million, of which $29.0 million
was used to repay all but $0.5 million of the Revolving Credit Facility and the
remainder for general corporate purposes.
Capital Resources
Funding for the Company's business activities has historically been
provided by bank financings, cash flow from operations, equity sales, property
divestitures and joint ventures with industry participants. The 1995
Acquisition, 1996 Acquisition and Ballard Acquisition were substantially funded
by bank financings.
On September 4, 1998 the Company entered into a purchase and sale
agreement with Pioneer for the purchase of certain oil and gas assets of
Pioneer for $410.0 million, subject to certain adjustments (the "Acquisition").
The assets to be purchased include producing oil and gas properties,
undeveloped mineral acres, undeveloped leasehold acres, a license to use
certain seismic data and gas plants, pipelines and processing facilities. The
Company paid a $25.0 million performance deposit to Pioneer which may be
subject to forfeiture if the Acquisition is not consummated. The Company
intends to fund the purchase price, which is estimated to be approximately
$390.0 million after adjustments (the "Estimated Purchase Price"), through the
sale of common stock and convertible preferred stock (the "Stock Issuance") and
borrowings under a new bank credit facility ("New Credit Facility"). The
Company believes that it is probable that it will obtain sufficient funds from
the Stock Issuance which, when combined with the expected proceeds from the New
Credit Facility, will allow the Company to complete the Acquisition.
Funds available under the Revolving Credit Facility were significantly
reduced to fund the $25 million performance deposit made upon execution of the
Acquisition Agreement. In the event the Acquisition is not consummated due to
a breach by Costilla, the Company would forfeit the $25 million deposit and be
liable for an additional $16 million in liquidated damages. The Company does
not currently have available, and has not made arrangements to obtain
financing, to pay the additional $16 million payment, which may make it
necessary to sell assets to fund the payment. The Company's ability to
generate or obtain capital resources necessary to fund its operating plans
could be significantly and adversely affected as a result of a failure to
consummate the Acquisition. If the Acquisition is consummated, the Company
anticipates that cash flow from operations will be sufficient for its 1999
capital expenditures, excluding acquisitions. However, because the Company's
ultimate 1999 capital expenditures, future cash flows and the availability of
financing are subject to a number of variables, there can be no assurance that
the Company's capital resources will be sufficient to maintain its capital
expenditures. In addition, if the Company is unable to generate sufficient
cash flow from operations to service its debt, it may be required to refinance
all or a portion of its debt or to obtain additional financing. There can be
no assurance that any such refinancing would be possible or that any additional
financing could be obtained.
If the Company is unable to obtain the financing necessary to
consummate the Acquisition, the Company may be required to seek alternative
financing or risk termination of the Acquisition Agreement and the consequences
resulting therefrom. The Company does not currently have any arrangements or
commitments for alternative sources of financing, and there can be no assurance
that such sources will be available.
At September 30, 1998, the Company was not in compliance with the
financial ratios required by the Revolving Credit Facility. The Company sought
and obtained a waiver from the Lenders under the Revolving Credit Facility
permitting the Company's non-compliance at September 30, 1998. If the Stock
Issuance is consummated, the Company will enter into the New Credit Facility,
close the Acquisition and anticipates that it will be in compliance with all
required financial ratios. However, if the Acquisition is not consummated, the
Company does not anticipate that it will be in compliance with any of the
financial ratios currently required by the Revolving Credit Facility at
December 31, 1998. There is no assurance that the Lenders under the Revolving
Credit Facility would grant further waivers of the Company's non-compliance
and, as a result, the Lenders would have the ability to accelerate the maturity
of all amounts due under the Revolving Credit Facility.
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Although certain of the Company's costs and expenses may be affected
by inflation, inflationary costs have not had a significant effect on the
Company's results of operations.
Capital Expenditures
During the nine months ended September 30, 1998 the Company had oil
and gas expenditures of approximately $52.5 million, exclusive of the $25.0
million performance deposit on the Acquisition and the $14.3 million spent on
the acquisition of existing oil and gas properties. The $52.5 million of oil
and gas expenditures consisted of $13.5 million of exploration costs, $29.7
million of development costs, $3.6 million of undeveloped acreage and $5.7
million on wells in progress at September 30, 1998. The Company anticipates
that its capital expenditures for the fourth quarter of 1998 will be
approximately $8.0 million, excluding the Acquisition. If the Acquisition is
consummated, the Company expects that cash flow from operations will be
adequate to fund 1999 oil and gas capital expenditures, exclusive of any
acquisitions.
Recent Accounting Pronouncements
YEAR 2000 - The Company will be required to modify its information
systems in order to accurately process data referencing the Year 2000. Because
of the importance of occurrence dates in the oil and gas industry, the
consequences of not pursuing these modifications could be very significant to
the Company's ability to manage and report operating activities. The Company's
third-party software vendor for its integrated oil and gas information system
is currently modifying the system to accurately handle the Year 2000 issue.
All necessary programming modifications are scheduled to be completed by
December 31, 1998. These modifications are part of the routine updates the
Company receives from its third-party software vendor as part of its systems
support contract, and the Company believes it will not incur any material costs
in addition to the ordinary software maintenance costs in preparing its
information systems for the Year 2000 issue.
In addition to its information systems, the Company is conducting an
assessment of the Year 2000 issues with respect to the production and other
field equipment associated with its current properties and the Acquisition
Properties. A significant failure of such equipment may cause delays in
production and product transportation which could have a material adverse
effect on the Company. Following this assessment, the Company intends to
establish a plan to make such equipment Year 2000 compliant or develop a
contingency plan for a possible failure of such equipment.
The Year 2000 issues also affect service companies, purchasers of
production, utility providers and other persons with whom the Company
contracts. The Company has submitted Year 2000 compliance questionnaires to
many of such persons, but is currently not aware of the preparations undertaken
by such person. A material and widespread failure of the utility service,
transportation of oil or gas, or similar service the Company utilizes could
have a material effect on the Company's production, cash flow and overall
financial condition. Therefore, failure of such third parties to adequately
prepare for Year 2000 issues may have a material adverse effect on the Company,
notwithstanding the Company's actions to prepare its own information systems.
The Company does not currently have a contingency plan in the event such third
parties are unable to provide services or products to the Company.
SEGMENT REPORTING - In June 1997, the FASB issued Statement of
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131") which establishes standards for public
business enterprises for reporting information about operating segments in
annual financial statements and requires that such enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement also established standards for related
disclosures about products and services, geographic areas, and major customers.
FAS 131 is effective for financial statements for years beginning after
December 15, 1997.
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The Company operates in the one product line of oil and gas production
in limited geographic areas. This information and information about major
customers historically has been disclosed in the Company's annual financial
statements.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, The
FASB issued Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" which establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction.
Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk.
This Statement applies to all entities and is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Initial application of this
Statement should be as of the beginning of an entity's fiscal quarter; on that
date, hedging relationships must be designated anew and documented pursuant to
the provisions of this Statement. Earlier application of all of the provisions
of this Statement is encouraged, but it is permitted only as of the beginning
of any fiscal quarter that begins after issuance of this Statement. This
Statement should not be applied retroactively to financial statements of prior
periods.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
*10.1 Purchase and Sale Agreement dated
September 4, 1998 by and between Costilla
Energy, Inc. and Pioneer Natural
Resources USA, Inc.
*27.1 Financial Data Schedule
* Filed herewith
</TABLE>
REPORTS ON FORM 8-K
None.
19
<PAGE> 20
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COSTILLA ENERGY, INC.
Date: November 13, 1998 By: /S/ BOBBY W. PAGE
-------------------------------
Bobby W. Page
Senior Vice President
and Chief Financial Officer
20
<PAGE> 21
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
*10.1 Purchase and Sale Agreement dated
September 4, 1998 by and between Costilla
Energy, Inc. and Pioneer Natural
Resources USA, Inc.
*27.1 Financial Data Schedule
* Filed herewith
</TABLE>
<PAGE> 1
EXHIBIT 10.1
PIONEER 1998 DIVESTITURE PACKAGE
PURCHASE AND SALE AGREEMENT
by and between
PIONEER NATURAL RESOURCES USA, INC.
as Seller
and
COSTILLA ENERGY, INC.
as Purchaser
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
ARTICLE 1. SALE AND PURCHASE
<S> <C>
Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Sale and Purchase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Excluded Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 2. CONSIDERATION
Consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Manner of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Like Kind Exchange Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Performance Deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Allocations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 3. DEFECTS
Definition of Acceptable Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Definition of Permitted Encumbrances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Environmental and Physical Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Identified Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Notice of Defects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Remedy for Defects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Special Defects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Preferential Purchase Rights and Consents to Assign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 4. SELLER'S REPRESENTATIONS AND DISCLAIMERS
Existence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Foreign Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
LIMITATION AND DISCLAIMER OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
<PAGE> 3
<TABLE>
ARTICLE 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
<S> <C>
Existence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Power. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Investment Intent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Sophisticated Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Economic Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Accredited Investor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE 5A. ADDITIONAL COVENANTS
Maintenance of Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
No Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Access to Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Permissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE 6. SELLER'S CONDITIONS OF CLOSING
Representations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Officer's Certificate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Pending Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
HSR Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE 7. PURCHASER'S CONDITIONS OF CLOSING
HSR Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Seller's Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE 8. CLOSING.
Time and Place of Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Closing Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Shareholder and Board Approval of Transaction; Closing Date Extension . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
<PAGE> 4
<TABLE>
ARTICLE 9. POST-CLOSING OBLIGATIONS
<S> <C>
Receipts and Credits; Suspense Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Costs and Liabilities; Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Delivery of Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Access to Data and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Purchaser's Release of Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Retroactive Effect. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Inducement to Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Purchaser's Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Related Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Evidence of Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Seller's Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Release of Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE 10. TERMINATION
Right of Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE 11. TAXES
Apportionment of Ad Valorem and Property Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Sales Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Other Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Cooperation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE 12. PHYSICAL CONDITION OF THE ASSETS
Prior Use of Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Assumption of Assets in Present Condition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Casualty Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>
<PAGE> 5
<TABLE>
ARTICLE 13. MISCELLANEOUS
<S> <C>
Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Assignability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
DTPA Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
No Third Party Beneficiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Not to be Construed Against Drafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Operatorship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
HSR Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Seller's Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Time of Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
No Partnership Created. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Express Negligence Rule; Conspicuousness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Filing and Recording. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
Exhibit "A" Subject Properties
Exhibit "A-I" Alongside Interests
Exhibit "B" Form of Assignment and Bill of Sale
Exhibit "C" Lands
Schedule 1 to Exhibit "A" Compressor Inventory List (GC Only)
Schedule 2 to Exhibit "A" Non-leasehold Equipment (GC Only)
Schedule 3 to Exhibit "A" Victoria Office & Yard (GC Only)
Schedule 4 to Exhibit "A" Undeveloped Leasehold (All)
Schedule 5 to Exhibit "A" Vehicle Report (All)
Schedule 6 to Exhibit "A" Gas Plants (PB & MC)
Schedule 3.1 Warwink Wells
Schedule 3.6A ARIES Proved Developed Producing
Schedule 3.6B NonARIES Producing Mineral Wells
Schedule 4.9 Litigation Schedule
Schedule 9.11 Purchaser Assumed Litigation
Schedule 13.24 Arbitration
<PAGE> 6
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT (this "Agreement") is made this 4th
day of September 1998, by and between PIONEER NATURAL RESOURCES USA, INC., a
Delaware corporation ("Seller"), and COSTILLA ENERGY, INC., a Delaware
Corporation ("Purchaser").
RECITALS:
WHEREAS, on the terms and conditions provided in this Agreement,
Seller has agreed to sell and Purchaser has agreed to purchase certain of
Seller's interests in certain oil and gas leases, agreements, contracts, real
property, personal property, equipment and related rights hereinafter defined.
NOW, THEREFORE, for good and valuable consideration and for the mutual
covenants contained herein, Seller and Purchaser hereby agree as follows:
ARTICLE 1. SALE AND PURCHASE
1.1. Effective Time. The effective time and date of the purchase
and sale contemplated hereby shall be 7:00 a.m. October 1, 1998 at the site of
the respective Subject Properties as defined below (the "Effective Time").
1.2. Sale and Purchase. Subject to the terms and conditions herein
contained, at Closing, as defined below, and effective as of the Effective Time,
Seller shall sell, assign, transfer and convey to Purchaser, and Purchaser shall
purchase, accept and receive, the right, title, and interest, if any, of Seller
as of the Effective Time [and, as to 1.2(a) below (the "Sale Interest")] in and
to the following described assets, less and except the Excluded Assets (the
"Assets"):
(a) the oil, gas and mineral leases and leasehold interests
appurtenant to the wells and/or Units described in Exhibit
"A" attached hereto and incorporated herein to the extent and
only to the extent they cover the lands described on Exhibit
C attached hereto together with Seller's interest in any
pooled, communitized or unitized acreage to the extent and
only to the extent any such interest directly pertains to such
wells and lands and all of the rights appurtenant thereto (the
"Subject Properties") (said interests to include all of the
lands covered by said leases appurtenant to the wells on
Exhibit "A" except in the instance(s) where Seller has
retained a well on or other rights or interests in said leases
and
1
<PAGE> 7
leaseholds in which event Purchaser shall receive the
pro-ration acreage attributable to the affected well(s) listed
on Exhibit "A" (or other minimum spacing unit or acreage
applicable) or such other lands as Purchaser and Seller may
agree, said lands to be described on Exhibit "A" to the
Assignment and Bill of Sale.);
(b) to the extent, and only to the extent, attributable or
allocable to the Subject Properties: (1) all wells (including,
but not limited to, the wells described in Exhibit "A" and all
other oil, gas, injection and water wells whether plugged or
unplugged and whether abandoned or not) ("Wells"), equipment,
gathering pipelines, gas facilities, gathering systems,
gathering, storage, distribution, treating, processing and
disposal facilities and tanks, tools, buildings, and all other
real or tangible personal property and fixtures which, as to
each of the foregoing items, are located on or directly and
solely related to the Subject Properties, including, without
limitation, items of personal property described in Schedules
1, and 2, to Exhibit "A", and specifically including portable
tools, snow vehicles, equipment, inventory, and the vehicles
listed on Schedule 5 to Exhibit "A" (collectively, the
"Rolling Stock") used exclusively on or exclusively
appurtenant to the Subject Properties or the Wells but except
as provided above, excluding personal property not solely
appurtenant to the Wells and personal property temporarily
located on the Subject Properties; (2) all oil, gas, mineral
and other hydrocarbon substances produced, saved and sold on
or after the Effective Time; (3) to the extent the same are
assignable or transferable by Seller, all orders, contracts,
title opinions and documents, abstracts of title, leases,
deeds, unitization agreements, pooling agreements, operating
agreements, division of interest statements, participation
agreements, gas purchase, sale transportation and processing
agreements and all other agreements and instruments; (4) all
surface leasehold and surface fee estates (but only to the
extent overlying and within the boundaries of the lands
comprising the Subject Properties or exclusively appurtenant
to or exclusively held and exclusively used in connection with
the operations of the Subject Properties), easements,
rights-of- way, licenses, authorizations, permits and similar
rights and interests, limited by and subject to the rights,
conditions and restrictions of third parties; (5) to the
extent assignable and limited by and subject to the rights of
third parties, lease files, land files, operating files, well
files, oil and gas sales contract files, gas processing files,
logs, test data, production histories, division order files,
abstracts, title files and materials, and all other books,
files and records (the "Records"), and all rights thereto,
limited by and subject to the rights of third parties; (6) all
other rights, privileges, benefits and powers conferred upon
the owner and holder of interests in the Subject Properties;
(7) all other interests in oil, gas and other minerals of
whatever nature directly appurtenant to the Subject
Properties, including, without limitation, all fee mineral and
royalty interests, reversionary interests, farmout rights and
overriding royalty interests; (8) a license, on Seller's
customary terms,
2
<PAGE> 8
to all existing seismic and geophysical raw data possessed by
Seller on the Effective Time, wholly owned by Seller, to the
extent and only to the extent covering the area directly
within the boundaries of the Subject Properties or within one
mile of the Subject Properties (but only to the extent it does
not cross over onto the boundary of a retained interest of
Seller or an Excluded Asset) and only to the extent permitted
by the applicable agreements and subject to all rights of
third parties and all conditions or restrictions imposed by
said third parties.
(c) to the extent and only to the extent necessary for the
ownership, use or development of the Subject Properties and
limited by and subject to the rights of and conditions or
restrictions imposed by third parties and applicable
agreements, the concurrent, nonexclusive right of ingress and
egress with respect to the fee, fee mineral, leasehold and
royalty retained or owned by Seller in the area of the
Subject Properties.
(d) the wells, real or personal property (or mixed property),
interests, assets, facilities or equipment identified on
Exhibit "A", Schedules 1, 2, 3, 4, 5 or 6, which may or may
not be expressly included in the engineering data previously
furnished to Purchaser but which constitute a part of the
Subject Properties and those interests, assets, facilities and
equipment appurtenant to the Subject Properties but which are
identified subsequent to the Execution Date by and placed on
Exhibit "A" or any of the Schedules listed immediately above
prior to Closing by Seller.
(e) the interests described on Exhibit "A-I " attached hereto
when offered by the owners thereof prior to Closing shall be
purchased by Purchaser at Closing for a value proportionate to
the allocated value of Seller's related interest in said
Asset, whether or not such interests are acquired by the
Seller on or prior to Closing, unless such interests are
subject to Defects specifically included in any Notice of
Defects delivered hereunder, in which case, at Seller's sole
option, (i) such affected interest shall be excluded from the
Assets or (ii) the value with respect to such interest shall
be reduced by the lesser of the cost to cure said defect or
the said defect value not to exceed the proportionate
allocated value for said interest and such interest shall be
conveyed to Purchaser at Closing as part of the Assets. All
such interests acquired by Purchaser shall be deemed to be a
part of the Sale Interest and subject to the terms of this
Agreement for all purposes and the Purchase Price shall be
increased at Closing by the amount allocated to such acquired
interests.
(f) the undeveloped leasehold identified in Exhibit A and more
fully described on Schedule 4 to Exhibit "A" together with all
contract rights, personal property or other rights directly
related thereto to the extent assignable, and subject to and
limited by the rights of third parties and Related Agreements.
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(g) the domestic U.S. mineral interests, royalty and overriding
royalty interests to the extent covering lands outside the
areas, land, counties, or parishes in the states described on
Exhibit E, with Seller expressly retaining, among other
things, all right, title and interest in the domestic U.S.
mineral interests, royalty and overriding royalty interests
inside the areas, land, counties, or parishes in the states
described on Exhibit E, (with such retained interests of
Seller referred to as the "Excluded Minerals", with Excluded
Minerals being considered Excluded Assets for purposes of this
Agreement) provided, however, as to such Excluded Minerals
should any land ultimately and specifically described on an
Exhibit "A" to any Assignment and Bill of Sale delivered to
Purchaser by Seller, pursuant to this Agreement (and an
interest in said land is intended to be conveyed thereby) fall
within the description for and conflict with the description
of Excluded Minerals, then as to and only as to the specific
lands described in the said Assignment and Bill of Sale
between Seller and Purchaser, all mineral, royalty and
overriding royalty interests of Seller, if any, to the extent
and only to the extent directly pertaining to and within the
boundaries of said specifically described lands shall not be
considered to be Excluded Minerals and shall be considered to
have been conveyed to Purchaser pursuant to the terms of this
Agreement, and only to the extent assignable, and subject and
limited by the rights of third parties and Related Agreements.
(h) the plants (the "Gas Plants") described on Schedule 6 to
Exhibit A and gathering systems appurtenant thereto to the
extent assignable and subject to and limited by the rights of
third parties and Related Agreements.
1.3. Excluded Assets. Notwithstanding anything in this Agreement to
the contrary, the Assets do not include and Purchaser agrees and acknowledges
that Seller has reserved and retained from the Assets and hereby reserves and
retains unto itself any and all rights, titles and interests in and to (a)
Excluded Minerals, leasehold and other interests pertaining to lands and
leasehold not within the boundaries of the lands comprising the Subject
Properties (b) the right of ingress and egress with respect to the Assets for
the purpose of mining, drilling, exploring, operating, holding, producing and
developing any interest including, without limitation, the oil, gas and mineral
leasehold, fee, fee mineral and royalty interests retained or owned by Seller
for oil, gas, minerals and other hydrocarbon substances, or other lawful
substances, (c) seismic, geologic and geophysical records, information, and
interpretations relating to the Assets, subject to Section 1.2 (b) (8) above and
Section 9.5 (iii), (d) any and all records which consist of previous or
contemporaneous offers, discussions, or analyses associated with the purchase,
sale or exchange of the Assets or any part thereof, proprietary or interpretive
information, reserve data, internal communications, personnel information
unrelated to the personnel interviewed and evaluated by Purchaser pursuant to
Section 13.20 below, tax information, information covered by a non-disclosure
obligation and information or documents covered by a legal privilege;(the
"Excluded Records") (e) originals or copies of Excluded Records and copies of
records retained by Seller; (f) all claims rights and causes of action against
third parties, asserted and unasserted, known and unknown relating to the period
prior to the Effective Time relating to the Assets; (g) to the extent Seller has
reserved interests, including
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deep rights, or to the extent Seller currently uses or may need to use the
following rights for its operations in the area of the Subject Properties
Seller reserves concurrent interests in any and all applicable easements,
rights of way, licenses, permits, contracts or other rights relating to the
reserved interests or interests in the area; (h) communication equipment,
leased or rented equipment or facilities, office equipment, computer equipment
and software; (i) all pipelines, gas plants, equipment and rights of way owned
or operated by Seller or any affiliate of Seller and which are not solely
appurtenant to the Wells or used exclusively therewith (except the Gas
Plants); (j) all oil in storage at the Effective Time; (k) wells, leases or
leasehold interests or other interests described on Exhibit A or any Schedule
thereto, which pursuant to and in accordance with this Agreement are not
included in an Assignment and Bill of Sale or another conveyancing instrument
delivered to Purchaser on or after Closing; (l) partnership interests, the Mesa
Offshore Royalty Trust, other royalty trust interests or other interests of
whatever nature listed on Exhibit A which Seller determines in its sole
discretion it will be unable to convey at Closing, or unable to convey in a
timely manner or without undue conditions or restrictions (as determined in
Seller's sole discretion) in which event Seller will advise Purchaser, the
affected interest will be removed from this Agreement, and an adjustment in the
Purchase Price will be made at Closing by the allocation for said affected
interest; (m) an overriding royalty equal to an undivided 1/32nd of eight
eighths proportionately reduced to the interest conveyed by Seller pursuant to
this Agreement in and to the WARWINK West wells and lands appurtenant thereto
as identified in Exhibit A or Exhibit C to this Agreement; and (n) items
excluded elsewhere in this Agreement, (a) through (n), collectively, the
"Excluded Assets").
1.4. Defined Terms.
"Acceptable Title" has the meaning as set forth in Section
3.1.
"Act" means the Securities Act of 1933.
"Adjusted Purchase Price" has the meaning set forth in Section
2.1.
"Affiliate" means, as to any Person each other Person that
directly or indirectly (through one or more intermediaries or
otherwise) controls, is controlled by, or is under common
control with, such Person.
"Agents" has the meaning as set forth in Section 3.3.
"Assets" has the meaning as set forth in Section 1.2.
"Business Day" or "Business Days" means a day or days
excluding Saturdays, Sundays and U.S. Legal Holidays.
"Casualty Loss" has the meaning as set forth in Section 12.3.
"Claims" has the meaning as set forth in Section 9.2.a.
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"Closing" means the consummation of the purchase and sale of
the Assets by Purchaser and Seller as contemplated in this
Agreement.
"Closing Date" has the meaning as set forth in Section 8.1.
"Code" means the United States Internal Revenue Code of 1986
as Amended.
"Confidentiality Agreement" has the meaning as set forth in
Section 13.2.
"Days" or "days" means calendar days unless stated otherwise.
"Defect" and "Defects" has the meaning as set forth in Section
3.5.
"Deposit" has the meaning as set forth in Section 2.4.
"Effective Time" has the meaning as set forth in Section 1.2.
"Environmental Defect" means a condition or circumstance
which constitutes a violation of applicable Environmental Laws
"Environmental Laws" means any and all Laws that relate to:
(a) the prevention of pollution or environmental damages, (b)
the abatement, remediation or elimination of pollution or
environmental damage, (c) the protection of the environment
generally, and/or (d) the protection of Persons or property
from actual or potential exposure (or the effects of exposure)
to pollution or environmental damage; including without
limitation, the Clean Air Act, as amended, the Clean Water
Act, as amended, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, the
Federal Water Pollution Control Act, as amended, the Resource
Conservation and Recovery Act of 1976, as amended, the Safe
Drinking Water Act, as amended, the Toxic Substance and
Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended the Hazardous and the
Solid Waste Amendments Acts of 1984, as amended, and the Oil
Pollution Act of 1990, as amended.
"Examination Period" has the meaning as set forth in Section
3.3.
"Excluded Assets" has the meaning as set forth in Section 1.3.
"Execution Date" means the date on which the last of the
Parties executes this Agreement.
"Final Accounting" has the meaning as set forth in Section
13.17.B.
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"Final Accounting Date" has the meaning as set forth in
Section 13.17.B.
"HSR Act" has the meaning as set forth in Section 13.19.
"Identified Claims" has the meaning as set forth in Section
3.4.
"Imbalances" has the meaning as set forth in Section 9.1.
"Knowledge of Seller [or Purchaser, as the case may be]", or
"to the best of Seller's [or Purchaser's as the case may be]
knowledge and belief" or words of similar import shall mean
only the then existing actual non-privileged knowledge of any
president or vice president (without obligation of further
inquiries) of Seller [or Purchaser, as the case may be], and
is not intended to imply that such party in fact has actual
knowledge of the subject matter to which such terms apply.
"Laws" means laws, statutes, ordinances, permits, decrees,
orders, judgments, rules or regulations (including without
limitation Environmental Laws) which are promulgated, issued
or enacted by a governmental entity (whether federal, state or
local) or tribal authority having appropriate jurisdiction.
"Letter Agreement" has the meaning as set forth in Section
13.2.
"NORM" has the meaning as set forth in Section 9.2.c.
"Notice of Defects" has the meaning as set forth in Section
3.5.
"Notice Period" has the meaning as set forth in Section 9.2.d.
"Party" means either Purchaser or Seller.
"Parties" means collectively the Purchaser and Seller.
"Permitted Encumbrances" has the meaning as set forth in
Section 3.2.
"Person" means and individual, corporation, partnership,
association, join stock company, trust or trustee thereof,
estate or executor thereof, unincorporated organization or
joint venture, court or other governmental unit or other
agency or subdivision thereof, or any other legally
recognizable entity.
"Gas Plants" has the meaning set forth in Section 1.2(h);
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"Preferential Rights" has the meaning as set forth in Section
3.2.c.
"Property" is the real property or properties, surface and
subsurface, in which and on which the Assets, or any portion
thereof, are located or pertain and includes the land, if any,
described or referred to in Exhibit "A".
"Property Taxes" has the meaning as set forth in Section
11.1.
"Purchase Price" has the meaning as set forth in Section 2.1.
"Records" has the meaning as set forth in Section 1.2.b.
"Related Agreements" has the meaning as set forth in Section
9.10.
"Representative" and "Representatives" have the same meanings
as set forth in Section 9.2.f.
"Sale Interest" has the meaning as set forth in Section 1.2.
"Subject Properties" has the meaning as set forth in Section
1.2.a.
"Suspense Funds" has the meaning as set forth in Section 9.1.
"Title Defect" has the meaning as set forth in Section
3.5.(a).
"Wells" has the meaning as set forth in Section 1.2.b.
ARTICLE 2. CONSIDERATION
2.1. Consideration. As consideration for this Agreement and the
benefits contained herein, at Closing, Purchaser (i) shall pay to Seller Four
Hundred and Ten Million Dollars $410,000,000 (US$) (the " Purchase Price"), as
may be adjusted pursuant hereto (the "Adjusted Purchase Price) The Purchase
Price has been allocated by Purchaser as provided on Exhibit "A". From December
15, 1998 until Closing the Purchase Price shall earn and accrue interest to the
benefit of Seller at a rate equal to that earned on the Deposit. Said interest
on the Purchase Price shall be paid or credited to Seller at Closing. If
Seller has delayed Closing by exercise of its rights pursuant to Section 8.1.
then interest on the Purchase Price will not accrue during of the period of
delay but upon the end of the delay period interest will again accrue on the
Purchase Price until Closing and paid or credited to Seller at Closing at the
rate and in the manner provided above without adjustment to the Purchase Price.
2.2. Manner of Payment. At Closing, except as provided in the
following Section 2.3, Purchaser shall pay Seller or Seller's designee the
Adjusted Purchase Price by wire transfer of immediately available funds as
follows:
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Account: Pioneer Natural Resources USA, Inc.
Account No: 1290288845
NationsBank, N.A.
ABA Routing No: 111000012
Attention: Frank Stowers
NationsBank N.A.-Midland
(915) 685-2179
2.3. Like Kind Exchange Option. Seller and Purchaser hereby agree
that Seller, in lieu of the sale of the Assets to Purchaser for the cash
consideration provided herein, shall have the right at any time prior to
Closing to assign all or a portion of its rights under this Agreement to a
qualified intermediary in order to accomplish the transactions contemplated
hereby in a manner that will comply, either in whole or in part, with the
requirements of a like kind exchange pursuant to Section 1031 of the Internal
Revenue Code of 1986, as amended ("Code"). In the event Seller assigns its
rights under this Agreement pursuant to this Section 2.3, Seller agrees to
notify Purchaser in writing of such assignment before Closing. If Seller
assigns its rights under this Agreement, Purchaser agrees to (i) consent to
Seller's assignment of its rights in this Agreement, (ii) deposit the Adjusted
Purchase Price with the qualified escrow or qualified trust account designated
by Seller at Closing, and (iii) take such further actions, at Seller's cost, as
are reasonably required to effectuate the transactions contemplated hereby
pursuant to Code Section 1031, but, in so acting, Purchaser shall have no
liability to any Party in connection with such actions. All risks associated
with any like kind exchange and compliance thereof with applicable laws, rules
and regulations shall be the sole responsibility of Seller, and Seller agrees
to indemnify and hold Purchaser harmless from and against all costs, expenses,
liabilities and obligations which arise as a result of Purchaser's agreement
contained in this Section 2.3.
2.4. Performance Deposit. Prior to the execution hereof or upon
the execution hereof Purchaser, as evidence of good faith, has paid or shall
pay to Seller twenty five million U.S. dollars ($25,000,000) (the "Deposit") in
immediately available funds by wire transfer pursuant to Section 2.2 above or
by Cashiers Check. Except as provided in this Agreement the Deposit will not
bear interest for Purchaser and is not refundable. If Closing occurs, such
Deposit and any interest accruing thereon during the period from the Execution
Date to the Effective Time shall be credited to Purchaser at the Closing. From
October 1, 1998 to Closing any interest on the Deposit shall be credited to
Seller, without any adjustment to the Purchase Price for such accrued interest
credited to Seller. If Closing does not occur or the Agreement is terminated,
the Deposit (including any accrued interest) shall be applied as provided in
Section 10.2. Until disposed of in accordance with the terms of this Agreement
or until termination of this Agreement, the Deposit shall be held and invested
by Seller in marketable obligations issued or unconditionally guaranteed by the
United States of America or an instrumentality or agency thereof and entitled
to the full faith and credit of the United States of America, or in money
market and/or mutual funds that invest solely in such obligations.
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2.5. Allocations. Within five (5) calendar days after receipt of
an allocation request from Seller, Purchaser will deliver to Seller a good
faith allocation of the Purchase Price to each of the Subject Properties or
Assets not previously allocated under 2.1 above.
ARTICLE 3. DEFECTS
3.1. Definition of Acceptable Title. As used herein, the term
"Acceptable Title" shall mean, as to the Gas Plants such right, title and
interest of that ownership interest expressed on Schedule 6 to Exhibit A that
is free and clear of all liens and encumbrances except for "Permitted
Encumbrances" provided, however that the presence of a preferential right to
purchase provision shall not be considered to be a Defect as defined in Section
3.5 below and, as to the Subject Properties except the wells listed on Schedule
3.1, the, "WARWINK" wells and the lands appurtenant thereto which are expressly
excluded from the Defect provisions of this Agreement and upon which Purchaser
shall not be permitted any claim for Defects including without limitation
Identified Claims, such right, title and interest that as to the existing
production from the currently producing intervals in the wells, (a) entitles
Seller to receive not less than the net revenue interest set forth in Exhibit
"A" of all oil, gas and associated liquid and gaseous hydrocarbons produced,
saved and marketed from the currently producing horizons of the respective
Subject Properties, (b) obligates Seller to bear costs and expenses relating to
the maintenance, development, and operation of all wells drilled to horizons
with current production relative to the respective Subject Properties in an
amount not greater than the working interest set forth in Exhibit "A", unless
there is a corresponding increase in the applicable net revenue interest, and
(c) except for Permitted Encumbrances, is free and clear of all liens, claims
and encumbrances; provided, however that the presence of a preferential right
to purchase provision shall not be considered to be a Defect as defined in
Section 3.5 below. Purchaser acknowledges and agrees that any net revenue
interests and working interests reflected on Exhibit "A" are for the
convenience of Seller and Purchaser and included solely for the purpose of
determining Acceptable Title prior to Closing; Seller does not and shall not
represent or warrant that the Sale Interest is equal to any such interests in
any respect, but agrees that (i) for purposes of determining Defects prior to
Closing, with respect to those Subject Properties listed on Exhibit "A" with
"0.0000" "APO" interests, the "APO" interests shall be deemed to be the same as
the corresponding "BPO" interests, and (ii) Purchaser may assert as a Title
Defect (as defined in and pursuant to Section 3.5 below) any matter reasonably
expected, as to existing production, to reduce the net revenue interest
assigned to such Subject Property or well or any matter reasonably expected, as
to existing production, to increase the working interest assigned to such
Subject Property and well unless there is a corresponding increase in the
applicable net revenue interest.
3.2. Definition of Permitted Encumbrances. As used herein, the
term "Permitted Encumbrances" shall mean the following items, provided none of
the following items shall operate, as of Closing, to increase the working
interest of Seller as set forth in Exhibit "A" for any of the Subject
Properties, without a corresponding increase in the applicable net revenue
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<PAGE> 16
interest, or decrease the net revenue interest of Seller set forth in Exhibit
"A" for any of the Subject Properties:
(a) lessors' royalties, overriding royalties, production payments,
reversionary interests and similar burdens;
(b) division orders and sales contracts;
(c) preferential rights to purchase not identified in writing to
Seller pursuant to Section 3.7 below, or, if so identified,
with respect to which, prior to Closing (1) waivers are
obtained from the appropriate Parties, (2) the appropriate
time period for asserting such rights has expired without an
exercise of such rights, or (3) appropriate Parties have
exercised such rights and the Purchase Price has been adjusted
where appropriate with reference to the value allocated in
Exhibit "A" to the affected Asset ("Preferential Rights");
(d) rights to consent to assignments required by this Agreement
held by Persons other than governmental entities and not
identified in writing to Seller pursuant to Section 3.7 below,
or, if so identified, with respect to which, prior to Closing
(1) waivers or consents are obtained from the appropriate
Parties, or (2) the prescribed time period for denying such
consent has expired;
(e) materialman's, mechanic's, repairman's, employee's,
contractor's, operator's, tax, and other similar liens,
assessments or charges arising in the ordinary course of
business for obligations that are not yet due or delinquent,
or if delinquent, that are being contested by Seller or the
affected operator in good faith in the normal course of
business;
(f) rights to consent by, required notices to, filings with, or
other actions by governmental entities in connection with the
sale or conveyance of oil and gas leasehold and fee estates or
interests therein, which consents, notices, filings and/or
other actions are customarily obtained after closing;
(g) easements, rights-of-way, servitudes, permits, surface leases
and other rights in respect of surface operations affecting
the Assets which in the aggregate are not such as to interfere
materially with the operation or use of any of the Subject
Properties or materially reduce the value thereof;
(h) rights reserved to or vested in any governmental, statutory or
public authority to control or regulate any of the Assets in
any manner, and all applicable laws, rules and orders of any
governmental authority affecting the Assets;
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(i) operating agreements, unit agreements, unit operating
agreements, pooling agreements and pooling designations
affecting the Subject Properties which are of public record or
contained in the Records or otherwise available to Purchaser
and all actions taken or operations occurring in the normal
course of business pursuant to such instruments;
(j) Title Defects that Purchaser may have expressly waived in
writing or which are deemed to have been waived pursuant to
Section 3.6;
(k) all conveyances, reservations and exceptions of public record
or contained in the Records affecting the Assets which in the
aggregate are not such as to interfere materially with the
operation or use of any of the Subject Properties or
materially reduce the value thereof; and
(l) all other liens, charges, encumbrances, contracts, agreements,
instruments, obligations, defects and irregularities affecting
the Assets which are not such as to interfere materially with
the operation or use of the affected Subject Properties or
materially reduce the value thereof.
3.3. Environmental and Physical Assessment. Subject to the terms
hereof and the Confidentiality Agreement, Purchaser shall have the right at its
sole risk and expense to make an environmental and other physical assessment of
the Assets during the period ("Examination Period") beginning on the Execution
Date and ending at 5:00 p.m. on the forty fifth (45th) day after the Execution
Date. If Purchaser desires to undertake an environmental assessment, both the
consultant(s) and the scope of the proposed assessment, including testing
protocols, must be acceptable to Seller before work may begin, however, Seller
will not unreasonably withhold its acceptance and will respond to Purchaser's
request in this regard by 5:00 p.m. the next business day after such request
and Purchaser shall indemnify, defend and hold harmless Seller as provided in
this Section 3.3. regarding the subject environmental assessment not
withstanding Seller's "acceptance" of same. During Seller's normal business
hours and subject to the terms of this Agreement Purchaser and its employees,
contractors, lenders and consultants ("Agents") shall have the right to enter
upon the Assets operated by Seller and all buildings and improvements thereon
(and Seller shall use reasonable efforts to obtain permission for Purchaser to
gain access to Assets operated by others but such access and the terms of such
access cannot be guaranteed) inspect the same, conduct soil and water tests and
borings, and generally conduct such tests, examinations, investigations and
studies as may be reasonably necessary or appropriate for the preparation of
appropriate environmental and other reports relating to the Assets, their
condition, and the presence of wastes or contaminants. Purchaser shall provide
Seller with 48 hours prior notice of such activities related to the Assets,
regardless of who operates the same, and Seller shall have the right to (i)
witness all such tests and investigations, (ii) receive an equal distribution
of all samples taken by Purchaser or its Agents, and (iii) prohibit such tests
and investigations which it believes could materially damage its properties or
business interests provided, however that if Purchaser disagrees with Seller's
prohibition hereunder then parties shall discuss the reasons for such
disagreement and if no consensus is reached on such
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issue, and if Seller does not remove the prohibition, either Purchaser or
Seller may remove such Asset by written notice to Seller, or Buyer as the case
may be, in which case the Purchase Price shall be reduced by said Asset's
allocated value and provided that Seller shall have the right to terminate this
Agreement if the Assets removed by Purchaser or Seller hereunder exceed 2% (two
percent), individually or in the aggregate, of the Purchase Price. Entry onto
the Assets by Purchaser or its Agents will be subject to third-party
restrictions, if any, and to Seller's safety, industrial hygiene, and drug and
alcohol policies and guidelines and Purchaser will be responsible for assuring
compliance with same by itself and its Agents. Until the Closing, Purchaser
and its Agents shall keep any data or information acquired by all such
examinations and the results of all analyses of such data and information
strictly confidential and not disclose any of the same to any Person unless
otherwise required by law or regulation and then only after written notice to
Seller of the need for disclosure and the identity of all intended recipients.
Seller hereby grants Purchaser access to the Assets to conduct its
environmental and other physical assessment upon the condition that, in
accordance with Section 9.2, PURCHASER HEREBY INDEMNIFIES, DEFENDS AND HOLDS
SELLER AND ITS AFFILIATES AND THEIR RESPECTIVE REPRESENTATIVES HARMLESS FROM
AND AGAINST ANY AND ALL CLAIMS OF WHATEVER NATURE FOR OR RELATED TO PERSONAL
INJURY, DEATH OR PROPERTY DAMAGE ARISING OUT OF OR AS A RESULT OF THE
ACTIVITIES BY OR ON BEHALF OF PURCHASER OR ITS AGENTS ON OR RELATED TO THE
ASSETS IN CONDUCTING SUCH ENVIRONMENTAL AND PHYSICAL ASSESSMENTS OR THE
EXERCISE OF ITS RIGHTS UNDER THIS SECTION 3.3.. If during the Examination
Period, Purchaser determines in good faith that there is an "Environmental
Defect", Purchaser may include notice of such Defect in any Notice of Defects
delivered hereunder; provided, that any such matter not included in a Notice of
Defects shall be and hereby is forever waived by Purchaser.
3.4. Identified Claims. During the Examination Period and up to
the fifty fifth (55th) day after the Execution Date, Seller shall make
available to Purchaser for examination and copying (at Purchaser's cost) any of
the Records and Seller's accounting records relating to the Assets as Purchaser
may reasonably request. Seller shall also permit Purchaser's Representatives
to consult with Seller's employees and Seller's independent contractors who
have knowledge concerning the Assets during normal business hours regarding
such records; provided, that such consultation shall not unreasonably disrupt
the performance by such employee or independent contractor of its duties with
Seller. If during the Examination Period, Purchaser determines in good faith
that (i) royalties, rentals or other payments due in respect of the Assets
prior to the Effective Time have not been paid (except for those amounts in
suspense), or (ii) there are unsatisfied claims, demands, liabilities or
obligations in respect of the Assets based upon omissions, events or
occurrences prior to the Effective Time (collectively, "Identified Claims"),
Purchaser may include notice of such Identified Claims in any Notice of Defects
delivered hereunder; provided, that any such matter not included in a Notice of
Defects shall be and hereby is forever waived by Purchaser.
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3.5. Notice of Defects. If any matter is discovered by Purchaser
that, in Purchaser's reasonable, good faith opinion, would (a) cause any of the
Sale Interest or the Gas Plants not to be Acceptable Title (a "Title Defect");
(b) constitute an Environmental Defect; or (c) constitute an Identified Claim
((a) through (c) to the extent that each such matter exceeds a value of
$15,000.00 net to Seller's interest (other than for (b) which individual
defects net to Seller's interest must exceed a minimum of $100,000.00)
individually, a "Defect", and collectively, the "Defects"), then if the total
value of all Defects exceeds five percent (5%) (the "Threshold")of the Purchase
Price, Purchaser may provide written notice (a "Notice of Defects") thereof
actually delivered to Seller not later than noon, on the fifty fifth (55th) day
after the Execution Date but if such 55th day falls on a Saturday or Sunday
then such notice may be delivered no later than noon on the next business day.
A Notice of Defects shall specifically identify the Defect and include (i) the
Purchaser's purported value of each specific Defect which value in the case of
Title Defects and Identified Claims only cannot exceed the value of the
affected Assets as set out on Exhibit "A", (ii) an identification of each
affected Asset, (iii) Purchaser's basis for determining the existence and value
of such Defect, together with all associated reports, opinions, data,
valuations, assessments, conclusions and supporting calculations, and (iv)
Purchaser's statement of steps necessary to cure each such Defect to its
satisfaction, all of which shall be kept strictly confidential by Purchaser and
its Agents prior to Closing on the affected Assets, except to the extent
required by law, regulation or order of any court or other governmental
authority or as may be necessary to address Defects identified in a Notice of
Defects. On any occasion when Seller disputes the value of a purported
Environmental Defect submitted by Purchaser, Seller may at its sole cost retain
a third party environmental consultant (the "Consultant") for the purpose of
reviewing Purchaser's said Environmental Defect and the decision of said
Consultant as to the value of the said Environmental Defect shall be binding on
the Parties hereto for purposes of establishing the value of said Environmental
Defect.
3.6. Remedy for Defects. In Seller's sole discretion, but without
obligation, it may, at its sole cost, take such steps as are reasonably
necessary to cure or minimize Defects identified in a Notice of Defects. In
addition to performing curative, Seller at its sole option and upon written
notice to Purchaser may remove the affected Subject Property from this
Agreement and adjust the Purchase Price by the Allocation for the removed
Subject Properties unless Purchaser waives the subject Defect(s) by written
notice within two (2) days after the date of Seller's notice to Purchaser
hereunder. In the event Seller is unable or elects not to cure or minimize any
or all Defects above the applicable 5% of Purchase Price Threshold shown in
Section 3.5 above and if any examination by Purchaser results in a finding that
the interest of Seller is greater than stated in Exhibit "A" and such increase
(which such increase must be identified in any notice to Seller), serves to
increase the value of the Subject Property or component of the Assets, Seller
and Purchaser may, at Seller's option, meet and use their best efforts to agree
in good faith on the validity of each Defect claim and the need for and amount
of any mutually acceptable Purchase Price adjustment.
(a) Title Defect adjustments shall be made with reference (as a
maximum) to the allocated value for each affected Asset as set
forth in Exhibit "A" and with the following criteria:
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(1) If the Defect is based on Seller's owning a different
net revenue interest than that shown on Exhibit "A",
then the adjustment will be the absolute value of the
number determined by the following formula:
(i) for instances where the correct interest
is less than the interest expressed in
Exhibit "A",
Adjustment = A x (1-[B/C])
A = Allocation for the affected Asset
B = correct net revenue agreed by the Parties for
the affected Asset
C = net revenue for the affected Asset as shown
on Exhibit "A"
(ii) for instances where the correct interest
is greater than the interest expressed in the
Exhibit "A", the formula would be the same
except that ; B= Net revenue for the affected
assets as shown on Exhibit "A" and C= The
correct net revenue for the affected asset;
provided , however, in either 1(i) or 1(ii)
if either the numerator or denominator is
zero (0), then the adjustment will unless
agreed otherwise by the parties be the
allocated value for the affected Subject
Asset.
(2) If the claim is based on an obligation or burden that
is liquidated in amount, then the adjustment will be
the sum agreed by the Parties necessary to remove the
obligation or burden from the affected Asset.
(3) If the claim is based on an obligation or burden that
is not liquidated, but can be estimated with
reasonable certainty, the adjustment will be the sum
agreed by the Parties necessary to compensate
Purchaser on the Closing Date for the adverse
economic effect on the affected Asset.
(i) Subject to (ii) below, if the amount of the adjustment for
each Defect cannot be determined based on the above criteria,
and if the parties cannot otherwise agree on the amount of an
adjustment, Seller may, at its sole option and upon written
notice to Purchaser, either:
(1) terminate this Agreement and refund the
deposit and all accrued interest thereon
subject to Section 10.2;
(2) remove the affected Asset from this Agreement
and adjust the Purchase Price by the
allocation for the Asset, or
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(3) elect to resolve the dispute under the
arbitration provisions of this Agreement.
(ii) The Purchase Price will be adjusted only if the sum (i.e.
offsetting of increases and decreases) of all adjustments
under this section (not otherwise resolved hereto) as to Title
Defects, or Identified Claims or Environmental Defects exceed
and then only to the extent exceeding the Threshold. If the
sum of all adjustments for Defects would result in the
Purchase Price being reduced by more than ten (10) percent,
Seller may, at its sole option, upon written notice to
Purchaser, either:
(1) terminate this Agreement and refund the
deposit and all accrued interest thereon
subject to Section 10.2; or
(2) remove all or a portion of the affected
Assets from the Agreement and adjust the
Purchase Price by the allocation for the
Assets.
(b) Seller will have thirty days after receipt of Purchaser's
Notice of Defects, or until five days before the Closing Date
if it determines that an Environmental Defect (whether
material or not) may exist with respect to an Asset, to elect
any of the following:
(1) adjust the allocation for an Asset by a mutually
acceptable amount reflecting Seller's proportionate
share, based on its working interest, of the cost
reasonably estimated to remediate the Environmental
Defect (in the manner described below or by the
Consultant) affecting the Assets:
(2) remove the affected Asset from this Agreement and
adjust the Purchase Price by the allocation for the
affected Asset.
(3) remedy, or agree to remedy, the Environmental Defect
as provided below;
(4) or terminate this Agreement and refund the deposit
and all accrued interest thereon subject to Section
10.2.
Seller may delay Closing until the end of this thirty-day
period, which delay will be in addition to and under the same
terms as Seller's right to delay Closing under Section 8.1.
If the Purchase Price is adjusted because of an Environmental
Defect, the amount of the adjustment will be based on the cost
to remediate the Environmental
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Defect, but only to the level required by the Environmental
Laws in effect on the Execution Date but not to exceed the
allocation for the affected Asset(s). Seller may require
Purchaser to remit the full allocation at Closing, without
adjustment for the Environmental Defect, but if it does so, it
will pay the amount of the adjustment to Purchaser when the
remediation performed by Purchaser is complete under
applicable law. If the cost to remediate exceeds the amount
of the adjustment, Purchaser will pay the additional costs to
remediate the Environmental Defect as required by applicable
law.
(c) If Seller elects or agrees with Purchaser to remediate an
Environmental Defect or is required by governmental or
regulatory agency to remediate a Environmental Defect, the
following will govern the remediation:
(1) Seller will be responsible for all negotiations and
contacts with federal, state, and local agencies and
authorities with regard to the Environmental Defect
or remediation. Purchaser may not make any
independent contacts with agency, authority, or other
third party with respect to the Environmental Defect
or remediation and will keep all information
regarding the Environmental Defect confidential,
except in each instance to the extent required by
applicable law.
(2) Seller will remediate the Environmental Defect to the
level agreed upon by Seller and Purchaser, but in no
event will Seller be required to remediate the
Environmental Defect beyond the level required by the
Environmental Laws in effect on the Execution Date.
(3) Purchaser will grant and warrant access to the Assets
and entry on the Property after Closing to Seller,
its Representatives, and third parties conducting
assessments or remediation, to the extent and as long
as necessary to conduct and complete the assessment
or remediation work, to remove equipment and
facilities, and to perform any other activities
reasonably necessary in connection with assessment or
remediation.
(4) Purchaser will use its best efforts not to interfere
with Seller's ingress or egress or assessment or
remediation activities. Seller will make reasonable
efforts to perform the work so as to minimize
disruption to Purchaser's business activities and to
the Assets and the Property.
(5) Seller will continue remediation of the Environment
Defect until the first of the following occurs:
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<PAGE> 23
(a) The appropriate governmental authorities
provide written notice to Seller or Purchaser
that no further remediation of the
Environmental Defect is required; or
(b) Seller determines that the Environmental
Defect has been remediated to the level
required by the Environmental Laws or as
agreed by the Parties.
Upon the occurrence of either (a) or (b) above,
Seller will notify Purchaser that remediation of the
Environmental Defect is complete and provide a copy
of the notification described in a (a) above, if
applicable. Upon delivery of Seller's notice, Seller
will be released, without further action or
documentation, from all liability and have no further
obligations under any provisions of this Agreement in
connection with said Environmental Defect.
(6) Until Seller completes remediation of an
Environmental Defect, Seller and Purchaser will each
notify the other of any pending or threatened Claim,
action, or proceeding by any authority or private
party that relates to or would affect the
environmental condition, the assessment, or the
remediation of the affected Assets or Property.
(7) After delivery of possession or Closing (whichever
occurs first) and before Seller has completed
remediation of an Environmental Defect, if a leak,
spill, or discharge of any material or substance
("Occurrence") occurs on the Property or Assets, or
any part of them, Purchaser will promptly notify
Seller and act promptly to minimize the effects of
the Occurrence. If a spill, leak or discharge occurs
and Seller determines that it may affect that area
where Seller is conducting remediation or assessment,
Purchaser will hire a consultant (who must be
acceptable to Seller) to assess the effect of the
Occurrence on the environmental condition of the
Property, Interest, and Seller's remediation work and
the cost of the additional work required as the
result of the Occurrence. Unless the Occurrence was
caused solely by Seller, Purchaser will be
responsible for the incremental cost of remediating
the impact of the Occurrence. If Seller's
remediation is expanded to incorporate remediation of
the Occurrence, Purchaser will promptly pay its share
of costs and expenses to Seller as the work is
performed, within thirty days of receipt of invoices
for the work (with supporting documentation).
Payments not made timely will bear interest at a rate
of twelve percent per annum or the maximum lawful
rate, whichever is less, compounded daily from the
date of Purchaser's receipt of the invoice until
paid.
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<PAGE> 24
If the cost of the additional work equals or exceeds
the cost which would have been incurred but for the
Occurrence, Seller will pay Purchaser the cost that
would have been incurred by Seller to complete the
remediation but for the Occurrence. As consideration
for this payment, Purchaser will accept the
environmental condition of the Property and Assets as
they exist on the date of the payment, assume full
responsibility for remediating the Property and
Assets and related off-site contamination in
accordance with this Agreement, and agree to release,
indemnify, hold harmless, and defend Seller and its
Representatives as to Claims arising from the
Occurrence to the same extent as described in Article
9.
(8) If Seller undertakes remediation as to any Assets in
which Seller's ownership was less than 100% Purchaser
will bill the other working interest owners for their
share of the remediation expenses. Regardless of
whether Seller recoups any amount from the other
working interest owners, Purchaser will refund to
Seller, within sixty days of each Seller invoice,
with documentation, any amounts expended by Seller
over the amount formerly attributable to Seller's
working interest share.
(9) If Seller will assess or remediate the Assets or
Property after Closing, the Assignment and Bill of
Sale or other recordable instrument will restate the
rights and obligations of this section.
(d) If the Aggregate Net Amount of Purchase Price adjustments
mutually agreed and/or as a result of Seller's removal of
Assets hereunder, plus the amount of any uninsured Casualty
Losses and Casualty Losses not fully covered by insurance (to
the extent of such deficiency only), plus the value of any of
the Subject Properties (with reference to the allocated value
thereof on Exhibit "A" as a maximum) to the extent taken in
condemnation or under the right of eminent domain prior to the
end of the Examination Period, or with respect to which
proceedings for such purposes shall be pending or threatened
in writing at such time, equals or exceeds twenty percent
(20%) of the Purchase Price, or (ii) if the aggregate value of
Subject Properties subject to Preferential Rights to be
exercised at Closing equals or exceeds eighty percent (80%) of
the Purchase Price, then Seller or Purchaser may, upon written
notice to the other, terminate this Agreement, without
liability or further obligation to the other party, subject to
Section 10.2. Seller shall have an absolute right to
terminate this Agreement upon written notice to Purchaser,
without liability or further obligation to Purchaser if the
Defects presented by Purchaser exceed ten percent (10%) of the
Purchase Price. Seller shall have no obligation hereunder to
Purchaser or any Person to sell, convey deliver or otherwise
transfer all or any part of the Assets if Purchaser or Seller
terminates this Agreement pursuant to this Section 3.6.
Purchaser agrees and acknowledges that Seller has no
obligation to adjust the Purchase Price with respect to
Defects.
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<PAGE> 25
If Closing occurs, Purchaser shall be deemed to have forever
waived and/or assumed any and all Claims, known and unknown,
arising from or related to any and all Defects or title to or
defect or other condition of the Assets in whole or in part,
including, without limitation, whether or not identified in a
Notice of Defects, and notwithstanding the fact that Seller
may not have cured any such Defect(s) to Purchaser's
satisfaction, and Seller shall have no obligation with respect
thereto. As used in this Agreement, the "Aggregate Net
Amount" of Purchase Price adjustments shall be determined by
subtracting from the value of all Defects asserted by
Purchaser (y) the value of all interests by which Seller's
actual interests in the Subject Properties exceeds the net
revenue interests set forth on Exhibit "A" hereto, and (z) the
value of Defects asserted by Purchaser which are cured or
otherwise resolved to Purchaser's reasonable satisfaction.
(e) Notwithstanding any provision in this Section 3.6 to the
contrary, in the event Seller delivers a notice terminating
this Agreement pursuant to this Section 3.6, Purchaser shall
have until 5:00 p.m. on the first Business Day after receipt
of said notice to forever waive, by written notice delivered
to Seller on or before said date and time, Defects which
constitute the grounds stated for termination in said
termination notice and if Purchaser so waives said Defects and
matters the notice of termination delivered by Seller shall be
considered withdrawn.
3.6A & 3.6 B Special Defects.
3.6A Not withstanding anything contained in this Agreement to the
contrary, if during the Examination Period Purchaser discovers, acting in good
faith, that Seller owns no interest in any of the Subject Properties or the Gas
Plants because the applicable oil and gas lease or leases have expired, have
been disposed of, or otherwise, and Seller cannot cause any interest to be
conveyed to Purchaser in the affected Subject Properties or Gas Plants then
Purchaser may include any such matter ( a "Special Defect") in the Notice of
Defects delivered pursuant to Section 3.5 and, if Seller, acting in good faith,
agrees with the findings of Purchaser, without consideration of the Threshold
Purchaser shall be entitled to a reduction in the Purchase Price equal to the
agreed value of such Special Defects based on, and not to exceed, the allocated
value of each affected Subject Properties or Gas Plants as set forth on Exhibit
"A" and said Subject Properties or Gas Plants shall be removed from this
Agreement, provided that any such matter not included in the Notice of Defects
shall be and hereby is forever waived by Purchaser. Further, if during the
Examination Period Purchaser discovers, acting in good faith, that the Working
Interest and/or Net Revenue interests for the Reserves, and only for the
Reserves, classified on Schedule 3.6A attached hereto as "Proved Developed
Producing" (abbreviated as "PDP") shown in Seller's ARIES database delivered to
Purchaser on August 29, 1998 (the "ARIES") which was used by Purchaser to
evaluate the Subject Properties is greater than the respective interest for such
Subject Properties shown in Exhibit "A", Purchaser shall without consideration
of the Threshold (after providing notice of same to Seller in the Notice of
Defects) be entitled to a reduction in the Purchase Price based on, and not to
exceed, the allocated value of
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<PAGE> 26
the affected Subject Properties using the formula shown in Article 3.6 (a)
(1)(i); provided, however, A= Allocated Value of the affected Subject Property,
B= Respective Exhibit "A" Interest, C= Respective ARIES Interest, provided,
however, that any matter not included in the Notice of Defects shall be and
hereby is forever waived by Purchaser. Similarly, where the interest shown on
the ARIES is less than that shown on Exhibit "A" whether asserted by Seller or
Purchaser (and Purchaser shall in good faith include all such instances in any
Notice of Defect), Seller shall be entitled to an increase in the Purchase
Price using the same formula with however, A= Allocated Value of the affected
Subject Property, B= Respective ARIES Interest, C= Respective Exhibit "A"
Interest ; provided however, if in either event that the numerator or the
denominator is zero (0) then the adjustment would unless mutually agreed
otherwise by the parties be the Allocated Value of the affected Subject
Property.
3.6B With respect to any reduction to the purchase price resulting
from the application of 3.6A above, Seller agrees that such reduction shall be
offset by the value as agreed between the Seller and Purchaser of those wells
listed on Exhibit A and which are identified on Schedule 3.6B which represent
producing mineral interest that were not on ARIES.
3.7. Preferential Purchase Rights and Consents to Assign. Upon
written notification to Seller by Purchaser identifying Persons (and their
addresses) holding preferential rights to purchase affecting the Assets or the
right to consent with respect to any assignments required hereby, other than
such consents of governmental authorities which are usually obtained in the
normal course of business after Closing, actually received by Seller not later
than the earlier of (i) fifteen (15) days prior to the Closing Date, or (ii)
five (5) business days prior to the latest date prior to Closing permitted by
the subject agreement for such notice to be provided, or upon Seller's own
initiative but without any obligation to so initiate, Seller shall send notice
of this Agreement to all such Persons (y) offering to sell to each such Person
the Assets for which a preferential right is held on and subject to the terms
hereof and for the same allocated value for such Assets reflected on Exhibit
"A", or (z) requesting, where appropriate, consent to any assignment required
in connection herewith. Notwithstanding the foregoing, Purchaser shall be
ultimately responsible for obtaining all approvals and consents from each and
every applicable Person, including, but not limited to, lessors, joint interest
owners, farmors, sublessors, assignors, grantors, co-parties to Agreements,
governmental bodies having jurisdiction, or other third parties and will
provide Seller on or before the Closing Date with proof of each consent,
approval or waiver. Purchaser shall be entitled to review and approve the form
of all such notices; provided, that such approval shall not be unreasonably
withheld or delayed. If, prior to Closing, any of such Persons asserting a
preferential purchase right notifies Seller that it intends to consummate the
purchase of the Assets to which it holds a preferential purchase right
pursuant to the terms and conditions hereof, or if the period allowed for
acceptance of the notice provided by Seller has not expired or will not expire
as of Closing (subject to Seller's right to extend the date of Closing) then
such Assets shall be excluded at Closing from the Assets to be conveyed to
Purchaser under this Agreement and the Purchase Price shall be reduced by the
allocated value of such Assets reflected in Exhibit "A"; provided, however,
that if the holder of such preferential right fails to consummate the purchase
of such Assets before, on or within a
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<PAGE> 27
reasonable time after the Closing Date (taking into account the notice or
acceptance period for the right of preferential purchase and a reasonable
amount of time, as determined by Seller, to assemble documentation for such
separate sale), then Seller shall promptly so notify Purchaser, and Seller
shall sell immediately to Purchaser, and Purchaser shall purchase from Seller,
for a price equal to the allocated value of such Assets and upon the other
terms of this Agreement, the Assets to which the preferential purchase right
was asserted. All Assets for which all preferential purchase rights have been
waived or have not been accepted prior to expiration after timely notice of
the acceptance period by the holder of such right, shall be sold to Purchaser
at Closing pursuant and subject to the provisions of this Agreement. If one
(1) or more of the holders of any preferential purchase rights notifies Seller
subsequent to Closing that it intends to assert its preferential purchase
right, Seller shall give notice thereof to Purchaser, whereupon Purchaser shall
satisfy all such preferential purchase right obligations of Seller to such
holders including, but not limited to, transferring the affected Assets to the
holder of such rights and shall indemnify and hold Seller harmless from and
against any and all Claims, liabilities, losses, costs and expenses (including,
without limitation, court costs and reasonable attorneys' fees) in connection
therewith, and Purchaser shall be entitled to receive upon satisfaction in full
by Purchaser of all the foregoing obligations all proceeds received from such
holders in connection with such preferential purchase rights. Purchaser shall
indemnify and hold harmless Seller from and against any and all Claims,
liabilities, losses, costs and expenses (including, without limitation, court
costs and reasonable attorneys' fees) asserted or incurred at any time (whether
before, on or after Closing) with respect to or arising directly or indirectly
from the claims of any Person to a preferential purchase right affecting any of
the Assets transferred to Purchaser hereunder.
ARTICLE 4. SELLER'S REPRESENTATIONS AND DISCLAIMERS
Seller represents to Purchaser that:
4.1. Existence. Pioneer Natural Resources USA, Inc. is a Delaware
corporation, duly formed, validly existing and in good standing under the laws
of the State of Delaware.
4.2. Power. Seller has the requisite power and authority to enter
into and perform this Agreement and the transactions contemplated hereby. The
execution, delivery and performance of this Agreement by Seller, and the
transactions contemplated hereby, will not (a) violate any provision of
Seller's Articles of Incorporation or other governing documents, (b) conflict
with, result in a breach of, constitute a default (or an event that with the
lapse of time or notice, or both would constitute a default) under any
agreement or instrument to which Seller is a Party or by which Seller is bound,
(c) to the best knowledge and belief of Seller, violate any judgment, order,
ruling, or decree applicable to Seller and entered or delivered in a proceeding
in which Seller was or is a named Party, or (d) to the best knowledge and
belief of Seller, violate any applicable law, rule or regulation.
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<PAGE> 28
4.3. Authorization. The execution, delivery and performance of
this Agreement and the transactions contemplated hereby have been duly and
validly authorized by all requisite action on the part of Seller. This
Agreement has been duly executed and delivered on behalf of Seller, and at the
Closing all documents and instruments required hereunder to be executed and
delivered by Seller shall be duly executed and delivered. This Agreement and
such documents and instruments shall constitute legal, valid and binding
obligations of Seller enforceable in accordance with their terms subject,
however, to the effect of bankruptcy, insolvency, reorganization, moratorium
and similar laws from time to time in effect relating to the rights and
remedies of creditors, as well as to general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or at
law).
4.4. Brokers. Seller has incurred no obligation or liability,
contingent or otherwise, for brokers' or finders' fees in respect of the
matters provided for in this Agreement which will be the responsibility of
Purchaser, and any such obligation or liability that might exist shall be the
sole obligation of Seller.
4.5. Foreign Person. Seller is not a "foreign person" within the
meaning of the Code.
4.6. Permits. To the best of Seller's knowledge Seller possesses
all material licenses, permits, certificates, orders, approvals and
authorizations necessary to own the Assets and to carry on its business as now
being conducted.
4.7. Compliance with Law. To the best of Seller's knowledge,
Seller is in material compliance with all laws, ordinances, rules, regulations
and orders applicable to the Assets, including, without limitation, all
environmental laws, ordinances, rules, regulations and orders, except to the
extent of any non-compliance that is not reasonably expected to result in a
material adverse affect on the Assets.
4.8. Taxes. All ad valorem, property, production, severance,
excise, and similar taxes and assessments based on or measured by the ownership
of property or the production of hydrocarbons or the receipt of proceeds
therefrom attributable to the Assets that have become due and payable have been
properly and timely paid, except to the extent of any failure that is not
reasonably expected to result in a material adverse effect on the Assets, and
except to the extent that such taxes are due and payable but contested,
protested or appealed by Seller.
4.9. Litigation. To Seller's best knowledge and belief, no
litigation, investigation or other proceeding in which Seller (or its direct
predecessor in title) is a named Party affects any of the Assets whether
pending or threatened in writing which is based upon omissions, events or
occurrences prior to the date of this Agreement, other than as disclosed on
Schedule 4.9 attached hereto.
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4.10. LIMITATION AND DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
THE EXPRESS REPRESENTATIONS AND/OR WARRANTIES OF SELLER CONTAINED IN THIS
AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND
WARRANTIES, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, AND THE REPRESENTATIONS
AND/OR WARRANTIES CONTAINED HEREIN SHALL TERMINATE IN ALL RESPECTS UPON
CLOSING. ANY ASSIGNMENT AND BILL OF SALE OR OTHER CONVEYANCE EXECUTED AND
DELIVERED PURSUANT HERETO SHALL BE: (a) WITHOUT ANY WARRANTY OR REPRESENTATION
OF TITLE, EITHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE; (b) WITHOUT ANY
EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION AS TO THE
CONDITION, QUANTITY, QUALITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY TO
MODELS OR SAMPLES OF MATERIALS OR MERCHANTABILITY OF ANY OF THE ASSETS OR THEIR
FITNESS FOR ANY PURPOSE; AND (c) WITHOUT ANY OTHER EXPRESS, IMPLIED, STATUTORY
OR OTHER WARRANTY OR REPRESENTATION WHATSOEVER. AT CLOSING, PURCHASER SHALL
HAVE INSPECTED OR WAIVED ITS RIGHT TO INSPECT THE RECORDS AND THE ASSETS FOR
ALL PURPOSES AND SATISFIED ITSELF AS TO THE PHYSICAL AND ENVIRONMENTAL
CONDITION OF THE ASSETS AND PROPERTY BOTH SURFACE AND SUBSURFACE, INCLUDING BUT
NOT LIMITED TO CONDITIONS SPECIFICALLY RELATED TO THE PRESENCE, RELEASE OR
DISPOSAL OF HAZARDOUS SUBSTANCES. PURCHASER IS RELYING SOLELY UPON ITS OWN
INSPECTION OF THE ASSETS AND PROPERTY, AND, PURCHASER SHALL ACCEPT ALL OF THE
SAME IN THEIR "AS IS, WHERE IS" CONDITION. IN ADDITION, EXCEPT AS EXPRESSLY
PROVIDED OTHERWISE IN THIS AGREEMENT, SELLER MAKES NO WARRANTY OR
REPRESENTATION, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AS TO THE ACCURACY OR
COMPLETENESS OF ANY DATA, REPORTS, RECORDS, PROJECTIONS, INFORMATION OR
MATERIALS NOW, HERETOFORE OR HEREAFTER FURNISHED OR MADE AVAILABLE TO PURCHASER
IN CONNECTION WITH THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY
DESCRIPTION OF THE ASSETS, PRICING ASSUMPTIONS, OR QUALITY OR QUANTITY OF
HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE ASSETS OR THE ABILITY OR
POTENTIAL OF THE ASSETS TO PRODUCE HYDROCARBONS OR THE ENVIRONMENTAL CONDITION
OF THE ASSETS OR PROPERTY OR ANY OTHER MATTERS CONTAINED IN CONFIDENTIAL
INFORMATION OR ANY OTHER MATERIALS FURNISHED OR MADE AVAILABLE TO PURCHASER BY
SELLER OR BY SELLER'S AGENTS OR REPRESENTATIVES. ANY AND ALL SUCH DATA,
RECORDS, REPORTS, PROJECTIONS, INFORMATION AND OTHER MATERIALS FURNISHED BY
SELLER OR BY SELLER'S AGENTS OR REPRESENTATIVES OR OTHERWISE MADE AVAILABLE TO
PURCHASER OR PURCHASER'S REPRESENTATIVES ARE PROVIDED TO OR FOR THE BENEFIT OF
PURCHASER AS A CONVENIENCE, AND SHALL NOT CREATE OR GIVE RISE TO ANY LIABILITY
OF OR AGAINST SELLER OR SELLER'S AGENTS OR REPRESENTATIVES. ANY RELIANCE ON OR
USE OF THE SAME SHALL BE AT PURCHASER'S SOLE RISK.
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<PAGE> 30
THE ASSIGNMENTS AND BILLS OF SALE OR OTHER CONVEYANCES TO BE DELIVERED BY
SELLER AT CLOSING SHALL EXPRESSLY SET FORTH THE LIMITATIONS AND DISCLAIMERS OF
REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS PARAGRAPH.
ARTICLE 5. REPRESENTATIONS, WARRANTIES AND
COVENANTS OF PURCHASER
Purchaser represents and warrants to and covenants with Seller that:
5.1. Existence. Purchaser is a Delaware corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
5.2. Power. Purchaser has the requisite power and authority to
enter into and perform this Agreement and the transactions contemplated hereby.
The execution, delivery and performance of this Agreement by Purchaser, and the
transactions contemplated hereby, will not (a) violate any provision of any
Purchaser's certificate or articles of incorporation or organization, as the
case may be, bylaws, regulations or other governing documents; (b) to the best
knowledge and belief of Purchaser, conflict with, result in a breach of,
constitute a default (or an event that with the lapse of time or notice, or
both would constitute a default) under any agreement or instrument to which
Purchaser is a Party or by which Purchaser is bound, (c) to the best knowledge
and belief of Purchaser, violate any judgment, order, ruling, or decree
applicable to Purchaser and entered or delivered in a proceeding in which
Purchaser was or is a named Party; or (d) to the best knowledge and belief of
Purchaser, violate any applicable law, rule or regulation.
5.3. Authorization. The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and validly
authorized by all requisite action on the part of Purchaser. This Agreement
has been duly executed and delivered on behalf of Purchaser, and at the Closing
all documents and instruments required hereunder to be executed and delivered
by Purchaser shall have been duly executed and delivered. This Agreement and
such documents and instruments shall constitute legal, valid and binding
obligations of Purchaser enforceable in accordance with their terms, subject,
however, to the effect of bankruptcy, insolvency, reorganization, moratorium
and similar laws from time to time in effect relating to the rights and
remedies of creditors, as well as to general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or at
law).
5.4. Brokers. Purchaser has not incurred any obligation or
liability, contingent or otherwise, for brokers' or finders' fees in respect of
the matters provided for in this Agreement which will be the responsibility of
Seller, and any such obligation or liability that might exist shall be the sole
obligation of Purchaser.
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5.5. Investment Intent. Purchaser is acquiring the Assets for
Purchaser's own account for investment, and not with a view to any distribution
thereof within the meaning of the Securities Act of 1933 (the "Act"), and shall
not resell any or all of the Assets except in compliance with all applicable
securities laws.
5.6. Due Diligence. Purchaser represents, warrants and covenants
that it has or will perform prior to Closing sufficient review and due
diligence, including review of file data and inspections, to evaluate the
Assets and Property to Purchaser's complete satisfaction as a prudent and
knowledgeable Purchaser.
5.7. Sophisticated Buyer. The Purchaser is a sophisticated buyer,
knowledgeable in the evaluation and acquisition of oil and gas properties, and
understands that by purchasing oil and gas properties or interests, the
Purchaser may be exposed to risks and liabilities associated with the oil and
gas business. The Purchaser is engaged in the business of exploring for or
production oil and gas or other minerals as an ongoing business. By reason of
this knowledge and experience, the Purchaser will evaluate the merits and risks
of the properties or interests to be purchased from Seller and will form an
opinion based solely upon the Purchaser's knowledge and experience and not upon
any opinion or predictions by Seller, its employees, agents, or
representatives.
5.8. Economic Risk. The Purchaser is aware that ownership of any
of the oil and gas properties or interests is highly speculative and subject to
substantial risks, and the Purchaser is capable of bearing the high degree of
economic risk and burdens of any purchase of the Assets from Seller, including,
but not limited to, the possibility of the complete loss of the Purchase Price,
all contributed capital, the loss of all anticipated tax benefits (if any), the
lack of a public market and limited transferability of such interests or
properties;
5.9. Financing. Purchaser has or will have adequate funding or
financing to pay the Purchase Price at Closing.
5.10. Accredited Investor. Purchaser is an "accredited investor" as
that item is defined in Regulation D promulgated under the Act.
ARTICLE 5A. ADDITIONAL COVENANTS
Seller covenants and agrees that from and after the execution of this
Agreement and until the Closing Date:
5A.1. Maintenance of Assets. Seller will not sell, transfer, assign,
convey or otherwise dispose of any of the Assets subject to Seller's direct
control, other than (a) oil, gas and other hydrocarbons produced, saved and
sold in the ordinary course of business, (b) personal property and equipment
which is replaced with property and equipment of comparable or better value and
utility in the ordinary and routine maintenance and operation of the Subject
Properties, and (c) as required in connection with any exercise of preferential
rights or as otherwise required to satisfy obligations to third parties under
contracts presently existing.
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5A.2. No Encumbrances. Seller will not create any lien, security
interest or encumbrance on the Assets, the oil or gas attributable to the
Assets, or the proceeds thereof, other than Permitted Encumbrances. To the
extent there exists liens, security interests or mortgages on the Assets or any
part thereof created by Seller which are identified to Seller in writing by
Purchaser prior to the end of the Examination Period, Seller, shall deliver to
Purchaser releases of same, including associated financing statements on or
before Closing.
5A.3. Operations. With respect to any of the Subject Properties and
the Gas Plants operated by Seller, (and as to 5A.3. (b), (f), (h), and (j)
below with regard to Subject Properties not operated by Seller). Seller will
endeavor in good faith until Closing (subject to this Agreement and the rights
of affected Parties under applicable agreements) to:
(a) cause the Subject Properties and Gas Plants to be
developed, maintained and operated in compliance with
applicable laws, ordinances, rules, regulations and
orders and in a prudent, good and workmanlike manner,
maintain insurance now in force with respect to the
Subject Properties, and pay or cause to be paid all
costs and expenses in connection therewith;
(b) not approve the drilling of any new well on the
Subject Properties without the advance written
consent of Purchaser, which consent (which may not be
unreasonably withheld) or non-consent must be given
by Purchaser within three (3) days of the notice
from Seller;
(c) not take any action or fail to take any action which
is reasonably expected to result in any termination
of the leases forming a part of the Subject
Properties;
(d) perform and comply with all of its obligations under
agreements relating to or affecting the Subject
Properties and Gas Plants;
(e) carry on its business with respect to the Subject
Properties and Gas Plants in substantially the same
manner as it has heretofore;
(f) not enter into or assume any contract, agreement or
commitment which is not in the ordinary course of
business as heretofore conducted or which involves
payments, receipts or potential liabilities with
respect to any one of the Subject Properties or Gas
Plants of more than $50,000, (net to Seller)
excluding emergency expenditures; and
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(g) not resign or otherwise voluntarily relinquish its
rights as operator of any of the Subject Properties
or Gas Plants for which it serves as operator on the
date hereof.
(h) not grant any preferential right to purchase or
similar right or agree to require the consent of any
Party to the transfer and assignment of the Assets to
Purchaser, subject to existing contractual
obligations;
(i) not enter into any gas sales contract or crude oil
sales or supply contract with respect to the Subject
Properties or Gas Plants which is not terminable
without penalty upon notice of thirty (30) days or
less;
(j) not enter into any transaction the effect of which,
considered as a whole, would be to cause Seller's
ownership interest in any of the Subject Properties
or Gas Plants to be decreased from its ownership
interest as of the date hereof;
(k) if any approval or consent by any federal, state or
local governmental authority is required to vest
Acceptable Title to any of the Sale Interest or Gas
Plants in Purchaser at Closing, exercise its best
efforts, as reasonably requested in writing by
Purchaser, to obtain all such required approvals or
consents at Purchaser's expense;
(l) through Closing, endeavor to give prompt written
notice to Purchaser of any notice of default (or
written threat of default, whether disputed or
denied) received or given by Seller after the date
hereof under any instrument or agreement affecting
the Subject Properties to which Seller is a Party or
by which it or any of the Subject Properties is
bound;
(m) to the extent it can do so without violating any
third party agreement and subject to the rights of
third parties, exercise its best efforts to provide
(as soon as practicable) Purchaser with a copy of
each material authority for expenditure and material
contract affecting the Subject Properties or Gas
Plants entered into after the Execution Date,
provided, however, that the provision of such matters
to Purchaser is for informational purposes only and
that Purchaser shall have no right to comment upon or
object to any such matter that is otherwise not in
violation of this Agreement.
5A.4. Access to Records. Seller will endeavor to provide Purchaser
and its Agents through the Examination Period 1) access to the Records located
in Seller's data room during the hours 8 a.m. to 12 p.m. seven days a week at
Seller's Midland, Texas office, access to other Records during normal business
hours at Seller's office and 2) adequate work space (as determined solely by
Seller) at such offices to review the Records, 3) access to a copy machine,
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at Purchaser's cost, at such offices, and 4) reasonable access to Seller's
personnel during normal business hours. Seller, at Purchaser's cost, will
assist Purchaser in obtaining access to and the right to review and copy
Records pertaining to the Subject Properties, producing minerals and Gas Plants
not in Seller's possession or control. From and after the Execution Date
through the Closing Date, Seller shall endeavor to not add to or remove from
the Records any contracts, instruments, documents or other materials except for
such additions and removals as are done in the ordinary course of business with
respect to on-going operations.
5A.5. Permissions. Seller will use reasonable efforts, at
Purchaser's cost, to assist Purchaser in obtaining all permissions, approvals,
and consents of federal, state and local governmental authorities and other
third parties required of Seller as may be required to consummate the sale
contemplated hereunder.
ARTICLE 6. SELLER'S CONDITIONS OF CLOSING
Seller's obligation to consummate the transactions provided for herein
is subject only to the satisfaction or waiver by Seller on or before the
Closing Date of the following conditions:
6.1. Representations. The representations and warranties of
Purchaser contained in Article 5 shall be true and correct in all material
respects on the Closing Date as though made on and as of that date.
6.2. Performance. Purchaser shall have performed in all material
respects the obligations, covenants and agreements hereunder to be performed by
it at or prior to the Closing, including but not limited to payment of the
Purchase Price.
6.3. Officer's Certificate. Purchaser shall have delivered to
Seller a certificate of an executive officer dated the Closing Date, certifying
on behalf of Purchaser that the conditions set forth in Sections 6.1 and 6.2
have been fulfilled.
6.4. Pending Matters. No suit, action or other proceeding by a
third party or a governmental authority shall be pending or threatened which
seeks substantial damages from Seller in connection with, or seeks to restrain,
enjoin or otherwise prohibit, the consummation of the transactions contemplated
by this Agreement.
6.5. HSR Act. The waiting period required by the HSR Act (as
defined in Section 13.19 below) shall have expired or been terminated, if
applicable.
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ARTICLE 7. PURCHASER'S CONDITIONS OF CLOSING
Purchaser's obligation to consummate the transactions provided for
herein is subject only to the satisfaction or waiver by Purchaser on or before
the Closing Date of the following conditions:
7.1. HSR Act. The waiting period required by the HSR Act (as
defined in Section 13.19 below) shall have expired or been terminated, if
applicable.
7.2. Officer's Certificate. Seller shall have delivered to
Purchaser a certificate of an executive officer dated the Closing Date
certifying on behalf of Seller that the representations contained in the first
sentence, and the first sentence only, of each of Section 4.1 through Section
4.5 are true and correct in all material respects on the Closing Date.
7.3. Seller's Performance. Seller has performed in all material
respects the Seller's covenants in Sections 5A.1 and 5A.2 and Seller shall have
performed in all material respects the obligations in this Agreement to be
performed by Seller at Closing pursuant to Article 8.
ARTICLE 8. CLOSING.
8.1. Time and Place of Closing. If the conditions to Closing have
been satisfied or expressly waived by the Party entitled to the benefits
thereof, the consummation of the transactions contemplated hereby ("Closing")
shall take place at one of Seller's offices on or before December 15, 1998 at
9:00 a.m., or at such other place and time or in such other manner agreed upon
by Seller and Purchaser ("Closing Date"); provided, that Seller shall have the
right to extend Closing for thirty (30) days for any reason and up to an
additional fifteen (15) days to respond to any Notice of Defects provided by
Purchaser and that any extension by Seller shall not serve to provide Purchaser
rights not otherwise expressly provided herein, nor to extend any rights of
Purchaser contained herein, including, without limitation, those contained in
Section 3.5.
8.2 Closing Obligations. At the Closing, the following events
shall occur, each being a condition precedent to the others and each being
deemed to have occurred simultaneously with the others:
(a) Seller shall execute, acknowledge and deliver to Purchaser
multiple originals of an Assignment and Bill of Sale in
substantially the form attached hereto as Exhibit "B", and
Purchaser shall, execute, acknowledge and deliver same to
Seller. (Seller may require the Parties to execute separate
instruments for each state, county or parish in which the
Assets are located to facilitate recording.);
(b) Seller and Purchaser shall execute, acknowledge and deliver
transfer orders or letters in lieu directing all purchasers of
production to make payment to Purchaser of proceeds
attributable to the Sale Interest;
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(c) Purchaser shall deliver by wire transfer the Adjusted Purchase
Price less the Deposit as provided in Article 2;
(d) Purchaser and Seller shall execute and deliver a settlement
statement (the "Preliminary Settlement Statement") prepared by
Seller and setting forth the Purchase Price and all
adjustments thereto using information to the extent then
available and if not then available then Seller's reasonable
good faith estimate thereof, subject to Section 13.17;
(e) Purchaser and Seller shall execute and deliver appropriate
state or federal lease assignment forms, appropriate
resignation or change of operator forms and other instruments
and certificates; and
(f) Purchaser shall take all such other action as may be necessary
to carry out its obligations under this Agreement.
(g) Subject to Section 13.18, Seller shall execute and deliver to
Purchaser appropriate resignation of operator and change of
operator forms reasonably requested by Purchaser prior to
fifteen (15) business days before the Closing Date.
8.2. Shareholder and Board Approval of Transaction; Closing Date
Extension. (a) Purchaser represents and warrants to Seller that in order for
Purchaser to consummate the transactions contemplated by this Agreement,
Purchaser must seek and obtain the approval of its shareholders, which approval
will require the filing with the United States Securities and Exchange
Commission (the "SEC") of a proxy statement (the "Proxy Statement") pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934.
Accordingly, Purchaser agrees to use its best efforts to prepare and file with,
and have cleared by, the SEC, the Proxy Statement as promptly as practicable
after the execution of this Agreement. Purchaser shall use its best efforts to
cause the Proxy Statement to be mailed to its shareholders as promptly as
practicable after it is cleared by the SEC, and shall duly call a meeting of
its shareholders to be held within 20 days after the Proxy Statement has been
cleared by the SEC for the purpose of approving the transactions contemplated
by this Agreement. In addition, Purchaser shall, through its Board of
Directors, recommend to its shareholders that they approve the transactions
contemplated by this Agreement, and, provided such actions are consistent with
their fiduciary duties, shall not rescind such recommendation. (b) Without
limiting the generality of the foregoing, Purchaser shall promptly (but in any
event within 10 days of the date of this Agreement) obtain and deliver to
Seller written agreements (in form and substance acceptable to Seller) from
each of Cadell S. Liedtke, Michael J. Grella, and Henry G. Musselman
irrevocably committing such shareholders to vote their shares in favor of the
transactions contemplated by this Agreement. (c) If Purchaser has not mailed
its definitive Proxy Statement to its shareholders on or before November 23,
1998, and the failure to mail results from the lack of clearance of the Proxy
Statement by the SEC (through no fault of Purchaser), than the Closing Date
shall be extended for such number of days as shall be necessary in order to
obtain clearance from the SEC; provided, however, (i) the Closing Date shall
not be extended beyond January 15, 1999, and (ii) on or after December 15,
1998, the Purchase Price shall be increased by adding interest thereto for each
day that the Closing has not occurred, with such interest to be computed at a
rate equal to that earned on the Deposit.
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ARTICLE 9. POST-CLOSING OBLIGATIONS.
9.1. Receipts and Credits; Suspense Funds. Upon Closing and
Subject to the terms hereof, all monies, refunds, proceeds, receipts, credits,
receivables, accounts and income attributable to the Assets (a) for all periods
of time from and after the Effective Time shall be the sole property and
entitlement of the Purchaser, and, to the extent received by Seller, Seller
shall fully disclose and account therefor to Purchaser promptly, and (b) for
all periods of time prior to the Effective Time shall be the sole property and
entitlement of Seller to the extent received by Purchaser or Seller prior to
the Final Accounting Date or allocated to Seller in the Final Accounting, and
if received by Purchaser, Purchaser shall fully disclose and account therefor
to Seller promptly. Purchaser shall pay Seller for Seller's share of
hydrocarbons attributable to the purchased Assets in storage above the pipeline
connection or in transit on the Effective Time at the relevant contract price,
net applicable taxes. Seller and Purchaser recognize that as of the Effective
Time there may be over or under imbalances with respect to gas production
attributable to the Subject Properties ("Imbalances") and hereby agree that (i)
Imbalances shall not be included in any Identified Claims asserted hereunder,
and (ii) the Subject Properties will be conveyed specifically subject to
Imbalances which exist as of the Effective Time, with Purchaser, as of Closing,
bearing and assuming all obligations with respect to any overproduction account
or liability and receiving the benefit of and being credited with any
underproduction account or credit; provided, however, that with respect to
Subject Properties that are subject to gas balancing agreements, Purchaser (x)
may include any net overproduced Imbalance as an Identified Claim hereunder, or
(y) at Closing shall pay Seller an amount determined by multiplying the net
underproduced Imbalance by $1.00/MCF with Purchaser, as of Closing, bearing and
assuming all obligations with respect to any overproduction account or
liability and receiving the benefit of and being credited with any
underproduction account or credit. At Closing, Seller shall deliver to
Purchaser all amounts in Seller's possession due third party owners of
interests in the Subject Properties, and Purchaser agrees that it shall be
solely responsible for the disposition of such funds, the payment thereof to
the rightful owners and the payment, if any, of royalty thereon (the "Suspense
Funds").
9.2. Costs and Liabilities; Indemnity
(a) As used in this Agreement, "Claims", "CLAIMS",
"claims" or "Claims" shall include costs, expenses,
obligations, claims, demands, causes of action,
lawsuits, liabilities, damages, fines, penalties,
debts, losses and judgments of any kind or character,
whether matured or absolute or contingent, accrued or
unaccrued, liquidated or unliquidated, known or
unknown, and all costs, expenses and fees (including,
without limitation,
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interest, attorneys' fees, costs of experts, court
costs and costs of investigation) incurred in
connection therewith, including, but not limited to
claims arising from or directly or indirectly related
to death, personal injury, property damage,
environmental damage or the remediation thereof,
royalty, operating, suspense and capital obligations
attributable to the Assets or the Property. As used
in this Section 9.2, "Assets" shall include the
Suspense Funds.
(b) Notwithstanding anything in this Agreement to the
contrary, it is the express intent and agreement of
Seller and Purchaser that, if Closing occurs,
Purchaser shall accept the Assets and Property in
their "as is, where is" condition, subject to any and
all faults, defects, deficiencies, irregularities and
claims related or attributable in any manner
thereto, including, without limitation, Title
Defects, Environmental Defects, Identified Claims or
any other matter affecting in any respect the title
or physical condition of, or the right to own, use,
operate, develop or enjoy, the Assets, whether known
or unknown, liquidated or unliquidated, fixed or
contingent, direct or indirect.
(c) At Closing and without further action or
documentation, Purchaser (1) shall assume, be
responsible for and comply with all duties and
obligations, express or implied, arising at any time
with respect to the Assets, including, without
limitation (i) those arising under or by virtue of
any lease, contract, agreement, document, permit,
law, statute, rule, regulation or order of any
governmental authority or court (specifically
including, without limitation, any governmental
request or other requirement to plug, re-plug or
abandon or re-abandon any well of whatsoever type,
status or classification, or take any clean-up,
remedial or other action with respect to the Assets
or Property), (ii) preferential rights to purchase
and (iii) third party consents; (2) shall assume, be
responsible for and pay all claims affecting or
arising, directly or indirectly, at any time in
connection with the Assets, including, without
limitation, claims for personal or property injury or
damage, environmental cleanup, remediation, or
compliance, or for any other relief, arising directly
or indirectly from or incident to, the use,
occupation, operation, maintenance or abandonment of
or production from the Assets, or condition of the
Assets or Property, whether latent or patent,
including, without limitation, contamination of
property or premises with Naturally Occurring
Radioactive Materials ("NORM"), and whether or not
arising solely from or contributed to by the
negligence in any form, whether active or passive, or
of any kind or nature, of Seller or its predecessors
in title or their respective Affiliates agents,
employees or contractors; and (3) SHALL DEFEND,
INDEMNIFY AND HOLD SELLER HARMLESS FROM
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ANY AND ALL CLAIMS ARISING, ASSERTED OR DUE AT ANY
TIME, WHETHER BEFORE, ON OR AFTER THE EFFECTIVE TIME,
IN CONNECTION WITH THE FOREGOING; AND, FURTHER,
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
PURCHASER WILL INDEMNIFY, DEFEND AND HOLD HARMLESS
SELLER FROM ALL CLAIMS ARISING AT ANY TIME, WHETHER
BEFORE, ON OR AFTER THE EFFECTIVE TIME, MADE BY ANY
PERSON AND ARISING OUT OF OR RESULTING FROM:
- THE OWNERSHIP OR OPERATION OF THE ASSETS BY OR ON
BEHALF OF SELLER OR ITS PREDECESSORS IN TITLE OR ACTS
OR OMISSIONS BY OR ON BEHALF OF SELLER OR ITS
PREDECESSORS IN TITLE IN CONNECTION WITH OR
PERTAINING TO THE ASSETS;
- THE OWNERSHIP OR OPERATION OF THE ASSETS BY OR ON
BEHALF OF PURCHASER OR ITS SUCCESSORS IN TITLE OR THE
ACTS OR OMISSIONS BY OR ON BEHALF OF PURCHSER OR ITS
SUCCESSORS IN TITLE IN CONNECTION WITH OR PERTAINING
TO THE ASSETS;
- THE ACTS OR OMISSIONS OF THIRD PARTIES RELATING TO
THE ASSETS;
- THE REVIEW, INSPECTION AND ASSESSMENT OF THE ASSETS
BY PURCHASER;
- AN ERROR IN DESCRIBING THE ASSETS;
- RIGHTS AND OBLIGATIONS OF THE PARTIES OR THIRD
PARTIES UNDER RELATED AGREEMENTS;
- FAILURE BY THIRD PARTIES TO APPROVE OR CONSENT TO ANY
ASPECT OF THIS TRANSACTION;
- OBLIGATIONS TO PLUG, RE-PLUG, ABANDON OR RE-ABANDON
WELLS, REMOVE FACILITIES, EQUIPMENT, PIPELINES AND
FLOWLINES, CLOSE PITS AND REMOVE SUMPS, AND RESTORE,
CLEAN UP AND/OR REMEDIATE THE ASSETS OR PROPERTY;
- PAYMENTS, ROYALTIES OR DISBURSEMENTS PAID OR PAYABLE
BY SELLER OR PURCHASER TO THIRD PARTIES WITH REGARD
TO THE ASSETS;
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- THE PHYSICAL OR ENVIRONMENTAL CONDITION OF OR
RELATING TO THE ASSETS OR PROPERTY OR ANY DISPOSAL
SITE (WHETHER ON THE ASSETS OR PROPERTY OR OFFSITE)
CONTAINING MATERIALS OR WASTES FROM THE OPERATION'S
OR ACTIVITIES ON THE PROPERTY OR ASSETS INCLUDING
CLAIMS UNDER ANY LAW OR ENVIRONMENTAL LAW;
- REMEDIATION ACTIVITIES, INCLUDING DAMAGES INCURRED BY
BUYER DURING OR ARISING FROM REMEDIATION ACTIVITIES
RELATING TO THE ASSETS OR PROPERTY;
- INABILITY OR FAILURE TO OBTAIN THE TRANSFER OF A
PERMIT OR AUTHORIZATION OR THE INABILITY TO OBTAIN A
PERMIT OR AUTHORIZATION RELATING TO THE ASSETS.
(d) From and after Closing, any claim for indemnity
hereunder shall be made by written notice, together
with a written description of any claims asserted
stating the nature and basis of such claim and, if
ascertainable, the amount thereof. Purchaser shall
have a period of twenty (20) days after receipt of
such notice within which to respond thereto or, in
the case of a claim which requires a shorter time for
response, then within such shorter period as
specified by Seller in such notice (the "Notice
Period"). If Purchaser denies liability hereunder or
fails to provide the defense for any claim, Seller
may defend or compromise the claim as it deems
appropriate without prejudice to any of Seller's
rights hereunder, with no right of Purchaser to
approve or disapprove any actions taken in connection
therewith by Seller. If Purchaser accepts liability
and responsibility for the defense of any claim, it
shall so notify Seller as soon as is practicable
prior to the expiration of the Notice Period and
undertake the defense or compromise of such claim
with counsel selected by Purchaser and reasonably
acceptable to Seller. If Purchaser undertakes the
defense or compromise of such claim, Seller shall be
entitled, at its own expense, to participate in such
defense. No compromise or settlement of any claim
shall be made without reasonable notice to Seller,
and without the prior written approval of Seller,
unless such compromise or settlement includes a
general and complete release of Seller, its
Affiliates and their respective Representatives in
respect of the matter, with prejudice, and with no
express or written admission of liability on the part
of Seller, its Affiliates and their respective
Representatives, and no constraints on the future
conduct of its or their respective businesses.
Purchaser acknowledges that
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its obligations to indemnify, defend and hold Seller
and its Affiliates harmless under this Agreement
includes obligations to pay the attorneys' fees and
court costs incurred by Seller and its Affiliates in
defending said Claims, regardless of the merits of
said Claims.
(e) Seller shall have the right at all times to
participate, at its sole cost, in the preparation for
any hearing or trial related to the indemnities set
forth in this Agreement, as well as the right to
appear on its own behalf or to retain separate
counsel to represent it at any such hearing or trial.
(f) THE INDEMNITIES PROVIDED IN THIS AGREEMENT SHALL
EXTEND TO SELLER AND ITS AFFILIATES AND ANY PERSON
WHO AT ANY TIME HAS SERVED OR IS SERVING AS A
DIRECTOR, OFFICER, EMPLOYEE, CONSULTANT, INVITEE OR
AGENT THEREOF (EACH A "REPRESENTATIVE" AND
COLLECTIVELY "REPRESENTATIVES"), AND EACH OF THEIR
RESPECTIVE HEIRS, EXECUTORS, SUCCESSORS AND ASSIGNS,
AND SHALL APPLY TO ALL CLAIMS SUBJECT TO INDEMNITY
HEREUNDER, INCLUDING THOSE BASED ON NEGLIGENCE OF ANY
NATURE, INCLUDING SOLE NEGLIGENCE, SIMPLE NEGLIGENCE,
CONCURRENT NEGLIGENCE, ACTIVE NEGLIGENCE, PASSIVE
NEGLIGENCE, STRICT LIABILITY OR FAULT OF SELLER (OR
ANY OTHER INDEMNIFIED PARTY) OR ANY OTHER THEORY OF
LIABILITY OR FAULT, WHETHER OF LAW (WHETHER COMMON OR
STATUTORY) OR IN EQUITY.; PROVIDED, HOWEVER,
PURCHASER SHALL NOT BE LIABLE FOR OR INDEMNIFY SELLER
FOR ANY CLAIM ASSERTED BY PURCHASER ARISING DIRECTLY
FROM A BREACH OF A MATERIAL TERM OF THIS AGREEMENT BY
SELLER AND FOR WHICH AND ONLY TO THE EXTENT THAT,
PURCHASER HAS OBTAINED AGAINST SELLER A BINDING ,
FINAL, NON-APPEALABLE ARBITRATION DECISION PURSUANT
TO THIS AGREEMENT OR COURT JUDGEMENT THE
INDEMNIFICATION PROVISIONS OF THIS SECTION 9.2 SHALL
BE IN ADDITION TO ANY OTHER INDEMNITY PROVISIONS
CONTAINED IN THIS AGREEMENT, AND IT IS EXPRESSLY
UNDERSTOOD AND AGREED THAT THE TERMS OF THIS SECTION
9.2 SHALL CONTROL OVER ANY CONFLICTING OR
CONTRADICTING TERMS OR PROVISIONS CONTAINED IN THIS
AGREEMENT, AND SHALL SURVIVE CLOSING.
9.3. Further Assurances. After Closing, Seller and Purchaser agree
to take such further actions and to execute, acknowledge and deliver all such
further documents that are
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necessary or useful in carrying out the purposes of this Agreement or of any
document delivered pursuant hereto. The parties will cooperate at all times
after Closing to execute and record correction instruments to correct
scrivener's errors in the preparation of Closing documents. Prior to Closing
upon written notice form Purchaser, delivered at least thirty (30) days prior
to the Closing Date, that Seller is not qualified to do business in one or more
states such that any conveyance of Assets located in such states would not be
valid, Seller shall cooperate with Purchaser and take such steps to gain good
standing in such states to make such proposed conveyances of Assets valid.
9.4. Delivery of Records. As soon as reasonably possible but no
later than thirty (30) days after the Closing Date, Seller shall deliver
originals or copies consistent with this Agreement at Seller's and Purchaser's
equally shared cost, of the Records to Purchaser; provided, that Seller (i)
shall exercise its best efforts to provide Purchaser at Closing or as soon
thereafter as is practicable with all Records necessary to assume and conduct
operations of the Assets, and (ii) shall have the right to retain, as its own,
original Records that pertain to the Excluded Assets and copies (at Seller's
and Purchaser's equally shared cost) of all other Records. No later than
thirty (30) days after Closing, Seller further agrees to assist Purchaser (at
Purchaser's cost) in making an electronic transfer of all Records applicable to
the Subject Properties. Such electronic data to include but is not limited to:
Property Master files, Name and Address files, (owners, purchasers, operators,
etc.), Division of Interest decks for billing and revenue, Oil and Gas
Purchaser Division Order/Property cross-reference, Land Records (Lease, tracts,
Critical Dates, Text file, Ownership, Rentals, Billing), Chart of Accounts,
Billing Category Codes, County and State Code cross-reference, System Code
Tables or Legends (Suspense Codes, Interest Types, Product Codes, etc.) Gas
Contract Records (Master File, Text, Details, Fees, Calendar, etc.), Owner
Netting Information, Production Records (Tank Master, Closing Stock, Production
Master, State Information, etc.), AFE Information, Revenue Suspense and/or
Billing suspense, Owner Net (Share) Revenue and Billing History, Property Gross
(8/8) Revenue and Billing History, Operated Property Production Information
(and Non-Operated if available), Operated Property Production Tax History
Information, Land Records (Rental Payments), Payout Information and Schedules,
1099 Information, Accounts Payable and Revenue information. Seller's
obligation pursuant to this Section 9.4 shall be limited to Seller's present
capability to perform such electronic transfers without disruption or undue
inconvenience to Seller's ongoing business, and further, Seller shall not be
required to create, assemble or develop such electronic files or records.
9.5. Access to Data and Records. Subject to the rights of third
parties and Seller's proprietary rights, Seller shall (i) provide Purchaser and
its Agents with reasonable access to Seller's books and records relating to the
Assets (both paper and electronic) before and after Closing as necessary for
Purchaser, at Purchaser's cost, to prepare its financial statements, (ii)
electronically download Seller's Records at Purchaser's cost regarding the
Subject Properties into Purchaser's accounting and land system within ten (10)
days after the Execution Date and thereafter, prior to Closing, electronically
update Purchaser's accounting, land and lease records at least one (1)
additional time from Seller's Records, so long as such electronic downloading
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efforts are not disruptive of Seller's business or accounting or land
departments and (iii) assist Purchaser, at Purchaser's cost, in acquiring the
appropriate licenses, permits and authorizations to possess and use all or part
of the seismic and geophysical data regarding the Subject Properties, subject
to the rights of third parties and to confidentiality or limited use conditions
or other conditions or restrictions required by Seller or such third parties.
9.6 Purchaser's Release of Seller. At Closing and without
further documentation, Purchaser releases and discharges Seller and Sellers
Affiliates from all Claims relating to the Assets, the Property or this
transaction, regardless of when or how the Claim arose or arises or whether
the Claim was foreseeable or unforeseeable. Purchaser's release of Seller and
its Affiliates includes Claims resulting in any way from the negligence or
strict liability of Seller and its Affiliates, whether the negligence or strict
liability is active passive, joint, concurrent, or sole. There are no
exceptions to Purchasers release of Seller and its Affiliates, and this release
is binding on Purchaser and its successors and assigns. PURCHASER EXPRESSLY
WARRANTS AND REPRESENTS AND DOES HEREBY STATE AND REPRESENT THAT NO PROMISE OR
AGREEMENT WHICH IS NOT HEREIN EXPRESSED HAS BEEN MADE TO PURCHASER IN EXECUTING
THIS AGREEMENT OR AGREEING TO THIS RELEASE AND THAT PURCHASER IS NOT RELYING
UPON ANY STATEMENT OR REPRESENTATION OF SELLER OR ANY AGENT OR AFFILIATE OF
SELLER. PURCHASER HAS BEEN REPRESENTED BY LEGAL COUNSEL AND SAID COUNSEL HAS
READ AND EXPLAINED TO PURCHASER THE ENTIRE CONTENTS OF THIS AGREEMENT AND THIS
RELEASE AND EXPLAINED THE LEGAL CONSEQUENCES THEREOF.
9.7 Retroactive Effect. Purchaser acknowledges that Purchaser's
obligations to release, indemnify, defend, and hold Seller and its Affiliates
harmless apply to matters occurring or arising before, on and after the
Effective Time to the extent provided in this Agreement.
9.8. Inducement to Seller. Purchaser acknowledges that it
evaluated its obligations under this article before it determined and submitted
its bid for the Assets and that its assumption of these obligations is a
material inducement to Seller to enter into this Agreement with and Close the
sale to Purchaser.
9.9 Purchaser's Indemnity. Except for Seller's Indemnity
contained in Section 9.13 below, it is the intent of Purchaser and Seller that
Seller be indemnified, defended and held harmless by Purchaser in a manner so
that Seller will be protected as if it has never at any time owned or operated
the Assets or the Property or any interest therein or pertaining thereto, in
whole or in part.
9.10. Related Agreements. Without further action or documentation,
unless specifically provided otherwise in this Agreement, the sale of the
Assets is made subject to all oil, gas and mineral leases, assignments,
subleases, farmout agreements, joint operating
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agreements, pooling agreements, letter agreements, easements, rights of way,
and all other agreements with respect to or pertaining to the Assets to the
extent they are binding on Seller or Seller's Affiliates (the "Related
Agreements"). Upon Closing, Purchaser expressly assumes the obligations and
liabilities of Seller or Seller's Affiliates under such agreements insofar as
the obligations and liabilities concern or pertain to the Assets and will
execute any documents necessary to effectuate such assumption. The Parties
agree that this Section 9.10 is applicable to all instruments whether they are
recorded or not.
9.11. Litigation. Upon and after Closing, Purchaser shall assume
all obligations of Seller and Seller's Affiliates and be responsible and liable
for all litigation listed on Schedule 9.11 and all matters, costs, judgments,
and expenses related thereto or arising therefrom. Notwithstanding Section 9.2
(c) above, 9.6, 9.9, and 12.2, upon Closing, Seller shall be responsible and
liable for all litigation which has been filed and served on Seller before the
Execution Date to which Purchaser is not a party and Seller is a party and
which is not listed on Schedule 9.11. Seller reserves the right to remove
litigation from Schedule 9.11 on or before Closing.
9.12. Evidence of Compliance. For Seller-operated Assets, Purchaser
shall deliver to Seller on or prior to 120 days after the Closing (1) evidence
of compliance with the rules and regulations dealing with the plugging and
abandoning of wells included in the Assets, including evidence of the
appropriate bond, surety letter, or letter of credit which has been accepted by
the relevant regulatory agency; (2) proof that Purchaser has been approved by
the relevant regulatory agency as operator of the Assets, including all Wells
that are subject to this Agreement; and (3) evidence that Purchaser has obtained
all necessary permits or transfers of permits to operate the Assets. For matters
which Purchaser has been unable to provide the necessary evidence and proof,
Purchaser shall provide Seller with a status report and action plan for
obtaining such required evidence and proof and continue diligently in its
efforts until all such matters have been achieved. Purchaser shall indemnify,
defend and hold harmless Seller and Seller's Representatives from all Claims
arising from or relating to Purchaser's failure to obtain or failure to obtain
in a timely manner the evidence or proof described in this Section 9.12 (1), (2)
and (3) above.
9.13. Seller's Indemnity. Notwithstanding any other provision of
this Article 9, for the period beginning on the Closing Date and ending on the
first anniversary of the Closing Date (the "Seller Indemnity Period") Seller
shall defend, indemnify and hold harmless Purchaser from any and all bona fide
third party claims asserted during the Seller Indemnity Period to the extent,
and only to the extent, directly relating to the mispayment, nonpayment or
underpayment of royalties for the for the Sale Interest applicable to the
period of Seller's ownership of the Affected Assets.
9.14. Release of Liens. To the extent there exists liens, security
interests or mortgages on the Assets or any part thereof created by Seller
which are identified to Seller in writing by Purchaser prior to the end of the
Examination Period, Seller, shall deliver to Purchaser releases of same,
including associated financing statements on or before Closing.
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ARTICLE 10. TERMINATION
10.1. Right of Termination. This Agreement and the transactions
contemplated hereby may be terminated at any time at or prior to the Closing:
(a) By Seller if Closing does not occur on or before
December 15, 1998, unless the Closing Date is extended by Purchaser pursuant to
and subject to Section 8.3 above in which event by Seller if Closing does not
occur on or before January 15, 1999;
(b) By mutual consent of the parties;
(c) By Purchaser or Seller in accordance with Article 3;
(d) By Purchaser by notice delivered to Seller on or
before Closing if all conditions described in Article 7 shall not have
been met and such noncompliance shall not have been caused or waived
by the actions or inactions of Purchaser; or
(e) By Seller by notice delivered to Purchaser on or
before Closing if (1) all conditions described in Article 6 shall not
have been met and such noncompliance shall not have been caused or
waived by the actions or inactions of Seller, or (2) Purchaser has not
made the filings and requests required of it in Section 8.3 in the
time required thereunder or by the first sentence of Section 13.20
prior to thirty days after the Execution Date.
10.2. Effect of Termination. If this Agreement is terminated
pursuant to Section 10.1, this Agreement shall become void and of no further
force or effect (except for the provisions of Section 3.3, Article 5, Section
10.2, and Article 13 each of which shall survive such termination and continue
in full force and effect). If this Agreement is terminated by Purchaser
pursuant to Section 10.1 (d) above, in the absence of a default by Purchaser,
Purchaser may, at its sole option, seek arbitration pursuant to Section 13.24
hereto to enforce whatever legal or equitable rights and remedies may be
appropriate and applicable, including, without limitation, damages and/or
specific performance of this Agreement, or in lieu thereof and with a written
release for all claims for the default(s) which is/are the basis for such
termination subject to the reasonable satisfaction of Seller, elect to receive
a refund of the Deposit and all accrued interest thereon which shall be
returned by Seller to Purchaser. If this Agreement is terminated by Seller
pursuant to Section 10.1(a) or (e) above, Seller shall have no further
liability to Purchaser and shall be entitled to retain the Deposit and all
accrued interest and to receive from Purchaser as its sole and exclusive remedy
liquidated damages in the amount of $41,000,000 plus the costs and expenses of
obtaining said amount from Purchaser, including attorneys fees, court costs,
and other expenses, less and except the amount of the Deposit and all accrued
interest on the Deposit which may be retained by Seller. If this Agreement is
terminated pursuant to Section 10.1(b) or (c) above, the Deposit and all
accrued interest on the Deposit shall be returned by Seller to Purchaser with
neither party having further remedy or recourse, except in the event the
termination is made in bad faith. Notwithstanding anything to the contrary
contained in this Agreement, upon any termination of this Agreement pursuant to
Section 10.1 by Seller, Seller shall be free immediately to enjoy all rights of
ownership of the Assets and may sell, transfer,
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encumber or otherwise dispose of the Assets to any party without any
restriction under this Agreement and without any impairment of its rights
hereunder to recover damages from Purchaser arising from any default hereunder
by Purchaser.
ARTICLE 11. TAXES
11.1. Apportionment of Ad Valorem and Property Taxes. All ad
valorem taxes, real property taxes, personal property taxes, and similar
obligations concerning the Assets with respect to the tax period in which the
Effective Time occurs ("Property Taxes") shall be apportioned as of the
Effective Time between Seller and Purchaser. Seller shall file or cause to be
filed all required reports and returns incident to the Property Taxes and shall
pay or cause to be paid to the taxing authorities all Property Taxes relating
to the tax period in which the Effective Time occurs. Purchaser shall pay to
Seller Purchaser's pro rata portion of Property Taxes within thirty (30) days
after receipt of Seller's invoice therefor.
11.2. Sales Taxes. The Purchase Price excludes any sales taxes or
other taxes required to be paid in connection with the sale of property
pursuant to this Agreement. Purchaser shall be liable for all sales, gross
receipts, use and other taxes, conveyance, transfer and recording fees and real
estate transfer stamps or taxes that may be imposed on any transfer of property
pursuant to this Agreement. These taxes shall be collected and remitted under
applicable law. Purchaser shall indemnify and hold Seller harmless with
respect to the payment of any of these taxes including any interest or
penalties assessed thereon.
11.3. Other Taxes. All taxes (other than income taxes) which are
imposed on or with respect to the production of oil, natural gas or other
hydrocarbons or minerals or the receipt of proceeds therefrom (including but
not limited to severance, production, and excise taxes) shall be apportioned
between the Parties based upon the respective shares of production taken by
the Parties. From and after Closing, Purchaser shall be responsible for paying
or withholding or causing to be paid or withheld all such taxes and for filing
all statements, returns, and documents incident thereto.
11.4. Cooperation. Each Party to this Agreement shall provide the
other Party with reasonable access to all relevant documents, data and other
information which may be required by the other Party for the purpose of
preparing tax returns and responding to any audit by any taxing jurisdiction.
Each Party to this Agreement shall cooperate with all reasonable requests of
the other Party made in connection with contesting the imposition of taxes.
Notwithstanding anything to the contrary in this Agreement, neither Party to
this Agreement shall be required at any time to disclose to the other Party any
tax return or other confidential tax information for a period of at least 12
months.
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ARTICLE 12. PHYSICAL CONDITION OF THE ASSETS
12.1. Prior Use of Assets. THE ASSETS AND PROPERTY HAVE BEEN USED
FOR EXPLORATION, DEVELOPMENT, PRODUCTION, STORAGE, AND TRANSPORTATION OF OIL
AND GAS AND RELATED OIL FIELD OPERATIONS. PHYSICAL CHANGES IN THE PROPERTY MAY
HAVE OCCURRED AS A RESULT OF SUCH USES. THE ASSETS OR THE PROPERTY ALSO MAY
INCLUDE BURIED PIPELINES, WASTES AND OTHER EQUIPMENT, WHETHER OR NOT OF A
SIMILAR NATURE, THE LOCATIONS OF WHICH MAY BE HIDDEN OR NOT NOW BE KNOWN OR
NOT READILY APPARENT BY A PHYSICAL INSPECTION OF THE AFFECTED ASSETS.
HYDROCARBONS AND OTHER SUBSTANCES, INCLUDING HAZARDOUS SUBSTANCES, MAY HAVE
COME TO BE RELEASED OR LOCATED ON OR BENEATH THE SURFACE OF THE ASSETS OR THE
PROPERTY.
12.2 Assumption of Assets in Present Condition. PURCHASER
ACKNOWLEDGES THAT (i) THE CONSUMMATION OF THIS AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY BY PURCHASER SHALL BE SOLELY ON THE BASIS OF ITS OWN
INVESTIGATION OF THE PHYSICAL CONDITION OF THE ASSETS AND PROPERTY, INCLUDING,
WITHOUT LIMITATIONS, SUBSURFACE CONDITION; (ii) THE ASSETS AND PROPERTY HAVE
BEEN USED IN THE MANNER AND FOR THE PURPOSES SET FORTH ABOVE AND THAT PHYSICAL
CHANGES TO THE ASSETS AND THE PROPERTY MAY HAVE OCCURRED AS A RESULT OF SUCH
USE; AND (iii) NORM AND ASBESTOS OR MAN-MADE MATERIAL FIBERS (COLLECTIVELY
"MMMF") MAY BE PRESENT AT SOME LOCATIONS. PURCHASER ACKNOWLEDGES THAT NORM IS A
NATURAL PHENOMENON ASSOCIATED WITH MANY OIL FIELDS IN THE UNITED STATES AND
THROUGHOUT THE WORLD. PURCHASER SHALL MAKE ITS OWN DETERMINATION OF THIS
PHENOMENON AND OTHER CONDITIONS. SELLER DISCLAIMS ANY LIABILITY ARISING OUT OF
OR IN CONNECTION WITH ANY PRESENCE OF NORM OR MMMF ON OR AFFECTING THE ASSETS OR
THE PROPERTY. IN ACCORDANCE WITH SECTION 9.2 AND AT CLOSING, PURCHASER SHALL
ASSUME THE RISK THAT THE ASSETS OR THE PROPERTY MAY CONTAIN WASTES OR
CONTAMINANTS AND ADVERSE PHYSICAL CONDITIONS, INCLUDING THE PRESENCE OF
PIPELINES, EQUIPMENT AND OTHER ITEMS OF PERSONAL PROPERTY, TANK BOTTOMS, HEATER
TREATER SLUDGE, AND WASTES OR CONTAMINANTS WHICH MAY NOT HAVE BEEN REVEALED BY
PURCHASER'S INVESTIGATION. IN ACCORDANCE WITH SECTION 9.2 AND AT CLOSING, ALL
RESPONSIBILITY AND LIABILITY RELATED TO DISPOSALS, SPILLS, WASTES, OR
CONTAMINATION, OR OTHER ADVERSE PHYSICAL CONDITIONS ON, BELOW, OR RELATED TO OR
AFFECTING THE ASSETS AS WELL AS THE PROPERTY SHALL BE ASSUMED BY PURCHASER AND
PURCHASER SHALL NOT WITHSTANDING WHEN THE BASIS FOR ANY CLAIM, ACTION, SUIT,
JUDGMENT (INCLUDING, WITHOUT LIMITATION, THOSE FOR DEATH, PERSONAL INJURY OR
PROPERTY DAMAGE) SHALL HAVE OCCURRED, INDEMNIFY, DEFEND AND HOLD SELLER HARMLESS
THEREFROM PURSUANT TO SECTION 9.2.
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12.3. Casualty Loss. In the event of any material damage by fire or
other casualty to any of the Assets prior to the Closing ("Casualty Loss"),
this Agreement shall remain in full force and effect, and as to each affected
Asset, Seller shall at its election either collect (and when collected pay over
to Purchaser) or assign to Purchaser any and all insurance claims related to
such damage, and Purchaser shall take title to the affected Asset without
reduction in the Purchase Price.
ARTICLE 13. MISCELLANEOUS
13.1. Governing Law.This Agreement and all instruments executed in
accordance herewith shall be governed by and interpreted in accordance with the
laws of the State of Texas, without regard to conflict of law rules that would
direct application of the laws of another jurisdiction, except to the extent
that it is mandatory that the law of the jurisdiction wherein the Assets are
located shall apply. In the event of any litigation or other proceeding in
connection with this Agreement, the venue for any such proceeding shall be in a
court of competent jurisdiction located in Dallas County, Texas, and the
prevailing Party shall be entitled to recover its reasonable attorney's fees
and costs incurred therein from the other Party, in addition to any damages
awarded.
13.2. Entire Agreement. This Agreement, all agreements and
instruments executed in connection herewith and the Confidentiality Agreement
dated April 15, 1998, between Purchaser and Seller (the "Confidentiality
Agreement") and that Letter Agreement dated September 1, 1998 by and between
the Purchaser and Seller constitute the entire agreement between the Parties
and supersede all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the Parties. The Letter Agreement and
the Confidentiality Agreement remain in full force and effect. No supplement,
amendment, alteration, modification, waiver or termination of this Agreement
shall be binding unless executed in writing by the Parties hereto.
13.3. Waiver. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar), nor shall such waiver constitute a continuing waiver
unless otherwise expressly provided.
13.4. Captions. The captions in this Agreement are for convenience
only and shall not be considered a part of or affect the construction or
interpretation of any provision of this Agreement.
13.5. Assignability. Purchaser shall not assign (whether before, at
or after Closing) this Agreement or any of its rights or obligations hereunder
without the prior written consent of the Seller, which may be withheld or
conditioned for any or no reason. Any assignment made without such consent
shall be void. Seller shall not assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of Purchaser, which
consent shall not be
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unreasonably withheld. Except as otherwise provided herein, this Agreement
shall be binding upon and inure to the benefit of the Parties hereto and their
respective permitted successors and assigns, however, in any event Purchaser
shall remain responsible and liable for the performance of the obligations of
Purchaser under this Agreement. All future conveyances of all or a portion of
the Assets shall expressly recognize and perpetuate the rights and obligations
set out in this Agreement.
13.6. Notices. Any notice provided or permitted to be given under
this Agreement shall be in writing, and may be served by personal delivery or
by registered or certified U.S. mail, addressed to the Party to be notified,
postage prepaid, return receipt requested. Notice deposited in the mail in the
manner hereinabove described shall be deemed to have been given and received on
the date of the delivery as shown on the return receipt. Notice served in any
other manner (including by facsimile delivery) shall be deemed to have been
given and received only if and when actually received by the addressee. For
purposes of notice, the addresses of the Parties shall be as follows:
SELLER:
Pioneer Natural Resources USA, Inc.
Attn: Ray Alameddine and W.T. Howard
1400 Williams Square West
5205 North O'Connor Blvd.
Irving, Texas 75039-3746
Telephone: 972/444-9001
Fax: 972/402/7066
PURCHASER:
Costilla Energy, Inc.
Attn: Clifford N. Hair, Jr.
400 West Illinois, Suite 1000
Midland, Texas 79701
Telephone: 915/686-6030
Fax: 915/686-6083
With copy to:
Michael J. Grella
400 West Illinois, Suite 1000
Midland, Texas 79701
Telephone: 915/686-6010
Fax: 915/688-4089
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Each Party shall have the right, upon giving three (3) days prior notice to the
other in the manner hereinabove provided, to change its address for purposes of
notice to any other appropriate street address.
13.7. DTPA Waiver. TO THE EXTENT APPLICABLE TO THE ASSETS OR ANY
PORTION THEREOF, PURCHASER HEREBY VOLUNTARILY WAIVES THE PROVISIONS OF THE
TEXAS DECEPTIVE TRADE PRACTICES ACT, CHAPTER 17, SUBCHAPTER E, SECTIONS 17.41
THROUGH 17.63, INCLUSIVE (OTHER THAN SECTION 17.555, WHICH IS NOT WAIVED), TEX.
BUS. & COM. CODE., A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS.
IN ORDER TO EVIDENCE ITS ABILITY TO GRANT SUCH WAIVER, PURCHASER HEREBY
REPRESENTS AND WARRANTS TO SELLER THAT IT (i) IS IN THE BUSINESS OF SEEKING OR
ACQUIRING, BY PURCHASE OR LEASE, GOODS OR SERVICES FOR COMMERCIAL OR BUSINESS
USE; (ii) HAS CONSULTED WITH AN ATTORNEY OF PURCHASER'S OWN CHOOSING; (iii)
HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL, BUSINESS AND OIL AND GAS MATTERS
THAT ENABLE IT TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS
CONTEMPLATED HEREBY; (iv) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING
POSITION; AND (v) THAT THIS WAIVER IS A MATERIAL AND INTEGRAL PART OF THIS
AGREEMENT AND THE CONSIDERATION THEREOF.
13.8. Expenses. Each Party shall be solely responsible for all
expenses incurred by it in connection with this transaction (including, without
limitation, fees and expenses of its own legal counsel and accountants).
13.9. Severability. The provisions of this Agreement are severable
at Seller's option. If a court of competent jurisdiction finds any part of
this Agreement to be void, invalid, or otherwise unenforceable, then Seller may
decide whether to enforce this Agreement without the void, invalid, or
unenforceable parts or to terminate this Agreement.
13.10. Damages. The Parties waive any rights to special, indirect,
punitive, exemplary, or consequential damages resulting from a breach of this
Agreement.
13.11. No Third Party Beneficiary This Agreement is not intended to
create, nor shall it be construed to create, any rights in any third party
under doctrines concerning third party beneficiaries.
13.12. Survival. The representations and warranties of the Parties
under this Agreement shall not survive, but shall terminate upon and be
extinguished by, Closing; provided, however, that (i) all representations,
warranties, disclaimers, releases, waivers, covenants, agreements and
indemnities contained within Sections 1.2, 2.3, 3.3, 3.6, 3.7, and 5.1 through
5.9, and Articles 9, 11, 12 and 13 of this Agreement shall survive the Closing,
further provided, that,
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notwithstanding anything herein to the contrary, Purchaser expressly agrees and
acknowledges that it shall have no remedy or recourse against Seller or its
Affiliates or any of their respective Representatives with respect to the
condition of the Assets or any representation or warranty made in connection
with this Agreement, except as expressly provided by Section 3.6. and 3.6.A.
13.13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.14. Not to be Construed Against Drafter. Purchaser and Seller
acknowledge that they have read this Agreement, have had the opportunity to
review it with an attorney of their respective choice, and have agreed to all
its terms. Under these circumstances, Purchaser and Seller agree that the rule
of construction that a contract be construed against the drafter shall not be
applied in interpreting this Agreement and that in the event of any ambiguity
in any of the terms or conditions of this Agreement, including any exhibits
hereto and whether or not placed of record, such ambiguity shall not be
construed for or against any Party hereto on the basis that such Party did or
did not author the same.
13.15. Waiver of Jury Trial. SELLER AND PURCHASER DO HEREBY
IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO
A TRIAL BY JURY IN ANY ACTION, SUIT OR OTHER LEGAL PROCEEDING BASED UPON,
ARISING OUT OF OR RELATING TO THIS AGREEMENT THE RIGHTS AND OBLIGATIONS UNDER
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
13.16. Publicity. Seller and Purchaser shall consult with each other
with regard to all publicity and other releases and disclosures to be made
prior to, at or after Closing concerning this Agreement and the transactions
contemplated hereby, which are not otherwise expressly permitted by the
Confidentiality Agreement, and, except as required by applicable law or the
applicable rules or regulations of any governmental body or stock exchange,
neither Party shall make any disclosure or issue any publicity or other release
without the prior written consent of the other Party, which consent shall not
be unreasonably withheld or delayed.
13.17 Accounting.
A. Seller shall deliver to Purchaser on or before the fourth
business day prior to Closing the Preliminary Settlement
Statement setting forth any adjustments to the Purchase Price
provided for in or required by this Agreement including,
without limitation, items such as the Purchase Price, Deposit,
expenses, prepaid items, revenue received, Property Taxes,
excise and energy taxes, copying and recording fees, to the
extent such information is available or estimated by Seller on
or before Closing. The Preliminary Settlement Statement shall
be prepared in accordance with this Agreement and with
standard industry and accounting practices. In connection
with the preparation of the Preliminary Settlement Statement,
the
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Purchase Price shall be (1) increased by (a) the costs and
expenses that are attributable to the Assets for the period
from the Effective Time to the Closing Date that are paid,
incurred or assessed by Seller (including, but not limited to,
Seller's internal cost for administrative overhead for each
well operated by Seller at the rate of $435.00 per well per
month for wells not otherwise subject to an applicable COPAS
overhead rate under an operating agreement and an amount equal
to the applicable COPAS overhead rate less any non-operator
billed overhead amounts that have actually been received by
Seller for wells subject to an applicable COPAS under an
operating agreement), and (b) other amounts due Seller and
contemplated hereby, and (2) reduced by (a) proceeds received
by Seller for hydrocarbons attributable to the Subject
Properties produced after the Effective Time, and (b) other
amounts due Purchaser and contemplated hereby.
B. Within 150 days after the Closing, Seller shall prepare, in
accordance with this Agreement and with standard industry and
accounting practices, and deliver to Purchaser, a final
accounting statement showing the proration and calculation of
credits and payment obligations of Purchaser and Seller
hereunder. As soon as reasonably practicable after receipt
thereof, Purchaser shall deliver to Seller a written report
containing any changes that Purchaser proposes to be made to
such statement. The Parties shall use their best efforts to
reach agreement (the "Final Accounting") on the final
accounting statement on or before the 150th day after the
Closing Date (such date the "Final Accounting Date", whether
or not Seller and Purchaser have agreed on the Final
Accounting). Once the Final Accounting has been agreed to by
Purchaser and Seller, there shall be no further adjustments to
the Purchase Price and Seller shall within thirty (30) days
send a check to Purchaser for the agreed amount owed by Seller
or invoice Purchaser for the amount owed by Purchaser and
Purchaser shall pay Seller the invoice amount within thirty
(30) days of the date of said invoice.
13.18. Operatorship. Seller does not represent to Purchaser that
Purchaser will automatically succeed to the operatorship of any given Subject
Property as to which Seller is currently the operator. Purchaser recognizes
and agrees that Purchaser will be required to comply with applicable operating
agreements, unit operating agreements or other similar contracts relating to
any elections or other selection procedures in order to succeed Seller as
operator.
13.19. HSR Act. The Parties shall exercise their best efforts to file
(or will cause their ultimate parent entities to file) with the United States
Federal Trade Commission and the United States Department of Justice all
notifications and reports required for the transaction contemplated hereby
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"), and
shall request expedited treatment and early termination of the prescribed
waiting period. The Parties will reasonably cooperate with each other in
regards to providing available
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data or access thereto to each other to facilitate the necessary filing. Both
Parties shall use their best efforts to promptly supply any supplemental or
additional information which may be requested in connection therewith pursuant
to the HSR Act and shall comply in all material respects with the requirements
of the HSR Act. Closing of the transaction contemplated hereby shall be
postponed unless and until all necessary filings and notifications under the
HSR Act have been made, including the provision of any required additional
information or documents, and the waiting period referred to in such Act shall
have expired or terminated, however, in no event shall the time for Closing be
extended or postponed pursuant to the foregoing provision beyond December 15,
1998. Subject to this Agreement, if the waiting period expires or terminates
prior to the Closing Date, the Parties will proceed to Closing on the Closing
Date and if the waiting period expires or terminates after the scheduled
Closing Date, the Parties shall close the subject transaction on or prior to
the fourth day after the expiration or termination of said waiting period.
13.20. Seller's Employees. Purchaser will interview and evaluate in
accordance with its normal employment procedures those Persons employed as
field personnel in the capacity of pumper, foreman, operator, technician,
mechanic, superintendent, repairman, utility man, or other similar field
classifications by Seller in connection with the Subject Properties and
identified by letter of even date herewith from Seller to Purchaser who desire
to be considered for employment by Purchaser, and will offer in writing
employment to those Persons for whom Purchaser in its sole discretion
determines a need. If Purchaser fails to offer such employment to all of such
Persons, Purchaser shall not, as a result of such failure, otherwise be in
default under this Agreement, but shall be required to reimburse Seller for
severance benefits paid by Seller to each such Person not offered employment by
Purchaser; provided, that such reimbursement shall not exceed that amount
determined by multiplying each such employee's normal weekly wage by twelve
(12). Persons offered employment with Purchaser will be offered employment at
their current work location with compensation and benefits comparable to those
provided to Purchaser's current employees performing similar tasks, or, if
none, with compensation and benefits comparable to those provided by Seller
Such offers shall be made prior to Closing, but shall be contingent upon the
occurrence of Closing and such employment shall not commence until Closing. If
any such Person employed by Purchaser is terminated by Purchaser within six (6)
months of Closing, Purchaser shall pay such Person a severance benefit equal to
the amount determined by multiplying each such employee's normal weekly wage by
ten (10). Purchaser shall have no obligation under this Section 13.20 with
respect to Persons offered employment by Purchaser pursuant to this Section
13.20 who decline such employment, except that the foregoing provisions shall
apply to the extent that such Person accepts employment with Purchaser or any
of its Affiliates within twelve (12) months of Closing.
13.21. Time of Performance. Time is of the essence in the performance
of all covenants and obligations under this Agreement.
13.22. No Partnership Created. It is not the purpose or intention of
this Agreement to create (and it shall not be construed as creating) a joint
venture, partnership or any type of
48
<PAGE> 54
association, and the Parties are not authorized to act as agent or principal
for each other with respect to any matter related hereto.
13.23. Express Negligence Rule; Conspicuousness. BUYER ACKNOWLEDGES
THAT THE PROVISIONS IN THIS AGREEMENT THAT ARE SET OUT IN ITALICS, IN BOLD,
UNDERLINE OR CAPITALS (OR ANY COMBINATION THEREOF) SATISFY THE REQUIREMENTS FOR
THE EXPRESS NEGLIGENCE RULE AND/OR ARE CONSPICUOUS.
13.24. Arbitration. Because of the high cost of litigation in
dollars, time and resources, Purchaser and Seller intend to and do hereby
establish an efficient, fair and binding out-of-court dispute resolution
procedure to be followed in the unlikely event any claim or controversy should
arise between the Parties after the date hereof out of or concerning in any
respect any of the following:
(1) the Property or Assets or either Seller's or
Purchaser's conduct with respect to the Property or
Assets, either before, on, or after the Effective
Time, or
(2) the conduct of Seller or Purchaser prior to the
execution of this Agreement or the conduct of Seller
or Purchaser prior to the Closing Date or Effective
Time (whichever is later), or
(3) the performance, applicability, validity,
enforceability, or interpretation of the Agreement or
any provision in this Agreement or any Closing or
post-Closing documents.
Accordingly, Purchaser, its successors, and assigns, and
Seller its successors and assigns agree that any Claim or controversy as
described above of whatever nature, including, any action in tort, contract, or
any statutory action (hereinafter referred to as "Disputed Claim" in this
section), or the arbitrability of any such Disputed Claim, shall be resolved in
accordance with the terms, conditions, and procedures set forth in Schedule
13.24 and will be binding on Purchaser, its successors, and assigns, and
Seller. Neither Purchaser, its successors, or assigns, nor Seller its
successors and assigns will prosecute or commence any suit or action against
the other Party relating to any matters that are subject to this Section 13.24.
Notwithstanding the above, any Disputed Claim by Purchaser for
which Purchaser has given notice to Seller on or prior to Closing that is not
settled prior to Closing and any Disputed Claim by either Party arising out of
facts that are the subject of existing or prospective litigation filed by a
third party at any time against Purchaser or Seller will, at Seller's sole
option, not be subject to this Section 13.24.
49
<PAGE> 55
13.25. Filing and Recording. Purchaser will file or record the
various originals of the Assignment and Bill of Sale and other conveyancing
documents promptly after Closing at Purchaser's sole cost. The recording Party
will provide either the original or photocopies of the recorded documents,
including the recording data, to the non-recording Party promptly. If
Purchaser fails to promptly record such documents then Seller may record such
documents. Purchaser will reimburse Seller for the costs of filing, recording,
and other reasonable fees actually incurred by Seller if Seller records or
files said documents, such costs or fees to be used in the Final Accounting
Settlement.
EXECUTED as of the date first set forth above.
SELLER:
PIONEER NATURAL RESOURCES USA, INC.
By:
------------------------------------------------
Name: Timothy L. Dove
------------------------------------------------
Its: Executive Vice President-Business Development
------------------------------------------------
PURCHASER:
COSTILLA ENERGY, INC.
By:
-----------------------------------------------
Name: Clifford N. Hair, Jr.
-----------------------------------------------
Its: Senior Vice President-Land
-----------------------------------------------
50
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF COSTILLA ENERGY INC. FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,361
<SECURITIES> 0
<RECEIVABLES> 11,524
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,996
<PP&E> 329,190
<DEPRECIATION> 93,775
<TOTAL-ASSETS> 263,231
<CURRENT-LIABILITIES> 36,457
<BONDS> 207,362
0
5
<COMMON> 967
<OTHER-SE> 18,440
<TOTAL-LIABILITY-AND-EQUITY> 263,231
<SALES> 48,824
<TOTAL-REVENUES> 49,671
<CGS> 21,208
<TOTAL-COSTS> 28,544
<OTHER-EXPENSES> 21,896
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,622
<INCOME-PRETAX> (23,248)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,248)
<DISCONTINUED> 0
<EXTRAORDINARY> (299)
<CHANGES> 0
<NET-INCOME> (24,854)
<EPS-PRIMARY> (2.49)
<EPS-DILUTED> (2.49)
</TABLE>
