<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 Number 000-22433
BRIGHAM EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 1311 75-2692967
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
5949 Sherry Lane, Suite 1616
Dallas, Texas 75225
(214) 360-9182
(Name, address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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 twelve months (or such shorter period that the
registrant was required to file such reports) and has been subject to such
filing requirements for the past 90 days.
Yes . No X .
----- -----
As of May 31, 1997, 12,253,574 shares of Common Stock, $.01 per share, were
outstanding.
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BRIGHAM EXPLORATION COMPANY
INDEX
PAGE
PART I. FINANCIAL INFORMATION: NUMBER
------
Item 1. Unaudited Condensed Consolidated Financial Statements
a) Balance Sheets - December 31, 1996 and
March 31, 1997 1
b) Statements of Operations - Three months ended
March 31, 1996 and 1997 2
c) Statements of Cash Flows - Three months ended
March 31, 1996 and 1997 3
d) Statement of Changes in Stockholders' Equity - 4
March 31, 1997
e) Notes to Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7 - 9
PART II. OTHER INFORMATION:
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10 - 11
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
BRIGHAM EXPLORATION COMPANY
UNAUDITED CONDENSED CONSOLIDATED
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
ASSETS (Predecessor) (Company)
------------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,447 $ 1,164
Accounts receivable 2,696 2,587
Prepaid expenses 152 362
------- --------
Total current assets 4,295 4,113
------- --------
Natural gas and oil properties, at cost, net 28,005 33,897
Other property and equipment, at cost, net 532 586
Drilling advances paid 419 740
Exploration advances paid -- 117
Other noncurrent assets 363 310
Deferred initial public offering costs -- 186
------- --------
$33,614 $ 39,949
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,937 $ 5,712
Accrued drilling costs 915 631
Participant advances received 1,137 1,645
Other current liabilities 628 1,128
------- --------
Total current liabilities 5,617 9,116
------- --------
Notes payable 8,000 10,850
Subordinated notes payable - related party 16,000 --
Other noncurrent liabilities 753 122
Deferred income tax liability -- 4,964
Commitments and contingencies
Stockholders' equity:
Predecessor capital 3,244 --
Preferred stock, $.01 par value, 10 million shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value, 30 million shares
authorized, 8,928,574 issued and outstanding -- 89
Additional paid-in capital -- 16,726
Unearned stock compensation -- (1,870)
Accumulated deficit -- (48)
------- --------
Total stockholders' equity 3,244 14,897
------- --------
$33,614 $ 39,949
======= ========
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements.
1
<PAGE> 4
BRIGHAM EXPLORATION COMPANY
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, March 31,
1996 1997
------------- ---------
(Predecessor) (Company)
<S> <C> <C>
Revenues:
Natural gas and oil sales $ 1,405 $ 2,136
Workstation revenue 166 164
------- -------
1,571 2,300
------- -------
Costs and expenses:
Lease operating 184 206
Production taxes 75 127
General and administrative 491 702
Amortization of stock compensation -- 29
Depletion of natural gas and oil properties 510 687
Depreciation and amortization 124 108
------- -------
1,384 1,859
------- -------
Operating income 187 441
------- -------
Other income (expense):
Interest income 21 18
Interest expense (15) (216)
Interest expense - related party (200) (174)
------- -------
Net income (loss) before income taxes (7) 69
Income tax benefit (expense):
Income tax provision -- 36
Deferred income tax charge -- (5,000)
------- -------
Net loss $ (7) $(4,895)
======= =======
Unaudited pro forma information:
Pro forma net income (loss) $ 15 $(4,897)
======= =======
Pro forma, as adjusted, net income $ 15 $ 103
======= =======
Pro forma net income (loss) per common share $ 0.00 $ (0.53)
======= =======
Pro forma net, as adjusted, net income per common share $ 0.00 $ 0.01
======= =======
Pro forma weighted average number of common shares outstanding 9,170 9,170
======= =======
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements.
2
<PAGE> 5
BRIGHAM EXPLORATION COMPANY
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, March 31,
1996 1997
------------- ---------
(Predecessor) (Company)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7) $(4,895)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depletion of natural gas and oil properties 510 687
Depreciation and amortization 124 108
Amortization of stock compensation -- 29
Changes in working capital and other items 498 8,295
------- -------
Net cash provided by operating activities 1,125 4,224
------- -------
Cash flows from investing activities:
Additions to natural gas and oil properties (4,241) (6,830)
Proceeds from the sale of natural gas and oil properties 2,149 --
Additions to other property and equipment (11) (33)
Increase in drilling advances paid (267) (321)
Increase in exploration advances paid -- (117)
------- -------
Net cash used by investing activities (2,370) (7,301)
------- -------
Cash flows from financing activities:
Increase in notes payable -- 2,850
Principal payments on capital lease obligations (66) (56)
------- -------
Net cash provided (used) by financing activities (66) 2,794
------- -------
Net decrease in cash and cash equivalents (1,311) (283)
Cash and cash equivalents, beginning of period 1,802 1,447
------- -------
Cash and cash equivalents, end of period $ 491 $ 1,164
======= =======
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements.
3
<PAGE> 6
BRIGHAM EXPLORATION COMPANY
UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common stock Additional Unearned
--------------------- Paid-in Stock Accumulated Predecessor
Shares Amounts Capital Compensation Deficit Capital Total
------ ------- ------- ------------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 -- $-- $ -- $ -- $-- $ 3,244 $ 3,244
Consummation of the
Exchange 8,928,574 89 19,674 -- -- (3,244) 16,519
Issuance of stock options -- -- 1,899 (1,899) -- -- --
Net loss for period ended
February 27, 1997 -- -- (4,847) -- -- -- (4,847)
Net loss for period from
February 27, 1997
to March 31, 1997 -- -- -- -- (48) -- (48)
Amortization of unearned
stock compensation -- -- -- 29 -- -- 29
--------- --- -------- ------- ---- ------- --------
Balance, March 31, 1997 8,928,574 $89 $ 16,726 $(1,870) $(48) $ -- $ 14,897
========= === ======== ======= ==== ======= ========
</TABLE>
See accompanying notes to the unaudited condensed
consolidated financial statements.
4
<PAGE> 7
BRIGHAM EXPLORATION COMPANY
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Brigham Exploration Company (the "Company") is a Delaware corporation
formed on February 25, 1997 for the purpose of exchanging its common
stock for the common stock of Brigham, Inc. and the partnership
interests of Brigham Oil & Gas, L.P. (the "Partnership"). Brigham, Inc.
is a Texas corporation whose only asset is its ownership interest in the
Partnership. The Partnership was formed in May 1992 to explore and
develop onshore domestic natural gas and oil properties using 3-D
seismic imaging and other advanced technologies. Since its inception,
the Partnership has focused its exploration and development of natural
gas and oil properties in the Permian and Hardeman Basins of West Texas,
the Anadarko Basin and the onshore Gulf Coast.
Pursuant to an exchange agreement dated February 26, 1997 (the "Exchange
Agreement") and upon the initial filing on February 27, 1997 of a
registration statement with the Securities and Exchange Commission for
the public offering of common stock (the "Offering"), the shareholders
of Brigham, Inc. transferred all of the outstanding stock of Brigham,
Inc. to the Company in exchange for 3,859,821 shares of common stock of
the Company. Pursuant to the Exchange Agreement, the Partnership's other
general partner and the limited partners also transferred all of their
partnership interests to the Company in exchange for 3,314,286 shares of
common stock of the Company. Furthermore, the holders of the
Partnership's subordinated convertible notes transferred these notes to
the Company in exchange for 1,754,464 shares of common stock. These
transactions are referred to as the "Exchange." In completing the
Exchange, the Company issued 8,928,571 shares of common stock to the
stockholders of Brigham, Inc., the partners of the Partnership and the
holder of the Partnership's subordinated notes payable. As a result of
the Exchange, the Company now owns all the partnership interests in the
Partnership.
In May 1997, the Company sold 3,325,000 shares of its common stock in
the Offering at a price of $8.00 per share. With a portion of the
proceeds from the Offering, the Company repaid the outstanding
borrowings, $13.3 million, under the Partnership's revolving credit
facility.
2. BASIS OF PRESENTATION
The unaudited condensed consolidated balance sheets at December 31, 1996
and March 31, 1997 reflect the accounts of the Partnership at December
31, 1996 and the consolidated accounts of the Company at March 31, 1997,
respectively. The unaudited condensed consolidated statements of
operations and of cash flows for the three months ended March 31, 1996
and 1997 include the results of operations and of cash flows of the
Partnership for the three months ended March 31, 1996 and the period
from January 1, 1997 to February 27, 1997 and for the Company the period
from February 25, 1997, the date of its inception, to March 31, 1997. As
the Exchange was the conversion of a partnership into a corporation, the
Exchange has been accounted for by the Company as a reorganization.
The accompanying consolidated financial statements are unaudited, and in
the opinion of management, reflect all adjustments that are necessary
for a fair presentation of the financial position and results of
operations for the periods presented. All such adjustments are of a
normal and recurring nature. The results of operations for the periods
presented are not necessarily indicative of the results to be expected
for the entire year. The unaudited condensed consolidated financial
statements should be read in conjunction with the Predecessors'
historical consolidated financial statements and notes thereto as of and
for the period ended December 31, 1996 as included in the Company's
Registration Statement on Form S-1 (333-22491) filed with the Securities
and Exchange Commission.
5
<PAGE> 8
BRIGHAM EXPLORATION COMPANY
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
3. UNAUDITED PRO FORMA INFORMATION
The Partnership's legal form has no relation to the capital structure of
the Company after the Exchange. As a result, historical loss per unit
amounts are not relevant and have not been presented. Pro forma net
income (loss) per common share and pro forma, as adjusted, net income
per common share are presented giving effect to the number of shares
outstanding subsequent to the Exchange (8,928,574 shares) and giving
effect to employee stock options granted on March 4, 1997, as if these
shares and options had been issued at the beginning of each period
presented. The effect of the stock option grants on pro forma net income
(loss) per common share and pro forma, as adjusted, net income per
common share was calculated using the treasury stock method.
Pro forma net income (loss) reflects pro forma exchange adjustments
primarily representing the amortization of compensation expense related
to employee stock options granted upon formation of the Company, the
reduction of interest expense related to the transfer of the
subordinated notes payable to the Company as part of the Exchange, and
related income tax effects. In addition to the effect of these pro forma
adjustments, pro forma, as adjusted, net income has been adjusted to
exclude the $5.0 million deferred tax charge recorded by the Company on
February 27, 1997 (see Note 4), as this was a nonrecurring charge
related to the Exchange.
4. INCOME TAXES
Prior to consummation of the Exchange, the Partnership was not subject
to federal income taxes. Income and losses were passed through to its
partners on the basis of the allocation provisions established by the
partnership agreement. Upon consummation of the Exchange, the
Partnership became subject to federal income taxes through its ownership
by the Company. Also in conjunction with the Exchange, the Company
recorded a deferred income tax liability of $5.0 million to recognize
the temporary differences between the financial statement and tax bases
of the assets and liabilities of the Partnership at the Exchange date,
February 27, 1997, given the provisions of enacted tax laws.
5. FUTURE REPORTING REQUIREMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
Earnings Per Share ("EPS"). SFAS 128 replaces the presentation of
primary EPS with a presentation of basic EPS and requires a dual
presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. Basic EPS
excludes dilutive securities and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if dilutive securities were
converted into common stock and is computed similarly to fully diluted
EPS pursuant to previous accounting pronouncements. SFAS 128 is
effective for periods ending after December 15, 1997, including interim
periods, and earlier application is not permitted. SFAS 128 requires
restatement of all prior period EPS data presented.
For the three months ended March 31, 1996 and 1997, the Company reported
pro forma net income (loss) per common share of $0.00 per share and
$(0.53) per share, respectively. Under SFAS 128, basic pro forma net
income (loss) per common share for the respective periods would have
been $0.00 and $(0.55), respectively, and diluted pro forma net income
(loss) per common share would have been $0.00 and $(0.53), respectively.
6
<PAGE> 9
BRIGHAM EXPLORATION COMPANY
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Comparison of three month periods ended March 31, 1996 and March 31, 1997
Natural gas and oil sales. Natural gas and oil sales increased 52%
from $1.4 million in the first quarter of 1996 to $2.1 million in the first
quarter of 1997. Of this increase, approximately $348,000 or 48% was
attributable to an increase in production, and approximately $383,000 or 52%
was attributable to an increase in the average sales price for natural gas and
oil. Production volumes for natural gas increased 75% from approximately
139,000 Mcf in the first quarter of 1996 to approximately 243,000 Mcf in the
first quarter of 1997. The average price received for natural gas increased 54%
from $2.01 per Mcf in the first quarter of 1996 to $3.10 per Mcf in the first
quarter of 1997. Production volumes for oil increased 6% from approximately
60,000 Bbls in the first quarter of 1996 to approximately 63,000 Bbls in the
first quarter of 1997. The average price received for oil increased 18% from
$18.55 per Bbl in the first quarter of 1996 to $21.82 per Bbl in the first
quarter of 1997. Natural gas and oil sales were increased by production from
wells completed since the first quarter of 1996 partially offset by the natural
decline of existing production. Natural gas and oil sales in the first quarter
of 1996 include one month of production related to certain properties sold at
the end of January 1996.
Lease operating expenses. Lease operating expense increased 12% from
$184,000 ($.37 per Mcfe) in the first quarter of 1996 to $206,000 ($.33 per
Mcfe) in the first quarter of 1997. This increase is primarily due to an
increase in the number of producing wells. The decrease in the per unit rate is
due to the sale of higher cost oil wells in January 1996 and an increase in the
percentage of production from natural gas wells.
General and administrative expenses. General and administrative
expenses increased 43% from $491,000 ($.98 per Mcfe) in the first quarter of
1996 to $702,000 ($1.13 per Mcfe) in the first quarter of 1997. The increase is
a result of payroll costs related to additional employees and charges related
to the relocation of the principal executive offices to Austin, Texas.
Depletion of natural gas and oil properties. Depletion of natural gas
and oil properties increased 35% from $510,000 ($1.02 per Mcfe) in the first
quarter of 1996 to $687,000 ($1.10 per Mcfe) in the first quarter of 1997 as a
result of higher production volumes.
Interest expense. Interest expense increased 81% from $215,000 in the
first quarter of 1996 to $390,000 in the first quarter of 1997. This increase
was due to a higher average outstanding balance in the first quarter of 1997
and a higher effective interest rate. The weighted average outstanding debt
balance increased 63% from $16.0 million in the first quarter of 1996 to $26.1
7
<PAGE> 10
million in the first quarter of 1997. The effective interest rate increased 16%
from 5.0% in the first quarter of 1996 to 5.8% in the first quarter of 1997.
The increase in the average outstanding balance was a result of the $10.1
million average outstanding balance under the Company's revolving credit
facility entered into in April 1996. The revolving credit facility had an
effective interest rate of 8.5% at March 31, 1997.
Income taxes. Prior to consummation of the Exchange, the Partnership
was not subject to federal income taxes. Income and losses were passed through
to its partners on the basis of the allocation provisions established by the
partnership agreement. Upon consummation of the Exchange, the Partnership
became subject to federal income taxes through its ownership by the Company.
Also in conjunction with the Exchange, the Company recorded a deferred income
tax liability of $5 million to recognize the temporary differences between the
financial statement and tax bases of the assets and liabilities of the
Partnership at the Exchange date, February 27, 1997, given the provisions of
enacted laws.
Liquidity and Capital Resources
The Company's primary sources of capital have been borrowings
(revolving credit facility and private placement debt), working capital and the
sale of interests in projects. During May 1997, as described in Note 1 to the
Unaudited Condensed Consolidated Financial Statements included herein, the
Company completed an initial public offering of Common Stock of the Company
that generated proceeds of approximately $24 million, net of offering costs,
that was used to repay all outstanding debt ($13.25 million) under the
revolving credit facility and to fund capital expenditures.
In the first quarter of 1997, the Company generated $4.2 million in
cash flow from operations as compared to $1.1 million in the first quarter of
1996 primarily as a result of an increase in natural gas and oil revenues, net
of production taxes, lease operating expenses and general and administrative
expenses. Cash flow used in investing activities was $7.3 million in the first
quarter of 1997 primarily as a result of capital expenditures. Cash flow
provided by financing activities was $2.8 million in the first quarter of 1997
as a result of borrowings under the revolving credit facility.
The Company expects to continue its exploration and production
activities during the remainder of 1997 and expects to finance those activities
with proceeds from the initial public offering, borrowings under the revolving
credit facility and cash flow from operations.
Forward Looking Information
The Company may make forward looking statements, oral or written,
including statements in this report, press releases and other filings with the
SEC, relating to the Company's drilling plans, its potential drilling
locations, capital expenditures, use of offering proceeds, the ability of
expected sources of liquidity to support working capital and capital
expenditure requirements and the Company's financial position, business
strategy and other plans and objectives for future operations.
8
<PAGE> 11
Such statements involve risks and uncertainties, including those relating to
the Company's dependence on exploratory drilling activities, the volatility of
natural gas and oil prices, the risks associated with growth (including the
risk of reduced availability of seismic gathering and drilling services in the
face of growing demand), the substantial capital requirements of the Company's
exploration and development projects, operating hazards and uninsured risks and
other factors detailed in the Company's registration statement and other
filings with the SEC. All subsequent oral and written forward looking
statements attributable to the Company are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update these
statements.
9
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 5. Other Information
In order to participate in wells drilled by the Company between
April 1, 1997 and March 31, 1998, Gasco Limited Partnership ("Gasco")
has agreed to fund 18% of the Company's drilling costs and 9% of its
completion cost for each well. In return, the Company will assign Gasco
an undivided 9% of the Company's interest in the leasehold allocated to
each completed well. As a result, in the absence of other participants,
the Company would pay 82% of costs attributable to its working interest
to casing point, and 91% of its completion costs, for 91% of its
original working interest.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Expense Allocation and Participation Agreement II, dated
April 1, 1997, between Brigham Oil & Gas, L.P. and Gasco
Limited Partnership.
11.1 Computation of Earnings per Share
27 Financial Data Schedule
SIGNATURES
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, in the City of Dallas, State of Texas,
on the 13th day of June, 1997.
BRIGHAM EXPLORATION COMPANY
By: /s/ BEN M. BRIGHAM
--------------------------------
Ben M. Brigham
President, Chief Executive
Officer and Chairman of
the Board
By: /s/ CRAIG M. FLEMING
--------------------------------
Craig M. Fleming
Chief Financial Officer
10
<PAGE> 13
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.1 Expense Allocation and Participation Agreement II,
dated April 1, 1997, between Brigham Oil & Gas, L.P.
and Gasco Limited Partnership.
11.1 Computation of Earnings per Share
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
EXPENSE ALLOCATION AND PARTICIPATION AGREEMENT II
R E C I T A L S:
A. Brigham Oil & Gas, L.P., a Delaware limited partnership
("BOG"), is active in the exploration and development of oil and gas properties
in the domestic United States.
B. Gasco Limited Partnership a West Virginia limited partnership
("Gasco"), entered into that certain Expense Allocation and Participation
Agreement dated effective as of April 1, 1996 (the "Previous Agreement")
providing for its participation with BOG in the drilling of certain wells on
properties owned or acquired, in whole or in part, by BOG, up and until March
31, 1997 upon and subject to the provisions contained in the Previous
Agreement.
B. Gasco now desires to enter into this Expense Allocation and
Participation Agreement II (the "Agreement") to again participate with BOG in
the drilling of wells on properties owned or hereafter acquired, in whole or in
part, by BOG, during the term hereof and otherwise upon and subject to the
provisions herein contained.
A G R E M E N T:
FOR A GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which are hereby acknowledged, BOG and Gasco hereby act, agree and covenant as
follows:
Section 1. DEFINED TERMS. As used herein, the following terms shall
have the following meanings:
"Affiliate" means, with respect to any Person: (a) any other
Person directly or indirectly owning, controlling or holding with
power to vote 10% or more of the outstanding voting securities of such
Person, (b) any other Person 10% or more of whose outstanding voting
securities are directly or indirectly owned, controlled or held with
power to vote by such Person, and (c) any other Person directly or
indirectly controlling, controlled by or under common control with
such Person.
"Agreement Term" means the period beginning on March 1, 1997
at 12:01 a.m. Dallas, Texas local time, and ending on the earlier to
occur of (i) March 31, 1998, at 11:59 p.m. Dallas, Texas local time,
or (ii) the date on which Gasco's 18% share of the Drilling Costs
incurred in drilling the Subject Wells and Subsequent Wells equals or
exceeds $4,500,000.00. However, in the event that it reasonably
appears to BOG that such $4,500,000.00 amount will be reached before
March 31, 1998 based upon the Drilling Costs incurred to that point in
time and BOG's estimate of future Drilling Costs, BOG shall give Gasco
written notice that such amount will probably be reached before March
31, 1998 and Gasco shall have the option to nonetheless extend the
term of this Agreement to 11:59 p.m. Dallas, Texas local time on March
31, 1998, by giving BOG written notice of such extension no less than
fifteen (15) days after Gasco's receipt of BOG's notice.
"Applicable Environmental Laws" means any federal, state
and/or local laws, rules, orders or regulations, whether now existing
or hereafter enacted, modified or amended, relating to health or to
the protection of the environment, including without limitation the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended by the Superfund Amendments and Reauthorization
Act of 1986, the Resource Conservation and Recovery Act of 1976, a
amended by the Used Oil Recycling Act of 1980, the Solid Waste
Disposal Act Amendments of 1980, and the Hazardous and Solid Waste
Amendments of 1984.
"Assigned Interests" shall have the meaning assigned to it in
Section 9 hereof.
"Assignment" means any assignment executed pursuant to Section
9 hereof by BOG in favor of Gasco.
<PAGE> 2
"BOG Completion Costs" means, with respect to any particular
Subject Well or Subsequent Well, BOG's share of the Completion Costs
associated with such Subject Well or Subsequent Well. For purposes of
the foregoing, "BOG's share" of Completion Costs shall be determined
based upon the share of Completion Costs allocable to BOG Properties
(a) without regard to any other agreement whereunder a third party
agrees to carry BOG for all or any portion of what would otherwise be
BOG's share of Completion Costs relative to any particular Subject
Well or Subsequent Well, (b) without regard to any agreement
whereunder BOG agrees to carry a third party for a share of such third
party's Completion Costs, and (c) with regard to and taking into
account any additional interest (and attendant share of Completion
Costs) in any particular Subject Well or Subsequent Well which BOG may
acquire, temporarily or permanently, due to the election by one or
more third parties not to participate in the Completion of such
Subject Well or Subsequent Well, provided, however, that the interests
that are the subject of such third party election not to participate
shall be deemed to be part of the BOG Properties for the full term of
the relinquishment of the interest by the third party in accordance
with the terms of the agreement creating the temporary interest. By
way of illustration, assume that BOG owns (or is entitled to earn,
under a BOG Farmout Agreement or otherwise) a 25% interest in a lease
covering 100% of the mineral fee interest in Tract A, and ABC Oil
Company ("ABC") owns 25% and CDE Oil Company ("CDE") owns the
remaining 50% interest. If BOG proposes the Completion of a Subject
Well or Subsequent Well on Tract A and all of BOG, ABC and CDE elect
to participate therein, BOG's share of the Completion Costs associated
with such well would, in typical circumstances, be 25%. If, however,
ABC elects not to participate in the Completion of the well and BOG
and CDE elect to proceed to Complete the well and each acquire a
proportionate part of ABC's non-consent interest, BOG's share of the
Completion Costs would, in typical circumstances, be 33.333%. In the
event ABC has the right to again participate in the well after, for
example, payout of a nonconsent penalty, the interests of BOG and
Gasco shall both proportionately be reduced to take into account the
after payout interest of ABC. In both of the examples set out above,
assume further that XYZ Oil Company ("XYZ") has agreed to carry BOG
for 50% of what would otherwise be BOG's share of Completion Costs in
order to earn 25% of BOG's interest in the well. Under such
circumstances, the BOG Completion Costs shall be determined without
regard to XYZ's agreement to pay 50% of what would otherwise be BOG's
share of the Completion Costs associated with the well, but the 25%
interest BOG is obligated to assign to XYZ shall be taken into account
in determining the interest in any particular BOG Property subject to
this Agreement. As such, in this example in which XYZ has agreed to
pay 50% of BOG's share of Completion Costs in return for 25% of BOG's
interest in the Subject Well or Subsequent Well, as BOG's interest in
the well is reduced to 18.75% in the example in which all of the
parties elected to participate and to 24.99975% in the example in
which ABC elected not to participate in order to account for XYZ's
earned interest, the BOG Completion Costs associated with such well
would be reduced to BOG's reduced interest in the Subject Well or
Subsequent Well.
"BOG Drilling Costs" means, with respect to any particular
Subject Well or Subsequent Well, BOG's share of the Drilling Costs
associated with such Subject Well or Subsequent Well. For purposes of
the foregoing, "BOG's share" of Drilling Costs shall be determined
based upon the share of Drilling Costs allocable to BOG Properties (a)
without regard to any other agreement whereunder a third party agrees
to carry BOG for all or any portion of what would otherwise be BOG's
share of Drilling Costs relative to any particular Subject Well or
Subsequent Well, (b) without regard to any agreement whereunder BOG
agrees to carry a third party for a share of such third party's
Drilling Costs, and (c) with regard to and taking into account any
additional interest (and attendant share of additional Drilling Costs)
in any particular Subject Well or Subsequent Well which BOG may
acquire, temporarily or permanently, due to the election by one or
more third parties not to participate in the drilling of such Subject
Well or Subsequent Well, provided, however, that the interests that
are the subject of such third party election not to participate shall
be deemed to be part of the BOG Properties for the full term of the
relinquishment of the interest by the third party in accordance with
the terms of the agreement creating the temporary interest. By way of
illustration, assume that BOG owns (or is entitled to earn, under a
BOG Farmout Agreement or otherwise) a 25% interest in a lease covering
100% of the mineral fee interest in Tract A, and ABC Oil Company
("ABC") owns 25% and CDE Oil Company ("CDE") owns the remaining 50%
interest. If BOG proposes the drilling of a well on Tract A and all
of BOG, ABC and CDE elect to participate therein, BOG's share of the
Drilling Costs associated with such well would, in typical
circumstances be 25%. If, however, ABC elects not to participate in
the drilling of the well and BOG and CDE elect to proceed to drill the
well and each acquire their proportionate part of ABC's non-consent
interest, BOG's share of the Drilling Costs would, in typical
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circumstances, be 33.333%. In the event ABC has the right to again
participate in the well after, for example, payout of a nonconsent
penalty, the interests of BOG and Gasco shall both proportionately
be reduced to take into account the after payout interest of ABC.
In both of the examples set out above, assume further that XYZ Oil
Company ("XYZ") has agreed to carry BOG for 50% of what would
otherwise be BOG's share of Drilling Costs in order to earn 25% of
BOG's interest in the Subject Well or Subsequent Well. Under such
circumstances, the BOG Drilling Costs shall be determined without
regard to XYZ's agreement to pay 50% of what would otherwise be BOG's
share of the Drilling Costs associated with the well, but the 25%
interest BOG is obligated to assign to XYZ shall be taken into account
in determining the interest in any particular BOG Property subject to
this Agreement. As such, in this example in which XYZ has agreed to
pay 50% of BOG's share of Drilling Costs in return for 25% of BOG's
interest in the Subject Well or Subsequent Well, as BOG's interest in
the well is reduced to 18.75% in the example in which all of the
parties elected to participate and to 24.99975% in the example in
which ABC elected not to participate in order to account for XYZ's
earned interest, the BOG Drilling Costs associated with such well
would be reduced to BOG's reduced interest in the Subject Well or
Subsequent Well.
"BOG Farmout Agreement" means any agreement through which BOG
and/or Gasco must either provide seismic data, drill a Subject Well or
drill a Subsequent Well in order to earn an assignment of BOG
Properties from a third party.
"BOG Participation Agreements" means any agreements now or
hereafter existing whereunder BOG agrees with certain third parties
upon terms and conditions of joint exploration and/or development of
oil and/or gas properties located in the domestic United States,
including without limitation the existing participation agreements
described in Exhibit A hereto, as same may be amended, modified or
extended from time to time.
"BOG Properties" means BOG's undivided right, title and
interest in and to any property, right or interest that gives BOG the
right to drill for and produce oil, gas and associated hydrocarbons in
any of the states set forth in Exhibit B attached hereto and any state
bottom offshore lands and waters for the states listed in Exhibit B,
whether now owned or hereafter acquired by BOG during the term hereof;
BOG Properties shall in no event include any overriding royalty
interest owned by or owing to BOG, whether pursuant to a BOG
Participation Agreement or otherwise. However, in the event that
prior to the Completion of a Subject Well BOG has assigned or has
agreed to assign interests in properties, rights or interests which
are related to such Subject Well or the Drilling and Production Unit
for the applicable Subject Well, the interests in such properties,
rights or interests which BOG has assigned or agreed to assign shall
not be part of the BOG Properties for purposes of this Agreement;
provided, however, that in the event that BOG enters into an agreement
with a third-party that is similar in form and substance as the terms
of this Agreement (being for participation in at least the majority of
all of the wells that are drilled by BOG over at least a six month
period and being hereinafter referred to as a "Parallel Agreement" and
which Parallel Agreement shall comply with the provisions of Section
3(c) hereof), then in such event the interests BOG has agreed to
assign to such third-party pursuant to the terms of the Parallel
Agreement shall be deemed to be part of the BOG Properties for
purposes of this Agreement. In addition, anything to the contrary
contained herein notwithstanding, in the event that BOG Drilling Costs
with respect to any particular Subject Well are estimated, as set out
in the initial authority for expenditure or "AFE" circulated for the
drilling of such Subject Well (which AFE may be circulated by BOG or
by some third party), to exceed $750,000.00, BOG's undivided interests
in and to the properties, rights and interests included in the
Drilling and Production Unit for such Subject Well shall be reduced in
the same proportion which is necessary to cause the estimated BOG
Drilling Costs (as reflected in the AFE) allocable to the BOG
Properties to be reduced to $750,000.00, and the amount of the
reduction shall not be a part of the BOG Properties and shall
otherwise be excluded from this Agreement for all purposes. By way of
illustration, assume that (a) the estimated BOG Drilling Costs for any
particular Subject Well is $1,000,000.00 and thus exceeds the amount
of $750,000.00 by $250,000.00, (b) the Drilling and Production Unit
for such Subject Well covers 80 acres and as part of the BOG
Properties BOG owns and undivided 70% interest in an oil and gas lease
(for purposes of this example referred to as the "Lease") covering 60
net mineral acres in such Drilling Unit and an undivided 40% interest
in the minerals (for purposes of this example referred to as the
"Minerals") covering the other 20 net mineral acres in the Drilling
and Production Unit. Under this example, only 75% of BOG's interest
in both the Lease and the Minerals would constitute
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the BOG Properties for such Drilling and Production Unit; as such,
only an undivided 52.5% (i.e. 75% of BOG's 70%) interest in the Lease
and an undivided 30% (i.e. 75% of BOG's 40%) interest in the Minerals
would be included the BOG Properties for the Drilling and Production
Unit for such Subject Well. Notwithstanding any provision hereof to
the contrary, the original estimate of BOG Drilling Costs as set
forth in the initial AFE circulated relative to any Subject Well will
always, unless BOG and Gasco mutually agree to the contrary,
definitely be utilized for purposes of determining whether and by how
much the above-described $750,000.00 benchmark has been exceeded.
"Casing Point" means the time when the well has been drilled
to the objective depth stated in the initial notice, appropriate tests
have been made, and the drilling operator notifies all of the
participating parties of his recommendation with respect to completing
or plugging and abandoning the well.
"Complete" or "Completion" means a single operation designed
to complete a Subject Well or Subsequent Well as a producer in one or
more zones, including without limitation the setting of production
casing, perforating, and, where necessary or appropriate, well
stimulation.
"Completion Costs" means the costs and expenses associated
with any attempted Completion of a Subject Well or Subsequent Well.
In addition, in the event that Completion operations are attempted
within a well but the well is not ultimately completed as a producer,
the costs incurred to plug and abandon such well shall also constitute
Completion Costs for purposes of this Agreement.
"Consent" means any right of a third party to grant or deny
its consent to the execution of this Agreement or the consummation of
all or any part of the transactions contemplated herein, including
without limitation any consents provided for or otherwise disclosed in
the existing BOG Participation Agreements.
"Drilling Costs" means all costs and expenses related to (a)
the preparation for drilling and then the drilling and equipping of a
well up and to Casing Point, and (b) all activities associated with
plugging and abandoning a well in which Completion operations have not
been attempted. Without limitation of the generality of the
foregoing, Drilling Costs shall include all costs associated with (i)
clearing and building a location and creating or improving access to
such location (e.g., by building roads), (ii) setting surface casing,
and (iii) logging and testing the well prior to the commencement of
Completion operations.
"Drilling and Production Unit" means, with respect to any
particular well, the acreage allocable, as determined by reference to
the formation initially Completed in such well, to such well under
applicable laws, rules or regulations of governmental authorities
having jurisdiction for the drilling and production of such well at a
legal location and the production from such well of its maximum
allowable, such maximum allowable to be determined by reference to the
lesser of (a) the maximum permissible allowable for such well as set
by any governmental authority having jurisdiction, and (b) such well's
maximum prudent physical productive capability, as determined by
reference to the initial potential test or initial deliverability
test, as the case may be, for such well, limited in each instance to
those depths between the surface and 100 feet below the deepest depth
drilled in the relevant well; the exact configuration of any such
Drilling and Production Unit shall be designated by BOG utilizing
reasonable discretion and good faith. In the event that no
governmental authority having jurisdiction has promulgated any laws,
rules or regulations pursuant to which the Drilling and Production
Unit for any particular well can be determined as set forth in the
immediately preceding sentence, BOG shall, utilizing reasonable
discretion and good faith, designate a Drilling and Production Unit
for such well. However, in the event that after a Drilling and
Production Unit is established for a Subject Well as provided herein,
the Drilling and Production Unit for a Subject Well that has been
completed as a producer is reconfigured or otherwise altered or
changed under law, rule, order or regulation of any governmental
authority having jurisdiction (which BOG agrees to neither apply for
or support if an effect of such order would be to reduce the interest
of Gasco in the applicable Drilling and Production Unit from that
which existed when the Subject Well was drilled and completed),
commencing with the effective date of such change, the Drilling and
Production Unit for such Subject Well shall be deemed to have been
altered as required by the law, rule, order or regulation and the
Parties shall execute all conveyance instruments necessary to cause
Gasco to own the interests (and only the interests) in the entirety of
the BOG Properties which are included within the revised Drilling and
Production Unit; provided, however, that in the event that
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<PAGE> 5
prior to the change in the Drilling and Production Unit a well has
been drilled on acreage (or lands pooled or otherwise combined
therewith) which was not previously included within such Drilling and
Production Unit or BOG has assigned interests in acreage which was not
previously included within such Drilling and Production Unit, BOG
shall not be required to assign such well (or any production
therefrom) or interests to Gasco despite the later inclusion of such
well or acreage in the Drilling and Production Unit. Similarly, in
the event that prior to a change in a Drilling and Production Unit a
Subsequent Well has been drilled on acreage which was previously
included within such Drilling and Production Unit and Gasco
participated in the drilling of such Subsequent Well as provided in
Section 9(b) below, Gasco shall not be required to assign its interest
in such Subsequent Well (or any production therefrom) to BOG despite
the later exclusion of such Subsequent Well or acreage from the
Drilling and Production Unit. The Drilling and Production Unit for
any particular Subject Well shall in no event include any acreage
and/or depths otherwise allocable to the drilling and spacing,
proration or pooled unit reasonably and in good faith designated by
BOG for any other well, the actual drilling of which was commenced
prior to the date hereof or which is the subject of the Previous
Agreement, in which BOG owns an interest and which does not constitute
a Subject Well.
"Initial Deposit" shall have the meaning assigned to it in
Section 8 hereof.
"Initial Period" shall have the meaning assigned to it in
Section 8 hereof.
"Person" means, an individual, corporation, partnership,
limited liability company, association, joint stock company, pension
fund, trust or trustee thereof, estate or executor thereof,
unincorporated organization or joint venture, court or governmental
unit or any agency or subdivision thereof, or any other legally
recognizable entity.
"Preferential Rights" means a preferential right or option in
favor of a third party to acquire all or a portion of a BOG Property,
or to otherwise participate with BOG in the exploration, or
development thereof.
"Pre-Payment Balance" means the balance of the funds that have
been paid to BOG for Gasco's share of BOG Drilling Costs and BOG
Completion Costs which have not yet been paid or advanced to the
drilling operator.
"Routine Governmental Approvals" means the right of any
governmental entity to consent to or approve the transfer of any
interest in a specific BOG Property.
"Seismic Data" means all data secured by or on behalf of BOG
in the conduct of 3-D seismic operations on, across or through the BOG
Properties, including any tapes, reproducibles and interpretations.
Seismic Data shall not include any data which BOG, in its sole and
absolute discretion, deems to be subject to a confidentiality
restriction imposed by or for the benefit of a third party.
"Shortfall Deposit" means any additional funds required to be
deposited by Gasco with BOG pursuant to subsection 8(b)(iii) hereof.
"Subject Well" means each well on a BOG Property, or on lands
pooled or unitized therewith, for which drilling operations are
actually commenced after the commencement of the Agreement Term and
for which Gasco's share of the BOG Drilling Costs for such well have
been forwarded to the drilling operator for such well prior to the
expiration of the Agreement Term in accordance with the terms of
Section 8 below, regardless of when the well was proposed; the term
Subject Well shall not include (a) any well in the drilling of which
BOG elects not to participate, or (b) any recompletion, deepening,
side track, plug back, rework or other operation in a wellbore already
in existence at the time the subject new operation is proposed. For
purposes of this definition, drilling operations for a well shall not
be deemed to have been "actually commenced" unless and until a drill
bit is turning in the ground at the well's surface location utilizing
a drilling rig that is capable of drilling the well to its proposed
total depth. The Parties recognize and agree that any well which is
drilled within the Drilling and Production Unit (or on lands pooled or
unitized therewith) that is established for a well which was the
subject of the Previous Agreement or for a well for which drilling
operations were actually commenced prior to the Agreement Term, shall
not be a Subject Well or Subsequent
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<PAGE> 6
Well for purposes of this Agreement and such a well shall not be
subject to this Agreement, to the effect that Gasco shall not be
obligated hereunder to pay any share of the Drilling Costs associated
with any such well or wells and shall further have no right hereunder
to receive assignment of any interest therein (or in any Drilling and
Production Unit otherwise allocable thereto), except to the extent
that such costs are to be paid and/or assignments are to be made under
the terms of the Previous Agreement. In addition, in the event that
BOG and Gasco mutually so agree with respect to any particular well or
wells proposed to be drilled during the Agreement Term, such well or
wells shall not become Subject Wells and shall otherwise not be
subject to this Agreement, to the effect that Gasco shall not be
obligated to pay any share of the Drilling Costs associated with any
such well or wells and shall further have no right to receive
assignment of any interest therein (or in any Drilling and Production
Unit otherwise allocable thereto).
"Subsequent Deposit" shall have the meaning assigned to it in
Section 8 hereof.
"Subsequent Month" means the next occurring calendar month.
"Subsequent Well" shall have the meaning assigned to it in
subsection 9(b) hereof.
Section 2. REPRESENTATIONS OF BOG. BOG represents to Gasco that:
(a) BOG is a limited partnership, duly formed and legally
existing under the laws of the State of Delaware. BOG has full power
to enter into and perform its obligations under this Agreement and has
taken all appropriate action to authorize entering into this Agreement
and performance of its obligations hereunder. Other than requirements
(if any) that there be obtained Consents or waivers of Preferential
Rights regarding the transfer of specific BOG Properties, and except
for Routine Governmental Approvals which are customarily obtained
post-closing and which BOG has no reason to believe cannot be
obtained, neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated hereby, nor the
compliance with the terms hereof, will result in any material default
under any material agreement or instrument to which BOG is a party or
by which the BOG Properties are bound, or violate any order, writ,
injunction, decree, statute, rule or regulation applicable to BOG or
to the BOG Properties. This Agreement constitutes the legal, valid
and binding obligation of BOG, enforceable in accordance with its
terms, except as limited by bankruptcy or other laws applicable
generally to creditor's rights and as limited by general equitable
principles.
(b) There are no suits, actions, claims, investigations,
inquiries, proceedings or demands pending (or, to the best of BOG's
knowledge, threatened) which affect the execution and delivery of this
Agreement, the consummation of the transactions contemplated hereby,
or the BOG Properties, other than as disclosed in Exhibit A.
(c) BOG has not entered into, and shall not during the
term of this Agreement enter into Parallel Agreements which would
result in the assignment of more than 40% of BOG's undivided interest
in the BOG Properties.
THE EXPRESS REPRESENTATIONS OF BOG CONTAINED IN THIS SECTION OR IN ANY
ASSIGNMENT EXECUTED PURSUANT HERETO ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER
REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND
BOG EXPRESSLY DISCLAIMS ANY AND ALL SUCH OTHER REPRESENTATIONS AND WARRANTIES.
WITHOUT LIMITATION OF THE FOREGOING, UNDIVIDED INTERESTS EARNED BY GASCO
HEREUNDER IN THE BOG PROPERTIES SHALL BE CONVEYED WITHOUT ANY WARRANTY OR
REPRESENTATION, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, RELATING TO
THE CONDITION, QUANTITY, QUALITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY
TO THE MODELS OR SAMPLES OF MATERIALS OR MERCHANTABILITY OF ANY EQUIPMENT OR
ITS FITNESS FOR ANY PURPOSE AND GASCO SHALL ACCEPT ALL OF THE SAME IN THEIR "AS
IS, WHERE IS" CONDITION. BOG MAKES NO WARRANTY OR REPRESENTATION, EXPRESS,
IMPLIED, STATUTORY OR OTHERWISE, AS TO THE ACCURACY OR COMPLETENESS OF ANY
DATA, INTERPRETATIONS, REPORTS, RECORDS, PROJECTIONS, INFORMATION OR MATERIALS
NOW,
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HERETOFORE OR HEREAFTER FURNISHED OR MADE AVAILABLE TO GASCO IN CONNECTION WITH
THIS AGREEMENT INCLUDING, WITHOUT LIMITATION, RELATIVE TO SEISMIC OR GEOLOGICAL
MATTERS, PRICING ASSUMPTIONS, OR QUALITY OR QUANTITY OF HYDROCARBON RESERVES
(IF ANY) ATTRIBUTABLE TO THE BOG PROPERTIES OR THE ABILITY OR POTENTIAL OF THE
BOG PROPERTIES TO PRODUCE HYDROCARBONS OR ANY OTHER MATTERS CONTAINED IN THE
PROPRIETARY DATA OR ANY OTHER MATERIALS FURNISHED OR MADE AVAILABLE TO GASCO BY
BOG OR BY BOG'S AGENTS OR REPRESENTATIVES. ANY AND ALL SUCH DATA, RECORDS,
REPORTS, PROJECTIONS, INFORMATION AND OTHER MATERIALS (WRITTEN OR ORAL)
FURNISHED BY BOG OR OTHERWISE MADE AVAILABLE OR DISCLOSED TO GASCO ARE PROVIDED
GASCO AS A CONVENIENCE AND SHALL NOT CREATE OR GIVE RISE TO ANY LIABILITY OF OR
AGAINST BOG AND ANY RELIANCE ON OR USE OF THE SAME SHALL BE AT GASCO'S SOLE
RISK TO THE MAXIMUM EXTENT PERMITTED BY LAW.
Section 3. REPRESENTATIONS OF GASCO. Gasco represents to BOG that:
(a) Gasco is a limited partnership duly organized and
legally existing under the laws of the State of West Virginia. Gasco
has full power to enter into and perform its obligations under this
Agreement and has taken all appropriate action to authorize entering
into this Agreement and performance of its obligations hereunder.
Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, nor the
compliance with the terms hereof, will result in any default under any
material agreement or instrument to which Gasco is a party or by which
Gasco is bound, or violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Gasco. This Agreement
constitutes the legal, valid and binding obligation of Gasco,
enforceable in accordance with its terms, except as limited by
bankruptcy or other laws applicable generally to creditor's rights and
as limited by general equitable principles.
(b) There are no suits, actions, claims, investigations,
inquiries, proceedings or demands pending (or, to the best of Gasco's
knowledge, threatened) which affect the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
(c) Gasco is a knowledgeable purchaser, owner and
operator of oil and gas properties, has the ability to evaluate (and
in fact has evaluated or will evaluate, as the case may be) the BOG
Properties for acquisition, and is acquiring the BOG Properties and
its rights and interests hereunder for its own account and not with
the present intent to make a distribution in violation of the
Securities Act of 1933 as amended (and the rules and regulations
pertaining thereto) or in violation of any other applicable securities
laws, rules, or regulations.
Section 4. PREFERENTIAL RIGHTS AND CONSENTS.
BOG will utilize reasonable efforts, consistent with industry
practices in transactions of this type, to identify any Preferential Rights or
Consents which would be applicable to the BOG Properties and the transactions
contemplated hereby. In attempting to identify such Preferential Rights and
Consents, BOG is in no event obligated to go beyond its own records. BOG shall
have no obligation other than to so attempt to identify such Preferential
Rights or Consents and to give the notices required by such identified
Preferential Rights or Consents prior to the drilling of a Subject Well or
Subsequent Well on the applicable BOG Properties. To the extent a Preferential
Right applicable to any BOG Property (or portion thereof) is properly exercised
prior to the execution of an Assignment covering such BOG Property in favor of
Gasco, any well located or proposed to be located on the lands covered by such
BOG Property shall not be considered a Subject Well for purposes hereof, and
Gasco shall have no obligation to pay or bear any BOG Drilling Costs associated
therewith; any share of BOG Drilling Costs paid by Gasco relating to such well
prior to the exercise of the subject Preferential Right shall be reimbursed by
BOG to Gasco. To the extent any Preferential Right applicable to any BOG
Property (or portion thereof) is identified after the date of an Assignment to
Gasco covering such BOG Property, and is further validly and properly exercised
by a third party or third parties after such date, Gasco shall convey the
specific BOG Property affected by such Preferential Right to the exercising
third party or third parties, and Gasco shall be entitled, as its sole remedy
against BOG, to a reimbursement of the 18% share of BOG Drilling Costs and 9%
share of BOG Completion Costs paid by Gasco with respect to the applicable
Subject Well or Subsequent Well which must be conveyed to such third party;
provided, however, that the amount of such reimbursement shall be
proportionately reduced in the event that less
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than all of Gasco's interest in the BOG Property is required to be conveyed to
such third-party and BOG shall receive any and all consideration and/or
payments which are to be made by the third-party as a result of its exercise of
the Preferential Right. BOG and Gasco hereby recognize that any Preferential
Right shall apply only to the specific property described in the instrument
creating same, and shall in no event be construed to apply to all, or any group
of, the BOG Properties, other than the specific property described in the
instrument creating the Preferential Right. BOG shall use reasonable
commercial efforts to secure any Consent of which it becomes aware (whether
such Consent was identified before or after an Assignment was made covering the
BOG Property burdened by such Consent), and to the extent BOG so utilizes
reasonable commercial efforts, whether successful or not, Gasco shall have no
legal redress against BOG relating to any Consent (or the failure to obtain
same). Prior to the drilling of each Subject Well, at Gasco's request, Gasco
will be given reasonable access, in BOG's offices, to BOG's copies of the
operating agreements and BOG Participation Agreements affecting the drilling of
such Subject Well.
Section 5. MAINTENANCE OF UNIFORM INTEREST PROVISIONS.
It is hereby recognized that some of the BOG Properties may now be, or
hereafter become, subject to agreements (the "MUI Agreements") containing
maintenance of uniform interest provisions or similar restrictions against
assigning an interest in part, but less than all, of the contract area covered
by such agreement. In this connection, BOG undertakes to use reasonable
commercial efforts to secure waivers from the other parties to each MUI
Agreement that will allow Assignments to be made hereunder. In order to secure
these waivers, BOG may agree that any separate measurement and/or storage
facilities necessitated by an assignment by BOG to Gasco of an interest in
part, but less than all, of the contract area covered by the applicable MUI
Agreement shall be arranged and paid for in equal shares by BOG (50%) and Gasco
(50%). BOG and Gasco further agree that any other costs, liabilities, damages
or obligations, of whatever kind or character, arising out of or relative to
any maintenance of uniform interest or similar provision contained in an MUI
Agreement shall be borne and paid for in equal shares by BOG (50%) and Gasco
(50%).
Section 6. PARTICIPATION IN BOG DRILLING COSTS BY GASCO.
Gasco shall have the obligation to fund 18% of the BOG Drilling Costs
associated with each Subject Well. The election whether or not to participate
in the drilling of any particular well, and thus whether such well becomes a
Subject Well hereunder, will be exercised in the sole and absolute discretion
of BOG; upon an election by BOG to participate in the drilling of any
particular Subject Well, Gasco's obligation to pay 18% of the BOG Drilling
Costs associated with such Subject Well shall become absolute. The Parties
recognize and agree that anything to the contrary contained herein
notwithstanding, in the event that Gasco's share of BOG Drilling Costs have
been forwarded to the drilling operator for a Subject Well prior to the
expiration of the Agreement Term, Gasco's responsibility to fund 18% of the BOG
Drilling Costs associated with such Subject Well shall continue despite the
termination of the Agreement Term. If prior to the expiration of the Agreement
Term BOG has not furnished to the operator funds advanced to it by Gasco
pursuant to the terms hereof for the payment of BOG Drilling Costs with respect
to a Subject Well, and such Subject Well is for such reason not a well which
remains subject to this Agreement, BOG shall, within fifteen (15) days after
the expiration of the Agreement Term, refund to Gasco all funds advanced to it
regarding such well.
Section 7. COMPLETION ELECTIONS.
Gasco shall have the obligation to fund 9% of the BOG Completion Costs
associated with each Subject Well. In the event there is a separate Completion
point election relative to any particular Subject Well, BOG shall, in its sole
and absolute discretion, make such election for itself and for Gasco. Any
election by BOG to Complete or not to Complete any Subject Well shall for all
purposes be binding upon Gasco, the same as if Gasco had also made the same
election. Gasco shall have the obligation to fund a 9% share of all BOG
Completion Costs associated with any Subject Well. The Parties recognize and
agree that anything to the contrary contained herein notwithstanding, in the
event that Gasco's share of BOG Drilling Costs have been forwarded to the
drilling operator for a Subject Well prior to the expiration of the Agreement
Term, Gasco's responsibility to fund 18% of the BOG Drilling Costs and 9% of
the BOG Completion Costs associated with such Subject Well shall continue
despite the termination of the Agreement Term.
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Section 8. FUNDING AND PAYMENT OBLIGATIONS
(a) Drilling Costs For March and April of 1997.
(i) On or prior to the execution hereof, BOG has
provided to Gasco an estimate, based on BOG's best judgment,
of all BOG Drilling Costs related to Subject Wells for which
costs are estimated to be incurred or advanced between March
1, 1997 and April 30, 1997 (the "Initial Period").
(ii) Contemporaneously with the execution of this
Agreement, Gasco shall forward to BOG two hundred ninety-four
thousand two hundred ten dollars ($294,210.00) (the "Initial
Deposit"), in readily available funds, representing the sum of
Gasco's 18% share of the estimated BOG Drilling Costs relating
to Subject Wells for the Initial Period estimated to be
incurred or advanced during the Initial Period.
(iii) It is hereby recognized that the amount of the
Initial Deposit has been calculated based on estimated BOG
Drilling Costs relating to Subject Wells for the Initial
Period. BOG shall have the right from time to time during the
Initial Period to revise its estimate of BOG Drilling Costs
relating to Subject Wells in the event that it reasonably
appears that the original estimate will be exceeded. To the
extent that the Pre-Payment Balance is (or is reasonably
estimated by BOG to be) less at any particular time than the
sum of Gasco's 18% share of the revised estimate of BOG
Drilling Costs relating to Subject Wells for the Initial
Period, Gasco shall forward to BOG readily available funds
representing 18% of the portion of the estimated shortfall
attributable to BOG Drilling Costs relating to Subject Wells
(which funds shall constitute a Shortfall Deposit); such
Shortfall Deposit shall be made by Gasco, in immediately
available funds, within 15 days after receipt by Gasco of a
written request for the subject Shortfall Deposit.
(iv) BOG shall pay when due, out of and to the
extent of the Initial Deposit and any Shortfall Deposit, the
share of BOG Drilling Costs relating to Subject Wells actually
incurred and charged to the account of Gasco. The balance of
the Initial Deposit and any Shortfall Deposit which has not
been incurred and paid for Gasco's share of BOG Drilling Costs
will be applied against Gasco's share of the BOG Drilling
Costs relating to Subject Wells to be incurred and paid in the
next Subsequent Month; to the extent that the Pre-Payment
Balance is at the conclusion of the Initial Period (or any
Subsequent Month) more than the sum of Gasco's 18% share of
the estimate of BOG Drilling Costs and Completion Costs
relating to Subject Wells to be incurred and paid in the next
Subsequent Month, BOG shall promptly (and not later than 15
days after the beginning of such Subsequent Month) refund any
such excess to Gasco.
(b) Drilling and Completion Costs During Subsequent
Months.
(i) On or before the 25th day of each calendar month
preceding each Subsequent Month (other than March and April of
1997), BOG shall provide to Gasco a written estimate, based
upon BOG's best judgment, of the BOG Drilling Costs and BOG
Completion Costs relating to Subject Wells for such Subsequent
Month.
(ii) On or before the first day of each Subsequent
Month, Gasco shall forward to BOG an amount (the "Subsequent
Deposit"), in readily available funds, representing the sum of
Gasco's 18% share of the estimated BOG Drilling Costs and
Gasco's 9% share of the estimated BOG Completion Costs
relating to Subject Wells for such Subsequent Month estimated
to be incurred or advanced during such Subsequent Month. The
amount of each Subsequent Deposit shall, however, be
determined giving due credit to any Pre-Payment Balance that
is expected to remain unused from a previous period (i.e.,
from the Initial Period or a prior Subsequent Month, as the
case may be) and that further is not earmarked by BOG for
payment of Gasco's share of BOG Drilling Costs and/or BOG
Completion Costs relating to Subject Wells for such previous
period, which costs are reasonably expected to be paid during
the immediate Subsequent Month.
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(iii) It is hereby recognized that each Subsequent
Deposit shall be calculated based on estimated BOG Drilling
Costs and BOG Completion Costs relating to Subject Wells for
the applicable Subsequent Month. BOG shall have the right
from time to time during each Subsequent Month to revise its
estimates of BOG Drilling Costs and/or BOG Completion Costs
relating to Subject Wells for such Subsequent Month upward in
the event that it reasonably appears that the original
estimates will be exceeded. To the extent that the Pre-Payment
Balance is (or is reasonably estimated by BOG to be) less at
any particular time than the sum of Gasco's 18% share of the
revised estimate of BOG Drilling Costs and Gasco's 9% share of
the revised estimate of BOG Completion Costs relating to
Subject Wells for the applicable Subsequent Month, Gasco shall
forward to BOG readily available funds (which shall constitute
a Shortfall Deposit) representing Gasco's share of the
estimated shortfall attributable to BOG Drilling Costs and BOG
Completion Costs relating to Subject Wells (such deposit shall
be made by Gasco, in immediately available funds, within 15
days after receipt by Gasco of a written request for the
Shortfall Deposit); to the extent that the unexpended amount
of such Subsequent Deposit is at the conclusion of such
Subsequent Month more than the sum of Gasco's 18% share of the
estimate of BOG Drilling Costs and Gasco's 9% share of the
estimate of BOG Completion Costs relating to Subject Wells to
be incurred and paid in the next Subsequent Month, BOG shall
promptly (and not later than 15 days after the beginning of
such Subsequent Month) refund any such excess to Gasco.
(iv) During each Subsequent Month BOG shall pay when
due, out of and to the extent of the Subsequent Deposit and
any Shortfall Deposit, the share of BOG Drilling Costs and BOG
Completion Costs relating to Subject Wells actually incurred
and charged to the account of Gasco during such Subsequent
Month. The balance of the Subsequent Deposit and any
Shortfall Deposit which has not been incurred and paid for
Gasco's share of BOG Drilling Costs and BOG Completion Costs
will be applied against Gasco's share of the BOG Drilling
Costs and BOG Completion Costs relating to Subject Wells to be
incurred and paid in the next Subsequent Month; to the extent
that the unexpended amount of such Subsequent Deposit is at
the conclusion of such Subsequent Month more than the sum of
Gasco's 18% share of the estimate of BOG Drilling Costs and
Gasco's 9% share of BOG Completion Costs relating to Subject
Wells to be incurred and paid in the next Subsequent Month,
BOG shall promptly (and not later than 15 days after the
beginning of such Subsequent Month) refund any such excess to
Gasco.
(c) Reporting. On or before a date that is Forty-five
(45) days after expiration of each calendar quarter occurring within
the Agreement Term, BOG shall provide to Gasco a statement reflecting,
on a well-by-well basis, application of the funds attributable to
Gasco's share of BOG Drilling Costs relating to Subject Wells and BOG
Completion Costs relating to Subject Wells for the previous calendar
quarter; such statement shall be based on actual numbers, where
available, and on estimates, where actuals are not available.
Section 9. ASSIGNMENTS AND SUBSEQUENT WELLS.
(a) Assignments. BOG shall execute an Assignment in favor of
Gasco covering each Subject Well that is Completed as a producer of
oil, gas and/or associated hydrocarbons; any such Assignment shall be
made on or before the later to occur of (i) thirty business days after
the date the Subject Well was Completed, and (ii) thirty business days
after BOG secures assignment from a third party of all or any portion
of the interest in the Subject Well it is obligated to assign to Gasco
hereunder. Under each Assignment, BOG shall assign to Gasco an
undivided 9% interest in and to the BOG Properties related to (A) the
wellbore of any particular Subject Well that is Completed as a
producer of oil, gas and/or associated hydrocarbons, and in and to the
right to produce oil, gas and/or associated hydrocarbons therefrom,
and (B) subject to the limitations and restrictions set forth in
subsection 9(b), below, the Drilling and Production Unit allocable to
such Subject Well. Each Assignment shall be made effective on or
before the date of first production from the Subject Well under
instrument in substantially the form attached hereto as Exhibit C.
Notwithstanding any provision hereof to the contrary, BOG shall not be
obligated to execute any Assignment to Gasco hereunder if Gasco has
failed to fund the BOG Drilling Costs or BOG Completion Costs for any
Subject Well(s) in accordance with the provisions of Section 8 above;
provided, however, that such Assignments shall not be withheld if
there is a reasonable good faith dispute as to the accuracy of the
invoice related to the amount of the BOG Drilling Costs or BOG
Completion Costs which have not been paid and Gasco has paid any part
of such BOG
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Drilling Costs and BOG Completion Costs which are not in good faith
dispute. The interest assigned to Gasco under any Assignment (the
"Assigned Interests") shall be burdened by an overriding royalty
interest in favor of BOG (the "BOG ORRI") in the same proportions as
the interests of the participants under the BOG Participation
Agreement(s) relating to such Assigned Interests are burdened by an
overriding royalty interest created or reserved in favor of BOG
pursuant to the applicable BOG Participation Agreement(s). The BOG
ORRI shall be calculated in the same manner, and shall bear the same
costs, expenses and taxes, as the overriding royalty interest of BOG
burdening the interests of the other participants under the BOG
Participation Agreements; provided, however, that in the event that
the BOG ORRI would reduce Gasco's net revenue interest in any of the
BOG Properties included within the Drilling and Production Unit of a
Subject Well below 75%, proportionately reduced to Gasco's interest in
the BOG Properties, with respect to those BOG Properties the amount of
the BOG ORRI shall be reduced to an amount that is equal to the
positive difference, if any, between 25% and the total of all existing
royalty and overriding royally interests burdening such BOG
Properties. Any Assigned Interests shall further bear their
proportionate share of any (i) rights of reversion or conversion in
favor of third parties that do or may result in the reduction of BOG's
interest in the Assigned Interests or the alteration of such interest
(e.g. a back-in right under a BOG Farmout Agreement), and (ii)
royalties, overriding royalties, production payments and any other
burdens against BOG's interest in, or share of production from, the
Assigned Interests, to the extent same are in existence or owing under
documentation in existence as of the date the Assignment is made.
(b) Subsequent Wells. Any well drilled or commenced to be
drilled, whether during or at any time after expiration of the
Agreement Term, on acreage and to depths included within the Drilling
and Production Unit (or on lands pooled or unitized therewith) for a
Subject Well shall be considered a "Subsequent Well" for all purposes
hereof. Notwithstanding any provision hereof to the contrary:
(i) In the event that both Gasco and BOG elect to
participate under the applicable BOG Participation Agreement,
joint operating agreement or similar agreement governing joint
operations on any Drilling and Production Unit in the drilling
of any particular Subsequent Well, Gasco shall have the
obligation to fund the sum of (A) 9% of BOG's share of all
Drilling Costs associated with such Subsequent Well (the "BOG
Carry Amount") and (B) Gasco's own share of the Drilling Costs
associated with such Subsequent Well. Upon an election by
both Gasco and BOG to participate in the drilling of any
particular Subsequent Well, Gasco's obligation to pay all BOG
Carry Amounts associated with such Subsequent Well shall
become absolute. Gasco shall pay over to BOG all BOG Carry
Amounts if and when incurred by BOG; provided that Gasco shall
have 15 business days after receipt from BOG of an invoice for
any particular BOG Carry Amounts to submit payment for same,
in immediately available funds, to BOG.
(ii) In the event that Gasco fails to timely pay any
BOG Carry Amount within 15 days of Gasco's receipt of written
notice of such default from BOG, and the amount of such
deficiency exceeds $5,000.00, in addition to, and without
limitation of any remedies that may be available to BOG at law
or in equity, at BOG's option Gasco shall automatically and in
perpetuity forfeit to BOG all of Gasco's right, title and
interest, whether legal or equitable, vested or contingent, in
and to the entire wellbore of the Subsequent Well to which
such BOG Carry Amount relates, together with any right to oil,
gas or other substances that may be produced therefrom and any
proceeds related thereto, free and clear of any liens or
encumbrances created by, through or under Gasco, but not
otherwise, and subject to any superior rights of third parties
under any BOG Participation Agreement, joint operating
agreement or other agreement governing joint operations on the
relevant Drilling and Production Unit to which both Gasco and
BOG are parties or are otherwise bound. However, in the event
that there is a reasonable good faith dispute as to whether an
invoiced BOG Carry Amount is accurate or otherwise due
hereunder and Gasco has paid any part of such BOG Carry Amount
which is not in good faith dispute, Gasco shall not be
required to forfeit its right, title and interest in and to
the Subsequent Well as otherwise provided in this Section
9(b)(ii).
(iii) Notwithstanding any provision hereof to the
contrary, in the event that any particular Subsequent Well has
allocated to it a drilling and spacing unit or a proration or
pooled unit, as the case may be, that includes acreage outside
the areal confines of the Drilling and Production Unit related
to
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<PAGE> 12
such Subsequent Well (the "Outside Lands"), Gasco shall in no
event be entitled to any right, title or interest in (A) any
such Outside Lands, or (B) any production or proceeds
allocable to such Outside Lands under applicable law, rule,
order or regulation or otherwise under any voluntary pooling,
unitization or similar agreement to which BOG is a party or is
otherwise bound; instead, Gasco shall be limited to its share
of production (or the proceeds thereof) as derived from its
right, title and interest only in the pooled unit, drilling
and spacing unit or proration unit, as the case may be, that
is made up of lands from the Drilling and Production Unit.
Further, BOG's share of Drilling Costs utilized in the
computation of BOG Carry Amounts shall be determined only by
reference to the proportionate share of any pooled unit,
drilling and spacing unit or proration unit, as the case may
be, that is made up of lands included in the Drilling and
Production Unit. By way of example, assume that a particular
Drilling and Production Unit is comprised of Tract A,
containing 320 acres, and Tract B, containing 320 acres; Gasco
owns a 9% share of the oil, gas and other mineral leasehold
interest in Tracts A and B and BOG owns the remaining 91%.
Further assume that a Subsequent Well is drilled on Tract A,
and both Gasco and BOG elect to participate in the drilling of
such well. Tract A, constituting Drilling and Production Unit
lands, is then pooled or otherwise combined with Tract C,
constituting Outside Lands; BOG owns a 100% interest in the
oil, gas and/other mineral leasehold interest in Tract C.
BOG's share of the Drilling Costs for the Subsequent Well is
$1,000,000. Under these facts, Gasco would be entitled to
4.5% (i.e. 9% of 50%) of the production and allocable proceeds
from the subject Subsequent Well, prior to deduction of
royalties and other burdens, assuming production is allocable
as between Tracts A and B equally (i.e., on a surface acreage
basis); if production is allocable as between Tracts A and C
other than on a surface acreage basis (e.g., based on
acre-feet), then Gasco's share of production from the
Subsequent Well, again derived only from its 9% interest in
Tract A, will be adjusted accordingly. Gasco's allocable
share of Drilling Costs under these facts would be $90,000
(i.e., the sum of (a) 9% x 50% x $1,000,000, and (b) the BOG
Carry Amount, which is 9% x 50% x $1,000,000), assuming that
Drilling Costs are allocable as between Tracts A and B on a
surface acreage basis; if Drilling Costs are allocable other
than on a surface acreage basis, Gasco's allocable share
thereof, again delivered from both its 9% interest in Tract A
and from its obligation to pay and bear the BOG Carry Amount,
shall be adjusted accordingly.
(iv) The provisions of this subsection 9(b) shall be
binding upon and shall enure to the benefit of BOG and Gasco,
and their respective successors and assigns. Any assignment
or other transfer by Gasco of any right, title or interest in
any Drilling and Production Unit established pursuant to this
Agreement shall be made expressly subject to the terms of this
subsection 9(b), and the transferee shall expressly agree to
assume and be bound by the terms of this subsection 9(b); any
attempted assignment or other transfer by Gasco that is not in
compliance with the foregoing shall be void.
Section 10. CONDITIONS PRECEDENT TO BOG PERFORMANCE AND TERMINATION
RIGHTS.
The obligation of BOG under this Agreement to allow Gasco to
participate in the drilling of any particular Subject Well, and to receive
assignment of an undivided 9% of BOG's interest therein, is subject to the
fulfillment of each of the following conditions, unless any one or more of same
are waived, in whole or in part, by BOG:
a. Each and every representation of Gasco under this
Agreement shall be true and accurate in all material respects as of
the date when made and shall be deemed to have been made again at and
as of the time of the proposed drilling of each Subject Well, and
shall at and as of the proposed drilling of each Subject Well be true
and accurate in all material respects except as to changes
specifically contemplated by this Agreement or consented to by BOG.
b. Gasco shall have performed and complied in all
material respects with (or compliance therewith shall have been waived
by BOG) each and every covenant, agreement and condition required by
this Agreement to be performed or complied with by Gasco, including
without limitation Gasco shall have timely performed its funding and
payment obligations under Section 8 hereof.
c. No suit, action or other proceedings shall, on the
date of the proposed drilling of each Subject Well, be pending or
threatened against Gasco or BOG before any court or governmental
agency seeking to
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restrain, prohibit, or obtain damages or other relief in connection
with the consummation of the transactions contemplated by this
Agreement, except to the extent that such suit, action or other
proceedings arise, in whole or in part out of any action or inaction
of BOG in breach of or otherwise in derogation of this Agreement.
Notwithstanding any provision hereof to the contrary, in the event Gasco fails
at any time or from time to time, within 15 days after receipt of written
notice of default from BOG, to make any payment owing to BOG hereunder or to
otherwise satisfy any funding obligation hereunder, and the amount of such
deficiency exceeds $5,000.00 in amount, in addition to and without limitation
of any and all other rights and remedies BOG may have in law or in equity for
such breach, BOG shall have the right, exercisable in its sole and absolute
discretion, to terminate this Agreement.
Section 11. CONDITIONS PRECEDENT TO GASCO PERFORMANCE.
The obligation of Gasco under this Agreement to fund BOG Drilling
Costs and BOG Completion Costs for the drilling of Subject Wells as set forth
in Section 8 above, is subject to the fulfillment of each of the following
conditions, unless any one or more of same are waived, in whole or in part, by
Gasco:
a. BOG shall have performed and complied in all material
respects with (or compliance therewith shall have been waived by
Gasco) each and every covenant, agreement and condition required by
this Agreement to be performed or complied with by BOG.
b. No suit, action or other proceedings shall, on the
date for funding as set forth in Section 8, be pending or threatened
against Gasco or BOG before any court or governmental agency seeking
to restrain, prohibit, or obtain damages or other relief in connection
with the consummation of the transactions contemplated by this
Agreement, except to the extent that such suit, action or other
proceedings arise, in whole or in part out of any action or inaction
of Gasco in breach of or otherwise in derogation of this Agreement.
Section 12. ASSUMPTION AND REIMBURSEMENT.
Any assignment made by BOG to Gasco hereunder shall be made expressly
subject to any applicable BOG Participation Agreement(s), and any joint
operating agreements related thereto. Gasco agrees to be bound by the terms of
any such BOG Participation Agreement(s) and any related joint operating
agreements, insofar as they apply to any Assigned Interests and related
facilities, and Gasco hereby agrees, effective as of the effective time of the
subject Assignment, to expressly assume a 9% share of BOG's obligations under
the applicable BOG Participation Agreements and joint operating agreement(s),
insofar as they pertain to the particular Assigned Interests and any related
facilities. Nothing contained in this Section 12 or elsewhere in this
Agreement or any Assignment executed pursuant hereto shall be construed to
afford Gasco any right (and Gasco shall have no right) to participate in
production from or proceeds attributable to any well, other than a Subject Well
or a Subsequent Well, whether drilled under the terms of any particular BOG
Participation Agreement and/or joint operating agreement or otherwise. In
addition, nothing contained in this Section 12 or elsewhere in this Agreement
or any Assignment executed pursuant hereto shall be construed to afford Gasco
any right (and Gasco shall have no right) to participate, as the result of the
operation of an area of mutual interest or similar provision, in any interests
acquired by third party participants under any BOG Participation Agreement or
joint operating agreement.
Section 13. INDEMNIFICATIONS.
(a) INDEMNIFICATIONS BY BOG. BOG agrees to indemnify and
hold harmless Gasco and its officers, directors, employees, agents,
and representatives from and against any and all claims, obligations,
actions, liabilities, damages, or expenses of any kind or character
arising out of or resulting from any agreement, arrangement or
understanding alleged to have been made by, or on behalf of, such
party with any broker or finder in connection with this Agreement or
the transactions contemplated hereby.
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(b) INDEMNIFICATIONS BY GASCO.
(i) GENERAL AND ENVIRONMENTAL. NOTWITHSTANDING ANY
PROVISION HEREOF TO THE CONTRARY, GASCO SHALL, FROM AND AFTER
THE EFFECTIVE DATE OF EACH ASSIGNMENT, AGREE TO INDEMNIFY AND
HOLD BOG, ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS AND
REPRESENTATIVES (HEREIN COLLECTIVELY CALLED THE "BOG
INDEMNIFIED PARTIES") HARMLESS FROM AND AGAINST ANY AND ALL
CLAIMS, OBLIGATIONS, ACTIONS, LIABILITIES, DAMAGES, OR
EXPENSES, INCLUDING WITHOUT LIMITATION COURT COSTS AND
ATTORNEYS' FEES (HEREIN COLLECTIVELY CALLED "CLAIMS"), TO THE
EXTENT SUCH CLAIMS AROSE OUT OF THE PHYSICAL CONDITION,
OWNERSHIP AND/OR OPERATION OF THE BOG PROPERTIES COVERED BY
THE SUBJECT ASSIGNMENT AT ANY TIME AFTER THE COMMENCEMENT OF
OPERATIONS FOR THE DRILLING OF THE SUBJECT WELL WHICH RESULTED
IN SUCH ASSIGNMENT, INCLUDING, WITHOUT LIMITATION, ANY CLAIMS
ARISING UNDER, OR AS A RESULT OF VIOLATION OF, APPLICABLE
ENVIRONMENTAL LAWS, WHETHER DUE, IN WHOLE OR IN PART, TO THE
NEGLIGENCE OR STRICT LIABILITY OF BOG, OTHER THAN GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. THE PARTIES RECOGNIZE,
ACKNOWLEDGE AND AGREE THAT GASCO'S OBLIGATIONS AND
RESPONSIBILITIES UNDER THIS SECTION 13(b)(i) TO INDEMNIFY AND
HOLD THE BOG INDEMNIFIED PARTIES HARMLESS SHALL BE
PROPORTIONATELY REDUCED TO THE PERCENTAGE INTEREST IN THE
SUBJECT BOG PROPERTIES WHICH IS ASSIGNED OR TO BE ASSIGNED TO
GASCO UNDER THE TERMS OF THIS AGREEMENT.
(ii) COMMISSIONS. Gasco agrees to indemnify and
hold harmless BOG and the other BOG Indemnified Parties, from
and against any and all claims, obligations, actions,
liabilities, damages, or expenses of any kind or character
arising out of or resulting from any agreement, arrangement or
understanding alleged to have been made by, or on behalf of,
such party with any broker or finder in connection with this
Agreement or the transactions contemplated hereby.
Section 14. WELL DATA AND INFORMATION.
For each Subject Well, BOG shall provide Gasco with the following: (i)
one copy of the AFE submitted for the Subject Well with an estimated working
interest and net revenue interest break down; (ii) one copy of the Exhibit A to
the final Joint Operating Agreement governing the drilling of such Subject Well
or any other document or instrument upon which BOG bases its allocation of
costs and expenses regarding such Subject Well; (iii) one copy of each drilling
and completion report received by BOG for the Subject Well; (iv) one copy of
each well log received by BOG for the Subject Well; and (v) all data and
information received regarding the testing and analysis of the well. With
respect to each Subject Well which is completed as a producer, following the
completion of such Subject Well BOG shall provide Gasco with a copy of each of
the following documents which are in BOG's possession (i) the BOG Participation
Agreements which affect Gasco's interests in the Drilling and Production Unit
for the Subject Well, (ii) the operating agreements which govern the Drilling
and Production Unit for the Subject Well, and (iii) a copy of each oil and gas
lease and farm-in agreement which covers minerals which are located within the
Drilling and Production Unit for the Subject Well; provided, however, that
Gasco shall reimburse BOG for any third party copying charges which are
incurred to generate such copies. In addition, with respect to each Subject
Well which is completed as a producer, subject to any contractual restrictions
that are placed on such interpretations pursuant to the terms of the applicable
BOG Participation Agreement(s) or the applicable seismic acquisition agreement,
BOG shall provide Gasco with one copy of a 3-D interpretational map generated
from Seismic Data by BOG for each of the targeted zone(s) in such Subject Well
(if a 3-D interpretational map has been generated by BOG for such zone),
limited in geographical extent to 1/2 mile of the outside perimeter of the
Drilling and Production Unit for the Subject Well. Under no circumstances
shall Gasco acquire any ownership interest or license in any of the Seismic
Data.
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Section 15. TITLE REVIEW.
To the extent that it is within BOG's control, BOG agrees that a
reasonable title examination shall be performed for each Subject Well prior to
the commencement of actual drilling operations for such Subject Well.
Section 16. NON-COMPETE.
During the Agreement Term and continuing for a period of 5 years
thereafter, unless BOG agrees in writing otherwise, except as provided in this
Agreement, neither Gasco, nor any Affiliate of Gasco, nor any broker or other
representative acting on behalf of Gasco shall own, purchase or otherwise
acquire any interest in the oil, gas and/or other minerals in, under or that
may be produced from any lands located within any of the following described
lands (hereinafter collectively referred to as the "Non-Compete Lands"): (1)
any lands located within one mile of the outside perimeter of the drilling
and/or proration units which are established for each Subject Well; and (2) the
lands which must be the subject of a non-compete agreement as the result of the
disclosure of 3-D interpretational maps or the assignment of interests in BOG
Properties pursuant to the terms of a BOG Participation Agreement which is
applicable to BOG Properties which are to be assigned to Gasco pursuant to the
terms of this Agreement. The interests Gasco is precluded hereunder from
owning or acquiring include leasehold working interests, mineral fee interests
or servitudes, overriding royalty interests, royalty interests, production
payments, net profits interests, and any other interests, whether similar or
dissimilar, in the oil, gas and/or other minerals in, under or that may be
produced from any part of the Non-Compete Lands. In the event that Gasco, any
Affiliate of Gasco or any broker or other representative acting on behalf of
Gasco or any Affiliate of Gasco owns or acquires any interest in breach of this
Section 16, BOG shall, in addition to any other remedies it may have at law or
in equity, have the right, exercisable in its sole discretion, to secure from
Gasco, an Affiliate of Gasco and/or any broker or other representative acting
on behalf of Gasco or any Affiliate of Gasco, as the case may be, an
assignment, free of all cost and expense, covering the entire interest so owned
or acquired in breach of this Section 16. The provisions of this Section 16
shall survive the expiration of the Agreement Term and any earlier termination
of this Agreement. Anything to the contrary contained in this Section 16
notwithstanding, the parties hereto agree that Gasco shall not be precluded
from acquiring interests from a third party which is a party to a BOG
Participation Agreement, provided that the interest acquired by Gasco from such
third party is subject to the BOG Participation Agreement to which such third
party is a party. In addition, anything to the contrary contained in this
Section 16 notwithstanding, the parties hereto agree that Gasco shall not be
precluded from acquiring interests that have been acquired under a Parallel
Agreement, provided that the interest acquired by Gasco from such third party
is subject to the Parallel Agreement to which such third party is a party
Section 17. ACCOUNTING MATTERS.
On or before a date that is 30 calendar days after the earlier of
expiration of the Agreement Term or termination of this Agreement under Section
10 or Section 11 hereof, BOG shall issue to Gasco a statement reflecting the
Pre-Payment Balance as of the statement date. Along with said statement, BOG
shall, subject to any right of set-off afforded BOG hereunder, return to Gasco
the Pre-Payment Balance, less that portion which BOG believes should be
retained by BOG in order to satisfy Gasco's share of any BOG Drilling Costs or
BOG Completion Costs still to be paid or incurred hereunder. On or before a
date that is 120 calendar days after the earlier of expiration of the Agreement
Term or termination of this Agreement under Section 10 or Section 11 hereof,
BOG shall return, subject to any right of set-off afforded BOG hereunder, to
Gasco any of the remaining Pre-Payment Balance, to the extent it exceeds an
amount sufficient to cover Gasco's share of any then-accrued BOG Drilling Costs
or BOG Completion Costs.
Section 18. INSURANCE.
Gasco agrees to be bound by any election made by BOG concerning
insurance coverage relative to any particular Subject Well, and Gasco shall pay
a 9% share of what would otherwise be BOG's insurance costs relative to such
Subject Well and any related facilities. Prior to execution of an Assignment
covering such Subject Well, BOG shall make any insurance elections for and on
behalf of Gasco, and such election shall be binding upon Gasco, the same as if
made by Gasco. For example, if BOG elects to be covered by the operator's
insurance relative to any particular Subject Well, so will Gasco and if BOG
decides to secure or utilize its own insurance coverage relative to
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<PAGE> 16
any particular Subject Well, Gasco's interest in the Subject Well shall also
rely upon such insurance coverage; Gasco shall pay a 9% share of BOG's costs in
securing insurance coverage relative to any particular Subject Well. If BOG
decides to secure or utilize its own insurance coverage relative to a Subject
Well, Gasco will be named as an additional insured in the certificate issued
for such coverage.
Section 19. NOTICES.
All notices and other communications required under this Agreement
shall (unless otherwise specifically provided herein) be in writing and be
delivered personally, by recognized commercial courier or delivery service
(which provides a receipt), by telex or telecopier (with receipt acknowledged),
or by registered or certified mail (postage prepaid), at the following
addresses:
If to Gasco:
194 Summers Street, 2nd Floor
Charleston, W.V. 25301
Facsimile # (304) 344-2467
Attention: Mr. J. S. Stevens, III
If to BOG:
Brigham Oil & Gas, L.P.
5949 Sherry Lane, Suite 1616
Dallas, Texas 75225
Facsimile # (214) 360-9825
Attention: Mr. Bud Brigham
and shall be considered delivered on the date of receipt. Either Gasco or BOG
may specify as its proper address any other post office address within the
continental limits of the United States by giving notice to the other party, in
the manner provided in this Section, at least two (2) business days prior to
the effective date of such change of address.
Section 20. SURVIVAL OF PROVISIONS.
All representations, warranties and indemnifications made herein by
BOG or Gasco shall survive in perpetuity the expiration of the Agreement Term
and any termination hereof under Section 10 or Section 11.
Section 21. DISCLAIMERS AND ELECTIONS.
The liabilities of the parties hereunder shall be several, not joint or
collective. It is not the intention of the parties to create, nor shall this
Agreement be deemed as creating, a joint venture, or a mining, tax or other
partnership or association or to render the parties liable as partners.
However, solely for purposes of income taxation and reporting of income taxes,
the parties agree that the relationship under this Agreement shall be
considered as a tax partnership in accordance with the provisions of the Tax
Partnership Agreement which is attached hereto as Exhibit D.
Section 22. MISCELLANEOUS MATTERS.
a. Neither Gasco nor BOG shall assign or otherwise transfer
any rights, interests or obligations under this Agreement to any
third party without first obtaining the written consent of the other,
which consent may be either granted or withheld in the sole and
absolute discretion of the party being asked to grant consent; provided
that either of BOG or Gasco may freely transfer or otherwise dispose of
all of its rights, interests and obligations hereunder (i) by sale or
other transfer or disposition of all or substantially all of its assets
(whether or not covered hereby) to an Affiliate or (ii) otherwise by
merger, reorganization or consolidation. This Agreement shall be
binding upon and shall enure to the benefit of Gasco and BOG and their
respective permitted successors and assigns.
-16-
<PAGE> 17
b. Each party shall bear and pay all expenses (including
without limitation attorneys' fees) incurred by it in connection with
the transaction contemplated by this Agreement.
c. This Agreement contains the entire understanding of the
parties hereto with respect to subject matter hereof and supersedes
all prior agreements, understandings, negotiations, and discussions
among the parties with respect to such subject matter. The
descriptive headings contained in this Agreement are for convenience
only and shall not control or affect the meaning or construction of
any provision of this Agreement. Within this Agreement words of any
gender shall be held and construed to cover any other gender, and
words in the singular shall be held and construed to cover the plural,
unless the context otherwise requires. Time is of the essence in this
Agreement.
d. This Agreement may be amended, modified, supplemented,
restated or discharged (and provisions hereof may be waived) only by
an instrument in writing signed by the party against whom enforcement
of the amendment, modification, supplement, restatement or discharge
(or waiver) is sought.
e. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS, EXCEPT THAT, TO THE EXTENT THAT THE
LAW OF A STATE IN WHICH A PORTION OF THE BOG PROPERTIES IS NOW OR
HEREAFTER LOCATED (OR WHICH IS OTHER APPLICABLE TO A PORTION OF THE
BOG PROPERTIES NECESSARILY GOVERNS, THE LAW OF SUCH STATE SHALL APPLY
TO THAT PORTION OF THE BOG PROPERTIES LOCATED IN (OR OTHERWISE SUBJECT
TO THE LAWS OF) SUCH STATE.
f. This Agreement may be executed in counterparts, all of
which are identical and all of which constitute one and the same
instrument. It shall not be necessary for BOG and Gasco to sign the
same counterpart and signature pages from different counterparts may
be combined to form masters of this Agreement.
This Agreement is executed by the parties hereto on the date set forth
beneath the signature of each but is effective for all purposes as of April 1,
1997.
BRIGHAM OIL & GAS, L.P.
By: Brigham, Inc.
Its: Managing General Partner
By: /s/ ANNE L. BRIGHAM
----------------------------------
Name: Anne L. Brigham
Title: Executive Vice President
Date: May 21, 1997
-------------------------
GASCO LIMITED PARTNERSHIP
By: Gasco, Inc.
Its: General Partner
By: /s/ J. S. STEVENS, III
-------------------------------
Name: J. S. Stevens, III
Title: President
Date: 5/22/97
-------------------------
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<PAGE> 18
EXHIBIT LIST
EXHIBIT A: Existing BOG Participation Agreements
EXHIBIT B: AMI
EXHIBIT C: Form of Assignment
EXHIBIT D: Tax Partnership Agreement
<PAGE> 1
Exhibit 11.1 Computation of pro forma weighted average number of common
shares outstanding for the three month periods ended March 31,
1996 and 1997 (in thousands).
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
1996 1997
------------- -------------
<S> <C> <C>
Number of shares outstanding after the Exchange 8,929 8,929
Employee stock options granted under the 1997
Incentive Plan 644 644
Shares assumed to be repurchased under the
treasury stock method:
$3,220,485 (1)/$8.00 per share (2) (403) (403)
------------- -------------
Pro forma weighted average number of common
shares outstanding 9,170 9,170
============= =============
</TABLE>
Notes:
(1) Calculated by multiplying employee stock options granted under the 1997
Incentive Plan (644,097) by their exercise price ($5.00).
(2) Initial public offering price.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,164
<SECURITIES> 0
<RECEIVABLES> 2,587
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,113
<PP&E> 34,483
<DEPRECIATION> 0
<TOTAL-ASSETS> 39,949
<CURRENT-LIABILITIES> 9,116
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 14,808
<TOTAL-LIABILITY-AND-EQUITY> 39,949
<SALES> 2,136
<TOTAL-REVENUES> 2,300
<CGS> 0
<TOTAL-COSTS> 333
<OTHER-EXPENSES> 702
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 390
<INCOME-PRETAX> 69
<INCOME-TAX> (36)
<INCOME-CONTINUING> 105
<DISCONTINUED> 0
<EXTRAORDINARY> 5,000
<CHANGES> 0
<NET-INCOME> (4,895)
<EPS-PRIMARY> 9,170
<EPS-DILUTED> 9,170
</TABLE>
