UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19118
ABRAXAS PETROLEUM CORPORATION
----------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 74-2584033
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification Number)
500 N. Loop 1604, East, Suite 100, San Antonio, Texas 78232
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (210) 490-4788
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the restraint
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X or No __
The number of shares of the issuer's common stock outstanding as of
November 10, 1999, was:
Class Shares Outstanding
Common Stock, $.01 Par Value 6,352,672
1 of 25
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1999
and December 31,1998.........................................3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1999 and 1998......5
Consolidated Statement of Stockholders Equity (Deficit)
September 30, 1999 and December 31, 1998.....................6
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998................7
Notes to Consolidated Financial Statements.....................8
ITEM 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations.........................................23
ITEM 3 - Quantitative and Qualitative Disclosures about market risk........23
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings 24
ITEM 2 - Changes in Securities...............................................24
ITEM 3 - Defaults Upon Senior Securities.....................................24
ITEM 4 - Submission of Matters to a Vote of Security Holders.................24
ITEM 5 - Other Information 24
ITEM 6 - Exhibits and Reports on Form 8-K....................................24
Signatures ..................................................25
2
<PAGE>
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
Consolidated Balance Sheets
September 30, December 31,
1999 1998
(Unaudited)
---------------------------
(In thousands)
<S> <C> <C>
Current assets:
Cash .................................................... $ 14,421 $ 61,390
Accounts receivable, less allowance for doubtful
accounts:
Joint owners ........................................ 6,629 3,337
Oil and gas production sales ........................ 8,166 6,098
Other ............................................... 2,350 1,070
-------- --------
17,145 10,505
Equipment inventory ..................................... 441 504
Other current assets .................................... 475 844
-------- --------
Total current assets .................................. 32,482 73,243
Property and equipment ..................................... 495,082 374,316
Less accumulated depreciation, depletion, and amortization . 191,398 165,867
-------- --------
Net property and equipment based on the full cost
method of accounting for oil and gas properties
of which $10,675 at December 31, 1998 and September 30,
1999, was excluded from amortization .................. 303,684 208,449
Deferred financing fees, net of accumulated amortization
of $2,911 and $3,984 at December 31, 1998 and September
30, 1999, respectively .................................. 9,919 8,059
Other assets ............................................... 1,240 1,747
======== ========
Total assets ............................................ $347,325 $291,498
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
Consolidated Balance Sheets (continued)
September 30, December 31,
1999 1998
(Unaudited)
----------------------------
(In thousands)
<S> <C> <C>
Current liabilities:
Accounts payable ......................................... $ 8,524 $ 10,499
Oil and gas production payable ........................... 10,527 5,846
Accrued interest ......................................... 13,637 5,522
Income taxes payable ..................................... 106 160
Other accrued expenses ................................... 1,539 527
--------- ---------
Total current liabilities .............................. 34,333 22,554
Long-term debt .............................................. 346,243 299,698
Deferred income taxes ....................................... 27,429 19,820
Minority interest in foreign subsidiary ..................... 10,286 9,672
Future site restoration ..................................... 4,374 3,276
Commitments and contingencies
Stockholders' equity (Deficit):
Common stock, par value $.01 per share - authorized
50,000,000 shares; issued 6,504,755 and 6,501,441 shares
at September 30, 1999 and December 31, 1998,
respectively ........................................... 65 65
Additional paid-in capital ............................... 51,651 51,695
Accumulated deficit ...................................... (123,099) (103,145)
Treasury stock, at cost, 152,083 and 171,015 shares at
September 30, 1999 and December 31, 1998, respectively . (1,071) (1,167)
Accumulated other comprehensive loss ..................... (2,886) (10,970)
--------- ---------
Total stockholders' equity (deficit) ........................ (75,340) (63,522)
--------- ---------
Total liabilities and stockholders' equity (deficit) .. $ 347,325 $ 291,498
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Abraxas Petroleum Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
1999 1998 1999 1998
----------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Revenue:
Oil and gas production revenues ................ $ 15,842 $ 12,798 $ 43,884 $ 41,406
Gas processing revenues ........................ 818 668 2,733 2,369
Rig revenues ................................... 129 112 328 350
Other .......................................... 169 221 2,759 1,884
-------- -------- -------- --------
16,958 13,799 49,704 46,009
Operating costs and expenses:
Lease operating and production taxes ........... 4,581 4,347 13,986 13,387
Depreciation, depletion, and amortization ...... 7,834 8,826 25,801 26,049
Rig operations ................................. 156 123 452 381
General and administrative ..................... 1,405 1,268 4,187 3,957
-------- -------- -------- --------
13,976 14,564 44,426 43,774
-------- -------- -------- --------
Operating income (loss) ........................... 2,982 (765) 5,278 2,235
Other (income) expense:
Interest income ................................ (226) (110) (493) (418)
Amortization of deferred financing fee ......... 382 278 1,073 913
Interest expense ............................... 10,016 7,530 28,422 22,795
-------- -------- -------- --------
10,172 7,698 29,002 23,290
-------- -------- -------- --------
Income (loss) before taxes ........................ (7,190) (8,463) (23,725) (21,055)
Income tax expense (benefit):
Current ........................................ 92 124 305 208
Deferred ....................................... (510) (2,913) (4,247) (4,741)
Minority interest in income of consolidated foreign
subsidiary ..................................... 147 121 172 (50)
-------- -------- -------- --------
Net income (loss) applicable to common stock ...... $ (6,919) $ (5,795) $(19,954) $(16,472)
======== ======== ======== ========
Earnings (loss) per common share:
Net Income (loss) per common share ........... $ (1.09) $ (0.92) $ (3.15) $ (2.60)
======== ======== ======== ========
Net income (loss) per common share - assuming
dilution ..................................... $ (1.09) $ (0.92) $ (3.15) $ (2.60)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share amounts)
Accumulatd
Common Stock Treasury Stock Additional Other
-----------------------------------------Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998.. 6,501,441 $ 65 (171,015) $(1,167) $ 51,695 $ (103,145) $ (10,970) $ (63,522)
Comprehensive income
(loss):
Net income .............. - - - - - (19,954) - (19,954)
Other comprehensive
income:
Foreign currency
translation - - - - - - 8,084 8,084
adjustment ..........
------------
Comprehensive income (loss) - - - - - - - (11,870)
Issuance of common stock
for compensation ........ 3,314 18,932 96 (44) - - 52
-------------------------------------------------------------------------------------------------
Balance at September 30, 1999
(unaudited) 6,504,755 $ 65 (152,083) $(1,071) $ 51,651 $ (123,099) $ (2,886) $ (75,340)
==================================================== ===========================================
</TABLE>
See accompanying notes to consolidatednancial statements
6
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1999 1998
-----------------------
(In Thousands)
<S> <C> <C>
Operating Activities
Net income (loss) .................................................. $ (19,954) $ (16,472)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Minority interest in income of foreign subsidiary ............. 172 (50)
Depreciation, depletion, and amortization ..................... 25,801 26,049
Amortization of deferred financing fees ....................... 1,073 913
Amortization of premium on Senior Notes ....................... (434) --
Deferred income tax benefit ................................... (4,247) (4,741)
Issuance of common stock for compensation ..................... 52 207
Changes in operating assets and liabilities:
Accounts receivable ....................................... (1,556) 3,254
Equipment inventory ....................................... 63 (126)
Other assets .............................................. 439 304
Accounts payable and accrued expenses ..................... 7,969 2,263
--------- ---------
Net cash provided by operating activities .......................... 9,378 11,601
Investing Activities
Capital expenditures, including purchases
and development of properties ...................................... (115,250) (41,661)
Proceeds from sale of oil and gas properties and equipment inventory 14,844 272
--------- ---------
Net cash (used) provided by investing activities ................... (100,406) (41,389)
Financing Activities
Issuance of common stock, net of expenses .......................... -- 5,014
Purchase of treasury stock, net .................................... (12) (980)
Proceeds from long-term borrowings ................................. 83,000 65,106
Premium from issuance of Senior Notes .............................. -- 3,471
Payments on long-term borrowings ................................... (36,298) (31,609)
Deferred financing fees ............................................ (2,834) (1,681)
Other .............................................................. -- 202
--------- ---------
Net cash provided by financing activities .......................... 43,856 39,523
Effect of exchange rate changes on cash ............................ 203 (1,303)
--------- ---------
Increase (decrease) in cash ........................................ (46,969) 8,432
Cash at beginning of period ........................................ 61,390 2,876
--------- ---------
Cash at end of period .............................................. $ 14,421 $ 11,308
========= =========
Supplemental Disclosures
Supplemental disclosures of cash flow information:
Interest paid ................................................. $ 20,788 $ 14,484
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
Note 1. Basis of Presentation
The accounting policies followed by Abraxas Petroleum Corporation and its
subsidiaries (the "Company"or "Abraxas") are set forth in the notes to the
Company's audited financial statements in the Annual Report on Form 10-K filed
for the year ended December 31, 1998 which is incorporated herein by reference.
Such policies have been continued without change. Also, refer to the notes to
those financial statements for additional details of the Company's financial
condition, results of operations, and cash flows. All the material items
included in those notes have not changed except as a result of normal
transactions in the interim, or as disclosed within this report. The
consolidated financial statements have not been audited by independent
accountants, but in the opinion of management, reflect all adjustments necessary
for a fair presentation of the financial position and results of operations. Any
and all adjustments are of a normal and recurring nature.
The consolidated financial statements include the accounts of the Company ,
its wholly -owned foreign subsidiary Canadian Abraxas Petroleum Limited.
("Canadian Abraxas"), its 48% owned foreign subsidiary Grey Wolf Exploration
Inc. ("Grey Wolf") and Canadian Abraxas' wholly-owned subsidiary, New Cache
Petroleums Ltd ("New Cache"). Minority interest represents the minority
shareholders' proportionate share of the equity and income of Grey Wolf.
Canadian Abraxas', New Cache's and Grey Wolf's assets and liabilities are
translated to U.S. dollars at period-end exchange rates. Income and expense
items are translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of shareholders'
equity.
Note 2. Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
September 30, December 31,
1999 1998
-------------------------
(In thousands)
<S> <C> <C>
11.5% Senior Notes due 2004, Series D ............................ $274,000 $274,000
Unamortized premium on Senior Notes .............................. 2,459 3,471
Credit facility due to Bankers Trust Company, ING
Capital and Union Bank of California ........................... -- 15,700
12.875% Senior Secured Notes due 2003 (see below) ................ 63,500 --
Credit facility due to a Canadian bank, providing for borrowings
to approximately $12,100,000 at the bank's prime rate plus
.125%, 6.20% at September 30, 1999 ............................. 6,277 6,515
Other ............................................................ 7 12
======== ========
$346,243 $299,698
======== ========
</TABLE>
In March 1999, the Company consummated the sale of $63.5 million of its
12.875% Senior Secured Notes due 2003 (the "Secured Notes"). Interest on the
Secured Notes is payable semi-annually in cash in arrears on March 15 and
September 15, commencing September 15, 1999. The Secured Notes are redeemable,
in whole or in part, at the option of Abraxas on or after March 15, 2001, at the
redemption prices set forth below, plus accrued and unpaid interest to the date
of redemption, if redeemed during the 12-month period commencing on March 15 of
the years set forth below:
8
<PAGE>
Year Percentage
2001............................................ 103.000%
2002 and thereafter............................. 100.000%
At any time, or from time to time, prior to March 15, 2001, Abraxas may, at its
option, use all or a portion of the net cash proceeds of one or more equity
offerings to redeem up to 35% of the aggregate original principal amount of the
Secured Notes at a redemption price equal to 112.875% of the aggregate principal
amount of the Secured Notes to be redeemed, plus accrued and unpaid interest.
The Secured Notes are senior indebtedness of Abraxas secured by a first
lien or charge on substantially all of the crude oil and natural gas properties
of Abraxas and the shares of Grey Wolf owned by Abraxas. The Secured Notes are
unconditionally guaranteed (the "Guarantees") on a senior basis, jointly and
severally, by Canadian Abraxas, New Cache and Sandia Oil & Gas Corporation
("Sandia"), a wholly-owned subsidiary of Abraxas (collectively, the
"Guarantors"). The Guarantees are secured by substantially all of the crude oil
and natural gas properties of the Guarantors and the shares of Grey Wolf owned
by Canadian Abraxas.
Upon a Change of Control, each holder of the Secured Notes will have the right
to require Abraxas to repurchase such holder's Secured Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, Abraxas will be obligated to
offer to repurchase the Secured Notes at 100% of the principal amount thereof
plus accrued and unpaid interest to the date of redemption in the event of
certain asset sales
The Indenture governing the Secured Notes (the "Secured Notes Indenture")
contains certain covenants that limit the ability of Abraxas and certain of its
subsidiaries, including the Guarantors (the "Restricted Subsidiaries"), to,
among other things, incur additional indebtedness, pay dividends or make certain
other restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, incur liens, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company.
The Secured Notes Indenture provides, among other things, that the Company
may not, and may not cause or permit the Restricted Subsidiaries, to, directly
or indirectly, create or otherwise cause to permit to exist or become effective
any encumbrance or restriction on the ability of such subsidiary to pay
dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except for such encumbrances or restrictions existing under or by
reason of: (i) applicable law; (ii) the Secured Notes Indenture or the Indenture
governing the Series D Notes; (iii) customary non-assignment provisions of any
contract or any lease governing leasehold interest of such subsidiaries; (iv)
any instrument governing indebtedness assumed by the Company in an acquisition,
which encumbrance or restriction is not applicable to such Restricted Subsidiary
or the properties or assets of such subsidiary other than the entity or the
properties or assets of the entity so acquired; (v) agreements existing on the
Issue Date (as defined in the Secured Notes Indenture) to the extent and in the
manner such agreements were in effect on the Issue Date; (vi) customary
restrictions with respect to subsidiaries of the Company pursuant to an
agreement that has been entered into for the sale or disposition of capital
stock or assets of such Restricted Subsidiary to be consummated in accordance
with the terms of the Secured Notes Indenture or any Security Documents (as
defined in the Secured Notes Indenture) solely in respect of the assets or
capital stock to be sold or disposed of; (vii) any instrument governing certain
liens permitted by the Secured Notes Indenture, to the extent and only to the
extent such instrument restricts the transfer or other disposition of assets
subject to such lien; or (viii) an agreement governing indebtedness incurred to
refinance the indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (ii), (iv) or (v) above; provided, however, that the
provisions relating to such encumbrance or restriction contained in any such
refinancing indebtedness are no less favorable to the holders of the Secured
Notes in any material respect as determined by the Board of Directors of the
Company in their reasonable and good faith judgment that the provisions relating
to such encumbrance or restriction contained in the applicable agreement
referred to in such clause (ii), (iv) or (v) and do not extend to or cover any
new or additional property or assets and, with respect to newly created liens,
(A) such liens are expressly junior to the liens securing the Secured Notes, (B)
the refinancing results in an improvement on a pro forma basis in the Company's
Consolidated EBITDA Coverage Ratio (as defined in the Secured Notes Indenture)
and (C) the instruments creating such liens expressly subject the foreclosure
rights of the holders of the refinanced indebtedness to a stand-still of not
less than 179 days.
9
<PAGE>
Note 3. Earnings Per Share
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- --------------------------------
1999 1998 1999 1998
---------------- --------------- ---------------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (6,919) $ (5,795) $ (19,954) $ (16,472)
-------------- --------------- ----------- -----------
Numerator for basic earnings per share - income (6,919) (5,795) (19,954) (16,472)
(loss) available to common stockholders
Effect of dilutive securities:
Preferred stock dividends - - - -
------------- -------------- ------------- -----------
Numerator for diluted earnings per share-income
available to common stockholders after assumed
Conversions (6,919) (5,795) (19,954) (16,472)
Denominator:
Denominator for basic earnings per share -
weighted-average shares 6,352,672 6,322,370 6,342,437 6,323,361
Effect of dilutive securities:
Stock options and warrants - - - -
------------- -------------- --------------- ----------
- - - -
------------- -------------- --------------- ----------
Dilutive potential common shares Denominator
for diluted earnings per share adjusted
weighted-average shares and assumed
Conversions 6,352,672 6,322,370 6,342,437 6,323,361
Basic earnings (loss) per share:
Income (loss) $ (1.09) $ (.92) $ (3.15) $ (2.60)
============= ============== =============== ===========
Diluted earnings (loss) per share:
Income (loss) $ (1.09) $ (.92) $ (3.15) $ (2.60)
============= ============== =============== ========
</TABLE>
For the three months and nine months ended September 30, 1999 and 1998,
none of the shares issuable in connection with stock options or warrants are
included in diluted shares. Inclusion of these shares would be antidilutive due
to losses incurred in the periods.
10
<PAGE>
Note 4. Summary Financial Information of Canadian Abraxas Petroleum Limited.,
New Cache Petroleums Ltd. and Sandia Oil & Gas Corporation.
The following is summary financial information of Canadian Abraxas and
Sandia, both of which are wholly- owned subsidiaries of the Company, and New
Cache which is a wholly- owned subsidiary of Canadian Abraxas, at September 30,
1999. Canadian Abraxas is jointly and severally liable with the Company for the
entire balance of the Company's and Canadian Abraxas' 11.5% Senior Notes due
2004, Series D (the "Series D Notes") ($274,000,000).The Series D Notes are
unconditionally guaranteed, on a senior basis, jointly and severally, by New
Cache and Sandia. The Secured Notes are unconditionally guaranteed, on a senior
basis, jointly and severally, by Canadian Abraxas, Sandia and New Cache. The
Company has not presented separate financial statements and other disclosures
concerning Canadian Abraxas, Sandia. or New Cache because management has
determined that such information is not material to the holders of the Series D
Notes, the Secured Notes and the Company's Common Stock.
<TABLE>
<CAPTION>
Summary Balance Sheets
September 30, 1999
(In Thousands)
Canadian New Cache Sandia Oil & Gas,
Abraxas Petroleums, Ltd Corp.
------------------ -------------------- --------------------
<S> <C> <C> <C>
Total current assets $ 33,380 $ 7,498 $ 225
Oil and gas properties 80,597 100,765 1,440
Other assets 67,001 - 2
------------------ -------------------- --------------------
$ 180,978 $ 108,263 $ 1,666
================== ==================== ====================
Total current liabilities $ 4,503 $ 3,177 $ 75
11.5% Senior Notes due 2004 74,682 - -
Intercompany payable 16,290 26,991 1,205
Other liabilities 17,520 13,247 -
Shareholder's equity 67,983 64,848 386
------------------ -------------------- --------------------
$ 180,978 $ 108,263 $ 1,666
================== ==================== ====================
</TABLE>
<TABLE>
<CAPTION>
Summary Statements of Operations
Nine Months ended September 30, 1999
(in Thousands)
Canadian New Cache Sandia Oil & Gas,
Abraxas Petroleums, Ltd Corp.
----------------- --------------------- --------------------
<S> <C> <C> <C>
Revenues $ 11,998 $ 12,604 $ 397
Operating costs & expenses (11,957) (12,064) (132)
Interest expense (7,450) (153) -
Other (91) - -
Income tax benefit (expense) 4,472 (200) -
----------------- --------------------- --------------------
Net income (loss) $ (3,028) $ 187 $ 265
================= ===================== ====================
</TABLE>
<TABLE>
<CAPTION>
Three Months ended September 30, 1999
(in Thousands)
Canadian New Cache Sandia Oil & Gas,
Abraxas Petroleums, Ltd Corp.
----------------- --------------------- -------------------
<S> <C> <C> <C>
Revenues $ 4,199 $ 4,472 $ 172
Operating costs & expenses (3,758) (3,553) (46)
Interest expense (2,420) 27 -
Other (147) - -
Income tax benefit (expense) 1,066 (402) -
----------------- --------------------- ---------------------
Net income (loss) $ (1,060) $ 544 $ 126
================= ===================== ====================
</TABLE>
11
<PAGE>
Note 5. Business Segments
Business segment information about the Company's third quarter operations
in different geographic areas is as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ............................... $ 5,920 $ 11,038 $ 16,958
================== ================= ===================
Operating profit (loss)................. $ 1,720 $ 1,993 $ 3,713
================== =================
General corporate ...................... (731)
Interest expense and amortization of
deferred financing fees ............. (10,172)
-------------------
Income (loss) before income taxes ... $ (7,190)
===================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ............................... $ 8,130 $ 5,669 $ 13,799
================== ================= ===================
Operating profit (loss)................. $ 1,193 $ (675) $ 518
================== =================
General corporate....................... (1,283)
Interest expense and amortization of
deferred financing fees ............. (7,698)
-------------------
Income before income taxes .......... $ (8,463)
===================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ............................... $ 18,678 $ 31,027 $ 49,705
================== ================= ===================
Operating profit (loss)................. $ 5,946 $ 1,556 $ 7,502
================== =================
General corporate ...................... (2,224)
Interest expense and amortization of
deferred financing fees ............. (29,002)
-------------------
Income before income taxes .......... $ (23,724)
===================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ............................... $ 28,561 $ 17,448 $ 46,009
================== ================= ===================
Operating profit (loss)................. $ 6,348 $ (878) $ 5,470
================== =================
General corporate ...................... (3,235)
Interest expense and amortization of
deferred financing fees ............. (23,290)
-------------------
Income before income taxes .......... $ (21,055)
===================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
<S> <C> <C> <C> <C>
Identifiable assets at September 30,1999 $ 108,450 $ 227,807 $ 336,257
================== =================
Corporate assets ....................... 11,068
-------------------
Total assets ........................ $ 347,325
===================
December, 31, 1998
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Identifiable assets at December 31, 1998 $ 153,030 $ 129,301 $ 282,331
================== ================= ===================
Corporate assets ....................... 9,167
-------------------
Total assets ........................ $ 291,498
===================
</TABLE>
Note 6. Contingencies
In May 1995, certain plaintiffs filed a lawsuit against the Company
alleging negligence and gross negligence, tortuous interference with contract,
conversion and waste. In March 1998, a jury found against the Company and, on
May 22, 1998 final judgment in the amount of $1.3 million was entered. The
Company has filed an appeal. Management believes that the plaintiffs' claims are
without merit and that damages should not be recoverable under this action;
however, the ultimate effect on the Company's financial position and results of
operations cannot be determined at this time. The Company has not established a
reserve for this matter at September 30, 1999.
Additionally, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. At September 30, 1999, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.
Note 7. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. In June 1999,
SFAS No. 137 was issued, which delays the required adoption of SFAS No. 133 by
one year. The statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Statement will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, of firm commitments
through earnings or recognized in other comprehensive income until the hedge
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined the effect of SFAS No. 133 will be on the earnings and financial
position of the Company.
Note 8. Divestitures
On August 11, 1999, the Company closed a transaction with a major Canadian
independent to sell non-core assets owned by Canadian Abraxas. The assets were
sold for $14.6 CDN ($9.8 million U.S.,)
Note 9. Subsequent Events
In October 1999, the Company sold a dollar denominated production payment
for $ 4.0 million relating to existing natural gas wells in the Edwards Trend in
South Texas to a unit of Southern Energy, Inc. The Company has the ability to
sell up to $50 million to Southern for additional drilling opportunities in the
Edwards Trend.
13
<PAGE>
In November 1999 the Company announced that an oral agreement had been
reached with an informal committee of the holders of the Series D Notes,
representing a majority of the outstanding principal amount of the Series D
Notes. The Company has been exploring alternatives to increase its liquidity,
including the restructuring of the Company's indebtedness. The Company has been
involved in discussions with the members of the informal committee, and as a
result of these discussions, the Company and the informal committee have agreed
to the following restructuring proposal:
o Noteholders will exchange the Series D Notes for new notes with a face
amount equal to 70% of the principal amount of the existing Series D
Notes with the same interest rate;
o The new notes will have a second priority lien on substantially all of
the assets of Abraxas;
o Noteholders will receive equity equal to 72% of the equity of the
restructured company;
o Noteholders will receive a contingent value right that will allow them to
receive additional equity if the price of Abraxas common stock does not
reach certain levels over the 18 month period following the consummation
of the restructuring; and
o Noteholders will appoint four members of a new seven-member board of
directors
The closing of the restructuring is subject to the satisfaction of certain
customary conditions to closing including board approval and the exchange of at
least 95% of the principal amount of the Series D Notes in exchange for new
notes with terms described above.
The Company currently expects that the proposed restructuring will be completed
on or about December 15, 1999.
Note 10. Reclassifications
Certain balances for 1998 have been reclassified for comparative purposes.
14
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion of the Company's financial condition, results
of operations, liquidity and capital resources. This discussion should be read
in conjunction with the consolidated financial statements of the Company and the
notes thereto, included in the Company's Annual report on Form 10-K filed for
the year ended December 31, 1998, which is incorporated herein by reference.
Results of Operations
The factors which most significantly affect the Company's results of
operations are (1) the sales prices of crude oil and natural gas, (2) the level
of total sales volumes of crude oil and natural gas, (3) the level of and
interest rates on borrowings and (4) the level and success of exploration and
development activity.
Selected operating data. The following table sets forth certain operating
data of the Company for the periods presented.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------------
1999 1998 1999 1998
------------ ----------- -------------- -------------
<S> <C> <C> <C> <C>
Operating Revenue (in thousands):
Crude Oil Sales $ 3,242 $ 2,374 $ 8,506 $ 7,768
Natural Gas Sales 11,074 9,082 32,012 28,699
Natural Gas Liquids Sales 1,526 1,342 3,366 4,939
Processing Revenue 818 668 2,733 2,370
Rig Operations 129 112 328 350
Other 169 421 2,759 1,883
============ =========== ============== =============
$ 16,958 $ 13,799 $ 49,704 $ 46,009
============ =========== ============== =============
Operating Income (in thousands) $ 2,982 $ (765) $ 5,278 $ 2,235
Crude Oil Production (MBBLS) 192 178 609 565
Natural Gas Production (MMCFS) 6,273 6,395 20,155 18,874
Natural Gas Liquids Production (MBBLS) 98 238 282 715
Average Crude Oil Sales Price ($/BBL) $ 16.88 $ 13.32 $ 13.98 $ 13.75
Average Natural Gas Sales Price ($/MCF) $ 1.77 $ 1.42 $ 1.59 $ 1.52
Average Liquids Sales Price ($/BBL) $ 15.62 $ 5.64 $ 11.96 $ 6.90
</TABLE>
Comparison of Three Months Ended September 30, 1999 to Three Months Ended
September 30, 1998
Operating Revenue. During the three months ended September 30, 1999,
operating revenue from crude oil, natural gas and natural gas liquid sales
increased to $15.8 million from $12.8 million for the same period in 1998. The
increase in revenue from crude oil, natural gas and natural gas liquids was
primarily due to increased prices received in 1999 as compared to 1998.
Increased prices contributed $4.8 million to revenue which was offset by $1.8
million as a result of lower production volumes. The average sales price for
crude oil was $16.88 per barrel for the three months ended September 30, 1999
compared to $13.32 for the same period of 1998, natural gas sales prices
averaged $1.77 per Mcf for the three months ended September 30, 1999 compared to
$1.42 per Mcf for the same period of 1998 and the average sales prices for
natural gas liquids were $15.62 per Bbl for the three months ended September 30,
1999 compared to $5.64 for the same period of 1998.
Revenue from crude oil production increased from $2.4 million in the third
quarter of 1998 to $3.2 million for the same period of 1999. Increased prices
contributed $0.6 million while increased production added an additional $0.2
million. The increase in production was primarily due to the acquisition New
Cache in January 1999. The New Cache properties contributed $1.3 million and 72
MBbls which offset the loss of production from the Company's properties in the
15
<PAGE>
Wamsutter area of Wyoming (the "Wyoming Properties") which were sold in the
fourth quarter of 1998. The Wyoming Properties contributed $0.3 million and 25.6
MBbls in the third quarter of 1998.
Revenue from natural gas production increased by $2.0 million during the third
quarter of 1999 to $11.1 million. The increase in natural gas revenue was
primarily attributable to increased prices during the quarter. The average price
received during the third quarter of 1999 was $1.77 compared to $1.42 for the
same period of 1998. Increased prices contributed $2.2 million offset by $0.2
million due to slightly lower production. The decline in natural gas production
volumes were the result of the sale of the Wyoming Properties in the fourth
quarter of 1998 Natural gas production in the third quarter of 1998 included 1.6
Bcf from the Wyoming Properties which was offset by 1.7 Bcf in natural gas
production from the New Cache acquisition in January 1999.
Natural gas liquids revenue increased to $1.5 million for the quarter ended
September 30, 1999 compared to $1.3 million for the same period of 1998.
Increased prices received for natural gas liquids during the third quarter of
1999 contributed $2.4 million to revenue. Production volume declines had a $2.2
million negative impact on revenue during the three months ended September 30,
1999. Production decreased by 140.4 MBbls to 97.7 MBbls for the three months
ended September 30, 1999 from 238.1 MBbls for the same period of 1998. The
decline in natural gas liquids volumes was due primarily to the sale of the
Wyoming Properties in the fourth quarter of 1998. The Wyoming Properties
contributed 132.8 MBbls of natural gas liquids during the third quarter of 1998.
Further declines in natural gas liquids production were the result of the
closing of the Company's Portilla processing plant in January 1999. The Portilla
processing plant contributed 12.6 MBbls of natural gas liquid during the third
quarter of 1998. The decline in natural gas liquids production was partially
offset by production New Cache which contributed 9.7 MBbls of natural gas
liquids during the third quarter of 1999.
Lease Operating Expenses. Lease operating expenses and natural gas
processing costs ("LOE") for the three months ended September 30, 1999 increased
to $4.6 million compared to $4.3 million for the same period in 1998. The
increase in LOE was primarily due to the greater number of wells owned by the
Company during the period ended September 30, 1999 compared to the same period
of 1998. The Company's LOE on a per MCFE basis for the three months ended
September 30, 1999 was $0.57 compared to $0.49 for the same period of 1998. The
increase on a per MCFE basis was due to a general increase in the cost of
services from 1998 to 1999 and from the sale of the Wyoming Properties which
were a low cost operating area with LOE per MCFE of $0.19 in 1998.
G&A Expenses. General and administrative ("G&A") expenses increased from
$1.3 million for the three months ended September 30, 1998 to $1.4 million for
the same period of 1999. The increase was due to the hiring of additional staff
to manage and develop the Company's properties including the addition of several
staff members associated with the New Cache acquisition. G&A expense on a per
MCFE basis increased from $0.14 for the quarter ended September 30, 1998 to
$0.18 for the same period of 1999.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense decreased from $8.8 million for the three
months ended September 30, 1998, to $7.8 million in the same period of 1999. The
Company's DD&A on a per MCFE basis for the three months ended September 30, 1999
was $0.98 per MCFE compared to $0.99 in 1998. The decrease in total DD&A was due
to write downs in the full cost pool at December 31, 1998 as a result of
depressed commodity prices at that time forcing some of the Company's oil
properties to their economic limits much sooner.
Interest Expense. Interest expense increased to $10.0 million for the three
months ended September 30, 1999 from $7.5 million for the same period of 1998.
This increase was attributable to increased borrowings by the Company during the
first quarter of 1999. Long-term debt increased from $299.7 million at December
31, 1998, to $346.2 million at September 30, 1999, as a result of the Company's
issuing $63.5 million of the Secured Notes in March 1999.
Comparison of Nine Months Ended September 30, 1999 to Nine Months Ended
September 30, 1998
Operating Revenue. During the nine months ended September 30, 1999,
operating revenue from crude oil, natural gas and natural gas liquid sales
increased from $41.4 million in the nine months ended September 30, 1998 to
$43.9 million for the same period in 1999. Increased production of crude oil and
natural gas contributed $2.6 million in additional revenue, while higher crude
oil and natural gas prices added revenue of $1.4 million. Lower production of
natural gas liquids had a negative impact of $5.2 million offset by $3.6 million
from higher prices.
Crude oil production increased from 564.9 MBbls for the first nine months of
1998 to 608.6 MBbls for the same period of 1999. Production from the New Cache
properties (acquired in January 1999) contributed 228.1 MBbls in 1999 which was
offset by declines in the production from the Company's existing properties and
16
<PAGE>
from the divestiture of the Wyoming Properties. The Wyoming Properties
contributed 74.6 MBbls of crude oil in the nine months ended September 30, 1998.
The decline in the production from existing properties was as a result of the
de-emphasis of the Company's crude oil exploration and development program in
1999 due to depressed crude oil prices during the first part of 1999. Crude oil
prices improved in the third quarter. The average price received for crude oil
for the first nine months of 1999 was $13.98 per Bbl compared to $13.75 per Bbl
for the same period of 1998.
Natural gas production increased by 1,281 MMcf for the first nine months of 1999
to 20,155 MMcf from 18,874 MMcf for the same period of 1998. The acquisition of
New Cache contributed 5,200 MMcf during the nine months ended September 30, 1999
which offset the loss of production from the Wyoming Properties, which were sold
in the fourth quarter of 1998. For the nine months ended September 30, 1998 the
Wyoming Properties contributed 4,599 MMcf. The increase in natural gas volumes
contributed $2.0 in additional revenue. Increased natural gas prices received
during the nine months ended September 30, 1999 contributed an additional $1.3
to revenue for the period. The average natural gas price received during the
first none months of 1999 was $1.59 per Mcf compared to $1.52 per Mcf for the
same period of 1998.
Revenue from natural gas liquids declined $1.6 million from $4.9 million for the
nine months ended September 30, 1998 to $3.4 million for the same period of
1999. Reduced production of natural gas liquids had a negative impact of $5.2
million on revenue for the nine months ended September 30, 1999 which was offset
by $3.6 million of increased revenue due to higher prices for the period.
Average natural gas liquids sales prices for the six months ended September 30,
1999 were $11.96 per Bbl compared to $6.90 for the same period of 1998. Natural
gas liquid production declined to 281.5 MBbls for the nine months ended
September 30, 1999 from 715.4 MBbls for the same period of 1998. The decline in
natural gas liquids volumes was due to the divestiture of the Wyoming Properties
in the fourth quarter of 1998 and the Company's decision to shut down the East
White Point and Portilla plants in South Texas. The Wyoming Properties
contributed 385.5 MBbls of natural gas liquids during the first nine months of
1998 which was partially offset by 57.2 MBbls from the New Cache properties
acquired in January 1999. The Company shut down its East White Point processing
plant during the fourth quarter of 1998 and shut down its Portilla Plant in
January 1999. The East White Point plant produced 40.4 MBbls of natural gas
liquids during the first nine months of 1998 and the Portilla Plant contributed
38.0 MBbls of natural gas liquids during the first nine months of 1998 compared
to 2.1 MBbls in 1999. The Company began processing the East White Point gas
through a third party plant in April 1999.Total East White Point production
through this facility was 37.7 MBbls during the period ended September 30, 1999.
The Company also elected not to process its West Texas gas during the first
quarter of 1999 due to the depressed prices of natural gas liquids. Processing
of the West Texas gas resumed in April 1999 contributing 41.7 MBbls during the
period ended September 30, 1999.
Lease Operating Expenses. LOE and natural gas processing expenses were
$14.0 million for the nine months ended September 30, 1999 compared to $13.4
million for the same period in 1998. The increase of $0.6 million was due to an
increase in the number of wells the Company owned as of September 30, 1998
compared to the same period of the prior year. LOE on a per MCFE basis increased
to $0.55 per MCFE for the nine months ended September 30, 1999 from $0.50 for
the same period of 1998. The increase per MCFE was due to a general increase in
the cost of services from 1998 to 1999 as well as from the divestiture of the
Wyoming Properties which was a low cost operating area with LOE of $0.16 per
MCFE.
G&A Expenses. G&A expenses increased from $4.0 million for the nine months
ended September 30, 1998 to $4.2 million for the same period of 1999. The
increase was primarily due to the hiring of additional staff to manage and
develop the Company's properties including the addition of several staff members
associated with the New Cache acquisition. G&A expense on a per MCFE basis
increased to $0.16 per MCFE from $0.15 for the same period of 1998.
Depreciation, Depletion and Amortization Expenses. DD&A expense decreased
to $25.8 million for the nine months ended September 30, 1999, from $26.0
million for the same period of 1998. DD&A expense on a per MCFE basis was $1.01
per MCFE for the nine months ended September 30, 1999 compared to $0.98 per MCFE
for the nine months ended June 30, 1998. The increase on a per MCFE basis was
due to higher finding cost during 1999, including the acquisition of New Cache,
in the Company's Canadian operations and the loss of reserves resulting from low
commodity prices that forced some of the Company's oil properties to their
economic limits much sooner. The increases were partially offset by lower DD&A
per MCFE from the U.S. operations as a result of the ceiling test write down of
the U.S. full cost pool as of December 31, 1998.
Interest Expense. Interest increased to $28.4 million for the nine months
ended September 30, 1999 from $22.8 million for the nine months ended September
30, 1998. The increase was due to increased levels of borrowings by the Company
during the first nine months of 1999. Long-term debt increased from $299.7
million at December 31, 1998 to $346.2 million at September 30, 1999, as a
result of the Company's issuing $63.5 million of its 12.875% Senior Secured
Notes due 2003 in late March 1999.
General . The Company's revenues, profitability and future rate of growth
are substantially dependent upon prevailing prices for crude oil and natural gas
and the volumes of crude oil, natural gas and natural gas liquids produced by
the Company. The prices of natural gas, crude oil and natural gas liquids
received by the Company improved during the first nine months of 1999. The
average natural gas price realized by the Company increased to $1.59 per Mcf
during the first nine months of 1999 compared with $1.52 per MCF during the same
period of 1998. Crude oil prices increased from $13.75 per Bbl during the nine
months of September 1998, to $13.98 per Bbl for the same period of 1999. Natural
gas liquids prices increased to $11.96 per Bbl compared to $6.90 per Bbl in
1998. The prices of crude oil and natural gas have strengthened in the third
17
<PAGE>
quarter and continued to strengthen in the fourth quarter. In addition, the
Company's proved reserves will decline as crude oil, natural gas and natural gas
liquids are produced unless the Company is successful in acquiring properties
containing proved reserves or conducts successful exploration and development
activities. In the event crude oil, natural gas and natural gas liquid prices
return to depressed levels or if the Company's production levels decrease, the
Company's revenues, cash flow from operations and profitability will be
materially adversely affected.
Delisting of Common Stock on The Nasdaq National Market
The Company's common stock has been delisted from The Nasdaq National
Market ("NMS") due to the Company's inability to meet the minimum net tangible
assets and "inside bid" price requirements for NMS listed companies. The
Company's stock is quoted and traded on the OTC Bulletin Board under the symbol,
AXAS.
Liquidity and Capital Resources
General: Capital expenditures excluding property divestitures during the
nine months ended September 30, 1999 were $115.3 million compared to $41.7
million during the same period of 1998. The table below sets forth the
components of these capital expenditures on a historical basis for the six
months ended September 30, 1999 and 1998.
Nine Months Ended
September 30
--------------------------------------
1999 1998
------------------- ------------------
Expenditure category (in thousands):
Acquisitions $ 92,586 $ 2,400
Development 21,006 35,475
Facilities and other 1,658 3,786
--------------- ------------
Total $ 115,250 $ 41,661
=============== ============
At September 30, 1999, the Company had current assets of $32.5 million and
current liabilities of $34.3 million resulting in a working capital deficit of
$1.8 million. This compares to working capital of $50.7 million at December 31,
1998 and a working capital deficit of $9.1 million at September 30, 1998. The
material components of the Company's current liabilities at September 30, 1999
include trade accounts payable of $8.5 million, revenues due third parties of
$10.5 million and accrued interest of $13.6 million.
Operating activities during the nine months ended September 30, 1999
provided $9.3 million in cash to the Company compared to $6.1 million in the
same period in 1998. Net income plus non-cash expense items during 1999 and net
changes in operating assets and liabilities accounted for most of these funds.
Investing activities required $100.4 million net during the first nine months of
1999, $92.6 million of which was utilized for the acquisition of oil and gas
properties, $21.0 million of which was utilized for the development of crude oil
and natural gas properties and other facilities, and $1.7 million of which was
utilized for facilities and other. Divestitures of oil and gas properties
provided $14.8 million. This compares to $41.7 million required during the same
period of 1998, $35.5 million of which was utilized for the development of crude
oil and natural gas properties and other facilities, and $2.4 million for the
acquisition of oil and gas properties. Financing activities provided $43.9
million for the first nine months of 1999 compared to providing $39.5 million
for the same period of 1998. Financing activities include the proceeds of $63.5
million from the issuance of the Secured Notes in March 1999 and borrowings
under the Credit Facility of $19.5 million, which were offset by the repayment
of the Credit Facility in the amount of $35.2 million in March 1999.
The Company's current budget for capital expenditures for the last three
months of 1999 other than acquisition expenditures is approximately $6.0
million. Such expenditures will be made primarily for the development of
existing properties. Additional capital expenditures may be made for
acquisitions of producing properties if such opportunities arise, but the
Company currently has no agreements, arrangements or undertakings regarding any
material acquisitions. The Company has no material long-term capital commitments
and is consequently able to adjust the level of its expenditures as
circumstances dictate. Additionally, the level of capital expenditures will vary
during future periods depending on market conditions and other related economic
factors. Should commodity prices remain at depressed levels or decline further,
reductions in the capital expenditure budget may be required.
Current Liquidity Needs. The Company has historically funded its operations
and acquisitions primarily through its cash flow from operations and borrowings
under the Credit Facility and other credit sources. In March 1999, the Company
18
<PAGE>
issued $63.5 million principal amount of the Secured Notes and repaid all
amounts outstanding under the Credit Facility and approximately $10.0 million of
debt assumed in connection with the acquisition of New Cache. Due to severely
depressed prices for crude oil and natural gas during the early part of 1999,
the Company's cash flow from operations has been substantially reduced.
In October 1999 the Company sold a dollar denominated production payment
for $ 4.0 million relating to existing natural gas wells in the Edwards Trend in
South Texas to a unit of Southern Energy, Inc. The Company has the ability to
sell up to $50 million to Southern for drilling opportunities in the Edwards
Trend.
In November 1999 the Company announced that an oral agreement had been
reached with an informal committee of the holders of the Series D Notes,
representing a majority of the outstanding principal amount of the Series D
Notes. The Company has been exploring alternatives to increase its liquidity,
including the restructuring of the Company's indebtedness. The Company has been
involved in discussions with the members of the informal committee, and as a
result of these discussions, the Company and the informal committee have agreed
to the following restructuring proposal:
o Noteholders will exchange the Series D Notes for new notes with a face
amount equal to 70% of the principal amount of the existing Series D
Notes with the same interest rate;
o The new notes will have a second priority lien on substantially all of
the assets of Abraxas;
o Noteholders will receive equity equal to 72% of the equity of the
restructured company;
o Noteholders will receive a contingent value right that will allow them
to receive additional equity if the price of Abraxas common stock does
not reach certain levels over the 18 month period following the
consummation of the restructuring; and
o Noteholders will appoint four members of a new seven-member board of
directors
The closing of the restructuring is subject to the satisfaction of certain
customary conditions to closing including board approval and the exchange of at
least 95% of the principal amount of the Series D Notes in exchange for new
notes with terms described above.
The Company currently expects that the proposed restructuring will be completed
on or about December 15, 1999.
The Company will have four principal sources of liquidity going forward:
(i) cash on hand, (ii) cash flow from operations (iii) the Production Payment
and (iv) proceeds from the sale of non-core assets. While the availability of
capital resources cannot be predicted with certainty and is dependent upon a
number of factors including factors outside of management's control, management
believes that the net cash flow from operations plus cash on hand, cash
available under the Production Payment and the proceeds from the sale of certain
non-core properties will be adequate to fund operations and planned capital
expenditures.
The Company's ability to obtain additional financing will be substantially
limited under the terms of the Series D Notes , the new notes to be issued in
the restructuring and the Secured Notes. Substantially all of the Company's
crude oil and natural gas properties and natural gas processing facilities are
subject to a first lien or charge for the benefit of the holders of the Secured
Notes and , if the restructuring is consummated, a second lien or charge for the
benefit of the holders of the new notes. Thus, the Company will be required to
rely on its cash flow from operations to fund its operations and service its
debt. The Company may also choose to issue equity securities or sell additional
assets to fund its operations, although the Indentures governing the Company's
outstanding Secured Notes and Series D Notes substantially limit the Company's
use of the proceeds of any such asset sales. Due to the Company's diminished
cash flow from operations and the resulting depressed prices for its common
stock, there can be no assurance that the Company would be able to obtain equity
financing on terms satisfactory to the Company.
Long-Term Indebtedness
Series D Notes. On November 14, 1996, Abraxas and Canadian Abraxas
consummated the offering of $215.0 million of their 11.5% Senior Notes due 2004,
Series A, which were exchanged for the Series B Notes in February 1997. On
January 27, 1998, Abraxas and Canadian Abraxas completed the sale of $60.0
million of the Series C Notes. The Series B Notes and the Series C Notes were
subsequently exchanged for $275.0 million in principal amount of the Series D
Notes in June 1998.
Interest on the Series D Notes is payable semi-annually in arrears on May 1
and November 1 of each year at the rate of 11.5% per annum. The Series D Notes
are redeemable, in whole or in part, at the option of Abraxas and Canadian
Abraxas, on or after November 1, 2000, at the redemption prices set forth below,
plus accrued and unpaid interest to the date of redemption, if redeemed during
the 12-month period commencing on November 1 of the years set forth below:
19
<PAGE>
Year Percentage
2000...................................... 105.750%
2001...................................... 102.875%
2002 and thereafter....................... 100.000%
In addition, at any time on or prior to November 1, 1999, Abraxas and
Canadian Abraxas may, at their option, redeem up to 35% of the aggregate
principal amount of the Series D Notes originally issued with the net cash
proceeds of one or more equity offerings, at a redemption price equal to 111.5%
of the aggregate principal amount of the Series D Notes to be redeemed, plus
accrued and unpaid interest to the date of redemption; provided, however, that
after giving effect to any such redemption, at least 65% of the aggregate
principal amount of the Series D Notes remains outstanding.
The Series D Notes are joint and several obligations of Abraxas and
Canadian Abraxas, and rank pari passu in right of payment to all existing and
future unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Series D
Notes rank senior in right of payment to all future subordinated indebtedness of
Abraxas and Canadian Abraxas. The Series D Notes are, however, effectively
subordinated to the Secured Notes to the extent of the value of the collateral
securing the Secured Notes (the "Collateral"). The Series D Notes are
unconditionally guaranteed, on a senior basis, jointly and severally, by the New
Cache and Sandia. The guarantees are general unsecured obligations of New Cache
and Sandia and rank pari passu in right of payment to all unsubordinated
indebtedness of New Cache and Sandia and senior in right of payment to all
subordinated indebtedness of New Cache and Sandia. These guarantees are
effectively subordinated to the Secured Notes to the extent of the value of the
Collateral.
Upon a Change of Control (as defined in the Series D Indenture), each
holder of the Series D Notes will have the right to require Abraxas and Canadian
Abraxas to repurchase all or a portion of such holder's Series D Notes at a
redemption price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase. In addition, Abraxas and Canadian
Abraxas will be obligated to offer to repurchase the Series D Notes at 100% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase in the event of certain asset sales.
The Series D Indenture provides, among other things, that the Company may
not, and may not cause or permit certain of its subsidiaries, including Canadian
Abraxas, to, directly or indirectly, create or otherwise cause to permit to
exist or become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas, guarantee
any indebtedness of Abraxas or transfer any of its assets to Abraxas except for
such encumbrances or restrictions existing under or by reason of: (i) applicable
law; (ii) the Series D Indenture; (iii) the Credit Facility (as defined in the
Series D Indenture); (iv) customary non-assignment provisions of any contract or
any lease governing leasehold interest of such subsidiaries; (v) any instrument
governing indebtedness assumed by the Company in an acquisition, which
encumbrance or restriction is not applicable to such subsidiaries or the
properties or assets of such subsidiaries other than the entity or the
properties or assets of the entity so acquired; (vi) customary restrictions with
respect to subsidiaries of the Company pursuant to an agreement that has been
entered into for the sale or disposition of capital stock or assets of such
subsidiaries to be consummated in accordance with the terms of the Series D
Indenture solely in respect of the assets or capital stock to be sold or
disposed of; (vii) any instrument governing certain liens permitted by the
Indenture, to the extent and only to the extent such instrument restricts the
transfer or other disposition of assets subject to such lien; or (viii) an
agreement governing indebtedness incurred to refinance the indebtedness issued,
assumed or incurred pursuant to an agreement referred to in clause (ii), (iii)
or (v) above; provided, however, that the provisions relating to such
encumbrance or restriction contained in any such refinancing indebtedness are no
less favorable to the holders of the Series D Notes in any material respect as
determined by the Board of Directors of the Company in their reasonable and good
faith judgment that the provisions relating to such encumbrance or restriction
contained in the applicable agreement referred to in such clause (ii), (iii) or
(v).
Secured Notes: In March 1999 the Company consummated the sale of $63.5 million
of the Secured Notes due 2003. Interest on the Secured Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. The Secured Notes are redeemable, in whole or in part, at the option of
Abraxas on or after March 15, 2001, at the redemption prices set forth below,
plus accrued and unpaid interest to the date of redemption, if redeemed during
the 12-month period commencing on March 15 of the years set forth below:
Year Percentage
2001................................... 103.000%
2002 and thereafter.................... 100.000%
20
<PAGE>
At any time, or from time to time, prior to March 15, 2001, Abraxas may, at
its option, use all or a portion of the net cash proceeds of one or more equity
offerings to redeem up to 35% of the aggregate original principal amount of the
Notes at a redemption price equal to 112.875% of the aggregate principal amount
of the Notes to be redeemed, plus accrued and unpaid interest.
The Secured Notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
and the shares of Grey Wolf owned by Abraxas. The Secured Notes are
unconditionally guaranteed (the "Guarantees") on a senior basis, jointly and
severally, by Canadian Abraxas, New Cache and Sandia (collectively, the
"Guarantors"). The Guarantees are secured by substantially all of the crude oil
and natural gas properties of the Guarantors and the shares of Grey Wolf owned
by Canadian Abraxas.
Upon a Change of Control, each holder of the Secured Notes will have the
right to require Abraxas to repurchase such holder's Secured Notes at a
redemption price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. In addition, the Issuers will be
obligated to offer to repurchase the Secured Notes at 100% of the principal
amount thereof plus accrued and unpaid interest to the date of redemption in the
event of certain asset sales.
The Secured Notes Indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the Guarantors
(the "Restricted Subsidiaries") to, among other things, incur additional
indebtedness, pay dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with affiliates,
incur liens, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of the
assets of the Company.
The Secured Notes Indenture provides, among other things, that the Company
may not, and may not cause or permit the Restricted Subsidiaries, to, directly
or indirectly, create or otherwise cause to permit to exist or become effective
any encumbrance or restriction on the ability of such subsidiary to pay
dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except for such encumbrances or restrictions existing under or by
reason of: (i) applicable law; (ii) the Indentures; (iii) customary
non-assignment provisions of any contract or any lease governing leasehold
interest of such subsidiaries; (iv) any instrument governing indebtedness
assumed by the Company in an acquisition, which encumbrance or restriction is
not applicable to such Restricted Subsidiary or the properties or assets of such
subsidiary other than the entity or the properties or assets of the entity so
acquired; (v) agreements existing on the Issue Date (as defined in the Secured
Notes Indenture) to the extent and in the manner such agreements were in effect
on the Issue Date; (vi) customary restrictions with respect to subsidiaries of
the Company pursuant to an agreement that has been entered into for the sale or
disposition of capital stock or assets of such Restricted Subsidiary to be
consummated in accordance with the terms of the Secured Notes Indenture or any
Security Documents (as defined in the Secured Notes Indenture) solely in respect
of the assets or capital stock to be sold or disposed of; (vii) any instrument
governing certain liens permitted by the Secured Notes Indenture, to the extent
and only to the extent such instrument restricts the transfer or other
disposition of assets subject to such lien; or (viii) an agreement governing
indebtedness incurred to refinance the indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (ii), (iv) or (v) above;
provided, however, that the provisions relating to such encumbrance or
restriction contained in any such refinancing indebtedness are no less favorable
to the holders of the Secured Notes in any material respect as determined by the
Board of Directors of the Company in their reasonable and good faith judgment
that the provisions relating to such encumbrance or restriction contained in the
applicable agreement referred to in such clause (ii), (iv) or (v) and do not
extend to or cover any new or additional property or assets and, with respect to
newly created liens, (A) such liens are expressly junior to the liens securing
the Secured Notes, (B) the refinancing results in an improvement on a pro forma
basis in the Company's Consolidated EBITDA Coverage Ratio (as defined in the
Secured Notes Indenture) and (C) the instruments creating such liens expressly
subject the foreclosure rights of the holders of the refinanced indebtedness to
a stand-still of not less than 179 days.
Hedging Activities. The Company's results of operations are significantly
affected by fluctuations in commodity prices and seeks to reduce its exposure to
price volatility by hedging its production through swaps, options and other
commodity derivative instruments.
In November 1996, the Company assumed hedge agreements extending through
October 2001 with a counterparty involving various quantities and fixed prices.
These hedge agreements provided for the Company to make payments to the
counterparty to the extent the market prices, determined based on the price for
crude oil on the NYMEX and the Inside FERC, Tennessee Gas Pipeline Co. Texas
(Zone O) price for natural gas exceeded certain fixed prices and for the
21
<PAGE>
counterparty to make payments to the Company to the extent the market prices
were less than such fixed prices. The Company accounted for the related gains or
losses (a gain of $204,600 during the first quarter of 1999) in crude oil and
natural gas revenue in the period of the hedged production. The Company
terminated these hedge agreements in January 1999 and was paid $750,000 by the
counterparty for such termination. This amount is included in other income in
the accompanying financial statements.
In March 1998, the Company entered into a costless collar hedge agreement
with Enron Capital and Trade Resources Corp. for 2,000 Bbls of crude oil per day
with a floor price of $14.00 per Bbl and a ceiling price of $22.30 per Bbl for
crude oil on the NYMEX. The agreement was effective April 1, 1998 and extended
through March 31, 1999. Under the terms of the agreement the Company was paid
when the average monthly price for crude oil on the NYMEX is below the floor
price and will pay the counterparty when the average monthly price exceeds the
ceiling price. During the nine months ended September 30, 1999 the Company
realized a gain of $204,000 on this agreement, which is accounted for in crude
oil and natural gas revenue. The Company has also entered into a hedge agreement
with Barrett Resources Corporation ("Barrett") covering 2,000 Bbls per day of
crude oil calling for the Company to realize an average NYMEX price of $14.23
per Bbl over the period April 1, 1999 to October 31, 1999. In May 1999, the
Company and Barrett amended this hedge agreement resulting in the Company being
paid an average NYMEX price of $17.00 per Bbl from June through October 1999. A
new agreement was entered into in October of 1999 for the period November 1999
through October 2000. This agreement is for 1,000 Bbls per day with the Company
being paid $20.30 and 1,000 barrels per day with a floor price of $18.00 per
barrel and a ceiling of $22.00 per Bbl. Additionally, Barrett has a call on
either 1,000 Bbls of crude oil or 20,000 MMBtu of natural gas per day at
Barrett's option at fixed prices through October 31, 2002. The Company realized
a loss of $0.9 million on this agreement which is accounted for in crude oil and
natural gas revenue during the nine months ended September 30, 1999.
As of March 1, 1999, the Company had 37.0 MMBtupd hedged at an average
NYMEX price of approximately $1.93 per MMBtu from April 1, 1999 to October 31,
1999 and 2.4 MMBtuUpd at an average NYMEX price of approximately $1.10 per MMBtu
from November 1, 1998 to October 31, 2000. Of the 37.0 MMBtupd hedged at $1.93
per MMBtu, 20.0 MMBtupd hedged with Barrett Resources Corporation, 11.0 MMBtupd
is hedged with Engage Energy Capital Canada LP, and 6.0 MMBtupd is hedged with
Amoco. New agreements were entered into for the term November 1, 1999 through
October 31, 2000 with Barrett Resources. The new agreement is for 20.0 MMBtupd
with a ceiling of $2.39 and a floor of $2.07 based on an AECO index. Barrett
Resources has an option to extend the agreement through October 2002 at fixed
prices. The 2.4 MMBtupd hedged at $1.10 per MMBtu is hedged with Barrett and was
assumed by the Company in connection with the acquisition of New Cache. In
connection with the 20.0 MMBtuTU Barrett hedge, the Company realized a loss of
$1.8 million for the nine months ended September 30, 1999, which is accounted
for in crude oil and natural gas revenue.
Net Operating Loss Carryforwards. At December 31, 1998, the Company had,
subject to the limitations discussed below, $59.2 million of net operating loss
carryforwards for U.S. tax purposes, of which approximately $55.0 million are
available for utilization without limitation. These loss carryforwards will
expire from 1999 through 2019 if not utilized. At December 31, 1998, the Company
had approximately $11.9 million of net operating loss carryforwards for Canadian
tax purposes which expire in varying amounts in 2002-2005. As a result of the
acquisition of certain partnership interests and crude oil and natural gas
properties in 1990 and 1991, an ownership change under Section 382, occurred in
December 1991. Accordingly, it is expected that the use of $4.9 million in net
operating loss carryforwards generated prior to December 31, 1991 will be
limited to approximately $235,000 per year. As a result of the issuance of
additional shares of common stock for acquisitions and sales of stock, an
additional ownership change under Section 382 occurred in October 1993.
Accordingly, it is expected that the use of all U.S. net operating loss
carryforwards generated through October 1993, or $8.9 million, will be limited
to approximately $1 million per year subject to the lower limitations described
above. Of the $8.9 million net operating loss carryforwards, it is anticipated
that the maximum net operating loss that may be utilized before it expires is
$6.1 million. Future changes in ownership may further limit the use of the
Company's carryforwards. In addition to the Section 382 limitations,
uncertainties exist as to the future utilization of the operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, the Company has established a valuation allowance of $5.9 million and
$32.8 million for deferred tax assets at December 31, 1997 and 1998,
respectively.
Based upon the current level of operations, the Company believes that cash
on hand, cash flow from operations, proceeds from the Production Payment,
reduced interest expense as a result of the proposed restructuring and proceeds
from the sale of non-core assets will be adequate to meet its anticipated
requirements for working capital, capital expenditures and scheduled interest
payments through 1999. Depressed prices for natural gas, crude oil or natural
gas liquids will have a material adverse effect on the Company's cash flow from
operations and anticipated levels of working capital, and could force the
Company to revise its planned capital expenditures.
22
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Commodity Price Risk
The Company's exposure to market risks rest primarily with the volatile
nature of crude oil, natural gas and natural gas liquids prices. The Company
manages crude oil and natural gas prices through the periodic use of commodity
price hedging agreements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources". Assuming
the production levels attained by the Company during the nine months ended
September 30, 1999, a 5% decline in crude oil, natural gas and natural gas
liquids prices would have reduced the Company's operating revenue, cash flow and
net income (loss) by approximately $2.2 million for the nine months ended
September 30, 1999. . Interest rate risk
At September 30, 1999, substantially all of the Company's long-term debt is
at fixed interest rates and not subject to fluctuations in market rates.
Foreign currency
The Company's Canadian operations are measured in the local currency of
Canada. As a result , the Company's financial results could be affected by
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets. Canadian operations reported a pre tax loss of $6.4 million for
the nine months ended September 30, 1999. It is estimated that a 5% change in
the value of the U.S. dollar to the Canadian dollar would have changed the
Company's net income by approximately $0.13 million. The Company does not
maintain any derivative instruments to mitigate the exposure to translation
risk. However, this does not preclude the adoption of specific hedging
strategies in the future.
Disclosure Regarding Forward-Looking Information
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this report
regarding the Company's financial position, business strategy, budgets and plans
and objectives of management for future operations are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed under "Risk Factors" in the Company's
Annual Report on Form 10-K which is incorporated by reference herein and this
report. All subsequent written and oral forward-looking statements attributable
to the Company, or persons acting on its behalf, are expressly qualified in
their entirety by the Cautionary Statements Cautionary
23
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
Exhibit 10.1 - Purchase agreement for Dollar Denominated
Production Payment
Exhibit 10.2 - Conveyance of Dollar Denominated Production
Payment
(b) Reports on Form 8-K
None
24
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
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.
ABRAXAS PETROLEUM CORPORATION
(Registrant)
Date: November 15, 1999 By:/s/_______________________
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: November 15, 1999 By:/s/________________________
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
25
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 14421
<SECURITIES> 0
<RECEIVABLES> 17181
<ALLOWANCES> (36)
<INVENTORY> 441
<CURRENT-ASSETS> 32482
<PP&E> 495082
<DEPRECIATION> (191398)
<TOTAL-ASSETS> 347325
<CURRENT-LIABILITIES> 34333
<BONDS> 346234
0
0
<COMMON> 65
<OTHER-SE> (75275)
<TOTAL-LIABILITY-AND-EQUITY> 347325
<SALES> 49704
<TOTAL-REVENUES> 49704
<CGS> 0
<TOTAL-COSTS> 44426
<OTHER-EXPENSES> 580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28422
<INCOME-PRETAX> (23725)
<INCOME-TAX> (3942)
<INCOME-CONTINUING> (19954)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13035)
<EPS-BASIC> (3.15)
<EPS-DILUTED> (3.15)
</TABLE>
EXHIBIT 10.1
PURCHASE AGREEMENT FOR DOLLAR
DENOMINATED PRODUCTION PAYMENT
between
ABRAXAS PETROLEUM CORPORATION,
as Seller,
and
SOUTHERN PRODUCER SERVICES, L.P.,
as Purchaser,
Dated as of October 6, 1999
<PAGE>
TABLE OF CONTENTS
Page
Section 1. Defined Terms.........................................1
Section 2. Agreement of Sale and Purchase.......................10
Section 3. Representations and Warranties of the Seller.........15
Section 4. Representations and Warranties of the Purchaser......19
Section 5. Covenants of the Seller..............................20
Section 6. Time and Places of Closings..........................31
Section 7. Transactions on and After the Initial Closing Date...31
Section 8. Inspections..........................................32
Section 9. Obligations Absolute.................................32
Section 10. Conditions to Obligations of Parties.................33
Section 11. Conditions to Obligations of the Seller..............33
Section 12. Conditions to Initial Closing........................34
Section 13. Conditions to Subsequent Closings....................37
Section 14. Adjustment to Dedication Percentage..................40
Section 15. Recording............................................41
Section 16. Amendments to Financings, etc........................41
Section 17. Notices..............................................41
Section 18. Expenses.............................................42
Section 19. Survival.............................................42
Section 20. Successors and Assigns...............................42
Section 21. Interest on Unpaid Amounts...........................42
Section 22. Maximum Interest.....................................43
Section 23. Waivers and Amendments...............................44
Section 24. Section Captions.....................................44
Section 25. Indemnity............................................44
Section 26. Confidentiality......................................45
Section 27. Servicer.............................................46
Section 28. Choice of Law........................................46
Section 29. Forum Selection and Consent to Jurisdiction..........46
Section 30. Waiver of Jury Trial.................................47
Section 31. Waiver of Consumer Rights............................47
Section 32. No Oral Agreements...................................48
i
<PAGE>
SCHEDULES AND EXHIBITS TO PURCHASE AGREEMENT
Schedule I - Disclosure Schedule
Exhibit A - Description of Subject Interests
Exhibit B - Form of Conveyance of Dollar-Denominated Production Payment
Exhibit C - Form of Indenture Release
Exhibit D - Insurance Requirements
Exhibit E - Form of Monthly Hydrocarbon Report (Purchaser/Seller)
Exhibit F - Form of Purchase Agreement Supplement
Exhibit G - Form of Conveyance Supplement
Exhibit H - Form of Gas Sales Agreement
Exhibit I - Form of Proposed Program Well Reconveyance
Exhibit J - List of Subsidiaries
ii
<PAGE>
PURCHASE AGREEMENT FOR DOLLAR
DENOMINATED PRODUCTION PAYMENT
THIS PURCHASE AGREEMENT FOR DOLLAR DENOMINATED PRODUCTION PAYMENT, dated as
of October 6, 1999 (as the same may be amended or modified from time to time,
this "Agreement"), is entered into between ABRAXAS PETROLEUM CORPORATION, a
Nevada corporation (the "Seller" or the "Working Interest Owner"), and SOUTHERN
PRODUCER SERVICES, L.P., a Delaware limited partnership (the "Purchaser" or
"Production Payment Owner").
W I T N E S S E T H:
WHEREAS, the Seller owns certain oil and gas leasehold and other interests
located in the States of Texas (which leasehold and other interests are more
specifically described in Exhibit A hereto); and
WHEREAS, pursuant to the Trust Indentures described below, Seller is
permitted, under certain circumstances, to sell and convey various production
payments or other term overriding royalty interests in order to obtain funds to
reimburse it for certain costs it has paid in connection with the drilling and
completing of oil and gas wells; and
WHEREAS, in order to obtain such funds, the Seller intends to sell and
convey to the Purchaser upon the terms and conditions set forth below a
production payment (the "Production Payment") of certain volumes of oil and gas
produced from the Subject Interests and certain rights to receive proceeds of
the sale of such production if, as and when produced, and the Purchaser intends
to purchase the Production Payment upon such terms and conditions, such
Production Payment to be substantially in the form of the Conveyance of Dollar
Denominated Production Payment annexed hereto as Exhibit B (as hereinafter
defined); and
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements herein contained, it is agreed as follows:
Section 1. Defined Terms.
(a) As used herein, the following terms shall have the meanings set forth
below (all terms defined in this Section 1 or in other provisions of this
Agreement in the singular shall have the same meanings when used in the plural
and vice versa).
"Acceptable Proved Reserves" shall mean Proved Reserves located in the
Subject Interests that (i) have been evaluated by the Independent Reserve
Engineer and are included in the most recent Independent Engineering Report,
(ii) are determined by Purchaser, in its sole and absolute discretion, to have
satisfactory title, including, without limitation, title opinions or other
assurances of title satisfactory to Purchaser, (iii) are free of any Liens
except for any Permitted Liens, and (iv) are covered by at least a Phase I
environmental report which has been delivered
1
<PAGE>
to Purchaser and the results of such environmental reports are satisfactory to
the Purchaser, in its sole and absolute discretion.
"Additional Subject Interests" has the meaning given to such term in each
Conveyance Supplement.
"Agreement" is defined in the preamble.
"Asset" is defined in Section 3.
"Capitalized Lease Liabilities" shall mean the discounted present value of
the rental obligations of the Working Interest Owner under a lease of (or other
agreement conveying the right to use) any property (whether real, personal or
mixed) that is required to be classified and accounted for as a capital lease
obligation at such date, determined in accordance with GAAP.
"CERCLA" shall mean the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.
"CERCLIS" is defined in Section 3(l).
"Closing" shall mean the Initial Closing or any Subsequent Closing.
"Closing Date" shall mean the Initial Closing Date or any Subsequent
Closing Date.
"Code" shall mean the Internal Revenue Code of 1986, as amended, reformed
or otherwise modified from time to time.
"Controlled Group" shall mean all members of a controlled group of
corporations and all members of a controlled group of trades or businesses
(whether or not incorporated) under common control which, together with Seller,
are treated as a single employer under Section 414(b) or 414(c) of the Code or
Section 4001 of ERISA.
"Conveyance" shall mean the Conveyance of Dollar Denominated Production
Payment made by Seller to Purchaser, substantially in the form of Exhibit B to
this Agreement, as from time to time supplemented by Conveyance Supplements or
otherwise amended or supplemented.
"Conveyance Supplement" shall mean a Supplement to Conveyance of Dollar
Denominated Production Payment executed by Seller and Purchaser, substantially
in the form of Exhibit G to this Agreement, as from time to time supplemented by
other Conveyance Supplements or otherwise amended or supplemented.
"Currency Agreement" shall mean any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect
against fluctuations in currency values.
2
<PAGE>
"Defensible Title" shall mean title which is good and which is free from
reasonable doubt such that a prudent person familiar with oil and gas title
matters in the Edwards Trend, with knowledge of all salient facts and
circumstances and their legal significance, would be willing to accept such
title.
"Disqualified Capital Stock" shall mean that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is mandatorily redeemable at the sole option of the
holder thereof, in whole or in part, in either case, on or prior to the final
maturity of the "notes" issued under the Trust Indentures. As used in this
definition, "Capital Stock" shall mean: (a) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of "common stock" or "preferred stock" of such Person and including
warrants, options or rights to acquire any of the foregoing and instruments
convertible into any of the foregoing, and (b) with respect to any Person that
is not a corporation, any and all partnership or other equity interests of such
Person.
"Drilling Costs" shall mean, with respect to any Proposed Program Well, the
documented and verifiable costs to Seller of drilling and completing such
Program Well, as mutually determined by Purchaser and Seller in their reasonable
discretion.
"Edwards Trend" shall mean all interests in oil, gas and other Hydrocarbons
within each of the following Counties located in the State of Texas: Austin,
Bee, Colorado, DeWitt, Karnes, La Salle, Lavaca, Live Oak, McMullen and Webb.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA also refer to any successor sections.
"Evaluation Date" shall mean each January 1, beginning with January 1,
2000, and each July 1, beginning with July 1, 2000.
"Existing Burdens" shall mean, for any period, the aggregate amounts
payable in respect of mineral owner royalty interests and overriding royalty
interests disclosed on Schedule I hereto as a result of production of
Hydrocarbons from the Subject Interests.
"GAAP" shall mean generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board as of any date of determination; and
the requisite that such principles be applied on a consistent basis shall mean
that the accounting principles observed in a current period are comparable in
all material respects to those applied in any preceding period.
3
<PAGE>
"Gas Sales Agreement" shall mean the Natural Gas Sales Agreement between
Seller and Purchaser executed and delivered pursuant to Section 5(t)(ii), in
substantially the form of Exhibit H hereto, as amended, supplemented, restated
or otherwise modified from time to time.
"Hazardous Material" shall mean (i) any "hazardous substance", as defined
by CERCLA; (ii) any "hazardous waste", as defined by the Resource Conservation
and Recovery Act, as amended; (iii) any petroleum product, crude oil or any
fraction thereof; or (iv) any pollutant or contaminant or hazardous, extremely
hazardous, dangerous or toxic chemical, material or substance within the meaning
of any applicable federal, state or local law, regulation, ordinance or
requirement (including consent decrees and administrative orders) relating to or
imposing liability or standards of conduct concerning any hazardous, toxic or
dangerous waste, substance or material, all as amended or hereafter amended.
"Hedge Agreement" is defined in Section 5(w).
"Hydrocarbons" shall mean collectively oil, condensate and other liquid
hydrocarbons, including natural gas or liquid products extracted from gas by
means other than conventional field separation, and natural gas, casinghead gas,
and other gaseous hydrocarbons.
"Impermissible Qualification" shall mean, relative to the opinion or
certification of any independent public accountant as to any financial statement
of the Working Interest Owner, any qualification or exception to such opinion or
certification: (a) which is of a "going concern" or similar nature; (b) which
relates to possible errors generated by financial reporting and related systems
due to the Year 2000 Problem; (c) which relates to the limited scope of
examination of matters relevant to such financial statement; or (d) which
relates to the treatment or classification of any item in such financial
statement and which, as a condition to its removal, would require an adjustment
to such item the effect of which would be to cause the Working Interest Owner to
be in default of any of its financial covenants under any credit facility,
indenture or similar agreement.
"Indebtedness" shall mean, with respect to any Person, without duplication
(a) all obligations of such Person for borrowed money and all obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments;
(b) all obligations, contingent or otherwise, relative to the face amount of all
letters of credit, whether or not drawn, and banker's acceptances issued for the
account of such Person; (c) all obligations of such Person as lessee under
leases which have been or should be, in accordance with GAAP, recorded as
Capitalized Lease Liabilities; (d) whether or not so included as liabilities in
accordance with GAAP, all obligations of such Person to pay the deferred
purchase price of property or services, and indebtedness (excluding prepaid
interest thereon) secured by a Lien on property owned or being purchased by such
Person (including indebtedness arising under conditional sales or other title
retention agreements), whether or not such indebtedness shall have been assumed
by such Person or is limited in recourse; (e) all Contingent Liabilities of such
Person in respect of any of the foregoing; (f) all obligations under Currency
Agreements and Interest Swap Obligations; and (g) all Disqualified Capital Stock
issued by such Person with the amount of Indebtedness
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represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed redemption
price or repurchase price.
"Indemnified Parties" is defined in Section 25.
"Indemnified Liabilities" is defined in Section 25.
"Indenture Release" shall mean the Release executed by Senior Secured
Trustee, substantially in the form of Exhibit C to this Agreement.
"Independent Reserve Engineer" shall mean DeGolyer and MacNaughton or such
other independent petroleum engineer of recognized standing selected by Seller
and acceptable to Purchaser, in its sole and absolute discretion.
"Independent Reserve Report" is defined in Section 5(g)(vii).
"Initial Closing" is defined in Section 6.
"Initial Closing Date" is defined in Section 6.
"Initial Purchase Price/Installment Payment" shall mean the lesser of (a)
$4,000,000 or (b) such amount for the Initial Wells as proposed by the Seller
and accepted by the Purchaser, in its sole discretion, for inclusion in the
Production Payment at the Initial Closing.
"Initial Wells" shall mean each of the wells described in Exhibit A hereto.
"Interest Swap Obligation" shall mean the obligations of any Person
pursuant to any arrangement with any other Person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collar and similar agreements.
"Internal Reserve Report" is defined in Section 5(f)(viii).
"ISDA Master Agreement" shall mean the "ISDA Master Agreement" executed and
delivered pursuant to Section 5(v), as amended, supplemented, restated or
otherwise modified from time to time.
"Kuester Well" shall mean any and all wells, including , without
limitation, the Kuester #1H and Kuester #2H wells, included in the Kuester Gas
Unit which was formed pursuant to that certain Amendment of Designation of
Kuester Gas Unit, effective April 1, 1998, recorded in
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Volume 35, Page 835 of the Official Public Records of DeWitt County, Texas, and
any successor wells or units thereto.
"Material Adverse Effect" shall mean a material adverse effect (i) on the
business, condition (financial or otherwise), operations, prospects or
properties (including the Subject Interests) of the Seller and its Subsidiaries,
taken as a whole, (ii) on the ability of the Seller to perform its material
obligations under any Production Payment Document to which it is a party, or
(iii) on the Subject Interests, in whole or in part, or the Production Payment.
"Oil Sales Agreement" shall mean an Oil Sales Agreement between Seller and
Purchaser executed and delivered pursuant to Section 5(t)(ii), in form and
substance mutually acceptable to Seller and Purchaser, as amended, supplemented,
restated or otherwise modified from time to time.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Pension Plan" shall mean a "pension plan", as such term is defined in
section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a multi
employer plan as defined in section 4001(a)(3) of ERISA), and to which Seller or
any corporation, trade or business that is, along with Seller, a member of a
Controlled Group, may have liability, including any liability by reason of
having been a substantial employer within the meaning of section 4063 of ERISA
at any time during the preceding five years, or by reason of being deemed to be
a contributing sponsor under section 4069 of ERISA.
"Permitted Liens" shall mean (1) any lien relating to taxes which are not
yet due and payable; (2) defects or irregularities in title, and liens, charges
or encumbrances, including, without limitation, liens under operating
agreements, pooling orders and unitization agreements and mechanics' and
materialmen's liens with respect to obligations incurred in the ordinary course
of business which are being contested in good faith, which are not such (i) as
to interfere materially with the development, operation or value of the Subject
Interests and (ii) as to affect materially title thereto; (3) the liens set
forth or referred to in Exhibit A to the Conveyance; (4) the liens, if any,
granted by Production Payment Owner in favor of any credit supplier; (5) any
lien or encumbrance created as a consequence of the execution and delivery of
the Conveyance; (6) any lien created by the Senior Secured Trust Indenture; (7)
any lien created by the Series C and Series D Trust Indenture; (8) any inchoate
mechanics or materialmens liens; and (9) any liens consented to in writing by
Production Payment Owner.
"Possible Non-Compliance Event" shall mean any event, act or condition
which with notice or lapse of time, or both, would constitute a Non-Compliance
Event.
"Preferential Right" is defined in Section 3(h).
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"Production Payment NPV" shall mean, with respect to the Subject Interests
for any period, the sum of (i) future net cash flow, discounted at 10% per
annum, attributable to total Acceptable Proved Reserves of the Subject Interests
for such period minus (ii) the estimated amount of Direct Taxes payable for such
period minus (iii) estimated amount of Existing Burdens payable for such period
minus (iv) estimated amount of Production Expenses payable for such period,
which in each instance reflect actual historical results. In connection with
such calculation, pricing assumptions are net at the wellhead and are based on,
(A) for volumes of oil and gas swapped or hedged with investment grade counter
parties, the hedged price, and (B) for unhedged volumes, the forward New York
Mercantile Exchange contract prices for oil and gas, less the basis adjustments
for geographical and quality differentials. If a dispute arises concerning the
inclusion of "lease operating expenses" relating to workovers or other remedial
capital expenses, the Independent Reserve Engineer will make a good faith
determination if such are a predictable, prudent and ongoing expense(s) of
Seller, viewed as a whole (if the Independent Reserve Engineer makes such good
faith determination, then those expenses previously projected as "capital
expenditures" will be included in lease operating expenses).
"Production Payment Owner" is defined in the preamble.
"Production Payment Period" shall mean the period from and after the
Initial Closing until the Termination Time.
"Production Unit" shall mean a tract of land containing a Program Well
which is equal in size to the greater of (i) the acreage sufficient to
reasonably protect such Program Well from drainage (drainage area), in
Purchaser's reasonable discretion or (ii) at least 80 acres, specified in either
instance as to both area and depths and which meets the following conditions:
(a) Seller owns Defensible Title to an undivided fee or leasehold interest in
and to the gaseous hydrocarbons which may be produced from such tract,
including, without limitation, the right to produce Hydrocarbons and market
production of Hydrocarbons from any Program Well located thereon; and (b) such
tract satisfies all drilling and spacing regulations of any governmental
authority having jurisdiction, including, without limitation, the Railroad
Commission of Texas, and is of sufficient size to afford a well thereon the
maximum applicable allowable size.
"Program Period" shall mean the period beginning on the Initial Closing
Date and including the earlier to occur of (a) October 6, 2004, or (b) the date
on which the Purchaser has paid $50,000,000 in aggregate Purchase
Price/Installment Payments to Seller.
"Program Well" shall mean (a) each of the Initial Wells, (b) each well not
already subject to the Conveyance that is drilled within the Program Period and
is either (i) within one mile of, (ii) penetrates the same reservoir fault block
of, (iii) penetrates a zone produced, or intended to be produced by, any well
that has, at such time, been made subject to the Conveyance, or (iv) within the
Edwards Trend, and (c) any Proposed Program Well accepted by Purchaser, in its
sole and absolute discretion, during the Program Period. Notwithstanding the
foregoing, in the event Purchaser does not accept a Proposed Program Well, such
Proposed Program Well shall not become a Program Well.
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"Proposed Activity" is defined in Section 2(f).
"Proposed Program Well" shall mean any well (other than a Program Well)
which Seller offers to Purchaser to become a Program Well by delivering
information with respect to such well pursuant to Section 2(b), including,
without limitation, any additional well drilled after the date hereof within the
Subject Interests.
"Proposed Program Well Reconveyance" shall mean the Partial Release and
Reconveyance of Dollar Denominated Production Payment executed by the Purchaser
pursuant to Section 2(c)(ii) of the Purchase Agreement, substantially in the
form of Exhibit I to this Agreement.
"Proved Developed Non-Producing Reserves" shall mean (1) those Proved
Reserves expected to be produced from existing completion intervals in existing
wells for which capacity currently is available, but due to pending pipeline
connections or other mechanical or contractual requirements hydrocarbon sales
have not yet commenced, and (2) other non-producing Proved Reserves which exist
behind the casing of existing wells, or at minor depths below the present bottom
of such wells, which are expected to be produced through these wells in the
predictable future, where the cost of making such Hydrocarbons available for
production should be relatively small compared to the cost of a new well and for
which capacity currently is available.
"Proved Reserves" shall mean those recoverable hydrocarbons which have been
proved to a high degree of certainty by reason of existing production, adequate
testing, or in certain cases by adequate core data and other engineering and
geologic information on zones which are present in existing wells or in known
reservoirs which are recoverable under existing economic and operating
conditions and for which capital currently is available for such recovery.
Reserves that can be produced economically through the application of
established improved recovery techniques are included in the "Proved Reserve"
classification when (a) successful testing by a pilot project or the operation
of any installed program in that reservoir or one in the immediate area with
similar rock and fluid properties provides support for the engineering analysis
on which the project or program was based, and (b) it is reasonably certain the
project will proceed. Reserves to be recovered by improved recovery techniques
that have yet to be established through repeated economically successful
applications are included in the "Proved Reserve" category only after successful
testing by a pilot project or after the operation of an installed program in the
reservoir provides support for the engineering analysis on which the project or
program was based. Improved recovery includes all methods for supplementing
natural reservoir forces and energy, or otherwise increasing ultimate recovery
from a reservoir, including (1) pressure maintenance, (2) cycling, (3) secondary
recovery in its original sense and (4) the methods of thermal, chemical
flooding, and the use of miscible and immiscible displacement fluids.
"Proved Undeveloped Reserves" shall mean those Proved Reserves which are
expected to be recovered from (1) new wells on undrilled acreage, (2) the
deepening of existing wells where a relatively major expenditure is required for
completion, or (3) an existing well where a relatively large expenditure is
required to recomplete an existing completion interval or install production
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or transportation facilities for a primary or improved recovery project.
Proved Undeveloped Reserves on undrilled acreage are limited to those drilling
units offsetting productive units that are reasonably certain of production when
drilled.
"Purchase Agreement Supplement" shall mean a Supplement to Purchase
Agreement executed by Seller and Purchaser, substantially in the form of Exhibit
F to this Agreement.
"Purchase Price/Installment Payment" shall mean a payment to be made by
Purchaser to Seller pursuant to Section 2(a) or 2(b) hereof in consideration of
the Conveyance or a Conveyance Supplement.
"Purchaser" is defined in the preamble.
"Release" shall mean a "release", as such term is defined in CERCLA and any
other spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, dumping or disposing of a Hazardous Material into
the environment.
"Resource Conservation and Recovery Act" shall mean the Resource
Conservation and Recovery Act, 42 U.S.C. Section 690, et seq., as in effect from
time to time.
"Seller" is defined in the preamble.
"Senior Secured Trust Indenture" shall mean that certain Indenture dated as
of March 26, 1999, made in connection with the issuance of 12 7/8% Senior
Secured Notes due March 15, 2003 by Seller and the Senior Secured Trustee, as
supplemented or amended from time to time, together with any other indenture
governing such Senior Secured Notes or any agreements extending the maturity of,
refinancing, replacing or otherwise restructuring all or any portion of the
Indebtedness under the Senior Secured Notes.
"Senior Secured Trustee" shall mean either Norwest Bank Minnesota, National
Association or such other Person serving as Trustee under the Senior Secured
Trust Indenture.
"Series C and Series D Trust Indenture" shall mean that certain Indenture
dated as of January 27, 1998, made in connection with the issuance of 11 1/2%
Series C and Series D Senior Notes due November 1, 2004 by Seller and the Series
C and Series D Trustee, as supplemented or amended from time to time, together
with any other indenture governing such Series C and Series D Notes or any
agreements extending the maturity of, refinancing, replacing or otherwise
restructuring all or any portion of the Indebtedness under the Series C and
Series D Notes.
"Series C and Series D Trustee" shall mean either IBJ Whitehall Bank &
Trust Company, successor-in-interest to IBJ Schroder Bank & Trust Company, or
such other Person serving as Trustee under the Series C and Series D Trust
Indenture.
"Servicer" is defined in Section 26.
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"Specified Rate" is defined in Section 22.
"Steinmann Well" shall mean any and all wells, including , without
limitation, the Steinmann #1H well, included in the Steinmann Gas Unit which was
formed pursuant to that certain Designation of Gas Unit, effective November 1,
1998, recorded in Volume 47, Page 698 of the Official Public Records of DeWitt
County, Texas, and any successor wells or units thereto.
"Subject Interests" shall have the meaning set forth in the Conveyance.
"Subsequent Closing" is defined in Section 6.
"Subsequent Closing Date" is defined in Section 6.
"Subsidiary" shall mean, with respect to any Person, (a) any corporation of
which more than 50% of the outstanding capital stock having ordinary voting
power to elect a majority of the board of directors of such corporation
(irrespective of whether at the time capital stock of any other class or classes
of such corporation shall or might have voting power upon the occurrence of any
contingency) is at the time directly or indirectly owned by such Person, by such
Person and one or more other Subsidiaries of such Person, or by one or more
other Subsidiaries of such Person; (b) any partnership of which such Person,
such Person and one or more other Subsidiaries of such Person, or one or more
other Subsidiaries of such Person is a general partner and is consolidated with
such Person under GAAP, (c) any limited liability company in which such Person,
such Person and one or more other Subsidiaries of such Person, or one or more
other Subsidiaries of such Person is a member or manager with ownership interest
in excess of 50% of all outstanding ownership interests, or (d) any other entity
in which such Person, such Person and one or more other Subsidiaries of such
Person, or one or more other Subsidiaries of such Person has an ownership
interest in excess of 50% of all outstanding ownership interests.
"Trust Indentures" shall mean the Senior Secured Trust Indenture and the
Series C and Series D Trust Indenture.
"Welfare Plan" shall mean a "welfare plan", as such term is defined in
section 3(1) of ERISA.
"Working Interest Owner" is defined in the preamble.
"Year 2000 Problem" shall mean the inability of computers, as well as
embedded microchips in non-computing devices, to perform properly date-sensitive
functions with respect to certain dates prior to and after December 31, 1999.
(b) For purposes of this Agreement, unless the context shall otherwise
require, all capitalized terms which are undefined in this Agreement shall be
used herein with the same meaning as assigned to such term in Annex I to the
Conveyance.
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Section 2. Agreement of Sale and Purchase. Subject to the terms and
conditions of this Agreement, the Seller agrees to sell and the Purchaser agrees
to buy the first component of the Production Payment for the Initial Purchase
Price/Installation Payment as the purchase price therefor.
(a) Initial Closing. On the Initial Closing Date, Seller shall deliver the
Conveyance to Purchaser, making the Subject Interests described therein,
including, without limitation, the Initial Wells, subject to the Production
Payment, and shall satisfy all of the conditions set out in Sections 10 and 12.
Thereupon Purchaser shall pay the Initial Price/Installment Payment to Seller.
(b) Subsequent Closings -- Delivery of Information. Throughout the Program
Period (but no more frequently than once per 30-day period), Seller shall
present to Purchaser all logs which it has made or received with respect to any
Program Well that has not previously been offered to Purchaser, including,
without limitation, the Kuester Well and the Steinmann Well, together with
copies of all relevant documentation and a written description of:
(i) The interval or intervals which Seller intends to complete,
together with (1) production information about offsetting wells, and (2)
any relevant drilling and completion records, electric logs, mud logs,
production data, geological and geophysical maps (or access thereto), along
with production data on offsetting wells,
(ii) The Production Unit on which such Program Well is located, and
whether or not such Production Unit contains acreage sufficient (1) to
afford such well its maximum allowable production (if any), as determined
in accordance with the rules and regulations of the governmental authority
having jurisdiction over such Program Well, and (2) to reasonably protect
such Program Well from drainage,
(iii) The pipeline system or systems by means of which the Subject
Hydrocarbons from such Program Well will be transported, the processing
facility or facilities at which the Subject Hydrocarbons from such Program
Well will be processed, the present total capacity of such pipeline(s) and
processing facilities, and the expectations of Seller as to how much of
such transportation capacity and processing capacity will be contractually
committed to Seller, Purchaser or to other Persons who may have priority
rights with respect to such transportation capacity or processing capacity,
(iv) A proposed Delivery Point for such well and the gathering system
to which such Program Well will be connected, the time needed to make such
connection, and whether or not such gathering system has sufficient
capacity and pressure to permit the continuing delivery of all Hydrocarbons
reasonably expected to be produced from such Program Well,
(v) Appropriate documentation and information relating to the
exemption of any of the Production Payment Hydrocarbons from severance tax
or other production-related taxes, which is in form and substance
acceptable to Purchaser, in its sole and absolute discretion,
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(vi) Receipt of an Internal Reserve Report evaluating the reserves of
the Program Well prepared within thirty (30) days of the date such
information is submitted to Purchaser, which report should be in form and
substance, and based on assumptions, acceptable to Purchaser in its sole
and absolute discretion,
(vii) Existing marketing arrangements, if any, that effect, or could
effect, the volumes and prices of Hydrocarbon production from the Program
Well,
(viii)Documentation relating to production, spacing rules, title and
leasehold ownership in connection with such Program Well,
(ix) Documentation relating to the Drilling Costs of such Program
Well, and
(x) Such other matters, including estimated direct operating expenses,
gathering fees, environmental information, including, but not limited to, a
Phase 1 environmental report, as Purchaser shall from time to time request
be disclosed in connection with Program Wells and Production Units.
(c) Subsequent Closings -- Additions or Reconveyance of Proposed Program
Wells.
(i) If Purchaser, in its sole and absolute discretion, agrees (X) to
add a Proposed Program Well as a Program Well under the Production Payment
and, if not already applicable, make such Proposed Program Well and related
Production Unit subject to the Conveyance, (Y) to accept Seller's proposed
Delivery Point or designate an alternative Delivery Point which is mutually
agreed to by Seller, and (Z) to pay the Purchase Price/Installment Payment
relating to such Proposed Program Well and the related Production Unit as
an installment of purchase price for the Production Payment, then:
(1) Seller and Purchaser shall in connection therewith execute
and deliver a Purchase Agreement Supplement, which shall specify (A)
the amount of the Purchase Price/Installment Payment for such Proposed
Program Well which amount shall be equal to the greater of (X) the
Drilling Costs associated with the Proposed Program Well on such
Production Unit and (Y) such other amount as Seller and Purchaser may
agree upon, (B) the portion of such Purchase Price/Installment Payment
which Seller then desires to receive, and (c) any exceptions to
representations and warranties, or additional representations,
warranties, covenants or other matters, as Seller and Purchaser may
agree upon;
(2) Purchaser shall prepare a Conveyance Supplement which shall
contain a legal description for such Production Unit and the Proposed
Program Well therein contained, a Delivery Point for the field in
which such Production Unit is located (if the same has not already
been designated for such field), and set out Seller's net revenue
interest and working interest therein and the amount (equal to the
portions of any Purchase Price/Installment Payments which Seller will
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concurrently receive) by which the Primary Sum is to be increased by
the addition of such Production Unit;
(3) If applicable, the Purchaser shall prepare a supplement to
the Gas Sales Agreement and the Oil Sales Agreement, if production
from new fields is to be sold thereunder, which shall contain a
delivery point and a sales price for production from such field; and
(4) On such Subsequent Closing Date, Seller will execute and
deliver such Conveyance Supplement to Purchaser and satisfy all other
conditions in Sections 10 and 13, Purchaser shall execute and deliver
such Conveyance Supplement to Seller, and Purchaser shall pay such
portion of such Purchase Price/Installment Payment to Seller.
(ii) If Purchaser, in its sole and absolute discretion, does not agree
to add a Proposed Program Well as a Program Well under the Production
Payment after receiving all of the information required to be delivered in
connection with Section 2(b) hereof, then Purchaser agrees to promptly
deliver to Seller, at Seller's cost and expense, a properly executed
Proposed Program Well Reconveyance and other necessary release documents
reasonably requested by Seller, all in form and substance acceptable to
Seller, in its reasonable discretion.
(iii) All revenues attributable to any Proposed Program Well which has
not yet been added as a Program Well pursuant to Section 2(c) of the
Purchase Agreement shall not be attributable to the Production Payment and
shall be payable to Seller.
(d) Subsequent Closings -- Payment of Purchase Price/Installation Payments.
(i) Seller will not at any time request payment of a Purchase
Price/Installment Payment (or any portion thereof) for any Program Well in
an amount that exceeds the amount of the Purchase Price/Installment Payment
agreed to by the Purchaser and the Seller pursuant to the terms of Section
2(c)(i)(1). As provided in Section 2(c)(i) above, the aggregate amount of
all such portions of Purchase Price/Installment Payments properly requested
by Seller shall be set out in Conveyance Supplements as additions to the
unliquidated balance of the Primary Sum. If in any calendar month (1)
Seller properly requests disbursements of portions of Purchase
Price/Installment Payments, but (2) Seller and Purchaser are not otherwise
executing a Conveyance Supplement under the preceding Section 2(c)(i)
above, then, if Seller so requests, Seller and Purchaser will nonetheless
execute a Conveyance Supplement to increase the unliquidated balance of the
Primary Sum by the amount of such portions of Purchase Price/Installment
Payments so requested by Seller.
(ii) Purchaser will make each disbursement of Purchase
Price/Installment Payments to Seller by wire transfer of immediately
available funds to such banks and bank accounts as Seller shall specify.
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(iii) Under no circumstances shall the aggregate amount of the Initial
Purchase Price/Installment Payment paid pursuant to Section 2(a) and of any
other Purchase Price/Installment Payments paid pursuant to Section 2(c)
exceed $50,000,000.
(iv) Under no circumstances shall Purchaser be liable to Seller or any
third party for the payment of any drilling and completion costs. It is the
agreement of the parties hereto that Purchaser shall purchase the
Production Payment by making Purchase Price/Installment Payments in amounts
which are determined, among other things, by reference to Drilling Costs.
(e) Payments to Purchaser. Seller will pay any amounts owing to Purchaser
under the Production Payment Documents by wire transfer of immediately available
funds to such banks and accounts as Purchaser shall from time to time specify in
writing at least five (5) Business Days prior to the effective date for any such
change of accounts. Seller will pay to Purchaser all Reimbursable Expenses as
they are billed. Seller has deposited $25,000 with Purchaser, to be applied to
Reimbursable Expenses, and these funds will be applied toward the Reimbursable
Expenses before Seller is asked to make any additional payments of Reimbursable
Expenses. To the extent that any such deposited funds are not needed to pay
Reimbursable Expenses (or other amounts which may be agreed to by Seller),
Purchaser will disburse such remaining amount to Seller, but Seller will
thereafter remain liable to pay all Reimbursable Expenses. To the extent that
such deposited funds are insufficient to pay all Reimbursable Expenses, Seller
will thereafter make additional deposits with Purchaser in increments of $15,000
which will be used to pay all additional Reimbursable Expenses as billed.
(f) Right of First Refusal. This Section shall be in full force and effect
until the full and final satisfaction in cash of all obligations under the
Production Payment Documents. In the event that Seller intends to produce
Hydrocarbons from any property owned by the Seller within the Edwards Trend,
including, without limitation, the Subject Interests, (a "Proposed Activity")
and prior to Seller approaching any other Person with respect to such Proposed
Activity, Seller first shall provide Purchaser with notice of its intent to
produce Hydrocarbons in connection with such Proposed Activity, together with
the information described in clauses (i) through (x) of Section 2(b) above, as
well as any other information which Purchaser may reasonably request in order
for Purchaser to adequately evaluate whether Purchaser would be willing to
purchase a Production Payment in connection with such Proposed Activity.
Purchaser's option to purchase a Production Payment in connection with such
Proposed Activity shall be subject to the terms and conditions of Section 2(d)
above. Purchaser shall then have a period of no less than thirty (30) days after
the delivery of such notice and all such information in order to determine
whether Purchaser shall purchase a Production Payment in connection with such
Proposed Activity. At the end of such period, Purchaser shall inform Seller
whether it will purchase a Production Payment in connection with such Proposed
Activity. Purchaser shall have no obligation to purchase a Production Payment in
connection with such Proposed Activity and may choose to purchase (or not to
purchase) a Production Payment in connection with any such Proposed Activity
without limiting its rights with respect to any future Proposed Activity. If,
and only if, Purchaser declines to purchase a Production Payment in connection
with such Proposed Activity,Seller shall be permitted to approach other Persons
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with respect to the production of Hydrocarbons in connection with such Proposed
Activity, provided that the proposal concerning such Proposed Activity offered
to such other Persons be on terms substantially similar to those offered to
Purchaser. In the event that any Person agrees to finance any portion of such
Proposed Activity, then Purchaser shall have the preferential right and option
to match such Person's offer with respect to the Proposed Activity under the
same terms and conditions proposed by such other Person. Within ten (10)
Business Days of Purchaser's receipt of such Person's offer with respect to the
Proposed Activity, the terms and conditions proposed by such Person and all
material information relating to such offer and proposal, Purchaser must advise
Seller whether Purchaser wishes to match such Person's offer with respect to the
Proposed Activity. Seller covenants and acknowledges that the granting of this
right of first refusal was a material condition and consideration for the
payment of the Initial Purchase Price/Installment Price and that Purchaser would
not have made such payment except for the granting of this right of first
refusal with respect to the Proposed Activity. In the event that (i) Purchaser
declines to finance such Proposed Activity and (ii) another Person is willing to
finance such Proposed Activity on terms substantially similar to those offered
to Purchaser, then Seller shall be free to proceed with such Proposed Activity,
provided that the financing of such Proposed Activity does not result in a
Material Negative Reservoir Event. The terms of this Section 2(f) shall be
deemed to be a covenant of the Seller and not a covenant running with the land
and the Subject Interests.
Section 3. Representations and Warranties of the Seller. The Seller
represents and warrants to the Purchaser that:
(a) The Seller is a corporation duly organized, validly existing and
in good standing under the laws of the State of Nevada, has the corporate
power to carry on its business as it is now being conducted, is duly
qualified to do business and is in good standing in each state in which a
property described in the Conveyance is located and in each other state
where failure to be so qualified or in good standing would have a Material
Adverse Effect. The Seller is not a "foreign person" within the meaning of
Sections 1445 and 7701 of the Code (i.e., Seller is not a non-resident
alien, foreign corporation, foreign partnership, foreign trust of foreign
estate, as those terms are defined in the Code and any regulations
promulgated thereunder).
(b) The Seller has the corporate power and authority to enter into and
perform this Agreement, the Conveyance and the other Production Payment
Documents and the consummation of the transactions contemplated by this
Agreement, the Conveyance, and the other Production Payment Documents are
within the Seller's corporate powers, have been duly authorized by all
necessary corporate action, have received all necessary governmental and
other approvals, exemptions, authorizations, licenses and permits (if any
shall be required), and do not and will not contravene or conflict with any
provision of any law, rule, regulation, order, writ, judgment, decree,
determination or award presently in effect having applicability to the
Seller or the articles of incorporation or bylaws of the Seller, and do not
and will not result in the breach or termination of any provision of, or
constitute a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Seller is a party or by which the
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Seller or the Seller's properties may be bound, including, without
limitation, any confidentiality agreement or restrictions on disclosure of
information.
(c) This Agreement, the Conveyance and the other Production Payment
Documents have been duly executed and delivered and constitute the legal,
valid and binding obligation of the Seller, enforceable against the Seller
in accordance with their terms, except as enforcement may be limited by
bankruptcy, reorganization, insolvency, moratorium or other laws affecting
the enforcement of creditors' rights generally and subject, as to
enforceability, to equitable principles of general application (regardless
of whether enforcement is sought in a proceeding in equity or at law).
(d) No authorization, consent or approval, or other action by, and no
notice to or filing with, any governmental authority or regulatory body or
other Person is required for the due execution, delivery or performance by
the Seller of this Agreement, the Conveyance or the other Production
Payment Documents.
(e) The Seller has not received any notice of default and is not in
default under and has not breached (i) any order, writ, injunction or
decree of any court or of any commission or other administrative agency
applicable to Seller or the Subject Interests, or (ii) any agreement or
obligation to which the Seller is a party or by which the Seller is bound,
or to which the Seller may be subject, affecting the Subject Interests or
any portion thereof.
(f) Except as disclosed in Schedule I hereto, there are no actions,
suits or proceedings by or before any court, arbitrator or any governmental
commission, board, bureau or other administrative agency pending, or to the
knowledge of the Seller threatened, against the Seller or any of the
Subject Interests.
(g) The descriptions attached to the Conveyance as Exhibit A
completely and correctly describe the Subject Interests, the
representations and warranties of the Seller in Section 11 of the
Conveyance are true and correct in all respects, and the Seller's ownership
of the Subject Interests entitles the Seller to a share of all Hydrocarbons
produced from or attributable to the Oil and gas leases located on or under
any of the lands described in Exhibit A to the Conveyance, and of the
proceeds of such production, after giving effect to and/or deducting all
applicable royalties, overriding royalties and other burdens or payments
out of production (except the Production Payment) which is not less than
the respective net revenue interests identified on Exhibit A to the
Conveyance and obligates the Seller to pay a share of all costs of
operation and development of such Oil and gas leases which is not greater
than the respective operating rights or leasehold interests identified on
Exhibit A to the Conveyance. The Seller has Defensible Title to the Subject
Interests free and clear of any mortgage, pledge, title retention lien, or
other lien, encumbrance or security interest, except for Permitted Liens.
Upon (I) the execution and delivery of the Production Payment Documents and
(ii) the delivery and filing of the Indenture Release, the Purchaser will
have Defensible Title to the Production Payment free and clear of any
mortgage, pledge, title retention lien, or other lien, encumbrance or
security interest except for Permitted Liens.
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Each lease and other interest in the Subject Interests and the
Production Payment is valid and in full force and effect, all taxes,
rentals, royalties and other amounts in respect thereof have been paid and
no default has occurred in respect of any such lease or interest.
(h) There are no sale or use contracts or agreements, preferential
purchase rights ("Preferential Right"), calls, rights of first refusal or
other similar rights or agreements of any nature whatsoever in effect
relating to any of the Subject Interests or the properties burdened by the
Production Payment.
(i) None of the Subject Interests is subject to a gas balancing,
take-or-pay/make-up or other arrangement under which one or more third
parties may take a portion of the Subject Interest Hydrocarbons without
payment (or without full payment) therefor, in cash or immediately
available funds, as a result of Hydrocarbons having been taken from, or as
a result of other actions or inactions with respect to, the Subject
Interests or other properties which would have a Material Adverse Effect.
(j) Except as disclosed in Schedule I hereto, the Seller has incurred
no obligation or liability, contingent or otherwise, for brokers' or
finders' fees in respect of the matters provided for in this Agreement.
(k) The Seller has complied with all applicable statutes, rules,
regulations, orders and restrictions of any domestic or foreign government
or any instrumentality or agency thereof, having jurisdiction over the
conduct of the Seller's businesses or any of the Seller's properties,
including, but not limited to, the Subject Interests, except where the
failure to comply would not result in a Material Adverse Effect. The Seller
has not received any notice to the effect that the Seller, the Seller's
operations or the Seller's properties, including, but not limited to, the
Subject Interests, are not in material compliance with any of the
requirements of applicable Environmental Laws, or are the subject of any
federal or state investigations evaluating whether any remedial action is
needed to respond to a Release of any Hazardous Material, whether from the
Seller's properties, including, but not limited to, the Subject Interests,
or elsewhere.
(l) Except as disclosed in writing to the Purchaser prior to the date
hereof, (i) all of the Subject Interests (including underlying groundwater)
have been, and continue to be, owned, leased or operated by the Seller in
compliance with all Environmental Laws; (ii) there have been no past, and
there are not pending or, to the best knowledge of Seller, threatened (x)
claims, complaints, notices or inquiries to, or requests for information
received by, or known to the Seller with respect to any alleged violation
of any Environmental Law or (y) claims, complaints, notices or inquiries
to, or requests for information received by, or known to the Seller for
potential liability under any Environmental Law or under any common law
theories relating to operations or the condition of any of the Subject
Interests (including underlying groundwater); (iii) there has been no
Release of Hazardous Materials at, on or under any of the Subject
Interests; (iv) the Seller has been issued and is in material compliance
with all permits, certificates, approvals, licenses and other
authorizations relating
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to environmental matters and necessary for the Seller's business and
the operation of each of the Subject Interests; (v) none of the Subject
Interests or any portion of any thereof are listed or proposed for listing
on the National Priorities List pursuant to CERCLA, on the Comprehensive
Environmental Response Compensation Liability Information System List
("CERCLIS") or on any other federal or state list of sites requiring
investigation or clean-up; (vi) there are no underground storage tanks,
active or abandoned, including petroleum storage tanks, on or under any of
the Subject Interests; (vii) the Seller has not directly transported or
directly arranged for the transportation of any Hazardous Material to any
location which is listed or proposed for listing on the National Priorities
List pursuant to CERCLA, on the CERCLIS or on any federal or state list or
which is the subject of any federal, state or local enforcement action or
other investigation which may lead to material claims against the Seller or
any portion of any of the Subject Interests for any remedial work, damage
to natural resources or personal injury, including claims under CERCLA;
(viii) there are no polychlorinated biphenyls, radioactive materials
(except those occurring naturally) or friable asbestos present at any of
the Subject Interests; and (ix) no condition exists at, on, under or in
respect of any of the Subject Interests or any portion of any thereof
which, with the passage of time, or the giving of notice or both, could
reasonably be expected to give rise to liability under any Environmental
Law.
(m) [Intentionally omitted].
(n) All material factual information heretofore or contemporaneously
furnished by or on behalf of the Seller to the Purchaser from time to time
for purposes of or in connection with this Agreement or the other
Production Payment Documents or any transaction contemplated hereby or
thereby, including, but not limited to, any Internal Reserve Report but
excluding all financial statements and any Independent Reserve Report, is,
and all other such factual information hereafter furnished by or on behalf
of the Seller to the Purchaser will be, true, correct and accurate on the
date as of which such information is dated or certified, compiled in
accordance with GAAP, if applicable, and does not contain any material
misstatement of fact or omit to state a fact necessary to make the
statement contained therein not misleading, and all estimated material so
furnished was prepared on the basis of assumptions, data, information,
tests or conditions believed to be valid or accurate or to exist at the
time such material was prepared and so furnished. The financial statements
furnished to Purchaser by Seller have been prepared in accordance with GAAP
and fairly reflect the results of operations and financial condition of
Seller and its Subsidiaries and the Subject Interests. Seller has provided
no materially false or misleading information to and has not withheld any
information from the Independent Reserve Engineer with respect to the
preparation of the Independent Reserve Report. Unless Seller otherwise
promptly notifies the Purchaser in writing, Seller is not aware of any
facts or circumstances that should reasonably cause the Seller to conclude
that any of the information that was supplied to the Independent Reserve
Engineer in connection with the preparation of the Independent Reserve
Report is not correct as of the date hereof except for the production of
oil, gas and other hydrocarbons in the ordinary course of business and
changes in oil and gas prices generally in the United States.
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(o) Seller and each of its Subsidiaries has filed all tax returns and
reports required by law to have been filed by it and has paid all taxes and
governmental charges thereby shown to be owing, except any such taxes or
charges which are being diligently contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP shall
have been established on its books.
(p) During the twelve-consecutive-month period prior to the date of
the execution and delivery of this Agreement and prior to the date of
payment of the Initial Purchase Price/Installment Payment, no steps have
been taken to terminate any Pension Plan, and no contribution failure has
occurred with respect to any Pension Plan sufficient to give rise to a Lien
under section 302(f) of ERISA. No condition exists or event or transaction
has occurred with respect to any Pension Plan which might result in the
incurrence by Seller or any member of the Controlled Group of any material
liability, fine or penalty. Except as previously disclosed in writing to
Purchaser, neither Seller nor any member of the Controlled Group has any
contingent liability with respect to any post-retirement benefit under a
Welfare Plan, other than liability for continuation coverage described in
Part 6 of Title I of ERISA.
(q) Since the date of the financial statements described in clause (n)
above, there has been no material adverse change in the financial
condition, operations, assets, business, properties or prospects of either
Seller or Seller and its Subsidiaries, taken as a whole, except changes in
oil and gas prices generally in the United States and production from the
Subject Interests in the ordinary course of business.
(r) Except for the Subsidiaries listed on Exhibit J, Seller has no
Subsidiaries.
(s) Except (i) as previously disclosed in writing to Purchaser, and
(ii) for any contracts or arrangements expressly mentioned in any Purchase
Agreement Supplement, no Subject Interest is dedicated or otherwise subject
to any contract or other arrangement for the sale, processing or
transportation of Hydrocarbons produced therefrom (or otherwise related to
the marketing of such Hydrocarbons) which would bind Purchaser as owner of
the Production Payment Hydrocarbons or would otherwise restrict the rights
of Purchaser under the Conveyance to take possession of and market
Production Payment Hydrocarbons. Neither Seller, nor any of its
predecessors in title, has received prepayments (including payments for gas
not taken pursuant to "take or pay" or other similar arrangements) for any
Hydrocarbons produced or to be produced from the Subject Interests. There
is no Subject Interest with respect to which Seller, or its predecessors in
title, has, prior to the date hereof, taken more ("overproduction"), or
less ("underproduction"), Hydrocarbons than its (or its predecessor's in
title's) ownership interest in such Subject Interest would entitle it to
take, which overproduction or underproduction has not been recouped as of
the date hereof. No Subject Interest is subject to any production balancing
arrangement under which one or more third Persons may take a portion of the
production attributable to such Subject Interest without payment (or
without full payment) therefor as a result of production having been taken
from, or as a result of other actions or inactions with respect to, other
properties. No Subject Interest is subject on the date hereof to any
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regulatory refund obligation and, to the best of Grantor's knowledge, no
facts exist which might cause the same to be imposed.
Section 4. Representations and Warranties of the Purchaser. The Purchaser
represents and warrants to the Seller that:
(a) The Purchaser is a limited partnership duly organized, validly
existing and in good standing under the laws of the State of Delaware, has
the power to carry on its business as it is now being conducted and is duly
qualified to do business and in good standing in all states where such
qualification is necessary and where failure to be so qualified or in good
standing would have a material adverse effect on its business or financial
condition.
(b) The consummation of the transactions contemplated by this
Agreement and the other Production Payment Documents are within the
Purchaser's limited partnership powers, have been duly authorized by all
necessary limited partnership action, and do not and will not contravene or
conflict with any provision of the limited partnership agreement of the
Purchaser, and do not and will not result in the breach or termination of
any term or provision of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which the
Purchaser is a party or by which it or its properties may be bound.
(c) The Purchaser has incurred no obligation or liability, contingent
or otherwise, for brokers' or finders' fees in respect of the matters
provided for in this Agreement which could result in a lien on any of the
Subject Interests.
(d) Purchaser is acquiring the Production Payment for its own account
and not with any intention to transfer all or any part of the Production
Payment to others in violation of the Securities Act of 1933, as amended,
or any other applicable securities laws.
(e) Purchaser is a "United States person", within the meaning of
Section 7701 of the Code as amended.
Section 5. Covenants of the Seller.
(a) To induce Purchaser to enter into this Agreement and to pay the
Purchase Price/Installment Payments, Seller covenants and agrees that until
the full and final payment of all payments due under the Production Payment
Documents and the termination of this Agreement and the Production Payment,
unless Purchaser has previously agreed otherwise:
(i) Seller will perform all of its covenants and duties under the
Production Payment Documents, all as fully as if they were set out in
full herein;
(ii) In addition to any reports and information specifically
required by the terms of this Agreement or the Conveyance, Seller
agrees to furnish to Purchaser full information, at all reasonable
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times, which Purchaser may request concerning any covenant, provision
or condition of the Production Payment Documents or any matter or
records in connection with such documents or with the operation of,
reserve engineering for, production from, or accounting for the
Subject Interests. Subject to any restrictions on Seller's right to do
so under applicable operating agreements or similar contracts, Seller
will permit representatives designated by Purchaser, including
independent accountants, agents, attorneys, and other Persons, to
visit and inspect the Subject Interests and Seller's books and records
pertaining to the Subject Interests (and to make copies and
photocopies from such records and to write down and record such
information as such representatives may request, provided that no
copies may be made of geological or seismic data), and Seller shall
permit Purchaser and its designated representatives reasonably to
investigate and verify the accuracy of information furnished to
Purchaser hereunder or in connection herewith and to discuss all such
matters with its officers, employees and representatives;
(iii) If any Person ever challenges or attacks (1) the validity
or priority of any Production Payment Document or of any rights,
titles, or interests created or evidenced thereby or (2) the title of
Seller to any Subject Interest or of Purchaser to any part of the
Production Payment, then upon learning thereof Seller will give prompt
written notice thereof to Purchaser and at Seller's own cost and
expense will diligently endeavor to defeat such challenge or attack
and to cure any defect that may be developed or claimed, and Seller
will take all necessary and proper steps for the defense of any legal
proceedings with respect thereto, including the employment of counsel
(at reasonable fees) to represent Seller, the prosecution or defense
of litigation, and the release or discharge of all adverse claims.
Purchaser (whether or not named as a party to legal proceedings with
respect thereto) is hereby authorized and empowered to take such
additional steps as in its sole judgment and discretion may be
necessary or proper for the defense of any such legal proceedings or
the protection of the validity or priority of the Production Payment,
and Production Payment Documents and the rights, titles, and interests
created or evidenced thereby, including, without limitation, the
employment of independent counsel to represent Purchaser, the
prosecution or defense of litigation, the compromise or discharge of
any adverse claims made with respect to the Production Payment, the
purchase of any tax title and the removal of prior liens or security
interests. All expenditures of every kind and character made by
Purchaser in connection with this Section shall be Reimbursable
Expenses (which obligations Seller hereby expressly promises to pay on
demand) owing by Seller to Purchaser and shall bear interest from the
date demanded until paid at the Agreed Rate;
(iv) Seller will, on reasonable request of Purchaser, (1)
promptly correct any defect, error or omission which may be discovered
in the contents, execution or acknowledgment of any Production Payment
Document, (2) execute, acknowledge, deliver and record or file such
further instruments and do such further acts as may be necessary,
desirable or proper to carry out more effectively the purposes of the
Production Payment Documents and to more fully identify and make
subject to the Conveyance any property intended to be covered thereby,
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including any renewals, additions, substitutions, replacements, or
appurtenances to the Subject Interests, and (3) execute, acknowledge,
deliver, and file or record any document or instrument reasonably
requested by Purchaser to protect its rights, title and interests
under the Production Payment Documents against the rights or interests
of third Persons; and Seller shall pay all reasonable costs connected
with any of the foregoing;
(v) Without limitation of Purchaser's remedies for breach of the
representations or warranties contained in Section 3(h), if a third
Person properly exercises a Preferential Right after the date hereof,
Purchaser will, in its sole and absolute discretion, either (i) join
in any required conveyance of the affected Subject Interest to such
third Person, or (ii) make a conveyance of the Production Payment
insofar as it covers the affected Subject Interest to Seller in order
that Seller may make the necessary conveyance to such third Person.
Upon making a conveyance in accordance with (i) or (ii), above,
Purchaser shall (without limitation of its remedies for breach of the
representations or warranties contained in Section 3(h) hereof) be
entitled to receive (and shall thereafter apply in the same manner as
Production Payment Proceeds) - either from the exercising third party,
assuming that Purchaser exercised option (i), or from Seller, assuming
that Purchaser exercised option (ii) - the entire amount of
consideration attributable to Purchaser's interest in the particular
Subject Interest covered by such Preferential Right. In addition, in
the event that any third Person or Persons collectively exercise
Preferential Rights relating to portions of the Subject Interest with
an aggregate value (based on the then current calculation of the
Production Payment NPV) of more than twenty percent (20%) of the then
current Production Payment NPV, Seller shall, if requested to do so by
Purchaser, repurchase the entire Production Payment from Purchaser for
a price equal to the then unliquidated balance of the Primary Sum as
determined after the application of all Production Payment Proceeds on
such date or the next occurring Application Date. Purchaser shall not
incur any liabilities with respect to any reconveyance of properties
that may be required in accordance with this subsection or otherwise
with respect to any exercise of a Preferential Right, and Seller shall
indemnify and hold harmless Purchaser from any liabilities (including
reasonable attorneys' fees) with respect thereto;
(vi) Seller will not cause or permit the Subject Interests or any
other interests of the Seller within the Edwards Trend to be in
material violation of any Environmental Laws pertaining thereto or do
anything or permit anything to be done which will subject the Subject
Interests or any other interests of the Seller within the Edwards
Trend to any material remedial obligations under any Environmental
Laws pertaining thereto, and Seller will promptly notify Purchaser in
writing of any existing, pending or, to the best knowledge of Seller,
threatened investigation or inquiry by any private party or
governmental authority in connection with any Environmental Laws.
Seller will take all steps necessary to determine that no Hazardous
Materials are disposed of or otherwise released or being released on
or to the Subject Interests or any other interests of the Seller
within the Edwards Trend in violation of any Environmental Laws.
Seller will not cause or permit the disposal or other release of any
Hazardous Materials on or to the Subject Interests or any other
22
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interests of the Seller within the Edwards Trend in violation of
any Environmental Law and covenants and agrees to remove or remediate
any Hazardous Materials on the Subject Interests or any other
interests of the Seller within the Edwards Trend;
(vii) Seller will ensure that no "Event of Default" (as defined
in each Trust Indenture) occurs under any of the Trust Indentures.
Seller will use all of the Purchase Price/Installment Payments in
compliance with each of the Trust Indentures;
(viii)Seller will provide to Purchaser any assurances of title
which Purchaser may from time to time reasonably request concerning
the Production Payment, including, without limitation, the recording
and filing of the Conveyance and the Conveyance Supplements and the
updating of any specified title opinions through such recording (it
being understood that no title deficiencies learned of by Purchaser
shall in any way be deemed to qualify any of Seller's warranties of
title or indemnities with respect to title in any of the Production
Payment Documents);
(ix) Seller will at all times be a corporation validly existing
and in good standing under the laws of its state of incorporation and
duly qualified to do business and in good standing in the State of
Texas;
(x) Seller will at all times obtain and possess (or cause to be
obtained and possessed) all consents, authorizations and waivers
necessary under any contract, indenture, instrument or agreement
binding on or affecting the Subject Interests or under any material
provision of law, rule, regulation, order, writ, judgment, decree,
determination or award binding on or affecting the Subject Interests,
in order to permit the performance by Seller of the Production Payment
Documents;
(xi) Seller will maintain Defensible Title to the Subject
Interests and the Retained Interests, and will not, without the prior
written consent of the Purchaser, in its sole and absolute discretion,
create or permit to exist any mortgage, pledge, title retention lien,
or other lien, encumbrance or security interest (A) with respect to
any of the Subject Interests except for Permitted Liens and liens in
favor of the Purchaser or (B) with respect to any of the Retained
Interests except for Permitted Liens;
(xii) Seller will not, without the prior written consent of the
Purchaser and except for the sale of the Production Payment and the
Residual Hydrocarbons to the Purchaser (or an affiliate of the
Purchaser), enter into any agreement selling, transferring or
encumbering the Subject Interests except for Permitted Liens;
(xiii)Seller will cause the Subject Interests to be maintained,
developed, protected against drainage, and continuously operated for
the production of Hydrocarbons in a good and workmanlike manner, as
would a prudent operator, all in accordance with generally accepted
practices, applicable operating agreements, and all applicable
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federal, state and local laws, rules and regulations (including,
without limitation, all Environmental Laws), excepting those being
contested in good faith;
(xiv) Seller will give prompt notice to the Purchaser of any
default, including, without limitation, any notice of any default
received by the Seller on or subsequent to the date of this Agreement,
under any instrument or agreement relating to the Subject Interests to
which the Seller is a party or by which the Seller is bound;
(xv) Seller will furnish the Purchaser promptly with such reports
and engineering studies on the Subject Interests with respect to
Hydrocarbon reserves, projections of the rate of production and net
operating income, gross proceeds and prices received by the Seller
from the sale of Hydrocarbons and incremental drilling, acquisition
activity and other operations, as the Purchaser may reasonably
request; and
(xvi) Seller will furnish to Purchaser, promptly upon receipt and
in any event not later than three (3) days following such receipt, any
information concerning any actions, suits or proceedings by or before
any court, arbitrator or any governmental commission, board, bureau or
other administrative agency pending or to the knowledge of Seller
threatened, against Seller, any of its Subsidiaries or any of the
Subject Interests, including, without limitation, any foreclosure
proceedings.
(b) Undertaking. The Seller hereby unconditionally and irrevocably
undertakes promptly and diligently to perform and observe all of the terms,
covenants and conditions to be performed or observed by the Seller under
the Conveyance.
(c) Taking in Kind; Marketing; Risk Management.
(i) The Production Payment Hydrocarbons shall be delivered to the
Purchaser in kind or to the credit of the Purchaser, free of cost, at
the Delivery Points in accordance with the Conveyance. The Seller
agrees to so deliver Production Payment Hydrocarbons prior to delivery
of other Subject Hydrocarbons and the first Subject Hydrocarbons so
delivered in any month shall be deemed to be Production Payment
Hydrocarbons until all Production Payment Hydrocarbons in respect to
such month shall have been delivered.
(ii) The Purchaser shall have the right, but not the obligation,
to market the following volumes of Hydrocarbons associated with the
Subject Interests:
(A) Subject to any existing sales or processing
agreements which cannot be amended or terminated (i)
as previously disclosed in writing to Purchaser, and
(ii) for any contracts or arrangements expressly
mentioned in any Purchase Agreement Supplement, all
of Seller's Residual Hydrocarbons, whether or not
currently marketed by Seller to other Persons.
Seller, to the extent it has the right to do so,
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shall assign any existing purchase and sale
agreements relating to the Residual Hydrocarbons to
Purchaser; and
(B) To the extent it has the right to do so and subject
to the terms of a mutually acceptable marketing
agreement between Purchaser and Seller setting out
Purchaser's compensation for its marketing services,
all other volumes of Seller's Hydrocarbons produced
from any properties owned or operated by Seller
within the Edwards Trend.
For purposes of this Section 5(c), such volumes described in clauses
(a) and (b) are herein collectively referred to as "Marketed Volumes".
Purchaser's right to the "Marketed Volumes" shall terminate on the
later of (i) three years from the date hereof or (ii) the Production
Payment Period.
(iii) The Seller shall market and sell on behalf of the Purchaser
all Production Payment Hydrocarbons and Residual Hydrocarbons (other
than Hydrocarbons delivered in kind to the Purchaser in accordance
with the Conveyance) which the Purchaser or Purchaser's Affiliate is
unable or refuses to receive.
(iv) Purchaser shall have the right, but not the obligation, to
be the sole provider of commodity price risk management products to
Seller as it relates to the Subject Hydrocarbons, the Subject
Interests, the Program Wells, the Production Units and the Marketed
Volumes.
(d) Gathering and Transportation and Other Services. The Seller at its
sole cost and expense shall gather or cause to be gathered all Production
Payment Hydrocarbons, Residual Hydrocarbons and any Marketed Volumes
marketed by Purchaser at the wellheads where produced and shall transport
and deliver the same to the Delivery Points, without any charge or
deduction to the Purchaser for any costs attributable to preparing the
Hydrocarbons for delivery, and delivering same to the Delivery Points.
(e) Material Negative Reservoir Event. The Seller shall notify the
Purchaser immediately of any Material Negative Reservoir Event.
(f) Scheduling, etc.
(i) Not less than fifteen (15) days prior to the first day of
each month, the Seller will notify the Purchaser or, if applicable,
the Servicer (as defined in Section 26 hereof), of the daily
quantities of Production Payment Hydrocarbons, Residual Hydrocarbons
and other Marketed Volumes which the Seller expects to be available
for delivery in kind to the Purchaser at each Delivery Point during
such month; provided that the delivery of such notice shall in no way
relieve the Seller of its obligations to deliver Production Payment
Hydrocarbons under the Production Payment Documents. The Seller will
use its best efforts to cause Gas to be delivered at uniform daily
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rates through each month at each Delivery Point at the rates scheduled
pursuant to the preceding sentence.
(ii) The Seller shall immediately notify the Purchaser or, if
applicable, the Servicer, of any change (in excess of tolerances
permitted by the First Transporter) in the rate of delivery of
Hydrocarbons at the Delivery Points. Variations in deliveries from
those scheduled which do not exceed the tolerances permitted by the
First Transporter without incurrence of a penalty or charge shall be
permitted hereunder and under the Conveyance, but subject to the terms
of the Conveyance. The Seller, the Purchaser, and the Servicer shall
cooperate to ensure that nominations are timely made to transporting
pipelines and that such nominations reflect the actual expected
deliveries and receipts. The Seller and the Servicer on behalf of the
Purchaser shall use reasonable efforts to give each other 24 hours
notice of any adjustments to be made in quantities delivered or
received.
(iii) The Seller is liable to the Purchaser for any charges,
penalties, costs or expenses incurred or payable to any transporting
pipeline, processing facility, or any other party, as a result of the
Seller's failure to notify the Purchaser sufficiently in advance of
the First Transporter's nomination deadline of any increase or
decrease in quantities of Hydrocarbons to be delivered at each
Delivery Point on any day, and shall hold the Purchaser harmless from
and against such charges, penalties, costs or expenses. The Seller and
the Purchaser shall promptly notify the other of any notice received
from any transporting pipeline, or other party, that indicates an
imbalance in deliveries exists or is occurring that may give rise to
any such charges, penalties, costs or expenses.
(iv) The Seller shall deliver, or cause to be delivered, the
Production Payment Hydrocarbons, the Residual Hydrocarbons and any
other Marketed Volumes which Purchaser elects to market consisting of
Gas at a pressure sufficient to deliver the same into the First
Transporter's pipeline at each Delivery Point against the operating
pressure of First Transporter's pipeline from time to time.
(v) The Seller shall deliver, or cause to be delivered, all other
Production Payment Hydrocarbons, Residual Hydrocarbons and any other
Marketed Volumes which Purchaser elects to market at each Delivery
Point.
(g) Reports. The Seller shall furnish or cause to be furnished to the
Purchaser, at the Seller's expense, copies of the following information and
agrees that the Purchaser can furnish copies of such information and any
other information the Purchaser obtains under or pursuant to or in
connection with this Agreement, any other Production Payment Document, or
the Subject Interests, to the Servicer and to any purchaser of Subject
Hydrocarbons from the Purchaser:
(i) As soon as available, and in any event within forty-five (45)
days after the end of each of the first three Fiscal Quarters of each
Fiscal Year of the Seller and within ninety (90) days after the end of
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each Fiscal Year of the Seller, consolidated financial statements of
the Seller and its Subsidiaries as of the end of and for such period,
including a balance sheet and consolidated statements of earnings and
cash flow for such period and for the period commencing at the end of
the previous Fiscal Year and ending with the end of such period, all
prepared in accordance with GAAP, certified by the chief financial
officer of the Seller, and, in the case of the annual financial
statements, certified (without any Impermissible Qualification) in a
manner acceptable to Purchaser by Ernst & Young LLP or such other
independent certified public accountants of nationally recognized
standing acceptable to Purchaser (the "Independent Accountant"),
together with a certificate from such accountants to the effect that,
in making the examination necessary for the signing of such annual
financial statements by such Independent Accountant, they have not
become aware of any Possible Non-Compliance Event or Non-Compliance
Event that has occurred and is continuing, or, if they have become
aware of such Possible Non-Compliance Event or Non-Compliance Event,
describing such Possible Non-Compliance Event or Non-Compliance Event
and the steps, if any, being taken to cure it. For so long as Seller
files Forms 10-Q and 10-K with the Securities and Exchange Commission
("SEC"), Seller may satisfy the reporting requirements in this
subsection 5(g)(i) by sending a copy of each such Form 10-Q and 10-K
to Purchaser within 15 days after filing the same with the SEC, and
whenever Seller or any Affiliate of Seller files any Form 10-Q or 10-K
with the SEC or Seller files any Form 8-K, Seller shall obtain and
send a copy of such form to Purchaser within 15 days after such form
is so filed. With respect to the quarterly financial statements,
Purchaser, in its sole discretion, shall have the right to employ once
each calendar year, at Seller's sole expense, an independent
accountant, acceptable to Purchaser in its sole discretion, to
independently verify the accuracy of such financial statements.
(ii) As soon as available and in any event within thirty (30)
days after the end of each calendar month of Seller, (i) a monthly
cash flow report of Seller on a cash basis for such month detailing
sources and uses of funds relating to the Subject Interests, (ii) a
monthly cash flow report of Seller on an accrual basis for such month
detailing sources and uses of funds relating to the Subject Interests,
(iii) a monthly compilation and aging of all accounts receivables and
accounts payable of Seller for such month relating to the Subject
Interests, (iv) a summary of net and gross general and administrative
expenses of Seller for such month relating to the Subject Interests,
(v) a lease operating statement for such month, including, without
limitation, oil, gas and water production, and lease operating costs,
including, without limitation, transportation, gathering and marketing
costs, and all COPAS expenses on a well-by-well and asset-by-asset
basis, and any other financial records or reports of Seller requested
by Purchaser relating to the Subject Interests, all prepared in
accordance with GAAP, certified by an Authorized Officer of the Seller
and (vi) internally generated reserve reports relating to the Subject
Interests, if any.
(iii) At such times as may be requested by the Purchaser, reports
concerning any change in methods of treatment or operation of all or
any wells on Subject Interests and production of Subject Hydrocarbons,
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any drilling or development, any method of secondary or tertiary
recovery, or any other action with respect to the Subject Interests,
the decision as to which may increase or reduce the quantity of
Hydrocarbons ultimately recoverable from the Subject Interests, or the
rate of production therefrom, or which may shorten or lengthen the
period of time required for liquidation of the Production Payment.
(iv) As from time to time requested by the Purchaser, copies of
maps showing property lines and well locations, well logs, core
analysis, flow and pressure tests, natural gas analysis and casing
programs, transportation agreements, leases, operating agreements,
farm-in and farm-out agreements, processing agreements and other
information related to the Subject Interests and the wells thereon and
the production therefrom.
(v) Together with the delivery of the financial statements
delivered pursuant to the foregoing clause (i), a certificate executed
by an officer of the Seller certifying that to the best of his
knowledge after due investigation the Seller is in compliance in all
material respects with the terms of this Agreement and the other
Production Payment Documents, or if not, specifying any exceptions
thereto in reasonable detail.
(vi) Promptly after December 31 of each calendar year, and in any
event not later than March 31 of the next succeeding calendar year,
reports in form and substance satisfactory to the Purchaser and using
pricing, engineering and other assumptions acceptable to the
Purchaser, prepared by Independent Reserve Engineer as of December 31
of such calendar year concerning (a) the quantity of Subject
Hydrocarbons economically recoverable based on the assumptions
provided by the Purchaser from the Subject Interests including,
without limitation, the quantity of Proved Reserves, Proved Developed
Producing Reserves, Proved Developed Non-Producing Reserves and Proved
Undeveloped Reserves; (b) the Production Payment NPV attributable to
the Subject Interests; (c) any change in methods of treatment or
operation of all or any wells on Subject Interests, any new drilling
or development, any method of secondary or tertiary recovery, or any
other action with respect to the Subject Interests, the decision as to
which may increase or reduce the quantity of Subject Hydrocarbons
ultimately recoverable from the Subject Interests, or the rate of
production therefrom, or which may shorten or lengthen the period of
time required for liquidation of the Production Payment; and (d) such
other information, technical or otherwise, as the Purchaser may
reasonably request (the "Independent Reserve Report").
(vii) Promptly after July 1 of each calendar year, and in any
event not later than September 30 of such calendar year, a report in
form and substance satisfactory to the Purchaser and using pricing,
engineering and other assumptions acceptable to the Purchaser,
prepared by the Seller as of July 1 of such calendar year updating the
Independent Reserve Report and concerning (a) the quantity of Subject
Hydrocarbons economically recoverable based upon the assumptions
provided by Purchaser from the Subject Interests; (b) the Production
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Payment NPV attributable to the Subject Interests including, without
limitation, the quantity of Proved Reserves, Proved Developed
Producing Reserves, Proved Developed Non-Producing Reserves and Proved
Undeveloped Reserves; (c) any change in methods of treatment or
operation of all or any wells on Subject Interests, any new drilling
or development, any method of secondary or tertiary recovery, or any
other action with respect to the Subject Interests, the decision as to
which may increase or reduce the quantity of Subject Hydrocarbons
ultimately recoverable from the Subject Interests, or the rate of
production therefrom, or which may shorten or lengthen the period of
time required for liquidation of the Production Payment; and (d) such
other information, technical or otherwise, as the Purchaser may
reasonably request (the "Internal Reserve Report").
(viii)Within thirty (30) days in the case of an Independent
Reserve Report and within twenty (20) days in the case of an Internal
Reserve Report, of any request by the Purchaser made after the
occurrence of Due Cause (as hereinafter defined), an additional
Independent Reserve Report or Internal Reserve Report, as the case may
be, prepared as of the date of such request, in form and substance
satisfactory to the Purchaser.
(ix) As soon as available and in any event within thirty (30)
days after the end of each month, a Monthly Hydrocarbons Report in
substantially the form attached hereto as Exhibit E in form and
substance satisfactory to the Purchaser.
(x) As each Subject Well is drilled, completed, and put onto
production, copies of: (i) well logs across all pay zones, (ii) all
test information, and (iii) reports detailing completion and response
to stimulation.
(xi) Promptly upon becoming aware of the institution of any steps
by Seller or any other Person to terminate any Pension Plan, or the
failure to make a required contribution to any Pension Plan if such
failure is sufficient to give rise to a Lien under section 302(f) of
ERISA, or the taking of any action with respect to a Pension Plan
which could result in the requirement that Seller furnish a bond or
other security to the PBGC or such Pension Plan, or the occurrence of
any event with respect to any Pension Plan which could result in the
incurrence by Seller of any material liability, fine or penalty, or
any material increase in the contingent liability of Seller with
respect to any post-retirement Welfare Plan benefit, notice thereof
and copies of all documentation relating thereto;
As used herein, "Due Cause" shall mean the occurrence, during any
period, of a material change (i) in oil and/or gas prices, (ii) in taxes,
including, but not limited to, Direct Taxes, (iii) in anticipated rates or
amounts of production from the Subject Interests, (iv) in the Seller's
title or purported title to the Subject Interests, (v) in operating costs
with respect to the Subject Interests, and (vi) in any other arrangement
relating to the Subject Interests. As used herein, "Fiscal Year" means any
period of twelve consecutive calendar months ending on December 31st of
each calendar year, and "Fiscal Quarter" means any quarter of any Fiscal
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Year. All reports herein described or otherwise described in this Agreement
and all other reports which the Seller is required to deliver pursuant to
the terms and conditions of the Conveyance shall be prepared and delivered
at the sole cost and expense of the Seller.
(h) Use of Proceeds. The Seller shall not use the Production Payment
or proceeds therefrom to (i) declare, pay or make any dividend or
distribution on any shares of any class of capital stock (now or hereafter
outstanding) of the Seller or on any warrants, options or other rights with
respect to any shares of any class of capital stock (now or hereafter
outstanding) of the Seller or (ii) pay any cost, expense or other amount
except as permitted under the Trust Indentures.
(i) [Intentionally omitted].
(j) Indebtedness. The Seller will not create, incur, assume or suffer
to exist or otherwise become or be liable in respect of any Indebtedness
except as permitted under the Trust Indentures.
(k) [Intentionally Omitted]
(l) Loans. The Seller shall not use the Production Payment or proceeds
thereof or any other money or assets of the Seller to make any loans or
advance any monies to any officer, director, shareholder, employee,
consultant or agent of the Seller.
(m) Production Expenses. The Seller shall not permit its Production
Expenses relating to the Subject Interests to exceed in the aggregate (i)
$1,800 per Subject Well per month (the "Permitted Monthly Production
Expenses") for each month during the 1999 calendar year, and (ii) for each
month for all subsequent calendar years, the sum of (A) Permitted Monthly
Production Expenses plus (B) an additional five percent (5%) of Permitted
Monthly Production Expenses per calendar year after the 1999 calendar year,
per Subject Well per month; provided that notwithstanding the foregoing,
the Seller may pay Production Expenses to the extent such Production
Expenses are required to be paid pursuant to applicable law upon written
notice to Purchaser.
(n) Insurance. The Seller will maintain with financially sound and
reputable insurance companies such insurance in amount and type and against
such risks, liabilities, casualties and contingencies as (i) is set forth
in Exhibit D hereto or (ii) after 30 days written notice by the Production
Payment Owner, is required by Production Payment Owner, in its reasonable
discretion, and maintained by other prudent companies in the industry. The
Seller shall furnish or cause to be furnished to the Purchaser prior to the
Closing Date and, upon the request of the Purchaser, from time to time
thereafter, a summary of the insurance coverage of the Seller in form and
substance satisfactory to the Purchaser in its sole discretion and copies
of all applicable insurance policies.
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(o) Taxes, Assessments and Liabilities. The Seller will pay when due
all taxes, including, but not limited to, Direct Taxes, assessments and
other liabilities except as contested in good faith and by appropriate
proceedings.
(p) Generally Accepted Accounting Principles. The Seller will prepare
all reports and computations required under this Agreement or the other
Production Payment Documents, will keep and maintain all books, records and
other information pertaining to the Seller or the Subject Interests, and
provide such other information as the Purchaser may request from time to
time, all in accordance with GAAP.
(q) Other Agreements. The Seller will not enter into any agreement
containing any provision which would be violated or breached by the
performance of its obligations hereunder or under any instrument or
document delivered or to be delivered by the Seller hereunder or in
connection herewith.
(r) Lease Use Hydrocarbons. The Seller will not use more than five
percent (5%) of the aggregate production of Hydrocarbons from the Subject
Interests as Lease Use Hydrocarbons.
(s) Maintenance of Employee Benefit Plans. The Seller will maintain
each employee benefit plan as to which it may have any liability, in
compliance with all applicable requirements of law and regulations.
(t) Marketing Rights. (i) Seller will not enter into, or cause, suffer
or permit to exist any arrangement or contract for the marketing of Subject
Hydrocarbons with any Person unless such arrangement or contract is (A)
fair and equitable to Seller, (B) an arrangement or contract of the kind
which would be entered into by a prudent Person in the position of Seller,
(C) not in excess of thirty (30) days in duration, and (D) in form and
substance and with a Person acceptable to Seller, in its reasonable
discretion; provided, however, that (X) Seller shall provide Purchaser with
five (5) Business Days notice of any such arrangement or contract and (Y)
Purchaser shall have the right of first refusal with respect to any such
arrangement or contract for the marketing of Subject Hydrocarbons which
right may be exercised by providing written notice to Seller within the
five (5) Business Day period prior to Seller entering into such arrangement
or contract.
(ii) Notwithstanding the foregoing, within thirty (30) days of
receipt by Seller of the written notice of the Purchaser, Seller shall
enter into (i) a Gas Sales Agreement concerning the Subject Interests, (ii)
an Oil Sales Agreement concerning the Subject Interests, (iii) such
memorandum of agreement relating to the purchase of the Hydrocarbons from
the Subject Interests as Purchaser shall request, in form and substance
satisfactory to Purchaser in its reasonable discretion, (iv) such
undertakings relating to the Subject Interests as Purchaser shall request,
in form and substance satisfactory to Purchaser in its reasonable
discretion, and (v) such partial assignments of gas and/or oil gathering,
transportation, processing and/or marketing agreements relating to
Hydrocarbons from the Additional Subject Interests as Purchaser shall
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request, in form and substance satisfactory to Purchaser in its reasonable
discretion.
(u) Modification of Certain Agreements. Seller will not permit, or
otherwise consent to, any amendment, assignment, supplement or other
modification of any of the terms or provisions contained in, or applicable
to, any material agreement or material contract affecting any of the
Subject Interests or any of the Retained Interests, without the prior
written consent of Purchaser.
(v) Hedge Agreements. Promptly, and in any event within thirty (30)
days of the request of Purchaser, Seller shall enter into (i) an ISDA
Master Agreement, in form and substance mutually acceptable to Purchaser
and Seller and (ii) one or more swap, hedge, floor, collar or other similar
agreements on an International Security Dealers Association form (each an
"Hedge Agreement") which are with Purchaser or an Affiliate of Purchaser
and satisfactory to Purchaser; provided, however, that such requirement
shall only apply if such agreements constitute "Crude Oil and Natural Gas
Hedge Agreements" as defined in each Trust Indenture.
Section 6. Time and Places of Closings. The Closing for the consummation of
the sale and purchase of the first component of the Production Payment (the
"Initial Closing") shall take place at the offices of Mayer, Brown & Platt in
Houston, Texas on October 6, 1999, or at such other time and place as shall be
mutually agreed upon (the "Initial Closing Date"). The closing for the
consummation of the sale and purchase of each subsequent component, if any, of
the Production Payment (each, a "Subsequent Closing") shall take place at such
place (or places) and on such date as may be agreed to by Seller and Purchaser
(each, a "Subsequent Closing Date").
Section 7. Transactions on and After the Initial Closing Date. On the
Initial Closing Date, the Seller shall execute and deliver the Conveyance to the
Purchaser, substantially in the form attached hereto as Exhibit B, in such
number of counterparts as the Purchaser may request together with the other
instruments and documents required pursuant to Section 12. Concurrently with
such delivery, the Purchaser shall make payment of the Purchase Price in
immediately available funds by wire transfer which payments shall be deemed to
constitute payments to Seller of the Purchase Price. Promptly after the Initial
Closing Date, the Purchaser, at the Seller's expense, shall provide and affix,
or cause to be provided and affixed, to one or more counterparts of the
Conveyance, and cancel, or cause to be canceled, such documentary tax stamps as
may be required by law, and pay any applicable real estate transfer taxes,
mortgage registration taxes and other taxes and filing fees.
Section 8. Inspections. The Purchaser and its agents, officers, employees
or consultants and the Servicer and any purchaser of Subject Hydrocarbons from
the Purchaser shall have the right from time to time during the term of the
Conveyance and for 24 months thereafter, to examine and to audit at any time the
books, records and charts of the Seller with respect to the Subject Interests,
including, without limitation, all information with respect to volumes of
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Hydrocarbons produced from the leases, the sales price of Hydrocarbons sold on
behalf of the Purchaser, the calculation of Lease Use Hydrocarbons and
Non-Consent Hydrocarbons, and the payment by the Seller of all costs and
expenses incurred in connection with the Subject Interests. This right to audit
shall be a free and unrestricted right, and shall survive the termination of the
Conveyance; provided that the Seller shall not be required to maintain books,
records or charts for a period of more than ten (10) years following the
calendar year in which the Production Payment is discharged. If, as a result of
any such audit, it is determined that any amount is due the Purchaser as a
result of the failure of the Seller to properly deliver all Subject
Hydrocarbons, or the proceeds thereof, to the Purchaser in accordance with the
terms of this Agreement and the other Production Payment Documents, the Seller
shall pay the Purchaser the value of the Subject Hydrocarbons which the Seller
failed to deliver, or the proceeds which the Seller failed to remit, together
with interest at the Specified Rate from the date that such amount should have
been delivered or paid in accordance with the terms of the Conveyance and this
Agreement to the date of payment. Upon request, the Seller shall also make
available to the Purchaser for audit purposes any relevant records of the
Seller's transporter(s) to which the Seller has access. A formal audit of
accounts shall not be made more often than once each calendar year and the
Seller shall have the right to require that a single audit be conducted on
behalf of all parties entitled to an audit in any given year. Any inaccuracy
will be promptly corrected when discovered; provided, however, that the
Purchaser shall not have any right to question or contest any charge or credit
if the matter is not called to the attention of the Seller in writing within ten
(10) years after the end of the calendar year in which the Production Payment is
discharged.
Section 9. Obligations Absolute. The obligations of the Seller hereunder
shall be absolute and unconditional irrespective of the genuineness, validity,
legality or enforceability of this Agreement, the other Production Payment
Documents or any other circumstances which might otherwise constitute a legal or
equitable discharge of a surety or guarantor and regardless of any law, rule,
regulation, decree or order now or hereafter in effect in any jurisdiction
purporting to affect in any manner the Purchaser's rights in respect thereof, it
being understood that the obligations of the Seller shall be absolute and
unconditional under any and all circumstances. Without in any way limiting the
foregoing, the Purchaser may, from time to time, without notice to the Seller,
assign or transfer the benefits under the Production Payment Documents; and,
notwithstanding any such assignment or transfer or any subsequent assignment or
transfer thereof, each and every immediate and successive assignee or transferee
shall, to the extent of the interest of such assignee or transferee in such
Production Payment Documents, be entitled to, the benefits of the Production
Payment Documents and each credit supplier providing financing from time to time
to the Purchaser shall be entitled to the same extent as if such assignee or
transferee or credit supplier, as the case may be, were the Purchaser; provided,
however, that, unless the Purchaser shall otherwise consent in writing, the
Purchaser shall have an unimpaired right, prior and superior to that of any such
assignee or transferee or credit supplier, as the case may be, to enforce the
Production Payment Documents, for the Purchaser's benefit, as to those of such
benefits which the Purchaser have not assigned or transferred. The Seller shall
employ and have supervision over the personnel required by the Seller to perform
its services and responsibilities hereunder. The Seller shall pay all expenses
in connection therewith, including, but not limited to, allocated portions of
compensation, salaries, wages, expenses, social security taxes, workmen's
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compensation insurance, retirement, insurance benefits and other such expenses.
Section 10. Conditions to Obligations of Parties. The obligations of each
party under this Agreement are subject to the satisfaction (or waiver by both
parties) on or prior to the Initial Closing Date of the following conditions:
(a) There shall not have been any legislation enacted or voted by
either House of the Congress of the United States of America nor any
regulation promulgated by the Secretary of the Treasury or the Internal
Revenue Service after the date of this Agreement and prior to the Closing
Date which in the judgment of tax counsel for such party would materially
adversely affect the income tax consequences to such party of the
transactions contemplated by this Agreement.
(b) All necessary permissions, approvals and consents of third parties
or governmental agencies, if any, with respect to the sale and transfer of
the Production Payment shall have been delivered to the parties hereto.
Section 11. Conditions to Obligations of the Seller. The obligations of the
Seller under this Agreement are subject to the satisfaction (or waiver by the
Seller) on or prior to the Initial Closing Date that the Purchaser shall have
performed all agreements and covenants required by this Agreement and the other
Production Payment Documents to be performed by it, and all representations
herein made by the Purchaser shall be true in all material respects as of the
Initial Closing Date, and the Seller shall have received a certificate to that
effect signed by the Purchaser. The Purchaser will provide Seller promptly after
its receipt of the Monthly Hydrocarbon Report prepared by the Seller a report
substantially in the form of Exhibit E attached hereto (the "Purchaser's Monthly
Report"); provided, however, the Purchaser shall have no liability for its
failure to deliver the Purchaser's Monthly Report and any failure to deliver the
Purchaser's Monthly Report shall not in any way relieve the Seller of its
obligation to deliver Hydrocarbons pursuant to the Production Payment Documents.
Section 12. Conditions to Initial Closing. Obligations of the Purchaser
under this Agreement are subject to the satisfaction (or waiver by the
Purchaser) on or prior to the Initial Closing Date of the following additional
conditions:
(a) All legal matters in connection with this Agreement and the
transaction contemplated hereby shall be acceptable to the Purchaser in its
sole discretion.
(b) The Seller shall have obtained all necessary consents, approvals
and permits from all federal and state regulatory agencies, governmental
authorities and from any other Persons, in form and substance satisfactory
to the Purchaser in its sole discretion, the Purchaser shall have received
copies of all such consents, approvals and permits, and such consents,
approvals and permits shall be in full force and effect on the Initial
Closing Date, and the Purchaser shall have received a certificate to that
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effect signed by the President or a Vice President of the Seller.
(c) The Seller shall have performed all agreements and covenants
required by this Agreement and by the other Production Payment Documents to
be performed by the Seller and all representations and warranties herein
and in the other Production Payment Documents made by the Seller shall be
true and correct as of the Initial Closing Date, and the Purchaser shall
have received a certificate to that effect signed by the President or a
Vice President of the Seller.
(d) The Seller shall have executed and delivered this Agreement, the
Conveyance in substantially the form set forth in Exhibit B hereto together
with letters in lieu of transfer orders addressed to each purchaser of any
Production Payment Hydrocarbons, and all other Production Payment
Documents, all in form and substance acceptable to the Purchaser in its
sole discretion.
(e) The Purchaser shall have received an Indenture Release from the
Senior Secured Trustee relating to the Subject Interests and related UCC-3
financing statement partial releases, in form and substance acceptable to
the Purchaser in its sole and absolute discretion.
(f) The Purchaser shall have received approval of the transaction
contemplated in this Agreement and the other Production Payment Documents
from the Purchaser's senior management.
(g) The Purchaser shall have received, at Seller's expense, favorable
opinions of counsel licensed to practice in each of the States in which the
Subject Interests are located and which is satisfactory to the Purchaser,
respectively, in form and substance satisfactory to the Purchaser in its
sole discretion which:
(i) will deliver an opinion as to the matters set forth in
Sections 3(a), 3(b), 3(c) and 3(d) hereof;
(ii) will express the author's opinion with respect to the
sufficiency under the laws of such State of the form, execution,
acknowledgment, recordability, validity and enforceability of the
Conveyance and the other Production Payment Documents;
(iii) will state that the Seller has Defensible Title to those of
the Subject Interests listed on Exhibit A hereto and located in such
State, free of any liens, charges or encumbrances other than those
described in Exhibit A to the Conveyance and that all filings and
recordings necessary to perfect the Purchaser's title to the Subject
Interests and to give constructive notice to third parties of the
Purchaser's interest therein have been made;
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(iv) will state that, under the laws of such State, upon
execution and delivery of the Conveyance to the Purchaser, the
Production Payment will have been validly created and will constitute
a legal and valid interest in real property, enforceable in accordance
with its terms; upon execution and delivery of the Conveyance to the
Purchaser, the Production Payment will constitute a legal, valid and
enforceable production payment dischargeable out of the volumes
specified in the Conveyance of the production of Hydrocarbons accruing
or attributable to the Subject Interests; upon execution and delivery
of the Conveyance to the Purchaser, the covenants and agreements of
the Seller contained in the Conveyance will be valid and enforceable
in accordance with their terms and will inure to the benefit of the
Purchaser as the owner of the Production Payment; in the event of the
commencement of any bankruptcy reorganization, reorganization, debt
arrangement or other case or proceeding under any bankruptcy or
insolvency laws involving the Seller, the property interest and the
production payments transferred by the Seller prior to any such
commencement shall be excluded from the bankruptcy estate;
(v) will specify whether, under the laws of such State, any
mortgage, documentary, stamp or other taxes will be payable in
connection with the execution, delivery or recording of the Conveyance
or any of the transactions contemplated thereby; will specify in which
recording offices in such State the Conveyance should be recorded or
filed in order to effect the transfer of the Production Payment to the
Purchaser and that upon such filing or recording, the Purchaser will
be the owner of such Production Payment, subject only to the matters
permitted by the terms of the Conveyance;
(vi) will state that no consents, waivers, approvals or other
action by any regulatory body of the respective State or of any third
party are necessary in connection with the execution, delivery and
performance by the Seller of this Agreement and the other Production
Payment Documents or, if any such consent, waiver, approval or other
action is necessary, that the same has been obtained or accomplished;
and
(vii) will state that the consummation of this transaction and
the delivery of this Agreement and the conveyance is permitted by, and
does not violate, the terms of the Trust Indentures.
which opinions may contain such qualifications or limitations as may be
acceptable to the Purchaser.
(h) [Intentionally omitted].
(i) The Purchaser shall have received reserve reports and completed a
Phase I environmental review satisfactory to the Purchaser, in its sole
discretion, and, if requested by Purchaser, Purchaser shall have received a
Phase II environmental report, relating to the Subject Interests, prepared
by Carr Environmental Group, Inc., in form, substance, scope and
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methodology satisfactory to the Purchaser and, since the date of each
report, there has been no material change in the information contained in
each such report.
(j) No suit, action or other proceeding shall be pending to restrain,
enjoin or otherwise prevent the consummation of this Agreement or the
transactions contemplated in connection herewith or which may have any
material affect on the Subject Interests.
(k) The Purchaser shall have received banking references and credit
and other due diligence relating to the Seller and the Subject Interests,
in form, substance, scope and methodology satisfactory to the Purchaser, in
its sole discretion.
(l) No Possible Non-Compliance Event or Non-Compliance Event shall
have occurred and be continuing on the Initial Closing Date either before
or after giving effect to this Agreement and the other Production Payment
Documents.
(m) All legal matters in connection with this Agreement and the
consummation of the transaction contemplated hereby shall be approved by
counsel for the Purchaser, and there shall have been furnished to such
counsel by the Seller such agreements, opinions of counsel, title or other
records and information as they may reasonably have requested for that
purpose.
(n) The Purchaser shall have received a certificate from Seller's
insurance brokers or advisors confirming that Seller is in compliance with
the requirements of Section 5(o) of this Agreement.
(o) The Purchaser shall have received an "Omnibus Certificate" of the
Secretary or Assistant Secretary of Seller which shall contain the names
and signatures of the officers of Seller authorized to execute the
Production Payment Documents and which shall certify to the truth,
correctness and completeness of the following exhibits attached thereto:
(i) a copy of resolutions duly adopted by the Board of Directors of Seller
and in full force and effect at the time this Agreement is entered into,
authorizing the execution of the Production Payment Documents and the
consummation of the transactions contemplated therein, (ii) a copy of the
organizational documents of Seller and all amendments thereto, certified by
the appropriate official of Seller's state of incorporation, and (iii) a
copy of the bylaws of Seller.
(p) The Purchaser shall have received a certificate (or certificates)
of the due formation, valid existence and good standing of Seller in its
state of incorporation, issued by appropriate authorities of such state,
and certificates of Seller's good standing and due qualification to do
business in Texas.
(q) [Intentionally omitted].
(r) The Purchaser shall have received certified copies of all purchase
agreements, transportation agreements, farm-in and farm-out agreements,
leases, processing agreements, operating agreements and such other
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agreements or contracts concerning the Subject Interests as Purchaser shall
request.
(s) Seller shall have entered into (i) such memorandum of agreement
relating to the purchase of Hydrocarbons from the Subject Interests as
Purchaser shall reasonably request, (ii) such undertakings relating to the
Subject Interests inform and substance satisfactory to Purchaser in its
sole discretion as Purchaser shall reasonably request, and (iii) such
partial assignments of gas and/or oil gathering, transportation, processing
and/or marketing agreements relating to Hydrocarbons from the Subject
Interests, in form and substance satisfactory to Purchaser in its
reasonable discretion as Purchaser shall reasonably request.
Section 13. Conditions to Subsequent Closings. The obligation of Purchaser
to pay each Purchase Price/Installment Payment in connection with a Subsequent
Closing on the related Subsequent Closing Date is subject to Purchaser's receipt
of each of the following, in form, substance, and date satisfactory to
Purchaser:
(a) All legal matters in connection with this Agreement and the
transaction contemplated hereby shall be acceptable to the Purchaser in its
sole discretion.
(b) The Seller shall have obtained all necessary consents, approvals
and permits from all federal and state regulatory agencies, governmental
authorities and from any other Persons, in form and substance satisfactory
to the Purchaser in its sole discretion, the Purchaser shall have received
copies of all such consents, approvals and permits, and such consents,
approvals and permits shall be in full force and effect on the Subsequent
Closing Date, and the Purchaser shall have received a certificate to that
effect signed by the President or a Vice President of the Seller.
(c) The Seller shall have performed all agreements and covenants
required by this Agreement and by the other Production Payment Documents to
be performed by the Seller and all representations and warranties herein
and in the other Production Payment Documents made by the Seller shall be
true and correct as of the Subsequent Closing Date, and the Purchaser shall
have received a certificate to that effect signed by the President or a
Vice President of the Seller.
(d) The Seller shall have executed and delivered a Purchase Agreement
Supplement and any documents called for thereunder (including any
supplements required for the Gas Sales Agreement and the Oil Sales
Agreement, the Conveyance Supplement and any other required Production
Payment Documents together with letters in lieu of transfer orders
addressed to each purchaser of any Production Payment Hydrocarbons, all in
form and substance acceptable to Purchaser.
(e) The Purchaser shall have received an Indenture Release from the
Senior Secured Trustee relating to the Additional Subject Interests, in
form and substance acceptable to the Purchaser in its sole and absolute
discretion.
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(f) The Purchaser shall have received approval of the transaction
contemplated in this Agreement and the other Production Payment Documents
from the Purchaser's senior management.
(g) The Purchaser shall have received, at Seller's expense, favorable
opinions dated as of the Subsequent Closing Date of counsel satisfactory to
the Purchaser and licensed to practice in each of the States in which the
Subject Interests are located, respectively, in form and substance
satisfactory to the Purchaser in its sole discretion which:
(i) will deliver an opinion as to the matters set forth in
Sections 3(a), 3(b), 3(c) and 3(d) hereof ;
(ii) will express the author's opinion with respect to the
sufficiency under the laws of such State of the form, execution,
acknowledgment, recordability, validity and enforceability of the
Conveyance Supplement and the other Production Payment Documents;
(iii) will state that the Seller has Defensible Title to those of
the Subject Interests listed on Exhibit A to the Conveyance Supplement
and located in such State, free of any liens, charges or encumbrances
other than those described in Exhibit A to the Conveyance Supplement
and that all filings and recordings necessary to perfect the
Purchaser's title to the Subject Interests and to give constructive
notice to third parties of the Purchaser's interest therein have been
made;
(iv) will state that, under the laws of such State, upon
execution and delivery of the Conveyance Supplement to the Purchaser,
the Production Payment will have been validly created and will
constitute a legal and valid interest in real property, enforceable in
accordance with its terms; upon execution and delivery of the
Conveyance Supplement to the Purchaser, the Production Payment will
constitute a legal, valid and enforceable production payment
dischargeable out of the volumes specified in the Conveyance
Supplement of the production of Hydrocarbons accruing or attributable
to the Additional Subject Interests; upon execution and delivery of
the Conveyance Supplement to the Purchaser, the covenants and
agreements of the Seller contained in the Conveyance will be valid and
enforceable in accordance with their terms and will inure to the
benefit of the Purchaser as the owner of the Production Payment; in
the event of the commencement of any bankruptcy reorganization,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency laws involving the Seller, the property
interest and the production payments transferred by the Seller prior
to any such commencement shall be excluded from the bankruptcy estate;
(v) will specify whether, under the laws of such State, any
mortgage, documentary, stamp or other taxes will be payable in
connection with the execution, delivery or recording of the Conveyance
Supplement or any of the transactions contemplated thereby; will
specify in which recording offices in such State the Conveyance
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Supplement should be recorded or filed in order to effect the transfer
of the Production Payment to the Purchaser and that upon such filing
or recording, the Purchaser will be the owner of such Production
Payment, subject only to the matters permitted by the terms of the
Conveyance;
(vi) will state that the Purchaser is not required, as a result
of the transactions contemplated hereby, to qualify to do business in
such State; and
(vii) will state that no consents, waivers, approvals or other
action by any regulatory body of the respective State or of any third
party are necessary in connection with the execution, delivery and
performance by the Seller of this Agreement and the other Production
Payment Documents or, if any such consent, waiver, approval or other
action is necessary, that the same has been obtained or accomplished;
which opinions may contain such qualifications or limitations as may be
acceptable to the Purchaser.
(h) [Intentionally omitted].
(i) The Purchaser shall have received reserve reports and completed a
Phase I environmental review satisfactory to the Purchaser, in its sole
discretion, and, if requested by Purchaser, Purchaser shall have received a
Phase II environmental report, relating to the Subject Interests, prepared
by an environmental assessment firm acceptable to the Purchaser, in its
reasonable discretion, in form, substance, scope and methodology
satisfactory to the Purchaser and, since the date of each report, there has
been no material change in the information contained in each such report.
(j) No suit, action or other proceeding shall be pending to restrain,
enjoin or otherwise prevent the consummation of this Agreement or the
transactions contemplated in connection herewith or which may have any
material affect on the Subject Interests.
(k) No Possible Non-Compliance Event or Non-Compliance Event shall
have occurred and be continuing on the Subsequent Closing Date either
before or after giving effect to this Agreement and the other Production
Payment Documents.
(l) All legal matters in connection with this Agreement and the
consummation of the transaction contemplated hereby shall be approved by
counsel for the Purchaser, and there shall have been furnished to such
counsel by the Seller such agreements, opinions of counsel, title or other
records and information as they may reasonably have requested for that
purpose.
(m) The Purchaser shall have received a certificate from Seller's
insurance brokers or advisors confirming that Seller is in compliance with
the requirements of Section 5(o) of this Agreement.
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(n) Supplements to the "Omnibus Certificates" of Seller delivered
under Section 12(q), confirming the matters specified therein and
containing any amendments or supplements to the resolutions, organizational
documents and bylaws attached thereto.
(o) To the extent, if any, requested by Purchaser, certificates of the
valid existence and good standing of Seller in its state of incorporation,
issued by the appropriate authorities of such state, and certificates of
Seller's good standing and due qualification to do business in Texas and
each state where required to do so by applicable law.
(p) Any assurances of title requested by Purchaser concerning the
Production Payment, including the recording and filing of the Conveyance
Supplements and the updating of any specified title opinions through such
recording (it being understood that Purchaser may require these to be given
after, as well as at, the various Closings, and that no title deficiencies
learned of by Purchaser at any time shall in any way be deemed to qualify
any of Seller's warranties of title or indemnities with respect to title in
any of the Production Payment Documents).
(q) (i) Purchaser shall have determined that market conditions and
other relevant factors relating to any existing Hedge Agreements are
satisfactory, in its sole discretion, and (ii) based on discussions with
Purchaser, Seller shall have entered into one or more swap, hedge, floor,
collar or other similar agreements on an International Security Dealers
Association form pursuant to the ISDA Master Agreement which are with
Purchaser or an Affiliate of Purchaser and satisfactory to Purchaser.
(r) The Purchaser shall have received certified copies of all purchase
agreements, transportation agreements, farm-in and farm-out agreements,
leases, processing agreements, operating agreements and such other
agreements or contracts concerning the Subject Interests as Purchaser shall
request.
(s) Seller shall have entered into, if applicable (i) an amendment to
the Gas Sales Agreement and the Oil Sales Agreement concerning the
Additional Subject Interests as Purchaser shall request, in form and
substance satisfactory to Purchaser in its reasonable discretion, (ii) such
memorandum of agreement relating to the purchase of Hydrocarbons from the
Additional Subject Interests as Purchaser shall request, (iii) such
undertakings relating to the Additional Subject Interests inform and
substance satisfactory to Purchaser in its sole discretion as Purchaser
shall request, and (iv) such partial assignments of gas and/or oil
gathering, transportation, processing and/or marketing agreements relating
to Hydrocarbons from the Additional Subject Interests, in form and
substance satisfactory to Purchaser in its sole discretion as Purchaser
shall request.
(t) The Seller and Purchaser shall have mutually agreed upon Delivery
Points which shall be applicable to the Additional Subject Interests.
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Section 14. Adjustment to Dedication Percentage. Using the Reserve Report
prepared as of each Evaluation Date and the Production Payment NPV as calculated
therein, Purchaser shall calculate the percentage, as of the last day of each
month, of such Production Payment NPV divided by the unliquidated balance of the
Total Sum (as defined in the Conveyance) as of such date. If such ratio is equal
to or greater than one hundred fifty percent (150%) then, as provided in the
Conveyance in the definition of "Dedication Percentage", the Dedication
Percentages thereunder shall remain unchanged. If, however, this percentage is
less than one hundred fifty percent (150%), then Purchaser shall calculate a new
Dedication Percentage which will result in a liquidation term of either (i) five
years from the date of this Agreement or (ii) such longer period as the
Purchaser may determine in its sole and absolute discretion. As provided in the
Conveyance in the definition of "Dedication Percentage", the new Dedication
Percentage will take effect with respect to the Subject Interests as of the
first day of the month following the date of the calculation of the Calculated
Percentage and shall be equal to the lesser of (i) the Calculated Percentage
applicable thereto and (ii) a maximum percentage of ninety percent (90%).
However, in no case will the Dedication Percentage fall below sixty percent
(60%).
Section 15. Recording. Concurrently with the Closing, the Purchaser will,
at the Seller's expense, record and/or file, or cause to be recorded and/or
filed, (i) in the appropriate recording and/or filing offices in each county and
State in which any Subject Interest is located, an executed counterpart of the
Conveyance or the Conveyance Supplement, as applicable, and (ii) with any
federal agency or office, such documents as may be required pursuant to
applicable laws, rules or regulations.
Section 16. Amendments to Financings, etc. The Seller acknowledges, agrees
and consents that, at any time and from time to time:
(a) Any financing arrangements of the Purchaser may be amended,
modified or supplemented or replaced at any time in any respect whatsoever
for any purpose whatsoever; and
(b) To the extent permitted by applicable law and Section 10.2 of the
Conveyance, the Purchaser may sell, assign, transfer and otherwise deal in
or with the Subject Interests or its interest therein, as the same may at
any time be amended or modified,
all without affecting this Agreement or the obligations of the Seller hereunder
and without notice to the Seller.
Section 17. Notices. Any notice or communication required or permitted
hereunder shall be given in writing, delivered to or sent by the United States
Postal Service, postage prepaid, or by prepaid telegram, addressed to the
following addresses:
To Seller: Abraxas Petroleum Corporation
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
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Attention: Robert Carington
Telephone: (210) 490-4788
Telecopy: (210) 490-8816
To Purchaser: Southern Producer Services, L.P.
1200 Smith Street
Two Allen Center, Suite 2890
Houston, Texas 77002
Attention: David W. Stewart
Telephone: (713) 276-1900
Telecopy: (713) 276-1990
or to such other address or to the attention of such other person as hereafter
may be designated in writing by the applicable party by notice to the other
party as herein provided, and shall be deemed to have been given as of the date
of receipt.
Section 18. Expenses. Whether or not the transactions hereby contemplated
shall be consummated, the Seller agrees to pay Reimbursable Expenses of the
Purchaser (other than payments required to be made by the Purchaser on account
of principal of or interest on any financing the proceeds of which are used to
finance the purchase of the Production Payment from the Seller or on account of
commitment fees thereunder or in connection therewith). In addition, the Seller
agrees to pay, and to reimburse the Purchaser for, all costs, expenses and taxes
hereafter incurred by the Purchaser in connection with the complete discharge of
the Production Payment not paid out of Production Payment Hydrocarbons under the
Conveyance, including, without limitation, the reasonable fees and out-of-pocket
expenses of internal and outside counsel employed by the Purchaser in connection
therewith.
Section 19. Survival. All of the representations, warranties, indemnities,
covenants and agreements contained herein shall survive the Initial Closing and
the conveyance of the Production Payment pursuant to the Conveyance.
Section 20. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the Seller and the Purchaser and their respective
successors and assigns; provided, however, that the Seller may not assign or
transfer any of its rights or obligations hereunder or under the other
Production Payment Documents without the prior written consent of the Purchaser;
and provided further that the Purchaser may mortgage, pledge, assign or transfer
any or all of its rights or obligations, or both, hereunder or under any of the
other Production Payment Documents without the necessity or requirement of any
consent by the Seller (which consent of Seller is hereby granted). Nothing in
this Agreement, express or implied, is intended to confer upon any other person
any rights or remedies under or by reason of this Agreement.
Section 21. Interest on Unpaid Amounts. Any amount not paid when due
hereunder shall bear interest on such overdue amount at a rate of interest per
annum equal to the lesser of (i) the Agreed Rate plus, if a Non-Compliance Event
shall have occurred and be continuing, one and ne-half percent (1.5%) and (ii)
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the Highest Lawful Rate such lesser rate from time to time (the "Specified
Rate"). Such interest shall be paid on demand.
Section 22. Maximum Interest. It is the intention of the parties hereto to
conform strictly to applicable usury laws and, anything herein to the contrary
notwithstanding, the obligations of the Seller to the Purchaser under this
Agreement and the other Production Payment Documents shall be subject to the
limitation that payments of interest shall not be required to the extent that
receipt thereof would be contrary to provisions of law applicable to the
Purchaser limiting rates of interest which may be charged or collected by the
Purchaser. Accordingly, if the transactions contemplated hereby would be
usurious under applicable law (including the Federal and state laws of the
United States of America, or of any other jurisdiction whose laws may be
mandatorily applicable) with respect to the Purchaser then, in that event,
notwithstanding anything to the contrary in this Agreement or the other
Production Payment Documents, it is agreed as follows:
(a) the provisions of this Section shall govern and control;
(b) the aggregate of all consideration which constitutes interest
under applicable law that is contracted for, charged or received under this
Agreement and the other Production Payment Documents, or under any of the
other aforesaid agreements or otherwise in connection with this Agreement
by the Purchaser shall under no circumstances exceed the maximum amount of
interest allowed by applicable law (such maximum lawful interest rate, if
any, with respect to the Purchaser herein called the "Highest Lawful
Rate"), and any excess shall be credited to the Seller by the Purchaser
(or, if such consideration shall have been paid in full, such excess
refunded to the Seller);
(c) all sums paid, or agreed to be paid, to the Purchaser for the use,
forbearance and detention of the amounts owed under this Agreement by the
Seller to the Purchaser hereunder shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and spread throughout the
full term of such amounts owed under this Agreement and the other
Production Payment Documents until payment in full so that the actual rate
of interest is uniform throughout the full term thereof; and
(d) if at any time the interest provided pursuant to Section 21
together with any other fees payable pursuant to this Agreement and the
other Production Payment Documents and deemed interest under applicable
law, exceeds that amount which would have accrued at the Highest Lawful
Rate, the amount of interest and any such fees to accrue to the Purchaser
pursuant to this Agreement and the other Production Payment Documents shall
be limited, notwithstanding anything to the contrary in this Agreement or
in any other Production Payment Document to that amount which would have
accrued at the Highest Lawful Rate, but any subsequent reductions, as
applicable, shall not reduce the interest to accrue to the Purchaser
pursuant to this Agreement and other Production Payment Documents below the
Highest Lawful Rate until the total amount of interest accrued pursuant to
this Agreement and the other Production Payment Documents and such fees
deemed to be interest equals the amount of interest which would have
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accrued to the Purchaser if a varying rate per annum equal to the interest
provided pursuant to Section 21 had at all times been in effect, plus the
amount of fees which would have been received but for the effect of this
Section.
In the event applicable law provides for an interest ceiling under ss.303 of the
Texas Finance Code and Chapter ID of Title 79, Texas Revised Civil Statutes
Annotated, that ceiling shall be the "indicated rate ceiling" or "weekly
ceiling" as defined in the Texas Finance Code or such Chapter 1D, provided that
the Purchaser may also rely, to the extent permitted by applicable laws, on
alternative maximum rates of interest under other laws applicable to the
Purchaser if greater. As used in this section the term "applicable law" means
the laws of the State of Texas or the laws of the United States of America,
whichever laws allow the greater interest, as such laws now exist or may be
changed or amended or come into effect in the future.
Section 23. Waivers and Amendments. No delay by the Purchaser in the
exercise of any right or remedy under this Agreement or any other Production
Payment Document shall operate as a waiver thereof, and no single or partial
exercise by the Purchaser of any right or remedy under this Agreement or any
other Production Payment Document shall preclude other or further exercise
thereof or the exercise of any other right or remedy hereunder or thereunder;
nor shall any modification to or waiver of any of the provisions of this
Agreement or any other Production Payment Document be binding upon the Purchaser
except as expressly set forth in a writing duly signed and delivered on behalf
of the Purchaser. No action by the Purchaser permitted hereunder shall in any
way affect or impair the rights of the Purchaser and the obligations of the
Seller under this Agreement. The Seller acknowledges that the Purchaser may from
time to time enter into Hedge Agreements with respect to the Production Payment.
Section 24. Section Captions. Section captions used in this Agreement are
for convenience of reference only and shall not affect the construction of this
Agreement.
Section 25. Indemnity. In consideration of the purchase by the Purchaser of
the Production Payment, the Seller hereby indemnifies, exonerates and holds each
"Indemnified Parties" free and harmless from and against any and all claims,
demands, suits, actions, causes of action, suits, losses, costs, judgments,
liabilities (including, without limitation, fines, penalties and interest) and
damages, and expenses of every kind and nature incurred in connection therewith
(irrespective of whether any such Indemnified Party is a party to the action for
which indemnification hereunder is sought), including reasonable attorneys' fees
and disbursements incurred by any Indemnified Party in enforcing the Seller's
obligations hereunder, together with interest on such amounts at the Specified
Rate until paid in full (collectively, the "Indemnified Liabilities"), made
against or incurred by, the Indemnified Parties or any of them as a result of,
or arising out of, or relating to (a) the Production Payment, as a consequence
of the assertion that they or any of them received Production Payment
Hydrocarbons or the proceeds thereof, (b) any loss or claim with respect to any
royalties or burdens on production, (c) the Conveyance, this Agreement or the
other Production Payment Documents and the ownership or purported ownership of
the Production Payment, (d) any investigation, litigation or proceeding related
to any environmental cleanup, audit, compliance or other matter relating to any
Environmental Law or the protection of the environment or the Release by the
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Purchaser or the Seller of any Hazardous Material, (e) the presence on or under,
or the escape, seepage, leakage, spillage, discharge, emission, discharging or
releases from, any of the Subject Interests any Hazardous Material (including
any losses, liabilities, damages, injuries, costs, expenses or claims asserted
or arising under any Environmental Law), regardless of whether caused by, or
within the control of, the Purchaser or the Seller, (f) any breach of any
representation or warranty by the Seller contained in this Purchase Agreement or
any other Production Payment Document, including, without limitation, any
representation or warranty with respect to title to any of the Subject
Interests, (g) the failure of the Seller to perform any of its agreements or
obligations set forth in this Agreement or in the other Production Payment
Documents, including, without limitation, the delivery obligation set forth in
Section 5(c) hereof, (h) any part of the costs, expenses or liabilities incurred
in connection with the exploring, developing, operating, owning, maintaining,
reworking or recompleting of the Subject Interests, (i) the physical condition
of the Subject Interests, (j) the handling, treating or transporting of
Hydrocarbons produced from the Subject Interests (including any costs, expenses,
losses or liabilities related to violation of an Environmental Law or otherwise
related to damage to or remediation of the environment, whether the same arise
out of Purchaser's ownership of an interest in property or out of the actions of
Seller or Purchaser or of third parties or arise otherwise), (k) any pipeline,
transportation, or processing agreements, (l) the failure by Seller to have
Defensible Title to the Subject Interests free and clear of all burdens,
encumbrances, liens and title defects other than Permitted Liens (including any
costs, expenses, losses or liabilities suffered by Purchaser as a result of any
claim that Purchaser must pay over to any person any part of the Production
Payment Proceeds at any time previously received or thereafter to be received by
Purchaser), (m) the Subject Interests, the wells and facilities thereon or used
in connection therewith or the production therefrom or (n) the occurrence of a
Non-Compliance Event, and whether through an act or omission of an Indemnified
Party or otherwise, and whether or not arising out of the sole, joint or
concurrent negligence, fault or strict liability of any Indemnified Party,
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the relevant Indemnified Party's gross
negligence or wilful misconduct, PROVIDED, THAT IT IS THE INTENTION OF THE
PARTIES HERETO THAT THE INDEMNIFIED PARTIES BE INDEMNIFIED IN THE CASE OF THEIR
OWN NEGLIGENCE. This indemnity shall apply, without limitation, to any liability
imposed upon any Indemnified Party as a result of any statute, rule, regulation
or theory of strict liability. The Indemnified Parties, and their respective
successors and assigns, shall have the right to defend against any such claims,
employing attorneys therefor and, unless furnished with reasonable indemnity,
they or any of them shall have the right to pay or compromise and adjust all
such claims. If and to the extent that the foregoing undertaking may be
unenforceable for any reason, the Seller hereby agrees to make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.
Section 26. Confidentiality. Each party hereto agrees to maintain the
confidentiality of the Information (as defined below), except that Information
may be disclosed (a) to its and its Affiliates' directors, officers, employees
and agents, including accountants, legal counsel and other advisors (it being
understood that the Persons to whom such disclosure is made will be informed of
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the confidential nature of such Information and instructed to keep such
Information confidential), (b) to the extent requested by any regulatory
authority, (c) to the extent required by applicable laws or regulations or by
any subpoena or similar legal process, (d) to any other party to this Agreement,
(e) in connection with the exercise of any remedies hereunder or any suit,
action or proceeding relating to this Agreement or the enforcement of rights
hereunder, (f) in connection with any assignment or potential assignment of such
party's rights hereunder which is or would be permitted hereunder (provided that
each such assignee or potential assignee is made aware that such information is
required to be held in confidence), (g) with the consent of the party which
delivered such Information, or (h) to the extent such Information (A) becomes
publicly available other than as a result of a breach of this Section by any
Person or (B) becomes available to Purchaser on a nonconfidential basis from a
source other than the Seller or any Person obligated to maintain the
confidentiality of such Information. For the purposes of this Section,
"Information" means all information received from another party relating to such
other party or its business, other than any publicly available information and
such information that is available to any other party to this Agreement on a
nonconfidential basis prior to disclosure by such party; provided that, in the
case of information received from Seller after the date hereof, such information
is clearly identified at the time of delivery as confidential. Any Person
required to maintain the confidentiality of Information as provided in this
Section shall be considered to have complied with its obligation to do so if
such Person has exercised the same degree of care to maintain the
confidentiality of such Information as such Person would accord to its own
confidential information.
Section 27. Servicer. The Seller agrees that the Purchaser may from time to
time designate one or more persons or entities to act as Servicer (from time to
time, a "Servicer") on behalf of the Purchaser to receive notices on behalf of
the Purchaser hereunder or under the Conveyance, to arrange deliveries of
Production Payment Hydrocarbons or Marketed Volumes to the Purchaser or to take
such other actions or perform such obligations as the Purchaser may from time to
time designate in its sole discretion and if the Seller receives any such
designation, the Seller will comply therewith until notified to the contrary by
the Purchaser.
Section 28. Choice of Law. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT
MADE UNDER THE LAWS OF THE STATE OF TEXAS AND FOR ALL PURPOSES SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT
REGARD TO CONFLICTS OF LAW PRINCIPLES THEREOF THAT WOULD CAUSE ANOTHER STATE'S
LAW TO APPLY) AND THE LAWS OF THE UNITED STATES OF AMERICA IN ALL RESPECTS,
INCLUDING, WITHOUT LIMITATION, MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
Section 29. Forum Selection and Consent to Jurisdiction. ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR
ANY OTHER PRODUCTION PAYMENT DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE SELLER OR THE
PURCHASER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE
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OF TEXAS OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
TEXAS; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY SUBJECT
INTEREST OR OTHER PROPERTY MAY BE BROUGHT, AT THE PURCHASER'S OPTION, IN THE
COURTS OF ANY JURISDICTION WHERE SUCH SUBJECT INTEREST OR OTHER PROPERTY MAY BE
FOUND. THE SELLER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION
OF THE COURTS OF THE STATE OF TEXAS AND OF THE UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF TEXAS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET
FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY
IN CONNECTION WITH SUCH LITIGATION. THE SELLER FURTHER IRREVOCABLY CONSENTS TO
THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL
SERVICE WITHIN OR WITHOUT THE STATE OF TEXAS. THE SELLER HEREBY EXPRESSLY AND
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH
THE SELLER MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH
LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY
SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT
THE SELLER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY
COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT
PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO
ITSELF OR ITS SUBJECT INTERESTS, THE SELLER HEREBY IRREVOCABLY WAIVES SUCH
IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER
PRODUCTION PAYMENT DOCUMENTS.
Section 30. Waiver of Jury Trial. THE SELLER AND PURCHASER HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR
IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER PRODUCTION PAYMENT
DOCUMENTS, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL
OR WRITTEN) OR ACTIONS OF THE SELLER IN CONNECTION THEREWITH. THE SELLER AND
PURCHASER EACH ACKNOWLEDGE AND AGREE THAT IT HAS RECEIVED FULL AND SUFFICIENT
CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF THIS AGREEMENT AND
THE OTHER PRODUCTION PAYMENT DOCUMENTS) AND THAT THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE OTHER PARTY HERETO ENTERING INTO THIS AGREEMENT AND THE OTHER
PRODUCTION PAYMENT DOCUMENTS.
48
<PAGE>
Section 31. Waiver of Consumer Rights. EACH OF THE SELLER AND THE PURCHASER
HEREBY WAIVES ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES ACT, SECTION
17.41 ET SEQ., BUSINESS AND COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL
RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF ITS OWN
SELECTION, EACH OF THE SELLER AND THE PURCHASER VOLUNTARILY CONSENTS TO THIS
WAIVER.
EACH OF THE SELLER AND THE PURCHASER FURTHER REPRESENTS AND WARRANTS TO THE
OTHER THAT IT (1) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS
THAT ENABLE IT TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED
BY THIS AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS, (2) IS REPRESENTED
BY LEGAL COUNSEL OF ITS OWN SELECTION IN CONNECTION WITH THIS AGREEMENT AND THE
OTHER PRODUCTION PAYMENT DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS AND SUCH LEGAL COUNSEL WAS
IN NO WAY, DIRECTLY OR INDIRECTLY, IDENTIFIED, SUGGESTED OR SELECTED BY THE
OTHER PARTY OR AN AGENT OR REPRESENTATIVE OF THE OTHER PARTY, AND (3) IS NOT IN
A DISPARATE BARGAINING POSITION RELATIVE TO THE OTHER PARTY.
Section 32. No Oral Agreements. THIS AGREEMENT AND THE OTHER PRODUCTION
PAYMENT DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[SIGNATURES BEGIN ON FOLLOWING PAGE]
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, acting
through their respective officers hereunto duly authorized, as of the date
hereinabove first written.
SELLER:
ABRAXAS PETROLEUM
CORPORATION
By:_____________________________
Name:
Title:
PURCHASER:
SOUTHERN PRODUCER SERVICES,
L.P.
By: SC Ashwood Holdings, Inc., as
general partner
By:______________________________
Name:
Title:
S-1
<PAGE>
SCHEDULE I
DISCLOSURE SCHEDULE
[TO BE PROVIDED BY SELLER]
SCHEDULE I - Page 1
<PAGE>
EXHIBIT A
Description of Subject Interests
[SHOULD INCLUDE LIST OF EACH WELL]
[to be attached]
EXHIBIT A - Page 1
<PAGE>
EXHIBIT B
[Form of]
Conveyance of Dollar Denominated Production Payment
[to be attached]
EXHIBIT B - Page 1
<PAGE>
EXHIBIT C
Form of Indenture Release
[to be attached]
EXHIBIT C - Page 1
<PAGE>
EXHIBIT D
Insurance Requirements
[SEE ATTACHED CERTIFICATE]
EXHIBIT D - Page 1
<PAGE>
EXHIBIT E
[Form of]
Monthly Hydrocarbon Report (Purchaser/Seller)
[to be attached]
EXHIBIT E - Page 1
<PAGE>
EXHIBIT F
[Form of]
Purchase Agreement Supplement
_____________ SUPPLEMENT TO PURCHASE AGREEMENT FOR
DOLLAR DENOMINATED PRODUCTION PAYMENT
THIS SUPPLEMENT TO PURCHASE AGREEMENT FOR DOLLAR DENOMINATED PRODUCTION
PAYMENT dated as of ________ ________________, ______ (herein, as from time to
time amended or supplemented, called this "Supplement") is entered into between
ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (herein called the "Seller"
or the "Working Interest Owner"), and SOUTHERN PRODUCER SERVICES, L.P., a
Delaware limited partnership (herein called the "Purchaser" or "Production
Payment Owner").
WITNESSETH
WHEREAS, the Seller and Purchaser have heretofore entered into that certain
Purchase Agreement for Dollar Denominated Production Payment dated as of October
6, 1999 (herein, as heretofore amended or supplemented, called the "Original
Purchase Agreement"), and, as contemplated therein, Seller has, by means of a
Conveyance of Dollar Denominated Production Payment of the same date (herein, as
heretofore amended or supplemented, called the "Original Conveyance"), conveyed
to Purchaser the "Production Payment" as therein defined, burdening interests of
Seller in certain oil and gas properties.
WHEREAS, as contemplated in the Original Purchase Agreement, Seller now
desires to supplement the Original Conveyance in consideration of the payment by
Purchaser of an additional Purchase Price/Installment Payment, as more fully
described below.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, Seller and Purchaser hereby agree as follows:
ARTICLE I. - Definitions and References
Section 1.1 Defined Terms and References. As used herein, the terms
"Original Conveyance", "Original Purchase Agreement", "Seller" and "Purchaser"
have the meanings given them above. Reference is also made to the Original
Purchase Agreement and to the Original Conveyance as defined therein, for the
meaning of various terms defined therein, all of which shall when used herein
(unless otherwise expressly defined herein) have the meanings. For purposes of
this Supplement, unless the context otherwise requires, the following additional
terms shall have the following meanings:
EXHIBIT F - Page 1
<PAGE>
"Additional Production Units" means the tract or tracts specified on
Exhibit A to the Current Conveyance Supplement.
"Additional Subject Interests" has the meaning given to such term in the
Current Conveyance Supplement.
"Current Closing Date" has the meaning given such term in Section 2.3.
"Current Conveyance Supplement" means the _______________ Supplement to
Conveyance of Dollar Denominated Production Payment executed by Seller,
substantially in the form of Exhibit A hereto.
"Current Purchase Price/Installment Payment" means a Purchase
Price/Installment Payment which is $_______________.
"Current Supplement Documents" means this Supplement, the Current
Conveyance Supplement, and all other Production Payment Documents delivered
substantially contemporaneously herewith.
"Purchase Agreement" means the Original Purchase Agreement as supplemented
and amended hereby.
Section 1.2 Rules of Construction. All references in this Supplement to
articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Supplement unless
expressly provided otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words "this Supplement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Supplement as a whole and not to any particular subdivision unless expressly so
limited. Unless the context otherwise requires: "including" (and its grammatical
variations) means "including without limitation"; "or" is not exclusive; words
in the singular form shall be construed to include the plural and vice versa;
words in any gender include all other genders; references herein to any
instrument or agreement refer to such instrument or agreement as it may be from
time to time supplemented or amended; and references herein to any Person
include such Person's successors and assigns. All references in this Supplement
to exhibits and schedules refer to the exhibits and schedules to this Supplement
unless expressly provided otherwise, and all such exhibits and schedules are
hereby incorporated herein by reference and made a part hereof for all purposes.
EXHIBIT F - Page 2
<PAGE>
ARTICLE II. - Purchase and Sale
Section 2.1 Agreement of Purchase and Sale. Upon the terms and conditions
of this Supplement and the Purchase Agreement, Seller agrees to amend and
supplement the Original Conveyance by executing and delivering the Current
Conveyance Supplement, and Purchaser agrees to acquire the interests therein
conveyed by Seller.
Section 2.2 Closing. On the Current Closing Date, Seller shall deliver the
Current Conveyance Supplement to Purchaser, making the Production Units
described therein subject to the Production Payment, and shall satisfy all of
the conditions set out in Sections 10 and 12 of the Purchase Agreement. *[Seller
shall also obtain supplements to the Gas Sales Agreement and the Oil Sales
Agreement in the forms attached as Exhibits B and C hereto.] Thereupon Purchaser
shall pay *[all/ $_______________of] the Current Purchase Price/Installment
Payment to Seller in accordance with the terms and procedures of the Purchase
Agreement, with:
*[The remainder of the Current Reimbursement/Installment Payment shall be paid
to Seller in connection with future Conveyance Supplements, as contemplated in
Sections 2(b) and 2(d) of the Purchase Agreement.]
Section 2.3 Time and Place of Closing. The closing for the consummation of
the transactions contemplated herein shall take place at such place and on such
date as may be agreed to by Seller and Purchaser (herein called the "Current
Closing Date").
*[Section (1) Expenses. Pursuant to Section 2(d) of the Purchase Agreement,
Seller has deposited $25,000 with Seller, to be applied to Reimbursable
Expenses. Concurrently herewith, Seller is depositing an additional $15,000 with
Purchaser, which will be used to pay additional Reimbursable Expenses as
billed.]
ARTICLE III. - Representations and Covenants
Section 3.1 Representations and Warranties of Seller. To induce Seller to
enter into this Supplement and to pay the Current Purchase Price/Installment
Payment, Seller hereby represents and warrants and covenants to Purchaser that:
(a) All representations and warranties made by Seller in any Production
Payment Document now or previously delivered are true and correct as of the
Current Closing Date, unless such representations and warranties are expressly
limited to an earlier date, in which case such representations and warranties
are true and correct as of such earlier date).
(b) Seller has performed all agreements, covenants, and conditions which
each are required by any Production Payment Document to perform on or prior to
the Current Closing Date.
EXHIBIT F - Page 3
<PAGE>
(c) The consummation on the Current Closing Date of the transactions
contemplated in the Current Supplement Documents: (i) is not prohibited by any
law or any regulation or order of any court or governmental agency or authority
applicable to Seller, and (ii) does not subject any of them to any penalty or
other onerous condition under or pursuant to any such law, regulation or order.
*[(d) Schedule 1 lists those Subject Wells the production from which is not
presently subject to severance tax pursuant to ss. 201.057 of the Texas Tax
Code.]1/
Section 3.2 Covenants *[and Consent].
(a) To induce Purchaser to enter into this Supplement and to pay the
Current Purchase Price/Installment Payment, Seller hereby covenants with
Purchaser that Seller will perform all of its covenants and duties under the
Production Payment Documents, all as fully as if they were set out in full
herein.
*(b) Insert any other covenants that may have been agreed upon.]
Section 3.3 Representations and Warranties of Purchaser. Purchaser hereby
represents and warrants to Seller that: (a) Purchaser has incurred no obligation
or liability, contingent or otherwise, for broker's or finder's fees in respect
of any of the matters provided for in this Supplement for which fees Seller
might be liable; (b) the Purchase Agreement constitutes the legal, valid and
binding act and obligation of Purchaser, enforceable against Purchaser in
accordance with its terms except as such enforcement may be limited by
bankruptcy, insolvency, moratorium and other similar laws applicable to
creditors' rights generally or by general principles of equity; (c) no
bankruptcy or insolvency proceeding is presently pending (or, to Purchaser's
best knowledge, threatened) by or against Purchaser under any applicable
bankruptcy, insolvency or other similar law of any jurisdiction; (d) Purchaser
has not made a general assignment for the benefit of creditors; (e) Purchaser is
acquiring the Production Payment for its own account and not with any intention
to transfer all or any part of the Production Payment to others in violation of
the Securities Act of 1933, as amended, or any other applicable securities laws,
and (f) Purchaser is a "United States person", within the meaning of Section
7701 of the Code as amended.
ARTICLE IV. - Miscellaneous
Section 4.1 Ratification of Production Payment Documents. The Original
Purchase Agreement as hereby supplemented and amended is hereby ratified and
confirmed in all respects. The other Production Payments Documents, as they may
be supplemented, amended or affected by the Current Supplement Documents, are
hereby ratified and confirmed in all respects. Any reference to the Purchase
Agreement in any Production Payment Document shall be deemed to refer to this
Supplement also, and any reference in any Production Payment Document to any
other document or instrument amended, renewed, extended or otherwise affected by
any Current Supplement Document shall also refer to such Current Supplement
Document. The execution, delivery and effectiveness of this Supplement and the
other Current Supplement Documents shall not, except as expressly provided
herein or therein, operate as a waiver of any right, power or remedy of Grantee
or Agent under the Purchase Agreement or any other Production Payment --------
1/ Update the list of Subject Wells which have qualified as being exempt from
severance tax.
EXHIBIT F - Page 4
<PAGE>
Document nor constitute a waiver of any provision of the Purchase Agreement or
any other Production Payment Document.
Section 4.2 Survival of Agreements. All representations, warranties,
covenants and agreements of Seller herein shall survive the execution and
delivery of this Supplement and the Current Conveyance Supplement and shall
further survive until terminated in accordance with the Purchase Agreement.
Section 4.3 Production Payment Documents. This Supplement and the other
Current Supplement Documents are Production Payment Documents, and all
provisions in the Purchase Agreement pertaining to Production Payment Documents
apply hereto and thereto.
THIS WRITTEN AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 4.4 Governing Law. This Supplement shall be deemed a contract and
instrument made under the laws of the State of Texas and shall be construed and
enforced in accordance with and governed by the laws of the State of Texas and
the laws of the United States of America, without regard to principles of
conflicts of law.
Section 4.5 Counterparts. This Supplement may be separately executed in
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed shall be deemed to constitute one and the same
Supplement.
EXHIBIT F - Page 5
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed as of the date first written
above.
SELLER:
ABRAXAS PETROLEUM CORPORATION
By:____________________________
Name:
Title:
PURCHASER:
SOUTHERN PRODUCER SERVICES, L.P.
By: SC Ashwood Holdings, Inc., as general
partner
By:_____________________________
Name:
Title:
EXHIBIT F - Page 6
<PAGE>
SCHEDULE I
TO
PURCHASE AGREEMENT SUPPLEMENT
ADDITIONAL DISCLOSURES
(including severance tax exempt wells)
EXHIBIT F - Page 7
<PAGE>
EXHIBIT A
TO
PURCHASE AGREEMENT SUPPLEMENT
Additional Production Units
[to be provided]
EXHIBIT F - Page 8
<PAGE>
EXHIBIT B
TO
PURCHASE AGREEMENT SUPPLEMENT
Supplement to Gas Sales Agreement
EXHIBIT F - Page 9
<PAGE>
EXHIBIT C
TO
PURCHASE AGREEMENT SUPPLEMENT
Supplement to Oil Sales Agreement
EXHIBIT F - Page 10
<PAGE>
EXHIBIT G
[Form of]
Conveyance Supplement
_______________ SUPPLEMENT TO CONVEYANCE OF DOLLAR
DENOMINATED PRODUCTION PAYMENT
THIS _______________ SUPPLEMENT TO CONVEYANCE OF DOLLAR DENOMINATED
PRODUCTION PAYMENT (this "Supplement") is entered into as of ___________,
________ between ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (herein
called the "Seller" or the "Working Interest Owner"), and SOUTHERN PRODUCER
SERVICES, L.P., a Delaware limited partnership (herein called the "Purchaser" or
"Production Payment Owner").
WITNESSETH
WHEREAS, on October 6, 1999, Seller executed in favor of Purchaser
that certain Conveyance of Dollar Denominated Production Payment (as heretofore
amended, the "Original Conveyance"), recorded as set forth in Schedule 1 hereto;
all capitalized terms used but not defined herein shall have the meanings
assigned to them in the Original Conveyance.
WHEREAS, Seller and Purchaser desire to supplement and amend the
Original Conveyance in order to include additional properties more particularly
described below.
SUPPLEMENT AND AGREEMENT:
FOR A GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which are hereby acknowledged, Seller and Purchaser do hereby agree, act and
covenant as follows:
Section 1. Effective as of 7:00 a.m. Houston, Texas time on
_______________, _______ (the "Effective Time"), the Original Conveyance is
amended in order to add the amount of _______________ dollars ($_______________)
to the unliquidated balance of the Primary Sum, as such unliquidated balance
stood as of the Effective Time.
Section 2. Exhibit A to the Original Conveyance is hereby amended and
supplemented, effective as of the Effective Time, to include at the end thereof
Exhibit A hereto (herein called "Additional Exhibit A").
EXHIBIT G - Page 1
<PAGE>
Section 3. The terms "NRI Percentage," "Production Payment
Hydrocarbons," "Subject Hydrocarbons," "Subject Interests," and "Subject Wells,"
as such terms are defined and used in the Original Conveyance are hereby
amended, effective as of the Effective Time, in order to take into account and
recognize the addition of Additional Exhibit A hereto to the end of Exhibit A as
attached to the Original Conveyance, and all other direct or indirect references
in the Original Conveyance shall likewise be considered amended in order to take
into account and recognize the addition of Additional Exhibit A hereto to the
end of Exhibit A as attached to the Original Conveyance.
Section 4. All of the terms and provisions of the Original Conveyance
not amended or supplemented hereby are ratified, adopted, affirmed and renewed,
and remain in full force and effect for the benefit of Seller, the Purchaser and
their respective successors and assigns.
For the above-recited consideration, Seller does hereby, in order to
more fully effectuate the amendments and other provisions herein contained,
GRANT, BARGAIN, SELL, CONVEY, ASSIGN, TRANSFER, SET OVER and DELIVER unto
Purchaser, as a production payment, a term overriding royalty interest carved
out of and burdening the "Additional Subject Interests," as defined below, equal
to and measured by all "Additional Production Payment Hydrocarbons," as defined
below, in, under and that may be produced from (or, to the extent pooled or
unitized, allocated to) the "Additional Subject Interests," with such production
payment to be effective as to deliveries of Additional Production Payment
Hydrocarbons as of the Effective Time and to terminate as of the Termination
Time.
TO HAVE AND TO HOLD the above-described production payment, upon and
subject to the terms of the Original Conveyance, as amended hereby, unto
Purchaser, and its successors and Permitted Assigns, until the Termination Time.
As used herein, the following terms have the following meanings:
(a) "Additional Production Payment Hydrocarbons" means the Dedication
Percentage, as defined in the Original Conveyance, of the NRI
Percentage (as the definition of such term is amended herein) of
all Hydrocarbons in, under or that may be produced from (or, to
the extent pooled or unitized, allocated to) any Additional
Subject Interests.
(b) "Additional Subject Interests" means:
(i) All of the leasehold interests and other property interests
described in Additional Exhibit A hereto; and
(ii) Without limitation of the foregoing, all other right, title
and interest (of whatever kind or character, whether legal
or equitable and whether vested or contingent) of Seller in
and to the oil, gas and other minerals in and under or that
may be produced from the lands described in Additional
Exhibit A (including interests in oil, gas or mineral leases
to the extent the same cover such lands, overriding
royalties, production payments and net profits interests in
such lands or such leases, and fee mineral interests, fee
EXHIBIT G - Page 2
<PAGE>
royalty interests and other interests in such oil, gas and
other minerals); and
(iii) All rights, titles and interests of Seller in and to, or
otherwise derived from, all presently existing and valid
oil, gas or mineral unitization, pooling, or communitization
agreements, declarations or orders and in and to the
properties covered and the units created thereby (including
all units formed under orders, rules, regulations, or other
official acts of any federal, state, or other authority
having jurisdiction, voluntary unitization agreements,
designations or declarations, and so-called "working
interest units" created under operating agreements or
otherwise) relating to the properties described in
subsections (i) or (ii) above in this definition.
Without limitation of the generality of the provisions of Section 3 or of the
foregoing provisions of this Section 4, effective as to deliveries of Additional
Production Payment Hydrocarbons as of the Effective Time, the definition of
Production Payment Hydrocarbons as found in the Original Conveyance shall be
amended to include all Additional Production Payment Hydrocarbons, as defined
herein, the definition of Subject Interests as found in the Original Conveyance
shall be amended to include all Additional Subject Interests, as defined herein;
and the term "Initial Time", as found in the definition of "Subject
Hydrocarbons" in the Original Conveyance, shall be deemed to read Effective
Date, as such term is defined herein, but only as to Additional Production
Payment Hydrocarbons from Additional Subject Interests, and the Original
Conveyance is amended to so provide.
Section 33 This Supplement may be executed in multiple counterparts,
all of which are identical, [except that, to facilitate recordation, in certain
counterparts hereof only those portions of Exhibit A which contain descriptions
of properties located in the recording jurisdiction in which the particular
counterpart is to be recorded are included. All of such counterparts together
shall constitute one and the same instrument. Complete copies of this Supplement
containing the entirety of Exhibit A, have been retained by Seller and
Purchaser.]
Section 34 This Supplement shall be binding upon and shall enure to
the benefit of the parties hereto, and their respective successors and assigns,
and all of the covenants and agreements contained in the Original Conveyance, as
amended hereby, shall be deemed to be covenants and agreements running with the
lands affected thereby.
EXHIBIT G - Page 3
<PAGE>
Section 35 This Supplement shall be governed by and construed in
accordance with the laws of the State of Texas, without regard to principles of
conflicts of laws.
EXHIBIT G - Page 4
<PAGE>
EXECUTED by the parties hereto on the dates set out below in their
respective acknowledgments, but effective as to deliveries of Additional
Production Payment Hydrocarbons as of the Effective Time.
SELLER:
ABRAXAS PETROLEUM CORPORATION
By:_____________________________
Name:
Title:
Address:
ABRAXAS PETROLEUM CORPORATION
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
Attention: Robert Carington
Telephone: (210) 490-4788
Telecopy: (210) 490-8816
PURCHASER:
SOUTHERN PRODUCER SERVICES, L.P.
By: SC Ashwood Holdings, Inc., as general
partner
By:__________________________________
Name:
Title:
Address:
1200 Smith Street
Two Allen Center, Suite 2890
Houston, Texas 77002
Attention: David W. Stewart
Telephone: (713) 276-1900
Telecopy: (713) 276-1990
EXHIBIT G - Page 5
<PAGE>
This document prepared by:
Francis R. Bradley, III, Esq.
Mayer, Brown & Platt
700 Louisiana, Suite 3600
Houston, Texas 77002
EXHIBIT G - Page 6
<PAGE>
STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
The foregoing instrument was acknowledged before me on this _____ day
of _______________, _______, by _____________________, the _____________________
of ABRAXAS PETROLEUM CORPORATION, a Nevada corporation, on behalf of such
corporation.
Witness my hand and official seal.
Notary Public
Residing at
My commission expires:
EXHIBIT G - Page 7
<PAGE>
STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
The foregoing instrument was acknowledged before me on this _____ day
of _______________, _______, by_______________________________, the
___________________ of SC Ashwood Holdings, Inc., as general partner for
Southern Producer Services, L.P., a Delaware limited partnership, on behalf of
such limited partnership.
Witness my hand and official seal.
Notary Public
Residing at
My commission expires:
EXHIBIT G - Page 8
<PAGE>
EXHIBIT A
TO
CONVEYANCE SUPPLEMENT
[To be supplied; use same format as used in
Exhibit A to the Original Conveyance]
EXHIBIT G - Page 9
<PAGE>
SCHEDULE I
TO
CONVEYANCE SUPPLEMENT
Recording Jurisdiction Book/Page*
EXHIBIT G - Page 10
<PAGE>
EXHIBIT H
[Form of]
Gas Sales Agreement
[to be attached]
EXHIBIT H - Page 1
<PAGE>
EXHIBIT I
[Form of]
Proposed Program Well Reconveyance
PARTIAL RELEASE AND RECONVEYANCE
OF DOLLAR DENOMINATED PRODUCTION PAYMENT
THIS PARTIAL RELEASE AND RECONVEYANCE OF DOLLAR DENOMINATED PRODUCTION
PAYMENT (this "Partial Reconveyance"), dated ___________, _______ to be
effective as of the Effective Date, is by and between SOUTHERN PRODUCER
SERVICES, L.P., a Delaware limited partnership (herein called "Assignor"), and
ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (herein called "Assignee").
Assignor's and Assignee's addresses are set forth in Section 5(a) hereof.
WHEREAS, pursuant to that certain Conveyance of Dollar Denominated
Production Payment dated as of October 6, 1999 (the "Original Conveyance"),
Assignee assigned and conveyed to Assignor certain rights and interests in
certain oil and gas leases and other rights, interests and estates affecting and
burdening certain lands located in the State of Texas; and
WHEREAS, counterparts of the Original Conveyance have been recorded
and filed as set forth on Schedule I attached to this Partial Reconveyance; and
WHEREAS, Assignor desires to reassign and convey to Assignee a portion
of the Production Payment (as defined in the Original Conveyance and used herein
with the same meaning) INSOFAR AND ONLY INSOFAR as it affects the lands, leases,
interests and properties described in Exhibit A to this Partial Reconveyance.
In consideration of the mutual covenants contained herein and other
good and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. (a) Grant of Production Payment. Assignor hereby grants, bargains,
sells, assigns, conveys, transfers and sets over to Assignee, effective as of
the Effective Date (defined below), that portion of the Production Payment
INSOFAR AND ONLY INSOFAR as the Production Payment burdens and affects the
lands, leases, interests and properties described in or referred to in Exhibit A
attached hereto and made a part hereof for all purposes (such interests and
properties collectively called the "Reassigned Properties"). To the extent this
Partial Reconveyance constitutes a partial reconveyance of a portion of the
Production Payment, the interest herein reconveyed shall merge with the working
interest out of which the Production Payment was created, and be extinguished.
EXHIBIT I - Page 1
<PAGE>
TO HAVE AND TO HOLD the Production Payment in the Reassigned
Properties, together with all and singular, all rights, privileges, options,
hereditaments, and appurtenances thereto in anywise belonging, unto Assignee,
its successors and assigns forever, subject to the terms, conditions,
exceptions, reservations, covenants, and agreements herein set forth.
(b) Title Warranty. Assignor hereby binds itself, its successors and
assigns to warrant and forever defend the title to the Production Payment herein
granted, conveyed, assigned, and transferred unto Assignee, its successors and
assigns, against the lawful claims and demands of every person whomsoever
claiming or to claim the same or any part thereof, by, through or under
Assignor, but not otherwise.
2. Reservation. Assignor excepts and reserves unto Assignor all its right,
title and interest in and to the Production Payment conveyed by the Original
Conveyance insofar as it affects lands, interests and properties other than the
Reassigned Properties.
IT IS EXPRESSLY UNDERSTOOD AND AGREED THIS IS A PARTIAL RELEASE AND
RECONVEYANCE RELATING SOLELY TO THE REASSIGNED PROPERTIES, AND SHALL IN NO WAY
RELEASE, OR OTHERWISE AFFECT OR IMPAIR, THE PRODUCTION PAYMENT INSOFAR AS IT
COVERS OTHER LANDS.
3. THE PARTIES AGREE THAT TO THE EXTENT REQUIRED TO BE OPERATIVE, THE
DISCLAIMERS OF CERTAIN WARRANTIES CONTAINED IN THIS SECTION ARE "CONSPICUOUS"
DISCLAIMERS FOR THE PURPOSE OF ANY APPLICABLE LAW, RULE OR ORDER. OTHER THAN THE
COVENANTS, REPRESENTATIONS AND WARRANTIES, IF ANY, MADE AND GIVEN IN THIS
PARTIAL RECONVEYANCE, (A) THIS PORTION OF THE PRODUCTION PAYMENT IS RECONVEYED
AND ASSIGNED TO AND ACCEPTED BY THE ASSIGNEE WITHOUT REPRESENTATION, COVENANT OR
WARRANTY OF ANY KIND OR NATURE, EXPRESS, IMPLIED OR STATUTORY, AND (B) ASSIGNOR
HEREBY DISCLAIMS ALL REPRESENTATIONS, COVENANTS AND WARRANTIES, INCLUDING,
WITHOUT LIMITATION, ALL REPRESENTATIONS, COVENANTS AND WARRANTIES OF TITLE,
EXPRESS, IMPLIED AND STATUTORY. ASSIGNEE FOR ITSELF, ITS SUCCESSORS AND ASSIGNS
HEREBY RELIEVES AND RELEASES ASSIGNOR FROM AND AGAINST ALL DAMAGES OR LOSSES
WHICH MAY OCCUR IN CONNECTION WITH THIS DISCLAIMER OF WARRANTIES. THERE ARE NO
WARRANTIES WHICH EXTEND BEYOND THE DESCRIPTION ON THE FACE OF THIS PARTIAL
RECONVEYANCE. THIS PARTIAL RECONVEYANCE IS FURTHER MADE AND ACCEPTED UPON THE
UNDERSTANDING AND AGREEMENT THAT ASSIGNEE FOR ITSELF, ITS SUCCESSORS AND
ASSIGNS, HAS INSPECTED THE REASSIGNED PROPERTIES AND HAS SATISFIED ITSELF AS TO
THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, AND
THAT ALL INTERESTS CONVEYED HEREBY ARE SOLD AND ASSIGNED AND ACCEPTED BY
ASSIGNEE, IN THEIR "WHERE IS, AS IS" CONDITION WITHOUT ANY WARRANTIES
WHATSOEVER, EXPRESS OR IMPLIED OR STATUTORY, OF MARKETABILITY,
EXHIBIT I - Page 2
<PAGE>
QUALITY, CONDITION, MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE OR
USE, ALL OF WHICH ARE EXPRESSLY DISCLAIMED. ASSIGNEE FOR ITSELF, ITS SUCCESSORS
AND ASSIGNS HEREBY WAIVES, RELIEVES AND RELEASES ASSIGNOR FROM AND AGAINST ALL
DAMAGES OR LOSSES INCURRED OR SUFFERED FROM OR AFTER THE EFFECTIVE TIME (i)
WHICH MAY OCCUR AS A RESULT OF ANY DEFAULT UNDER THE PROVISIONS OF THE PRIOR
SENTENCE; AND/OR (ii) ARISING OUT OF OR IN ANY MANNER RELATED TO ANY TORT CLAIMS
IN NEGLIGENCE OR STRICT LIABILITY WHICH OTHERWISE MIGHT BE ASSERTED IN
CONNECTION WITH THIS TRANSACTION BUT FOR THIS EXPLICIT AND CONSPICUOUS
DISCLAIMER OF LIABILITY. IN ADDITION, ASSIGNOR HAS MADE NO REPRESENTATION,
COVENANT OR WARRANTY, EXPRESS OR IMPLIED OR STATUTORY, AS TO THE ACCURACY OR
COMPLETENESS OF ANY DATA, INFORMATION OR MATERIALS PREVIOUSLY OR HEREAFTER
FURNISHED ASSIGNEE IN CONNECTION WITH THE PRODUCTION PAYMENT, OR CONCERNING THE
QUALITY OR QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE
PRODUCTION PAYMENT, OR THE ABILITY OF ANY WELLS TO PRODUCE HYDROCARBONS OR THE
PRICES WHICH ASSIGNEE IS OR WILL BE ENTITLED TO RECEIVE FOR ANY SUCH
HYDROCARBONS. ANY AND ALL SUCH DATA, INFORMATION AND OTHER MATERIALS FURNISHED
BY ASSIGNOR ARE PROVIDED ASSIGNEE AS A CONVENIENCE, AND ANY RELIANCE ON OR USE
OF SUCH DATA, INFORMATION AND OTHER MATERIALS SHALL BE AT ASSIGNEE'S SOLE RISK
AND WITHOUT RECOURSE TO ASSIGNOR. ASSIGNEE EXPRESSLY WAIVES THE PROVISIONS OF
CHAPTER XVII, SUBCHAPTER E, SECTIONS 17.41 THROUGH 17.63, INCLUSIVE (OTHER THAN
SECTION 17.55A, WHICH IS NOT WAIVED), VERNON'S TEXAS CODE ANNOTATED, BUSINESS
AND COMMERCE CODE.
4. General Provisions.
(a) Notices. All notices, communications and payments required or
permitted to be given hereunder shall be delivered in conformity with Section 16
of the Original Conveyance.
(b) Successors and Assigns. All agreements and conditions between the
parties hereto shall extend to and be binding upon their respective successors
and assigns.
(c) Agreement. As of the date hereof, the Production Payment in the
Reassigned Properties is no longer subject to the terms and conditions of the
Original Conveyance.
(d) Further Assurances. Assignor agrees to execute, acknowledge and
deliver, as appropriate, any and all such other and additional instruments,
notices, and other documents and to perform such other acts as may be necessary
more fully to assure Assignee and its successors or assigns all of the rights
and interests hereby granted or intended so to be and to pay upon demand all
costs and expenses of the preparation, filing and/or recording thereof.
EXHIBIT I - Page 3
<PAGE>
(e) Headings. The headings of the articles and sections of this
Partial Reconveyance are for convenience of reference only and shall not limit
or otherwise affect any of the terms or provisions of this Partial Reconveyance.
(f) Unenforceable or Inapplicable Provisions. If any provision of this
Partial Reconveyance is invalid or unenforceable in any jurisdiction, the other
provisions hereof shall remain in full force and effect in such jurisdiction and
the remaining provisions shall be liberally construed in order to carry out the
intent of this Partial Reconveyance. The invalidity of any provision of this
Partial Reconveyance in any jurisdiction shall not affect the validity and
enforceability of such provision in any other jurisdiction.
(g) Counterparts. This Partial Reconveyance may be executed in several
original counterparts. To facilitate filing and recording, there may be omitted
from certain counterparts the parts of Exhibit A hereto containing specific
descriptions of certain Reassigned Properties which relate to land under the
jurisdiction of offices or located in counties or parishes other than the office
or county or parish in which the particular counterpart is to be filed or
recorded. Each counterpart shall be deemed to be an original for all purposes,
and all counterparts shall together constitute but one and the same instrument.
(h) References. References made in this Partial Reconveyance,
including use of a pronoun, shall be deemed to include where applicable,
masculine, feminine, singular or plural, individuals, partnerships, corporations
and other persons. As used in this Partial Reconveyance "person" shall mean any
natural person, corporation, partnership, trust, estate or other entity.
(i) Choice of Law. Insofar as permitted by otherwise applicable law,
this Partial Reconveyance shall be construed under and governed by the laws of
the State of Texas; provided, however, that, with respect to any portion of the
Reassigned Properties located outside of the State of Texas, the laws of the
place where such property is located (or otherwise made applicable) shall apply
to the extent, and only to the extent, necessary to permit the transfer and
ownership of the Production Payment in the Reassigned Properties and permit
Assignee to enforce or realize upon its rights and remedies hereunder with
respect to such property.
(j) Recording References. All recording references in Exhibit A are to
the official real property records of the county or parish in which the affected
land is located. The references in Exhibit A hereto to liens, encumbrances and
other burdens shall not be deemed to recognize or create any rights in third
parties.
(k) Effective Date. The transfer of the Production Payment to Assignee
shall be effective as of ____________, _______, at 7:00 a.m. local time at the
location of the Reassigned Properties (the "Effective Date").
(l) Production Proceeds. All parties producing, purchasing or
receiving any hydrocarbons produced from or attributable to Assignor's interest
in the Production Payment in the Reassigned Properties, or having such
hydrocarbons, or proceeds therefrom in their possession for
EXHIBIT I - Page 4
<PAGE>
which they or others are accountable to the Assignee by virtue of the provisions
of this Partial Reconveyance, are authorized and directed to treat and regard
the Assignee as the assignee and transferee of the Assignor and entitled in the
Assignor's place and stead to receive such hydrocarbons and all proceeds
therefrom; and such parties and each of them shall be under no obligation to see
to the application by the Assignee of any such proceeds or payments received by
it.
(m) Subject to Existing Matters. The Production Payment in the
Reassigned Properties is conveyed subject to valid and presently subsisting
encumbrances, defects, burdens, easements, servitudes, covenants and rights of
way, either of record or on the ground.
EXHIBIT I - Page 5
<PAGE>
IN WITNESS WHEREOF, this Partial Reconveyance is executed on the date
of the acknowledgment hereto.
ASSIGNOR:
SOUTHERN PRODUCER SERVICES, L.P.
By: SC Ashwood Holdings, Inc., its general
partner
Attesting Witnesses:
By:
Title:
Name:
EXHIBIT I - Page 6
<PAGE>
ASSIGNEE:
Attesting Witnesses: ABRAXAS PETROLEUM CORPORATION,
a Texas corporation
_______________________________
_______________________________ By_____________________________
Name:
Title:
EXHIBIT I - Page 7
<PAGE>
ACKNOWLEDGMENTS
STATE OF __________ )
) SS.
COUNTY OF ________ )
The foregoing instrument was acknowledged before me on this _____ day
of _______________, _______, by _____________________, the _____________________
of SC ASHWOOD HOLDINGS, INC., a Delaware corporation and general partner of
SOUTHERN PRODUCER SERVICES, L.P., a Delaware limited partnership, on behalf of
such limited partnership.
Witness my hand and official seal.
Notary Public
Residing at
My commission expires:
EXHIBIT I - Page 8
<PAGE>
ACKNOWLEDGMENTS
STATE OF __________ )
) SS.
COUNTY OF ________ )
The foregoing instrument was acknowledged before me on this _____ day
of _______________, _______, by _____________________, the _____________________
of ABRAXAS PETROLEUM CORPORATION, a Nevada corporation, on behalf of such
corporation.
Witness my hand and official seal.
Notary Public
Residing at
My commission expires:
EXHIBIT I - Page 9
<PAGE>
SCHEDULE I TO
PARTIAL RELEASE AND RECONVEYANCE OF DOLLAR DENOMINATED PRODUCTION PAYMENT
dated ___________, _______, to
Abraxas Petroleum Corporation from
Southern Producer Services, L.P.
Recording Schedule
Jurisdiction Records Document File No. File Date
|_________________|___________________|________________|____________|__________|
|_________________|___________________|________________|____________|__________|
|_________________|___________________|________________|____________|__________|
|_________________|___________________|________________|____________|__________|
|_________________|___________________|________________|____________|__________|
|_________________|___________________|________________|____________|__________|
|_________________|___________________|________________|____________|__________|
24200758.13 101899 844C 99566929
EXHIBIT I - Page 10
<PAGE>
EXHIBIT A TO
PARTIAL RELEASE AND RECONVEYANCE
OF DOLLAR DENOMINATED PRODUCTION PAYMENT
dated ___________, _______, to
Abraxas Petroleum Corporation from
Southern Producer Services, L.P.
Legal Description of the Reassigned Properties
[to be attached]
EXHIBIT I - Page 11
<PAGE>
EXHIBIT J
List of Subsidiaries
[to be provided by Seller]
EXHIBIT J - Page 1
<PAGE>
EXHIBIT 10.2
CONVEYANCE OF DOLLAR
DENOMINATED PRODUCTION PAYMENT
between
ABRAXAS PETROLEUM CORPORATION,
as Working Interest Owner,
and
SOUTHERN PRODUCER SERVICES, L.P.,
as Production Payment Owner,
Dated as of October 6, 1999
<PAGE>
TABLE OF CONTENTS
Page
Section 1. Conveyance..................................................1
Section 2. Production Payment..........................................2
Section 2.1 Amount and Term of Production Payment.......................2
Section 2.2 Application of Production Payment...........................3
Section 2.3 Non-Cost-Bearing Interest...................................3
Section 2.4 Delivery Services...........................................5
Section 2.5 Marketing of Production Payment Hydrocarbons................6
Section 2.6 Measurement; Hydrocarbons Lost or Used; Quality.............8
Section 2.7 No Proportionate Reduction..................................9
Section 2.8 Termination.................................................9
Section 2.9 Payment Mechanics..........................................10
Section 2.10 Protection to Buyers.......................................10
Section 2.11 Taxes......................................................10
Section 3. Operation of Subject Interests.............................11
Section 4. Abandonment of Wells or Transfer of Subject Interests......14
Section 5. Operations.................................................15
Section 5.1 Pooling and Unitization....................................15
Section 5.2 Renewals and Extensions and New Leases.....................15
Section 5.3 Future Gas Imbalances......................................15
Section 6. Non-Compliance Events......................................16
Section 7. Remedies of Production Payment Owner.......................18
Section 8. Access to Subject Interests................................20
Section 9. Definitions................................................20
Section 10. Successors and Assigns.....................................20
Section 10.1 Assignments by Working Interest Owner......................20
Section 10.2 Assignments by Production Payment Owner....................20
Section 10.3 Binding Effect.............................................21
Section 11. Representations and Warranties by Working Interest Owner...21
Section 12. Interest on Unpaid Amounts.................................22
Section 13. Choice of Law..............................................22
Section 14. Intentions of the Parties..................................23
Section 15. Ownership of Equipment.....................................23
Section 16. Notices....................................................23
Section 17. Unenforceable or Inapplicable Provisions...................24
Section 18. Certain Notices............................................24
Section 19. Further Assurances and Warranty............................24
Section 20. Partition..................................................24
Section 21. Survival...................................................24
Section 22. Execution in Counterparts..................................24
i
<PAGE>
EXHIBITS, SCHEDULES AND ANNEXES
EXHIBIT A - Description of Subject Interests
EXHIBIT B - [Intentionally omitted]
EXHIBIT C - Delivery Points
ANNEX I - Definitions
24200767.10 101899 843C 99566929
ii
<PAGE>
CONVEYANCE OF DOLLAR
DENOMINATED PRODUCTION PAYMENT
THIS CONVEYANCE OF DOLLAR DENOMINATED PRODUCTION PAYMENT is dated as
of October 6, 1999 (such agreement, as from time to time hereafter may be
modified, supplemented or amended, this "Conveyance"), and is a CONVEYANCE OF
DOLLAR DENOMINATED PRODUCTION PAYMENT from ABRAXAS PETROLEUM CORPORATION, a
Nevada corporation (herein called "Working Interest Owner"), to SOUTHERN
PRODUCER SERVICES, L.P., a Delaware limited partnership (herein called
"Production Payment Owner").
RECITAL
Working Interest Owner is presently the owner of the Oil and gas
leases and other interests described in Exhibit A attached hereto and intends to
convey to Production Payment Owner a production payment payable from the oil and
gas produced and saved therefrom.
CONVEYANCE OF PRODUCTION PAYMENT
Section 1. Conveyance. Working Interest Owner, for valuable
consideration to Working Interest Owner in hand paid by Production Payment
Owner, the receipt and sufficiency of which are hereby acknowledged, hereby
grants, sells, conveys, assigns, delivers and sets over unto Production Payment
Owner, effective as of the Initial Time, as a real property interest and as a
PRODUCTION PAYMENT, for the period from and including the Initial Time, to the
Termination Time, a term overriding royalty interest carved out of and burdening
the Subject Interests equal to and measured by all Production Payment
Hydrocarbons if, as and when produced from (or, to the extent pooled or
unitized, allocated to) the Subject Interests. The interests hereby conveyed,
including, but not limited to, the real property interest described above,
together with the Hydrocarbons accruing thereto and the rights, titles,
interests, remedies, powers and privileges appurtenant or incident thereto, as
hereinafter provided, is hereinafter called the "Production Payment";
TO HAVE AND TO HOLD the Production Payment unto Production Payment
Owner, and Production Payment Owner's successors and assigns, forever.
In the event any individual Subject Interest (or portion thereof, as
applicable) should cease to be in force and effect, or otherwise expire before
the time this Conveyance and the Production Payment shall terminate, and such
individual Subject Interest (or portion thereof, as applicable) not be extended,
renewed or replaced, the Production Payment no longer shall apply to that
particular Subject Interest (or portion thereof, as applicable), but the
Production Payment shall remain in full force and effect and undiminished as to
all remaining Subject Interests (and the remainder portion of such Subject
Interest, as applicable), and the unliquidated balance of the total Sum shall
1
<PAGE>
never be reduced or diminished by reason of the expiration of a Subject Interest
(or any portion thereof, as applicable).
Section 2. Production Payment.
Section 2.1 Amount and Term of Production Payment. The Production
Payment shall continue and remain in full force and effect until the receipt and
realization by Production Payment Owner from Production Payment Proceeds of the
aggregate sum of the amounts specified in the following subsections of this
Section 2.1 (collectively, the "Total Sum"):
(a) the full amount of the Primary Sum; plus
(b) an amount equal to the interest which would accrue at the
Agreed Rate on the unliquidated balance of the Total Sum outstanding
during the period from the Initial Closing Date (as defined in the
Purchase Agreement) to but not including the first Application Date,
and thereafter during each period from and including one Application
Date to but not including the next occurring Application Date, if the
unliquidated balance of the Total Sum were to bear such interest; plus
(c) an amount equal to all Direct Taxes (other than Production
Payment Severance Taxes), to the extent such Direct Taxes are paid by
Production Payment Owner should Working Interest Owner fail to
promptly pay the same as required by Section 2.3, together with an
additional amount equal to interest on the amount so paid computed at
the Agreed Rate from and including the date Production Payment Owner
pays such Direct Taxes to but not including the earlier of the date
such Direct Taxes are either reimbursed by Working Interest Owner or
paid by the application of Production Payment Proceeds under Section
2.2(a) or added to the unliquidated balance of the Primary Sum under
Section 2.2(a); plus
(d) an amount equal to all Reimbursable Expenses to the extent
paid by Production Payment Owner should Working Interest Owner fail to
promptly pay the same as required by Section 2.3, together with an
additional amount equal to interest on the amount so paid computed at
the Agreed Rate from and including the date Production Payment Owner
pays such Reimbursable Expenses to but not including the earlier of
the date such Reimbursable Expenses are either reimbursed by Working
Interest Owner or paid by the application of Production Payment
Proceeds under Section 2.2(a) or added to the unliquidated balance of
the Primary Sum pursuant to Section 2.2(a); plus
(e) an amount equal to all Delivery Charges to the extent paid by
Production Payment Owner should Working Interest Owner fail to
promptly pay same as required by Section 2.3, together with an
additional amount equal to interest on the amount so paid, computed at
the Agreed Rate from and including the date Production Payment Owner
pays such Delivery Charges to but not including the earlier of the
date such Delivery Charges are either reimbursed by Working Interest
Owner or paid by the application of Production Payment Proceeds under
2
<PAGE>
Section 2.2(a) or added to the unliquidated balance of the Primary Sum
pursuant to Section 2.2(a); plus
(f) an amount equal to all Hedging Costs to the extent paid by
Production Payment Owner should Working Interest Owner fail to
promptly pay same as required by Section 2.3, together with an
additional amount equal to interest on the amount so paid, computed at
the Agreed Rate from and including the date Production Payment Owner
pays such Hedging Costs to but not including the earlier of the date
such Hedging Costs are either reimbursed by Working Interest Owner or
paid by the application of Production Payment Proceeds under Section
2.2(a) or added to the unliquidated balance of the Primary Sum
pursuant to Section 2.2(a).
The amounts (including interest) referred to in subsections (c), (d), (e) and
(f) of this section are herein collectively called the "Expense Components".
Section 2.2 Application of Production Payment.
(a) On each Application Date, all Production Payment Proceeds
that have actually been received by Production Payment Owner (whether
from the purchasers of Production Payment Hydrocarbons or from Working
Interest Owner as provided in Section 2.9) in immediately available
funds prior to noon, Central time, on such Application Date, shall, to
the extent not previously applied, be applied as follows to the Total
Sum:
(i) First, to the amounts described in subsections (b), (c),
(d), (e) and (f) of Section 2.1; and
(ii) Second, to the reduction of the unliquidated balance of
the Primary Sum.
If Production Payment Proceeds applied on any Application Date are
insufficient to cover the full amounts specified in the foregoing
subsection (i) of this subsection (a), then such unrecovered amounts
shall be added to the unliquidated balance of the Primary Sum.
(b) Neither the actual or potential application of Production
Payment Proceeds to Expense Components shall release Working Interest
Owner from its obligations to make any payments or reimbursements of
Expense Components required under Section 2.3, but if any Production
Payment Proceeds are actually applied to Expense Components or added
to the unliquidated balance of the Primary Sum pursuant to the
preceding subsection (a) and if such Expense Components (including
interest thereon) are thereafter paid or reimbursed by Working
Interest Owner, then on the next occurring Application Date the
unliquidated balance of the Primary Sum shall be reduced by the
amounts so paid or reimbursed by Working Interest Owner.
3
<PAGE>
Section 2.3 Non-Cost-Bearing Interest.
(a) The Production Payment conveyed pursuant hereto is a
non-expense bearing interest in the Subject Interests, free and clear
of (i) all Direct Taxes, (other than Production Payment Severance
Taxes), (ii) all costs, risks and expenses associated with acquiring,
exploring, developing, maintaining, producing, operating, reworking,
recompleting, and remediating the Subject Interests, (iii) all
Delivery Charges and (iv) all Hedging Costs and is a non-operating
interest. All Direct Taxes (other than Production Payment Severance
Taxes), all such other costs and expenses, and all Delivery Charges
shall be borne by the Retained Interests and paid by Working Interest
Owner promptly, on or before the dates the same become due and owing.
Production Payment Owner shall not be liable or responsible in any way
for payment of any costs, expenses or liabilities in respect of the
Subject Interests or any portion thereof or incurred in connection
with the production or delivery of Production Payment Hydrocarbons. In
addition, Working Interest Owner will promptly (and in any event
within 30 days after receiving any notice or statement for the same)
pay all Reimbursable Expenses which have been incurred and are unpaid
and reimburse Production Payment Owner for any Reimbursable Expenses
which have been paid by Production Payment Owner. Each amount which is
to be paid by Working Interest Owner pursuant to this Section 2.3
which is instead paid by Production Payment Owner shall bear interest
at the Agreed Rate on each day from and including the date of such
payment until but not including the date repaid by Working Interest
Owner.
(b) No recourse shall be had for any claim based on this
Conveyance against Production Payment Owner or any other Indemnified
Party, whether by virtue of any constitution, statute or rule of law,
or by the enforcement of any assessment or penalty or otherwise, all
such liability, whether based upon constitution, statute, common law,
or equity, being released as a part of the consideration for the
purchase by Production Payment Owner of the Production Payment and the
Working Interest Owner hereby indemnifies the Indemnified Parties
against all such claims to the extent set forth in Section 25 of the
Purchase Agreement. It is understood and agreed that neither under
this Agreement nor the Purchase Agreement does Production Payment
Owner assume, nor shall Production Payment Owner ever be liable or
responsible in any way for, the payment of any costs, expenses or
liabilities incurred in connection with developing, exploring,
drilling, equipping, testing, operating, producing, maintaining or
abandoning the Subject Interests or any well or facility thereon or
storing, handling, treating or transporting to any Delivery Point
production therefrom. If Production Payment Owner shall pay any such
costs, expenses or liabilities notwithstanding the foregoing, the
Production Payment Owner shall have no obligation or liability for any
other such costs, expenses or liabilities, and the Working Interest
Owner hereby indemnifies Production Payment Owner, and each other
Indemnified Party from and against all such costs, expenses and
liabilities.
4
<PAGE>
(c) Production Payment Owner agrees to look solely to the
Production Payment Hydrocarbons for satisfaction and discharge of the
Production Payment, and Working Interest Owner shall not be personally
liable for the payment and discharge thereof. The foregoing provision
shall not, however, relieve Working Interest Owner of the obligation
to respond in damages for any breach of any of the representations,
warranties, covenants, agreements and obligations of Working Interest
Owner hereunder, in the Purchase Agreement or in any other Production
Payment Document.
Section 2.4 Delivery Services.
(a) Expected Deliveries. To the extent not prevented by Force
Majeure, Working Interest Owner shall deliver, or cause to be
delivered, all Production Payment Hydrocarbons constituting Gas to the
relevant Delivery Point in a condition satisfactory to meet or exceed
pipeline specifications and qualifications of the applicable sales,
transportation or processing contract at such Delivery Point and will
deliver all Production Payment Hydrocarbons constituting Oil at the
points at which the Working Interest Owner delivers Oil from the same
Subject Interests into third party pipelines or to third party
transporters or, if requested by Production Payment Owner, at one or
more other points of sale reasonably convenient and mutually agreeable
to both Working Interest Owner and Production Payment Owner. All tasks
required to make such delivery (whether gathering, treating,
separating, compressing, processing, transporting, or otherwise) are
herein called the "Delivery Services". All Delivery Services, whether
performed by Working Interest Owner or by any other Person, shall be
performed without any cost or charge to Production Payment Owner,
whether incurred or assessed by Working Interest Owner or any other
Person, and all costs so incurred or assessed shall be borne and paid
by Working Interest Owner as provided in Section 2.3. The Delivery
Services shall be provided to Production Payment Owner on a first
priority basis, to the extent permitted by law and applicable
contracts (meaning, for example, that (A) pipeline and compressor
capacity, if owned or controlled by Working Interest Owner or any
Affiliate of Working Interest Owner, shall be afforded to Subject
Hydrocarbons prior to affording any such capacity to Working Interest
Owner, any Affiliates of Working Interest Owner or any other Person
with respect to any other Hydrocarbons, and (B) pipeline and
compressor capacity owned or controlled by any Person other than
Working Interest Owner or any Affiliate of Working Interest Owner
shall be afforded to Subject Hydrocarbons prior to affording any such
capacity to Working Interest Owner or any Affiliate of Working
Interest Owner with respect to any other Hydrocarbons), and Working
Interest Owner hereby expressly subordinates any capacity rights it
may now or hereafter have to the Production Payment Hydrocarbons.
Working Interest Owner shall, to the extent permitted by law and
applicable contracts, take whatever action is appropriate to cause any
Affiliate of Working Interest Owner or any other Person to afford
Subject Hydrocarbons the priority capacity described in this
subsection (a), including assigning to Production Payment Owner, upon
Production Payment Owner's request following failure by Working
Interest Owner to provide Delivery Services as required hereunder, any
capacity rights Working Interest Owner may have under assignable
5
<PAGE>
contracts or other arrangements with an Affiliate or any other Person
as may be necessary or useful to facilitate delivery of Production
Payment Hydrocarbons to each Delivery Point in a condition
satisfactory to meet or exceed pipeline specifications or
qualifications at such Delivery Point.
(b) Excess Deliveries. If at any time Working Interest Owner
delivers to Production Payment Owner Production Payment Hydrocarbons
in excess of the amount of Production Payment Hydrocarbons required to
be delivered to Production Payment Owner hereunder, the amount of such
excess delivery shall not be returned by Production Payment Owner but
shall instead be deemed an early delivery by Working Interest Owner of
future Production Payment Hydrocarbons and shall be considered as
fully and finally delivered to Production Payment Owner for all
purposes hereunder on the date received by Production Payment Owner;
provided, that if any Hydrocarbons are delivered hereunder to
Production Payment Owner following the termination hereof the proceeds
of such Hydrocarbons shall be paid to Working Interest Owner.
Section 2.5 Marketing of Production Payment Hydrocarbons.
(a) Marketing by Production Payment Owner. Production Payment
Owner shall take possession of all of the Production Payment
Hydrocarbons at the applicable Delivery Points and shall thereafter
market and sell such Production Payment Hydrocarbons for its own
account, crediting all proceeds mutually agreed to by Working Interest
Owner and Production Payment Owner received from the sale and
marketing thereof to the Total Sum on the date such proceeds are
received by Production Payment Owner; provided that in no event shall
the Total Sum be credited with an amount which is less than the amount
which would have been received by the Production Payment Owner for the
Production Payment Hydrocarbons delivered at the applicable Delivery
Points as a reasonably prudent marketer of Hydrocarbons in an
arms-length transaction with an unaffiliated third-party. Working
Interest Owner shall take such actions (including executing all
division orders, transfer orders, instructions in lieu thereof and
other additional instruments) as are necessary or appropriate to
achieve such results, and Working Interest Owner will cooperate with
Production Payment Owner in instructing all purchasers of such
Production Payment Hydrocarbons to pay the proceeds thereof directly
to Production Payment Owner and shall execute such additional
instruments (including division orders, transfer orders and
instructions in lieu thereof) as may be requested by Production
Payment Owner in connection therewith. If payment for any Production
Payment Hydrocarbons is nonetheless made to Working Interest Owner for
any reason, all amounts so paid to Working Interest Owner shall be
held in trust by Working Interest Owner for Production Payment Owner
and Working Interest Owner shall immediately pay over such proceeds,
in the form received, to Production Payment Owner (but without
recourse to Working Interest Owner on any proper endorsement by
Working Interest Owner to Production Payment Owner). Working Interest
Owner shall not enter into any contracts or other arrangements for the
sale, transportation, gathering, processing or other marketing of
Subject Hydrocarbons which would interfere with Production Payment
6
<PAGE>
Owner's rights under this Section 2.5 to take possession of and market
the Production Payment Hydrocarbons, free and clear of such contracts
or other arrangements.
(b) Cooperation and Assistance. Production Payment Owner and
Working Interest Owner will each be taking quantities of Hydrocarbons
from the Subject Interests, and Working Interest Owner and Production
Payment Owner recognize that coordination between Production Payment
Owner and Working Interest Owner will be required with respect
thereto. Working Interest Owner agrees to cooperate with, and assist,
Production Payment Owner in connection with Production Payment Owner's
receipt and sale of Production Payment Hydrocarbons. Without
limitation of the foregoing:
(i) Not less than 10 days prior to the first day of each
Application Period, Working Interest Owner will notify Production
Payment Owner or its authorized representatives or direct
purchasers, in writing, of the total amounts and average daily
amounts of Gas and Oil which Working Interest Owner expects to be
produced from the Subject Interests during such Application
Period and the portion thereof which Working Interest Owner
projects will be Production Payment Hydrocarbons.
(ii) To the extent reasonably practicable, Working Interest
Owner shall thereafter immediately (but in no event more than
once weekly) notify Production Payment Owner or its authorized
representatives or direct purchasers, in writing, of any material
change in the rate of delivery of Production Payment Hydrocarbons
from the Subject Interests which has come to the attention of
Working Interest Owner.
(iii)Working Interest Owner and Production Payment Owner
will cooperate to ensure that nominations to transporters and
purchasers of Production Payment Hydrocarbons are timely made and
that such nominations reflect expected deliveries from the
various Subject Interests, and Production Payment Owner and its
authorized representatives shall be entitled to rely upon Working
Interest Owner's projections for the purpose of scheduling
deliveries with transporters and purchasers.
Should Production Payment Owner so request, Working Interest Owner
will furnish the information provided for above and will make
nominations and schedule deliveries in conjunction with Production
Payment Owner (and make any revisions to such nominations and
reschedule deliveries in conjunction with Production Payment Owner)
for Production Payment Hydrocarbons (in the form and at the times
required by such Persons), directly to the Persons purchasing or
transporting Production Payment Hydrocarbons for Production Payment
Owner. Working Interest Owner and Production Payment Owner acknowledge
to each other that concurrently herewith Production Payment Owner and
Working Interest Owner are entering into the Gas Sales Agreement and
the Oil Sales Agreement referred to in the Purchase Agreement. Working
Interest Owner and Production Payment Owner further agree that to the
extent Working Interest Owner is ever the purchaser of Production
Payment Hydrocarbons, there will be no need for Working Interest Owner
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to furnish information and make or revise nominations to itself.
(c) Responsibility. Any charges, costs, penalties or expenses
incurred or payable to any Person solely as a result of Production
Payment Owner's failure to adjust nominations or scheduled deliveries
in accordance with (i) a notification from Working Interest Owner to
Production Payment Owner of any increase or decrease in quantities to
be delivered from any Subject Well, or (ii) a notification from
Production Payment Owner's direct purchaser of any increase or
decrease in quantities to be delivered at Delivery Points, where it
was reasonably possible for Production Payment Owner to make such
adjustment without penalty, then, as between the parties hereto,
Production Payment Owner shall be liable for and shall hold Working
Interest Owner harmless from any such charges, costs, penalties or
expenses. If any such charges, costs, penalties or expenses (the
"Imbalance Charges") are incurred or payable to any Person other than
in the circumstances provided for in the preceding sentence (including
charges, costs, penalties or expenses caused by failure to deliver
projected quantities or failure to provide notice of changes in
deliveries, or charges, costs, penalties or expenses incurred when
Working Interest Owner is making nominations, or revisions to
nominations, on behalf of Production Payment Owner, as provided for in
the next-to-last sentence of Section 2.5(b)), then, as between the
parties hereto, Working Interest Owner shall be liable for and shall
indemnify and hold Production Payment Owner harmless for such
Imbalance Charges. Each of Working Interest Owner and Production
Payment Owner shall promptly notify the other of any notice received
by it from any third party which indicates that an imbalance in
deliveries exists or is occurring that may give rise to any such
Imbalance Charges.
Section 2.6 Measurement; Hydrocarbons Lost or Used; Quality.
(a) As used in this Conveyance, the term "Hydrocarbons" shall not
include Oil or Gas produced from any particular Subject Well which,
based on prudent industry practice and custom for wells which are
similar to the Program Wells, are unavoidably lost in the production
thereof or in the compression, production or transportation thereof
prior to the Lease Measuring Point for such Subject Well, or which are
used, based on prudent industry practice and custom for wells which
are similar to the Program Wells, by Working Interest Owner or the
operator of any Subject Well for the production of Subject
Hydrocarbons or for the compression or transportation of Subject
Hydrocarbons prior to the Lease Measuring Point for such Subject Well,
in each case only to the extent the same are lost or used in the
course of operations which are being conducted prudently and in a good
and workmanlike manner. Working Interest Owner hereby represents,
warrants and covenants to Production Payment Owner as follows: (a) the
Lease Measuring Point applicable to each Subject Well is and will
continue to be located at a point prior to any point where Gas from
such Subject Well is commingled with Gas or any other Hydrocarbons
from any other well or wells, (b) Working Interest Owner currently
meters, and will continue to meter, Gas from each Subject Well
separately (i.e., on a well-by-well basis), (c) the volumes (measured
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in Mcfs) of Production Payment Hydrocarbons constituting Gas produced
from or out of any particular Subject Well are measured and
determined, and will continue to be measured and determined at the
Lease Measuring Point applicable to such Subject Well, and (d) the
Separation Point for each Subject Well is and will continue to be
upstream of the Lease Measuring Point for such Subject Well. Working
Interest Owner covenants and agrees to determine the number of MMBtus
in each Mcf of Gas included in Production Payment Hydrocarbons at the
Lease Measuring Points under the applicable transportation agreement
with First Transporter and in the case of Oil in accordance with
generally accepted industry practices in effect at the time and place
of delivery using the latest ASTM or API test methods. Volumes of Oil
shall be corrected to 60 degrees Fahrenheit temperature in accordance
with the latest ASTM test methods and the latest edition of API volume
correction tables, with deductions for all basic sediment and water
and other impurities.
(b) All Oil delivered to Production Payment Owner, or to
Production Payment Owner's credit, shall satisfy the Quality Standards
in accordance with the applicable sales, transportation or processing
agreement. All costs and expenses of treating the Oil to satisfy the
Quality Standards shall be borne and paid by Working Interest Owner.
(c) All Gas delivered to Production Payment Owner, or to
Production Payment Owner's credit, shall satisfy the Quality Standards
in accordance with the applicable sales, transportation or processing
agreement. All costs of dehydrating, treating and compressing the Gas
to satisfy the Quality Standards shall be borne by Working Interest
Owner.
(d) Working Interest Owner shall deliver, or cause to be
delivered, the Gas delivered hereunder at a pressure sufficient to be
delivered into First Transporter's pipeline at the Delivery Points, at
the existing pressures of such pipeline and in accordance with the
applicable sales, transportation or processing agreement.
Section 2.7 No Proportionate Reduction. It is understood and agreed
that, though the Production Payment is conveyed by Working Interest Owner to
Production Payment Owner out of the Subject Interests, the Production Payment
shall be equal to, but shall not exceed, the full Dedication Percentage in
effect from time to time of the NRI Percentage of the Hydrocarbons produced from
(or, to the extent pooled or unitized, allocated to) the various lands described
on Exhibit A and shall not be reduced for any reason. Among other things, the
Production Payment and the Production Payment Hydrocarbons shall not be reduced
due to (a) the undivided interest owned by Working Interest Owner in a lease
constituting any Subject Interests being less than the entire interest in such
lease, or (b) the interest in Oil, Gas or other minerals underlying any portion
of the lands described on Exhibit A which is covered by a particular lease (or
group of leases) being less than the entire interest in the oil, gas and other
minerals underlying such portion of the lands described on Exhibit A, or (c) the
share of production from (or, to the extent pooled or unitized, allocated to)
any portion of lands described on Exhibit A which is attributable to the Subject
Interests being less than the NRI Percentage set forth on Exhibit A for such
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portion of the lands described on Exhibit A, or (d) Working Interest Owner's
failure to own, or otherwise have Defensible Title to, all or any part of the
Subject Interests as described on Exhibit A, except leases which terminate or
expire by their own force and effect.
Section 2.8 Termination. The Production Payment shall remain in full
force and effect until the time (the "Termination Time") when the full aggregate
amount of the Total Sum, together with all reimbursements, indemnities,
restitutions, and other payments required hereunder, have been received by
Production Payment Owner as provided herein; provided, however, that the
Production Payment shall in any event terminate whenever twenty-one (21) years
less one (1) day shall have elapsed after the death of the last survivor of all
the descendants of Joseph P. Kennedy, father of John F. Kennedy, late President
of the United States of America, who are living at the date of the earliest
execution of this instrument by any of the parties hereto. At the Termination
Time, all rights, titles and interests herein conveyed in and to any
Hydrocarbons thereafter produced shall automatically terminate and vest in
Working Interest Owner, and, upon request by Working Interest Owner, Production
Payment Owner shall execute and deliver such instrument or instruments (in
proper recordable form, if applicable) as may be necessary to evidence such
termination of the Production Payment; provided, that, notwithstanding the
foregoing or anything herein to the contrary, any and all obligations which any
Person may have to indemnify or reimburse Production Payment Owner or its
Affiliates for any reason, or to make payments to Production Payment Owner or
its Affiliates on account of Production Payment Hydrocarbons produced before the
Termination Time, shall survive any termination of the Production Payment. No
pipeline company or other Person purchasing, taking, or processing Production
Payment Hydrocarbons shall ever be required to take notice of, or keep informed
concerning, the termination of the Production Payment, until actual receipt of
written notice from Production Payment Owner confirming that such termination
has occurred, which Production Payment Owner agrees to deliver with reasonable
promptness upon request of Working Interest Owner.
Section 2.9 Payment Mechanics. All Production Payment Proceeds
received by Working Interest Owner (instead of directly by Production Payment
Owner) prior to the last day of any Application Period shall be paid by Working
Interest Owner to Production Payment Owner, prior to noon, Central time, on the
related Application Date. No Production Payment Proceeds (whether paid by
Working Interest Owner or any other Person) shall be deemed received by
Production Payment Owner or applied to the Production Payment until such
Production Payment Proceeds have been so received by Production Payment Owner's
bank or collection agent in immediately available funds for the account of
Production Payment Owner. Working Interest Owner will make each payment which it
owes under this Conveyance (except for payments made pursuant to Section 2.5(a),
which shall be made as provided therein) in immediately available funds received
at or before noon, Central time, on the date specified for the payment thereof,
and all such payments by Working Interest Owner will otherwise be made in
accordance with the procedures set out in Section 2.5 of the Purchase Agreement.
Section 2.10 Protection to Buyers. No pipeline company or other person
buying, taking, or processing Production Payment Hydrocarbons shall be required
to take notice of, or to keep informed concerning, the discharge or termination
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of the Production Payment, until actual receipt by such company or person of
written notice from Production Payment Owner or any assignee of Production
Payment Owner advising such company or person of the discharge or termination of
the Production Payment.
Section 2.11 Taxes. Working Interest Owner shall pay, promptly when
due, together with interest and penalties thereon, if any, (a) all ad valorem
taxes (or taxes imposed in lieu thereof) imposed upon or assessed with respect
to or charged against the Production Payment or any mortgage thereof, or upon
the Subject Interests or the Subject Hydrocarbons or the Production Payment or
the Production Payment Hydrocarbons, or against Production Payment Owner by
reason of its ownership of the Production Payment (other than any taxes levied
on the net income of the Production Payment Owner) or against any mortgagee of
the Production Payment by reason of his or its mortgagee interest therein; (b)
all Direct Taxes imposed upon or with respect to or measured by or charged
against the Production Payment or the Production Payment Hydrocarbons; (c) any
excise taxes imposed on any windfall profit imposed upon or with respect to or
measured by or charged against the Production Payment or the Production Payment
Hydrocarbons; and (d) all other taxes, duties, imposts, charges, levies and
assessments of any kind or nature whatsoever, whether or not currently existing,
imposed upon or assessed with respect to or charged against the Production
Payment or any mortgage thereof, or upon the Subject Interests or the Subject
Hydrocarbons or the Production Payment Hydrocarbons, or against Production
Payment Owner by reason of its ownership of the Production Payment or otherwise
(other than any taxes levied on the income of the Production Payment Owner) or
against any mortgagee of the Production Payment by reason of his or its
mortgagee interest therein or otherwise.
Section 3. Operation of Subject Interests. So long as the Production
Payment shall remain in force, and whether or not Working Interest Owner is the
operator of the Subject Interests, Working Interest Owner shall, as an
independent contractor and at Working Interest Owner's own cost and expense:
(a) Cause the Subject Interests to be maintained, developed,
protected against drainage, and continuously operated for the
production of Hydrocarbons in a good and workmanlike manner, as would
a prudent operator (without regard to the existence of the Production
Payment), all in accordance with generally accepted practices,
applicable operating agreements, and all applicable federal, state and
local laws, rules and regulations (including, without limitation, all
Environmental Laws), excepting those being contested in good faith;
(b) Pay, or cause to be paid, promptly as and when due and
payable, all rentals, royalties and proceeds payable to the other
minerals interest owners in respect of the Subject Interests or the
Subject Hydrocarbons, and all Production Expenses and Direct Taxes
incurred in or arising from the operation or development of the
Subject Interests, or the producing, treating, gathering, storing,
marketing or transporting of the Subject Hydrocarbons;
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(c) Cause all machinery, equipment and facilities of any kind now
or hereafter located on the Subject Interests, and necessary or useful
in the operation thereof for the production of Hydrocarbons therefrom,
to be kept in good and effective operating condition as would a
prudent operator (without regard to the existence of the Production
Payment), and all necessary repairs, renewals, replacements, additions
and improvements thereof or thereto to be promptly made;
(d) Give or cause to be given to Production Payment Owner written
notice of every adverse claim or demand made by any person affecting
the Subject Interests or the Subject Hydrocarbons in any manner
whatsoever, and of any suit or other legal proceeding instituted with
respect thereto, and cause all necessary and proper steps to be taken
with reasonable diligence to protect and defend the Subject Interests
and the Subject Hydrocarbons against any such adverse claim or demand,
including (but not limited to) the employment of counsel for the
prosecution or defense of litigation and the contest, release or
discharge of such adverse claim or demand;
(e) Cause the Subject Interests to be kept free and clear of
liens, charges and encumbrances of every character (including, without
limitation, mortgages, deeds of trust, security interest, pledges,
collateral chattel mortgages, and hypothecations), other than
Permitted Liens;
(f) Carry with financially sound and reputable insurance
companies, insurance similar in amount and type and against such
risks, liabilities, casualties and contingencies as either (i) is set
forth in Exhibit D to the Purchase Agreement or (ii) after 30 days
written notice by the Production Payment Owner, is required by
Production Payment Owner, in its reasonable discretion, and maintained
by other prudent companies in the industry;
(g) Pay or repay any amounts owing to others under advance
payment, loan or other similar agreements only in cash, and not pay,
or elect to pay, under any circumstances, except with the prior
written consent of Production Payment Owner, in its sole and absolute
discretion, any such amounts in Hydrocarbons;
(h) In the event of any destruction or loss of any platform,
pipeline, well, equipment or facility, promptly redrill, rebuild,
reconstruct, repair, restore or replace such damaged or destroyed
property, unless otherwise agreed to by Production Payment Owner in
its reasonable discretion;
(i) If, for any reason Production Payment Owner or an affiliate
of Production Payment Owner is unable or refuses to receive Gas or Oil
from any Subject Interest, Working Interest Owner will market such
severed Gas and Oil on behalf of Production Payment Owner. All
Production Payment Hydrocarbons marketed by Working Interest Owner on
behalf of Production Payment Owner shall be sold pursuant to arm's
length contracts with parties not affiliated with Working Interest
Owner, containing terms negotiated by Working Interest Owner as a
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prudent operator. Any such sale by Working Interest Owner shall be
subject always to the right of Production Payment Owner, upon notice
to Working Interest Owner, to separately dispose of all or any portion
of such Production Payment Hydrocarbons and shall be only for such
minimum periods of time (not to exceed 30 days) as are consistent with
the practices of the industry. All proceeds received by Working
Interest Owner from the sale of Production Payment Hydrocarbons sold
on behalf of Production Payment Owner pursuant to the terms hereof are
received by Working Interest Owner in trust for Production Payment
Owner and shall be held in trust by Working Interest Owner for
Production Payment Owner; provided, however, Working Interest Owner
shall promptly pay such proceeds to such account as Production Payment
Owner shall have designated from time to time to Working Interest
Owner. Working Interest Owner will diligently enforce the terms of all
sales agreements under which Production Payment Hydrocarbons are sold
on behalf of Production Payment Owner, including full and prompt
payment of all amounts due from such sales. In the event of any late
payment by any purchaser, Working Interest Owner shall remit to
Production Payment Owner any interest or penalties collected with
respect to the sale of Production Payment Hydrocarbons. Production
Payment Owner shall have the right at any time Production Payment
Owner considers prudent to direct the purchasers of any Production
Payment Hydrocarbons to pay the proceeds thereof directly to
Production Payment Owner by delivering to such purchasers letters in
lieu of transfer orders and Working Interest Owner agrees to promptly
execute and deliver from time to time such letters in lieu as
Production Payment Owner shall request. In the event Production
Payment Owner requests direct payment, whether or not a Non-Compliance
Event shall have occurred and be continuing, Working Interest Owner
will cooperate in instructing the purchasers to pay such proceeds
directly to Production Payment Owner and shall execute such additional
instruments as may be necessary or appropriate in connection
therewith. In the event any Production Payment Hydrocarbons are sold
by Working Interest Owner, on behalf of Production Payment Owner,
under the terms of any agreement between Working Interest Owner and
Production Payment Owner, Production Payment Owner shall at all times
be entitled to retain the proceeds of such sale;
(j) [Intentionally omitted];
(k) The obligations of Working Interest Owner hereunder shall be
subject to all applicable federal, state and local laws, rules,
regulations and orders (including those of any applicable agency,
board, official or commission having jurisdiction). Working Interest
Owner shall timely make all material filings with all applicable
agencies, boards, officials and commissions having jurisdiction with
respect to the Subject Interests or the operation thereof prior to or
at the time any such filing becomes due. Should any statute, or any
rules or regulations of any governmental body, or any provisions in
private contracts (including those limiting the size of overriding
royalties and similar interests but excluding any contracts directly
entered into by Production Payment Owner) become applicable to the
Subject Interests so as to limit the portion of the Hydrocarbons
produced from the lands covered by a particular Subject Interest which
may be attributable to the Production Payment, the Production Payment
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shall, as to such Subject Interest and for the period of time during
which such statute, rule, regulation or contractual provision is
applicable, be limited to the maximum amount of production from such
lands which can be attributed to the Production Payment under such
statute, rule, regulation or contractual provision; provided, however,
should such limitation come into effect as to one or more Subject
Interests, then (without prejudice to other rights Production Payment
Owner may have) the Dedication Percentage applicable to that portion
of production from (or, to the extent pooled or unitized, allocated
to) lands described on Exhibit A covered by other Subject Interests
which would be attributable to the Production Payment in the absence
of the provisions of this subsection shall be increased, up to a
maximum of ninety percent (90%), so as to cause, to the maximum extent
possible, Production Payment Owner to receive, by virtue of ownership
of the Production Payment, the same amount of Hydrocarbons which
Production Payment Owner would have received had the aforementioned
statute, rule, regulation or contractual provision not reduced the
share of production from the aforementioned Subject Interest with
respect to which the Production Payment could be paid. Unless and
until the Dedication Percentages are otherwise increased as provided
herein and in the Purchase Agreement, the foregoing increase in the
Dedication Percentages shall remain in effect only for so long as such
limitation applies, and thereafter until Production Payment Owner has
received Production Payment Hydrocarbons sufficient to reduce the
unliquidated balance of the Primary Sum to what it would have been had
such limitation never existed; and
(l) Without the prior consent of Production Payment Owner,
Working Interest Owner shall not elect to be a non-participating party
with respect to any plugging back, reworking, sidetracking,
completion, or other operation on any Subject Interest (or lands
pooled therewith), or (except in instances where abandonment of such
well would be permitted without Production Payment Owner's consent
hereunder) elect to be an abandoning party with respect to a well
located on any Subject Interest (or lands pooled therewith), if the
consequence of such election is that Working Interest Owner's interest
in such Subject Interest or any part thereof is temporarily (e.g.,
during a recoupment period) or permanently forfeited to the parties
participating in such operations or electing not to abandon such well.
Upon any such election by Working Interest Owner that is consented to
by Production Payment Owner, such election shall also be binding on
the Production Payment Owner as to the interest so temporarily or
permanently forfeited. Any additional interests acquired by Working
Interest Owner by virtue of electing to pay for or acquire the
interest of a non-consenting or abandoning party in a situation of the
type described in the preceding sentence shall not become a part of
the Subject Interests or be subject to the Production Payment.
Section 4. Abandonment of Wells or Transfer of Subject Interests. So
long as the Production Payment remains in force, Working Interest Owner shall
not, without first obtaining the written consent of Production Payment Owner,
(1) abandon or convert to injection any well which is capable of producing in
paying quantities or which a reasonable prudent operator would make capable of
producing in paying quantities by reworking, reconditioning, deepening, plugging
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back, or otherwise, heretofore or hereafter completed for production of
Hydrocarbons on any of the lands described on Exhibit A; (2) surrender or
release any Subject Interest or any part thereof except such of the Subject
Interests or rights thereunder which may have expired or terminated in
accordance with the applicable lease or contract governing same; (3) sell,
assign, lease or otherwise transfer Working Interest Owner's interest in any of
the Subject Interests, either in whole or in part, except in connection with
Permitted Liens; provided that (i) any such sale, assignment, lease or other
transfer must expressly be made subject to both the Production Payment and the
rights of Production Payment Owner pursuant to the Production Payment Documents
and (ii) any purported sale, assignment, lease or other transfer in
contravention hereof shall for all purposes be null and void; (4) be a party to
any merger or consolidation except where the surviving entity expressly agrees
to be bound by the terms of this Conveyance; (5) resign as operator of any of
the Subject Interests operated by Working Interest Owner unless the successor
operator has been approved in writing by Production Payment Owner or, following
the occurrence of a Non-Compliance Event, Production Payment Owner shall have
requested in writing such resignation; or (6) conduct any work or operation in
any well bore of a Subject Interest, which work or operation is related to any
zone, horizon, formation or interval not included in the Subject Interests.
For all purposes of this Section, (1) a well shall be deemed to be
capable of producing Hydrocarbons "in paying quantities" unless and until there
arises a condition, which reasonably appears to be permanent, such that the
aggregate value of the Subject Hydrocarbons which are being produced or will be
produced from such well (without considering the effect of the Production
Payment) no longer exceeds or will not exceed the costs and expenses directly
related to the operation and maintenance of such well (excluding home office and
management overhead and similar charges); and (2) the restoration of the
productivity of a well or the drilling of a well shall be deemed to be
"economically feasible" whenever the aggregate value of the Subject Hydrocarbons
which it reasonably appears will be produced from such well (without considering
the effect of the Production Payment) will exceed the costs and expenses
directly related to such restoration or drilling and the operation and
maintenance of such well (excluding home office and management overhead and
similar charges).
If at any time operations on the Subject Interests shall cease
pursuant to the provisions of this Section, Working Interest Owner shall
thereafter, as often as Production Payment Owner may request, but not more often
than twice in each calendar year, make or cause to be made such investigations
and studies of the engineering and economic facts existing at the time of each
such request to determine whether the Subject Interests are, or could be made,
capable of producing hydrocarbons in paying quantities, and shall, within 30
days after such request, deliver a certificate to Production Payment Owner
signed by an authorized representative of Working Interest Owner setting forth
in reasonable detail the facts, projections and conclusions drawn therefrom, and
concurrently therewith furnish to Production Payment Owner, at the expense of
Working Interest Owner, a report of the Independent Reserve Engineer with
respect to such matters. In the event such engineering report shows that the
Subject Interests are capable of producing Hydrocarbons in paying quantities,
Working Interest Owner shall, at Working Interest Owner's own cost and expense,
cause operations on the Subject Interests to be resumed and cause the Subject
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Interests to be thereafter regularly operated, maintained and developed in the
same manner and for the same purposes as Working Interest Owner was obligated to
do prior to such ceasing of operations. Pursuant to this Section, operations on
the Subject Interests may be successively ceased, resumed and ceased again.
Section 5. Operations.
Section 5.1 Pooling and Unitization. Working Interest Owner may not
enter into pooling or unitization agreements with respect to the Subject
Interests without the prior written consent of Production Payment Owner. The
interest in any such unit attributable to any of the Subject Interests (or any
part thereof) included therein shall become a part of the Subject Interests and
shall be subject to the Production Payment in the same manner and with the same
effect as though such unit and the interest of Working Interest Owner therein
were specifically described in Exhibit A.
Section 5.2 Renewals and Extensions and New Leases. This Conveyance
and the Production Payment shall apply to all renewals, extensions and other
similar arrangements of the leases (or other determinable interests) which are
included in the Subject Interests, whether such renewals, extensions or
arrangements have heretofore been obtained by Working Interest Owner or are
hereafter obtained by or for Working Interest Owner or any Affiliate thereof and
whether or not the same are described in Exhibit A. For the purposes of the
preceding sentence, a new lease that covers the same interest (or any part
thereof) covered by a prior lease, and which is acquired within one year after
the expiration, termination, or release of such prior lease, shall be treated as
a renewal or extension of such prior lease.
Section 5.3 Future Gas Imbalances.
(a) No Undertakes Without Consent. Without the prior consent of
Production Payment Owner, Working Interest Owner will not deliberately
take (for itself and for Production Payment Owner) a lesser share of
Gas produced from a Subject Well than the share of Gas which Working
Interest Owner and Production Payment Owner are collectively entitled
to take by virtue of ownership of the Subject Interests (without regard
to any rights to take a lesser share under any production balancing
agreement or other arrangement or any rights under common law with
respect to production balancing), except as a result of Working
Interest Owner and Production Payment Owner, or any predecessor in
title to such Subject Interest, having previously taken from such
Subject Well or other wells located on Subject Interests more Gas than
such parties would be entitled to receive by virtue of their ownership
("previous overproduction"), but only to the extent that the amount of
such previous overproduction occurred after the Initial Time or
occurred prior to the Initial Time and is disclosed in the Purchase
Agreement. If any such deliberate undertakes by Working Interest Owner
occur in violation of this Section, the Production Payment Hydrocarbons
shall be determined (to the maximum extent allowed under applicable law
and any applicable Permitted Liens) without regard thereto. It is
recognized, however, that due to differences between the nominations by
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Working Interest Owner and its (and Production Payment Owner's) share
of actual production and differences between nominations by other
owners of production and their shares of actual production, minor
instances of overproduction or underproduction will frequently occur,
and any such instances will not be deemed violations of this Section.
(b) Proportional Sharing in Overtakes. If, as permitted by
applicable contracts and laws, Working Interest Owner takes a greater
share of the Gas produced from a Subject Well than the share of Gas
which Working Interest Owner is entitled to take by virtue of ownership
of the Subject Interests (such shares determined without regard to the
existence of the Production Payment), then Production Payment Owner
shall be entitled to share in such overproduction with Working Interest
Owner in the same percentages that they share in the normal production
from such well (i.e., the production to which they are entitled without
regard to such overproduction).
(c) No Balancing From Other Properties. Except to the extent, if
any, that a Subject Interest is subject to such a balancing arrangement
before it becomes subject to this Conveyance and such fact is disclosed
to (and accepted by) Production Payment Owner as an express exception
to Section 3(s) of the Purchase Agreement, Working Interest Owner will
not allow any Subject Interest to be subject to any production
balancing arrangement under which one or more third Persons may take a
portion of the production attributable to such Subject Interest without
payment (or without full payment) therefor as a result of production
having been taken from, or as a result of other actions or inactions
with respect to, properties other than such Subject Interest.
Section 6. Non-Compliance Events. Each of the following events or
occurrences described in this Section shall constitute a "Non-Compliance Event":
(a) Any warranty or representation made by the Working Interest
Owner herein or in any other Production Payment Document shall be
untrue in any material respect.
(b) A default in the due performance or observance by the Working
Interest Owner of any covenant, agreement, obligation or condition
contained herein or in any other Production Payment Document, and such
default shall continue to exist for a period of 30 days after the
earlier to occur of (i) the date on which an officer of the Working
Interest Owner has knowledge, or a reasonably prudent officer should
have had knowledge, of such default or (ii) after notice of such
default shall have been given to the Working Interest Owner by the
Production Payment Owner; provided however that if such default cannot
reasonably be cured within such 30 day period and Borrower shall have
commenced to cure such default within such 30 day period and thereafter
diligently and expeditiously proceeds to cure such default, such 30 day
period shall be extended for so long as it shall require Working
Interest Owner in the exercise of due diligence to cure such untrue
warranty or representation, it being agreed that no such extension
shall be to a cure period in excess of 90 days in the aggregate.
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(c) A default in the due performance or observance by the Working
Interest Owner of any covenant, agreement, obligation or condition
contained in a material agreement pertaining to the Subject Interests
(which for purposes hereof would be any agreement, including, without
limitation, any loan agreement, indenture or contract which would
impose on the Working Interest Owner a material cost, liability or
expense) of the Working Interest Owner, and such default shall continue
to exist for a period of 30 days after the earlier to occur of (i) the
date on which an officer of the Working Interest Owner has knowledge,
or a reasonably prudent officer should have had knowledge, of such
default or (ii) after notice of such default shall have been given to
the Working Interest Owner by the Production Payment Owner; provided
however that if such default cannot reasonably be cured within such 30
day period and Borrower shall have commenced to cure such default
within such 30 day period and thereafter diligently and expeditiously
proceeds to cure such default, such 30 day period shall be extended for
so long as it shall require Working Interest Owner in the exercise of
due diligence to cure such untrue warranty or representation, it being
agreed that no such extension shall be to a cure period in excess of 90
days in the aggregate.
(d) The Working Interest Owner shall (i) become insolvent or
generally fail to pay, or admit in writing its inability or
unwillingness to pay, debts as they become due; (ii) apply for, consent
to, or acquiesce in, the appointment of a trustee, receiver,
sequestrator or other custodian for the Working Interest Owner, the
Subject Interests or any other property thereof, or make a general
assignment for the benefit of creditors; (iii) in the absence of such
application, consent or acquiescence, permit or suffer to exist the
appointment of a trustee, receiver, sequestrator or other custodian for
the Working Interest Owner or for a substantial part of the Subject
Interests or other property thereof, and such trustee, receiver,
sequestrator or other custodian shall not be discharged within 60 days,
provided, that the Working Interest Owner hereby expressly authorizes
the Production Payment Owner to appear in any court conducting any
relevant proceeding during such 60-day period to preserve, protect and
defend its rights under this Agreement, the Purchase Agreement and any
other Production Payment Documents; (iv) permit or suffer to exist the
commencement of any bankruptcy, reorganization, debt arrangement or
other case or proceeding under any bankruptcy or insolvency law, or any
dissolution, winding up or liquidation proceeding, in respect of the
Working Interest Owner and, if any such case or proceeding is not
commenced by the Working Interest Owner such case or proceeding shall
be consented to or acquiesced in by the Working Interest Owner, or
shall result in the entry of an order for relief or shall remain for 60
days undismissed, provided, that the Working Interest Owner hereby
expressly authorizes the Production Payment Owner to appear in any
court conducting any such case or proceeding during such 60-day period
to preserve, protect and defend its rights under this Agreement and the
other Production Payment Documents; or (v) take any action authorizing,
or in furtherance of, any of the foregoing.
(e) Any change in the business, assets, properties, prospects or
financial condition of the Working Interest Owner which materially and
adversely affects the Working Interest Owner's ability to perform its
18
<PAGE>
extraction, delivery, indemnity and other obligations hereunder and
under the other Production Payment Documents.
(f) Any Change in Control of the Working Interest Owner shall
occur.
(g) Any occurrence, in Production Payment Owner's opinion, of a
Material Negative Reservoir Event.
(h) The insurance required to be maintained pursuant to Sections
5(l) and (p) of the Purchase Agreement shall not be in full force and
effect.
Section 7. Remedies of Production Payment Owner. Upon the occurrence of
a NonCompliance Event, in addition to Production Payment Owner's right to
recover damages and all other remedies available to Production Payment Owner at
law or in equity, Production Payment Owner may (but is not obligated or required
to), either on its own behalf or through any agent or representative, exercise
any one or more of the following remedies (it being agreed that the exercising
of any one remedy shall not preclude the exercising of any other remedy):
(a) If Working Interest Owner has failed to perform any act or
to take any action which Working Interest Owner is required
hereunder to perform or take or to pay any money which
Working Interest Owner is required hereunder to pay, then
Production Payment Owner may, but shall not be obligated to,
perform or cause to be performed such act or take such
action or pay such money, all in Working Interest Owner's
name or in Production Payment Owner's own name. Any expenses
so incurred by Production Payment Owner and any money so
paid by Production Payment Owner shall be a demand
obligation owing by Working Interest Owner to Production
Payment Owner (which obligation Working Interest Owner
hereby expressly promises to pay) and Production Payment
Owner, upon making such payment, shall be subrogated to all
of the rights of the Person receiving such payment. Each
amount due and owing by Working Interest Owner to Production
Payment Owner pursuant to this subsection shall bear
interest each day, from the date of such expenditure or
payment until paid, at the Specified Rate, which interest
shall be payable on the first day of each month and shall
itself bear interest at the same rate if not timely paid.
(b) Production Payment Owner shall be entitled to notify the
purchasers of the Subject Hydrocarbons to make any payments
relating to such Subject Hydrocarbons directly to Production
Payment Owner.
(c) Production Payment Owner shall be entitled to request that
Working Interest Owner resign as operator of the Subject
Interests (and Working Interest Owner agrees to comply with
such request) and Production Payment Owner shall be entitled
to take any and all actions necessary to replace Working
Interest Owner as operator with a reputable third party who
is experienced in operating oil and gas properties and who
19
<PAGE>
is acceptable to Production Payment Owner, including,
without limitation, the negotiation of a substitute
operating agreement containing such terms and conditions as
are commercially reasonable in a transaction involving a
contract operator with no ownership interest in the contract
area covered by the operating agreement; provided, that
Working Interest Owner shall remain obligated for all
obligations, costs and expenses arising from operating the
Subject Interests.
(d) Production Payment Owner shall be entitled to apply to a
court of competent jurisdiction for the specific performance
or observance of any covenant or agreement or in aid of the
execution of any power herein granted.
In addition to and not in limitation of the foregoing, upon the occurrence of a
Non-Compliance Event, the Production Payment Owner shall have the option to
increase the Dedication Percentage to capture all excess volumes (over and above
any volumes required to pay reasonable, actual lease operating expenses;
provided that such lease operating expenses do not exceed the amount of
Authorized Production Expenses applicable for such period of time) necessary to
repay the Total Sum to zero and such volumes shall be applied as provided in
Section 2.2 hereof; provided, if Working Interest Owner is producing the
Hydrocarbons in a manner acceptable to Production Payment Owner, in the
Production Payment Owner's sole discretion, and Production Payment Owner
consents thereto, some amount of the production at the Production Payment
Owner's sole discretion may be delivered to the Working Interest Owner in
respect of the Subject Hydrocarbons other than the Production Payment
Hydrocarbons. All rights to which Production Payment Owner shall have succeeded
under the provisions of this Section shall terminate either (1) when the
Production Payment terminates and all amounts then due and payable to Production
Payment Owner pursuant to this Section, including amounts payable for interest
as aforesaid, and all amounts in respect of any Direct Taxes, Reimbursable
Expenses, Hedging Costs, Delivery Charges, Imbalance Charges or Indemnified
Liability, shall have been duly paid to the Production Payment Owner in full in
cash, or (2) at such earlier date when such Non-Compliance Event of Working
Interest Owner shall have been remedied and all such amounts shall have been
duly paid in full, without prejudice, however, to the exercise of any such
rights upon any subsequent failure of Working Interest Owner to perform or
observe any of his covenants or agreements hereunder or under the Purchase
Agreement. Notwithstanding the foregoing provisions of this Section, the
Production Payment Owner will not exercise any of its rights pursuant to this
Section in respect of the Non-Compliance Event described in Section 6(g), if
within 30 days of the occurrence of such Non-Compliance Event, Working Interest
Owner shall deliver to the Production Payment Owner an Independent Reserve
Report meeting the requirements of Section 5(f)(vii) of the Purchase Agreement
and otherwise in form and substance satisfactory to the Production Payment Owner
which report demonstrates that as of the date of such report (which date shall
be no more than thirty (30) days from the date of delivery thereof to the
Production Payment Owner) that the percentage that (a) the Production Payment
NPV bears to (b) the unliquidated balance of the Total Sum is equal to or
greater than one hundred fifty percent (150%) as of the date of such report.
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Section 8. Access to Subject Interests. Working Interest Owner will
permit the duly authorized representatives of Production Payment Owner or any
Credit Supplier, at any reasonable time, but at Production Payment Owner's risk
and expense, to make such inspection of the Subject Interests and the machinery,
equipment and facilities used in the operation thereof as such representatives
shall deem proper, and will furnish to Production Payment Owner, upon request,
such detailed information as Production Payment Owner may reasonably request
concerning the Subject Interests, the operation thereof and the production and
processing of Hydrocarbons therefrom.
Section 9. Definitions. For all purposes of this Conveyance, unless the
context otherwise requires, terms defined in Annex I hereto shall be used herein
with the same meaning.
Section 10. Successors and Assigns.
Section 10.1 Assignments by Working Interest Owner. Without the prior
consent of Production Payment Owner (which consent may be granted or withheld in
the sole and absolute discretion of Production Payment Owner), Working Interest
Owner shall not assign, sell, transfer, convey, exchange, mortgage or pledge all
or any part of the Subject Interests or create any lien thereon or security
interest therein, except for Permitted Liens.
Section 10.2 Assignments by Production Payment Owner. Production
Payment Owner's interest in the Production Payment may not be transferred except
in compliance with this section. Production Payment Owner and each Permitted
Assign (as hereinafter defined) shall have the right to sell, assign, transfer
or convey its interest in the Production Payment, in whole or in part (and
either absolutely or by mortgage or other security instrument), at any time;
provided that no change of ownership or right to receive payment of the
Production Payment or of any part thereof, however accomplished, shall be
effective or binding upon Working Interest Owner until notice thereof shall have
been registered with Working Interest Owner by the transferor and by the
transferee, and then only with respect to payments made after receipt of such
notice. Any Person to whom all or any interest in the Production Payment is
assigned or conveyed in accordance with the foregoing requirements is herein
called a "Permitted Assign". Production Payment Owner shall keep records of all
Permitted Assigns, their interest in the Production Payment, and their
addresses, and shall give notice thereof to the other Persons, if any, from time
to time holding the interests of Production Payment Owner hereunder. If the
interests of Production Payment Owner under this Conveyance are ever owned by
more than one Person, all Persons owning interests hereunder shall designate in
writing to Working Interest Owner one Person as their agent to deliver and
receive all communications (including consents) and exercise the discretion of
Production Payment Owner hereunder on their behalf. If Production Payment Owner,
or Production Payment Owner's successors and assigns, at any time shall execute
a mortgage or deed of trust covering all or any part of the Production Payment
as security for any obligation, the mortgagee, the pledgee or the trustee
therein named or the holder of the obligation secured thereby shall be entitled,
to the extent such mortgage or deed of trust so provides, to exercise all of the
rights, remedies, powers and privileges herein conferred upon Production Payment
21
<PAGE>
Owner, and to give or withhold all consents herein required or permitted to be
obtained from Production Payment Owner.
Section 10.3 Binding Effect. All the covenants and agreements of
Working Interest Owner herein contained shall be covenants running with the land
and the Subject Interests and shall be binding upon the successors and assigns
of Working Interest Owner and shall inure to the benefit of the successors and
assigns of Production Payment Owner; provided, however, that this provision
shall not be deemed to permit any assignment or other transfer of the interest
of Working Interest Owner in any of the Subject Interests that is not
specifically permitted by the provisions of this instrument.
Section 11. Representations and Warranties by Working Interest Owner.
Working Interest Owner warrants to Production Payment Owner and its respective
successors and assigns that:
(a) Working Interest Owner has Defensible Title to the Subject
Interests, free from all liens, charges and encumbrances, subject only
to (i) the lien of ad valorem taxes not yet due and payable and (ii)
the Permitted Liens.
(b) Working Interest Owner has the corporate right, power and
authority to sell and convey, as herein provided, the Production
Payment.
(c) The Production Payment is payable from, and has a first and
prior claim upon (subject only to the matters referred to in Section
11(a) above), that portion of the Subject Hydrocarbons which is herein
dedicated to the Production Payment.
(d) Each Oil and gas lease and other interest described in Exhibit
A is valid and subsisting and in full force and effect, insofar as it
covers or relates to the land described in Exhibit A as covered
thereby; all material agreements, contracts, leases, permits,
easements, right-of-ways, and other surface use rights necessary to
own, maintain and operate such Oil and gas leases are in full force and
effect and no material breach or default exists thereunder.
(e) All rentals, royalties and taxes and other amounts due and
payable under or in respect of said leases and other interests, or any
of them, have been duly paid or provided for, except to the extent
being diligently contested in good faith by appropriate proceedings and
for which adequate reserves in accordance with GAAP shall have been set
aside on its books. No default or event of default now exists under any
of said leases and other interests and Working Interest Owner has
received no notice of any default or event of default or breach or
claimed default or breach in respect of any thereof.
(f) Working Interest Owner is not obligated, by virtue of any
prepayment made under any "take or pay" clause or under any similar
arrangement, to deliver Subject Hydrocarbons at some future time
22
<PAGE>
without then or thereafter receiving full payment therefor at the
market price or value thereof.
(g) The production of all Hydrocarbons which have heretofore been
produced from the Subject Interests has not been in excess of allowable
production quotas allowed or permitted to the Subject Interests by any
applicable regulatory authority so as to subject, after the Initial
Time, any well located thereon, or Production Payment Owner's interest
in the production therefrom, to restrictions or penalties on allowables
for overproduction.
(h) None of the Subject Interests or Subject Hydrocarbons are
committed or dedicated to any contract or agreement regarding the sale
or use thereof, other than as described in Exhibit A.
(i) None of the Subject Interests or any of the Subject
Hydrocarbons is subject to, or encumbered by, any balancing, deferred
production, credit financing or similar arrangement, except for
Permitted Liens.
(j) The Subject Interests include and cover all of the properties,
rights and interests of Working Interest Owner (other than the Kuester
#1H well) for which oil and gas reserves and the future production and
revenues therefrom were estimated and projected in that certain
Appraisal Report prepared by DeGolyer and MacNaughton dated as of
December 31, 1998, on certain interests owned by Working Interest Owner
which has heretofore been delivered by Working Interest Owner to
Production Payment Owner.
This Conveyance is made with full substitution and subrogation of Production
Payment Owner, its successors and assigns, in and to all covenants and
warranties by others heretofore given or made in respect of any of the Subject
Interests or any part thereof.
Section 12. Interest on Unpaid Amounts. Any amount not paid when due
hereunder shall bear interest on such overdue amount at a rate of interest per
annum equal to the lesser of (i) the Agreed Rate plus, if a Non-Compliance Event
shall have occurred and be continuing, one and one-half percent (1.5%), or (ii)
the Highest Lawful Rate (the "Specified Rate"). Such interest shall be paid by
Working Interest Owner to Production Payment Owner on demand.
Section 13. Choice of Law. THIS CONVEYANCE SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER THE LAWS OF THE STATE OF TEXAS AND FOR ALL PURPOSES SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS
(WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THEREOF THAT WOULD CAUSE ANOTHER
STATE'S LAW TO APPLY) AND THE LAWS OF THE UNITED STATES OF AMERICA IN ALL
RESPECTS, INCLUDING, WITHOUT LIMITATION, MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
23
<PAGE>
Section 14. Intentions of the Parties. Nothing herein contained shall
be construed to constitute either party hereto (under state law or for tax
purposes) in partnership with the other party. In addition, the parties hereto
intend that the Production Payment shall at all times be treated (and all
provisions of this Conveyance shall be construed and treated accordingly) as a
production payment (i.e., a term overriding royalty) and an interest in real
property under the laws of each state in which Subject Interests are located.
Section 15. Ownership of Equipment. The Production Payment does not
include any right, title or interest in and to any of the personal property,
fixtures, structures or equipment now or hereafter placed on, or used in
connection with, the Subject Interests, and the interest herein conveyed to
Production Payment Owner is exclusively a production payment (i.e., a term
overriding royalty).
Section 16. Notices. Any notice or communication required or permitted
hereunder shall be given in writing, delivered to or sent by the United States
Postal Service, postage prepaid, or by prepaid telegram, addressed to the
following addresses:
To Working Interest Owner:
Abraxas Petroleum Corporation
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
Attention: Robert Carington
Telephone: (210) 490-4788
Telecopy: (210) 490-8816
To Production Payment Owner:
Southern Producer Services, L.P.
1200 Smith Street
Two Allen Center, Suite 2890
Houston, Texas 77002
Attention: David W. Stewart
Telephone: (713) 276-1900
Telecopy: (713) 276-1990
or to such other address or to the attention of such other person as hereafter
may be designated in writing by the applicable party by notice to the other
party as herein provided, and shall be deemed to have been given as of the date
of receipt.
Section 17. Unenforceable or Inapplicable Provisions. If any provision
hereof is invalid or unenforceable in any jurisdiction, the other provisions
hereof shall remain in full force and effect in such jurisdiction, and the
remaining provisions hereof shall be liberally construed in favor of Production
Payment Owner, and its successors and assigns, in order to effectuate the
24
<PAGE>
provisions hereof, and the invalidity of any provision hereof in any
jurisdiction shall not affect the validity or enforceability of any such
provision in any other jurisdiction.
Section 18. Certain Notices. During the term hereof, Working Interest
Owner will not change his name, identity, principal place of business or the
office where the Working Interest Owner keeps its books and records concerning
the Production Payment, the Production Sale Contracts and the contract rights
and accounts now existing or hereafter arising in connection therewith without
notifying Production Payment Owner of any such change at least 30 days prior to
the Initial Time of such change.
Section 19. Further Assurances and Warranty. Working Interest Owner and
Production Payment Owner will execute and deliver all such other and additional
instruments, notices, releases and other documents and will do all such other
acts and things as may be necessary or appropriate more fully to assure to each
other party or its successors or assigns all of the respective rights and
interests herein and hereby granted or intended so to be. Working Interest Owner
will warrant and forever defend the Production Payment unto Production Payment
Owner, its successors and assigns, against every person whomsoever now or at any
time hereafter lawfully claiming the same or any part thereof.
Section 20. Partition. Working Interest Owner and Production Payment
Owner acknowledge that neither has any right or interest that would permit it to
partition any portion of the Subject Interests as against the other, and each
waives any such right.
Section 21. Survival. The covenants and obligations of the Working
Interest Owner under Sections 2.3(a) and 2.3(b) of this Conveyance shall survive
the termination of this Conveyance and the other Production Payment Documents.
Section 22. Execution in Counterparts. This Conveyance has been
executed in several counterparts each of which shall be deemed to be an original
and all of which are identical, except that in the case of certain counterparts
and to facilitate recordation, portions of Exhibit A which describe properties
situated in Parishes or Counties other than the Parish or County in which the
particular counterpart is being recorded may have been omitted. All of such
counterparts together shall constitute but one and the same Conveyance. All of
said documents are integral parts of one consolidated transaction and are to be
construed as a single transaction.
[SIGNATURES BEGIN ON NEXT PAGE]
25
<PAGE>
IN WITNESS WHEREOF, this Conveyance has been executed, or caused to be
executed on his behalf, by Working Interest Owner as of the day and year first
above written, but effective as of the Initial Time.
ABRAXAS PETROLEUM
CORPORATION
By:______________________
Name:
Title:
Attest:
__________________________
Name:
Title: Secretary
The name and address of Working Interest Owners is:
ABRAXAS PETROLEUM CORPORATION
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
Attention: Robert Carington
The name and address of Production Payment Owner are:
SOUTHERN PRODUCER SERVICES, L.P.
1200 Smith Street
Two Allen Center, Suite 2890
Houston, Texas 77002
Attention: David W. Stewart
S-1
<PAGE>
STATE OF TEXAS )
) SS.
COUNTY OF HARRIS )
The foregoing instrument was acknowledged before me on this _____ day
of _______________, _______, by _____________________, the _____________________
of ABRAXAS PETROLEUM CORPORATION, a Nevada corporation, on behalf of such
corporation.
Witness my hand and official seal.
Notary Public
Residing at
My commission expires:
S-2
<PAGE>
EXHIBIT A
TO
CONVEYANCE OF DOLLAR DENOMINATED PRODUCTION PAYMENT
This Exhibit A sets forth the description of the "Leases" and other
interests which are defined as "Subject Interests" in the Conveyance of Dollar
Denominated Production Payment to which this Exhibit A is attached, subject to
the limitations contained herein.
A. Leases. Each field contains descriptions of the oil, gas and mineral
leases, oil and gas leases and other interests which are the "Leases" covered
hereby covering lands located within the State of Texas. The following
descriptive information may also be included for a particular Lease:
County or Parish: A designation of the county or parish in which
the respective Subject Interests lie.
Description of Property: This sets forth a description of some or
all of the properties covered by the Oil and gas leases designated.
The Subject Interests are not limited nor shall they be confined to any
unit, unitized interval, aerial extent of a unit, well bore or other similar
limitation, notwithstanding the inclusion of well names, unit names, land
descriptions or other matters, all of which are included for identification
only. Rather, all of the interests of Working Interest Owner in the various
Leases listed on the following pages shall be included within the meaning of the
term Subject Interests.
B. Leasehold and Net Revenue Interests. Immediately following the
listing of Leases for each field is a listing of Properties, well names
associated therewith and, as indicated, "Leasehold and Net Revenue Interests"
for each such well. With respect to each of the said wells, the leasehold
interest is the share of costs borne with respect thereto and the net revenue
interests shall mean, with respect to the relevant well or the relevant unit on
which the well is located, that interest in the Oil and Gas production which is
produced, saved and sold from such well or unit after deducting all burdens
against the production therefrom (other than the burden or burdens created by
this instrument and other instruments of even date herewith among the same
parties as those who have executed this instrument).
C. Permitted Encumbrances. Following the description of Leasehold and
Net Revenue Interests in this Exhibit A is a listing of easements,
rights-of-way, servitudes, permits, surface leases, and other rights in respect
of surface operations, on a prospect by prospect basis as identified in such
listing, that affect the Subject Interests shown on this Exhibit A and in the
wells or units described or referred to in this Exhibit A, but only to the
extent that such instruments are valid and in force and effect. These
instruments shall be deemed the "Permitted Encumbrances" for purposes of the
instrument to which this Exhibit A is attached.
EXHIBIT A - 1
<PAGE>
D. Matters Contested in Good Faith. Following the description of
Permitted Encumbrances in this Exhibit A is a listing of all liens and
encumbrances pertaining to the Subject Interests which the Working Interest
Owner is contesting in good faith.
E. Defined Terms. Capitalized terms used in this Preamble and not
otherwise defined herein shall have the meanings ascribed to them in Annex I to
the Conveyance of Dollar Denominated Production Payment.
EXHIBIT A - 2
<PAGE>
EXHIBIT B
TO
CONVEYANCE OF DOLLAR DENOMINATED PRODUCTION PAYMENT
[Intentionally omitted]
EXHIBIT B - 1
<PAGE>
EXHIBIT C
TO
CONVEYANCE OF DOLLAR DENOMINATED PRODUCTION PAYMENT
Delivery Points
EXHIBIT C - 1
<PAGE>
ANNEX I
TO
CONVEYANCE OF DOLLAR DENOMINATED PRODUCTION PAYMENT
Definitions
In addition to such other defined terms as may be set forth in the
Conveyance of Dollar Denominated Production Payment as used in the Conveyance,
the following terms have the following respective meanings:
"Affiliate" shall mean, with respect to any Person, (a) any other
Person who directly or indirectly through one or more intermediaries
controls, or is controlled by, or under common control with, such
specified Person, and (b) any Related Person of such Person. For
purposes of this definition, the term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction
of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative of the
foregoing.
"Agreed Rate" shall mean a rate of interest of fifteen percent
(15.0%) per year, calculated on the basis of actual days elapsed and a
year of 360 days.
"API" shall mean the American Petroleum Institute.
"Application Date" shall mean the next-to-last Business Day of
each calendar month, starting with November 30, 1999. As used herein
with respect to any Application Period, the "related Application Date"
shall mean the Application Date that occurs approximately one month
after the end of such Application Period. For example, if an
Application Period ends at 7:00 a.m., Central time, on March 1 and the
next-to-last Business Day of such March is March 30, the related
Application Date is such March 30.
"Application Period" shall mean a period of time beginning at 7:00
a.m., Central time, on the first day of any calendar month and ending
at 7:00 a.m., Central time, on the first day of the next succeeding
calendar month. The first Application Period will begin at the Initial
Time and will end at 7:00 a.m., Central time, on October 31, 1999. As
used herein with respect to any Application Date, the "related
Application Period" shall mean the Application Period immediately
preceding (but not including) such Application Date. For example, if an
Application Date occurs on February 27, the related Application Period
is the one which ended at 7:00 a.m., Central time, on the preceding
February 1.
"ASTM" shall mean the American Society for Testing Materials.
"Authorized Production Expenses" shall have the meaning set forth
in Section 5(m) of the Purchase Agreement.
ANNEX I - 1
<PAGE>
"Barrel of Oil" shall mean 42 United States standard gallons of
231 cubic inches per gallon of Oil at a temperature of 60 degrees
Fahrenheit.
"Btu" or "British Thermal Unit" shall mean the amount of energy
required to raise the temperature of one (1) pound (avoirdupois) of
pure water one (1) degree Fahrenheit (1(degree)F.) from fifty-nine
degrees Fahrenheit (59(degree)F.) to sixty degrees Fahrenheit
(60(degree)F.).
"Business Day" shall mean a day that is not a Saturday, a Sunday
or a legal holiday in Atlanta, Georgia or Houston, Texas.
"Change in Control" shall mean a change resulting when any
Unrelated Person or any Unrelated Persons acting together which would
constitute a Group together with any Affiliates or Related Persons
thereof (in each case also constituting Unrelated Persons) shall at any
time either (A) Beneficially Own more than 20% of the aggregate voting
power of all classes of Voting Stock of the Working Interest Owner
provided that such ownership has not been obtained in a transaction
which has been approved by the Board of Directors of such Person or (B)
during any period of two consecutive years ending on or after the
Initial Closing Date, as determined as of the last day of each calendar
quarter after the Initial Closing Date, the individuals (the "Incumbent
Directors") who at the beginning of such period constituted the Board
of Directors of the Working Interest Owner (other than additions
thereto or removals therefrom from time to time thereafter approved by
a vote of the Board of Directors in accordance with the Working
Interest Owner's by-laws) shall cease for any reason to constitute 51%
or more of the Board of Directors of the Working Interest Owner. As
used herein, (a) "Beneficially Own" means "beneficially own" as defined
in Rule 13d-3 of the Securities Exchange Act of 1934, as amended, or
any successor provision thereto; provided, however, that, for purposes
of this definition, a Person shall not be deemed to Beneficially Own
securities tendered pursuant to a tender or exchange offer made by or
on behalf of such Person or any of such Person's Affiliates until such
tendered securities are accepted for purchase or exchange; (b) "Group"
means a "group" for purposes of Section 13(d) of the Securities
Exchange Act of 1934, as amended; (c) "Unrelated Person" means at any
time any Person other than the Working Interest Owner or any Subsidiary
and other than any trust for any employee benefit plan of the Working
Interest Owner or any Subsidiary of the Working Interest Owner; (d)
"Related Person" of any Person shall mean any other Person owning (1)
5% or more of the outstanding common stock of such Person or (2) 5% or
more of the Voting Stock of such Person; and (e) "Voting Stock" of any
Person shall mean capital stock of such Person which ordinarily has
voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long
as no senior class of securities has such voting power by reason of any
contingency.
"Contingent Liability" shall mean any agreement, undertaking or
arrangement by which any Person guarantees, endorses or otherwise
becomes or is contingently liable upon (by direct or indirect
ANNEX I - 2
<PAGE>
agreement, contingent or otherwise, to provide funds for payment, to
supply funds to, or otherwise to invest in, a debtor, or otherwise to
assure a creditor against loss) the indebtedness, obligation or any
other liability of any other Person (other than by endorsements of
instruments in the course of collection), or guarantees the payment of
dividends or other distributions upon the shares of any other Person.
The amount of any Person's obligation under any Contingent Liability
shall (subject to any limitation set forth therein) be deemed to be the
outstanding principal amount (or maximum principal amount, if larger)
of the debt, obligation or other liability guaranteed thereby.
"Conveyance" shall mean that certain Conveyance of Dollar
Denominated Production Payment, dated October 6, 1999, between the
Working Interest Owner and the Production Payment Owner, as from time
to time hereafter may be modified, supplemented or amended.
"Dedication Percentage" shall mean (i) sixty (60%) with respect to
the NRI Percentage of each portion of lands described on Exhibit A;
provided, that the Dedication Percentage shall be adjusted upward
(automatically, without any need for an amendment hereto) from time to
time as follows:
(a) as of the first day of each month, the Dedication
Percentage shall be adjusted upward in the event that the
Reserve Report prepared as of such then most-recent
Evaluation Date reflects that the Production Payment NPV is
less than one hundred fifty percent (150%) of the
unliquidated balance of the Total Sum as of such then
most-recent Evaluation Date, and the new Dedication
Percentage (in this definition, the "Adjusted Dedication
Percentage") shall, in the case of Subject Interests, be that
percentage between sixty percent (60%) and a maximum of
ninety percent (90%), necessary to achieve, to the maximum
extent possible, the level of one hundred fifty percent
(150%) of the unliquidated balance of the Total Sum, all as
more particularly described in Section 14 of the Purchase
Agreement;
(b) the Dedication Percentage may be adjusted from
time to time pursuant to Section 14 in the Purchase Agreement
(but no such adjustment shall result in a Dedication
Percentage in excess of ninety percent (90%) for the Subject
Interests).
"Delivery Charges" shall mean the actual costs, if any, incurred
by Production Payment Owner for separating, gathering, compressing,
treating, or Processing Production Payment Hydrocarbons prior to a
Delivery Point or of transporting Production Payment Hydrocarbons to a
Delivery Point in a condition satisfactory to meet pipeline
specifications and qualifications at such Delivery Point (net of any
revenues received by Production Payment Owner in connection with any
such Processing, to the extent that such revenues are not included in
Production Payment Proceeds).
ANNEX I - 3
<PAGE>
"Delivery Point" shall mean (a) as of the Initial Time, for each
field listed on Exhibit A hereto, the Delivery Point specified for such
field on Exhibit C, or (b) such other delivery point or points in the
vicinity of such field hereafter from time to time designated by
Production Payment Owner and mutually agreed to by Working Interest
Owner at which Hydrocarbons from the Subject Interests in such field is
(or reasonably could be, without any additional capital expenditures)
sold to a third party or delivered into a pipeline for transportation
to a market point. Unless otherwise mutually agreed by Working Interest
Owner and Production Payment Owner, any new Delivery Point shall become
effective one month after the first day of the next succeeding
Application Period.
"Delivery Services" is defined in Section 2.4(a).
"Direct Taxes" shall mean all ad valorem, property, gathering,
transportation, pipeline regulating, gross receipts, severance,
production, excise, heating content, carbon, value, value added,
environmental, occupation, franchise, sales, use, fuel, and other taxes
and governmental charges, fees and assessments imposed on or as a
result of all or any part of the Subject Interests, the Hydrocarbons
produced from Subject Interests or the proceeds thereof, the Production
Payment, or the Production Payment Hydrocarbons or the proceeds
thereof, regardless of the point at which or the manner in which such
taxes, charges or assessments are charged, collected, levied or
otherwise imposed. The only taxes which are not Direct Taxes are
federal income taxes, state income taxes, and franchise taxes levied
against Production Payment Owner and any other taxes levied against the
overall net income of Production Payment Owner (including interest,
penalties and withholding obligations owing to governmental authorities
with respect to such income or franchise taxes). Interest, penalties
and withholding obligations owing to governmental authorities with
respect to any Direct Taxes shall constitute "Direct Taxes".
"economically feasible" is defined in Section 4.
"Environmental Laws" shall mean all applicable federal, state or
local statutes, laws, ordinances, codes, rules, policies, directives,
orders, judgments, decisions, regulations and guidelines (including
consent decrees and administrative orders) relating to public health
and safety and protection of the environment.
"Evaluation Date" is defined in the Purchase Agreement.
"Exhibit A" shall mean Exhibit A attached to the Conveyance and
the Purchase Agreement.
"Expense Components" is defined in Section 2.1.
"First Transporter" shall mean the first interstate or intrastate
pipeline downstream of the Delivery Points.
ANNEX I - 4
<PAGE>
"Force Majeure" shall mean acts of God, governmental action,
strikes, lockouts or other industrial disturbances, acts of the public
enemy, wars, blockades, insurrections, riots, epidemics, landslides,
lightning, earthquakes, fires, hurricanes, tornados, storms, storm
warnings, floods, washouts, freezes, arrests and restraints of
governments and people, civil disturbances, explosions, breakage of, or
accidents to, lines of pipe or subsurface storage caverns regardless of
how caused, and any other causes, whether of the kind herein enumerated
or otherwise, not within the control of the party claiming suspension
(including, but not limited to, acts of negligence or willful
misconduct of third parties) and which by the exercise of due diligence
such party is unable to prevent or overcome; provided, however, that
"force majeure" shall not include any transportation curtailment,
failure of machinery or equipment or failure or inadequacy of reserves.
"GAAP" shall mean generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards
Board as of any date of determination; and the requisite that such
principles be applied on a consistent basis shall mean that the
accounting principles observed in a current period are comparable in
all material respects to those applied in any preceding period.
"Gas" shall mean natural gas which meets or exceeds the Quality
Standards and shall include all liquefiable hydrocarbons and other
components entrained in the gas upon delivery to Production Payment
Owner.
"Gas Sales Agreement" is defined in the Purchase Agreement.
"Hedging Costs" shall mean costs incurred by Production Payment
Owner in conformity with its hedging guidelines (i) with respect to any
commodity swap or hedge agreement or other hedging transaction,
including, without limitation, rescheduling, unwinding, termination or
other costs and all increased costs, interest period breakage and
indemnity costs, (ii) with respect to all stranded transportation
charges, which for purposes hereof shall mean that portion of any
demand charges incurred for reservation of firm transportation capacity
downstream of the scheduled Delivery Points which were utilized as a
result of Working Interest Owner's failure to deliver the required
volumes at the appropriate Delivery Points, and (iii) costs of
acquiring Gas and Oil to satisfy contractual obligations incurred by
Production Payment Owner pursuant to any contract for the sale of
Production Payment Hydrocarbons; provided that at no time will
Production Payment Owner enter into any hedge transaction (A) involving
Hydrocarbon volumes in excess of the currently expected volume of
Production Payment Hydrocarbons as determined in Production Payment
Owner's economic projections or (B) for the purpose of speculating in
Hydrocarbons.
"Highest Lawful Rate" is defined in Section 23(b) of the Purchase
Agreement.
ANNEX I - 5
<PAGE>
"Hydrocarbons" shall mean collectively oil, gas and other liquid
or gaseous hydrocarbons.
"Imbalance Charges" is defined in Section 2.5(c).
"Indemnified Party" shall mean the Production Payment Owner and
any of its members, officers, employees, agents, shareholders,
directors, advisors or affiliates.
"Independent Reserve Engineer" shall mean DeGolyer and MacNaughton
or such other independent petroleum engineer of recognized standing
selected by Working Interest Owner and acceptable to Production Payment
Owner, in its sole and absolute discretion.
"Independent Reserve Report" has the meaning set forth in Section
5(g) of the Purchase Agreement.
"Initial Time" shall mean October 1, 1999, at 7:00 A.M.,
determined as to each locality in accordance with the time then
generally observed in such locality.
"Lease Measuring Point" shall mean, with respect to any particular
Subject Well, the point at which the Btu content of Gas included in
Production Payment Hydrocarbons produced from such Subject Well is
initially measured.
"Lease Use Hydrocarbons" shall mean any Hydrocarbons which are
lost in the production thereof or used by Working Interest Owner or the
operator of the Subject Interests for the purpose of producing
Hydrocarbons from the Subject Interests, but only for so long as and to
the extent such Hydrocarbons are so used.
"Material Negative Reservoir Event" shall mean (a) any reservoir
discrepancy or other well problem which results in or could reasonably
be expected to result in a downward reevaluation of reserves in the
aggregate for the life of the reservoir, as determined using the
standards provided in the Independent Reserve Report delivered pursuant
to Section 5(f)(vii) of the Purchase Agreement, (b) loss of reservoir
pressure, (c) reservoir damage, or (d) other problem or matter which,
in Production Payment Owner's sole discretion, could adversely affect
the Working Interest Owner's ability to produce and deliver the
Production Payment Hydrocarbons.
"Mcf" shall mean one thousand cubic feet.
"MMBtu" shall mean 1,000,000 British Thermal Units.
"Month" shall mean a calendar month.
"Non-Compliance Event" is defined in Section 6 of the Conveyance.
ANNEX I - 6
<PAGE>
"Non-Consent Hydrocarbons" shall mean those Hydrocarbons produced
from a well during the applicable period of recoupment or reimbursement
pursuant to a non-consent provision covering the relevant well or
wells, which Hydrocarbons have been relinquished to the consenting
party or participating party under the terms of such non-consent
provision as the result of the election by Working Interest Owner not
to participate in the particular operation; provided such election by
Working Interest Owner has been made in good faith and as a prudent
operator.
"NRI Percentage" shall mean, with respect to each portion of
Subject Interests described on Exhibit A, the percentage shown on
Exhibit A as the "Net Revenue Interest" for such portion of the lands
described on Exhibit A.
"Oil" shall mean crude oil, condensate and other liquid
hydrocarbons which meet or exceed the Quality Standards when delivered
to Production Payment Owner at the Delivery Points.
"Oil and Gas Leases" shall include oil, gas and mineral leases and
shall also include subleases and assignments of operating rights.
"Oil Sales Agreement" is defined in the Purchase Agreement.
"Permitted Assigns" is defined in Section 10.2.
"Permitted Liens" shall mean (1) any lien relating to taxes which
are not yet due and payable; (2) defects or irregularities in title,
and liens, charges or encumbrances, including, without limitation,
liens under operating agreements, pooling orders and unitization
agreements and mechanics' and materialmen's liens with respect to
obligations incurred in the ordinary course of business which are being
contested in good faith, which are not such (i) as to interfere
materially with the development, operation or value of the Subject
Interests and (ii) as to affect materially title thereto; (3) the liens
set forth or referred to in Exhibit A hereto; (4) the liens, if any,
granted by Production Payment Owner in favor of any credit supplier;
(5) any lien or encumbrance created as a consequence of the execution
and delivery of the Conveyance; (6) any lien created by the Senior
Secured Trust Indenture; (7) any lien created by the Series C and
Series D Trust Indenture; (8) any inchoate mechanics or materialmens
liens; and (9) any liens consented to in writing by Production Payment
Owner.
"Person" shall mean any natural person, corporation, partnership,
joint venture, trust, firm, association, government, governmental
agency or any other entity, whether acting in an individual, fiduciary
or other capacity.
"previous overproduction" is defined in Section 5.3(a).
ANNEX I - 7
<PAGE>
"Primary Sum" shall mean the sum of $4,000,000, as such sum may be
increased from time to time by amendments or supplements hereto or
increased or decreased by operation of Section 2.2(a) or any provision
of this Conveyance.
"Processing" or "Processed" shall mean to manufacture, fractionate
or refine Subject Hydrocarbons or otherwise to engage in any process
designed to remove elements (hydrocarbons or nonhydrocarbons) from Gas,
but such terms do not mean or include natural pressure reduction, the
use of normal lease or well equipment or other normal operations on or
near any of the Subject Interests (such as the use on or near the lease
- or, in the case of any offshore or near-shore wells, at or near the
landfall of the connecting pipeline - of dehydrators, gas treating
facilities, separators, heater-treaters, lease compression facilities,
injection or recycling equipment, tank batteries, field gathering
systems, pipelines and equipment and so forth). References to
Hydrocarbons which are "Processed" (including the reference thereto
contained in the definition of Gas) refer both to the natural gas
liquids and other products of Processing and to the residue gas and
other hydrocarbons remaining after such operations.
"Production Expenses" shall mean all costs, fees, expenses, and
other obligations of any kind whatsoever incurred for or in connection
with the development, operation or maintenance of the Subject Interests
for the production of Subject Hydrocarbons, the lifting, handling,
gathering, producing, treating, storing, marketing or transporting of
the Subject Hydrocarbons and shall include, without limitation,
utilities, rental payments under site leases and leases of equipment or
vehicles, royalties, utilities, salaries , wages (including, without
limitation, withholding, social security and other payroll burdens,
workers compensation insurance deposits and premiums and the costs of
claims) and benefits (including without limitation, medical insurance
benefits, bonuses, vacation pay or pay for other compensated absences)
of field employees, first level supervisors and technical, accounting,
billing or other administrative employees employed in operating,
producing, reworking and maintaining the Subject Hydrocarbons and the
Subject Interests and all accruals with respect to any of the
foregoing; overhead and operating expenses (including, without
limitation, expenses for office supplies and equipment) pursuant to
applicable operating agreements covering the Subject Interests;
compensation to well operators, consultants, and others necessary for
and related to operating, producing, reworking and maintaining the
Subject Interests and plugging and abandoning the wells; shut-in,
minimum and advance royalties; insurance premiums in connection with
the Subject Interests or any equipment located thereon and utilized in
operating, producing, reworking or maintaining the Subject Interests;
accounting, billing or other administrative services provided by third
parties including, but not limited to, the preparation of any reserve
report; and Capital Expenditures and Direct Taxes.
"Production Payment" has the meaning stated in Section 1 of the
Conveyance.
"Production Payment Documents" shall mean the Conveyance, the
Conveyance Supplements, the Purchase Agreement, the Purchase Agreement
Supplements and any other document or agreement executed in connection
ANNEX I - 8
<PAGE>
with such agreements, as each from time to time hereafter may be
modified, supplemented or amended.
"Production Payment Hydrocarbons" shall mean the Dedication
Percentage of the NRI Percentage of all Hydrocarbons in and under and
that may be produced from (or, to the extent pooled or unitized,
allocated to) any Subject Interest between the Initial Time and the
Termination Time.
"Production Payment NPV" is defined in the Purchase Agreement.
"Production Payment Owner" and "Working Interest Owner" shall
include the successors and assigns of each.
"Production Payment Owner" is defined in the preamble.
"Production Payment Proceeds" shall mean, for any particular
Application Period, the total dollar amount received by Production
Payment Owner during or (to the extent not previously applied) prior to
such Application Period from sales of Production Payment Hydrocarbons,
determined after deduction of all Production Payment Severance Taxes
(whether paid before or after receipt by Production Payment Owner).
"Production Payment Severance Taxes" shall mean all severance
taxes actually attributable to the Production Payment Hydrocarbons,
taking into account any applicable credits, rebates and other factors.
"Production Sale Contracts" shall mean contracts for the sale of
Subject Hydrocarbons now in effect or hereafter entered into by Working
Interest Owner with Production Payment Owner's written consent,
including, without limitation, the Oil Sales Agreement and the Gas
Sales Agreement.
"Proved Developed Producing Reserves" shall mean, with respect to
the Subject Interests, those quantities of Hydrocarbons, estimated by
Production Payment Owner and Production Payment Owner's Credit
Suppliers with reasonable certainty, as demonstrated by geological and
engineering data, to be economically recoverable based upon the prices
set forth in the then most recent Independent Reserve Report delivered
pursuant to Section 5(f)(vii) of the Purchase Agreement from the
Subject Interests by standard producing methods under existing
regulatory practices and economic conditions using existing
conventional equipment and operating methods from existing completion
intervals open for production on the Initial Time of the evaluation.
"Purchase Agreement" shall mean that certain Purchase Agreement
for Dollar Denominated Production Payment, dated October 6, 1999,
between the Working Interest Owner and the Production Payment Owner, as
from time to time hereafter may be modified, supplemented or amended.
ANNEX I - 9
<PAGE>
"Purchaser" shall mean the Production Payment Owner.
"Quality Standards" shall mean, with respect to each Delivery
Point, the quality requirements and specifications set forth in the Gas
Sales Agreement, Oil Sales Agreement and/or any other marketing
arrangement applicable to Hydrocarbons delivered at such Delivery
Point, as the same may be modified from time to time.
"Reimbursable Expenses" shall mean all costs, fees and expenses
paid or incurred by or on behalf of Production Payment Owner or its
Affiliates which are in any way related to: (a) the negotiation,
acquisition, ownership, enforcement, or termination of the Production
Payment, this Conveyance, the other Production Payment Documents, or
any waivers or amendments hereto or thereto, or (b) any litigation,
contest, release or discharge of any adverse claim or demand made or
proceeding instituted by any Person affecting in any manner whatsoever
the Production Payment, any Production Payment Hydrocarbons or
Production Payment Proceeds, this Conveyance or the other Production
Payment Document, or the enforcement or defense hereof or thereof, or
the defense of Production Payment Owner's and its Affiliates' exercise
of their rights hereunder or thereunder. Included among the
Reimbursable Expenses are (i) all recording and filing fees, (ii) all
reasonable fees and expenses of counsel, engineers, accountants and
other consultants, experts and advisors for Production Payment Owner
and its Affiliates, (iii) all reasonable travel and other out of pocket
expenses of the consultants, experts and advisors of Production Payment
Owner and its Affiliates, (iv) all charges for Delivery Services, (v)
all Imbalance Charges, (vi) all Production Expenses, and (vii) all
amounts which any Indemnified Party is entitled to receive under
Section 26 of the Purchase Agreement or Section 7 hereof.
Notwithstanding the foregoing, Reimbursable Expenses shall not include
expenses associated with third party claims (1) relating to title to
the Production Payment, to the extent such claims arise solely due to
the actions of Production Payment Owner or its Affiliates, or (2) that
arise solely out of the failure by Production Payment Owner to perform
its obligations under any contractual arrangement entered into directly
by Production Payment Owner pursuant to Section 2.5(a) hereof.
"related Application Date" is defined in the definition of
"Application Period".
"Residual Hydrocarbons" shall mean for any period of time the
volume of all Hydrocarbons produced from the Subject Interests less the
volume of Production Payment Hydrocarbons delivered in kind to the
Production Payment Owner during the same period of time.
"Retained Interests" shall mean the interests retained by Working
Interest Owner in the Subject Interests after conveyance of the
Production Payment hereunder.
"Seller" is defined in the Purchase Agreement.
ANNEX I - 10
<PAGE>
"Senior Secured Trust Indenture" shall mean that certain Indenture
dated as of March 26, 1999, made in connection with the issuance of 12
7/8% Senior Secured Notes due March 15, 2003 by Seller and the Senior
Secured Trustee, as supplemented or amended from time to time, together
with any other indenture governing such Senior Secured Notes or any
agreements extending the maturity of, refinancing, replacing or
otherwise restructuring all or any portion of the Indebtedness under
the Senior Secured Notes.
"Senior Secured Trustee" shall mean either Norwest Bank Minnesota,
National Association or such other Person serving as Trustee under the
Senior Secured Trust Indenture.
"Separation Point" shall mean the point at which lease level
separation of Oil takes place.
"Series C and Series D Trust Indenture" shall mean that certain
Indenture dated as of January 27, 1998, made in connection with the
issuance of 11 1/2% Series C and Series D Senior Notes due November 1,
2004 by Seller and the Series C and Series D Trustee, as supplemented
or amended from time to time, together with any other indenture
governing such Series C and Series D Notes or any agreements extending
the maturity of, refinancing, replacing or otherwise restructuring all
or any portion of the Indebtedness under the Series C and Series D
Notes.
"Series C and Series D Trustee" shall mean either IBJ Whitehall
Bank & Trust Company, successor-in-interest to IBJ Schroder Bank &
Trust Company, or such other Person serving as Trustee under the Series
C and Series D Trust Indenture.
"Specified Rate" is defined in Section 12.
"Subject Hydrocarbons" shall mean all Hydrocarbons in and under,
and which may be produced and saved from, and which shall accrue or be
attributable to the Subject Interests and which are produced after the
Initial Time (other than Lease Use Hydrocarbons and Non-Consent
Hydrocarbons where Working Interest Owner is the non-consenting party).
"Subject Hydrocarbons" and "Production Payment Hydrocarbons,"
respectively, shall be deemed to include the proceeds of such
Hydrocarbons.
"Subject Interests" shall mean the following:
(a) The Oil and gas leases and the leasehold, production
payment, net profit, fee and mineral interests, and all personal
property, surface and subsurface machinery, goods, equipment, fixtures,
inventory, facilities, supplies or other property of whatsoever kind or
nature (excluding drilling rigs, trucks, automotive equipment or other
ANNEX I - 11
<PAGE>
property taken to the premises to drill a well or for other similar
temporary uses) now or hereafter located on or under any of the lands
described on Exhibit A to the Conveyance, which are used or useful for
the production, gathering, treatment, processing, storage or
transportation of Hydrocarbons, including, but not by way of
limitation, all oil wells, gas wells, water wells, injection wells,
pumping units and engines, christmas trees, platforms, separators,
compressors, tanks, gas systems, pipelines, water systems, power
plants, communication systems, roads, loading racks and shipping
facilities, and all other properties, rights, titles, interests and
things of value, including, without limitation, all operating
agreements, processing agreements, farming agreements, farmout
agreements, joint venture agreements, exploration agreements, bottom
hole agreements, dryhole agreements, support agreements, acreage
contribution agreements, insurance policies, title opinions, title
abstracts, title materials and information, files, records, data bases,
information systems, logs, well cores, fluid samples, production data
and reports, well testing data and reports, maps, seismic and
geophysical, geological and chemical data and information,
interpretative and analytical reports of any kind or nature, computer
hardware and software and all documentation therefor or relating
thereto (including, without limitation, all licenses relating to or
covering such computer hardware, software and/or documentation),
rights-of-way, easements, servitudes, surface leases, permits,
licenses, subject, however, to the restrictions, exceptions,
reservations, and other matters, if any, set forth in the specific
descriptions of said properties and interests in Exhibit A (including
the presently existing and valid royalties, overriding royalties,
payments out of production, oil and gas sales, purchase, exchange and
processing contracts, and all other contracts and other instruments and
matters, referred to in Exhibit A).
(b) Working Interest Owner's right, title and interest, if
any, in, to and under, or derived from, all of the presently existing
and valid unitization and pooling agreements which are described in
Exhibit A or which relate to any of the properties and interests
described in Exhibit A.
(c) Working Interest Owner's right, title and interest in, to
and under, or derived from, all of the presently existing and valid
oil, liquids, condensate, casinghead gas and gas sales, purchase,
exchange and processing contracts, and all other contracts and
instruments, which are described in Exhibit A, which are permitted
pursuant to the provisions of the Conveyance, or which relate to any of
the properties and interests described in Exhibit A;
provided, however, that the term "Subject Interest" shall not include
(i) any of the above-referenced items relating to a Production Unit
which has been specifically released by Production Payment Owner
pursuant to Section 2(c)(ii) of the Purchase Agreement or (ii) any
Proposed Program Well which has not yet been added as a Program Well
pursuant to Section 2(c) of the Purchase Agreement.
The term "Subject Interest," when used with reference to any particular
Subject Interest, shall mean and include (i) such Subject Interest as
the same may be enlarged or
ANNEX I - 12
<PAGE>
diminished by the provisions of any contract or other instrument
described in Exhibit A, or by the removal of any charges or
encumbrances to which such Subject Interest is subject, (ii) any and
all renewals and extensions of such Subject Interest, (iii) all
contracts supplemental to or amendatory of or in substitution for the
contracts described above insofar as the same relate to such Subject
Interest, and (iv) all rights, titles and interests accruing or
attributable to such Subject Interest by virtue of its being included
in any unit.
"Subject Wells" shall mean all wells now located on the Subject
Interests which are expressly identified on Exhibit A hereto (as such
exhibit shall be modified from time to time with the mutually consent
of the parties).
"Swap Agreement" shall mean any commodity swap, cap, floor or
collar agreement entered into for the purpose of fixing or hedging
fluctuations in commodity prices or marking to market any costs under
such an agreement.
"Termination Time" is defined in Section 2.8.
"Total Sum" is defined in Section 2.1.
"unliquidated balance of the Primary Sum" shall mean, at any time,
the Primary Sum plus the aggregate amounts which have been added
thereto pursuant to Section 2.2(a), less the aggregate amount of
Production Payment Proceeds which have been applied thereto at or
before such time pursuant to Section 2.2(a)(ii), and less any
reductions under Section 2.2(b).
"Working Interest Owner" is defined in the preamble.
