-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JjzMqBzgNyUqQk2SisYFCtTfcKsKadMhGsfMgLxfoFZ/Uqj2spJyXSYM9aCDS0NW VZHeiyw+5TwKn0urVBASMg== 0001104659-06-049593.txt : 20060728 0001104659-06-049593.hdr.sgml : 20060728 20060728154808 ACCESSION NUMBER: 0001104659-06-049593 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060728 DATE AS OF CHANGE: 20060728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POGO PRODUCING CO CENTRAL INDEX KEY: 0000230463 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 741659398 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07792 FILM NUMBER: 06988053 BUSINESS ADDRESS: STREET 1: 5 GREENWAY PLAZA STE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77252-0504 BUSINESS PHONE: 7132975000 MAIL ADDRESS: STREET 1: 5 GREENWAY PLAZA SUITE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77252 FORMER COMPANY: FORMER CONFORMED NAME: PENNZOIL OFFSHORE GAS OPERATORS INC /TX/ DATE OF NAME CHANGE: 19600201 10-Q 1 a06-15149_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934

For the quarterly period ended June 30, 2006 or

o Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from to

Commission file number 1-7792

POGO PRODUCING COMPANY

(Exact Name of Registrant as Specified in Its Charter)

Delaware		74-1659398
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

5 Greenway Plaza, Suite 2700		77046-0504
Houston, Texas		(Zip Code)
(Address of principal executive offices)

(713) 297-5000

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.: Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). : Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $1.00 per share:

58,032,847 shares as of July 25, 2006

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

POGO PRODUCING COMPANY AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Expressed in millions,
	except per share amounts)
Revenues:
Oil and gas	$	357.1		$	274.0		$	711.5		$	528.1
Gain on sale of properties	308.3			—			308.3			0.3
Other	9.2			0.5			28.3			1.9
Total	674.6			274.5			1,048.1			530.3

Operating Costs and Expenses:
Lease operating	68.3			33.5			125.4			62.2
General and administrative	30.1			18.3			58.8			37.0
Exploration	5.3			3.3			8.0			14.5
Dry hole and impairment	12.4			6.5			38.0			53.9
Depreciation, depletion and amortization	113.4			67.9			223.5			138.4
Production and other taxes	20.1			14.2			33.6			25.4
Transportation and other	16.6			4.4			42.1			(1.2		)
Total	266.2			148.1			529.4			330.2

Operating Income	408.4			126.4			518.7			200.1
Interest:
Charges	(36.2		)	(13.8		)	(64.5		)	(24.0		)
Income	0.6			1.4			1.1			2.2
Capitalized	18.6			2.7			34.8			4.9
Commodity derivative expense	(7.1		)	—			(3.8		)	—
Foreign Currency Transaction Gain	1.3			—			1.1			—

Income From Continuing Operations Before Taxes	385.6			116.7			487.4			183.2
Income Tax Expense	(23.7		)	(42.7		)	(58.0		)	(69.7		)

Income From Continuing Operations	361.9			74.0			429.4			113.5
Income from Discontinued Operations, net of tax	—			29.5			—			49.2
Net Income	$	361.9		$	103.5		$	429.4		$	162.7

Earnings per Common Share:
Basic
Income from continuing operations	$	6.31		$	1.23		$	7.48		$	1.83
Income from discontinued operations, net of tax	—			0.48			—			0.80
Net income	$	6.31		$	1.71		$	7.48		$	2.63

Diluted
Income from continuing operations	$	6.25		$	1.22		$	7.41		$	1.82
Income from discontinued operations, net of tax	—			0.48			—			0.78
Net income	$	6.25		$	1.70		$	7.41		$	2.60

Dividends per Common Share	$	0.075		$	0.0625		$	0.15		$	0.125

See accompanying notes to consolidated financial statements.

POGO PRODUCING COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

	June 30,			December 31,
	2006			2005
	(Expressed in millions)

Assets
Current Assets:
Cash and cash equivalents	$	26.9		$	57.7
Accounts receivable	153.0			198.8
Other receivables	28.3			19.9
Federal income tax receivable	—			21.7
Deferred tax asset	4.2			12.2
Inventories - product	17.4			13.2
Inventories - tubulars	26.6			19.1
Other	19.2			4.2
Total current assets	275.6			346.8

Property and Equipment:

Oil and gas, on the basis of successful efforts accounting
Proved properties	6,900.6			6,254.5
Unevaluated properties	1,127.7			872.2
Other, at cost	46.1			40.5
	8,074.4			7,167.2
Accumulated depreciation, depletion and amortization
Oil and gas	(1,624.7		)	(1,858.3		)
Other	(28.4		)	(24.5		)
	(1,653.1		)	(1,882.8		)
Property and equipment, net	6,421.3			5,284.4

Other Assets:
Other	49.5			44.5
	49.5			44.5

	$	6,746.4		$	5,675.7

See accompanying notes to consolidated financial statements.

POGO PRODUCING COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

	June 30,			December 31,
	2006			2005
	(Expressed in millions,
	except share amounts)
Liabilities and Shareholders’ Equity

Current Liabilities:
Accounts payable - operating activities	$	159.0		$	167.3
Accounts payable - investing activities	159.9			137.1
Income taxes payable	118.2			2.0
Accrued interest payable	21.9			20.2
Accrued payroll and related benefits	3.2			3.7
Price hedge contracts	30.9			52.3
Other	13.4			12.5
Total current liabilities	506.5			395.1

Long-Term Debt	2,011.6			1,643.4

Deferred Income Tax	1,432.9			1,316.9

Asset Retirement Obligation	124.2			149.4

Other Liabilities and Deferred Credits	52.8			72.3
Total liabilities	4,128.0			3,577.1

Commitments and Contingencies	—			—

Shareholders’ Equity:
Preferred stock, $1 par; 4,000,000 shares authorized	—			—
Common stock, $1 par; 200,000,000 shares authorized, 65,387,706 and 65,275,106 shares issued, respectively	65.4			65.3
Additional capital	959.7			977.9
Retained earnings	1,884.9			1,464.2
Deferred compensation	—			(17.5		)
Accumulated other comprehensive income (loss)	69.7			(30.0		)
Treasury stock (7,365,359 shares, at cost)	(361.3		)	(361.3		)
Total shareholders’ equity	2,618.4			2,098.6

	$	6,746.4		$	5,675.7

See accompanying notes to consolidated financial statements.

POGO PRODUCING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended
	June 30,
	2006			2005
	(Expressed in millions)
Cash Flows from Operating Activities:
Cash received from customers	$	749.5		$	551.0
Operating, exploration, and general and administrative expenses paid	(301.8		)	(143.1		)
Interest paid	(59.0		)	(18.6		)
Income taxes paid	(60.6		)	(72.1		)
Income tax refund	2.6			—
Other	7.5			7.5
Cash provided by continuing operations	338.2			324.7
Cash provided by discontinued operations	—			104.9
Net cash provided by operating activities	338.2			429.6

Cash Flows from Investing Activities:
Capital expenditures	(369.8		)	(208.0		)
Purchase of corporations and property	(820.4		)	(35.1		)
Sale of current investments	—			122.3
Purchase of current investments	—			(16.8		)
Sale of properties and corporations	463.0			7.8
Other	12.9			7.8
Cash used in continuing operations	(714.3		)	(122.0		)
Cash used in discontinued operations	—			(48.1		)
Net cash used in investing activities	(714.3		)	(170.1		)

Cash Flows from Financing Activities:
Borrowings under senior debt agreements	1,368.0			1,165.0
Payments under senior debt agreements	(1,450.0		)	(1,337.0		)
Proceeds from 2013 and 2015 Notes, respectively	450.0			297.3
Purchase of Company stock	(7.7		)	(221.7		)
Payments of cash dividends on common stock	(8.7		)	(7.8		)
Payments from discontinued operations	—			109.6
Payment of debt issue costs	(11.2		)	(3.2		)
Proceeds from exercise of stock awards	4.1			4.3
Cash provided by continuing operations	344.5			6.5
Cash used in discontinued operations	—			(109.6		)
Net cash provided by (used in) financing activities	344.5			(103.1		)
Effect of exchange rate changes on cash	0.8			(0.2		)
Net increase (decrease) in cash and cash equivalents	(30.8		)	156.2
Cash and cash equivalents from continuing operations, beginning of the year	57.7			33.5
Cash and cash equivalents from discontinued operations, beginning of the year	—			53.0
Cash and cash equivalents at the end of the period	$	26.9		$	242.7

Reconciliation of net income to net cash provided by operating activities:
Net income	$	429.4		$	162.7
Adjustments to reconcile net income to net cash provided by operating activities -
Income from discontinued operations, net of tax	—			(49.2		)
Gains from the sales of properties	(308.3		)	(0.3		)
Depreciation, depletion and amortization	223.5			138.4
Dry hole and impairment	38.0			53.9
Interest capitalized	(34.8		)	(4.9		)
Price hedge contracts	1.6			1.0
Other	11.9			5.8
Deferred income taxes	(100.1		)	(9.1		)
Change in operating assets and liabilities	77.0			26.4
Net cash provided by continuing operating activities	338.2			324.7
Net cash provided by discontinued operating activities	—			104.9
Net cash provided by operating activities	$	338.2		$	429.6

See accompanying notes to consolidated financial statements.

POGO PRODUCING COMPANY AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity (Unaudited)

	For the Six Months Ended June 30,
	2006					2005
	Shareholders’					Shareholders’
	Equity					Equity
	Shares		Amount			Shares		Amount
	(Expressed in millions, except share amounts)
Common Stock:
$1.00 par-200,000,000 shares authorized
Balance at beginning of year	65,275,106		$	65.3		64,580,639		$	64.6
Stock option activity	105,800		0.1			162,801		0.1
Shares issued as compensation	6,800		—			5,900		—
Issued at end of period	65,387,706		65.4			64,749,340		64.7

Additional Capital:
Balance at beginning of year			977.9					943.7
Stock options exercised - proceeds			3.0					5.8
Stock based compensation - federal tax benefit			0.8					—
Stock based compensation expense - stock options			0.6					—
Stock based compensation expense - restricted stock			5.1					1.0
Cumulative effect of change in accounting principle			(27.7		)			—
Balance at end of period			959.7					950.5

Retained Earnings:
Balance at beginning of year			1,464.2					728.7
Net income			429.4					162.7
Dividends ($0.15 and $0.125 per common share, respectively)			(8.7		)			(7.8		)
Balance at end of period			1,884.9					883.6

Accumulated Other
Comprehensive Income (Loss):
Balance at beginning of year			(30.0		)			2.6
Cumulative foreign currency translation adjustment			75.3					—
Change in fair value of price hedge contracts			19.0					(12.1		)
Reclassification adjustment for losses included in net income			5.4					(1.0		)
Balance at end of period			69.7					(10.5		)

Deferred Compensation
Balance at beginning of year			(17.5		)			(9.9		)
Activity during the period			—					1.1
Cumulative effect of change in accounting principle			17.5					—
Balance at end of period			—					(8.8		)

Treasury Stock:
Balance at beginning of year	(7,365,359	)	(361.3		)	(55,239	)	(1.7		)
Activity during the period	—		—			(4,752,900	)	(221.7		)
Balance at end of period	(7,365,359	)	(361.3		)	(4,808,139	)	(223.4		)

Common Stock Outstanding, at the End of the Period	58,022,347					59,941,201

Total Shareholders’ Equity			$	2,618.4				$	1,656.1

See accompanying notes to consolidated financial statements.

POGO PRODUCING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1) GENERAL INFORMATION -

The consolidated financial statements included herein have been prepared by Pogo Producing Company (the “Company”) without audit and include all adjustments (of a normal and recurring nature), which are, in the opinion of management, necessary for the fair presentation of interim results. The interim results are not necessarily indicative of results for the entire year. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

The Company’s results for 2005 reflect its oil and gas exploration, development and production activities in the Kingdom of Thailand and in Hungary as discontinued operations. Except where noted and for pro forma earnings per share, the discussions in the following notes relate to the Company’s continuing operations only.

(2) ACQUISITIONS –

2006 - On May 2, 2006, the Company completed the acquisition of Latigo Petroleum, Inc. (“Latigo”), a privately held corporation for approximately $766.4 million in cash, including transaction costs. The purchase price was funded using cash on hand and debt financing. As of April 1, 2006, Latigo owned approximately 100,100 net producing acres, plus approximately 304,600 net acres of undeveloped leasehold. Latigo’s operations are concentrated in west Texas and the Texas Panhandle with key exploration plays in the Texas Panhandle. The Company acquired Latigo primarily to strengthen its position in domestic exploration and development properties. The following is a calculation and preliminary allocation of purchase price to the acquired assets and liabilities based on their relative fair values:

CALCULATION OF PURCHASE PRICE (IN MILLIONS)
Cash paid, including transaction costs	$	766.4

Plus fair market value of liabilites assumed:
Deferred income taxes	207.7
Other liabilities	55.0
Total purchase price for assets acquired	$	1,029.1

ALLOCATION OF PURCHASE PRICE (IN MILLIONS)
Proved oil and gas properties	$	851.1
Unproved oil and gas properties	156.0
Other assets	22.0
Total	$	1,029.1

The purchase price allocation noted above is subject to change based on the Company’s final analysis of the assets and liabilities it has acquired, which is expected to be completed by the fourth quarter of 2006.

In addition to the Latigo acquisition, the Company also completed the corporate acquisition of a Canadian company on February 21, 2006 for cash consideration totaling approximately $18.6 million. The Company recorded the estimated fair value of assets and liabilities that consisted primarily of $26.9 million of oil and gas properties and deferred tax liabilities of $8.0 million. No goodwill was recorded in connection with these transactions.

2005 - On September 27, 2005, the Company completed the acquisition of Northrock Resources Ltd. (“Northrock”) for approximately $1.7 billion in cash. As of September 27, 2005, Northrock owned approximately 292,000 net producing acres, plus approximately 950,000 net acres of undeveloped leasehold. Northrock’s activities are concentrated in Saskatchewan and Alberta with key exploration plays in Canada’s Northwest Territories, British Columbia and the Alberta Foothills. The Company acquired Northrock primarily to strengthen its position in North American exploration and development properties. The following is a calculation and final allocation of purchase price to the acquired assets and liabilities based on their relative fair values:

CALCULATION OF PURCHASE PRICE (IN MILLIONS)
Cash paid, including transaction costs	$	1,737.5

Plus fair market value of liabilites assumed:
Other liabilites	100.5
Asset retirement obligation	38.8
Deferred income taxes	757.3
Total purchase price for assets acquired	$	2,634.1

ALLOCATION OF PURCHASE PRICE (IN MILLIONS)
Proved oil and gas properties	$	1,715.8
Unproved oil and gas properties	799.0
Other assets	119.3
Total	$	2,634.1

In addition to the Northrock acquisition, the Company completed two other corporate acquisitions in Canada during 2005 for cash consideration totaling approximately $32.9 million and six other producing property acquisitions for cash consideration totaling approximately $51 million. The Company recorded the estimated fair value of assets and liabilities on the two corporate transactions that consisted primarily of $50 million of oil and gas properties and deferred tax liabilities of $15.8 million. No goodwill was recorded for these transactions.

Pro Forma Information

The following summary presents unaudited pro forma consolidated results of operations for the three and six months ended June 30, 2006 and 2005 for the Company’s continuing operations as if the acquisitions of Latigo and Northrock had each occurred as of January 1, 2005. The pro forma results are for illustrative purposes only and include adjustments in addition to the pre-acquisition historical results of Latigo and Northrock, such as increased depreciation, depletion and amortization expense resulting from the allocation of fair value to oil and gas properties acquired, increased interest expense on acquisition debt and the related tax effects of these adjustments. The unaudited pro forma information (presented in millions of dollars, except per share amounts) is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated at that date, nor are they necessarily indicative of future operating results.

Pro Forma:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Revenues	$	653.9	$	335.0	$	1,019.4	$	649.2
Income from continuing operations	339.3		55.6		394.5		91.1
Earnings per share:
Basic -	$	5.91	$	0.92	$	6.88	$	1.47
Diluted -	$	5.86	$	0.91	$	6.81	$	1.46

(3) DISCONTINUED OPERATIONS –

Under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company classifies assets to be disposed of as held for sale or, if appropriate, discontinued operations when appropriate approvals by the Company’s management or Board of Directors have occurred and when other criteria are met. During 2005, the Company completed the sale of the assets discussed below, which have been reported as discontinued operations in the Company’s historical financial statements.

Thaipo Ltd. and B8/32 Partners Ltd.

On August 17, 2005, the Company completed the sale of its wholly owned subsidiary Thaipo Ltd. and its 46.34% interest in B8/32 Partners Ltd. (collectively referred to as the “Thailand Entities”) for a purchase price of $820 million. The Company recognized an after tax gain of approximately $403 million on the sale of the Thailand Entities.

Pogo Hungary Ltd.

On June 7, 2005, the Company completed the sale of its wholly owned subsidiary Pogo Hungary, Ltd. (“Pogo Hungary”) for a purchase price of $9 million. The Company recognized an after tax gain of approximately $5 million on the sale of Pogo Hungary.

The summarized results of the discontinued operations were as follows (amounts expressed in millions):

Operating Results Data

	Three months ended			Six months ended
	June 30, 2005			June 30, 2005

Revenues	$	112.9		$	214.5
Costs and expenses	(57.3		)	(112.3		)
Other income	3.5			4.1
Income before income taxes	59.1			106.3
Income taxes	(34.8		)	(62.3		)
Income before gain from discontinued operations, net of tax	24.3			44.0
Gain on sale of Pogo Hungary, net of tax	5.2			5.2
Income from discontinued operations, net of tax	$	29.5		$	49.2

(4) EARNINGS PER SHARE -

Earnings per common share (basic earnings per share) are based on the weighted average number of shares of common stock outstanding during the periods. Earnings per share and potential common shares (diluted earnings per share) consider the effect of dilutive securities as set out below. This disclosure reflects net income from both continuing and discontinued operations. Amounts are expressed in millions, except per share amounts.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005

Income (numerator):
Income from continuing operations	$	361.9	$	74.0	$	429.4	$	113.5
Income from discontinued operations, net of tax	—		29.5		—		49.2

Net Income - basic and diluted	$	361.9	$	103.5	$	429.4	$	162.7

Weighted average shares (denominator):
Weighted average shares - basic	57.4		60.3		57.4		61.9
Dilution effect of stock options and unvested restricted stock outstanding at end of period	0.5		0.6		0.6		0.6

Weighted average shares - diluted	57.9		60.9		58.0		62.5

Earnings per share:
Basic:
Income from continuing operations	$	6.31	$	1.23	$	7.48	$	1.83
Income from discontinued operations	—		0.48		—		0.80
Basic earnings per share	$	6.31	$	1.71	$	7.48	$	2.63

Diluted:
Income from continuing operations	$	6.25	$	1.22	$	7.41	$	1.82
Income from discontinued operations	—		0.48		—		0.78
Diluted earnings per share	$	6.25	$	1.70	$	7.41	$	2.60

Antidilutive securities;
Shares assumed not issued from options to purchase common shares as the exercise prices are above the average market price for the period or the effect of the assumed exercise would be antidilutive	0.02		0.03		—		0.03
Average price	$	48.93	$	49.02	$	—	$	49.02

(5) LONG-TERM DEBT –

Long-term debt at June 30, 2006 and December 31, 2005, consists of the following (dollars expressed in millions):

	June 30,			December 31,
	2006			2005
Senior debt -
Bank revolving credit agreement:
LIBOR based loans, borrowings at June 30, 2006 and December 31, 2005 at interest rates of 6.776% and 5.811%, respectively	$	510.0		$	595.0
Prime based loans, borrowings at June 30, 2006 and December 31, 2005 at interest rates of 8.25% and 7.25%, respectively	14.0			11.0
LIBOR Rate Advances, borrowings at June 30, 2006 and December 31, 2005 at interest rates of 6.485% and 5.618%, respectively	40.0			40.0
Total senior debt	564.0			646.0
Senior subordinated debt -
8.25% Senior subordinated notes, due 2011	200.0			200.0
7.875% Senior subordinated notes, due 2013	450.0			—
6.625% Senior subordinated notes, due 2015	300.0			300.0
6.875% Senior subordinated notes, due 2017	500.0			500.0
Total senior subordinated debt	1,450.0			1,000.0
Unamortized discount on 2015 Notes	(2.4		)	(2.6		)
Total debt	2,011.6			1,643.4
Amount due within one year	—			—
Long-term debt	$	2,011.6		$	1,643.4

On June 6, 2006, the Company issued $450 million principal amount of 7.875% senior subordinated notes due 2013. The proceeds from the sale of the 2013 Notes were used to pay down obligations under the Company’s bank credit facility. The 2013 Notes bear interest at a rate of 7.875%, payable semi-annually in arrears on May 1 and November 1 of each year. The 2013 Notes are general unsecured senior subordinated obligations of the Company, and are subordinated in right of payment to the Company’s senior indebtedness, which currently includes the Company’s obligations under the bank revolving credit agreement and LIBOR rate advances. The Company, at its option, may redeem the 2013 Notes in whole or in part, at any time on or after May 1, 2010, at a redemption price of 103.938% of their principal amount and decreasing percentages thereafter. The Company may also redeem a portion of the 2013 Notes prior to May 1, 2009 and some or all of the Notes prior to May 1, 2010, in each case by paying specified premiums. The indenture governing the 2013 Notes also imposes certain covenants on the Company, including covenants limiting: incurrence of indebtedness including senior indebtedness; restricted payments; the issuance and sales of restricted subsidiary capital stock; transactions with affiliates; liens; disposition of proceeds of assets sales; non-guarantor restricted subsidiaries; dividends and other payment restrictions affecting restricted subsidiaries; and merger, consolidations and the sale of assets.

(6) INCOME TAXES –

During the second quarter of 2006, the Company recognized both a deferred income tax benefit and a reduction of its deferred income tax liability in the amount of $112.3 million related to the enactment of a 1.5% reduction in Alberta provincial tax rates, the phase-in of a 5% reduction in Saskatchewan provincial tax rates and the phase-in of a 3% reduction in Canadian federal tax rates.

As of June 30, 2006, no deferred U.S. income tax liability has been recognized on the $188.1 million of undistributed earnings of certain foreign subsidiaries as they have been deemed permanently invested outside the U.S., and it is not practicable to estimate the deferred tax liability related to such undistributed earnings.

(7) ASSET RETIREMENT OBLIGATION –

The Company’s liability for expected future costs associated with site reclamation, facilities dismantlement, and plugging and abandonment of wells for the six-month period ended June 30, 2006 is as follows (in millions):

	2006
ARO as of January 1,	$	156.3
Liabilities incurred during the six months ended June 30,	5.2
Liabilities settled during the six months ended June 30,	(35.2		)
Accretion expense	5.1
Balance of ARO as of June 30,	131.4
Less: current portion of ARO	(7.2		)
Long-term ARO as of June 30,	$	124.2

For the three months ended June 30, 2006 and 2005 the Company recognized depreciation expense related to its asset retirement cost (“ARC”) of $2.1 million and $1.0 million, respectively. For the six months ended June 30, 2006 and 2005 the Company recognized depreciation expense related to its ARC of $4.3 million and $1.9 million, respectively.

(8) GAIN ON SALE OF ASSETS-

On May 31, 2006, the Company sold an undivided 50 percent interest of each and all of its Gulf of Mexico oil and gas leasehold interests and related pipelines and equipment to an affiliate of Mitsui & Co., Ltd., for approximately $455 million, after purchase price adjustments. The sale resulted in a pre-tax gain of $308.4 million, which, along with $0.1 million of pre-tax losses on sales of other properties, have been reflected in the caption “Gain on sale of properties” in the Company’s results of operations.

(9) GEOGRAPHIC INFORMATION

The Company’s reportable geographic information is identified below. The Company evaluates performance based on operating income (loss). Financial information by geographic region is presented below:

	2006		2005
	(Expressed in millions)
Long-Lived Assets:
As of June 30,
United States	$	3,565.0	$	2,536.1
Canada	2,856.2		—
Total	$	6,421.2	$	2,536.1

Capital Expenditures:
(including interest capitalized)
For the three months ended June 30,
United States	$	1,283.3	$	134.4
Canada	181.7		—
Total	$	1,465.0	$	134.4

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2006		2005			2006		2005
	(Expressed in millions)
Revenues:
For the three months ended June 30,
United States	$	545.9	$	274.5		$	789.6	$	530.3
Canada	128.7		—			258.5		—
Total	$	674.6	$	274.5		$	1,048.1	$	530.3

Depreciation, depletion, and amortization expense:
For the three months ended June 30,
United States	$	63.9	$	67.9		$	127.2	$	138.4
Canada	49.5		—			96.3		—
Total	$	113.4	$	67.9		$	223.5	$	138.4

Operating income (loss):
For the three months ended June 30,
United States	$	372.8	$	127.9		$	454.9	$	209.5
Canada	31.3		—			60.5		—
Other	4.3		(1.5		)	3.3		(9.4		)
Total	$	408.4	$	126.4		$	518.7	$	200.1

(10) COMMODITY DERIVATIVES AND HEDGING ACTIVITIES -

As of June 30, 2006, the Company held various derivative instruments. During 2005 and 2006, the Company entered into natural gas and crude oil option agreements referred to as “collars”. Collars are designed to establish floor and ceiling prices on anticipated future natural gas and crude oil production. The Company has designated these contracts as cash flow hedges designed to achieve a more predictable cash flow, as well as to reduce its exposure to price volatility. While the use of these derivative instruments limits the downside risk of adverse price movements, they may also limit future revenues from favorable price movements. The use of derivatives also involves the risk that the counterparties to such instruments will be unable to meet the financial terms of such contracts. Currently, the Company does not expect losses due to creditworthiness of its counterparties.

During the three and six month periods ended June 30, 2006 the Company recognized a pre-tax gain of $0.1 million and a pre-tax loss of $4.3 million, respectively, related to settled contracts in its oil and gas revenues from its price hedge contracts. Price hedging activity had no effect on the Company’s oil and gas revenues during the three and six-month periods ended June 30, 2005. The Company recognized pre-tax losses of $1.3 million and $1.6 million due to ineffectiveness on hedge contracts during the three and six-month periods ended June 30, 2006, respectively. The Company recognized pre-tax losses of $1.0 million and $1.0 million due to ineffectiveness on hedge contracts during the three and six-month periods ended June 30, 2005, respectively. Unrealized pre-tax losses on derivative instruments of $44.9 million ($28.5 million after taxes), have been reflected as a component of other comprehensive income at June 30, 2006. Based on the fair market value of the hedge contracts as of June 30, 2006, the Company would reclassify additional pre-tax losses of approximately $24.8 million (approximately $15.7 million after taxes) from accumulated other comprehensive income (shareholders’ equity) to net income during the next twelve months.

The gas derivative contracts are generally settled based upon the average of the reported settlement prices on the NYMEX for the last three trading days of a particular contract month. The oil derivative transactions are generally settled based on the average of the reporting settlement prices for West Texas Intermediate on the NYMEX for each trading day of a particular calendar month. For any particular collar transaction, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price for such transaction, and the Company is required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling price of such transaction.

The estimated fair value of these transactions is based upon various factors that include closing exchange prices on the NYMEX, volatility and the time value of options. Further details related to the Company’s hedging activities as of June 30, 2006 are as follows:

		NYMEX
		Contract				Fair Value
Contract Period and		Price				of
Type of Contract	Volume	Floor		Ceiling		Asset/(Liability)
						(in millions)
Natural Gas Contracts (MMBtu) (a)
Collar Contracts:
September 2006	150	$	5.00	$	7.50	$	—
July 2006 - December 2006	920	$	5.50	$	8.25	$	(0.4	)
November 2006 - December 2006	305	$	5.75	$	8.27	$	(0.4	)
July 2006 - December 2006	5,520	$	6.00	$	13.50	$	1.1
July 2006 - December 2006	920	$	6.00	$	13.55	$	0.2
July 2006 - December 2006	1,840	$	6.00	$	13.60	$	0.4
July 2006 - December 2006	5,520	$	6.00	$	14.00	$	1.2
July 2006 - December 2006	920	$	7.00	$	10.60	$	0.5
July 2006 - December 2006	920	$	7.00	$	10.62	$	0.5
July 2006 - December 2006	920	$	7.00	$	10.70	$	0.5
January 2007 - December 2007	5,475	$	6.00	$	12.00	$	(2.7	)
January 2007 - December 2007	1,825	$	6.00	$	12.15	$	(0.8	)
January 2007 - December 2007	9,125	$	6.00	$	12.50	$	(3.6	)
January 2007 - December 2007	913	$	8.00	$	13.40	$	0.4
January 2007 - December 2007	2,738	$	8.00	$	13.50	$	1.1
January 2007 - December 2007	913	$	8.00	$	13.52	$	0.4
January 2007 - December 2007	913	$	8.00	$	13.65	$	0.4
January 2008 - December 2008	1,830	$	8.00	$	12.05	$	0.5
January 2008 - December 2008	2,745	$	8.00	$	12.10	$	0.8
January 2008 - December 2008	915	$	8.00	$	12.25	$	0.3

(a) MMBtu means million British Thermal Units.

		NYMEX
		Contract				Fair Value
Contract Period and		Price				of
Type of Contract	Volume	Floor		Ceiling		Asset/(Liability)
						(in millions)
Crude Oil Contracts (Barrels)
Collar Contracts:
July 2006 - December 2006	736,000	$	50.00	$	78.00	$	(2.3	)
July 2006 - December 2006	184,000	$	50.00	$	79.00	$	(0.5	)
July 2006 - December 2006	736,000	$	50.00	$	81.00	$	(1.6	)
July 2006 - December 2006	184,000	$	50.00	$	81.04	$	(0.4	)
July 2006 - December 2006	920,000	$	50.00	$	82.00	$	(1.8	)
July 2006 - December 2006	368,000	$	60.00	$	84.00	$	(0.5	)
July 2006 - December 2006	92,000	$	60.00	$	85.25	$	(0.1	)
January 2007 - December 2007	1,460,000	$	50.00	$	75.00	$	(10.3	)
January 2007 - December 2007	365,000	$	50.00	$	75.25	$	(2.5	)
January 2007 - December 2007	3,650,000	$	50.00	$	77.50	$	(22.0	)
January 2007 - December 2007	182,500	$	60.00	$	82.75	$	(0.6	)
January 2007 - December 2007	547,500	$	60.00	$	83.00	$	(1.7	)
January 2007 - December 2007	182,500	$	60.00	$	84.00	$	(0.5	)
January 2008 - December 2008	183,000	$	60.00	$	80.00	$	(0.6	)
January 2008 - December 2008	183,000	$	60.00	$	80.05	$	(0.6	)
January 2008 - December 2008	183,000	$	60.00	$	80.10	$	(0.6	)
January 2008 - December 2008	366,000	$	60.00	$	80.25	$	(1.1	)

Although the Company’s collars are effective as economic hedges, the sale of 50% of the Company’s Gulf of Mexico interests on May 31, 2006 and the forecasted shut-in hydrocarbon production from the Company’s Gulf of Mexico properties (resulting primarily from hurricane activity during the third quarter of 2005) caused certain of the gas and crude oil collar contracts to lose their qualification for hedge accounting under SFAS 133. For the collar contracts that no longer qualify for hedge accounting, the Company now recognizes changes in the fair value of these contracts in the consolidated statement of income for the period in which the change occurs under the caption “Commodity derivative expense.’’ The Company recognized a $7.1 million non-cash charge related to these contracts during the second quarter of 2006. As of June 30, 2006, the Company had the following open collar contracts that no longer qualify for hedge accounting:

		NYMEX
		Contract				Fair Value
Contract Period and		Price				of
Type of Contract	Volume	Floor		Ceiling		Liability
						(in millions)
Natural Gas Contracts (MMBtu)
Collar Contracts:
July 2006 - December 2006	920	$	5.50	$	8.25	$	(0.4	)
July 2006 - December 2006	2,610	$	5.00	$	7.50	$	(2.1	)
July 2006 - December 2006	1,535	$	5.75	$	8.27	$	(0.3	)
January 2007 - December 2007	7,300	$	6.00	$	12.15	$	(3.3	)
January 2007 - December 2007	3,650	$	6.00	$	12.20	$	(1.6	)

(11) EMPLOYEE BENEFIT PLANS -

The Company has adopted a trusteed retirement plan for its U.S. salaried employees. The benefits are based on years of service and the employee’s average compensation for five consecutive years within the final ten years of service that produce the highest average compensation. The Company did not make a contribution to the plan during the first six months of 2006 and does not expect to make a contribution during the remainder of 2006.

Although the Company has no obligation to do so, the Company currently provides full medical benefits to its retired U.S. employees and dependents. For current employees, the Company assumes all or a portion of post-retirement medical and term life insurance costs based on the employee’s age and length of service with the Company. The post-retirement medical plan has no assets and is currently funded by the Company on a pay-as-you-go basis.

The Company’s net periodic benefit cost for its benefit plans is comprised of the following components (in millions of dollars):

	Retirement Plan
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Service cost	$	1.1		$	0.9		$	2.2		$	1.7
Interest cost	0.7			0.6			1.3			1.1
Expected return on plan assets	(0.7		)	(0.7		)	(1.4		)	(1.3		)
Amortization of net loss	0.4			0.3			0.9			0.6
	$	1.5		$	1.1		$	3.0		$	2.1

	Post-Retirement Medical Plan
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005

Service cost	$	0.5	$	0.4	$	0.9	$	0.8
Interest cost	0.3		0.3		0.6		0.6
Amortization of transition obligation	—		0.1		—		0.2
Amortization of net loss	—		0.1		0.1		0.2
	$	0.8	$	0.9	$	1.6	$	1.8

The assumptions used in the valuation of the Company’s employee benefit plans and the target investment allocations have remained the same as those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

In December 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduced a prescription drug benefit under Medicare (Medicare Part D), as well as a nontaxable federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company has elected not to reflect changes in the Act in its financial statements since the Company has concluded that the effects of the Act are not a significant event that calls for remeasurement under SFAS 106.

(12) ACCOUNTING FOR STOCK-BASED COMPENSATION -

The Company’s incentive plans authorize awards granted wholly or partly in common stock (including rights or options which may be exercised for or settled in common stock) to key employees and non-employee directors. Awards to employees of the Company may be made as grants of stock options, stock appreciation rights, stock awards, cash awards, performance awards or any combination thereof (collectively, “Stock Awards”). Employee stock options generally become exercisable in three installments. Employee restricted stock generally becomes exercisable in four installments. The number of shares of Company common stock available for future issuance was 3,652,024 as of June 30, 2006. Stock options granted during and after 2003 expire 5 years from the date of grant, if not exercised. Stock options granted prior to 2003, if not exercised, expire 10 years from the date of grant.

Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”) and the prospective method transition provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock Based Compensation—Transition and Disclosure—an amendment of FAS No. 123” (“SFAS 148”) for all Stock Awards granted, modified or settled after January 1, 2003. Under SFAS 123, the Company recognized compensation cost for all Stock Awards on either a straight-line basis over the vesting period or upon retirement, whichever was shorter (the nominal vesting period approach). On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment”, which replaced the provisions of SFAS 123. The cumulative effect of the change in accounting principle resulting from the adoption of SFAS 123R was recognized in the Company’s financial statements through the elimination of previously recognized deferred compensation costs, with offsetting amounts recorded in the additional capital account within shareholders’ equity and the related deferred income tax payable. The Company adopted SFAS 123R using the modified prospective transition method. Under that transition method, compensation cost recognized during the six months ended June 30, 2006 includes (a) compensation cost for Stock Awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all Stock Award grants subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with SFAS 123R. Compensation cost for restricted stock, stock options and other stock-based compensation is recognized using the nonsubstantive vesting period approach, i.e. (a) on a straight-line basis, over either the vesting period for the applicable Stock Award or until retirement eligibility age, whichever is shorter, or (b) over a six-month period for Stock Awards to employees who have reached retirement eligibility age. The impact of using the nonsubstantive vs. the nominal vesting period approach for the three and six month periods ended June 30, 2006 would have resulted in a reduction in after-tax compensation expense of $0.3 million and $0.1 million, respectively. The impact of using the nonsubstantive vs. the nominal vesting period approach would have resulted in a reduction of after-tax compensation expense of $0.1 million for the three month period ended June 30, 2005 and in additional after-tax compensation expense of $0.5 for the six month period ended June 30, 2005.

The following table illustrates the effect on the Company’s net income and earnings per share if the fair value recognition provisions of SFAS 123R for employee stock-based compensation had been applied to all Stock Awards outstanding during the three and six month periods ended June 30, 2005 (in millions of dollars, except per share amounts):

	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005

Net income, as reported	$	103.4		$	162.7
Add: Employee stock-based compensation expense, net of related tax effects, included in net income, as reported	1.1			2.1

Deduct: Total employee stock-based compensation expense, determined under fair value method for all awards, net of related tax effects	(1.7		)	(3.3		)
Net income, pro forma	$	102.8		$	161.5

Earnings per share:
Basic - as reported	$	1.71		$	2.63
Basic - pro forma	$	1.70		$	2.61
Diluted - as reported	$	1.70		$	2.60
Diluted - pro forma	$	1.69		$	2.58

Restricted Stock

The fair value of restricted stock grants is estimated based on the average of the high and low share price on the date of grant. A summary of the status of the Company’s unvested restricted stock as of June 30, 2006 and the changes in the six months ended June 30, 2006 is presented below:

			Average
			Grant Date
	Shares		Fair Value
Unvested restricted stock:
Unvested at December 31, 2005	630,600		$	51.57

Granted	12,500		$	46.23
Vested	(31,525	)	$	46.26
Forfeited	(5,700	)	$	48.26

Unvested at June 30, 2006	605,875		$	50.03

As of June 30, 2006, there was approximately $22.3 million of total unrecognized compensation cost related to unvested restricted stock that is expected to be recognized over a weighted average period of 2.6 years. Total compensation expense for restricted stock during the three and six-month periods ended June 30, 2006 was $2.4 million ($1.6 million, net of tax) and $4.9 million ($3.1 million, net of tax), respectively. Total compensation expense for restricted stock during the three and six-month periods ended June 30, 2005 was $1.3 million ($0.8 million, net of tax) and $2.5 million ($1.6 million, net of tax), respectively. The total fair value of shares that vested and were distributed during the three and six month periods ended June 30, 2006 was $0.6 million and $1.6 million, respectively, which resulted in tax deductions to realize benefits of less than $0.1 million in each period. The total fair value of shares that vested and were distributed during the three and six month periods ended June 30, 2005 was $0.4 million and $0.4 million, respectively, which resulted in tax deductions to realize benefits of less than $0.1 million in each period.

Stock Options

No stock options were granted during 2005 or in the first six months of 2006. The fair value of previous stock option grants that either vested in 2005 or will vest in 2006 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for stock option grants made in 2004 and 2003, respectively: risk free interest rates of 3.00% and 2.30%, expected volatility of 25.7% and 28.4%, dividend yields of 0.48% and 0.61%, and an expected life of the options of three and a half and three years. Total compensation expense for stock options during the three and six months ended June 30, 2006 was $0.4 million ($0.2 million, net of tax) and $0.6 million ($0.4 million, net of tax), respectively. Total compensation expense for stock options during the three and six months ended June 30, 2005 was $0.3 million ($0.2 million, net of tax) and $0.7 million ($0.4 million, net of tax), respectively. The total intrinsic value of stock options exercised during the three and six months ended June 30, 2006 was $0.7 million and $2.2 million, resulting in tax deductions of $0.2 million and $0.8 million, respectively. The total intrinsic value of stock options exercised during the three and six months ended June 30, 2005 was $1.3 million and $3.2 million, resulting in tax deductions of $0.5 million and $1.2 million, respectively. As of June 30, 2006, there was approximately $0.2 million in unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted average period of 5 months. The Company’s current practice is to issue new shares to satisfy stock option exercises. A summary of the status of the Company’s stock option activity as of June 30, 2006 and changes during the six months ended June 30, 2006 is presented below:

					Weighted
			Weighted		Average	Aggregate
			Average		Remaining	Intrinsic
	Number of		Exercise		Contractual	Value
	Awards		Price		Term	(millions)(a)

Outstanding, December 31, 2005	1,782,236		$	29.69
Exercised	(105,800	)	$	29.54
Canceled	(15,867	)	$	43.11
Outstanding, June 30, 2006	1,660,569		$	29.58	4.5 years	$	27.3
Exercisable, June 30, 2006	1,536,902		$	28.55	4.9 years	$	26.8

(a) Calculated based on the exercise price of underlying awards and the quoted price of the Company’s common stock as of the balance sheet date.

Restricted Stock Units

On November 1, 2005 the Company awarded 135,000 Restricted Stock Units (the “Units”) to certain employees of Northrock. The Units vest ratably over a three-year period. Vested Units are payable in cash in an amount equal to the fair market value of the Company’s common stock for the five-day trading period ending on the vesting date. The Company recognizes compensation expense and a liability based on the average fair market value of Company common stock for the last five trading days of the period. For the three and six months ended June 30, 2006, the Company recognized compensation expense of $0.4 million and $0.9 million, respectively, related to the Units.

(13) COMPREHENSIVE INCOME-

As of the indicated dates, the Company’s comprehensive income consisted of the following (in millions):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006		2005

Net income	$	361.9		$	103.5		$	429.4	$	162.7
Foreign currency translation adjustment, net of tax	83.2			—			75.3		—
Change in fair value of price hedge contracts, net of tax	(2.9		)	1.7			19.0		(13.7		)
Reclassification adjustment for hedge contract losses included in net income, net of tax	5.2			(0.1		)	5.4		0.6
Comprehensive income	$	447.4		$	105.1		$	529.1	$	149.6

(14) RECENT ACCOUNTING PRONOUNCEMENTS-

On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FAS 109”. FIN 48 clariﬁes the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Implementation of FIN 48 is not expected to have a material financial statement impact on the Company.

POGO PRODUCING COMPANY AND SUBSIDIARIES

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 as well as the risk factors therein and herein. The Thailand Entities and Pogo Hungary are classified as discontinued operations in the Company’s financial statements for all periods presented. Except where noted, discussions in this report relate to the Company’s continuing operations. Some of the statements in the discussion are “Forward Looking Statements” and are thus prospective. As further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

Executive Overview

During the second quarter of 2006, significant progress was made in the completion of the strategic initiatives the Company announced in January 2005. The Company has been transformed from a predominantly offshore property base to one where the majority of its assets are located onshore North America. During the second quarter of 2006, the Company closed both the sale of an undivided 50% of its Gulf of Mexico properties and the acquisition of Latigo Petroleum. The Company issued $450 MM of Senior Subordinated Notes during the second quarter of 2006 in order to finance a portion of the Latigo acquisition. Below is an overview of the significant transactions and financial matters which occurred during the second quarter of 2006.

Acquisition of Latigo Petroleum Inc.

On May 2, 2006, the Company completed the acquisition of Latigo Petroleum, Inc. (“Latigo”), a privately held exploration and production company for approximately $766.4 million. The purchase price was funded using cash on hand and debt financing. As of April 1, 2006, Latigo’s estimated proven reserves were approximately 275 Bcfe located on approximately 100,100 net acres, plus approximately 304,600 net acres of undeveloped leasehold interests. Latigo’s operations are concentrated in the Permian Basin and Panhandle of Texas. The Company believes that this acquisition along with its sale of 50% of its Gulf of Mexico interests discussed below further the Company’s strategy to reposition itself as a predominantly onshore North American exploration and development company.

Sale of 50% of Gulf of Mexico Interests

On May 31, 2006, the Company closed the sale of an undivided 50 percent interest of each of its Gulf of Mexico oil and gas leasehold interests and related pipelines and equipment to an affiliate of Mitsui & Co., Ltd., for approximately $455 million. The proceeds were used to repay a portion of the debt used to finance the Latigo acquisition. As of December 31, 2005, the interests sold were attributed approximately 143 Bcfe of net estimated proven oil and gas reserves. The Company recognized a pre-tax gain of $308.4 million related to the sale in the second quarter of 2006.

Issuance of Senior Subordinated Notes

On June 6, 2006, the Company issued and sold $450 million aggregate principal amount of 7.875% Senior Subordinated Notes due 2013 (the “2013 Notes”). The 2013 Notes were issued in a private placement pursuant to an Indenture, dated as of June 6, 2006, between the Company and The Bank of New York Trust Company, N.A., as trustee. Net proceeds were used to reduce outstanding debt under the Company’s credit facility.

Second Quarter Results

Total revenues for the second quarter of 2006 were $674.6 million (including $308.4 million related to the sale of the Gulf of Mexico interests) and net income totaled $361.9 million, or $6.31 per share. Cash provided by operations totaled $338.2 million. As of June 30, 2006, long-term debt was $2,011.6 million, increasing from the first quarter by $434.1 million due primarily to the Latigo acquisition.

2006 Capital Budget

The Company has established an $800 million exploration and development budget for 2006 (excluding acquisitions), including approximately $240 million for exploration and $560 million for development activities. The capital budget calls for the drilling of approximately 550 wells during 2006, including wells in the United States and Canada.

During the second quarter of 2006, the Company spent $229.4 million on its exploratory and development activities and, as of June 30, 2006, had spent approximately 53% of its $800 million 2006 capital budget. During the second quarter of 2006, 102 wells were drilled with 90 successfully completed, an 88% success rate. As of June 30, 2006, 103 wells were either drilling, completing or testing.

Recognition of Income Tax Benefit

During the second quarter 2006, the Company’s consolidated effective tax rate was 6.2%, down from 33.7% in the first quarter of 2006. This decrease relates to the enactment of a reduction of the Alberta and Saskatchewan provincial tax rates, in addition to a reduction in the statutory Canadian federal income tax rate, which generated a one-time deferred tax benefit of approximately $112 million. Apart from the one-time benefits, the Company currently expects its annual effective tax rate to continue to decrease over the next two years to approximately 30% - 32%, based on current earnings levels.

Derivatives Hedging Charge

hurricane activity during the third quarter of 2005) caused certain of the gas and crude oil collar contracts to lose their qualification for hedge accounting. The Company recognized a $7.1 million non-cash charge related to these contracts in the second quarter of 2006.

2006 Production Target

The Company’s 2006 production volumes target, including the effects of the Latigo purchase and the Gulf of Mexico sale, is approximately 96,000 barrels of oil equivalent per day (“Boepd”). The Company’s 2006 target production yearend exit rate is approximately 108,000 Boepd. These estimates are subject to change, and actual results could differ materially, depending upon the production levels from the Latigo purchase, the amount of Gulf of Mexico production that remains shut-in, the timing of any such production coming back on-line, the availability of oilfield services, acquisitions, divestitures and many other factors that are beyond the Company’s control.

Exposure to Oil and Gas Prices and Availability of Oilfield Services

Oil and natural gas prices have historically been seasonal, cyclical and volatile. Prices depend on many factors that the Company cannot control such as weather and economic, political and regulatory conditions. The average prices the Company is currently receiving for production are higher than historical average prices. A future drop in oil and gas prices could have a material adverse effect on cash flow and profitability. Sustained periods of low prices could have a material adverse effect on the Company’s operations and financial condition. Additionally, the cost of drilling, completing and operating wells and installing facilities and pipelines is often uncertain and have each increased substantially during 2005 and the first half of 2006. The market for oil field services is currently very competitive and shortages or delays in delivery or availability of equipment or fabrication yards could impact the Company’s ability to conduct oil and gas drilling and completion operations.

Results of Operations

Oil and Gas Revenues

The Company’s oil and gas revenues for the second quarter of 2006 were $357.1 million, an increase of approximately 30% from oil and gas revenues of $274.0 million for the second quarter of 2005. The Company’s oil and gas revenues for the first six months of 2006 were $711.5 million, an increase of approximately 35% from oil and gas revenues of $528.1 million for the first six months of 2005. The following table reflects an analysis of variances in the Company’s oil and gas revenues (expressed in millions) between 2006 and 2005.

	2nd Qtr. 2006			1st 6 Mos. 2006
	Compared to			Compared to
	2nd Qtr. 2005			1st 6 Mos. 2005

Increase (decrease) in oil and gas revenues resulting from variances in:
Natural gas -
Price	$	(10.5	)	$	21.2
Production	8.5			23.4
	(2.0		)	44.6
Crude oil and condensate -
Price	45.1			59.0
Production	33.0			64.0
	78.1			123.0

Natural gas liquids	7.0			15.8
Increase in oil and gas revenues	$	83.1		$	183.4

The most significant cause for the increase in hydrocarbon production was the acquisitions of Northrock on September 27, 2005 and Latigo on May 2, 2006. The increased hydrocarbon production from both of the acquisitions was partially offset by decreased production in the Company’s Gulf of Mexico region resulting from sale of 50% of the Company’s interest in its Gulf of Mexico properties on May 31, 2006, in addition to the curtailment of hydrocarbon production in 2006 due to the infrastructure damage caused by Hurricanes Katrina and Rita in the third quarter of 2005 and natural production declines. The following tables reflect the relative changes in hydrocarbon volumes and prices by geographic area:

					% Change						% Change
	2nd Quarter				2005 to		1st Six Months				2005 to
	2006		2005		2006		2006		2005		2006
Comparison of Increases (Decreases) in:
Natural Gas —
Average prices (per Mcf)
United States (a)	$	5.90	$	6.48	(9	)%	$	6.53	$	6.22	5	%
Canada	$	6.33	$	—	N/M		$	7.05	$	—	N/M
Company-wide average price	$	6.02	$	6.48	(7	)%	$	6.68	$	6.22	7	%

Average daily production volumes (MMcf per day) (a):
United States	192.4		254.5		(24	)%	200.0		256.7		(22	)%
Canada	77.5		—		N/M		76.0		—		N/M
Company-wide average daily production	269.9		254.5		6	%	276.0		256.7		8	%

(a) Price hedging activity increased the average price of the Company’s United States natural gas production during the second quarter of 2006 by less than $0.01 per Mcf and reduced the average price of the Company’s United States natural gas production during the first six months of 2006 by $0.09 per Mcf. Price hedging activity had no effect on the average price of the Company’s United States natural gas production during the second quarter and first six months of 2005. “MMcf” is an abbreviation for million cubic feet.

					% Change						% Change
	2nd Quarter				2005 to		1st Six Months				2005 to
	2006		2005		2006		2006		2005		2006
Comparison of Increases (Decreases) in:
Crude Oil and Condensate —
Average prices (per Bbl)
United States (a)	$	70.38	$	46.62	51	%	$	62.39	$	45.19	38	%
Canada	$	58.60	$	—	N/M		$	50.74	$	—	N/M
Company-wide average price	$	65.47	$	46.62	40	%	$	57.50	$	45.19	27	%


Average daily production volumes (Bbls per day) (a):
United States	18,594		26,303		(29	)%	18,932		26,448		(28	)%
Canada	13,242		—		N/M		13,674		—		N/M
Company-wide average daily production	31,836		26,303		21	%	32,606		26,448		23	%

Total Liquid Hydrocarbons —
Company-wide average daily production (Bbls per day)	37,292		30,450		22	%	38,420		30,521		26	%

(a) Price hedging activity had no effect on the average price of the Company’s United States crude oil and condensate production during the second quarters and first six months of 2006 or 2005. “Bbls” is an abbreviation for barrels.

Gain on Sale of Properties

Gains on sale of property are derived from the sale of oil and gas properties and other assets, including tubular stock and vehicles. The increase in the Company’s gain on property sales in the second quarter and first six months of 2006, compared to the same periods of 2005, is related to the recognition of a $308.4 million gain on the sale of 50% of the Company’s interests in its Gulf of Mexico properties on May 31, 2006.

Other Revenues

Other revenue is derived from sources other than the current production of hydrocarbons. This revenue includes, among other items, natural gas inventory sales, pipeline imbalance settlements and revenue from salt-water disposal activities. The Company recognized $8.6 million and $27.0 million of natural gas inventory sales from the Company’s Canadian operations in the second quarter and first six months of 2006, respectively. No gas inventory sales were made in the second quarter and first six months of 2005.

Costs and Expenses

	2nd Quarter						% Change		1st Six Months						% Change
	2006			2005			2005		2006			2005			2005
	(Expressed in millions, except DD&A statistics)
Comparison of Increases (Decreases) in:
Lease Operating Expenses:
United States	$	47.3		$	33.5		41	%	$	86.4		$	62.2		39	%
Canada	$	21.0		$	—		N/M		$	39.0		$	—		N/M
Total	$	68.3		$	33.5		104	%	$	125.4		$	62.2		102	%

General and Administrative Expenses	$	30.1		$	18.3		64	%	$	58.8		$	37.0		59	%
Exploration Expenses	$	5.3		$	3.3		61	%	$	8.0		$	14.5		(45	)%
Dry Hole and Impairment Expenses	$	12.4		$	6.5		91	%	$	38.0		$	53.9		(29	)%
Depreciation, Depletion and
Amortization (DD&A) Expenses	$	113.4		$	67.9		67	%	$	223.5		$	138.4		61	%
DD&A rate	$	2.52		$	1.71		47	%	$	2.44		$	1.74		40	%
MMcfe produced	44,927			39,785			13	%	91,688			79,603			15	%
Production and Other Taxes	$	20.1		$	14.2		42	%	$	33.6		$	25.4		32	%
Transportation and Other	$	16.6		$	4.4		277	%	$	42.1		$	(1.2	)	(3608	)%
Interest–
Charges	$	(36.2	)	$	(13.8	)	162	%	$	(64.5	)	$	(24.0	)	169	%
Capitalized Interest	$	0.6		$	2.7		(78	)%	$	34.8		$	4.9		610	%
Commodity Derivative Income (Expense)	$	(7.1	)	$	—		N/M		$	(3.8	)	$	—		N/M
Income Tax Expense	$	(23.7	)	$	(42.7	)	(44	)%	$	58.0		$	(69.7	)	(183	)%

Lease Operating Expenses

The increase in lease operating expenses for the second quarter and first six months of 2006, compared to the second quarter and first six months of 2005, is primarily related to the acquisitions of Northrock in September of 2005 and Latigo in May 2006 and to higher costs being charged by service companies in 2006 relative to the 2005 period. These higher expenses were only partially offset by the reduction in lease operating expense related to the sale of 50% of the Company’s Gulf of Mexico offshore interests on May 31, 2006.

On a per unit of production basis, the Company’s total lease operating expenses have increased from an average of $0.84 per Mcfe for the second quarter of 2005 to $1.52 per Mcfe for the second quarter of 2006. On a per unit of production basis, the Company’s total lease operating expenses have increased from an average of $0.78 per Mcfe for the first six months of 2005 to $1.37 per Mcfe for the first six months of 2006. These increases in unit costs are related to the higher oilfield service costs being charged in 2006, in addition to the Company’s increased hurricane repair related operating expenses compounded by the associated reduced offshore hydrocarbon production and natural production declines.

General and Administrative Expenses

The increase in general and administrative expenses for the second quarter and first six months of 2006, compared with the respective 2005 periods, is related primarily to increases in the size of the Company’s workforce due to the Northrock and Latigo acquisitions over the prior twelve months, increased benefit expenses and increases in compensation. On a per unit of production basis, the Company’s general and administrative expenses increased to $0.67 per Mcfe and $0.64 per Mcfe in the second quarter and first six months of 2006, respectively, from $0.46 per Mcfe and $0.47 per Mcfe in the second quarter and first six months of 2005, respectively.

Exploration Expenses

Exploration expenses consist primarily of rental payments required under oil and gas leases to hold non-producing properties (“delay rentals”) and exploratory geological and geophysical costs that are expensed as incurred. Exploration expenses for the second quarter of 2006 resulted primarily from $6.9 million of seismic activity in the Company’s Canadian and Gulf Coast regions (offset by a $4.7 million reimbursement of previously incurred exploration expenses in the Company’s international operations by a new joint venture partner) and $2.2 million of delay rentals. Exploration expenses for the second quarter of 2005 consisted primarily of $1.5 million from 3-D seismic activity in New Zealand and $1.1 million of delay rentals. Exploration expenses for the first six months of 2006 resulted primarily from $8.4 million of seismic activity in the Company’s Canadian and Gulf Coast regions (offset by a $4.7 million reimbursement of previously incurred exploration expenses in the Company’s international operations by a joint venture partner) and $3.3 million of delay rentals. Exploration expenses for the first six months of 2005 consisted primarily of $12.5 million from 3-D seismic activity in New Zealand and the Company’s Gulf of Mexico regions, and $1.4 million of delay rentals.

Dry Hole and Impairment Expenses

Dry hole and impairment expenses relate to costs of unsuccessful exploratory wells drilled and impairment of oil and gas properties. The increase in dry hole and impairment expense for the second quarter of 2006, compared to the second quarter of 2005, was primarily the result of increased dry hole costs as discussed below. The decrease in dry hole and impairment expense for the first six months of 2006, compared to the first six months of 2005, was primarily the result of decreased dry hole costs, partially offset by the increased impairments discussed below. The Company incurred approximately $7.0 million of exploratory dry hole costs during the second quarter of 2006 compared to approximately $5.6 million incurred in the second quarter of 2005. The Company incurred approximately $27.0 million of exploratory dry hole costs during the first six months of 2006 compared to approximately $50.6 million incurred in the first six months of 2005. The Company had approximately $57.2 million of costs attributable to exploratory wells in progress as of June 30, 2006 that, as of July 25, 2006 were either still in progress or pending evaluation.

Generally accepted accounting principles require that if the expected future cash flow of the Company’s reserves on a property fall below the cost that is recorded on the Company’s books, these properties must be impaired and written down to the property’s fair value. Depending on market conditions, including the prices for oil and natural gas, and the Company’s results of operations, a similar test may be conducted at any time to determine whether impairments are appropriate. Depending on the results of this test, impairment could be required on some of the Company’s properties and this impairment could have a material negative non-cash impact on the Company’s earnings and balance sheet. During the second quarters of both 2006 and 2005, the Company recognized miscellaneous impairments on various prospects and leases in the amount of $5.4 million and $0.9 million, respectively. During the first six months of both 2006 and 2005, the Company recognized miscellaneous impairments on various prospects and leases in the amount of $11.0 million and $3.3 million, respectively.

Depreciation, Depletion and Amortization Expenses

The Company’s provision for DD&A expense is based on its capitalized costs and is determined on a cost center by cost center basis using the units of production method. Generally, the Company establishes cost centers on the basis of an oil or gas trend or play for its onshore oil and gas activities. The Company generally creates cost centers on a field-by-field basis for oil and gas activities in the Gulf of Mexico. The increase in the Company’s DD&A expenses for the second quarter and first six months of 2006 compared to the respective 2005 periods resulted primarily from an increase in the Company’s composite DD&A rate and, to a lesser extent, an increase in the Company’s equivalent hydrocarbon production.

The increase in the composite DD&A rate for all of the Company’s producing fields for the second quarter and first six months of 2006, compared to the corresponding 2005 periods, resulted primarily from a decrease in the percentage of the Company’s production coming from fields that have DD&A rates that are lower than the Company’s recent historical composite DD&A rate (principally offshore fields and legacy onshore fields) and a corresponding increase in the percentage of the Company’s production coming from fields that have DD&A rates that are higher than the Company’s recent historical composite rate (principally production from the Northrock and Latigo acquisitions). The Company currently expects its average DD&A rate to increase over the remainder of 2006, as the effects of the higher rate per Mcfe Latigo properties and the sale of the lower rate per Mcfe Gulf of Mexico properties have a greater impact on the Company’s overall production profile.

Production and Other Taxes

The increase in production and other taxes during the second quarter and first six months of 2006, compared to the corresponding 2005 periods, relates primarily to increased severance, property and franchise taxes resulting from the higher product prices received by the Company and increased production from the Company’s domestic onshore and Canadian properties.

Transportation and Other

Transportation and other expense includes the Company’s cost to move its products to market (transportation costs), accretion expense related to Company asset retirement obligations under generally accepted accounting principles, natural gas purchase costs, recognition of recoveries from business interruption insurance and various other operating expenses. The following table shows the significant items included in Transportation and other and the changes between periods (expressed in millions):

	For the Quarter Ended June 30,					For the Six Months Ended June 30,
	2006			2005		2006			2005
Gas inventory purchases	$	8.6		$	—	$	26.5		$	—
Business interruption insurance	(0.7		)	—		(3.7		)	(11.4		)
Transportation costs	4.3			2.9		10.2			5.8
Accretion expense	2.5			1.4		5.1			2.7
Other	1.9			0.1		4.0			1.7
Total	$	16.6		$	4.4	$	42.1		$	(1.2	)

Gas inventory purchases are related solely to the Company’s Canadian operations and were therefore not present in the second quarter or first six months of 2005. The business interruption insurance relates to claims from the shut-in of a significant portion of the Company’s Gulf of Mexico production as a result of the infrastructure damage caused by Hurricanes Ivan, Katrina and Rita. Transportation costs increased in the second quarter and first six months of 2006 compared to the corresponding periods of 2005 due to the acquisition of Northrock in the third quarter of 2005 and Latigo in May 2006. Accretion expense increased in the second quarter and first six months of 2006 compared to the corresponding periods of 2005 due to increased estimates of future liabilities due to rising service costs and the acquisitions of Northrock and Latigo, which was only partially offset by the sale of 50% of the Company’s Gulf of Mexico interests on May 31, 2006.

Interest

Interest Charges. The increase in the Company’s interest charges for the second quarter and first six months of 2006, compared to the second quarter and first six months of 2005, resulted primarily from an increase in the average amount of the Company’s outstanding debt and, to a lesser extent, an increase in the average interest rate on the Company’s revolving credit facility. See “-Liquidity and Capital Resources” below.

Capitalized Interest. Interest costs related to financing major oil and gas projects in progress are capitalized until the projects are substantially complete and ready for their intended use if projects are evaluated as successful. The increase in capitalized interest for the second quarter and first six months of 2006, compared to the comparable 2005 periods, resulted primarily from an increase in the dollar amount of oil and gas projects in progress subject to interest capitalization during the second quarter and first six months of 2006 (approximately $1,088.9 million and $1,013.7 million, respectively), compared to the second quarter and first six months of 2005 (approximately $175.8 million and $172.2 million, respectively). The increase is primarily attributable to unproved property acquired in the Northrock transaction in September 2005 and the Latigo transaction in May 2006.

Commodity Derivative Expense

Commodity derivative expense for the second quarter and first six months of 2006 represents realized and unrealized losses on derivative contracts that no longer qualify for hedge accounting treatment. Although the Company’s collars are effective as economic hedges, the sale of 50% of the Company’s Gulf of Mexico interests on May 31, 2006 and the forecasted shut-in hydrocarbon production from the Company’s Gulf of Mexico properties (resulting primarily from hurricane activity during the third quarter of 2005) caused certain of the gas and crude oil collar contracts to lose their qualification for hedge accounting under SFAS 133. No such expense was incurred during the second quarter and first six months of 2005, as all of the Company’s derivative contracts qualified for hedge accounting at that time.

Income Tax Expense

Changes in the Company’s income tax expense are a function of the Company’s consolidated effective tax rate, the Company’s pre-tax income and the jurisdiction in which the income is earned. The decrease in the Company’s tax expense for the second quarter and first six months of 2006, compared to the second quarter and first six months of 2005, primarily resulted from enacted tax rate changes in Canada during the 2006 periods. The Company’s consolidated effective tax rate was 6.2% and 11.9% for the second quarter and first six months of 2006, respectively, compared to 36.6% and 38.0% for the second quarter and first six months of 2005. The Company currently expects its annual effective tax rate to continue to decrease over the next two years, based on current earnings levels. This reduction is expected due to the favorable impact of cross-border financing related to the acquisition of Northrock Resources, reductions in the statutory federal income tax rates in Canada from approximately 26% to 19%, the phase-in of a deduction in Canada for Crown royalties, and the phase-in of the deduction for qualified domestic production activities in the United States.

Discontinued Operations-

The Thailand Entities (sold August 17, 2005) and Pogo Hungary (sold June 7, 2005) are classified as discontinued operations in the Company’s financial statements. The summarized financial results of the discontinued operations were as follows (amounts expressed in millions):

	Three Months			Six months
	Ended			Ended
Operating Results Data	June 30, 2005			June 30, 2005

Revenues	$	112.9		$	214.5
Costs and expenses	(57.3		)	(112.3		)
Other income	3.5			4.1
Income before income taxes	59.1			106.3
Income taxes	(34.8		)	(62.3		)
Income before gain from discontinued operations, net of tax	24.3			44.0
Gain on sale of Pogo Hungary, net of tax	5.2			5.2
Income from discontinued operations, net of tax	$	29.5		$	49.2

Liquidity and Capital Resources

The Company’s primary needs for cash are for exploration, development, acquisition and production of oil and gas properties, repayment of principal and interest on outstanding debt and payment of income taxes. The Company funds its exploration and development activities primarily through internally generated cash flows and debt financing, and budgets capital expenditures based on projected cash flows. The Company adjusts capital expenditures in response to changes in oil and natural gas prices, drilling and acquisition results, and cash flow. The Company has historically utilized net cash provided by operating activities, available cash, debt, and equity as capital resources to obtain necessary funding for all other cash needs.

The Company’s cash flow provided by operating activities for the first six months of 2006 was $338.2 million compared to cash flow provided by operating activities of $429.6 million in the first six months of 2005. The decrease is attributable primarily to higher expenses, partially offset by increased production volumes and higher oil and gas prices discussed under “Results of Operations” above. Cash flow from operating activities and debt financing were used during the first six months of 2006 to fund $407.4 million in cash expenditures for capital and exploration projects and property acquisitions. The $766.4 million Latigo acquisition was funded using cash on hand and debt financing, a portion of which was subsequently repaid using the $463.1 million in cash proceeds from the Gulf of Mexico sale. During the first six months of 2006, the Company issued $450 million principal amount of 2013 Notes (see below) and repaid senior debt obligations of approximately $82 million (net of borrowings). During the first six months of 2006 the Company paid $7.7 million for purchases of Company stock made in late December 2005 and also paid $8.7 million of common stock dividends. As of June 30, 2006, the Company had cash and cash equivalents of $26.9 million and long-term debt obligations of $2.0 billion (excluding debt discount) with no repayment obligations until 2009. The Company may determine to repurchase outstanding debt in the future, including in market transactions, privately negotiated transactions or otherwise, depending on market conditions, liquidity requirements, contractual restrictions and other factors.

Effective June 6, 2006, the Company’s lenders redetermined the borrowing base under its bank credit facility at $1.365 billion. As of July 25, 2006, the Company had an outstanding balance of $542 million under its facility and a $1.0 billion borrowing capacity under the facility. As such, the available borrowing capacity under the facility was $458 million.

LIBOR Rate Advances

Under separate Promissory Note Agreements dated May 8, 2004 and September 13, 2004, two of the Company’s lenders make available to the Company LIBOR rate advances on an uncommitted basis up to $50 million. Advances drawn under these agreements are reflected as long-term debt on the Company’s balance sheet because the Company currently has the ability and intent to refinance such amounts through borrowings under its bank credit facility, which is due in December 2009. The Company’s 2011 Notes, 2013 Notes, 2015 Notes and 2017 Notes may restrict all or a portion of the amounts that may be borrowed under the Promissory Note Agreements. The Promissory Note Agreements permit either party to terminate the letter agreements at any time upon three business days notice. As of July 25, 2006, there was $40 million outstanding under these agreements.

2013 Notes

sales; non-guarantor restricted subsidiaries; dividends and other payment restrictions affecting restricted subsidiaries; and merger, consolidations and the sale of assets.

Future Capital and Other Expenditure Requirements

The Company’s capital and exploration budget for 2006, which does not include any amounts that may be expended for acquisitions or any interest which may be capitalized resulting from projects in progress, was increased by the Company’s Board of Directors in April 2006 to $800 million, of which approximately $422 million was incurred in the six months ended June 30, 2006. The Company has included 550 gross wells in its 2006 capital and exploration budget (209 of which were drilled in the first six months of 2006), including wells in the United States and Canada.

The Company currently anticipates that its available cash, cash provided by operating activities and funds available under its bank credit facility will be sufficient to fund the Company’s ongoing operating, interest and general and administrative expenses, capital expenditures, and dividend payments at current levels for the foreseeable future. The declaration and amount of future dividends on the Company’s common stock will depend upon, among other things, the Company’s future earnings and financial condition, liquidity and capital requirements, its ability to pay dividends and other payments under covenants contained in its debt instruments, the general economic and regulatory climate and other factors deemed relevant by the Company’s Board of Directors.

Share Repurchase

On January 25, 2005, the Company announced a plan to repurchase, through open market or privately negotiated transactions, not less than $275 million nor more than $375 million of its common stock. As of December 31, 2005, the Company had completed the purchase of 7,310,000 shares at a total cost of $359.5 million. There were no repurchases of the Company’s equity securities during the six months ended June 30, 2006.

Recent Accounting Pronouncements

On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FAS 109”. FIN 48 clariﬁes the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Implementation of FIN 48 is not expected to have a material financial statement impact on the Company.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to market risk, including adverse changes in commodity prices, interest rates and foreign currency exchange rates as discussed below.

Commodity Price Risk

The Company produces and sells natural gas, crude oil, condensate and NGLs. As a result, the Company’s financial results can be significantly affected as these commodity prices fluctuate widely in response to changing market forces. The Company makes use of a variety of derivative financial instruments only for non-trading purposes as a hedging strategy to manage commodity prices associated with oil and gas sales and to reduce the impact of commodity price fluctuations.

Current Hedging Activity

As of June 30, 2006 the Company held various derivative instruments. The Company has entered into natural gas and crude oil option agreements referred to as “collars”. Collars are designed to establish floor and ceiling prices on anticipated future natural gas and crude oil production. The Company has designated a significant portion of these contracts as cash flow hedges designed to achieve a more predictable cash flow, as well as to reduce its exposure to price volatility. While the use of these derivative instruments limits the downside risk of adverse price movements, they may also limit future revenues from favorable price movements. The use of derivatives also involves the risk that the counterparties to such instruments will be unable to meet the financial terms of such contracts. Currently, the Company does not expect losses due to creditworthiness of its counterparties.

The gas derivative transactions are generally settled based upon the average of the reporting settlement prices on the NYMEX for the last three trading days of a particular contract month. The oil derivative transactions are generally settled based on the average of the reporting settlement prices for West Texas Intermediate on the NYMEX for each trading day of a particular calendar month. For any particular collar transaction, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price for such transaction, and the Company is required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling price of such transaction.

POGO PRODUCING COMPANY AND SUBSIDIARIES

		NYMEX
		Contract				Fair Value
Contract Period and		Price				of
Type of Contract	Volume	Floor		Ceiling		Asset/(Liability)
						(in millions)
Natural Gas Contracts (MMBtu) (a)
Collar Contracts:
September 2006	150	$	5.00	$	7.50	$	—
July 2006 - December 2006	920	$	5.50	$	8.25	$	(0.4	)
November 2006 - December 2006	305	$	5.75	$	8.27	$	(0.4	)
July 2006 - December 2006	5,520	$	6.00	$	13.50	$	1.1
July 2006 - December 2006	920	$	6.00	$	13.55	$	0.2
July 2006 - December 2006	1,840	$	6.00	$	13.60	$	0.4
July 2006 - December 2006	5,520	$	6.00	$	14.00	$	1.2
July 2006 - December 2006	920	$	7.00	$	10.60	$	0.5
July 2006 - December 2006	920	$	7.00	$	10.62	$	0.5
July 2006 - December 2006	920	$	7.00	$	10.70	$	0.5
January 2007 - December 2007	5,475	$	6.00	$	12.00	$	(2.7	)
January 2007 - December 2007	1,825	$	6.00	$	12.15	$	(0.8	)
January 2007 - December 2007	9,125	$	6.00	$	12.50	$	(3.6	)
January 2007 - December 2007	913	$	8.00	$	13.40	$	0.4
January 2007 - December 2007	2,738	$	8.00	$	13.50	$	1.1
January 2007 - December 2007	913	$	8.00	$	13.52	$	0.4
January 2007 - December 2007	913	$	8.00	$	13.65	$	0.4
January 2008 - December 2008	1,830	$	8.00	$	12.05	$	0.5
January 2008 - December 2008	2,745	$	8.00	$	12.10	$	0.8
January 2008 - December 2008	915	$	8.00	$	12.25	$	0.3

(a) MMBtu means million British Thermal Units.

		NYMEX
		Contract				Fair Value
Contract Period and		Price				of
Type of Contract	Volume	Floor		Ceiling		Asset/(Liability)
						(in millions)
Crude Oil Contracts (Barrels)
Collar Contracts:
July 2006 - December 2006	736,000	$	50.00	$	78.00	$	(2.3	)
July 2006 - December 2006	184,000	$	50.00	$	79.00	$	(0.5	)
July 2006 - December 2006	736,000	$	50.00	$	81.00	$	(1.6	)
July 2006 - December 2006	184,000	$	50.00	$	81.04	$	(0.4	)
July 2006 - December 2006	920,000	$	50.00	$	82.00	$	(1.8	)
July 2006 - December 2006	368,000	$	60.00	$	84.00	$	(0.5	)
July 2006 - December 2006	92,000	$	60.00	$	85.25	$	(0.1	)
January 2007 - December 2007	1,460,000	$	50.00	$	75.00	$	(10.3	)
January 2007 - December 2007	365,000	$	50.00	$	75.25	$	(2.5	)
January 2007 - December 2007	3,650,000	$	50.00	$	77.50	$	(22.0	)
January 2007 - December 2007	182,500	$	60.00	$	82.75	$	(0.6	)
January 2007 - December 2007	547,500	$	60.00	$	83.00	$	(1.7	)
January 2007 - December 2007	182,500	$	60.00	$	84.00	$	(0.5	)
January 2008 - December 2008	183,000	$	60.00	$	80.00	$	(0.6	)
January 2008 - December 2008	183,000	$	60.00	$	80.05	$	(0.6	)
January 2008 - December 2008	183,000	$	60.00	$	80.10	$	(0.6	)
January 2008 - December 2008	366,000	$	60.00	$	80.25	$	(1.1	)

		NYMEX
		Contract				Fair Value
Contract Period and		Price				of
Type of Contract	Volume	Floor		Ceiling		Liability
						(in millions)
Natural Gas Contracts (MMBtu)
Collar Contracts:
July 2006 - December 2006	920	$	5.50	$	8.25	$	(0.4	)
July 2006 - December 2006	2,610	$	5.00	$	7.50	$	(2.1	)
July 2006 - December 2006	1,535	$	5.75	$	8.27	$	(0.3	)
January 2007 - December 2007	7,300	$	6.00	$	12.15	$	(3.3	)
January 2007 - December 2007	3,650	$	6.00	$	12.20	$	(1.6	)

Interest Rate Risk

From time to time, the Company has entered into various financial instruments, such as interest rate swaps, to manage the impact of changes in interest rates. As of July 25, 2006, the Company has no open interest rate swap or interest rate lock agreements. Therefore, the Company’s exposure to changes in interest rates primarily results from its short-term and long-term debt with both fixed and floating interest rates. The following table presents principal or notional amounts (stated in millions) and related average interest rates by year of maturity for the Company’s debt obligations and their indicated fair market value at June 30, 2006:

	2005		2006		2007		2008		2009			Thereafter			Total			Fair Value
Long-Term Debt:
Variable Rate	$	0.0	$	0.0	$	0.0	$	0.0	$	564.0		$	0.0		$	564.0		$	564.0
Average Interest Rate	—		—		—		—		6.79		%	—			6.79		%	—
Fixed Rate	$	0.0	$	0.0	$	0.0	$	0.0	$	0.0		$	1,450.0		$	1,450.0		$	1,397.4
Average Interest Rate	—		—		—		—		—			7.32		%	7.32		%	—

Foreign Currency Exchange Rate Risk

The Company does not actively manage foreign currency risk in its foreign subsidiaries where the U.S. dollar is not the functional currency, primarily Canada, since the majority of transactions are denominated in the local currency. A substantial amount of the Company’s cash is located in Canada, in Canadian dollars, which provides a natural hedge against foreign currency risk. Exposure from market rate fluctuations related to activities in New Zealand and Vietnam is not material at this time. As of July 25, 2006, the Company had no foreign currency financial derivatives.

ITEM 4. Controls and Procedures.

The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.

Based on their evaluation as of the end of the period covered by this quarterly report, the Company’s Chairman, President and Chief Executive Officer and its Senior Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

ITEM 1A. Risk Factors.

Please read “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, some of which are updated below.

The Company’s recent acquisitions are significant and may not be successful.

In September 2005, the Company completed the acquisition of Northrock, the largest acquisition in its history. In May 2006, the Company completed the acquisition of Latigo, another significant acquisition for the Company. The Company may not be able to realize anticipated economic, operational and other benefits from these recent acquisitions due to the following risks and difficulties, among others:

· the acquired properties may not produce revenues, earnings or cash flow at anticipated levels;

· the Company may have exposure to unanticipated liabilities and costs as a result of the acquisitions, some of which may materially exceed its estimates;

· the Company may lose key employees on whom management is substantially dependent in the operation of Northrock’s or Latigo’s assets;

· the Company may lose customers, suppliers, partners and agents of Northrock or Latigo; and

· the Company may experience material difficulties and additional costs in integrating Northrock’s or Latigo’s operations, systems and personnel with its own.

The Company may not be able to obtain sufficient drilling equipment and experienced personnel to conduct its operations.

In periods of increased drilling activity resulting from high commodity prices, demand exceeds availability for drilling rigs, drilling vessels, supply boats and personnel experienced in the oil and gas industry in general, and the offshore oil and gas industry in particular. This may lead to difficulty and delays in consistently obtaining services and equipment from vendors, obtaining drilling rigs and other equipment at favorable rates, and scheduling equipment fabrication at factories and fabrication yards. This, in turn, may lead to projects being delayed or experiencing increased costs.

The Company’s operations are subject to casualty risks against which it cannot fully insure.

The Company’s operations are subject to inherent casualty risks such as blowouts, fires, explosions, cratering, uncontrollable flows of oil, natural gas or well fluids, pollution and other environmental risks, marine hazards and natural disasters. If any such event occurred, the Company could be subject to substantial financial losses due to personal injury, property damage, environmental discharge, or suspension of operations. The impact on the Company of one of these events could be significant. Although the Company purchases insurance at levels it believes to be customary for a company of its size in its industry, the Company is not fully insured against all risks incident to its business. For some risks, the Company may not obtain insurance if it believes the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, it could adversely affect the Company’s operations and financial condition. Moreover, there is no assurance that recoveries for insured events will be sufficient to cover cash flow that the Company would have otherwise generated from affected properties.

The Company has substantial capital requirements.

The Company requires substantial capital to replace its reserves and generate sufficient cash flow to meet its financial obligations. If the Company cannot generate sufficient cash flow from operations or raise funds externally in the amounts and at the times needed, it may not be able to replace its reserves or meet its financial obligations. The Company recently paid approximately $1.7 billion in cash to acquire Northrock and approximately $766 million in cash to acquire Latigo. The Company’s ongoing capital requirements consist primarily of the following items:

· funding its 2006 capital and exploration budget of $800 million;

· other allocations for acquisition, development, production, exploration and abandonment of oil and natural gas reserves;

· future dividends and stock repurchases.

The Company plans to finance anticipated ongoing expenses and capital requirements with funds generated from the following resources:

· available cash and cash investments;

· cash provided by operating activities;

· funds available under its credit facility;

· its uncommitted money market line(s) of credit; and

· capital the Company believes it can raise through opportunistic debt and equity offerings.

Accordingly, these acquisitions reduce the availability of those resources for other capital requirements. Moreover, the uncertainties and risks associated with future performance and revenues will ultimately determine the Company’s liquidity and ability to meet anticipated capital requirements.

The Company will continue to pursue acquisitions and dispositions.

The Company will continue to seek opportunities to generate value through business combinations, purchases and sales of assets. The Company examines potential transactions on a regular basis, depending on market conditions, available opportunities and other factors. In addition, the Company competes with other companies in pursuing acquisitions, many of which have greater financial and other resources to acquire attractive companies and properties. The successful acquisition of oil and gas properties requires an assessment of several factors, including recoverable reserves, development and exploratory potential, projected future cash flows that are, in part, based upon future oil and gas prices, current and projected operating, general and administrative and other costs, and contingent liabilities associated with the properties or entities acquired, including potential environmental and other liabilities. The accuracy of the Company’s assessment of these factors is inherently uncertain, and the Company’s review and assessment of potential acquisitions will not reveal all existing or potential problems nor will it permit the Company to become sufficiently familiar with the properties or entities to fully assess their deficiencies and capabilities. Even when problems are identified, the other party may be unwilling or unable to provide effective contractual protection against all or part of the problems. Furthermore, the Company may not be entitled to contractual indemnification for certain liabilities, or it may acquire the properties on an “as is, where is” basis.

Dispositions of portions of the Company’s existing business or properties would be intended to result in the realization of immediate value but would consequently result in lower cash flows over the longer term, unless the proceeds are reinvested in more productive assets.

The Company’s reserve data are estimates.

No one can measure underground accumulations of oil and natural gas in an exact way. Projecting future production rates and the timing and amount of development expenditures is also an uncertain process. Accuracy of reserve estimates depends on the quality of available data and on economic, engineering and geological interpretation and judgment. As a result, reserve estimates often differ from the

quantities of oil and natural gas ultimately recovered. To estimate economically recoverable reserves, various assumptions are made regarding future oil and natural gas prices, production levels and operating and development costs that may prove incorrect. Any significant variance from those assumptions could greatly affect estimates of economically recoverable reserves and future net revenues.

It should not be assumed that the present value of future net cash flows from the Company’s proven reserves is the current value of the estimated natural gas and oil reserves. Estimates of discounted future net cash flows from proven reserves are based on prices and costs on the date of the estimate. Actual future prices and costs may differ materially from those used in net present value estimates, and future net present value estimates using then-current prices and costs may be significantly less than current estimates.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no repurchases of the Company’s equity securities during the six months ended June 30, 2006.

ITEM 4. Submission of Matters to Vote of Security Holders

The registrant held its annual meeting of stockholders in Houston, Texas on April 25, 2006. Each of the individuals nominated for election as a director was elected and the proposal before the meeting was approved. The following sets forth the items that were submitted to a vote of the stockholders and the results thereof:

(A) election of three directors, each for a term of three years. The vote tabulation for each nominee was as follows:

Nominee	For	Withheld
Jerry M. Armstrong	53,330,540	309,798
Gerrit W. Gong	53,391,213	249,125
Carroll W. Suggs	53,327,392	312,946

(B) a proposal to ratify the appointment of PricewaterhouseCoopers LLP, independent accountants, to audit the financial statements of the Company for the year 2006, with 53,075,659 votes cast for ratification, 31,096 votes cast against ratification and 533,583 votes cast in absentia to the ratification.

ITEM 6. Exhibits

2.1		Agreement and Plan of Merger dated April 13, 2006 by and among Latigo Petroleum, Inc., Pogo Producing Company and Pogo Merger Sub 1, Inc. (a copy of any omitted schedule will be furnished supplementally to the Commission upon request).
2.2		Purchase and Sale Agreement dated April 20, 2006 between Pogo Producing Company and MitEnergy Upstream LLC (a copy of any omitted schedule will be furnished supplementally to the Commission upon request).
*3.1		Restated Certificate of Incorporation of Pogo Producing Company, as filed on April 28, 2004 (Exhibit 3.1, Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, File No. 1-7796).
*3.2		Bylaws of Pogo Producing Company, as amended and restated through July 16, 2002 (Exhibit 4.1, Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 1-7792).
*4.1		Indenture dated as of June 6, 2006 between Pogo Producing Company and the Bank of New York Trust Company N.A. (Exhibit 4.1 of the Company’s Current Report on Form 8-K filed June 8, 2006, File No. 1-7792).
*4.2		Registration Rights Agreement dated as of June 6, 2006 among Pogo Producing Company and the initial purchasers named therein (Exhibit 4.2 of the Company’s Current Report on Form 8-K filed June 8, 2006, File No. 1-7792).
*4.3		Senior Loan Facility dated May 2, 2006 by and among Pogo Producing Company, as the Borrower, certain Lenders party thereto from time to time and Goldman Sachs Credit Partners L.P., as the sole Lead Arranger and Book Runner, Syndication Agent, Administration Agent and Lender (Exhibit 4.1 of the Company’s Current Report on Form 8-K filed May 8, 2006, File No. 1-7792).
10.1		Purchase Agreement dated June 1, 2006, by and between Pogo Producing Company and Goldman Sachs & Co. and the other initial purchasers named therein.
10.2		Commitment Letter dated April 18, 2006, by and between Pogo Producing Company and Goldman Sachs Credit Partners L.P.
*10.3		Indemnification Agreement by and between Pogo Producing Company and Jerry M. Armstrong, dated April 25, 2006. (Exhibit 10.1, Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-7792).
*10.4		Indemnification Agreement by and between Pogo Producing Company and Robert H. Campbell, dated April 25, 2006. (Exhibit 10.2, Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-7792).
*10.5		Indemnification Agreement by and between Pogo Producing Company and William L Fisher, dated April 25, 2006. (Exhibit 10.3, Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-7792).
*10.6		Indemnification Agreement by and between Pogo Producing Company and Thomas A. Fry, III, dated April 25, 2006. (Exhibit 10.4, Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-7792).
*10.7		Indemnification Agreement by and between Pogo Producing Company and Gerrit W. Gong, dated April 25, 2006. (Exhibit 10.5, Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-7792).

*10.8		Indemnification Agreement by and between Pogo Producing Company and Charles G. Groat, dated April 25, 2006. (Exhibit 10.6, Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-7792).
*10.9		Indemnification Agreement by and between Pogo Producing Company and Carroll W. Suggs, dated April 25, 2006. (Exhibit 10.7, Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-7792).
*10.10		Indemnification Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated April 25, 2006. (Exhibit 10.8, Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-7792).
*10.11		Indemnification Agreement by and between Pogo Producing Company and Stephen A. Wells, dated April 25, 2006. (Exhibit 10.9, Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-7792).
12.1		Statement showing computation of ratios of earnings to fixed charges.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer.
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer.

* Asterisk indicates an exhibit incorporated by reference as shown.

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.

		Pogo Producing Company
		(Registrant)


		/s/ Thomas E. Hart
		Thomas E. Hart
		Vice President and Chief
		Accounting Officer


		/s/ James P. Ulm, II
		James P. Ulm, II
		Senior Vice President and Chief
		Financial Officer

Date: July 28, 2006

EX-2.1 2 a06-15149_1ex2d1.htm EX-2

Exhibit 2.1

AGREEMENT AND PLAN OF MERGER

by and among

Latigo Petroleum, Inc.,
(the “Company”)

and

Pogo Producing Company
(the “Purchaser”)

and

Pogo Merger Sub 1, Inc.
(the “Merger Subsidiary”)

* * * * *

Dated as of April 13, 2006

TABLE OF CONTENTS

		Page

Article I.	Definitions and Construction

1.1	Definitions.
1.2	Rules of Construction.

Article II.	The Merger	2

2.1	The Merger.	2
2.2	Effective Time.	2
2.3	Effects of the Merger.	2
2.4	Certificate of Incorporation and Bylaws.	2
2.5	Directors and Officers.	2
2.6	Conversion of Outstanding Shares.	2
2.7	Treatment of Options.	3
2.8	Dissenters’ Rights.	4
2.9	Closing of Transfer Books.	4
2.10	Merger Consideration.	5
2.11	Closing Payments.	5
2.12	Payment Related Provisions.	6
2.13	Escrowed Funds.	7
2.14	Escrow Agreement	7

Article III.	Closing	8

3.1	Time and Place of Closing.	8
3.2	Obligations of the Company At or Prior to the Closing.	8
3.3	Obligations of Purchaser at or Prior to the Closing.	9

Article IV.	Representations and Warranties of the Company	9

4.1	Organization and Authority.	9
4.2	Capitalization.	11
4.3	No Violation.	11
4.4	Consents and Approvals.	12
4.5	Violation of Laws, Permits, etc.	12
4.6	Financial Statements.	12
4.7	No Undisclosed Liabilities.	12
4.8	Absence of Certain Changes.	12
4.9	Title to Property; Encumbrances.	13
4.10	Environmental Matters.	14
4.11	Royalties.	14
4.12	Current Commitments; Imbalances.	14
4.13	Sales and Transportation Agreements.	15
4.14	Tax Partnerships.	15
4.15	No Funds in Suspense.	15
4.16	Litigation.	15
4.17	Tax Returns and Payments.	15

4.18	Insurance.	16
4.19	Bank Accounts.	16
4.20	Contracts.	16
4.21	Employee Matters.	18
4.22	Brokers, Finders and Advisors.	19
4.23	Property Operation.	19
4.24	Take-or-Pay.	20
4.25	Timely Payment.	20
4.26	Outstanding Obligations.	20
4.27	Condemnation.	20
4.28	Bankruptcy.	20
4.29	Wells.	20
4.30	Calls on Production.	20
4.31	Transactions With Affiliates.	20
4.32	Indebtedness to and from Officers, Directors and Others.	21
4.33	Accounts Receivable.	21
4.34	Intellectual Property.	21
4.35	No Continuing Rights/Obligations.	21
4.36	Preferential Rights.	22
4.37	Investment Company Act.	22
4.38	PUHCA.	22
4.39	Foreign Person.	22

Article V.	Representations and Warranties of Purchaser and Merger Subsidiary	22

5.1	Organization.	22
5.2	Authority.	22
5.3	Consents and Approvals.	23
5.4	Litigation.	24
5.5	Investment Intent; Investment Experience.	24
5.6	Brokers, Finders and Advisors.	24
5.7	Financing.	24

Article VI.	Actions of the Company Prior to the Closing Date	24

6.1	Affirmative Covenant.	24
6.2	Negative Covenants.	25
6.3	Consents.	26
6.4	Regulatory and Other Authorizations; Notices and Consents.	26
6.5	Access to Properties and Records.	26
6.6	Distribution of Royalty Partnership.	27
6.7	Termination of Agreements.	28
6.8	Company Transaction Costs.	28
6.9	Stockholder Representative.	28

Article VII.	Actions of Purchaser and Merger Subsidiary Prior to and Following the Closing Date; Indemnification Provisions	28

7.1	Affirmative Covenants.	28
7.2	Reasonable Efforts.	28
7.3	Employee Benefits.	28
7.4	Indemnification Provisions.	29
7.5	Debt.	29
7.6	Cooperation.	29
7.7	Purchaser Availability during Interim Period	29

Article VIII.	Conditions To Closing	30

8.1	Conditions to the Obligations of Each Party.	30
8.2	Conditions to the Obligations of the Company.	30
8.3	Conditions to the Obligations of the Purchaser and Merger Subsidiary.	31

Article IX.	Termination, Waiver and Amendment	32

9.1	Termination.	32
9.2	Manner of Exercise.	33
9.3	Effect of Termination.	33

Article X.	Investigation; No Other Representations and Warranties; No Affiliate Liability	33

10.1	Investigation and Agreement by Purchaser and Merger Subsidiary; No Other Representations or Warranties.	33
10.2	No Affiliate Liability.	34

Article XI.	Title and Environmental Matters	35

11.1	Stockholder Representative; Title Examination and Access.	35
11.2	Notice of Title Defects.	36
11.3	Claims for Breach of Surviving Representations.	37
11.4	Casualty or Condemnation Loss.	37
11.5	Limitations on Applicability Surviving Representations.	38
11.6	Environmental Assessment.	38
11.7	Notice of Violations of Environmental Laws.	38
11.8	Remedies for Violations of Environmental Laws.	38
11.9	Dispute respecting Defects and Defect Amounts.	39
11.10	Limitations on Article XI Adjustments.	40
11.11	Defect Claims of Purchaser Made Prior the Closing Date	41
11.12	Procedure for Claims Against Escrow Amount	42

Article XII.	General Provisions	43

12.1	Survival of Representations and Warranties; Waiver of Rights.	43
12.2	Scope of Representations; Disclaimer.	43
12.3	Confidentiality.	44
12.4	Further Assurances.	44

iii

12.5	Binding Effect; Third Party Beneficiaries.	44
12.6	Notices.	45
12.7	Expenses.	45
12.8	Entire Agreement.	45
12.9	Amendments; Waivers.	46
12.10	Counterparts.	46
12.11	Specific Performance.	46
12.12	GOVERNING LAW.	46
12.13	Disclosure Schedule.	46
12.14	Assistance with Financials.	46
12.15	Waiver of Conflict.	47

INDEX TO ANNEXES, EXHIBITS AND SCHEDULES

Annex A	Definitions
Annex B	Knowledge of the Company


Exhibit A	Major Properties
Exhibit B	Miscellaneous Interests
Exhibit C	Letter of Transmittal
Exhibit D	Option Cancellation and Surrender Agreement


Schedule 6.6(A)	Ranches South Leases and Partnership ORRI
Schedule 6.6(B)	Units Excluded from Partnership ORRI

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”) is entered into as of April 13, 2006, by and among LATIGO PETROLEUM, INC., a Delaware corporation (the “Company”), POGO PRODUCING COMPANY, a Delaware corporation (“Purchaser”), and POGO MERGER SUB 1, INC., a Delaware corporation (“Merger Subsidiary”).

RECITALS

WHEREAS, the Purchaser and the Company believe that the acquisition of the Company by the Purchaser and the merger of Merger Subsidiary with and into the Company (the “Merger”) in accordance with the General Corporation Law of the State of Delaware (“DGCL”), in the manner provided by, and subject to the terms and conditions of, this Agreement, is desirable and in the best interest of their respective stockholders; and

WHEREAS, the Boards of Directors of the Company, Purchaser and Merger Subsidiary have each approved and adopted this Agreement, the Merger (as hereinafter defined) and the other transactions contemplated hereby and declared the advisability of this Agreement (and, in the case of the Company, recommended that this Agreement be adopted by its Stockholders and, in the case of Merger Subsidiary, recommended that this Agreement be adopted by Purchaser, as sole stockholder of Merger Subsidiary).

NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, the parties hereby agree as follows:

Article I.
Definitions and Construction

1.1 Definitions. Certain capitalized and other terms used in this Agreement are defined in Annex A hereto and are used herein with the meanings ascribed to them therein.

1.2 Rules of Construction. Unless the context otherwise requires, as used in this Agreement (a) a term has the meaning ascribed to it; (b) an accounting term not otherwise defined has the meaning ascribed to it in accordance with GAAP; (c) “or” is not exclusive; (d) “including” means “including, without limitation;” (e) words in the singular include the plural; (f) words in the plural include the singular; (g) words applicable to one gender shall be construed to apply to each gender; (h) the terms “hereof,” “herein,” “hereby,” “hereto,” and derivative or similar words refer to this entire Agreement; and (i) the terms “Article” or “Section” shall refer to the specified Article or Section of this Agreement.

Article II.
The Merger

2.1 The Merger. At the Effective Time, Merger Subsidiary shall be merged with and into the Company in accordance with the terms of, and subject to the conditions set forth in, this Agreement and the DGCL. At the Effective Time, the Company shall continue as the surviving corporation in the Merger (sometimes hereinafter referred to as the “Surviving Corporation”) and the separate corporate existence of Merger Subsidiary shall cease.

2.2 Effective Time. Upon the terms and subject to the conditions set forth in this Agreement, as soon as practicable after the satisfaction or waiver of the conditions set forth in Article VIII, the Company, Purchaser and Merger Subsidiary shall cause a Certificate of Merger meeting the requirements of Section 251 of the DGCL (the “Certificate of Merger”) to be properly executed and filed with the Secretary of State of the State of Delaware in accordance with the terms and conditions of the DGCL. The Merger shall become effective at the time of filing of the Certificate of Merger with the Secretary of State of the State of Delaware in accordance with the DGCL or, subject to Applicable Law, at such subsequent date and time as the Company and Purchaser shall agree and specify in the Certificate of Merger (the “Effective Time”).

2.3 Effects of the Merger. At and after the Effective Time, the Merger shall have the effects set forth in the DGCL. Without limiting the generality of the foregoing and subject thereto, at the Effective Time all the property, rights, privileges, immunities, powers and franchises of the Company and Merger Subsidiary shall vest in the Surviving Corporation, and all debts, Liabilities, obligations and duties of the Company and Merger Subsidiary shall become the debts, Liabilities, obligations and duties of the Surviving Corporation.

2.4 Certificate of Incorporation and Bylaws. The certificate of incorporation and bylaws of the Company in effect immediately prior to the Effective Time shall be the certificate of incorporation and bylaws of the Surviving Corporation as of the Effective Time, until duly amended in accordance with applicable Laws.

2.5 Directors and Officers. The directors and officers of Merger Subsidiary immediately prior to the Effective Time shall be the directors and officers of the Surviving Corporation as of the Effective Time.

2.6 Conversion of Outstanding Shares. At the Effective Time, by virtue of the Merger and without any action on the part of any party or Stockholder:

(a) Each share of common stock, par value $0.001 per share, of Merger Subsidiary issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock, par value $0.001 per share, of the Surviving Corporation, so that, after the Effective Time, Purchaser shall be the holder of all of the issued and outstanding shares of the Surviving Corporation’s common stock.

(b) Each Outstanding Common Share (i) shall be converted into the right to receive the Common Stock Per Share Merger Consideration, payable (in accordance with Section 2.11 and Section 2.12) in cash to the holder thereof, without interest thereon, and to receive, if applicable, the Additional Per Share Merger Consideration in accordance with Section 11.12, and (ii) shall otherwise cease to be outstanding, shall be canceled and cease to exist; provided, however, that Dissenting Shares shall not be so converted or represent the right to receive the foregoing consideration, but the holders of such Dissenting Shares shall only be entitled to such rights as are set forth in Section 2.8.

(c) Each share of Company Common Stock held in the treasury of the Company immediately prior to the Effective Time, if any, shall be canceled without any conversion thereof, and no payment or distribution shall be made with respect thereto.

(d) Each share of Preferred Stock outstanding immediately prior to the Effective Time (each, an “Outstanding Preferred Share” and collectively, the “Outstanding Preferred Shares”) (i) shall be converted into the right to receive the Preferred Stock Per Share Total Merger Consideration and, if applicable, the Additional Per Share Merger Consideration for such share, payable (in accordance with Section 2.11, Section 2.12 and Section 11.12) in cash to the holder thereof, without interest thereon, and (ii) shall otherwise cease to be outstanding, shall be canceled and cease to exist; provided, however, that any Dissenting Shares shall not be so converted or represent the right to receive the foregoing consideration, but the holders of such Dissenting Shares shall only be entitled to such rights as are set forth in Section 2.8.

2.7 Treatment of Options. At the Effective Time, by virtue of the Merger, without any action on the part of any party and notwithstanding anything to the contrary in the Company’s 2002 Stock Incentive Plan or in any stock option agreement, (a) each Outstanding In-the-Money Option Share shall be converted into the right to receive (i) an amount equal to the product of (A) the number of Outstanding In-the-Money Option Shares previously issuable immediately prior to the Effective Time pursuant to such Option, multiplied by (B) the excess of (I) the Common Stock Per Share Merger Consideration over (II) the exercise price per share of Common Stock previously issuable pursuant to such Option (with respect to each Outstanding In-the-Money Option Share, the “Initial Option Consideration”), payable (in accordance with Section 2.11 and Section 2.12) in cash to the holder thereof and (ii) an amount equal to the product of (A) the number of Outstanding In-the-Money Option Shares previously issuable immediately prior to the Effective Time pursuant to such Option multiplied by (B) if applicable, the Additional Per Share Merger Consideration (with respect to each Outstanding In-the-Money Option Share, the “Additional Option Consideration” and together with the Initial Option Consideration, the “Option Consideration”) , payable in accordance with Section 11.12, and (b) with respect to each such Option (or portion thereof) that does not constitute an Outstanding In-the-Money Option Share, such Option (or portion thereof) shall be cancelled by the Company and terminated in full without consideration immediately prior to the Effective Time. Promptly after the execution of this Agreement and concurrent with the delivery of the Option Surrender Agreement pursuant to Section 2.12,

the Company shall give notice in writing to each holder of a vested Option (each an “Optionholder” and collectively, the “Optionholders”) outstanding immediately prior to the Effective Time of, and shall take such actions, including amending the Company’s 2002 Stock Incentive Plan and stock option agreements, as may be required to facilitate the foregoing.

2.8 Dissenters’ Rights.

(a) Promptly following the approval of this Agreement by the Stockholders, the Company shall provide each record holder of Outstanding Shares, who shall not have voted in favor of the Merger or consented thereto in writing, with notice of such holder’s appraisal rights pursuant to Section 262 of the DGCL. The Company shall give Purchaser prompt notice of any demands for appraisal pursuant to Section 262 of the DGCL received by the Company from any Stockholders, withdrawals of such demands and any other instruments served pursuant to the DGCL and received by the Company in connection therewith and the opportunity to participate in and direct all negotiations with respect to any such demand for appraisal. No later than ten (10) days following the date on which the Effective Time occurs, Purchaser and the Surviving Corporation shall provide notice of the Effective Time to each Stockholder who has neither voted in favor of the Merger nor consented thereto in writing and has not withdrawn or lost the right to the appraisal pursuant to Section 262 of the DGCL. The Company shall not, except with the prior written consent of the Purchaser, make any payment or agree to make any payment with respect to any demand for appraisal or agree to settle any such demands.

(b) Notwithstanding any provision of this Agreement to the contrary, no Outstanding Shares that are held immediately prior to the Effective Time by holders who have neither voted in favor of the Merger nor consented thereto in writing and who have demanded and perfected the right, if any, for appraisal of such Outstanding Shares in accordance with the provisions of Section 262 of the DGCL and have not withdrawn or lost such right to appraisal (collectively, the “Dissenting Shares”) shall be converted into or represent a right to receive the Common Stock Per Share Merger Consideration or Preferred Stock Per Share Total Merger Consideration, as applicable, or any other consideration pursuant to Section 2.11, Section 2.12 or Section 11.12, but the holder of such Dissenting Shares shall only be entitled to such appraisal rights as are granted by the DGCL. If a holder of Outstanding Shares who demands appraisal of such Outstanding Shares under the DGCL shall thereafter effectively withdraw or lose (through failure to perfect or otherwise) the right to appraisal with respect to such Outstanding Shares, then, as of the occurrence of such withdrawal or loss, each such Outstanding Share shall be deemed to have been converted into and represent only the right to receive, in accordance with Section 2.6, Section 2.11, Section 2.12 and (if applicable) Section 11.12, the Common Stock Per Share Merger Consideration in the case of Outstanding Common Shares or the Preferred Stock Per Share Total Merger Consideration in the case of Outstanding Preferred Shares, in each case, without interest thereon, except as otherwise provided in Section 11.12.

2.9 Closing of Transfer Books. From and after the Effective Time, the stock transfer books of the Company shall be closed and no transfer of Common Stock or

Preferred Stock shall thereafter be made. From and after the Effective Time, the holders of Stock Certificates evidencing ownership of Outstanding Shares immediately prior to the Effective Time shall cease to have any rights with respect to such Outstanding Shares, except as otherwise provided for in this Agreement or by Applicable Law. All cash paid pursuant to Article II upon surrender or exchange of Stock Certificates representing Outstanding Shares shall be deemed to have been paid in full satisfaction of all rights pertaining to such Outstanding Shares with respect to the Merger, except as otherwise provided by this Agreement or applicable Laws.

2.10 Merger Consideration. The total Merger consideration, subject to adjustment in accordance with the terms of this Agreement, paid by Purchaser in connection with the Merger is $750,000,000 (the “Total Merger Consideration”). The Total Merger Consideration shall be reduced by the aggregate sum of (a) the amount of the Company Transaction Costs as determined pursuant to Section 6.8, (b) $37,612,081, representing the mark-to-market value associated with the Hedging Agreements as of March 31, 2006, (c) the sum of $210,000,000, representing the total of the Bank Debt as of April 4, 2006, (d) reductions under Article XI below agreed to by the parties as of Closing, to the extent the same exceed the Deductible, and (e) the Escrow Amount (the Total Merger Consideration reduced by the sum of (a) through (e), the “Adjusted Total Merger Consideration”). At Closing, Purchaser shall pay the unpaid Company Transaction Costs, by wire transfer of immediately available funds, to such account or accounts as are designated by the Company in accordance with Section 6.8.

2.11 Closing Payments. Contemporaneously with the filing of the Certificate of Merger, Purchaser shall pay or cause to be paid the following amounts by wire transfers of immediately available funds, which payments shall not, in the aggregate, exceed the Adjusted Total Merger Consideration:

(a) to each Preferred Stockholder holding a Stock Certificate that immediately prior to the Effective Time represented Outstanding Preferred Shares and who has delivered to the Purchaser a completed and duly executed Letter of Transmittal and such Stock Certificate prior to the Closing, an amount equal to the product of (i) the number of Outstanding Preferred Shares previously represented by such Stock Certificate, multiplied by (ii) the Preferred Stock Per Share Total Merger Consideration for each such share;

(b) to each Common Stockholder holding a Stock Certificate that immediately prior to the Effective Time represented Outstanding Common Shares and who has delivered to the Purchaser a completed and duly executed Letter of Transmittal and such Stock Certificate prior to the Closing, an amount equal to the product of (i) the number of Outstanding Common Shares previously represented by such Stock Certificate, multiplied by (ii) the Common Stock Per Share Merger Consideration; and

(c) to each Optionholder who has delivered to the Purchaser a completed and duly executed Option Surrender Agreement prior to the Closing, an amount equal to the aggregate Option Consideration for the Outstanding In-the-Money Option Shares surrendered pursuant to the Option Surrender Agreement.

Not later than three (3) Business Days prior to Closing, the Company shall provide a detailed schedule (inclusive of wire instructions) as to all payments required at Closing under this Section 2.11. In addition to the Common Stock Per Share Merger Consideration and the Preferred Stock Per Share Merger Consideration payable under this Section 2.11, the holders of the Shares and Options may become entitled to Additional Per Share Merger Consideration in accordance with Section 11.12. Any such Additional Per Share Merger Consideration shall be paid by the Escrow Agent to holders of the Shares and Options entitled thereto in accordance with Section 11.12 and the Escrow Agreement.

2.12 Payment Related Provisions.

(a) Promptly after the execution of this Agreement, the Company shall deliver:

(i) to each record holder of Company Common Stock or Preferred Stock (A) a letter of transmittal, which shall specify that delivery shall be effected, and risk of loss and title to the Stock Certificates shall pass, only upon delivery of the Stock Certificates to Purchaser, and which letter shall be in the form attached as Exhibit C for Company Common Stock or for Preferred Stock hereto (collectively, the “Letter of Transmittal”) and (B) instructions for effecting the surrender of such Stock Certificates in exchange for the consideration such Stockholder has the right to receive pursuant to Section 2.6 and Section 2.11, as applicable; and

(ii) to each Optionholder (A) an irrevocable option cancellation agreement in the form attached as Exhibit D hereto covering the Options held by such Optionholder (the “Option Surrender Agreement”) and (B) instructions for effecting the surrender of such Options in exchange for the consideration such Optionholder has the right to receive pursuant to Section 2.7 and Section 2.11.

(b) Each Common Stockholder and Preferred Stockholder who delivers a completed and duly executed Letter of Transmittal and a Stock Certificate for cancellation to Purchaser after the Closing shall be entitled to receive from Purchaser in exchange therefor (i) the Common Stock Per Share Merger Consideration and/or the Preferred Stock Per Share Total Merger Consideration such Stockholder has the right to receive pursuant to Section 2.6, Section 2.11 and Section 11.12, as applicable, directly from Purchaser promptly after such delivery is made without interest thereon, except as otherwise provided in Section 11.12. Each Optionholder who delivers to Purchaser a duly executed Option Surrender Agreement after Closing shall be entitled to receive in exchange therefor the Option Consideration such Optionholder has the right to receive pursuant to Section 2.7, Section 2.11 and Section 11.12, as applicable, directly from Purchaser promptly after such delivery without interest thereon except as otherwise provided in Section 11.12.

(c) The Surviving Corporation shall be entitled to deduct and withhold from the consideration otherwise payable to any Stockholder or Optionholder pursuant to

this Article II any amounts as the Surviving Corporation is required to deduct and withhold with respect to the making of such payment under the Code and the rules and regulations promulgated thereunder or any provision of federal, state, local or foreign Tax law. If the Surviving Corporation so withholds amounts, such amounts shall be treated for all purposes of this Agreement as having been paid to the Stockholders or Optionholders in respect of which the Surviving Corporation made such deduction or withholding. No interest shall accrue or be paid on the cash payable upon the delivery of Stock Certificates or Option Surrender Agreements.

(d) If any Stock Certificate shall have been lost, stolen or destroyed, upon (i) the making of an affidavit of that fact by the Person claiming such Stock Certificate to be lost, stolen or destroyed and (ii) if reasonably required by Purchaser, the posting by such Person of a bond in such reasonable amount as Purchaser may direct as indemnity against any claim that may be made against Purchaser or the Surviving Corporation with respect to such Stock Certificate or the Purchaser, as applicable, will issue in exchange for such lost, stolen or destroyed Stock Certificate the consideration otherwise payable pursuant to this Article II.

2.13 Escrowed Funds.

(a) At the Closing, the sum of $35,000,000, less Article XI adjustments made at Closing pursuant to Sections 2.10(d) and 11.12 (the “Escrow Amount”) will be deducted from the Total Merger Consideration and deposited by Purchaser in escrow with the Escrow Agent in accordance with the terms of the Escrow Agreement. The Escrow Amount, together with any investment income earned thereon, shall be referred to herein as the “Escrowed Funds.” The Escrowed Funds shall be retained by the Escrow Agent and thereafter be disbursed in accordance with Section 11.12 and the Escrow Agreement. In the event of any conflict or inconsistency between the terms of the Escrow Agreement and this Agreement, the terms of the Escrow Agreement shall control. Purchaser shall be responsible for and pay any and all fees and expenses associated with the Escrow Agent or the Escrowed Funds.

(b) Until disposed of in accordance with the terms of this Agreement and the Escrow Agreement, the Escrowed Funds shall be held and invested by the Escrow Agent in (i) marketable obligations issued or unconditionally guaranteed by the United States of America or an instrumentality or agent thereof and entitled to the full faith and credit of the United States of America, or (ii) demand deposit accounts or time deposit certificates issued by the Escrow Agent, but in no event in the aggregate outstanding at any time in excess of the amount insured by the Federal Deposit Insurance Corporation. Interest earned on the Escrowed Funds shall become part of and be included in the Escrowed Funds.

2.14 Escrow Agreement. Upon execution of this Agreement, the Company and the Purchaser covenant and agree to utilize their respective best efforts to agree upon the Escrow Agent and Escrow Agreement. JPMorgan Chase Bank, N.A., shall be the Escrow Agent, unless the Purchaser or the Company determines, in good faith, that such institution’s Escrow Agreement does not contain commercially reasonable terms and

provisions. In such case, the Purchaser and the Company shall proceed in good faith to promptly choose an Escrow Agent other than JPMorgan Chase Bank, N.A. and to negotiate and agree upon the Escrow Agreement. Each Party agrees that it will not fail or refuse to close the transaction contemplated in this Agreement pursuant to Section 8.1(d) so long as the Escrow Agreement contains terms and provisions that are usual and customary in transactions of the type contemplated in this Agreement.

Article III.
Closing

3.1 Time and Place of Closing. Subject to fulfillment or waiver of all the conditions specified in Article VIII, the closing of the Merger (the “Closing”) shall take place at the offices of Pray, Walker, Jackman, Williamson & Marlar, Tulsa, Oklahoma, 100 West 5th Street, Suite 900, commencing at 10:00 a.m. local time on the later of April 28, 2006, or the fifth (5th) Business Day following the satisfaction of the condition set forth in Section 8.1(a), or as soon as possible thereafter if all the conditions specified in Article VIII have not been fulfilled or waived as of such date unless the Parties mutually agree in writing to a different date. The date upon which Closing occurs shall be referred to herein as the “Closing Date”.

3.2 Obligations of the Company At or Prior to the Closing. At or prior to Closing, the Company shall deliver to Purchaser the following:

(a) A copy of the certificate of incorporation of the Company certified as of a date within ten days of the Closing Date by the Secretary of State of Delaware and certified by the corporate secretary as to the absence of any amendments between the date of certification by the Secretary of State and the Closing Date;

(b) A certificate from the appropriate governmental officials of the state of incorporation as to the existence and if applicable, good standing of the Company and each of its Subsidiaries;

(c) A certificate of the corporate secretary of the Company attaching thereto a true and correct copy of the bylaws of the Company;

(d) A certificate of the corporate secretary of the Company attaching copies of the resolutions of the board of directors and the Stockholders of the Company approving the Merger Agreement and the Merger;

(e) The Certificate of Merger duly executed on behalf of the Company;

(f) The certificate of the Company referred to in Section 8.3(d);

(g) The Escrow Agreement duly executed on behalf of the Company;

(h) A certificate of the corporate secretary of the Company that certifies that the Company has no further obligations under the Company’s 2002 Stock

Incentive Plan other than the payment of amounts to holders of Options as contemplated by this Agreement and that the Company has no further monetary obligations under the Employment Agreements;

(i) Such other documents as are required to be delivered by the Company pursuant to this Agreement; and

(j) Not later than three (3) Business Days prior to Closing, payoff letters that commit to cancel the Bank Debt and release any and all liens against Company assets upon receipt at Closing of a sum certain.

3.3 Obligations of Purchaser at or Prior to the Closing. At or prior to the Closing, Purchaser shall deliver to the Company the following:

(a) A certificate from the appropriate governmental officials of the State of Delaware as to the existence and good standing of Purchaser as of a date within ten days of the Closing Date;

(b) A certificate from the appropriate governmental officials of the State of Delaware as to the existence and good standing of Merger Subsidiary as of the date within ten days of the Closing Date;

(c) A certificate of the corporate secretary of Merger Subsidiary attaching copies of corporate resolutions duly adopted by the board of directors and sole stockholder of Merger Subsidiary authorizing this Agreement and the consummation of the transactions contemplated hereby;

(d) The Certificate of Merger duly executed on behalf of Merger Subsidiary;

(e) The certificate of Purchaser referred to in Section 8.2(c);

(f) The Escrow Agreement, duly executed on behalf of Purchaser and Merger Subsidiary; and

(g) Such other documents as are required to be delivered by Purchaser pursuant to this Agreement.

Article IV.
Representations and Warranties of the Company

The Company hereby represents and warrants to the Purchaser and Merger Subsidiary that, except as disclosed in the applicable section of the Disclosure Schedule:

4.1 Organization and Authority.

(a) Each of the Company and its Subsidiaries is duly organized and validly existing as a corporation, limited liability company or limited partnership, as the

case may be, and (other than any Texas limited partnership) in good standing under the laws of its jurisdiction of formation. Each of the Company and its Subsidiaries has the requisite power and authority to carry on its business as now being conducted and to own, lease and operate its property and assets, and each of the Company and its Subsidiaries is duly qualified or licensed to do business and is in good standing in every jurisdiction in which the failure to be so qualified and licensed would reasonably be expected to have a Material Adverse Effect. Section 4.1 of the Disclosure Schedule sets forth the name and state of incorporation of the Company, the state of incorporation or formation of each of its Subsidiaries and each state in which each of them is qualified or licensed to do business.

(b) Subject to obtaining the requisite approval of the Stockholders, the Company has the requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated herein. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated herein have been duly and validly authorized by all necessary corporate action on the part of the Company, subject to obtaining the requisite approval of the Stockholders. The Board of Directors of the Company has adopted a resolution declaring the advisability of, and recommending that the Stockholders adopt, this Agreement. The only Stockholder approval required to approve and adopt this Agreement and the transactions contemplated hereby is the approval by (i) holders of Preferred Stock, voting separately as a single class, who collectively own of record at least a majority of the outstanding shares of Preferred Stock, (ii) holders of Common Stock, voting separately as a single class, who collectively own of record at least a majority of the outstanding shares of Common Stock, and (iii) holders of Common Stock and holders of Preferred Stock, voting together as a single class (with each share of Common Stock entitled to one vote and each share of Series A Preferred Stock entitled to one vote for each share of Common Stock issuable upon conversion of the Preferred Stock), who collectively own of record a majority of the outstanding shares of Common Stock and Preferred Stock. Except for the filing of the Certificate of Merger and the approval of this Agreement by the Stockholders, no other corporate proceedings on the part of the Company or the Stockholders are necessary to authorize this Agreement, perform its obligations hereunder or for the Company to consummate the transactions contemplated herein. Assuming that the requisite Stockholders’ approval is obtained, this Agreement has been duly and validly executed and delivered by the Company and, assuming that this Agreement constitutes the valid and binding agreement of the other parties hereto, constitutes the valid and binding obligations of the Company, enforceable against the Company in accordance with its terms and conditions, except that the enforcement hereof and thereof may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Laws now or hereafter in effect relating to creditors’ rights generally and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity.

4.2 Capitalization.

(a) The authorized, issued and outstanding capital stock of the Company and each of its Subsidiaries as of the date hereof is as set forth in Section 4.2 of the Disclosure Schedule. All of the issued shares of the Company and each of its Subsidiaries are validly issued, fully paid and nonassessable and none of such shares have been issued in violation of the preemptive rights of any Person.

(b) Except as set forth in Section 0 of the Disclosure Schedule, there are no (i) shares of capital stock or other securities bearing voting or other equity rights, whether contingent or not, of the Company or any of its Subsidiaries outstanding; (ii) outstanding subscriptions, puts, options, warrants or other rights (including preemptive rights), contractual or otherwise, to purchase or acquire any capital stock from the Company or any of its Subsidiaries, or, (iii) contracts, commitments, understandings, arrangements or restrictions by which the Company or any of its Subsidiaries is or may become bound to issue any additional equity interests or any options or rights with respect thereto, or any securities convertible into any equity interests.

(c) As of the date hereof, the issued and outstanding stock of the Company is owned of record, and to the Knowledge of the Company, beneficially, as described in Section 4.2 of the Disclosure Schedule, free and clear of all Encumbrances. The Company owns all of the issued and outstanding stock (or other ownership interests) of each of its Subsidiaries, directly or indirectly, free and clear of all Encumbrances. Except for its Subsidiaries, neither the Company nor any of its Subsidiaries own or hold any equity interest in any entity or business or any option to acquire any such interest.

4.3 No Violation. Assuming compliance with the requirements of the HSR Act, none of the execution, delivery or performance of this Agreement does or will, after the giving of notice, lapse of time or otherwise, (i) result in any violation of or be in conflict with or constitute a default under any term or provision of the certificate of incorporation or bylaws of the Company or the operating agreement or partnership agreement of any of its Subsidiaries, as applicable; (ii) result in any violation of any term or provision of any judgment, decree, order, statute, injunction, rule or regulation applicable to the Company or any of its Subsidiaries or of any note, bond, mortgage, indenture, lease, license, franchise, agreement or other instrument or obligation to which the Company or any of its Subsidiaries is bound; (iii) result in the creation of any Encumbrance upon Shares or any of the properties or assets of the Company or any of its Subsidiaries pursuant to any such term or provision; or (iv) constitute a default under, terminate, accelerate, amend or modify, or give any party the right to terminate, accelerate, or refuse to perform or comply with, any contract or agreement to which the Company or any of its Subsidiaries is a party, or by which the Company or any of its Subsidiaries or any of their rights, properties or assets may be subject or bound, except, in the case of clauses (ii), (iii) or (iv), for such violations, conflicts, Encumbrances, defaults or other events which would not reasonably be expected to have a Material Adverse Effect.

4.4 Consents and Approvals. No consent, waiver, approval or authorization of, or declaration, designation, filing, registration or qualification with, any Governmental Authorities, or any third party, is required to be made or obtained by the Company or any of its Subsidiaries in connection with the execution, delivery and performance of this Agreement except (i) those that have already been obtained, (ii) the filing of the Certificate of Merger with the Secretary of State of Delaware, (iii) the filings by required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (iv) any filings with or approvals from authorities required solely by virtue of the jurisdictions in which the Company or its Subsidiaries conduct any business or own any assets, or (v) those the failure to obtain or make would not reasonably be expected to have a Material Adverse Effect.

4.5 Violation of Laws, Permits, etc. Neither the Company nor any of its Subsidiaries is in violation of (i) applicable Laws or Permits (other than Environmental Laws and Permits under Environmental Laws as to which the Company’s exclusive representations and warranties are made in Section 4.10); or (ii) any term, condition or provision of any agreement, note, bond, mortgage, contract, franchise or license to which it or the Subsidiaries are a party or any of its or the Subsidiaries’ assets are bound, other than in the cases of clauses (i) and (ii) of this Section, such violations which would not reasonably be expected to have a Material Adverse Effect.

4.6 Financial Statements. The Financial Statements fairly present in all material respects the consolidated financial position of the Company and its subsidiaries as of the dates thereof and the consolidated results of their operations for the respective periods ended on such dates, all in conformity with GAAP consistently applied, except as otherwise indicated.

4.7 No Undisclosed Liabilities. To the Company’s Knowledge and as of the date of this Agreement, neither the Company nor any of its Subsidiaries have any liabilities, whether direct, indirect, absolute or contingent, that would be required to be presented in a balance sheet prepared in conformity with GAAP as of the date hereof, except (a) liabilities that are fully reflected on or reserved against on the latest balance sheet included in the Financial Statements, (b) liabilities incurred in the ordinary course of business since the date of the latest balance sheet included in the Financial Statements that are consistent with past practice, or (c) for liabilities which would not reasonably be expected to have a Material Adverse Effect.

4.8 Absence of Certain Changes. To the Company’s Knowledge and for periods since the date of the latest balance sheet included in the Financial Statements through the date of this Agreement, neither the Company nor any of its Subsidiaries has:

(a) Suffered any Material Adverse Effect;

(b) Adopted or made any material change in any pension, retirement, profit sharing or other employee benefit plan or arrangement;

(c) Borrowed or agreed to borrow any money or incurred, assumed or become subject to, whether directly or by way of guarantee or otherwise, any other obligation or liability for borrowed money, whether absolute, contingent, known, unknown, or otherwise;

(d) Except as contemplated in Section 6.6, (i) issued, purchased or redeemed any of its capital securities or any option, warrant or right to purchase any of the same; (ii) authorized, declared or paid stock dividends; or (iii) authorized, declared or made any dividends, distributions of earnings or capital on, or splits or any other reclassification of its equity securities;

(e) Mortgaged, pledged or subjected to any material Encumbrance any material portion of its assets, tangible or intangible other than Permitted Encumbrances;

(f) Acquired or disposed of, or entered into any agreement to acquire or dispose of, any material assets or properties, other than in the ordinary course of business or as described in Section 6.6;

(g) Increased in any material respect the salaries, compensation, pension or other benefits payable to its officers and directors;

(h) Forgiven or cancelled any material debts or claims or waived any material rights against any Person;

(i) Entered into, terminated or received notice of the termination of any commitment, contract, agreement or transaction that is material to the Company and its Subsidiaries, taken as a whole; or

(j) Agreed, either in writing or otherwise, to take any action described in this Section 4.8.

4.9 Title to Property; Encumbrances.

(a) The Company or its Subsidiaries have Defensible Title to the Major Properties.

(b) The Company or its Subsidiaries have Defensible Title to the Miscellaneous Interests except to the extent the failure to have such Defensible Title would not reasonably be expected to have a Material Adverse Effect.

(c) The Company or its Subsidiaries have Defensible Title to all properties and assets, real, personal and mixed, tangible and intangible (other than Major Properties and the Miscellaneous Interests), reflected as owned on the latest balance sheet included in the Financial Statements or acquired after the date of such balance sheet, except for properties and assets disposed of since the date of such balance sheet in the ordinary course of business and except for matters that would not reasonably be expected to have a Material Adverse Effect.

(d) The properties and assets described in (a) and (b) above are free and clear of any and all Encumbrances, except the Permitted Encumbrances. The properties and assets described in (c) above are free and clear of any and all Encumbrances except for Encumbrances which would not reasonably be expected to have a Material Adverse Effect.

4.10 Environmental Matters.

(a) The Company and its Subsidiaries and the operation of the business are not in violation of any applicable Environmental Law other than such violations that would not reasonably be expected to have a Material Adverse Effect.

(b) The Company and its Subsidiaries (i) are not subject to any consent decree, compliance order, or administrative order issued pursuant to applicable Environmental Laws, and (ii) have not received written notice request for information, notice of violation, demand letter, administrative inquiry, complaint or claim from any Governmental Authorities pursuant to any Environmental Law, other than the foregoing that would not reasonably be expected to have a Material Adverse Effect.

(c) The Company and its Subsidiaries have not released Hazardous Substances into the environment in connection with the operation of the business except for such releases that would not reasonably be expected to have a Material Adverse Effect.

4.11 Royalties. To the Company’s Knowledge (i) all payments (including royalties, delay rentals, shut-in royalties, payments due under unit or operating agreements but excluding royalties or other payments on production held in suspense by the Company or its Subsidiaries for a justifiable purpose) due under the Leases included in the Major Properties have been made, and (ii) no notices have been received by the Company or its Subsidiaries of any claim to the contrary.

4.12 Current Commitments; Imbalances. To the Knowledge of the Company:

(a) Except as set forth in Section 4.12(a) of the Disclosure Schedule, there are no outstanding authority for expenditures (“AFEs”) (i) covering operations conducted or to be conducted by third parties, or (ii) covering work in progress or work not yet started by the Company, respecting which the Company anticipates that expenditures will be made prior to May 15, 2006.

(b) As of the date of this Agreement, there are no material gas imbalances, individually or in the aggregate, between the Company or its Subsidiaries and any third party working interest owners with respect to any of the Major Properties. Notwithstanding anything to the contrary in the preceding sentence or this Agreement, due to the difficulty in ascertaining imbalances without the agreement of all other parties involved, the Company makes no representation or warranty with respect to (a) the accuracy of the volumes of the imbalances set forth on the Disclosure Schedule other than that such volumes have been calculated in a manner consistent with the past

practices of the Company and its Subsidiaries or (b) any pipeline gas imbalances between the Company or its Subsidiaries and any third party pipeline.

4.13 Sales and Transportation Agreements. With respect to the oil or gas product purchase and sale contracts and gas processing, gathering or transportation agreements included in the Interests (the “Gas Contracts”):

(a) The Company is not obligated by virtue of any prepayment arrangement under any of the Gas Contracts and containing a “take or pay” or similar provision or a production payment or any other arrangement to deliver Hydrocarbons produced from the Interests at some future time without then or thereafter receiving full payment therefor;

(b) All material payments for gas sold pursuant to each of the Gas Contracts are current (subject to adjustment in accordance with the Gas Contracts) and in accordance with the prices set forth in the Gas Contracts; and

(c) No purchaser under any of the Gas Contracts has communicated to the Company (or to the Knowledge of the Company the operator of the subject Interests) its intent to cancel, terminate or renegotiate any of the Gas Contracts or otherwise to fail or refuse to take or pay for gas in the quantities and at the price set out in any of the Gas Contracts whether such failure or refusal was pursuant to any force majeure, market-out or any similar provision contained in any of the Gas Contracts or agreement or otherwise.

4.14 Tax Partnerships. The Company or its Subsidiaries have not filed any federal or state income tax returns identifying the Interests as held by any tax partnership.

4.15 No Funds in Suspense. To the Knowledge of the Company, all material proceeds from the sale of Hydrocarbons produced from the Major Properties are as of the date hereof being paid to the Company or its Subsidiaries and no portion of such proceeds is currently being held in suspense by any purchaser thereof or any other party by whom proceeds are paid.

4.16 Litigation. There is no action, proceeding, investigation or inquiry pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or their assets or business, including any by or before any Governmental Authority, that would reasonably be expected to result in a Material Adverse Effect.

4.17 Tax Returns and Payments. Except as would not reasonably be expected to result in a Material Adverse Effect:

(a) (i) all Tax Returns which were required to be filed by or with respect to any of the Company and its Subsidiaries have been duly and timely filed, (ii) all items of income, gain, loss, deduction and credit or other items (“Tax Items”) required to be included in each such Tax Return have been so included, (iii) all Taxes shown on each such Tax Return have been timely paid in full, (iv) no penalty, interest or

other charge is or will become due with respect to the late filing of any such Tax Return or late payment of any such Tax, and (v) all Tax withholding and deposit requirements imposed on or with respect to any of the Company and its Subsidiaries have been satisfied in full in all respects.

(b) None of the Company and its Subsidiaries has in force any waiver of any statute of limitations in respect of Taxes or any extension of time with respect to a Tax assessment or deficiency.

(c) None of the Company and its Subsidiaries is a party to any Tax allocation or sharing agreement with other members of the Company Group (other than the Company and its Subsidiaries) that will survive the Closing.

(d) To the Knowledge of the Company, there are no pending written proposed deficiencies or other written claims for unpaid Taxes of the Company or its Subsidiaries.

(e) To the Knowledge of the Company, all of the producing wells which comprise a part of the Major Properties (the “Producing Wells”) have been included on the property Tax rolls of the Tax jurisdictions in which such Major Properties are located.

4.18 Insurance. The Disclosure Schedule contains a true, correct, and complete description as of the date hereof of all policies of fire, casualty and extended coverage, public liability, products liability, worker’s compensation and other forms of insurance owned or held by the Company and its Subsidiaries.

4.19 Bank Accounts. The Disclosure Schedule sets forth the names and locations of all bank institutions at which the Company and its Subsidiaries maintain accounts or lock boxes of any nature, the account or box number and the names of all Persons authorized to draw thereon or make withdrawals therefrom.

4.20 Contracts.

(a) The Disclosure Schedule contains a complete and correct list as of the date hereof of all agreements, contracts and commitments of the following types (and all amendments thereto), written or oral, to which the Company or any of its Subsidiaries is a party or by which any of their properties is bound (excluding Leases and contracts or agreements creating or resulting in real property interests other than commercial office leases):

(i) any note, agreement, mortgage, indenture, security agreement or other instrument relating to the borrowing of money or evidence of credit or the deferred purchase price of property, or the direct or indirect guarantee by such entities of any such indebtedness or deferred purchase price in excess of $100,000;

(ii) any lease of property providing for payments under any such lease at an annual rate in excess of $100,000;

(iii) any partnership or joint venture agreement providing for any capital contribution or expenditure at an annual rate in excess of $1,000,000;

(iv) any material management, employment and consulting agreement or other contract for personal services that is not terminable by any of such entities on not more than one month’s notice without penalty;

(v) any agreement providing for liability for severance pay, collective bargaining agreements, labor contracts, or labor or personnel policies;

(vi) any surety, performance and maintenance bond or letter of credit in excess of $100,000;

(vii) any agreement or commitment for capital expenditures in excess of $1,000,000, for any single project (it being represented and warranted that the liability for capital expenditures under all undisclosed agreements and commitments does not exceed $2,500,000 in the aggregate for all projects);

(viii) any plan, contract or arrangement providing for bonuses, pensions, deferred compensation, retirement plan payments, profit sharing, incentive pay, or for any other employee benefit plan;

(ix) any brokerage or finder’s agreement;

(x) any agreement that (a) restricts the right of such entities to engage in any place in any line of business, other than in the ordinary course of business or (b) would restrict the right of the Surviving Corporation or any subsidiary of the Surviving Corporation to engage in any line of business after the Closing Date, other than in the ordinary course of business;

(xi) any contract, commitment or agreement that involves the disposition after December 31, 2005 of any assets of any of such entities not in the ordinary course of business;

(xii) other than as contemplated in Section 6.6, any contract, commitment or agreement between any of such entities and

any Stockholder which will require payments over the remaining term of such contract, commitment or agreement (without regard to any extensions of such term at the option of the Company or its Subsidiaries) in excess of $1,000,000 (other than those that will be terminated on or prior to Closing);

(xiii) any Oil and Gas Contract which requires any of the Company or its Subsidiaries to expend more than $1,000,000 in any calendar year;

(xiv) any other agreement, contract or commitment that would require payment by the Company or its Subsidiaries of more than $1,000,000 during the remaining term of such agreement, contract or commitment (without regard to any extensions of such term at the option of the Company or its Subsidiaries); and

(xv) any Hedging Agreement.

(b) Upon request, the Company will make available to Purchaser complete and correct copies of all written agreements, contracts and commitments, together with all amendments thereto, described in subparagraph (a). To the Knowledge of the Company, all parties to such agreements, contracts and commitments have performed all obligations required to be performed by them to date thereunder and are not in default thereunder other than such failures to perform and defaults as would not reasonably be expected to result in a Material Adverse Effect.

4.21 Employee Matters.

(a) The Company will promptly make available to Purchaser (i) the names, job titles and current annual compensation rates of all directors, officers, employees, and independent contractors of the Company and its Subsidiaries as of the date of this Agreement; and (ii) copies of the Employment Agreements, which the Company represents constitute all employment agreements with any employee of the Company and its Subsidiaries as of the date of this Agreement. Except as provided in the Severance and Retention Policies, there are no bonuses or other amounts payable to any employee of the Company and its Subsidiaries upon termination of such employee’s employment, whether in connection with the consummation of the transaction contemplated by this Agreement or thereafter.

(b) For all purposes of this Section, “Plan” means any employee benefit plan as defined in Section 3(3) of the ERISA which is maintained by the Company or any of its Subsidiaries or to which the Company or any of its Subsidiaries is making or accruing an obligation to make contributions. The Disclosure Schedule provides a description of each Plan.

(c) Each Plan is now, and has been from its inception, administered in compliance with the provisions of all applicable laws and regulations, including ERISA and the Code, insofar as such statutes are applicable to such Plan, except for such non-compliance that would not reasonably be expected to result in a Material Adverse Effect.

(d) There are no actions, suits or claims pending (other than routine claims for benefits) with respect to any of the Plans or their assets that would reasonably be expected to result in a Material Adverse Effect.

(e) No act, omission or transaction has occurred with respect to any of the Plans which would result in breach of fiduciary duty liability damages or prohibited transaction penalties or taxes that would reasonably be expected to result in a Material Adverse Effect.

(f) No Plan provides retiree medical or retiree life insurance benefits to former employees of the Company.

(g) To the Knowledge of the Company, the Company and its Subsidiaries are in compliance with all Laws relating to the employment of labor, including all such Laws relating to wages, hours, collective bargaining, discrimination, civil rights, safety and health, workers’ compensation and the collection and payment of withholding or social security taxes and similar taxes, other than the non-compliance with which would result in a Material Adverse Effect. The Company and the Subsidiaries have not received any citations or complaints or other claims or notices relating to the workplace, employee working conditions, or other similar matters that would reasonably be expected to result in a Material Adverse Effect.

(h) None of the Company or the Subsidiaries is a party to any labor or collective bargaining agreement respecting its employees. No labor organization or employee has made a pending demand for recognition, there are no representation proceedings pending with a labor relations tribunal, and there is no threatened organizing activity respecting the employees. There are no pending strikes, work stoppages, slow-downs, lockouts, or other labor disputes respecting the employees.

4.22 Brokers, Finders and Advisors. The Company has employed Randall & Dewey, a division of Jefferies & Company, Inc., to provide transactional and financial advice to the Company in connection with the transaction contemplated hereby, the fees and expenses of which shall be Company Transaction Costs. Neither the Company nor any of the Stockholders has employed any other broker, finder or investment advisor on its behalf or incurred any liability for any brokerage or finder’s fees or commissions, in connection with the transaction contemplated hereby for which the Purchaser or Merger Subsidiary will have any liability.

4.23 Property Operation. To the Company’s Knowledge: (i) the Producing Wells operated by the Company have been drilled, completed, operated, developed and produced in material compliance with all applicable judgments, orders, laws, rules and regulations; and (ii) all necessary certificates, consents, permits, licenses and other

governmental authorizations affecting the Major Properties have been obtained and are in force or the failure to obtain or to be in force would not constitute a Material Adverse Effect.

4.24 Take-or-Pay. To the Company’s Knowledge, the Company is not obligated, under a take-or-pay or similar arrangement, or by virtue of an election to non-consent or to not participate in a past or current operation on the Major Properties pursuant to the applicable operating agreements, to produce Hydrocarbons, or allow Hydrocarbons to be produced, without receiving full payment at the time of delivery in an amount that corresponds to the Net Revenue Interest in the Hydrocarbons described on Exhibit A.

4.25 Timely Payment. To the Company’s Knowledge, the Company is timely receiving its share of proceeds from the sale of Hydrocarbons produced from the Producing Wells without suspense, counterclaim or set-off. To Company’s Knowledge, there has been no production of Hydrocarbons from the Producing Wells in excess of the allowable production established pursuant to applicable state or federal law or regulation that would result in a restriction on production from the Producing Wells subsequent to the Effective Time.

4.26 Outstanding Obligations. To the Company’s Knowledge, there are no outstanding authorizations for expenditures or any written commitments or proposals to conduct operations on the Major Properties which are required to be approved by non-operators under the terms of the applicable operating agreement.

4.27 Condemnation. To the Company’s Knowledge, there is no actual or threatened taking (whether permanent, temporary, whole, or partial) of any part of the Major Properties or the Miscellaneous Interests by reason of condemnation or the threat of condemnation.

4.28 Bankruptcy. There are no bankruptcy, reorganization, or similar arrangement proceedings pending, being contemplated by the Company, or, to the Company’s Knowledge, threatened against Company.

4.29 Wells. To the Company’s Knowledge, there are no unplugged, temporarily abandoned, or temporarily shut-in Wells situated on the Major Properties or the Miscellaneous Interests that would reasonably be expected to constitute a Material Adverse Effect.

4.30 Calls on Production. To the Company’s Knowledge, there are no calls on production or other similar marketing restrictions affecting the Major Properties or the Miscellaneous Interests that would reasonably be expected to constitute a Material Adverse Effect.

4.31 Transactions With Affiliates. Other than contracts which the Company may have with portfolio companies of either Warburg, Pincus & Co. or J.P. Morgan Partners which are not material to the Company, other than commercial banking

arrangements with affiliates of J.P. Morgan Partners and other than the Partnership ORRI, there are no contracts or agreements between the Company or any of its Subsidiaries and any Affiliate of the Company: (i) the termination of which at or after the Closing would materially increase the cost of ownership of or materially reduce (below that existing on the Financial Statements) the economic benefit to the Company or the Subsidiaries of any of their respective assets; or (ii) that will survive the Closing. Except for the Partnership ORRI and as set forth in Section 4.31 of the Disclosure Schedule and except for transfers among the Company and its Subsidiaries, no transfers of assets to the Company from any Affiliate of the Company or its Subsidiaries have been made within the twelve (12) month period immediately preceding the date of this Agreement.

4.32 Indebtedness to and from Officers, Directors and Others. Except for Preferred Stock and the obligations described in Section 4.32 of the Disclosure Schedule, neither the Company nor its Subsidiaries is, to the Company’s Knowledge, indebted to any of its current or former owners, directors, officers, employees or agents, or their respective family members, heirs, legatees, beneficiaries or legal representatives, except for amounts due as normal salaries and reimbursement of normal expenses, all on current basis consistent with past practices. No present or former director, officer, employee or agent of the Company or the Subsidiaries is, to Company’s Knowledge, indebted to any of the Company or its Subsidiaries.

4.33 Accounts Receivable. Except as set forth in Section 4.33 of the Disclosure Schedule, and subject to creditors’ rights described in clauses (i) and (ii) of the last sentence of Section 4.1, all accounts receivable reflected on the Financial Statements, and all accounts receivable which have arisen since the date of the Financial Statements (in each case, net of any reserves established), are, to the Company’s Knowledge: (i) valid and enforceable claims, and (ii) subject to no known defenses, setoffs or counterclaims.

4.34 Intellectual Property. To the Knowledge of the Company, the activities, products and services of the Company or its Subsidiaries have not and do not infringe upon, misappropriate, dilute (in the case of trademarks), and/or otherwise violate, or constitute the unauthorized use of, the intellectual property of any other person in any manner that could reasonably be expected to constitute a Material Adverse Effect.

4.35 No Continuing Rights/Obligations. Other than portfolio companies of either Warburg, Pincus & Co. or J.P. Morgan Partners which may own interests in certain Wells or units which are included in the Major Properties or the Miscellaneous Interests and other than the Partnership ORRI, from and after the Effective Time, except as specifically provided herein, no holder of any Common Stock or Preferred Stock or other ownership interest in the Company or any current or former director, officer, employee or agent of any of the Company or the Subsidiaries will, to the Company’s Knowledge, have any further or continuing interest in or with respect to the Major Properties or Miscellaneous Interests, any debt or equity security of any of the Company or the Subsidiaries or, except in connection with any employment of such Person by any of the Company or the Subsidiaries after the Effective Time, any subsequent business activity or enterprise of any of the Company or the Subsidiaries.

4.36 Preferential Rights. To the Knowledge of the Company, there are no preferential rights to purchase or similar rights in favor of third parties with respect to the Major Properties or Miscellaneous Interests that will become operative in connection with the consummation of the Merger.

4.37 Investment Company Act. The Company is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

4.38 PUHCA. The Company is not a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of a “holding company” or of a “subsidiary company” of a “holding company” within the meaning of the Public Utility Holding Company Act of 1935, as amended, and the rules and regulations promulgated thereunder.

4.39 Foreign Person. At Closing, to the Knowledge of the Company, no stockholder of the Company shall be a “foreign person” within the meaning of Section 1445 of the Code.

Article V.
Representations and Warranties of Purchaser and Merger Subsidiary

Purchaser and Merger Subsidiary hereby represent and warrant to the Company as follows:

5.1 Organization. Purchaser is duly organized, validly existing and in good standing under the laws of Delaware and Merger Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and each of Purchaser and Merger Subsidiary has all requisite corporate power and authority to carry on its business as now being conducted and is duly qualified to do business as a foreign corporation and is in good standing to conduct business in each jurisdiction in which the business it is conducting, or the operation, ownership or leasing of its properties, makes such qualification necessary, other than in such jurisdictions where the failure so to qualify would not materially impair the ability of Purchaser and Merger Subsidiary to consummate the transactions contemplated in this Agreement. Purchaser directly owns all of the issued and outstanding capital stock of Merger Subsidiary free and clear of all Encumbrances. A true, correct and complete copy of Purchaser’s certificate of incorporation and bylaws and the certificate of incorporation and bylaws of Merger Subsidiary, as in effect on the date of this Agreement, has been furnished to the Company or its representatives.

5.2 Authority.

(a) Subject to obtaining the requisite approval of Purchaser, as sole stockholder of Merger Subsidiary (which will occur immediately after the execution and delivery of this Agreement), each of Purchaser and Merger Subsidiary has all requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the transactions contemplated herein. Subject to obtaining

the requisite approval of Purchaser, as sole stockholder of Merger Subsidiary (which will occur immediately after the execution and delivery of this Agreement), the execution, delivery and performance of this Agreement by each of Purchaser and Merger Subsidiary and the consummation of the transactions contemplated herein have been duly and validly authorized by all necessary corporate and stockholder action on the part of Purchaser and Merger Subsidiary. Except for filing the Certificate of Merger and obtaining the approval of this Agreement by Purchaser, as sole stockholder of Merger Subsidiary, no other proceedings on the part of Purchaser or Merger Subsidiary are necessary to authorize this Agreement, to perform Purchaser’s or Merger Subsidiary’s obligations hereunder or for Purchaser and Merger Subsidiary to consummate the transactions contemplated herein. This Agreement has been, or upon execution and delivery will be, duly and validly executed and delivered by each of Purchaser and Merger Subsidiary, as applicable, and, assuming that this Agreement constitutes the valid and binding agreement of the other parties thereto, constitute, or upon execution and delivery will constitute, the valid and binding obligations of Purchaser and Merger Subsidiary, enforceable against Purchaser and Merger Subsidiary in accordance with its terms and conditions, except that the enforcement hereof and thereof may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors’ rights generally and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity).

(b) Assuming compliance with the requirements of the HSR Act, none of the execution, delivery or performance of this Agreement does or will, after the giving of notice, lapse of time or otherwise, (i) result in any violation of or be in conflict with or constitute a default under any term or provision of the certificate of incorporation or bylaws of Purchaser or Merger Subsidiary, (ii) result in any violation of any term or provision of any judgment, decree, order, statute, injunction, rule or regulation applicable to Purchaser or Merger Subsidiary or of any material note, bond, mortgage, indenture, lease, license, franchise, agreement or other instrument or obligation to which Purchaser or Merger Subsidiary is bound; or (iii) result in the creation of any Encumbrance upon any of the properties or assets of Purchaser or Merger Subsidiary pursuant to any such term or provision; or (iv) constitute a default under, terminate, accelerate, amend or modify, or give any party the right to terminate, accelerate, or refuse to perform or comply with any material contract or agreement to which Purchaser or Merger Subsidiary is a party, or by which Purchaser or Merger Subsidiary or any of the rights, properties or assets of Purchaser or Merger Subsidiary may be subject or bound, except, in the case of clauses (ii), (iii) or (iv), for such violations, conflicts, Encumbrances, defaults or other events which would not reasonably be expected to prevent or delay the consummation of the Merger or to materially and adversely affect the business or financial condition of Purchaser.

5.3 Consents and Approvals. Except for consents already obtained and the filings of the Certificate of Merger with the Secretary of State of Delaware, no consent, waiver, approval or authorization of, or declaration, designation, filing, registration or qualification with, any Governmental Authorities, or any third party, is required to be

made or obtained by Purchaser or Merger Subsidiary in connection with the execution, delivery and performance of this Agreement, except (i) those that have already been obtained, (ii) the filing of the Certificate of Merger with the Secretary of State of Delaware, (iii) the filings by Purchaser and Merger Sub required by the HSR Act, and (iv) the applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder.

5.4 Litigation. There are no actions, suits, proceedings or governmental investigations or inquiries pending, or to the Knowledge of Purchaser, threatened against Purchaser or Merger Subsidiary or any of their Affiliates or their respective properties, assets, operations or business seeking to prevent the consummation of the transactions contemplated hereby.

5.5 Investment Intent; Investment Experience. Purchaser is acquiring the Shares for its own account and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act. Purchaser acknowledges that it is able to fend for itself, can bear the economic risks involved in acquiring the equity interests of the Company and has such knowledge and experience in financial, business and oil and gas matters that it is capable of evaluating the merits and risks of the acquisition of the equity interests of the Company. Purchaser is an “accredited investor” as such term is defined in Regulation D under the Securities Act.

5.6 Brokers, Finders and Advisors. Neither Purchaser nor Merger Subsidiary has employed any broker, finder or investment advisor on its behalf or incurred any liability for any brokerage or finder’s fees or commissions, in connection with the transaction contemplated hereby for which the Company or any of the Stockholders will have any liability.

5.7 Financing. Purchaser has, and at the Closing will have, sufficient cash or sources of immediately available funds to enable it to pay, or cause to be paid, the Total Merger Consideration when required hereunder, and to repay or make satisfactory arrangements for the assumption of the Bank Debt in full.

Article VI.
Actions of the Company Prior to the Closing Date

6.1 Affirmative Covenant. From and after the date hereof to the Closing Date (“Interim Period”), the Company, except as restricted in Section 6.2 below and as otherwise set forth in Section 6.1 of the Disclosure Schedule and Section 6.6 hereof, covenants that, unless the prior written consent of Purchaser is first obtained, which consent shall not be unreasonably withheld, the Company and its Subsidiaries will carry on their respective businesses in the ordinary course in substantially the same manner as heretofore conducted and, to the extent consistent with such businesses, use all reasonable efforts to (i) preserve intact their respective present business organizations, (ii) keep available the services of their respective present officers and key employees and (iii) preserve their respective relationships with customers, suppliers and any others having business dealings with them (iv) cause the Major Properties operated by the

Company to be developed, maintained or operated in a manner consistent with prior operations and in compliance with good operating standards and in accordance with the terms and conditions of the applicable Leases, laws and regulations and will regularly consult with Purchaser with respect to same; (v) not abandon any part of the Major Properties (except the abandonment of nonproducing Leases upon the expiration of their respective terms); (vi) ensure the payment of all rentals, royalties, overriding royalties and other payments due with respect to the Major Properties operated by the Company; (vii) maintain all insurance now in force with respect to the Company and the Major Properties; (viii) maintain all material permits, approvals, bonds, and guaranties affecting the Major Properties, and make all filings that the Company is required to make under applicable law with respect to the Major Properties; (ix) maintain books of account and records with regard to the Major Properties in accordance with the Company’s past practices; (x) pay its share of all costs and expenses attributable to the Major Properties in accordance with past practices; (xi) promptly notify Purchaser of any written notice of default (or written threat of default) received or given by the Company with respect to the Major Properties; (xii) not transfer, convey or encumber (except for Permitted Encumbrances) any of the Major Properties; and (xiii) terminate the Employment Agreements and prevent any future grants of incentive stock, options or other rights under the 2002 Stock Incentive Plan.

6.2 Negative Covenants. From and after the date hereof to the Closing Date, except with the prior written consent of Purchaser, and except as otherwise set forth in Section 6.2 of the Disclosure Schedule, which consent shall not be unreasonably withheld, the Company and its Subsidiaries will not:

(a) Take any action that if taken prior to the date hereof and after December 31, 2005 would have been required to be disclosed in the Disclosure Schedule with respect to the matters referred to in Sections 4.8(b) [Material Change in Employee Benefit Arrangements], 4.8(c) [Borrowings] (other than additional Bank Debt borrowings), 4.8(d) [Sale and Purchases of securities; dividends] (other than issuance of Shares upon the exercise of Options and other than distribution of the Royalty Partnership), 4.8(e) [Encumbrances], 4.8(f) [Acquisitions and Dispositions], 4.8(g) [Compensation], or 4.8(h) [Claims and Rights].

(b) Enter into any transaction other than in the ordinary course of business;

(d) Make any material change in the conduct of its business or operations;

(e) Amend in any material respect any contract or agreement except where such amendment will not have a Material Adverse Effect;

(f) Declare or pay any dividends in respect of its equity securities except as set out in the Disclosure Schedule or Section 6.6;

(g) Merge into or with or consolidate with any other Person or acquire all of substantially all of the business or assets of any Person;

(h) Purchase any securities of any Person;

(i) Commit to any new operations reasonably anticipated by the Company to require future capital expenditures by the Company in excess of $100,000;

(j) Run pipe (except in the ordinary course of business) or plug or abandon any well;

(k) Fail to participate in any proposed operation;

(l) Enter into any new employment contracts with existing or new employees, or amend any existing employment contracts in any material respect;

(m) Issue any additional capital stock, warrants, etc. other than pursuant to the exercise of outstanding Options; or

(n) Commit itself to do any of the foregoing.

6.3 Consents. The Company and its Subsidiaries will use their Reasonable Efforts to obtain any consents from third parties necessary or appropriate to effectuate the transactions contemplated by this Agreement.

6.4 Regulatory and Other Authorizations; Notices and Consents. Upon the terms and subject to the conditions hereof, each of the parties hereto shall (a) use all commercially reasonable efforts to take, or cause to be taken, all appropriate action and do, or cause to be done, all things necessary, proper or advisable under applicable Laws or otherwise to consummate and make effective the Merger and the other transactions contemplated by this Agreement, (b) use all commercially reasonable efforts to obtain from Governmental Authorities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by the Purchaser or the Company or any of their subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the Merger and the other transactions contemplated by this Agreement and (c) use all commercially reasonable efforts to make all necessary filings, and thereafter make any other required submissions with respect to this Agreement, the Merger and the other transactions contemplated by this Agreement required under the HSR Act (including a joint request for early termination) and any other applicable Law. The parties hereto shall cooperate with each other in connection with the making of all such filings and the Company and Purchaser shall equally share the filing fees incurred under the HSR Act.

6.5 Access to Properties and Records. Subject to the terms and conditions of that certain Confidentiality Agreement dated March 3, 2006 and subject to any confidentiality

obligations that the Company or its Subsidiaries owe to third parties, from and after the date of this Agreement through the earlier of the Closing or the termination of this Agreement, the Company and its Subsidiaries shall (a) provide Purchaser access to all books, Records and documents, including contracts, agreements, consents, settlements, maps, revenue and expense information, production data and geological and geophysical data relating to the Interests, and (b) afford to Purchaser and its officers, attorneys, accountants and other authorized representatives access to the offices, files, properties, books and Records of the Company and its Subsidiaries, together with access to appropriate Company personnel capable of answering questions about the Company and its Subsidiaries. Notwithstanding the foregoing, neither Purchaser nor its representatives shall have right of access to, and the Company shall have no obligation to provide and may destroy if it so decides, bids received from others in connection with the transactions contemplated by this Agreement and information and analysis (including financial analysis) relating to such bids. Purchaser shall indemnify, defend and hold harmless the Company and its Affiliates from and against any Losses or claims asserted or suffered by any of them resulting from, or arising out of, examinations made by Purchaser or its authorized representatives pursuant to this Section 6.5. The Company agrees to provide the access provided for in this Section 6.5 for at least the following hours: Until two days prior to the Pre-Closing Claim Date, such access shall be from 7:00 a.m. until midnight Monday through Friday, and from 8:00 a.m. until 7:00 p.m. Saturday and Sunday. Thereafter, such access shall, upon Purchaser’s request, be on a 24-hour basis until the Pre-Closing Claim Date. Notwithstanding the preceding two sentences, the Company shall only be required to make (i) its offices accessible to Purchaser during regular business hours, and (ii) its personnel available during regular business hours (and by telephone during other reasonable hours). Requests by Purchaser for data and information shall be submitted during regular business hours (i.e., 8:00 a.m. to 5:00 p.m. CDST) and the Company shall use its best efforts to promptly respond to Purchaser’s requests.

6.6 Distribution of Royalty Partnership. The Company is the sole owner of RSR and RSR Holdings, the general partner and limited partner, respectively, of Ranches South Royalty, LP (collectively, the “Royalty Partnership”). The Royalty Partnership owns an overriding royalty interest (“Partnership ORRI”) in certain undeveloped leases of the Company in Hutchinson and Roberts Counties, Texas (the “Ranches South Leases”). The Partnership ORRI in the Ranches South Leases is the difference between the base royalty of the applicable lease and 75%. The Company will retain a 75% NRI, proportionately reduced, in all of the Ranches South Leases and the Partnership ORRI will not be applicable to any proration units within the Ranches South Leases which are producing as of the date of this Agreement. A list of the Ranches South Leases and the respective Partnership ORRI is set forth at Schedule 6.6(A) and a list of any producing units excluded from the Partnership ORRI is set forth at Schedule 6.6(B). Purchaser and Merger Subsidiary each acknowledge that the value of the Partnership ORRI is not included within the Total Merger Consideration and the Partnership ORRI is not intended to be acquired by Purchaser as a part of the transaction contemplated herein. The Company shall distribute the Partnership ORRI to the Stockholders and Optionholders in accordance with Schedule 6.6(A) immediately prior to the Effective Time.

6.7 Termination of Agreements. Prior to the Closing, the Company shall take such action as may be necessary to cause the Stockholders’ Agreement to be terminated in full and of no further force or effect as of and after the Effective Time, and shall have presented Purchaser with evidence reasonably satisfactory to Purchaser of such termination.

6.8 Company Transaction Costs. Not later than two (2) Business Days prior to the Closing Date, the Company shall provide to Purchaser the amount, in the aggregate, of all Company Transaction Costs that are to be paid or caused to be paid by Purchaser at Closing and shall provide Purchaser with a certificate setting forth (a) the identity of each Person that is to be paid at Closing; (b) the amount owed or to be owed to each such Person; and (c) the bank account and wire transfer information for each such Person.

6.9 Stockholder Representative. Not later than two (2) Business Days prior to the Closing Date, the Company shall provide notice to Purchaser of the identity of the Stockholder Representative (including in such notice the address and contact information for such Stockholder Representative), for purposes of Article XI and as otherwise contemplated in this Agreement.

Article VII.
Actions of Purchaser and Merger Subsidiary
Prior to and Following the Closing Date; Indemnification Provisions

7.1 Affirmative Covenants. Prior to the Closing Date, Purchaser and Merger Subsidiary covenant that, unless the prior written consent of the Company is first obtained, neither Purchaser nor Merger Subsidiary will take any action which could reasonably be expected to delay or prevent the consummation of the Merger.

7.2 Reasonable Efforts. Purchaser and Merger Subsidiary will use their Reasonable Efforts to cause to be fulfilled those of the conditions to the Company’s obligations to consummate the transactions contemplated by this Agreement that are dependent upon their actions and to execute and deliver such instruments and take such other actions as necessary or appropriate in order to carry out the intent of this Agreement.

7.3 Employee Benefits. From and after the Effective Time and until such time as all Company employees retained by Surviving Corporation have been transitioned to and become participants in Surviving Corporation’s employee benefit plans, Purchaser and the Surviving Corporation agree as follows (subject to applicable Law and except as contemplated hereby): (i) Purchaser and the Surviving Corporation will honor, in accordance with their terms, all employee benefit plans, programs, agreements or arrangements of the Company in effect as of the date hereof (unless terminated in accordance with this Agreement), including the Plans, and (ii) Purchaser shall take such actions as are necessary to provide the employees of the Company and its Subsidiaries with their currently credited service with the Company or its Subsidiaries prior to the Closing Date for purposes of eligibility to participate and vesting under all employee

benefit plans and vacation policies maintained by Purchaser and its Affiliates in which such employees participate on or after the Closing.

7.4 Indemnification Provisions.

(a) Purchaser agrees that all rights to indemnification existing in favor of the present or former directors and officers of the Company or any of its Subsidiaries (collectively, the “Indemnified Parties”) as provided in the Company’s Certificate of Incorporation or By-Laws or the certificate or articles of incorporation, by-laws or similar organizational documents of any of its Subsidiaries as in effect as of the date hereof shall survive the Merger and shall continue in full force and effect (without modification or amendment, except as required by applicable law or except to make changes permitted by law that would enlarge the Indemnified Parties’ right of indemnification), to the fullest extent and for the maximum term permitted by law, and shall be enforceable by the Indemnified Party against both the Surviving Corporation and Purchaser. As of the Closing, Purchaser hereby expressly and directly assumes all such obligations.

(b) For a period of six years after the Effective Time, Purchaser shall cause to be maintained in effect the current policies of directors’ and officers’ liability insurance including employment practices liability and fiduciary liability insurance maintained by the Company and its Subsidiaries with respect to or arising from facts, events, or matters that occurred on or before the Effective Time. The Company shall prepay the cost of the aforementioned policies in full prior to Closing and neither the Purchaser nor the Surviving Corporation, or their successors and assigns, shall terminate nor cancel such policies during their six-year coverage period.

(c) Purchaser shall pay all reasonable expenses, including reasonable attorneys’ fees, that may be incurred by any Indemnified Party in enforcing the indemnity and other obligations provided in this Section 7.4.

7.5 Debt. Purchaser agrees to advance, or cause to be advanced, at the Closing sufficient funds to pay in full the Bank Debt.

7.6 Cooperation. Purchaser and the Company shall use all Reasonable Efforts to take, or cause to be taken, all action and do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including to obtain all necessary or appropriate waivers, consents or approvals of third parties required in order to preserve contractual relationships of Purchaser and the Company and their respective subsidiaries, all necessary or appropriate waivers, consents and approvals to effect all necessary registrations, filings and submissions and to lift any injunction or other legal bar to consummation of the Merger (and, in such case, to proceed with the consummation of the Merger as expeditiously as possible), including through all possible appeals.

7.7 Purchaser Availability during Interim Period. Purchaser agrees, during the Interim Period, to make its appropriate operations personnel available on a daily basis (including weekends and holidays, if requested by the Company) for a telephone

conference, as needed, to discuss the operations activities anticipated to occur that day and/or any future operations activities, which personnel shall have the authority to promptly consent (or withhold Purchaser’s consent) with respect to matters which arise during the Interim Period, as set forth in Section 6.2 above.

Article VIII.
Conditions To Closing

8.1 Conditions to the Obligations of Each Party. The obligations of the Company, the Purchaser and Merger Subsidiary to consummate the Merger are subject to the satisfaction or waiver (where permissible), at or prior to the Closing, of each of the following conditions:

(a) any waiting period (and any extension thereof) applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated;

(b) no Governmental Authority or court of competent jurisdiction located or having jurisdiction in the United States shall have enacted, issued, promulgated, enforced or entered any Law or Governmental Order which is then in effect making the consummation of the Merger illegal or otherwise prohibiting the consummation of the Merger;

(c) no action shall have been commenced or threatened by any Governmental Authority against either the Company or the Purchaser seeking to restrain or materially and adversely alter the transactions contemplated by this Agreement which do, or would reasonably be expected to, render it impossible or unlawful to consummate such transactions; and

(d) execution by the Purchaser, the Company, the Merger Subsidiary and the Escrow Agent of the Escrow Agreement.

8.2 Conditions to the Obligations of the Company. The obligations of the Company to consummate the Merger shall be subject to the satisfaction or waiver (where permissible), at or prior to the Closing, of each of the following conditions:

(a) the representations and warranties of the Purchaser and the Merger Subsidiary contained in this Agreement (without giving effect to any materiality qualifications or limitations therein) shall be true and correct, in each case as of the Closing Date as though made on and as of the Closing Date, except (i) for such failures to be true and correct that have not had a material adverse effect on the ability of the Purchaser and the Merger Subsidiary to consummate timely the transactions contemplated by this Agreement or a material adverse effect on the rights of the Company or the Stockholders hereunder; (ii) that those representations and warranties that address matters only as of a particular date shall remain true and correct as of such date, subject to the qualifications in (i) above; and (iii) for changes expressly permitted as contemplated by the terms of this Agreement.

(b) the covenants contained in this Agreement to be complied with by the Purchaser and Merger Subsidiary on or before the Closing shall have been complied with in all material respects;

(c) the Company shall have received a certificate from the Purchaser and Merger Subsidiary certifying as to the matters described in (a) and (b) above signed by a duly authorized officer thereof;

(d) this Agreement shall have been approved by the affirmative vote of the holders of in excess of 95% of the Common Stock and Preferred Stock (collectively and in separate classes, as applicable) in accordance with the DGCL and the Company’s certificate of incorporation on or before five hours following the execution and delivery of this Agreement;

(e) the Partnership ORRI shall have been distributed to the Stockholders and Optionholders of the Company;

(f) the Purchaser shall have provided evidence of its ability to pay in immediately available funds an amount equal to the Total Merger Consideration and shall have made arrangement, reasonably satisfactory to the holders of the Bank Debt, to pay or assume all such obligations in full as of the Effective Time; and

(g) adjustments to the Total Merger Consideration sought by Purchaser for Defects pursuant to Article XI shall not, after application of the Deductible, exceed the sum of Thirty-Five Million Dollars ($35,000,000).

8.3 Conditions to the Obligations of the Purchaser and Merger Subsidiary. The obligations of the Purchaser and Merger Subsidiary to consummate the Merger shall be subject to the satisfaction or waiver (where permissible), at or prior to the Closing, of each of the following conditions:

(a) the representations and warranties of the Company contained in this Agreement (without giving effect to any materiality qualifications or limitations therein or any references therein to Material Adverse Effect) shall be true and correct, in each case as of the Closing Date as though made on and as of the Closing Date, except (i) for such failures to be true and correct that have not had a Material Adverse Effect; (ii) that those representations and warranties that address matters only as of a particular date shall remain true and correct as of such date, subject to the qualifications in (i) above; and (iii) for changes expressly permitted as contemplated by the terms of this Agreement.

(b) the covenants and agreements contained in this Agreement to be complied with by the Company on or before the Closing shall have been complied with in all material respects;

(d) the Purchaser shall have received a certificate from the Company certifying as to the matters described in (a) and (b) above signed by a duly authorized officer thereof; and

(e) unless the Company has contested and referred to arbitration Defects or Defect Amounts pursuant to Section 11.11(b) below, adjustments to the Total Merger Consideration sought by Purchaser for Defects shall not, in the aggregate, and after application of the Deductible, exceed the sum of Thirty-Five Million Dollars ($35,000,000);

Article IX.
Termination, Waiver and Amendment

9.1 Termination. This Agreement and the transactions contemplated herein may be terminated and abandoned at any time on or prior to the Closing Date:

(a) By mutual consent of the Company and Purchaser; or

(b) By Purchaser if:

(i) The Company or its Subsidiaries shall have defaulted in any material respect in performance of any material obligation under this Agreement and such breach is not cured within ten (10) days of the Company’s receipt of a notice from Purchaser that such breach exists or has occurred; or

(ii) Consummation of the transactions contemplated by this Agreement would violate any nonappealable final order, decree or judgment of any Governmental Authority having competent jurisdiction; or

(i) Purchaser or Merger Subsidiary shall have defaulted in any material respect in performance of any material obligation under this Agreement and such breach is not cured within ten (10) days of Purchaser’s receipt of a notice from the Company that such breach exists or has occurred; or

(ii) Consummation of the transactions contemplated by this Agreement would violate any nonappealable final order, decree or judgment of any Governmental Authority having competent jurisdiction;

(d) By either the Company or Purchaser upon the later of May 31, 2006 and ten (10) Business Days after the necessary approvals under the HSR Act have been obtained; provided, however, that (i) a Party may not terminate this Agreement pursuant to this Section 9.1(d) if the Merger has not been consummated because of a breach by such party of its covenants set forth herein, and (ii) neither the Company nor Purchaser may terminate if the Closing has been delayed beyond May 31, 2006, as a result of arbitration proceedings brought pursuant to Section 11.11(b) below (in which case, either Party may terminate if, and only if, upon completion of such arbitration

proceedings, the aggregate of all adjustments to the Total Merger Consideration determined to be made for Defects asserted by Purchaser under Article XI exceed (after application of the Deductible) the sum of Thirty-Five Million Dollars ($35,000,000); and

(e) Automatically, without further action by any Party, if this Agreement shall fail to be approved (and evidence thereof provided to the Parties) by the Stockholders (collectively and in separate classes, as applicable) in accordance with the DGCL and the Company’s certificate of incorporation, in each case on or before five hours following execution of this Agreement.

9.2 Manner of Exercise. In the event of termination of this Agreement by Purchaser or the Company, or both, pursuant to Section 9.1, written notice thereof shall forthwith be given to the other Parties and this Agreement shall terminate and the transactions contemplated hereunder shall be abandoned without further action by the Parties.

9.3 Effect of Termination. In the event of termination of this Agreement by any Party hereto as provided in Section 9.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of any Party hereto; provided, however, that no such termination shall relieve any Party from liability for a knowing and intentional breach of a representation or warranty or a breach of any covenant hereof and that the Confidentiality Agreement shall remain in full force and effect.

Article X.
Investigation; No Other Representations and Warranties; No Affiliate Liability

10.1 Investigation and Agreement by Purchaser and Merger Subsidiary; No Other Representations or Warranties.

(a) Each of Purchaser and Merger Subsidiary acknowledges and agrees that it has made its own inquiry and investigation into, and, based thereon and on the representation and warranties made by the Company in Article IV, has formed an independent judgment concerning, the Company and its businesses and operations. In connection with Purchaser’s and Merger Subsidiary’s investigation of the Company and its businesses and operations, Purchaser, Merger Subsidiary and their respective representatives have received from the Company or its representatives certain projections and other forecasts for the Company and certain estimates, plans and budget information. Purchaser and Merger Subsidiary acknowledge and agree that (i) there are uncertainties inherent in attempting to make such projections, forecasts, estimates, plans and budgets; (ii) Purchaser and Merger Subsidiary are familiar with such uncertainties; and (iii) Purchaser and Merger Subsidiary are taking full responsibility for making their own evaluations of the adequacy and accuracy of all estimates, projections, forecasts, plans and budgets so furnished to them or their representatives.

(b) Each of Purchaser and Merger Subsidiary agrees that, except for the representations and warranties made by the Company that are expressly set forth in Article IV of this Agreement, none of the Company, any Stockholder, or any of their

respective Affiliates or representatives has made and shall not be deemed to have made to any of Purchaser, Merger Subsidiary or their respective Affiliates or representatives any representation or warranty of any kind (and Purchaser and Merger Subsidiary acknowledge and agree that they and their respective Affiliates and representatives have not relied upon any representation or warranty not made in this Agreement). Without limiting the generality of the foregoing, and except as expressly covered by the express representations and warranties made by the Company set forth in Article IV, each of Purchaser and Merger Subsidiary agrees that none of the Company, any Stockholder, or any of their respective Affiliates or representatives makes or has made any representation or warranty to Purchaser, Merger Subsidiary or to any of their respective representatives or Affiliates with respect to:

(i) any projections, forecasts, estimates, plans or budgets of future revenue, expenses or expenditures, future results of operations (or any component thereof), future cash flows (or any component thereof) or future financial condition (or any component thereof) of the Company or its Subsidiaries or the future business, operations or affairs of the Company or its Subsidiaries heretofore or hereafter delivered to or made available to Purchaser, Merger Subsidiary or their respective representatives or Affiliates; or

(ii) any other information, statements or documents heretofore or hereafter delivered to or made available to Purchaser, Merger Subsidiary or their respective representatives or Affiliates, with respect to the Company or its Subsidiaries or the business, operations or affairs of the Company or its Subsidiaries.

10.2 No Affiliate Liability. Each of the following is herein referred to as a “Company Affiliate”: (a) any direct or indirect holder of equity interests or securities in the Company (whether limited or general partners, members, stockholders or otherwise) and (b) any director, officer, employee, representative or agent of (i) the Company or (ii) any Person who controls the Company. NO COMPANY AFFILIATE SHALL HAVE ANY LIABILITY OR OBLIGATION TO PURCHASER OR MERGER SUBSIDIARY OF ANY NATURE WHATSOEVER IN CONNECTION WITH OR UNDER THIS AGREEMENT, ANY OF THE TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, AND PURCHASER AND MERGER SUBSIDIARY HEREBY WAIVE, RELEASE AND DISCHARGE ALL CLAIMS OF ANY SUCH LIABILITY AND OBLIGATION, INCLUDING, WITHOUT LIMITATION, CONTRACT OR TORT CLAIMS OR CLAIMS UNDER STATE OR FEDERAL LAWS (OTHER THAN SECURITIES LAWS), AVAILABLE AT COMMON LAW OR BY STATUTE.

Article XI.
Title, Casualty, Surviving Representations and Environmental Matters

11.1 Stockholder Representative; Title Examination and Access.

(a) For purposes of this Article XI, claims asserted by Purchaser prior to Closing shall be made to the Company and claims made by Purchaser after the Closing Date and on or before the Claims Date (hereinafter defined) shall be delivered to a representative designated by the Company on or before the Closing Date pursuant to Section 6.9 (the “Stockholder Representative”). Notwithstanding anything contained herein to the contrary, any and all notices required from the Purchaser under this Article XI to be made after the Closing Date and on or before the Claims Date to the Stockholder Representative shall be contemporaneously provided to the Escrow Agent.

(b) Purchaser may make or cause to be made at its expense such examination as it may desire of the title of Company to the Major Properties. For such purposes, Company shall, prior to Closing (i) give to Purchaser and to the employees, consultants, independent contractors, attorneys, and other advisers of Purchaser full access to all of the files, records, contracts, correspondence, computer output and data files, maps, data, reports, plats, abstracts of title, lease files, well files, unit files, division order files, production marketing files, title opinions, title files and title records, title insurance policies, ownership maps, surveys, and any other information, data, records, and files that Company has (or has access to) relating in any way to the title to the Major Properties, the past or present operation thereof, and the marketing of production therefrom, except, however, where restricted by license agreements or other agreements or contracts, together with access to appropriate Company personnel capable of answering questions regarding the foregoing; (ii) furnish to Purchaser all other information in the possession of or available to Company with respect to the title to the Major Properties as Purchaser may from time to time reasonably request, except to the extent that Company is prohibited therefrom by any agreement or contract to which it is a party or of which it is a beneficiary; and (iii) authorize Purchaser and its representatives to consult with attorneys, abstract companies, and other consultants or independent contractors of Company, whether utilized in the past or presently, concerning title-related matters with respect to the Major Properties. Company shall advise Purchaser of any restrictions or constraints on the right of Company to provide and disclose to Purchaser all data and information herein provided, and Purchaser shall have the right to attempt to remove such restrictions and constraints. The Company agrees to provide the access provided for in this Section 11.1(b) for at least the following hours: Until two days prior to the Pre-Closing Claim Date, such access shall be from 7:00 a.m. until midnight Monday through Friday, and from 8:00 a.m. until 7:00 p.m. Saturday and Sunday. Thereafter, such access shall, upon Purchaser’s request, be on a 24-hour basis until the Pre-Closing Claim Date. Notwithstanding the preceding two sentences, the Company shall only be required to make its personnel available during regular business hours (and by telephone during other reasonable hours). Requests by Purchaser for data and information shall be submitted during regular business hours (i.e., 8:00 a.m. to 5:00 p.m.

CDST) and the Company shall use its best efforts to promptly respond to Purchaser’s requests.

11.2 Notice of Title Defects.

(a) To assert a claim arising out of a breach of Section 4.9(a), the Purchaser must deliver a claim notice to the Company or Stockholder Representative (as applicable) promptly after becoming aware of a Title Defect but in any event no later than 180 days following the Closing Date (the “Claim Date”), except as otherwise provided under Sections 11.5 and 11.11. Such notice shall be in writing and shall include (i) a specific description of the alleged Title Defect(s), (ii) the Major Properties affected, (iii) supporting documents reasonably necessary for the Company or Stockholder Representative (as well as any title attorney or examiner hired by the Company) to verify the existence of the alleged Title Defect(s), and (iv) the amount by which the Purchaser reasonably believes the values of the Major Properties set forth in Exhibit A (the “Allocated Value”) of those Major Properties are reduced by the alleged Title Defect(s) and (v) the computations and information upon which the Purchaser’s belief is based. Notwithstanding anything to the contrary, the Purchaser shall be deemed to have waived all breaches of Section 4.9(a) of which notice has not been given on or before the Claim Date.

(b) The reduction in the Allocated Value resulting from a Title Defect (the “Title Defect Amount”) shall be determined in good faith taking into account all relevant factors, as follows:

(i) if the Purchaser and the Company or Stockholder Representative (as applicable) agree on the Title Defect Amount, that amount shall be the Title Defect Amount;

(ii) if the Title Defect is an Encumbrance that is undisputed and liquidated in amount, then the Title Defect Amount shall be the amount necessary to be paid to remove the Title Defect from the affected Major Property;

(iii) if the Title Defect represents a discrepancy between (A) the net revenue interest for any Major Property and (B) the net revenue interest stated on Exhibit A for such Major Property, then the Title Defect Amount shall be the product of the Allocated Value of such Major Property multiplied by a fraction, the numerator of which is the net revenue interest decrease and the denominator of which is the net revenue interest stated on Exhibit A, provided that if the Title Defect is not effective or does not affect a Major Property throughout its entire term, the Title Defect Amount determined under this Section 11.2(b)(iii) shall be reduced accordingly;

(iv) if the Title Defect represents an Encumbrance of a type not described in subsections (i), (ii) or (iii) above, the Title Defect Amount shall be determined by taking into account the Allocated Value of the Major Property so affected, the portion of the Company’s interest in the Major Property affected by

the Title Defect, the legal effect of the Title Defect, the potential economic effect of the Title Defect over the life of the affected Major Property, the values placed upon the Title Defect by the Parties, and such other factors as are necessary to make a proper evaluation;

(v) notwithstanding anything to the contrary in this Section 11.2, the aggregate Title Defect Amounts attributable to the effects of all Title Defects upon any given Major Property shall not exceed the Allocated Value of such Major Property;

(vi) if a Title Defect is reasonably susceptible of being cured, the Title Defect Amount determined under subsections (iii) or (iv) above shall not be greater than the lesser of (A) the reasonable cost and expense of curing such Title Defect or (B) the share of such curative work cost and expense which is allocated to such Major Property pursuant to subsection (vii) below; and

(vii) the Title Defect Amount with respect to a Major Property shall be determined without duplication of any costs or Losses (A) included in another Title Defect Amount hereunder, (B) included in a casualty loss under Section 11.4, or (C) for which the Purchaser otherwise receives credit in the calculation of the Adjusted Total Merger Consideration. To the extent that the cost to cure any Title Defect will result in the curing of all or a part of one or more other Title Defects, such cost of cure shall be allocated for purposes of Section 11.2(b)(vi) among the Major Properties so affected on a fair and reasonable basis.

(c) To the extent discovered prior to the Claim Date, any Title Defect Amounts determined in accordance with Section 11.2(b) shall be reduced by: any title increases found with respect to any Major Property, including any interest that entitles the Company to receive more than the NRI set forth on Exhibit A or obligates the Company to bear costs and expenses in an amount less than the WI set forth on Exhibit A.

11.3 Claims for Breach of Surviving Representations. Purchaser may notify the Company or Stockholder Representative (as applicable) in writing on or before the Claim Date, of any breach by the Company of the Surviving Representations that Purchaser reasonably believes in good faith may exist, including with such notice a reasonably detailed description of (i) the specific matter that is an alleged breach by the Company of one or more of the Surviving Representations, and (ii) the specific dollar amount Purchaser alleges has resulted, or could be reasonably expected to result, in the form of an adverse economic impact upon Purchaser or the Surviving Corporation as a result of the Company’s breach of such Surviving Representation.

11.4 Casualty or Condemnation Loss. If, after the date of this Agreement but prior to the Closing Date, any portion of the Major Properties is destroyed by fire or other casualty or is taken in condemnation or under right of eminent domain, the Purchaser shall nevertheless be required to close and the Company shall elect by written notice to the Purchaser prior to Closing either (a) to cause the Major Properties affected by any

casualty to be repaired or restored and to reduce the Total Merger Consideration for the cost of such repair of restoration, net of any amounts receivable in respect to insurance policies or from other responsible third parties, as promptly as reasonably practicable (which work may extend after the Closing Date only with Purchaser’s written consent), (b) to treat such casualty or taking as a Title Defect with respect to the affected Major Property or Properties under Section 11.2; or (c) to (i) transfer to Purchaser such Major Property notwithstanding such casualty loss, and (ii) transfer to Purchaser such insurance proceeds, claims, awards, and other payments arising out of such casualty loss; provided that if the amount of such insurance proceeds, claims, awards, and other payments is insufficient to cover the amount of damages to the Major Properties resulting from such casualty loss, then Company (for the account of the Stockholders and Optionholders) shall either pay to Purchaser the difference or reduce the Total Merger Consideration by such amount. Company shall not voluntarily compromise, settle, or adjust any amounts payable by reason of any casualty loss without first obtaining the written consent of Purchaser.

11.5 Limitations on Applicability of Surviving Representations. The Surviving Representations shall terminate as of the Claim Date and shall have no further force and effect thereafter, provided there shall be no termination of the Purchaser’s rights under this Article XI with respect to any bona fide Defect claim properly reported on or before the Claim Date.

11.6 Environmental Assessment. The Purchaser may, at its option, cause a phase one environmental assessment (the “Assessment”) of all or any portion of the Major Properties or Miscellaneous Interests to be conducted prior to the Claim Date by a reputable environmental consulting or engineering firm. The Assessment shall be conducted at the sole risk, cost and expense of Purchaser, and Purchaser shall indemnify and defend Company from and against any and all losses arising from the Assessment.

11.7 Notice of Violations of Environmental Laws. Purchaser may notify the Company or Stockholder Representative (as applicable) in writing, on or before the Claim Date, of any environmental matters disclosed by the Assessment that Purchaser reasonably believes in good faith may constitute Violations of Environmental Laws including with such notice a reasonably detailed description of the specific matter that is an alleged Violation of Environmental Laws. For purposes of this Agreement, the term “Violation of Environmental Laws” shall mean, as to any given Major Property or Miscellaneous Interest, the violation of or failure to meet specific objective requirements or standards that are clearly applicable to such property under applicable Environmental Laws where such requirements or standards are in effect as of the Effective Time.

11.8 Remedies for Violations of Environmental Laws. If the Company or Stockholder Representative confirms to its reasonable satisfaction that any matter described in a notice delivered pursuant to Section 11.7 constitutes a Violation of Environmental Laws, then Company or Stockholder Representative (as applicable) shall reduce the Total Merger Consideration by an amount, or distribute to Purchaser from the Escrowed Funds such amount, agreed upon in writing by Purchaser and Company or

Stockholder Representative (as applicable) as being a reasonable estimate of the cost of curing such Violation of Environmental Laws.

11.9 Dispute respecting Defects or Defect Amounts.

(a) The Company or Stockholder Representative and the Purchaser shall attempt to agree on all Defects and Defect Amounts by not later than (i) two (2) Business Days prior to the Closing Date with respect to Defects asserted by Purchaser on or before the Pre-Closing Claim Date, and (ii) ten (10) Business Days following the Claim Date as to all other Defects timely asserted by Purchaser hereunder. If the Company or Stockholder Representative and the Purchaser are unable to agree by the applicable date (the “Dispute Resolution Date”), the Defects and/or Defect Amounts in dispute shall (subject to Section 11.11(b) below) be exclusively and finally resolved by arbitration pursuant to this Section 11.9(a). Not later than 30 days following the Dispute Resolution Date, Defects and Defect Amounts in dispute shall be submitted to an attorney with at least 10 years’ experience in the oil and gas exploration and production industry (i.e., such oil and gas attorney being experienced in title examinations law if such disputed Defects or Defect Amounts relate to Title Defects) as selected by (A) mutual agreement of the Purchaser and the Company or Stockholder Representative, or (B) absent such agreement during the 30-day period, by the Dallas office of the American Arbitration Association (the “Arbitrator”). The Arbitrator shall not have had an affiliation with any Party or their affiliates within the five (5) year period preceding the arbitration, or have any financial interest in the dispute, controversy, or claim. The arbitration proceeding shall be held in Dallas, Texas, and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, to the extent such rules do not conflict with the terms of this Section. The Arbitrator’s determination shall be made within sixty (60) days after submission of the matters in dispute and shall be final and binding upon all Parties, without right of appeal. Judgment on the Arbitrator’s determination may be entered in any court having jurisdiction. In making his determination, the Arbitrator shall be bound by the rules set forth in this Article XI and may consider such other matters which are not inconsistent herewith as in the opinion of the Arbitrator are necessary or helpful to make a proper determination. Additionally, the Arbitrator may consult with and engage disinterested third Persons to advise the Arbitrator, including without limitation attorneys from other states, petroleum engineers and environmental consultants. In no event shall any Defect Amount exceed the estimate given by the Purchaser in its claim notice delivered in accordance with the provisions of this Agreement. The Arbitrator shall act as an expert for the limited purpose of determining the specific disputed Defect Amounts submitted by either Party and may not award damages, interest or penalties to either Party with respect to any matter. The Company (for arbitrations initiated prior to Closing), the Stockholders and Optionholders (for arbitrations commenced after the Closing) and the Purchaser shall each bear its own legal fees and other costs of presenting its case. The Company (for arbitrations initiated prior to Closing) and the Stockholders and Optionholders (for arbitrations commenced after the Closing) shall bear one-half and the Purchaser shall bear one-half of the costs and expenses of the Arbitrator and any

consultant retained by the Arbitrator in accordance with the provisions of this Section 11.9(a).

(b) If the arbitration occurs after Closing, then the Stockholder Representative and the Purchaser agree to execute joint instructions to the Escrow Agent promptly upon their receipt of the Arbitrator’s decision for release of Escrow Funds in such manner and to the Party as are consistent with the Arbitrator’s determination. If either Party fails or refuses to make such joint instructions, such Party shall be liable for all court costs and attorney’s fees incurred by the other Party in its enforcement of the Arbitrator’s decision.

(c) The Stockholders and Optionholders may at their option and sole cost continue after Closing to attempt to cure or remove any Defects. If any Defect for which a Total Merger Consideration adjustment and/or claim against the Escrow Amount is made, is cured or removed by the Stockholder Representative within the later of (i) six (6) months from the Closing Date or (ii) three (3) months after the Claim Date, the Stockholder Representative shall (for the benefit of the Stockholders and Optionholders) be reimbursed in that final adjustment for the amount of any previous deduction from the Total Merger Consideration or payment from the Escrow Amount with respect to such Defect.

11.10 Limitations on Article XI Adjustments. Notwithstanding anything contained in this Article XI to the contrary, the following provisions shall govern the manner in which the Total Merger Consideration shall be adjusted at Closing (and the Escrowed Funds accessed following Closing) as a result of Title Defects (including casualty losses treated as Title Defects under Section 11.4), casualty or condemnation losses and breaches of Surviving Representations and/or Violations of Environmental Laws:

(a) a Title Defect or casualty loss shall not be taken into consideration for any purpose unless the Title Defect Amount or casualty loss exceeds $10,000;

(b) a Violation of Environmental Laws shall not be taken into consideration for any purpose unless the reasonable estimate of the cost of curing such Violation of Environmental Laws (including any fines or penalties relating thereto) exceeds $10,000;

(c) a breach of any Surviving Representation raised by Purchaser shall not be taken into consideration for any purpose unless the adverse economic impact upon Surviving Corporation resulting from such alleged breach exceeds, or could reasonably be expected to exceed, $10,000;

(d) Purchaser shall be entitled neither to any reduction to the Total Merger Consideration nor to any Escrowed Funds for Title Defects, casualty losses, breaches of Surviving Representations and/or Violations of Environmental Laws, unless and until the aggregate Defect Amounts exceed the Deductible, and then only to the extent that such aggregate amounts exceed the Deductible;

(e) In no event shall Purchaser’s aggregate reductions to the Total Merger Consideration and receipt of Escrowed Funds for claims made on or before the Claim Date under this Article XI exceed the sum of $35,000,000, subject to Purchaser’s having first satisfied the Deductible; and

(f) After Closing, Purchaser shall use reasonable commercial efforts (i) to mitigate the Defect Amounts arising out of any Defects and (ii) to seek recoveries under available insurance policies and relevant third parties in order to reduce the applicable Defect Amounts.

11.11 Defect Claims of Purchaser Made Prior to the Closing Date.

(a) Nothing contained in this Article XI to the contrary shall be construed to prevent Purchaser from raising Title Defects, casualty losses, breaches of Surviving Representations and/or Violations of Environmental Laws prior to Closing and requesting (subject to the Deductible) that such matters be cured prior to Closing or the Total Merger Consideration adjusted on the Closing Date; provided, however, that no reductions to the Total Merger Consideration shall be made on the Closing Date with respect to any such Defect claims except:

(i) to the extent that a notice of Defects is delivered no later than 5:30 p.m. on the third (3rd) Business Day prior to Closing (the “Pre-Closing Claim Date”); and

(ii) the Company has agreed to the applicable Defect Amount prior to Closing.

Subject to Section 11.11(b) below, Article XI claims asserted by Purchaser prior to Closing which are neither cured nor a reduction amount agreed to by the Parties shall be governed by Section 11.12 below.

(b) If Defect Amounts alleged by Purchaser on or before the Pre-Closing Claim Date exceed, in the aggregate, the sum of Thirty-Five Million Dollars ($35,000,000), after application of the Deductible, the Company shall have the option to either (i) terminate this Agreement pursuant to Section 8.2(g) above, or (ii) if the Company disputes either the existence of Defects or Purchaser’s alleged Defect Amounts such that, if the Company is correct, the Defect Amounts asserted on or before the Pre-Closing Claim Date would, in the aggregate, be less than Thirty-Five Million Dollars ($35,000,000), the Company may refer such disputed Defects and/or Defect Amounts to arbitration pursuant to Section 11.9. In such event, the Parties shall proceed in good faith to arbitrate such matters under Section 11.9 and Closing shall be postponed during the pendency of such arbitration process. If the disputed Defects and/or Defect Amounts are resolved such that all Article XI adjustments to the Total Merger Consideration would exceed Thirty-Five Million Dollars ($35,000,000), either the Company or Purchaser may terminate this Agreement. If, however, either (a) such arbitration proceedings result in a determination that all Article XI adjustments to the Total Merger Consideration would equal an amount that is equal to or less than Thirty-Five Million Dollars ($35,000,000),

or (b) such arbitration proceedings result in a determination that Article XI adjustments to the Total Merger Consideration would exceed $35,000,000, but neither the Company nor Purchaser elects to terminate this Agreement, adjustments agreed to by the Parties to the Total Merger Consideration shall be made and the Parties shall promptly proceed to Closing.

11.12 Procedure for Claims Against Escrow Amount.

(a) Purchaser may make a claim against the Escrowed Funds after the Closing Date and on or before the Claim Date under this Article XI without reduction for any tax benefit derived from payment thereof (an “Asserted Claim”). Purchaser shall provide written notice of the Asserted Claim to the Stockholder Representative, with a copy of such notice being contemporaneously delivered to the Escrow Agent. Such notice shall describe the Asserted Claim as a Title Defect, casualty loss, a breach of Surviving Representation or Violation of Environmental Laws (as applicable), including the specific amount of Escrowed Funds that Purchaser is requesting and such supporting information as is required under this Article XI. Upon receipt of notice of an Asserted Claim, the Stockholder Representative shall have thirty (30) days to dispute the Asserted Claim by giving written notice of such dispute to the Escrow Agent and Purchaser.

(b) If the Stockholder Representative does not timely dispute the Asserted Claim, the Stockholder Representative and the Purchaser shall promptly jointly instruct the Escrow Agent to disburse to Purchaser the amount of Escrowed Funds requested by Purchaser in the notice of Asserted Claim with respect to liquidated claims, or with respect to Asserted Claims that are not yet liquidated or resolved, the amount of Escrowed Funds reasonably estimated by Purchaser to be necessary to reimburse Purchaser for such Asserted Claims shall be deemed set aside within the Escrowed Funds and shall not be disbursed until such Asserted Claim is liquidated or resolved. If the Stockholder Representative timely disputes the Asserted Claim, the Escrow Agent shall not disburse any of the Escrowed Funds with respect to the Asserted Claim unless and until it receives, and in accordance with, joint instructions from Purchaser and the Stockholder Representative or a final and binding award from a court of competent jurisdiction.

(c) Upon the expiration of fifteen (15) days from and after the Claim Date, the Purchaser and the Stockholder Representative shall promptly jointly instruct the Escrow Agent to make a disbursement of the Escrowed Funds to the persons (who shall be all the Stockholders and Optionholders) and in the manner as indicated on a schedule prepared by the Stockholder Representative to the joint instruction and in an aggregate amount equal to all of the Escrowed Funds remaining on such date less the amount of any Asserted Claims pending on such date. The Stockholder Representative shall be entitled to provide that the Escrow Agent utilize the same manner of payment and to the same address or pursuant to the same wire transfer instructions as are used in the Closing. As such pending Asserted Claims are resolved, any Escrowed Funds not reasonably expected to be required to reimburse Purchaser for Article XI Losses resulting from or arising out of the remaining pending Asserted Claims shall be disbursed to the Stockholders and Optionholders. The Purchaser and the Stockholder Representative shall promptly jointly

instruct the Escrow Agent to distribute such funds to the Holders of the Common Stock or Preferred Stock as applicable as additional consideration (the “Additional Per Share Merger Consideration”) hereunder. Additional Per Share Merger Consideration shall be distributed to the Persons who were holders of Shares and Options immediately prior to the Effective Time in proportion to the number of Shares and Options such Persons held immediately prior to the Effective Time. If a pending Asserted Claim is liquidated or resolved such that Purchaser becomes entitled to reimbursement for an Article XI Loss, then the Stockholder Representative and Purchaser shall promptly jointly instruct the Escrow Agent to distribute Escrow Funds to Purchaser in such amount as necessary to reimburse Purchaser for such Loss.

(d) Making an Article XI claim prior to Closing pursuant to Section 11.11 or an Asserted Claim in accordance with this Section 11.12 shall be Purchaser’s sole and exclusive remedies with respect to any Title Defects, casualty or condemnation losses, breaches of Surviving Representations or Violations of Environmental Laws.

(e) No Asserted Claim shall include or seek any punitive, incidental or consequential damages, including lost profits, claimed by the Purchaser or the Surviving Corporation.

(f) As used in this Section 11.12(f), the term “party” means Purchaser or the Stockholder Representative, as applicable. The parties agree to provide joint instructions as contemplated herein and in a prompt manner. If either Purchaser or the Stockholder Representative fails to promptly give written instructions to the Escrow Agent as contemplated herein, the party entitled to the Escrowed Funds under this Section 11.12 (the “Requesting Party”) shall be entitled to seek a court order of a court of competent jurisdiction instructing the Escrow Agent to make the distribution contemplated herein. Any court granting such an order shall also be entitled to assess costs against the party that failed to give such instructions promptly and to award interest on the subject funds if the court determines that an award of interest would be appropriate.

Article XII.
General Provisions

12.1 Survival of Representations and Warranties; Waiver of Rights. The representations and warranties contained herein and in any certificates delivered pursuant hereto shall not survive the Effective Time, except the Surviving Representations shall survive Closing with respect to Defects timely asserted by Purchaser on or before the Claim Date. All pre-Closing covenants and any liability therefor shall terminate as of the Effective Time. This Section 12.1 shall not limit any covenant or agreement of the Parties that by its terms requires performance after the Effective Time.

12.2 Scope of Representations; Disclaimer. Except to the extent expressly set forth in Article IV of this Agreement, the Company makes no representations or warranties whatsoever, express or implied, at common law, by statute or otherwise, and disclaims all liability and responsibility for any other representation, warranty, statement

or information made or communicated (orally or in writing) to Purchaser. Without limiting the generality of the foregoing, except as expressly set forth in this Agreement, the Company makes no representation or warranty as to title to any of the assets or properties of the Company and, with respect to any personal property and equipment included within such assets or properties, THE COMPANY EXPRESSLY DISCLAIMS AND NEGATES ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, OF FITNESS FOR A PARTICULAR PURPOSE. IN ADDITION, OTHER THAN AS EXPRESSLY SET FORTH ABOVE IN ARTICLE IV, THE COMPANY MAKES NO WARRANTY AND HEREBY DISCLAIMS ANY WARRANTY THAT THE RESERVE ESTIMATES, CASH FLOW ESTIMATES, PRICE ESTIMATES, OR PRODUCTION OR FLOW RATE ESTIMATES CONTAINED IN ANY RESERVE REPORT OR IN ANY SUPPLEMENT THERETO OR UPDATE THEREOF ARE IN ANY WAY COMPLETE, ACCURATE OR NOT MISLEADING, THE SAME BEING PREDICTIONS AS TO FUTURE EVENTS WHICH ARE INHERENTLY SUBJECT TO INCOMPLETENESS AND INACCURACY.

12.3 Confidentiality. Except as otherwise required by law, the Parties will, and will cause their officers, directors, employees and authorized representatives to, hold in confidence all, and not to use or to disclose to others any, nonpublic information received by them from another Party hereto in connection with the transactions contemplated by this Agreement in accordance with the Confidentiality Agreement. No Party shall make any public announcement or press release with respect to this transaction without the prior written consent of the other Parties.

12.4 Further Assurances. After Closing, the Parties shall execute, acknowledge and deliver or cause to be executed, acknowledged and delivered such instruments and take such other action including payment of monies as may be necessary or advisable to carry out their obligations under this Agreement and under any document, certificate or other instrument delivered pursuant hereto or required by law. If at any time subsequent to the Closing, any Party comes into possession of money or property belonging to another Party, such money or property shall be promptly turned over to the Party entitled thereto.

12.5 Binding Effect; Third Party Beneficiaries. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Party without the prior written consent of the others. Nothing contained herein, express or implied, is intended to confer on any Person other than the Parties or their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except that all of the Stockholders, directors and officers shall have rights hereunder to the extent so provided including without limitation, the provisions of Section 7.4, and shall be third party beneficiaries hereof.

12.6 Notices. Any notice, request, instructions or other document to be given hereunder to any Party shall be in writing, sent by facsimile transmission or delivered personally or by courier or sent by certified mail, postage prepaid, as follows:

If to the Company:

Latigo Petroleum, Inc.

15 W. 6th Street, Suite 1100

Tulsa, Oklahoma 74119

Attention: Raymond A. Foutch

Telephone: (918) 582-7770

Telecopy: (918) 582-5577

If to Purchaser or Merger Subsidiary:

Pogo Producing Company

5 Greenway Plaza, Suite 3000

Houston, Texas 77046

Attention: Corporate Secretary

Telephone: (713) 297-5000

Telecopy: (713) 297-4970

With a copy to:

Pogo Producing Company

300 North Marienfeld, Suite 600

Midland, Texas 79701

Attention: Land Department

Telephone: (713) 685-8100

Telecopy: (713) 685-8151

Any Party may change its address for purposes of this Section by giving written notice of such change of address to the other Parties in the manner herein provided for giving notice. Any notice or communication hereunder shall be deemed to have been (i) three Business Days after being deposited in the United States mail, if by certified mail, and (ii) when received, if delivered personally or by courier or facsimile transmission.

12.7 Expenses. Except as otherwise provided herein, the Parties shall each pay their own expenses and costs in connection with this Agreement and the transactions contemplated hereby.

12.8 Entire Agreement. This Agreement (including the instruments between the Parties referred to herein and any waivers delivered pursuant hereto) constitutes the entire agreement among the Parties and supersedes all other prior agreements and understandings, both written and oral, among the Parties, or any of them, with respect to the subject matter hereof except for the Confidentiality Agreement. The Exhibits and

Schedules are a part of this Agreement as if fully set forth herein. All references to articles, sections, subsections, paragraphs, clauses, exhibits and schedules shall be deemed references to such part of this Agreement, unless the context shall otherwise require.

12.9 Amendments; Waivers. No supplement, modification, or amendment of this Agreement or waiver of any provision of this Agreement will be binding unless executed in writing by, or on behalf of, all Parties to this Agreement. No waiver of any of the provisions of this Agreement will be deemed or will constitute a waiver of any other provision of this Agreement (regardless of whether similar), nor will any such waiver constitute a continuing waiver unless otherwise expressly provided.

12.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one agreement.

12.11 Specific Performance. The Parties agree that irreparable damage would occur if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provision hereof in any court of the United States or any state having jurisdiction, in addition to any other remedy to which they are entitled at law or in equity.

12.12 GOVERNING LAW. THIS AGREEMENT AND THE LEGAL RELATIONS AMONG THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.

12.13 Disclosure Schedule. Certain information set forth in the Disclosure Schedule is included solely for informational purposes, and may not be required to be disclosed pursuant to this Agreement. The specification of any dollar amount in the representations and warranties contained in this Agreement or the inclusion of any specific item in the Disclosure Schedule is not intended to imply that such amounts (or higher or lower amounts) are or are not material, and no Party shall use the fact of the setting of such amounts or the fact of the inclusion of any such item in the Disclosure Schedule in any dispute or controversy between the Parties as to whether any obligation, item, or matter not described herein or included in a Disclosure Schedule is or is not material for purposes of this Agreement.

12.14 Assistance with Financials. The Parties shall cooperate and use commercially reasonable efforts to assist Purchaser, at Purchaser’s sole expense, in the preparation of such pro forma financial information respecting the Company as required by applicable Securities and Exchange Commission (“SEC”) rules and regulations for inclusion in filings by the Purchaser with the SEC and information regarding the business

and operations of the Company and its Subsidiaries as reasonably necessary or appropriate for inclusion in future offering documents or loan syndications.

12.15 Waiver of Conflict.

(a) Purchaser waives and will not assert, and agrees to cause the Company and any Subsidiary to waive and to not assert, any conflict of interest arising out of or relating to the representation, after the Closing (the “Post-Closing Representation”), of any stockholder, officer, employee or director of Company or any Subsidiary (any such Person, a “Designated Person”) in any matter involving this Agreement or any other agreements or transactions contemplated thereby, by any legal counsel currently representing the Company or any Subsidiary in connection with this Agreement or any other agreements or transactions contemplated thereby (the “Current Representation”).

(b) Purchaser waives and will not assert, and agrees to cause the Company and any Subsidiary to waive and to not assert, any attorney-client privilege with respect to any communication between any legal counsel and any Designated Person occurring during the Current Representation in connection with any Post-Closing Representation, including in connection with a dispute with Purchaser, and following the Closing, with the Company or any Subsidiary, it being the intention of the parties hereto that all such rights to such attorney-client privilege and to control such attorney-client privilege shall be retained by the Stockholders; provided, that the foregoing waiver and acknowledgment of retention shall not extend to any communication not involving this Agreement or any other agreements or transactions contemplated thereby, or to communications with any Person other than the Designated Persons and their advisers.

EXECUTED as of the day and year first above written.

		COMPANY:

		LATIGO PETROLEUM, INC.

By:
		Randy A. Foutch
		President & Chief Executive Officer

	PURCHASER:

	POGO PRODUCING COMPANY


	By:
			Stephen R. Brunner
			Executive Vice President


	MERGER SUBSIDIARY:

	POGO MERGER SUB 1, INC.


	By:
			Stephen R. Brunner
			Executive Vice President

ANNEX A

Definitions

Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings:

“2002 Stock Incentive Plan” means that plan adopted by the Company dated December 12, 2002.

“AFEs” is as defined in Section 4.12(a).

“Additional Option Consideration” is as defined in Section 2.7.

“Additional Per Share Merger Consideration” is as defined in Section 11.10(c).

“Adjusted Total Merger Consideration” has the meaning set forth in Section 2.10.

“Affiliate” means an “affiliate” or “associate” as those terms are defined in Rule 12b-2 promulgated by the Commission under the Exchange Act.

“Allocated Value” is as defined in Section 11.2(a).

“Arbitrator” is as defined in Section 11.3(a).

“Asserted Claim” is as defined in Section 7.7(a).

“Assessment” is as defined in Section 11.6.

“Bank Debt” means all amounts owing under (i) that certain Credit Agreement dated August 1, 2003, as amended, among the Company, as borrower, the various guarantors and lenders from time to time party thereto; JPMorgan Chase bank, N.A., as administrative agent; Bank of America, N.A., as co-administrative agent; and Harris Nesbitt Financing, Inc. as documentation agent; and (ii) that certain Senior Subordinated Term Loan Credit Agreement dated April 28, 2004, as amended, among the Company, as borrower, the various guarantors and lenders from time to time party thereto; and Wells Fargo Energy Capital, Inc., as administrative agent for the lenders.

“Business Day” means any day other than Saturday, Sunday, or federal holidays.

“Certificate of Merger” is as defined in Section 2.2.

“Claim Date” has the meaning set forth in Section 11.2(a).

“Closing” means the closing referred to in Section 3.1.

“Closing Date” is as defined in Section 3.1.

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“Code” means the Internal Revenue Code of 1986, as amended, or any successor statute.

“Common Stockholder” means a holder of Company Common Stock.

“Common Stock Merger Consideration” means an amount equal to the Adjusted Total Merger Consideration, minus the aggregate Preferred Stock Per Share Preferential Merger Consideration for all Outstanding Preferred Shares.

“Common Stock Per Share Merger Consideration” means an amount equal to the quotient (rounded to the fifth decimal place) of (a) the sum of (i) the Common Stock Merger Consideration plus (ii) the aggregate exercise price of all Outstanding In-the-Money Option Shares, divided by (b) the sum of the number of (i) the Outstanding Common Shares, plus (ii) the Outstanding In-the-Money Option Shares, plus (iii) the Outstanding Preferred Shares.

“Company Affiliate” is as defined in Section 10.2.

“Company Common Stock” means the common stock of the Company, par value $0.001.

“Company Group” means the Company and its Affiliates.

“Company Subsidiaries” means (a) Latigo Petroleum Texas, LP, a Texas limited partnership, (b) Latigo Investments, LLC, a Delaware limited liability company, doing business in the State of Texas as Latigo (Texas), LLC, (c) Latigo Holdings (Texas), LLC, a Delaware limited liability company, (d) Latigo Gas Services, LP, a Texas limited partnership, (e) Latigo Gas Group, LLC, a Texas limited liability company, (f) Latigo Gas Holdings, LLC, a Delaware limited liability company, (g) Ranches South Royalty, LP, (h) RSR, and (i) RSR Holdings.

“Company Transaction Costs” means (i) all fees, costs and expenses of Randall & Dewey, (ii) one-half of all filing fees under the HSR Act, and (iii) all fees and expenses incurred by the Company after March 1, 2006 of any other brokers, financial advisors, consultants, accountants, attorneys or other professionals engaged by the Company in connection with the structuring, negotiation or consummation of the transactions contemplated by this Agreement which are unpaid as of the Closing Date.

“Confidentiality Agreement” means the Confidentiality Agreement, dated as of March 3, 2006, by and between the Company and Purchaser.

“DGCL” means the Delaware General Corporation Law, as amended, or any successor statute.

“Deductible” means the sum of One Million Dollars ($1,000,000.00).

“Defect Amounts” means all Title Defect, casualty or condemnation losses contemplated by Section 11.4, anticipated remediation costs for Violations of Environmental Laws (inclusive of fines and penalties) and anticipated Losses to

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Purchaser and/or the Surviving Company attributed by Purchaser to breaches of Surviving Representations asserted pursuant to Article XI hereof.

“Defects” means all Title Defects, casualty or condemnation losses, breaches of Surviving Representations and Violations of Environmental Laws asserted by Purchaser pursuant to Article XI hereof.

“Defensible Title” means such title that (i) with respect to each Major Property, subject to the Permitted Encumbrances, entitles the Company or the relevant Subsidiary as of the date of this Agreement to receive not less than the Net Revenue Interest set forth in Exhibit A with respect to all Hydrocarbons produced and attributable to such Major Property (except as such Net Revenue Interest may be affected in connection with gas imbalances and operations for which the Company or one of the relevant Subsidiaries is a non-consenting co-owner, and further except as otherwise set forth on Exhibit A), and obligates the Company or the relevant Subsidiary to pay costs and expenses relating to such Major Property in an amount not greater than the Working Interest set forth in Exhibit A with respect to such Major Property (except for increases in such amount that also result in a proportionate increase in the Company’s or the relevant Subsidiary’s Net Revenue Interest or that result from contribution requirements with respect to defaulting co-owners, and further except as otherwise set forth on Exhibit A); and (ii) with respect to the Miscellaneous Interests, such title of the Company or the relevant Subsidiary that is free from reasonable doubt to the end that a prudent person engaged in the business of the ownership, development and operation of oil and gas properties with knowledge of all of the facts and appreciation of their legal significance would be willing to accept the same.

“Designated Person” is as defined in Section 12.15.

“Disclosure Schedule” refers to the Disclosure Schedule delivered by the Company to Purchaser contemporaneously with the execution of this Agreement. Each heading in the Disclosure Schedule shall refer to the applicable section of this Agreement.

“Dispute Resolution Date” is as defined in Section 11.9(a).

“Dissenting Shares” are as defined in Section 2.8.

“Employment Agreements” refers to those three (3) employment agreements dated December 12, 2002, by and between the Company and, respectively, Randy A. Foutch, Rodney S. Myers and W. Mark Womble.

“Effective Time” is as defined in Section 2.2.

“Encumbrance” means any option, pledge, security interest, lien, charge, encumbrance (other than Permitted Encumbrances) or restriction (whether on voting, sale, transfer, disposition or otherwise), whether imposed by agreement, understanding, law or otherwise, except those arising under applicable federal or state securities laws.

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“Environmental Laws” means all Laws that relate to the prevention, abatement or elimination of pollution, or the protection of the environment, including the federal Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Oil Pollution Act of 1990, the Clean Water Act, the Safe Drinking Water Act, the Toxic Substance Control Act, the Hazardous Materials Transportation Act and all state statutes serving similar or related purposes.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute.

“Escrow Agent” means JPMorgan Chase Bank, N.A., or such other institution as is agreed upon in good faith by Company and Purchaser.

“Escrow Agreement” means the Escrow Agreement among the Escrow Agent, the Stockholder Representative, Purchaser, and Merger Subsidiary, to be executed at Closing.

“Escrow Amount” is as defined in Section 2.13.

“Escrowed Funds” is as defined in Section 2.13.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any successor statute.

“Financial Statements” refers to, collectively, the audited consolidated financial statements of each of the Company and the Company Subsidiaries as of and for the years ended December 31, 2004 and 2005.

“GAAP” means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, in statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination.

“Gas Contracts” are as defined in Section 4.13.

“Governmental Authorities” means any federal, state or local government, court, or governmental regulatory body and any of their respective subdivisions, agencies, instrumentalities, authorities or tribunals.

“Hazardous Substances” means any substance that is listed, defined, or regulated as a “hazardous substances,” “hazardous waste,” “hazardous material,” or “toxic substance” pursuant to any Environmental Law.

“Hedging Agreement” means any commodity, interest rate or currency swap, cap, floor, collar, forward agreement or other exchange or protection agreements or any option with respect thereto.

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“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or any successor statute.

“Hydrocarbons” mean oil, gas and/or other liquid and gaseous hydrocarbons or any combination thereof.

“Indemnified Parties” are as defined in Section 7.4(a).

“Initial Option Consideration” is as defined in Section 2.7.

“Interests” means:

(a) the Major Properties;

(b) the Miscellaneous Interests; and

(c) all of the Company’s or, as the case may be, the relevant Subsidiary’s, rights, titles and interests, whether direct or indirect, in and to all of the property, rights and interests incident to the Major Properties or the Miscellaneous Interests, including without limitation all of the Company’s or such Subsidiary’s rights, titles and interests in and to all Oil and Gas Contracts, leases, rights-of-way, easements, options, orders and rulings of applicable regulatory agencies, wells, lease and well equipment, machinery, production facilities, processing facilities, gathering systems, transportation systems, disposal systems, fixtures and other items of personal property and improvements now or as of the Closing Date appurtenant to the Major Properties or the Miscellaneous Interests or used, obtained or held for use in connection with the operation of the Major Properties or the Miscellaneous Interests or with the production, treatment, sale or disposal of Hydrocarbons or water produced therefrom or attributable thereto.

“Interim Period” has the meaning set forth in Section 6.1.

“Knowledge of the Company” means the actual knowledge, as of the date hereof, without independent investigation, of the individuals listed on Annex B and shall include what should reasonably be known by such individuals in the ordinary course of business and any other information actually personally known or information which should have been ascertained had a reasonable inquiry or investigation been undertaken.

“Laws” means any constitution, statute, code, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other official act of any applicable Governmental Authorities but shall not include any Environmental Laws.

“Leases” means oil, gas and mineral leases, oil and gas leases, oil leases, gas leases, other mineral leases, subleases, assignments of operating rights and similar agreements, and any extensions or renewals thereof.

“Letter of Transmittal” is as defined in Section 2.12(a)(i).

A-5

“Liabilities” means any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or un-matured, or determined or determinable, including, without limitation, those arising under any Law, action or Governmental Order, and those arising under any contract or agreement.

“Loss” means any and all Liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, attorneys’ fees and expenses) actually suffered or incurred by a Person.

“Major Properties” means all of the Company’s and any of its Subsidiaries’ rights, titles and interests, whether direct or indirect, other than the Partnership ORRI, in and to the wells, units, zones and lands described in Exhibit A.

“Material Adverse Effect” means any result, occurrence, condition, fact, change, violation, event or effect that, individually or in the aggregate with any such other results, occurrences, conditions, facts, changes, violations, events or effects, is materially adverse to the financial condition, business, assets, liabilities or results of operations of the Company and its Subsidiaries, taken as a whole; provided, however, that in no event shall any of the following constitute a Material Adverse Effect: (i) any change or effect resulting from changes in general economic, regulatory or political conditions, conditions in the United States or worldwide capital markets; (ii) any change or effect that affects the oil and gas exploration and development industry generally (including changes in commodity prices, general market prices and regulatory changes affecting the oil and gas industry generally); (iii) any effect, change, event, occurrence or circumstance relating to fluctuations in the value of currencies; (iv) the outbreak or escalation of hostilities involving the United States, the declaration by the United States of a national emergency or war or the occurrence of any other calamity or crisis, including acts of terrorism; (v) the disclosure of the fact that Purchaser is the prospective acquirer of the Company; (vi) the announcement or pendency of the transactions contemplated by this Agreement, including any termination of, reduction in or similar negative impact on relationships, contractual or otherwise, with any customers, suppliers, distributors, partners or employees of the Company and its Subsidiaries due to the announcement or pendency of the transactions contemplated by this Agreement; (vii) any change in accounting requirements or principles imposed upon the Company, its Subsidiaries or their respective businesses or any change in law, or the interpretation thereof; (viii) actions taken by Purchaser or any of its Affiliates; (ix) any effect, change, event, occurrence or circumstance resulting from any action taken by the Company or its Subsidiaries with Purchaser’s consent or from compliance by the Company with the terms of this Agreement; or (x) any effect, change, event, occurrence or circumstance resulting from the failure of the Company or its Subsidiaries to take any action referred to in Section 6.2 due to Purchaser’s unreasonable withholding of consent or delaying its consent, or (xi) any result, occurrence, condition, fact, change, violation, event or effect with respect to which, but only to the extent that, Purchaser is entitled under Article XI to a reduction of the Total Merger Consideration or Purchaser is entitled to receive amounts out of the Escrow Amount.

“Merger” means the merger of the Merger Subsidiary with and into the Company as described in Section 2.1.

A-6

“Merger Subsidiary Shares” means the common stock, $.001 par value per share, of the Merger Subsidiary.

“Miscellaneous Interests” means all of the Company’s and any of its Subsidiaries’ claims, rights, titles and interests, whether direct or indirect, in and to all Leases, royalty interests, overriding royalty interests and other oil, gas and mineral properties of every kind and character, whether producing, non-producing, developed or undeveloped, wherever situated (other than the Major Properties), including without limitation those oil, gas and mineral properties described in Exhibit B, and the Company’s gathering and related facilities, but excluding the Partnership ORRI.

“Net Revenue Interest” or “NRI” means the decimal interest set forth on Exhibit A as the Net Revenue Interest with respect to a particular Major Property.

“Oil and Gas Contracts” means all permits, licenses, farmout or farmin agreements, bottom hole or acreage contribution agreements, operating agreements, unit agreements, declarations or orders, joint venture, exploration, participation or acquisition agreements, division orders, production, sales, purchase, exchange, processing or transportation agreements and all other contracts and agreements in effect or in existence on the date hereof and affecting or relating to the ownership or operation of the Interests or the disposition of the Hydrocarbons produced therefrom, excluding Leases and contracts or agreements creating, or resulting, in real property interests.

“Option Consideration” is as defined in Section 2.7.

“Option Surrender Agreement” is as defined in Section 2.12(a)(ii).

“Optionholder” and collectively, “Optionholders” is as defined in Section 2.7.

“Options” means those options to purchase up to 398,718 shares of Company Common Stock.

“Outstanding Common Share” or collectively, “Outstanding Common Shares” means each share of Company Common Stock outstanding immediately prior to the Effective Time to the extent such share has vested at the time of Closing (including shares that vest as a result of the Merger).

“Outstanding In-the-Money Option Shares” means the number of shares of Company Common Stock issuable immediately prior to the Effective Time under the Options outstanding immediately prior to the Effective Time to the extent that (a) such Options have become vested and exercisable in accordance with their terms at the time of Closing (including Options that vest and become exercisable as a result of the Merger) and (b) the exercise price for each such share of Company Common Stock is less than the Common Stock Per Share Merger Consideration.

“Outstanding Preferred Share” or collectively, “Outstanding Preferred Shares” is as defined in Section 2.6(d).

A-7

“Outstanding Shares” means the Outstanding Common Shares and the Outstanding Preferred Shares.

“Partnership ORRI” is as defined in Section 6.6.

“Party” means a party to this Agreement and, after Closing, shall include the Stockholder Representative.

“Permits” means all governmental licenses, permits, certificates, orders, consents, approvals, franchises and authorizations.

“Permitted Encumbrances” means the following, but only to the extent they do not operate to reduce the Net Revenue Interests of the Major Properties to less than the Net Revenue Interests set forth in Exhibit A or increase the Working Interests of the Major Properties to more than the Working Interests set forth in Exhibit A (unless there is a corresponding increase in the Net Revenue Interests): (i) lessor’s royalties, terms and conditions of Leases, overriding royalties, division orders and sales contracts covering Hydrocarbons, reversionary interests and similar burdens; (ii) all existing operating agreements and unit agreements; (iii) any and all federal and state regulatory orders and rules to which the Interests are presently subject; (iv) preferential rights to purchase and required third-party consents to assignments and similar agreements; (v) liens for Taxes not due or not delinquent at the time of Closing or the validity of which are being contested in good faith by appropriate actions; (vi) statutory Encumbrances not yet delinquent; (vii) all rights to consent by, required notices to, filings with, or other actions by Governmental Authorities in connection with the sale or conveyance of Leases or Interests therein if the same are customarily obtained after such sale or conveyance; (viii) easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface operations, pipelines, grazing, logging, canals, ditches, reservoirs or the like; and easements for streets, alleys, highways, pipelines, telephone lines, power lines, railways and other easements and rights-of-way, on, over or in respect of any of the Interests; (ix) liens of operators relating to obligations not yet due or not delinquent; (x) title problems commonly encountered in the oil and gas business which would not be considered material by a reasonable and prudent person engaged in the business of the ownership, development and operating of oil and gas properties with knowledge of all the facts and appreciation of their legal significance; (xi) Encumbrances described in Exhibit A or Exhibit B; and (xii) Encumbrances related to the Bank Debt.

“Person” means an individual, partnership, corporation, joint-venture, trust, estate or an unincorporated organization or association or other legal entity.

“Plan” is as defined in Section 4.21(b).

“Post-Closing Representation” is as defined in Section 12.15.

“Pre-Closing Claim Date” is as defined in Section 11.11(a).

“Preferred Stock” means the Series A Convertible Participating Preferred Stock of the Company, par value $0.001 per share.

A-8

“Preferred Stockholder” means a holder of Preferred Stock.

“Preferred Stock Per Share Preferential Merger Consideration” means, for each Outstanding Preferred Share, an amount equal to the sum of $50 plus all accrued and unpaid dividends thereon for the period from (and including) the date such share was issued to (and including) the Closing Date in accordance with the terms of the certificate of incorporation as in effect on the date of this Agreement.

“Preferred Stock Per Share Total Merger Consideration” means, for each Outstanding Preferred Share, an amount equal to the sum of the Preferred Stock Per Share Preferential Merger Consideration plus the Common Stock Per Share Merger Consideration.

“Producing Wells” are as defined in Section 4.17(e).

“Ranches South Leases” are as defined in Section 6.6.

“Ranches South Royalty, LP” means Ranches South Royalty, LP, a Texas limited partnership.

“Reasonable Efforts” means the taking by a Party of such action as would be in accordance with reasonable commercial practices as applied to the particular matter in question; provided, however, that such action shall not include the incurrence of unreasonable expense.

“Records” means and includes all originals and copies (except where the context indicates that only originals or copies are being referred to) of minute books, tax records, documents, computer files and tapes, maps, books, records, accounts and files in the possession or control of the Company or its Subsidiaries relating to the Company or its Subsidiaries and their businesses.

“Requesting Party” is as defined in Section 11.12(f).

“Royalty Partnership” means, collectively, Ranches South Royalty, LP, its general partner, RSR, and its limited partner, RSR Holdings.

“RSR Holdings” means RSR Holdings, LLC, a Delaware limited liability company and limited partner of Ranches South Royalty, LP.

“RSR” means RSR, LLC, a Delaware limited liability company and general partner of Ranches South Royalty, LP.

“SEC” or “Securities and Exchange Commission” has the meaning provided in Section 12.14.

“Securities Act” means the Securities Act of 1933, as amended, or any successor statute.

“Severance and Retention Policies” shall refer to those policies of the Company set forth in Section 4.20 of the Disclosure Schedule.

A-9

“Shares” means (i) all of the issued and outstanding Preferred Stock of the Company consisting of 3,210,251 shares of Preferred Stock, and (ii) the 251,359 vested shares of Company Common Stock..

“Stock Certificate” means a certificate representing Company Common Stock or Preferred Stock.

“Stockholder Representative” is as defined in Section 11.1(a).

“Stockholders” mean the common stockholders and the preferred stockholders of the Company.

“Subsidiary” or “Subsidiaries” means any corporation or limited liability company more than 50 percent of the voting power of which is owned directly or indirectly by the Company or other relevant Person, as the context requires.

“Surviving Corporation” is as defined in Section 2.1.

“Surviving Representations” means, for purposes of Article XI and Section 12.1, Sections 4.7 through 4.12 and 4.32.

“Tax” or “Taxes” means all income, profits, franchise, withholding, ad valorem, employment, social security, disability, occupation, property, severance and excise taxes imposed on behalf of any Governmental Authorities.

“Taxing Authority” means, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Tax for such entity or subdivision, including any governmental or quasi-governmental entity or agency that imposes, or is charged with collecting, social security or similar charges or premiums.

“Tax Items” has the meaning set forth in Section 4.17(a)(i).

“Tax Return” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto.

“Title Defect” means any Encumbrance, other than a Permitted Encumbrance, that causes a breach of the Seller’s representation and warranty in Section 4.9(a).

“Title Defect Amount” has the meaning set forth in Section 11.2(c).

“Total Merger Consideration” has the meaning set forth in Section 2.10.

“Violation of Environmental Laws” has the meaning set forth in Section 11.7.

“Wells” means the wells described in Exhibit A or wells located in any unit listed in Exhibit A.

A-10

“Working Interest” or “WI” means the decimal interest set forth on Exhibit A as the Working Interest with respect to a particular Major Property.

A-11

EX-2.2 3 a06-15149_1ex2d2.htm EX-2

Exhibit 2.2

PURCHASE AND SALE AGREEMENT

BY AND BETWEEN

POGO PRODUCING COMPANY,

AS SELLER,

AND

MITENERGY UPSTREAM LLC,

AS BUYER

TABLE OF CONTENTS

ARTICLE 1 - DEFINITIONS		1
ARTICLE 2 – SALE AND TRANSFER OF ASSETS; CLOSING		15

2.01.	Assets	15
2.02.	Purchase Price	15
2.03.	Closing	16
2.04.	Closing Obligations	16
2.05.	Allocations and Adjustments	18
2.06.	Assumption	21
2.07.	Retained Liabilities	22
2.08.	Imbalances and Future Delivery/Payment Obligations	22

ARTICLE 3 – REPRESENTATIONS AND WARRANTIES OF SELLER		24

3.01.	Organization and Good Standing	24
3.02.	Authority; No Conflict	24
3.03.	Bankruptcy	25
3.04.	Taxes	25
3.05.	Legal Proceedings; Orders	26
3.06.	Environmental	26
3.07.	Equipment and Personal Property	27
3.08.	Title to Properties	27
3.09.	Brokers	28
3.10.	Tax Sharing Agreements	28
3.11.	Consents and Preferential Purchase Rights	28
3.12.	Imbalances and Future Delivery/Payment Obligations	28
3.13.	Status of Leases	28
3.14.	Contracts	28
3.15.	Laws and Regulations	30
3.16.	Non-Consent Operations	30
3.17.	Wells	30
3.18.	Outstanding Capital Commitments	30
3.19.	Operation of Assets Since Effective Time	30
3.20.	No Pooling, Unitization, Communitization or Spacing Orders	31
3.21.	Material Factor	31

ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF BUYER		31

4.01.	Organization and Good Standing	31
4.02.	Authority; No Conflict	31
4.03.	Certain Proceedings	32
4.04.	Knowledgeable Investor	32
4.05.	Securities Laws	32
4.06.	Due Diligence	32
4.07.	Basis of Buyer’s Decision	33
4.08.	Material Factor	33
4.09.	Brokers	33

ARTICLE 5 – COVENANTS OF SELLER		33

5.01.	Access and Investigation	33
5.02.	Operation of the Assets	33
5.03.	Insurance	35

5.04.	Consent and Waivers	36
5.05.	Notification	36
5.06.	Satisfaction of Conditions	37
5.07.	HSR Notification	37

ARTICLE 6 - COVENANTS OF BUYER		37

6.01.	Notification	37
6.02.	Limitations on Sections 5.05 & 6.01	37
6.03.	Satisfaction of Conditions	38
6.04.	HSR Notification	38
6.05.	MMS Qualification	38

ARTICLE 7 - CONDITIONS PRECEDENT TO BUYER’S OBLIGATION TO CLOSE		38

7.01.	Accuracy of Representations	38
7.02.	Seller’s Performance	38
7.03.	No Proceedings	39
7.04.	HSR Act	39
7.05.	Main Pass 61 and 72 Fields	39
7.06.	Buyer Qualification	39

ARTICLE 8 - CONDITIONS PRECEDENT TO SELLER’S OBLIGATION TO CLOSE		39

8.01.	Accuracy of Representations	39
8.02.	Buyer’s Performance	39
8.03.	No Proceedings	40
8.04.	HSR Act	40
8.05.	Buyer Qualification	40

ARTICLE 9 - TERMINATION		40

9.01.	Termination Events	40
9.02.	Effect of Termination	40

ARTICLE 10 – INDEMNIFICATION; REMEDIES		41

10.01.	Survival	41
10.02.	Indemnification and Payment of Damages by Seller	41
10.03.	Indemnification and Payment of Damages by Buyer	42
10.04.	Time Limitations	43
10.05.	Limitations on Amount—Seller	44
10.06.	Limitations on Amount—Buyer	44
10.07.	Procedure for Indemnification--Third Party Claims	44
10.08.	Procedure for Indemnification—Other Claims	45
10.09.	Extent of Representations and Warranties	45
10.10.	Compliance With Express Negligence Test	46
10.11.	Limitations of Liability	46

ARTICLE 11 – TITLE MATTERS AND ENVIRONMENTAL MATTERS		47

11.01.	Title Examination and Access	47
11.02.	Preferential Purchase Rights	47
11.03.	Required Consents	48
11.04.	Defensible Title	48
11.05.	Title Defects	49

11.06.	Seller’s Right to Cure	51
11.07.	Contested Title Defects	51
11.08.	Limitations on Adjustments for Title Defects	52
11.09.	Interest Additions	52
11.10.	Reconveyance	53
11.11.	Phase I Environmental Assessment	53
11.12.	Environmental Defect Notice	54
11.13.	Seller’s Election with Respect to Environmental Defects	54
11.14.	Limitation	56
11.15.	Exclusive Remedies	56
11.16.	Casualty Loss and Condemnation	56

ARTICLE 12 – GENERAL PROVISIONS		58

12.01.	Records	58
12.02.	Expenses	58
12.03.	Notices	58
12.04.	Jurisdiction; Service of Process	60
12.05.	Further Assurances	60
12.06.	Waiver	61
12.07.	Entire Agreement and Modification	61
12.08.	Assignments, Successors, and No Third-Party Rights	61
12.09.	Severability	62
12.10.	Article and Section Headings, Construction	62
12.11.	Time of Essence	62
12.12.	Governing Law	62
12.13.	Counterparts	62
12.14.	Waiver of Texas Deceptive Trade Practices - Consumer Protection Act	62
12.15.	Arbitration	63
12.16.	Tax Deferred Exchange	64
12.17.	Press Release	64
12.18.	Confidentiality	65

EXHIBITS AND SCHEDULES

Exhibit “A” Schedule of Wells

Exhibit “B” Schedule of Leases and Contracts

Exhibit “C-1” Form of Assignment of Record Title and Bill of Sale (OCS Leases)

Exhibit “C-2” Form of Assignment of Operating Rights and Bill of Sale (OCS Leases)

Exhibit “C-3” Form of Assignment and Bill of Sale of Oil, Gas and Mineral Leases (State Leases)

Exhibit “D” Seller’s Disclosure Schedule

Exhibit “E” Buyer’s Disclosure Schedule

Exhibit “F” Form of Certificates

Exhibit “G” Form of Offshore Operating Agreement

Exhibit “H” Form of Tag-Along Agreement

Exhibit “I” Form of Transition Services Agreement

Schedule 2.02 Allocation of Purchase Price

Schedule 5.03 Insurance Coverage Pending Closing

iii

PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement (this “Agreement”) is made as of April 20, 2006, by and among Pogo Producing Company, a Delaware corporation (“Seller”) and MitEnergy Upstream LLC, a Delaware limited liability company (“Buyer”).

RECITALS

Seller desires to sell, and Buyer desires to purchase, undivided interests in certain oil, gas, and mineral properties and related assets and contracts, for the consideration and on the terms set forth in this Agreement.

AGREEMENT

For and in consideration of the promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows:

ARTICLE 1

DEFINITIONS

For purposes of this Agreement, in addition to other capitalized terms defined in this Agreement, the following terms have the meanings specified or referred to in this Article 1 when capitalized:

“AAA” – as defined in Section 12.15.

“Affiliate” – any Person directly or indirectly controlled by, controlling, or under common control with, Buyer or Seller, including any subsidiary of Buyer or Seller and any “affiliate” of Buyer or Seller within the meaning of Reg. §240.12b-2 of the Securities Exchange Act of 1934, as amended, with “control,” as used in this definition, meaning possession, directly or indirectly, of the power to direct or cause the direction of management, policies or action through ownership of voting securities, contract, voting trust, or membership in management or in the group appointing or electing management or otherwise through formal or informal arrangements or business relationships.

“Aggregate Environmental Defect Value” – as defined in Section 11.14.

“Aggregate Title Defect Value” – as defined in Section 11.08.

“Agreed Interest Rate” – LIBOR plus two percent (2%) per annum.

“Allocated Values” – the values assigned among the Assets as set forth on Schedule 2.02.

“Assets” – an undivided fifty percent (50%) of Seller’s Record Title interests, Operating Rights, working interests, net revenue interests, overriding royalty interests, net profits interests, carried interests, rights and interests under non-consent or non-participation provisions of operating or similar agreements, post-payout interests, claim or cause of action interests and any other interests of a similar nature attributable to the following, except to the extent constituting Excluded Assets: (i) the Leases, (ii) the Equipment, (iii) Hydrocarbons produced after the Effective Time, (iv) the Contracts, (v) the Claims, (vi) the Surface Rights, and (vii) the Asset Records.

“Asset Records” – Copies (or duplicate originals, if available) of all lease files, land files, well files, gas and oil sales contract files, gas processing files, division order files, abstracts, title opinions, land surveys, cores, logs, geological and geophysical information, maps, engineering data and reports, production records, reserve studies and evaluations (insofar as they cover and exist within the boundaries of the Assets), and other books, records, data, files, maps and accounting records, in each case to the extent related to the Assets, or used or held for use in connection with the ownership, use, maintenance or operation thereof.

“Assumed Liabilities” – as defined in Section 2.06.

“Breach” – a “Breach” of a representation, warranty, covenant, obligation, or other provision of this Agreement or any instrument delivered pursuant to this Agreement shall be deemed to have occurred if there is or has been any inaccuracy in or breach of, or any failure to perform or comply with, such representation, warranty, covenant, obligation, or other provision.

“Business Day” – any day other than a Saturday, Sunday, or any other day on which commercial banks in the United States of America or Japan are authorized or required by law or executive order to close.

“Buyer’s Closing Documents” – as defined in Section 4.02(a).

“Buyer’s Disclosure Schedule” – the disclosure schedule attached as Exhibit E.

“Buyer Group” – as defined in Section 10.02.

“Claims” – All of Seller’s right, title and interest in and to any claims, demands, causes of action, rights of recovery, rights of set-off, rights to refunds and similar rights against third parties (including, without limitation, (i) claims against insurers under the insurance policies required to be maintained until Closing pursuant to Section 5.03, (ii) claims or rights to any insurance proceeds for business interruption related to Hurricanes Katrina and/or Rita, and (iii) claims for indemnification and contribution) to the extent related to (a)

the ownership, use, construction, maintenance or operation of the Assets after the Effective Time, (b) with respect only to claims or rights to any insurance proceeds for business interruption related to Hurricanes Katrina and/or Rita, the ownership, use, construction, maintenance or operation of the Assets prior to the Effective Time, (c) any damage to the Assets not repaired or replaced prior to the Effective Time, (d) the Assumed Liabilities, or any portion thereof, if any, including any claims for refunds, prepayments, offsets, recoupment, judgments and the like, whether received as payment or credit against future liabilities, in each case to the extent related to the matters covered by clauses (a), (b), (c) or (d) above; provided, however, that the term “Claims” shall not include (1) any claims or causes of action against Seller or any Affiliate of Seller, (2) any claims or rights against insurers or other third parties for Retained Liabilities for which Seller is responsible under this Agreement, and (3) any claims or rights against insurers, other than (I) claims or rights under the insurance policies required to be maintained until Closing pursuant to Section 5.03 (except for Retained Liabilities), (II) claims or rights to any insurance proceeds for the damages referenced in (c) above, and (III) claims or rights to any insurance proceeds for business interruption related to Hurricanes Katrina and/or Rita referenced in (ii) above. The proceeds for business interruption insurance referenced in (ii) above shall be deemed to be one-half (1/2) of all proceeds from business interruption insurance related to Hurricanes Katrina and/or Rita to the extent attributable to the Assets and/or the Retained Assets.

“Closing” – as defined in Section 2.03.

“Closing Date” – as defined in Section 2.03.

“Confidentiality Agreement” – that certain Confidentiality Agreement between Buyer and Seller dated September 7, 2005.

“Consent” – any approval, consent, ratification, waiver, or other authorization (including any Governmental Authorization), or filing with or notification to, any Person which is required to be obtained, made or complied with for or in connection with any sale, assignment, transfer or encumbrance of any Asset or any interest therein.

“Contemplated Transactions” – all of the transactions contemplated by this Agreement, including, but not limited to:

(a) the sale of the Assets by Seller to Buyer;

(b) the execution, delivery, and performance of the Instruments of Conveyance and all other instruments and documents required under this Agreement;

(c) the performance by Buyer and Seller of their respective covenants and obligations under this Agreement; and

(d) Buyer’s acquisition, ownership, and exercise of control over the Assets.

“Contract” – any valid and subsisting contract, agreement or instrument (other than master service contracts and other contracts entered into by Seller in its capacity as operator of the Assets rather than simply as an owner of the Assets) by which any of the Assets are bound, or that directly relates to or is otherwise directly applicable to any of the Assets, only to the extent applicable to the Assets rather than Seller’s other properties, including but not limited to, operating agreements, unitization, pooling and communitization agreements, declarations and orders, joint venture agreements, farmin and farmout agreements, water rights agreements, platform agreements, production handling agreements, exploration agreements, participation agreements, exchange agreements, transportation or gathering agreements, agreements for the sale and purchase of Hydrocarbons or processing agreements to the extent applicable to the Assets or the production of Hydrocarbons from the Assets, including, without limitation, those listed on Exhibit B that are valid and subsisting and directly relate to or are otherwise directly applicable to any of the Assets, but excluding any contracts, agreements and instruments to the extent transfer is prohibited by any bona fide third party restriction or Legal Requirement and the necessary consents to transfer are not obtained as contemplated by Section 11.03.

“Covered Liabilities” – as defined in Section 2.06.

“Cure” – as defined in Section 11.06.

“Cure Notice” – as defined in Section 11.06.

“DTPA” – as defined in Section 12.14.

“Damages” – as defined in Section 10.02.

“Defect Value” – as defined in Section 11.05.

“Defensible Title” – as defined in Section 11.04.

“De Minimis Environmental Defect Cost” – as defined in Section 11.14.

“De Minimis Title Defect Cost” – as defined in Section 11.08.

“Deposit Amount” – One percent (1%) of the Purchase Price.

“Effective Time” – January 1, 2006, at 7:00 a.m., Central Time.

“Encumbrance” – any charge, equitable interest, privilege, lien, option, pledge, collateral assignment, security interest, right of first refusal, restriction, reservation, encroachment, defect or irregularity of any kind.

“Environment” – soil, land, surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands), groundwater,

drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life, and any other environmental medium or natural resource.

“Environmental Claim Date” – as defined in Section 11.11.

“Environmental Condition” – (i) any condition existing prior to the Closing Date with respect to the Assets, the air, land, soil, surface, seabed, subsurface strata, surface water, ground water, or sediments, or Hazardous Materials released or migrating from the Assets, which causes an Asset to be subject to Remediation under, or not in compliance with an Environmental Law, or (ii) any operating practice or similar course of conduct by Seller or its Affiliates (or the operator) with respect to the Assets that existed or commenced prior to the Closing Date with respect to matters governed by or regulated under Environmental Laws that is not in compliance with such Environmental Laws.

“Environmental Defect” – an Environmental Condition discovered by Buyer as a result of any Phase I Environmental Assessment conducted by or on behalf of Buyer pursuant to Section 11.11 of this Agreement.

“Environmental Defect Notice” – as defined in Section 11.12.

“Environmental Defect Value” – as defined in Section 11.12.

“Environmental Law” – any Legal Requirement that requires or relates to:

(a) advising appropriate authorities, employees, and the public of intended or actual releases of pollutants or hazardous substances or materials that could have significant impact on the Environment;

(b) preventing or reducing to acceptable levels the release of pollutants or hazardous substances or materials into the Environment;

(c) reducing the quantities, preventing the release, or minimizing the hazardous characteristics of wastes that are generated;

(d) protecting resources, species, or ecological amenities;

(e) reducing to acceptable levels the risks inherent in the transportation of hazardous substances, pollutants, oil, or other potentially harmful substances;

(f) cleaning up pollutants that have been released, preventing the threat of release, or paying the costs of such clean up or prevention;

(g) making responsible parties pay private parties, or groups of them, for damages done to their health or the Environment, or permitting

self-appointed representatives of the public interest to recover for injuries done to public assets; or

(h) protecting human health and safety.

“Environmental Liabilities” – any cost, damage, expense, liability, obligation, or other responsibility arising from or under either an Environmental Law or third party claims relating to the Environment, Environmental Conditions, or the release, handling, use or disposal of Hazardous Materials, and which relates to the Assets or the ownership or operation of the same.

“Environmental Material Adverse Effect” – any Environmental Liabilities that are reasonably expected to result in Damages to Seller or Buyer in an amount exceeding $100,000 per occurrence, or $500,000 in the aggregate.

“Environmental Rejection Notice” – as defined in Section 11.13(b).

“Equipment” – any and all wells, equipment, and facilities located on the Leases, including, but not limited to, the Wells, pumps, platforms, well equipment (surface and subsurface), saltwater disposal wells, water wells, lines and facilities, sulfur recovery facilities, compressors, compressor stations, dehydration facilities, treatment facilities, pipeline gathering lines, flow lines, transportation lines, valves, meters, separators, tanks, tank batteries, and other fixtures to the extent that the same are used for or held for use in connection with, and attributable to Seller’s ownership or operation of, the Leases.

“Excluded Assets” – the following assets, which are not covered by the transaction contemplated by this Agreement:

(a) (i) all trade credits, accounts receivable, notes receivable. and other receivables attributable to the Assets with respect to any period of time prior to the Effective Time, (ii) all deposits, cash, checks in process of collection, cash equivalents, and funds attributable to the Assets with respect to any period of time prior to the Effective Time, and (iii) funds attributable to third parties for production of Hydrocarbons prior to the Effective Time but suspended or impounded by Seller;

(b) all corporate, financial, and tax records of Seller, subject to Section 12.01 below;

(c) all claims and causes of action of Seller (other than the Claims) (i) arising from acts, omissions, or events, or damage to or destruction of property occurring prior to the Effective Time, and (ii) affecting any of the other Excluded Assets;

(d) all rights, titles, claims, and interests of Seller arising prior to the Effective Time (i) under any policy or agreement of insurance or indemnity, (ii) under any bond, or (iii)

to any insurance proceeds or awards; provided that these exclusions shall not prejudice Seller’s assignment of its interests in the Claims;

(e) all Hydrocarbons produced from or attributable to the Assets with respect to all periods prior to the Effective Time, excluding all rights and interests with respect to Imbalances as of the Effective Time, together with all proceeds from or attributable to such Hydrocarbons;

(f) claims of Seller for refund of, or loss carry forwards with respect to (i) production, ad valorem, or any other taxes attributable to any period prior to the Effective Time, or (ii) income or franchise taxes or any other taxes attributable to any of the other Excluded Assets;

(g) all amounts due or payable to Seller as adjustments or refunds under any Contracts, with respect to periods prior to the Effective Time, specifically including, without limitation, (i) credits, adjustments, or refunds under the Deep Water Royalty Relief Act or any other act, statute, rule, law, or regulation, and (ii) amounts recoverable from audits under operating agreements, but excluding all rights and interests with respect to Imbalances as of the Effective Time;

(h) all amounts due or payable to Seller as adjustments to insurance premiums related to any period prior to the Effective Time;

(i) all proceeds, benefits, income, or revenues accruing (and any security or other deposits made) with respect to (i) the Assets prior to the Effective Time, but excluding all rights and interests with respect to Imbalances as of the Effective Time; and (ii) any of the other Excluded Assets;

(j) all legal files; attorney-client communications or attorney work product; records and documents subject to confidentiality provisions, claims of privilege or other restrictions on access; and auditor’s reports; provided, however, that Buyer shall be entitled to receive copies of title abstracts and title opinions with respect to the Assets and these copies (but not the originals) will be included in the Assets, with the understanding that Seller makes no representation regarding the accuracy of any such title abstracts or title opinions;

(k) any interpretive seismic, geochemical, and geophysical information and data, or other proprietary information relating thereto licensed by unaffiliated third parties to Seller ;

(l) all of Seller’s and its Affiliates’ intellectual property, including but not limited to proprietary computer software, patents, trade secrets, copyrights, names, marks, and logos, but not including proprietary, interpretive seismic, geochemical, and geophysical information and data;

(m) all of Seller’s boats, tools, pulling machines, microwave equipment, computer equipment, remote terminal units, and any other equipment or material (other than inventory) temporarily located on the Assets;

(n) any pipelines, fixtures, tanks, or equipment located on the Assets that belong to third parties (other than Affiliates of Seller), such as lessors or purchasers of Hydrocarbons; and

(o) all of Seller’s offshore service agreements and charter party agreements, whether or not services thereunder are or were utilized in connection with the Assets.

“Existing Environmental Liabilities” – All Environmental Liabilities arising out of the operation or ownership of the Assets on or prior to the Closing Date, other than Environmental Defects.

“Final Amount” – as defined in Section 2.05(c).

“Final Settlement Date” – as defined in Section 2.05(c).

“Final Settlement Statement” – as defined in Section 2.05(c).

“Future Delivery/Payment Obligation” – any obligation of Seller (i) under any contract or agreement for the sale of gas from the Assets containing a take-or-pay, advance payment, prepayment, or similar provision, or under any gathering, transmission, or any other contract or agreement with respect to any of the Assets, to gather, deliver, process, or transport any gas without then or thereafter receiving full payment therefor, (ii) to deliver any quantities of gas or to pay any penalties or other amounts, in connection with the violation of any of the terms of any gas contract or other agreement with shippers with respect to the Assets, or (iii) to pay any penalties or other payments under any gas transportation or other agreement as a result of the delivery of quantities of gas from the Wells in excess of the contract requirements; provided that Future Delivery/Payment Obligations shall not include any Imbalances.

“Governmental Authorization” – any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement.

“Governmental Body” – any:

(a) nation, state, county, city, town, village, district, or other jurisdiction of any nature;

(b) federal, state, local, municipal, foreign, or other government;

(c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal);

(d) multi-national organization or body; or

(e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature.

“Hazardous Materials” – any material, pollutant, contaminant, substance or waste that is regulated by any Governmental Body under any Environmental Laws.

“HSR Act” – the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“Hurricane Costs” – all costs for the Hurricane Damage Repairs, including all costs, expenses, fines, penalties, liabilities and obligations owing to third parties (including personal injury and property damage claims) in connection with or arising out of the Hurricane Damage Repairs.

“Hurricane Damage Repairs” – the restoration, repair and/or replacement of all physical damage to the Equipment and other tangible property included in the Assets to the extent such damage is directly attributable to Hurricanes Katrina, Rita, and/or Ivan and such restoration, repair and/or replacement work is necessary (i) to restore such property to serviceable condition, and (ii) to bring such property into compliance with the applicable rules and regulations of the MMS and any other applicable Governmental Body having jurisdiction over the Assets and the Retained Assets, or to replace such damaged property if within a commercially reasonable period of time such property cannot be brought into compliance with such applicable rules and regulations.

“Hydrocarbons” – oil, gas, minerals, and other gaseous and liquid hydrocarbons or any combination of the foregoing, produced from and attributable to the Leases.

“Imbalances” – over-production or under-production or over-deliveries or under-deliveries with respect to Hydrocarbons produced from or allocated to the Assets, regardless of whether such over-production or under-production or over-deliveries or under-deliveries arise at the platform, wellhead, pipeline, gathering system, transportation system, processing plant or other location, including, without limitation, any imbalances under gas balancing or similar agreements, platform imbalances under production handling agreements, imbalances under processing agreements and imbalances under gathering or transportation agreements.

“Instruments of Conveyance” – the instruments of conveyance transferring title to the Assets. For each OCS Lease, Seller and Buyer shall execute, acknowledge, and deliver

five (5) originals of an Assignment and Bill of Sale substantially in the form of Exhibit “C-1,” where Seller owns Record Title, or Exhibit “C-2,” where Seller owns only Operating Rights. For all State Leases, Seller and Buyer shall execute, acknowledge, and deliver five (5) originals of an Assignment and Bill of Sale substantially in the form of Exhibit “C-3,” along with such counterpart instruments as may be required by the relevant Governmental Body, prepared on the form promulgated by such Governmental Body. In addition, Seller and Buyer shall execute, acknowledge, and deliver a general assignment, bill of sale and conveyance covering all Assets, in a form to be mutually and reasonably agreed to by Buyer and Seller, and such other instruments as may be necessary to convey all of the Assets (including but not limited to Assignments of Overriding Royalty) in forms that are mutually acceptable to the parties. The foregoing Instruments of Conveyance shall contain a special warranty of title pursuant to which Seller warrants Defensible Title (except for clauses (d) and (e) of Section 11.04) to the Assets unto Buyer, its successors and assigns with respect thereto, against every Person whomsoever lawfully claiming or to claim the same or any part thereof by, through or under Seller or any Affiliate of Seller.

“Interest Addition” – as defined in Section 11.09.

“Interest Addition Notice” – as defined in Section 11.09.

“Interest Addition Rejection Notice” – as defined in Section 11.09.

“Interest Addition Value” – as defined in Section 11.09.

“IRC” – the Internal Revenue Code of 1986 or any successor law, and regulations issued by the IRS pursuant to the Internal Revenue Code or any successor law.

“IRS” – the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury.

“Key Main Pass Assets” – as defined in Section 7.05.

“Knowledge” – an individual will be deemed to have “Knowledge” of a particular fact or other matter if such individual is actually aware of such fact or other matter. A Person (other than an individual) will be deemed to have “Knowledge” of a particular fact or other matter if any individual who is serving as an officer or director of such Person has, or at any relevant time had, Knowledge of such fact or other matter. Seller will also be deemed to have “Knowledge” of a particular fact or other matter if any of the individuals who on the date of this Agreement or the Closing Date hold the following management positions below the officer level has, or at any relevant time had, Knowledge of such fact or other matter: Operations, Planning and Development Manager; Operations Manager; Manager of Environmental, Safety & Health; or Manager of Revenue Accounting.

“Leases” – the oil, gas, and mineral leases described on Exhibit B, together with all interest derived from the such leases in or to any pools or units which include any lands covered by any such leases or all or a part of any such leases or include any Wells, including those pools or units shown on Exhibit B, and including all interest derived from such leases in production from any such pooled area or unit, whether such pooled area or unit production comes from Wells located on or off of a Lease, and all tenements, hereditaments and appurtenances belonging to such leases and such pooled areas or units.

“Legal Requirement” – any federal, state, local, municipal, foreign, international, or multinational law, administrative order, constitution, ordinance, principle of common law, regulation, statute, or treaty.

“LIBOR” – for the day in question or the previous banking day if the day in question is not a banking day, the interest rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum if such rate is not such a multiple) equal to the rate per annum at which six (6) months deposits in U.S. Dollars are offered by the principal office of Barclays Bank in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) on such day.

“MMS” – the United States Department of the Interior Minerals Management Service.

“Net Revenue Interest” – for any Well or Lease (or the specified zone(s) therein), Seller’s share of the Hydrocarbons produced, saved, and marketed therefrom (after satisfaction of all royalties, overriding royalties, nonparticipating royalties, net profits interests, or other similar burdens on or measured by production of Hydrocarbons).

“OCS Lease” – a Lease of submerged lands under the Outer Continental Shelf Lands Act, issued by the MMS.

“Operating Rights” – with respect to an OCS Lease, a leasehold interest that entitles the holder to conduct drilling and related operations, but the holder of which does not have a contractual relationship with the MMS, and cannot relinquish or terminate the OCS Lease.

“Order” – any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator.

“Organizational Documents” – (a) the articles or certificate of incorporation and the bylaws of a corporation; (b) the articles of organization and regulations of a limited liability company; (c) the certificate of limited partnership and limited partnership agreement of a limited partnership; and (d) any amendment to any of the foregoing.

“Permitted Encumbrance” – any of the following: (a) any obligations or duties reserved to or vested in any municipality or other Governmental Body to regulate any Asset in any manner including all applicable Legal Requirements, except to the extent any of the same have been applied or exercised, individually or in the aggregate, in a manner which operates to reduce Seller’s Net Revenue Interest in a Well below that shown in Exhibit A or increase Seller’s Working Interest in a Well above that shown in Exhibit A without a proportionate increase in the Net Revenue Interest; (b) the terms and conditions of all leases, options, servitudes, contracts for sale, purchase, exchange, refining or processing of Hydrocarbons, operating agreements, construction agreements, construction and operation agreements, participation agreements, shoot-to-earn agreements, exploration agreements, partnership agreements, processing agreements, plant agreements, pipeline, gathering, exchange, and transportation agreements, disposal agreements, permits, licenses, and any other agreements affecting the Assets, including those set forth as Contracts on Exhibit B attached hereto, but only to the extent that they do not, individually or in the aggregate, (i) operate to reduce Seller’s Net Revenue Interest in a Well below that shown in Exhibit A or increase Seller’s Working Interest in a Well above that shown in Exhibit A without a proportionate increase in the Net Revenue Interest or (ii) except in the case of Contracts listed on Exhibit B, adversely affect the ownership and/or operation of the affected Assets (as currently used or owned) in any material respect; (c) the Consents identified in Part 3.11 of the Seller’s Disclosure Schedule with respect to which prior to Closing (i) waivers or consents have been obtained from the appropriate Person, (ii) the applicable period of time for asserting such rights has expired without any exercise of such rights, or (iii) mutually agreed upon arrangements have been made by the parties to allow Buyer to receive substantially the same economic benefits as if all such waivers and consents had been obtained;(d) easements, rights-of-way, servitudes, permits, surface leases, and other similar rights on, over, or in respect of any of the Assets, as long as any such encumbrances, individually or in the aggregate, do not interfere in any material respect with the exploration, development or operation of the Assets burdened thereby; (e) lessor’s royalties, overriding royalties, production payments, net profits interests, reversionary interests, and similar burdens with respect to a Well if the net cumulative effect of such burdens does not operate to reduce Seller’s Net Revenue Interest in such Well below that shown in Exhibit A or increase Seller’s Working Interest in such Well above that shown in Exhibit A without a proportionate increase in the Net Revenue Interest, (f) such other defects or irregularities of title or Encumbrances as Buyer may have waived in writing or which Buyer shall be deemed to have waived pursuant to the provisions of Section 11.05 hereof; and (g) conventional rights of reassignment obligating Seller to reassign its interests in any portion of the Leases to a third party in the event Buyer intends to release or abandon such interest prior to the expiration of the primary term or other termination of such interest.

“Person” – any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Body.

“Post-Closing Amount” – as defined in Section 2.05(c).

“Post-Closing Date” – as defined in Section 2.05(c).

“Preferential Purchase Right” – any right or agreement that enables any Person to purchase or acquire any Asset or any interest therein or portion thereof as a result of or in connection with (i) the sale, assignment or other transfer of any Asset or any interest therein or portion thereof or (ii) the execution or delivery of this Agreement or the consummation or performance of the terms and conditions contemplated by this Agreement.

“Preliminary Amount” – as defined in Section 2.05(a).

“Proceeding” – any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator.

“Property Costs” – as defined in Section 2.05(a).

“Purchase Price” – as defined in Section 2.02.

“Record Title” – with respect to an OCS Lease, an ownership interest in the contractual lease document with the MMS, which includes the right to explore for and develop oil, gas, or sulphur resources, as well as responsibilities for all lease liabilities created or established during tenure of ownership, and which also includes the right to relinquish the OCS Lease.

“Rejection Notice” – as defined in Section 11.07.

“Remediate” or “Remediation” – affirmative actions or remedial work taken to remove or otherwise remedy an Environmental Condition, including but not limited to (i) any survey, site assessment, audit, investigation, inspection, sampling, analysis, removal, excavation, pump and treat, cleanup, disposal, storage, handling, or treatment and (ii) any action required to bring any Asset or operating practice or similar course of conduct by Seller or its Affiliates (or the operator) into compliance with Environmental Laws.

“Representative” – with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors.

“Reserve Report” – the reserve report dated January 2006 of Ryder Scott with respect to the Leases and Wells and, to the extent any well or completion is not listed on the aforesaid reserve report, the Reserve Report shall also include the reserve report dated October 2005 of Ryder Scott with respect to the Leases and Wells.

“Retained Assets” – Seller’s interests in (i) the Leases, (ii) the Equipment, (iii) Hydrocarbons produced after the Effective Time, (iv) the Contracts, (v) the Claims, (vi) the Surface Rights, and (vii) the Asset Records that are not included in the Assets. “Retained Assets” shall also include any rights, titles, interests, assets and properties that are originally included in the Assets under the terms of this Agreement, but that are subsequently excluded from the Assets or sale under this Agreement pursuant to the terms of this Agreement at any time before or after Closing.

“Retained Liabilities” – as defined in Section 2.07.

“Seller’s Closing Documents” – as defined in Section 3.02 (a).

“Seller’s Disclosure Schedule” – the disclosure schedule attached as Exhibit D.

“Seller Group” – as defined in Section 10.03.

“State Lease” – a Lease from any state of the United States of America, or from a Governmental Body of any state of the United States of America.

“Seller Operated Assets” – Assets operated by Seller or an Affiliate of Seller.

“Surface Rights” – All easements, permits, licenses, servitudes, rights-of-way, surface or seabed leases and other surface or seabed rights appurtenant to, and used or held for use in connection with the Assets, excluding any such easements, permits and other rights to the extent transfer is restricted by any Legal Requirement and the necessary authorizations or consents to transfer under such Legal Requirement are not obtained.

“Tax” – any tax (including any income tax, capital gains tax, value-added tax, sales tax, property tax, severance tax, gift tax, or estate tax), levy, assessment, tariff, duty (including any customs duty), deficiency, or other fee, and any related charge or amount (including any fine, penalty, interest, or addition to tax), imposed, assessed, or collected by or under the authority of any Governmental Body or payable pursuant to any tax-sharing agreement or any other contract relating to the sharing or payment of any such tax, levy, assessment, tariff, duty, deficiency, or fee.

“Tax Return” – any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Legal Requirement relating to any Tax.

“Threatened” – a claim, Proceeding, dispute, action, or other matter will be deemed to have been “Threatened” if any demand or statement has been made (orally or in writing) to

a party or any of its officers, directors, or employees that would lead a prudent Person to conclude that such a claim, Proceeding, dispute, action, or other matter is likely to be asserted, commenced, taken, or otherwise pursued in the future.

“Title Claim Date” – as defined in Section 11.05.

“Title Defect” – any matter affecting the Assets that, in the opinion of Buyer, would not give Buyer Defensible Title, in accordance with Section 11.04 hereof.

“Title Defect Notice(s)” – as defined in Section 11.05.

“Violation of Environmental Laws” – a violation of, or the failure to perform any obligation imposed by, an Environmental Law.

“Wells” – oil and gas wells located (or projected to be located) on the Leases, and more particularly described on Exhibit A, which Exhibit A may also include possible well locations and exploratory prospects.

“Working Interest” – for any Well (or the specified zone(s) therein) or Lease, that share of costs and expenses associated with the exploration, maintenance, development and operation of such Well or Lease that Seller is required to bear and pay.

ARTICLE 2

SALE AND TRANSFER OF ASSETS; CLOSING

2.01. Assets. Subject to the terms and conditions of this Agreement, at the Closing, Seller shall sell and transfer the Assets to Buyer.

2.02. Purchase Price. Subject to any adjustments that may be made under Section 2.05, the purchase price (the “Purchase Price”) for the Assets will be Five Hundred Million Dollars ($500,000,000.00). The Purchase Price for the Assets shall be allocated among the Assets as set forth in Schedule 2.02 hereto. The amount so allocated to a part of the Assets shall constitute the Allocated Values for such part of the Assets. Seller and Buyer agree to be bound by the allocation set forth in Schedule 2.02 for purposes of Article 11 hereof. Within five (5) Business Days after the date hereof, Buyer (or any direct or indirect owner(s) of Buyer on behalf of Buyer) shall pay Seller the Deposit Amount. If the Closing timely occurs, the Deposit Amount plus interest at the Agreed Interest Rate shall be applied as a credit toward the Purchase Price. If the Closing does not timely occur as a result of the Breach by Buyer of the terms of this Agreement and there has been no Breach by Seller of the terms of this Agreement, the Deposit shall be retained by Seller as its sole and exclusive remedy and as liquidated damages (and not as a penalty). If the Closing does not timely occur for any other reason, the Deposit Amount plus interest at the Agreed Interest Rate shall be immediately returned to Buyer; provided, however, if the Closing does not timely occur as a result of the Breach by Seller of the terms of this Agreement and there has been no Breach by Buyer of the terms of the Agreement,

Buyer at its option may (a) terminate this Agreement, in which event Seller shall be immediately obligated to pay the Deposit Amount plus interest at the Agreed Interest Rate to Buyer, or (b) enforce specific performance of the duties and obligations of Seller under this Agreement.

2.03. Closing. The purchase and sale (the “Closing”) provided for in this Agreement shall take place at the offices of Seller, at 10:00 a.m. (local time) on or before the later of (i) May 31, 2006, or (ii) five (5) Business Days after Buyer becomes qualified with the MMS to own the Assets (the “Closing Date”), or at such other time and place as the parties may agree. Subject to the provisions of Articles 9, 10, and 11, failure to consummate the purchase and sale provided for in this Agreement on the date and time and at the place determined pursuant to this Section 2.03 shall not result in the termination of this Agreement and shall not relieve any party of any obligation under this Agreement. Ten (10) Business Days prior to the Closing Date, Seller will deliver to Buyer a statement setting forth in reasonable detail Seller’s determination of the Preliminary Amount based upon the best information available at the time of Closing.

2.04. Closing Obligations. At the Closing:

(a) Seller shall deliver (and execute, as appropriate), or cause to be delivered (and executed, as appropriate), to Buyer:

(i) the Instruments of Conveyance dated as of the Closing Date;

(ii) possession of the Assets;

(iii) a certificate, in substantially the form set forth in Exhibit F, executed by Seller (a) representing and warranting to Buyer that each of Seller’s representations and warranties in this Agreement is accurate in all material respects (or, with respect to representations and warranties qualified by materiality, in all respects) as of the Closing Date as if made on the Closing Date and (b) certifying as to the incumbency for each officer of Seller executing this Agreement, the Instruments of Conveyance or other documents delivered pursuant to this Agreement;

(iv) certified copies of resolutions of Seller’s board of directors or other managing authority, as appropriate, authorizing and approving the execution, delivery, and performance of the Agreement;

(v) such documents as Buyer or counsel for Buyer may reasonably request, including but not limited to letters-in-lieu of transfer order to purchasers of production from the Wells;

(vi) as to properties to be owned solely by Buyer and Seller, a separate Offshore Operating Agreement, in the form set out as Exhibit “G,”

for each Lease, or covering more than one Lease if Buyer and Seller mutually agree;

(vii) true and complete copies of all consents and waivers received by Seller pursuant to Sections 5.04, 11.02 and 11.03;

(viii) a Tag-Along Agreement in the form attached hereto as Exhibit “H”; and

(ix) a Transition Services Agreement in the form attached hereto as Exhibit “I.”

(b) Buyer shall deliver (and execute, as appropriate) to Seller:

(i) the Preliminary Amount, less the Deposit Amount and any interest accrued thereon, by wire transfer to the account(s) specified by Seller in written notice given by Seller to Buyer at least ten (10) Business Days prior to the Closing Date;

(ii) the Instruments of Conveyance dated as of the Closing Date;

(iii) a certificate, in substantially the form set forth in Exhibit F, executed by Buyer (a) representing and warranting to Seller that each of Buyer’s representations and warranties in this Agreement is accurate in all material respects as of the Closing Date as if made on the Closing Date and (b) certifying as to the incumbency for each officer of Buyer executing this Agreement, the Instruments of Conveyance or other documents delivered pursuant to this Agreement;

(iv) certified copies of resolutions of Buyer’s board of directors or other managing authority, as appropriate, authorizing and approving the execution, delivery, and performance of the Agreement;

(v) such other documents as Seller or counsel for Seller may reasonably request;

(vi) as to properties to be owned solely by Buyer and Seller, a separate Offshore Operating Agreement, in the form set out as Exhibit “G,” for each Lease, or covering more than one Lease if Buyer and Seller mutually agree;

(vii) a Tag-Along Agreement in the form attached hereto as Exhibit “H”; and

(viii) a Transition Services Agreement in the form attached hereto as Exhibit “I.”

2.05. Allocations and Adjustments. If the Closing occurs:

(a) Notwithstanding the effective time of the Instruments of Conveyance, Buyer shall be entitled to all revenues, production, proceeds, income, and products from or attributable to the Assets on and after the Effective Time, and to all other income, proceeds, receipts and credits earned with respect to the Assets on or after the Effective Time, and shall be responsible for (and entitled to any refunds with respect to) all Property Costs attributable to the Assets and incurred on and after the Effective Time (and prior to the Effective Time, with respect only to costs of business interruption insurance related to Hurricanes Katrina and/or Rita) . Seller shall be entitled to all revenues, production, proceeds, income, accounts receivable, and products from or attributable to the Assets prior to the Effective Time, and shall be responsible for (and entitled to any refunds with respect to) all Property Costs attributable to the Assets and incurred prior to the Effective Time. “Earned” and “incurred”, as used in this Agreement, shall be interpreted in accordance with generally accepted accounting principles and Council of Petroleum Accountants Society (COPAS) standards. “Property Costs” shall mean all amounts attributable to the operation and ownership of the Assets incurred in the ordinary course of business and not in Breach of this Agreement. For purposes of allocating revenues, production, proceeds, income, accounts receivable, and products under this Section, (i) liquid hydrocarbons produced into storage facilities will be deemed to be “from or attributable to” the Wells when they pass through the pipeline connecting into the storage facilities into which they are run, and (ii) gaseous hydrocarbons and liquid hydrocarbons produced into pipelines will be deemed to be “from or attributable to” the Wells when they pass through the delivery point sales meters on the pipelines through which they are transported. In order to accomplish the foregoing allocation of production, the parties shall rely upon gauging, metering, and strapping procedures conducted by Seller on or about the Effective Time to the extent possible and, unless demonstrated to be inaccurate, shall utilize reasonable interpolating procedures to arrive at an allocation of production when exact gauging, metering, and strapping data is not available on hand as of the Effective Time. Within ten (10) days after the execution of this Agreement, Seller shall provide to Buyer evidence of all gauging, metering, and strapping procedures conducted hereunder in connection with the Wells, together with all data necessary to support any estimated allocation, for purposes of establishing the adjustment to the Purchase Price. Ad valorem taxes for 2006 shall be prorated on a daily basis, with Buyer liable for the

portion allocated to the period on and after the Effective Time and Seller liable for the portion allocated to the period before the Effective Time. If the amount of such taxes for part, or all, of the Assets is not available on the Closing Date, proration of taxes shall be made on the basis of taxes assessed in the previous year, with a subsequent cash adjustment of such proration to be made between Seller and Buyer when actual tax figures are available. Property Costs shall not include (i) any amounts which constitute or relate to Retained Liabilities or Existing Environmental Liabilities or (ii) any costs of insurance related to Hurricanes Katrina and/or Rita, other than premiums for business interruption insurance (it being understood and agreed that Property Costs shall include one-half (1/2) of the total premium of $2.2 million paid by Seller for business interruption insurance with respect to the Assets and/or Retained Assets related to Hurricanes Katrina and/or Rita, and that Buyer shall be entitled to one-half (1/2) of all proceeds from such business interruption insurance to the extent attributable to the Assets and/or Retained Assets, without regard to the Effective Time). The “Preliminary Amount” shall be the Purchase Price, adjusted as provided in Section 2.05(b), based upon the best information available at time of the Closing.

(b) The Purchase Price shall be, without duplication,

(i) increased by the following amounts:

(A) the aggregate amount of all non-reimbursed Property Costs which are attributable to the period from and after the Effective Time and which have been incurred and paid by Seller with respect to the Wells and Leases;

(B) any other upward adjustment mutually agreed upon by the parties;

(ii) decreased by the following amounts:

(A) the aggregate amount of (i) proceeds received by Seller from the sale of Hydrocarbons produced from and attributable to the Assets from and after the Effective Time for which Buyer is entitled under Section 2.05(a) and (ii) other proceeds received with respect to the Assets for which Buyer would otherwise be entitled under Section 2.05(a), including without limitation one-half (1/2) of all business interruption insurance proceeds with respect to the Assets and/or Retained Assets related to Hurricanes Katrina and/or Rita that have been received by Seller prior to the Closing Date;

(B) the amount of any downward adjustment relating to Title Defects as set forth in Article 11;

(C) the aggregate amount of all downward adjustments pursuant to Article 11;

(D) Seller’s share of estimated ad valorem taxes through the Effective Time; and

(E) the amount of any downward adjustment mutually agreed upon by the parties.

(c) Subject to the arbitration provisions of Article 12.15 as to adjustments under Section 2.05(b)(ii)(B), as soon as practicable after Closing, but no later than ninety (90) days following the Closing Date, Seller shall prepare and submit to Buyer, a statement (the “Final Settlement Statement”) setting forth each adjustment or payment which was not finally determined as of the Closing Date and showing the values used to determine such adjustments to reflect the final adjusted Purchase Price. On or before sixty (60) days after receipt of the Final Settlement Statement, Buyer shall deliver to Seller a written report containing any changes that Buyer proposes be made to the Final Settlement Statement. During this sixty (60) day period, Buyer shall be given reasonable access to Seller’s books and records relating to the matters required to be accounted for in the Final Settlement Statement, permitted to review the working papers of Seller relating to the Final Settlement Statement, and given reasonable access to the employees of Seller primarily responsible for the preparation of the Final Settlement Statement. Seller and Buyer shall undertake to agree with respect to the amounts due pursuant to the post-closing adjustment no later than one hundred eighty (180) days after the Closing Date (the “Post-Closing Date”). If Seller and Buyer are unable to agree by the Post-Closing Date as to adjustment matters not subject to arbitration in accordance with this Agreement, Seller and Buyer shall nevertheless adjust the Purchase Price to take into account all agreed-upon adjustments at that time. The Purchase Price, as adjusted on the Post-Closing Date, shall be called the “Post-Closing Amount.” If (a) the Post-Closing Amount is more than the Preliminary Amount, Buyer shall pay to Seller the amount of the difference; or (b) the Post-Closing Amount is less than the Preliminary Amount, Seller shall pay to Buyer the amount of the difference. Such payment, together with interest at the Agreed Interest Rate, shall be made within five (5) Business Days after the Post-Closing Date by wire transfer to accounts specified by Seller or Buyer, as appropriate. For those adjustment matters not subject to arbitration, and as to which Seller and Buyer are unable to reach agreement by the Post-Closing Date, Seller shall select an independent accounting firm in Houston,

Texas, from a list of two such firms provided by Buyer (none of which shall be the independent accounting firm regularly used by Buyer or Seller), which firm shall determine the Purchase Price adjustment or payment amount in accordance with the terms and conditions set forth in this Agreement. The decision of such independent accounting firm shall be binding on Seller and Buyer, and the fees and expenses of such independent accounting firm shall be borne one-half (1/2) by Seller and one-half (1/2) by Buyer. The date upon which the Purchase Price is established, as provided in the preceding sentence, shall be called the “Final Settlement Date,” and the final adjusted Purchase Price shall be called the “Final Amount.” If (a) the Final Amount is more than the Post-Closing Amount, Buyer shall pay to Seller the amount of the difference; or (b) the Final Amount is less than the Post-Closing Amount, Seller shall pay to Buyer the amount of the difference. Such payment, together with interest at the Agreed Interest Rate, shall be made within five (5) Business Days of the Final Settlement Date by wire transfer to accounts specified by Seller or Buyer, as appropriate.

2.06. Assumption. If the Closing occurs, from and after the Closing Date, Buyer shall assume, pay, and discharge the following liabilities insofar as allocable to the Assets (“Assumed Liabilities”):

Any and all duties, claims, damages, expenses, fines, penalties, costs (including attorneys’ fees and expenses), liabilities, and obligations (“Covered Liabilities”) (i) attributable to or resulting from the ownership or operation of the Assets from and after the Effective Time under any Contract, Governmental Authorization, or Lease (except for the Retained Liabilities), (ii) imposed by any Legal Requirement relating to the Assets (excluding any Covered Liabilities attributable to or resulting from a violation of any Legal Requirement occurring prior to the Effective Time, except for the portion, if any, of such Covered Liabilities that is attributable to the continuation of such violation after the Effective Time), (iii) for plugging, abandonment, and surface restoration of the oil, gas, injection, water, or other wells located on the lands covered by the Leases, other than any such Covered Liabilities in connection with wells that were required to be plugged and abandoned by Seller or any Affiliate of Seller prior to the Effective Time, (iv) from any act, omission, event, condition, or occurrence accruing subsequent to the Effective Time relating to the Assets (except for the Retained Liabilities), and (v) attributable to all Environmental Liabilities relating to the Assets, other than Existing Environmental Liabilities; provided, however, the provisions of this Section 2.06 shall not relieve Seller from (i) liability resulting from a Breach, if any, of its representations, warranties, or covenants under this Agreement, as provided in Article 10 or (ii) those obligations of Seller under Article 11 that continue after the Closing Date.

Liabilities which constitute liabilities attributable to the Excluded Assets and/or Retained Assets, as well as Assumed Liabilities attributable to the Assets, shall be reasonably and fairly apportioned between Assumed Liabilities for which Buyer is responsible and liabilities with respect to the Excluded Assets and/or Retained Assets for which Seller is responsible. Nothing in this Agreement shall operate to release, impair or diminish any obligations and responsibilities of any member of Seller Group as operator under any operating or similar agreement with respect to the period after the Effective Time. The Assumed Liabilities shall not include any Retained Liabilities or Existing Environmental Liabilities.

2.07. Retained Liabilities.

Seller shall retain, perform, pay and discharge the following (collectively “Retained Liabilities”):

(a) all Covered Liabilities excluded under clauses (ii) and (iii) of the definition of Assumed Liabilities, other than Existing Environmental Liabilities;

(b) all Hurricane Damage Repairs (or cause the performance of all Hurricane Damage Repairs) in a timely fashion and in a good and workmanlike manner as would a prudent operator;

(c) all Hurricane Costs;

(d) all Covered Liabilities attributable to or resulting from any claim for personal injury or death occurring between the Effective Time and the Closing Date to the extent Seller has liability for such claim and such claim arises out of or is attributable to Seller’s use, ownership or operation of the Assets; provided, however, that Seller’s obligations under this clause (d) shall not exceed the aggregate amount of Seller’s insurance coverage with respect to such claims under the insurance policies required to be maintained until Closing pursuant to Section 5.03; and

(e) any liability arising prior to the Effective Time with respect to gas pipeline Imbalances.

The Retained Liabilities shall not include any Assumed Liabilities or Existing Environmental Liabilities.

2.08. Imbalances and Future Delivery/Payment Obligations. Should either party discover any inaccuracy in Parts 3.12(a), 3.12(c) or 3.12(d) of the Seller’s Disclosure Schedule prior to eighteen (18) months after the Closing, it shall promptly give the other party notice of such inaccuracy. Either party may assert one or more claims for an adjustment under this Section by delivering a written notice of each such claim to the other party prior to eighteen (18) months after the Closing or, in the case of Buyer, within five (5) Business Days after Buyer’s receipt of notice of such inaccuracy from Seller as required by this Section 2.08, if later. If it is determined that there is an

inaccuracy in the Imbalances set forth in Part 3.12(a) of the Seller’s Disclosure Schedule or in the Future Delivery/Payment Obligations set forth in Part 3.12(c) of the Seller’s Disclosure Schedule, then (i) if such claim is made before Closing, an adjustment to the Purchase Price will be made as set forth below or (ii) if such claim is made after Closing, a post-Closing adjustment to the Purchase Price will be made as set forth below (and in the case of a post-Closing adjustment, the payor will also pay the payee interest at the Agreed Interest Rate on the amount of the adjustment from the date of Closing to the date of payment):

(a) Imbalances.

(i) If Seller’s total net Imbalance reflects that the Seller is more overproduced or less underproduced than as set forth in Part 3.12(a) of the Seller’s Disclosure Schedule, then the Purchase Price shall be reduced by the net change in the total Imbalance times $4.00 per MMBtu (or, with respect to oil Imbalances, $35.00 per barrel); or

(ii) If Seller’s total net Imbalance reflects that the Seller is more underproduced or less overproduced than as set forth in Part 3.12(a) of the Seller’s Disclosure Schedule, then the Purchase Price shall be increased by the net change in the total Imbalance times $4.00 per MMBtu (or, with respect to oil Imbalances, $35.00 per barrel).

(b) Future Delivery/Payment Obligations.

(i) If the value of Seller’s total Future Delivery/Payment Obligations is greater than the value of Seller’s total Future Delivery/Payment Obligations as set forth in Part 3.12(c) of the Seller’s Disclosure Schedule (with gas delivery obligations being valued at the rate of $4.00 per MMBtu, oil delivery obligations being valued at $35.00 per barrel, and penalty payment obligations being valued at the dollar amount thereof), then the Purchase Price shall be reduced by the net change in the value of Seller’s total Future Delivery/Payment Obligations; or

(ii) If the value of Seller’s total Future Delivery/Payment Obligations is less than the value of Seller’s total Future Delivery/Payment Obligations as set forth in Part 3.12(c) of the Seller’s Disclosure Schedule (with gas delivery obligations being valued at the rate of $4.00 per MMBtu, oil delivery obligations being valued at $35.00 per barrel, and penalty payment obligations being valued at the dollar amount thereof), then the Purchase Price shall be increased by the net change in the value of Seller’s total Future Delivery/Payment Obligations.

This Section 2.08 provides the exclusive remedy for any inaccuracies in Parts 3.12(a) or 3.12(c) of the Seller’s Disclosure Schedule. With respect to any claims made before Closing, an adjustment to the Purchase Price will be made at Closing in the manner provided above. With respect to any claims made after Closing, post-Closing adjustments to the Purchase Price will be made in the manner provided above. If the Purchase Price is reduced as a result of any such post-Closing adjustment, Seller will pay to Buyer the amount of such adjustment, plus interest at the Agreed Interest Rate on the amount of the adjustment from the date of Closing to the date of payment by Seller. If the Purchase Price is increased as a result of any such post-Closing adjustment, Buyer will pay to Seller the amount of such adjustment, plus interest at the Agreed Interest Rate on the amount of the adjustment from the date of Closing to the date of payment by Buyer. If one or more claims are made under this Section 2.08 post-Closing, the amount owing with respect to any post-Closing claim will take into account the other adjustments to the Purchase Price (at Closing and post-Closing) made pursuant to this Section 2.08. No deductible or limitation of liability under this Agreement shall be applied to reduce Seller’s and Buyer’s respective obligations under this Section 2.08.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF SELLER

Seller represents and warrants to Buyer, as of the date of this Agreement, as follows:

3.01. Organization and Good Standing. Seller is a Delaware Corporation, duly organized, validly existing, and in good standing under the laws of the state of Delaware and every state in which it is qualified to do business, with full corporate power and authority to conduct its business as it is now being conducted, and to own or use the properties and assets that it purports to own or use. Seller is not a “foreign person” for purposes of Section 1445 or Section 7701 of the IRC.

3.02. Authority; No Conflict.

(a) This Agreement constitutes the legal, valid, and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy or other similar laws affecting the rights and remedies of creditors generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Upon the execution and delivery by Seller of the Instruments of Conveyance and any other documents executed and delivered by Seller at the Closing (collectively, the “Seller’s Closing Documents”), Seller’s Closing Documents shall constitute the legal, valid, and binding obligations of Seller, enforceable against Seller in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy or other similar laws affecting the rights and remedies of creditors generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Except as set forth in Part 3.02 of the

Seller’s Disclosure Schedule, Seller has the absolute and unrestricted right, power, authority, and capacity to execute and deliver this Agreement and Seller’s Closing Documents, and to perform its obligations under this Agreement and Seller’s Closing Documents.

(b) Except as set forth in Part 3.02 of the Seller’s Disclosure Schedule, neither the execution and delivery of this Agreement by Seller nor the consummation or performance of any of the Contemplated Transactions by Seller shall, directly or indirectly (with or without notice or lapse of time):

(i) contravene, conflict with, or result in a violation of (A) any provision of the Organizational Documents of Seller, or (B) any resolution adopted by the board of directors or the stockholders of Seller;

(ii) contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Contemplated Transactions, to terminate, accelerate or modify any terms of, or to exercise any remedy or obtain any relief under, any Contract or agreement or any Legal Requirement or Order to which Seller, or any of the Assets, may be subject;

(iii) contravene, conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental Authorization that relates to the Assets;

(iv) result in the imposition or creation of any Encumbrance upon or with respect to any of the Assets.

3.03. Bankruptcy. There are no bankruptcy, reorganization, or arrangement proceedings being contemplated by Seller or, to the Knowledge of Seller, pending or Threatened against Seller.

3.04. Taxes. Seller has filed or caused to be filed all Tax Returns that it has been or was required to file, either separately or as a member of a consolidated group, pursuant to applicable Legal Requirements. All Tax Returns filed by (or that include on a consolidated basis) Seller are true, correct, and complete. Seller has paid all Taxes that have become due pursuant to those Tax Returns or otherwise, or pursuant to any assessment received by Seller, to the extent not being contested in good faith without any lien for Taxes having been filed or recorded against any of the Assets. Seller does not have any Knowledge of any Threatened Tax assessment against it except as disclosed in Part 3.04 of the Seller’s Disclosure Schedule. Except as disclosed in Part 3.04 of the Seller’s Disclosure Schedule, none of the Assets were bound as of the Effective Time and/or will be bound following the Closing by any tax partnership agreement of or binding upon Seller or its assigns affecting any of the Assets.

3.05. Legal Proceedings; Orders.

(a) Except as set forth in Part 3.05 of the Seller’s Disclosure Schedule, there is no pending Proceeding against Seller or any of its Affiliates:

(i) that relates to or may affect any of the Assets; or

(ii) that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions.

(b) Except as set forth in Part 3.05 of the Seller’s Disclosure Schedule, to Seller’s Knowledge: (1) no Proceeding of the type referenced in Section 3.05 (a) has been Threatened, (2) no event has occurred nor does any circumstance exist that may give rise to or serve as a basis for the commencement of any such Proceeding, and (3) no basis exists for any claim by any employee of Seller or any other person under any Legal Requirement for which Buyer could become liable as a successor or otherwise.

(c) Except as set forth in Part 3.05 of the Seller’s Disclosure Schedule, to Seller’s Knowledge, there is no Order adversely affecting the use or ownership of the Assets to which Seller, or any of the Assets, is subject.

3.06. Environmental.

(a) With respect to the Seller Operated Assets and, to the Knowledge of Seller, with respect to the other Assets, except as set forth in Part 3.06 of the Seller’s Disclosure Schedule, and except as would not have an Environmental Material Adverse Effect, there are no Violations of Environmental Laws that arise from events occurring during the period Seller owned the affected Assets, which have not been corrected or Remediated under the requirements of any Governmental Body having jurisdiction.

(b) There are no Environmental Liabilities that arise from events occurring prior to Seller’s ownership of the Seller Operated Assets or, to the Knowledge of Seller, any other Assets, except as would not have an Environmental Material Adverse Effect.

(c) Except as would not have an Environmental Material Adverse Effect, all licenses, permits, consents, or other approvals required under Environmental Laws that are necessary to the operation of the Seller Operated Assets or, to the Knowledge of Seller, any other Assets, have been

obtained and are in full force and effect, and Seller has operated the Seller Operated Assets in compliance with such Permits.

(d) Seller is not currently operating under any order, agreement, or decree issued by a Governmental Body that arose out of a Violation of Environmental Laws.

(e) There are no environmental investigations, studies, or audits with respect to any of the Assets owned or commissioned by, or in the possession of, Seller or its Affiliates that have not been made available to Buyer.

3.07. Equipment and Personal Property.

(a) Except as set forth in Part 3.07(a) of the Seller’s Disclosure Statement, all Equipment (i) is in an operable state of repair adequate to maintain normal operations and (ii) is suitable for the purposes for which such Equipment is being used. Seller has all material easements, rights of way, licenses and Governmental Authorizations necessary to access, construct, operate, maintain and repair the Equipment in material compliance with all Legal Requirements. Except to the extent included in the Assets, neither Seller nor any Affiliate of Seller owns any gathering systems, downstream transportation systems or gas processing facilities in or through which any Hydrocarbons are gathered, transported or processed.

(b) To Seller’s Knowledge, Part 3.07(b) of the Seller’s Disclosure Statement sets forth (i) a description of all material repair, replacement and restoration work with respect to the Equipment necessitated by Hurricanes Katrina, Rita and/or Ivan, (ii) the reasonably estimated cost of such work, (iii) the reasonably estimated completion dates for such work, (iv) the Wells which are off production or materially below normal production as a result of such hurricanes or such work, and (v) the respective dates on which normal production from such Wells is reasonably expected to be restored.

(c) Subject to and without limiting Sections 3.07(a) and 3.07(b), to the extent the Assets constitute personal property or fixtures, Seller expressly disclaims and negates (a) any implied or express warranty of merchantability, (b) any implied or express warranty of fitness for a particular purpose, (c) any implied or express warranty of conformity to models or samples of materials, and (d) any other warranty of any nature, express or implied, except as expressly provided herein, and all such Assets are to be conveyed “As Is” And “Where Is,” with All faults.

3.08. Title to Properties. On the Closing Date, Seller shall convey to Buyer Defensible Title to the Assets. Seller has delivered or made available to Buyer all items in its possession that

would be relevant in the determination as to whether Seller has the ability to convey Defensible Title to the Assets.

3.09. Brokers. Seller has not incurred any obligation or liability, contingent or otherwise, for broker’s or finder’s fees with respect to the transactions contemplated by this Agreement other than obligations that are the sole responsibility of Seller.

3.10. Tax Sharing Agreements. There are no tax sharing agreements or any other contract relating to the sharing or payment of any Tax for which Buyer will have any liability in connection with the Contemplated Transactions.

3.11. Consents and Preferential Purchase Rights. Part 3.11 of the Seller’s Disclosure Schedule sets forth all Consents and Preferential Purchase Rights.

3.12. Imbalances and Future Delivery/Payment Obligations. Except as set forth in Part 3.12(a) of the Seller’s Disclosure Schedule, there are no Imbalances as of the Effective Time. To Seller’s Knowledge, the current status of Imbalances is as set forth in Part 3.12(b) of the Seller’s Disclosure Schedule. Except as set forth in Part 3.12(c) of the Seller’s Disclosure Schedule, there are no Future Delivery/Payment Obligations as of the Effective Time. Except as set forth in Part 3.12(d) of the Seller’s Disclosure Schedule, no Future Delivery/Payment Obligations have been incurred after the Effective Time. Notwithstanding anything to the contrary contained in this Agreement, Seller makes no representation or warranty with respect to gas pipeline Imbalances, which, pursuant to Section 2.07, constitute Retained Liabilities.

3.13. Status of Leases. (i) To Seller’s Knowledge, the Leases have been maintained according to their terms, in compliance with the agreements to which the Leases are subject; (ii) all royalties (other than royalties held in suspense), delay rentals, and other payments due under the Leases which are Seller Operated Assets (and to Seller’s Knowledge with respect to the other Leases) have been properly and timely paid and all conditions necessary to keep the Leases in force have been fully performed; (iii) to Seller’s Knowledge, except as shown on the Exhibits hereto, and without expanding or enlarging any warranty of title given elsewhere herein, the Leases are presently in force and effect; and (iv) neither Seller nor, to Seller’s Knowledge, any other party to any Lease has received notice or threat of any claim or action seeking to terminate, cancel, rescind, or procure a judicial reformation of any Lease or any provisions thereof or seeking the release of any Lease (or portion thereof).

3.14. Contracts.

(a) Set forth on Part 3.14 of the Seller’s Disclosure Schedule (and segregated in Part 3.14 among the below categories) is a true and correct description of each contract, agreement, lease or similar arrangement which is included in the Assets (or by which any of the Assets is bound) and which:

(i) is between Seller and any Affiliate of Seller;

(ii) is a contract for the sale, purchase, processing or transportation of any Hydrocarbons or any other Assets, except those Hydrocarbon sales, purchase, processing or transportation agreements which can be terminated by Seller and its assigns upon not more than ninety (90) days notice without penalty or detriment to Seller and its assigns;

(iii) creates a purchase option, right of first refusal, call or preferential purchase right on any Hydrocarbons;

(iv) creates any area of mutual interest or similar provision with respect to the acquisition by Seller or its assigns of any interest in any Hydrocarbons, land or asset, or contains any restrictions on the ability of Seller or its assigns to compete with any other Person;

(v) is a participation, partnership, joint venture, farmout, farmin or similar agreement;

(vi) creates or evidences any Preferential Purchase Right or Consent;

(vii) evidences an obligation in excess of $250,000.00 to pay a deferred purchase price of property, except accounts payable arising in the ordinary course of business;

(viii) evidences a lease or rental of any land, building or other improvements or portion thereof, excluding Leases; or

(ix) evidences a futures, hedge, swap, collar, put, call, floor, cap, option or other contract which is intended to benefit from or reduce or eliminate the risk of fluctuations in (i) the price of commodities, including oil, natural gas and natural gas liquids, (ii) interest rates, or (iii) securities.

(b) Seller has made available to Buyer complete and correct copies of all Contracts and Leases listed on Exhibit B and/or Part 3.14 of the Seller’s Disclosure Schedule.

(c) Except as set forth on Parts 3.02 and 3.14 of the Seller’s Disclosure Schedule, and except where the failure would not have a material adverse effect on the operations or value of the Assets, taken as a whole, (1) all Contracts are in full force and effect; (2) there are no violations or breaches of any Contract or existing facts or circumstances which upon notice or the passage of time or both will constitute a violation or breach thereof; (3) no notice of the exercise or attempted exercise of premature termination, price

reduction, market-out or curtailment of any Contract has been received by Seller or any Affiliate of Seller; (4) no notice has been received by Seller or any Affiliate of Seller that any party thereto intends not to honor its obligations under any Contract; and (5) Seller is not participating in any discussions or negotiations regarding modification of any Contract.

(d) Except as set forth in Part 3.11 of the Seller’s Disclosure Schedule, the Contracts are freely assignable without the consent of third parties.

3.15. Laws and Regulations. Except as set forth in Part 3.15 of the Seller’s Disclosure Schedule, the Seller Operated Assets are, and Seller’s operation of the Seller Operated Assets is and, to the Knowledge of Seller, the other Assets are and the operation of the other Assets is, in compliance in all material respects with the provisions and requirements of all Legal Requirements (other than requirements of Environmental Laws which are governed by Section 3.06 rather than this Section). Seller has in effect all Governmental Authorizations necessary for it to own, lease or operate the Assets and to carry on its business with respect to the Assets, and there has occurred no default under any such Governmental Authorization.

3.16. Non-Consent Operations. Seller has not elected not to participate in any operation or activity proposed with respect to the Assets which could result in any of Seller’s interest in any Assets becoming subject to a penalty or forfeiture as a result of such election not to participate in such operation or activity, except to the extent reflected in the Net Revenue Interests and Working Interests set forth in Exhibit A.

3.17. Wells. All Wells have been drilled and completed within the limits permitted by all applicable Leases, contracts, and pooling or unit agreements, and by Legal Requirements. No Well is subject to penalties on allowables after the Effective Time because of any overproduction or any other violation of Legal Requirements. There are no wells, platforms or other Equipment located on the Assets that: (i) Seller is currently obligated by any Legal Requirement or contract to currently plug and abandon; (ii) are subject to exceptions to a requirement to plug and abandon issued by a Governmental Body; or (iii) have been plugged and abandoned in a manner that does not comply in all material respects with Legal Requirements.

3.18. Outstanding Capital Commitments. To Seller’s Knowledge, as of the Effective Time and as of the date of this Agreement, there were and are no outstanding AFEs or other commitments to make capital expenditures which are binding on Seller or the Assets and which Seller reasonably anticipates will individually require expenditures by the owner of the Assets after the Effective Time in excess of $300,000.00, other than those shown on Part 3.18 of the Seller’s Disclosure Schedule.

3.19. Operation of Assets Since Effective Time. From the Effective Time until the date of this Agreement, Seller (a) has conducted the business with respect to the Assets only in the ordinary course of business, (b) has conducted such business in the manner required under Section 5.02(a)(i) through (iv) had such provisions been applicable during such period, and (c) has not taken any action

for which consent or waiver by Buyer would have been required under Section 5.02(b)(ii), (v), (vi), (vii) or (viii) had such provisions been applicable during such period.

3.20. No Pooling, Unitization, Communitization or Spacing Orders. Seller represents and warrants that no pooling, unitization, communitization or spacing orders or agreements have been entered or promulgated after the Effective Time, and Seller has not received any notice of any proposed pooling, unitization, communitization or spacing orders or agreements, with respect to the Assets that would cause any change to Seller’s Net Revenue Interests or Working Interests as set forth in Exhibit A hereto.

3.21. Material Factor. Seller acknowledges that Seller’s representations under this Article are a material inducement to Buyer to enter into this Agreement and close the Contemplated Transactions with Seller.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to Seller, as of the date of this Agreement, as follows:

4.01. Organization and Good Standing. Buyer is duly organized, validly existing, and in good standing under the laws of Delaware and in each jurisdiction in which it conducts business, and, prior to the Closing, in each jurisdiction in which the Assets are located.

4.02. Authority; No Conflict.

(a) This Agreement constitutes the legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy or other similar laws affecting the rights and remedies of creditors generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Upon the execution and delivery by Buyer of the Instruments of Conveyance and any other documents executed and delivered by Buyer at the Closing (collectively, the “Buyer’s Closing Documents”), the Buyer’s Closing Documents shall constitute the legal, valid, and binding obligations of Buyer enforceable against Buyer in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy or other similar laws affecting the rights and remedies of creditors generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Buyer has the absolute and unrestricted right, power, authority, and capacity to execute and deliver this Agreement and the Buyer’s Closing Documents, and to perform its obligations under this Agreement and the Buyer’s Closing Documents, subject to Buyer

becoming qualified with the MMS to own the Assets and posting all bonds required by Federal regulations prior to the Closing as contemplated by Section 6.05.

(b) Except as disclosed to Seller on Part 4.02 of the Buyer’s Disclosure Schedule, neither the execution and delivery of this Agreement by Buyer nor the consummation or performance of any of the Contemplated Transactions by Buyer shall give any Person the right to prevent, delay, or otherwise interfere with any of the Contemplated Transactions.

(c) Except as disclosed to Seller on Part 4.02 of the Buyer’s Disclosure Schedule, Buyer is not and shall not be required to give any notice to or obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions.

4.03. Certain Proceedings. There is no pending Proceeding that has been commenced against Buyer that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To Buyer’s Knowledge, no such Proceeding has been Threatened.

4.04. Knowledgeable Investor. Buyer is an experienced and knowledgeable investor in the oil and gas business. Prior to entering into this Agreement, Buyer was advised by its own legal, tax, and other professional counsel concerning this Agreement, the Contemplated Transactions, the Assets, and their value, and it has relied solely thereon and the representations and obligations of Seller in this Agreement and the documents to be executed by Seller in connection with this Agreement at Closing. Buyer is acquiring the Assets for its own account and not for distribution.

4.05. Securities Laws. The solicitation of offers and the sale of the Assets by Seller have not been registered under any securities laws. Buyer represents that at no time has it been presented with or solicited by or through any public promotion or any form of advertising in connection with this transaction. Buyer represents that it intends to acquire the Assets for its own benefit and account and that it is not acquiring the Assets with the intent of distributing fractional, undivided interests that would be subject to regulation by federal or state securities laws, and that if it sells, transfers, or otherwise disposes of the Assets or fractional undivided interests therein, it shall do so in compliance with applicable federal and state securities laws.

4.06. Due Diligence. Without limiting or impairing any representation, warranty, covenant or agreement of Seller contained in this Agreement and the Seller’s Closing Documents, or Buyer’s right to rely thereon, Buyer represents that it has performed, or shall perform before the Closing, sufficient review and due diligence with respect to the Assets, which includes reviewing well data and other files in performing necessary evaluations, assessments, and other tasks involved in evaluating the Assets to satisfy its requirements completely and to enable it to make an informed decision to acquire the Assets under the terms of this Agreement.

4.07. Basis of Buyer’s Decision. Buyer represents that by reason of its knowledge and experience in the evaluation, acquisition, and operation of oil and gas properties, Buyer has evaluated the merits and the risks of purchasing the Assets from Seller, and has formed an opinion based solely on Buyer’s knowledge and experience, Buyer’s due diligence and Seller’s representations, warranties, covenants and agreements contained in this Agreement, and not on any other representations or warranties by Seller. Buyer represents that it has not relied and shall not rely on any statements by Seller or its representatives (other than those representations, warranties, covenants and agreements of Seller contained in this Agreement) in making its decision to enter into this Agreement or to close this transaction.

4.08. Material Factor. Buyer acknowledges that Buyer’s representations under this Article are a material inducement to Seller to enter into this Agreement and close the Contemplated Transactions with Buyer.

4.09. Brokers. Buyer has not incurred any obligation or liability, contingent or otherwise, for broker’s or finder’s fees with respect to the transactions contemplated by this Agreement other than obligations that are the sole responsibility of Buyer.

ARTICLE 5

COVENANTS OF SELLER

5.01 Access and Investigation. Between the date of this Agreement and the Closing Date, Seller shall (a) afford Buyer and its Representatives reasonable access to Seller’s personnel, properties, contracts, books and records, and other documents and data, (b) furnish Buyer and its Representatives with copies of all such contracts, books and records, and other existing documents and data as Buyer may reasonably request (and upon Buyer’s request use reasonable efforts to obtain the consent of third party operators to give Buyer and its Representatives reasonable access to similar information with respect to Assets not operated by Seller or an Affiliate of Seller), and (c) furnish Buyer and its Representatives with such additional financial, operating, and other data and information as Buyer may reasonably request; PROVIDED THAT, EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT AND IN THE SELLER’S CLOSING DOCUMENTS, SELLER MAKES NO WARRANTY, AND EXPRESSLY DISCLAIMS ALL WARRANTIES AS TO THE ACCURACY OR COMPLETENESS OF THE DOCUMENTS, INFORMATION, BOOKS, RECORDS, FILES, AND OTHER PERTINENT DATA THAT IT MAY PROVIDE TO BUYER.

5.02. Operation of the Assets.

(a) Between the date of this Agreement and the Closing Date, Seller shall conduct the business relating to the Assets only in the ordinary course of business. By way of example, and not as a limitation, during such period, Seller shall use commercially reasonable efforts to:

(i) maintain the Assets and operate the Assets or cause the Assets to be operated in the ordinary course of business;

(ii) pay or cause to be paid all bonuses and rentals, royalties, overriding royalties, shut-in royalties, and minimum royalties and development and operating expenses, current taxes, and other payments incurred with respect to the Assets except (i) royalties held in suspense as a result of title issues and that do not give any third party a right to cancel an interest in an Asset and (ii) expenses or royalties being contested in good faith and for which adequate reserves have been provided, unless the nonpayment of such contested expenses or royalties could result in the loss of a Lease, in which case Seller will notify Buyer and obtain Buyer’s approval prior to withholding such payment;

(iii) maintain the personal property comprising part of the Assets in at least as good a condition as it is on the date hereof, subject to ordinary wear and tear;

(iv) safeguard and maintain confidential all records of a nonpublic nature (including without limitation geological and geophysical data and maps and interpretations thereof) that relate to the Assets; and

(v) keep Buyer reasonably informed regarding current and proposed activities and operations relating to the Assets.

(b) Similarly, between the date of this Agreement and Closing, Seller shall not, without Buyer’s consent:

(i) take any action that would cause its representations or warranties under this Agreement to be materially incorrect as of the Closing Date except in the ordinary course of business;

(ii) abandon any Asset (except the abandonment of producing leases not capable of producing in paying quantities after the expiration of their primary terms);

(iii) commence, propose, or agree to participate in any single operation with respect to the Wells or Leases with an anticipated cost in excess of $50,000 except for emergency operations;

(iv) elect to participate in any single operation proposed by a third party with respect to the Wells or Leases with an anticipated cost in excess of $50,000, except for emergency operations;

(v) terminate or materially amend or modify any Contract;

(vi) waive any right of material value under any Contract;

(vii) sell, lease, encumber, or otherwise dispose of all or any portion of any Assets, except sales of Hydrocarbons in the ordinary course of business under Hydrocarbon sales agreements which meet the requirements of paragraph (viii) below or which are listed in Part 3.14(a)(ii) of Seller’s Disclosure Schedule; or

(viii) enter into any new production sales, processing, gathering, or transportation agreement with respect to the Wells not terminable by Buyer without penalty after Closing on ninety (90) days notice or less.

5.03. Insurance.

(a) Seller shall maintain in force during the period from the Effective Time until April 30, 2006 (and through November 15, 2006, with respect to business interruption insurance relating to Hurricanes Katrina and/or Rita) all of Seller’s general liability, workers compensation, auto liability, property and casualty, business interruption and well control insurance policies in the amounts and with the coverages set forth in Schedule 5.03 covering the Assets and the Retained Assets.

(b) Seller shall obtain, during the period from May 1, 2006 until the Closing, such general liability, workers compensation, auto liability, property and casualty, business interruption and well control insurance policies in such amounts and with such coverages as may be negotiated by Seller covering the Assets and the Retained Assets.

(c) Notwithstanding subparagraphs (a) and (b) above, the premiums for such insurance that accrue after the Effective Time (and before the Effective Time, in the case of business interruption insurance only related to Hurricanes Katrina and/or Rita) and are attributable to insurance coverage for the period after the Effective Time (and before the Effective Time, in the case of business interruption insurance only related to Hurricanes Katrina and/or Rita) until the Closing will constitute Property Costs. Notwithstanding the foregoing, any insurance coverage or proceeds with respect to Retained Liabilities shall be for Seller’s sole account and benefit and the costs of such insurance related to Hurricanes Katrina and/or Rita (other than business interruption insurance to the extent provided in Section 2.05(a)) or Retained Liabilities shall not be included in Property Costs or charged to Buyer.

(d) Seller shall obtain and deliver to Buyer at least ten (10) Business Days prior to the Closing Date written documentation reasonably acceptable to Buyer evidencing that Buyer is a named insured or otherwise entitled to the benefits of the coverage under the insurance policies required to be maintained by Seller pursuant to Section 5.03(a) (including business interruption insurance relating to losses attributable to Hurricanes Katrina and/or Rita), or failing which, with respect to the period prior to May 1, 2006, Seller shall place Buyer in the same economic position as if Buyer had such insurance benefits.

(e) Seller shall use commercially reasonable efforts to have Buyer added as a named insured under all insurance policies obtained by Seller pursuant to Section 5.03(b) or failing which, with respect to the period prior to Closing, Seller shall place Buyer in the same economic position as if Buyer had such insurance benefits.

(f) Following the Closing, Seller shall deliver to Buyer one-half (1/2) of all proceeds (but only to the extent attributable to the Assets and/or Retained Assets) from Seller’s business interruption insurance policies related to Hurricanes Katrina and/or Rita; provided, however, that the share of proceeds to be paid to Buyer pursuant to this Section 5.03(f) shall not be duplicative of the amount of any such proceeds for which Buyer has received credit under Section 2.05(b)(ii)(A). Such amounts shall be due to Buyer within ten (10) Business Days after Seller’s receipt of such proceeds, after which such proceeds shall accrue interest at the Agreed Interest Rate. Seller shall use commercially reasonable efforts to collect such proceeds, but makes no representation or warranty, whether express, implied, or otherwise, regarding the ability of Seller to collect any such proceeds, nor the amount that may be collected. Seller shall be the only party to negotiate with the carrier of such policy, and shall be free to negotiate, settle, or compromise with the policy carrier on such terms as Seller deems appropriate so long as Seller conducts such negotiation, settlement, or compromise in good faith.

5.04. Consent and Waivers. Seller agrees to use commercially reasonable efforts to obtain prior to Closing written waivers of all Preferential Purchase Rights and all waivers and Consents necessary for the transfer of the Assets to Buyer; provided that in the event Seller is unable to obtain all such waivers and Consents after using such reasonable efforts, such failure to satisfy shall not constitute a Breach of this Agreement.

5.05. Notification. Between the date of this Agreement and the Closing Date, Seller shall promptly notify Buyer in writing if Seller obtains Knowledge of any fact or condition that causes or constitutes a Breach, in any material respect, of any of Buyer’s representations and warranties as of the date of this Agreement, or if Seller obtains Knowledge of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a Breach, in any material respect, of any such representation or warranty had such

representation or warranty been made as of the time of occurrence or discovery of such fact or condition. During the same period, Seller shall promptly notify Buyer if Seller obtains Knowledge of the occurrence of any Breach, in any material respect, of any covenant of Seller in this Article 5 or of the occurrence of any event that may make the satisfaction of the conditions in Article 7 impossible or unlikely. The covenants and agreements set forth in Section 6.02 are incorporated into this Section as covenants and agreements of Seller.

5.06. Satisfaction of Conditions. Between the date of this Agreement and the Closing Date, Seller shall use commercially reasonable efforts to cause the conditions in Article 7 to be satisfied; provided that in the event Seller is unable to satisfy such conditions after using such commercially reasonable efforts, such failure to satisfy shall not constitute a Breach of this Agreement; provided further, however, the foregoing shall not constitute a waiver of Seller’s Breach of any of the other provisions of this Article 5 or any other Breach of this Agreement.

5.07. HSR Notification. If required by to filed under the HSR Act, Seller shall prepare and file such notification with respect to the Contemplated Transactions and will promptly respond to any inquiry made by the Federal Trade Commission or the Antitrust Division of the Department of Justice regarding such notification.

ARTICLE 6

COVENANTS OF BUYER

6.01. Notification. Between the date of this Agreement and the Closing Date, Buyer shall promptly notify Seller in writing if Buyer obtains Knowledge of any fact or condition that causes or constitutes a Breach, in any material respect, of any of Seller’s representations and warranties as of the date of this Agreement, or if Buyer obtains Knowledge of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a Breach, in any material respect, of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. During the same period, Buyer shall promptly notify Seller if Buyer obtains Knowledge of the occurrence of any Breach, in any material respect, of any covenant of Buyer in this Article 6 or of the occurrence of any event that may make the satisfaction of the conditions in Article 8 impossible or unlikely.

6.02. Limitations on Sections 5.05 & 6.01. Should there be any dispute as to whether a party had Knowledge that a representation or warranty of the other party had been Breached or would be Breached in any material respect or that any covenant or agreement of the other party had been Breached in any material respect, the burden of proof regarding such party’s Knowledge shall be on the party claiming that Knowledge existed. There shall be no Breach of the covenants in Section 5.05 or Section 6.01 as a result of a party’s failure to report a Breach of any representation or warranty or a

Breach of any covenant or agreement of which it had Knowledge if the party subject to the Breach also had Knowledge thereof prior to Closing.

6.03. Satisfaction of Conditions. Between the date of this Agreement and the Closing Date, Buyer shall use commercially reasonable efforts to cause the conditions in Article 8 to be satisfied; provided that in the event Buyer is unable to satisfy such conditions after using such commercially reasonable efforts such failure to satisfy shall not constitute a Breach of this Agreement; provided further, however, the foregoing shall not constitute a waiver of Buyer’s Breach of any of the other provisions of this Article 6 or any other Breach of this Agreement.

6.04. HSR Notification. If required to be filed under the HSR Act, Buyer shall prepare and file such notification with respect to the Contemplated Transactions and will promptly respond to any inquiry made by the Federal Trade Commission or the Antitrust Division of the Department of Justice regarding such notification.

6.05. MMS Qualification. On or before the Closing Date, Buyer shall use its best efforts to become qualified with the MMS to own the Assets and to post all bonds required by Federal regulations. On or before May 1, 2006, Buyer shall file all documents as required by Federal regulations to become qualified with the MMS to own the Assets.

ARTICLE 7

CONDITIONS PRECEDENT TO BUYER’S OBLIGATION TO CLOSE

Buyer’s obligation to purchase the Assets and to take the other actions required to be taken by Buyer at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer, in whole or in part):

7.01 Accuracy of Representations. All of Seller’s representations and warranties in this Agreement must have been accurate in all material respects (or, with respect to representations and warranties qualified by materiality, in all respects) as of the date of this Agreement, and must be accurate in all material respects (or, with respect to representations and warranties qualified by materiality, in all respects) as of the Closing Date as if made on the Closing Date.

7.02. Seller’s Performance.

(a) All of the covenants and obligations that Seller is required to perform or to comply with pursuant to this Agreement at or prior to the Closing must have been duly performed and complied with in all material respects.

(b) Seller must deliver, or be prepared to deliver, each document required to be delivered by it pursuant to Section 2.04.

7.03. No Proceedings. Since the date of this Agreement, there must not have been commenced or Threatened against Seller, or against any Affiliates thereof, any Proceeding (other than by Buyer or an Affiliate of Buyer) seeking to restrain, enjoin or otherwise prohibit or make illegal, or seeking to recover material damages on account of, any of the Contemplated Transactions.

7.04. HSR Act. Buyer and Seller shall have obtained appropriate consents and/or approvals to close this transaction as provided by the HSR Act, if applicable.

7.05. Main Pass 61 and 72 Fields. The sum of (i) the Aggregate Title Defect Value (including any unresolved disputed Title Defects and any uncured Title Defects, whether or not Seller has elected to attempt to cure) with respect to the OCS Main Pass Blocks 61 and 62 and those lands and depths within Main Pass Blocks 72, 73, and 74 included in that certain unit created under that certain Unit Agreement for Outer Continental Shelf Exploration, Development and Production Operations on the Main Pass 73 Field Unit, Main Pass Block 72 OCS-G 3195, Main Pass Block 72/74 OCS-G 3417, Main Pass Block 73 OCS-G 2947, Main Pass Block 73 Field, Main Pass Area, Offshore Louisiana, effective as of November 1, 1982 (the “Key Main Pass Assets”), plus (ii) the Aggregate Environmental Defect Value (including any unresolved disputed Environmental Defects and any uncured Environmental Defects, whether or not Seller has elected to attempt to cure) with respect to the Key Main Pass Assets, plus (iii) the aggregate casualty losses with respect to the Key Main Pass Assets shall not exceed ten percent (10.0%) of the Allocated Value of the Key Main Pass Assets.

7.06. Buyer Qualification. Buyer shall be qualified with the MMS to own the Assets.

ARTICLE 8

CONDITIONS PRECEDENT TO SELLER’S OBLIGATION TO CLOSE

Seller’s obligation to sell the Assets and to take the other actions required to be taken by Seller at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Seller, in whole or in part):

8.01. Accuracy of Representations. All of Buyer’s representations and warranties in this Agreement must have been accurate in all material respects as of the date of this Agreement, and must be accurate in all material respects as of the Closing Date as if made on the Closing Date.

8.02. Buyer’s Performance.

(a) All of the covenants and obligations that Buyer is required to perform or to comply with pursuant to this Agreement at or prior to the Closing must have been duly performed and complied with in all material respects.

(b) Buyer must deliver, or be prepared to deliver, each document required to be delivered by it pursuant to Section 2.04.

8.03. No Proceedings. Since the date of this Agreement, there must not have been commenced or Threatened against Buyer, or against any Affiliates thereof, any Proceeding (other than by Seller or an Affiliate of Seller) seeking to restrain, enjoin or otherwise prohibit or make illegal, or seeking to recover material damages on account of, any of the Contemplated Transactions.

8.04. HSR Act. Buyer and Seller shall have obtained appropriate consents and/or approvals to close this transaction as provided by the HSR Act, if applicable.

8.05. Buyer Qualification. Buyer shall be qualified with the MMS to own the Assets.

ARTICLE 9

TERMINATION

9.01. Termination Events. This Agreement may, by written notice given prior to or at the Closing, be terminated:

(a) by either Buyer or Seller if a material Breach of any provision of this Agreement has been committed by the other party and such Breach has not been waived or cured;

(b) by mutual consent of Buyer and Seller;

(c) by either Buyer or Seller if the Closing has not occurred (other than through the failure of any party seeking to terminate this Agreement to comply fully with its obligations under this Agreement) on or before the date scheduled for Closing in Section 2.03, or such later date as the parties may agree upon in writing;

(d) by Buyer if the conditions in Article 7 have not been satisfied on or before the Closing Date;

(e) by Seller if the conditions in Article 8 have not been satisfied on or before the Closing Date; or

(f) as provided in Article 11.

9.02. Effect of Termination. Each party’s rights of termination under Article 11 are in addition to the rights it may have under this Article 9. If this Agreement is terminated pursuant to Section 9.01, all further obligations of the parties under this Agreement shall terminate, but such termination shall not impair nor restrict the rights of either party against the other with respect to the Deposit Amount or under Article 10.

ARTICLE 10

INDEMNIFICATION; REMEDIES

10.01. Survival. All representations, warranties, covenants, and agreements contained in this Agreement shall survive the Closing and continue for eighteen months (18 months) following the Closing Date (or, if termination of this Agreement occurs under Article 9, then eighteen months (18 months) following the termination under Article 9, in the case of Sections 10.02(c), 10.03(c) and 10.03(d) only), except:

(a) those contained in Section 3.06 shall terminate on the Closing, those contained in Section 3.08 (other than for matters arising between the Title Claim Date and the Closing) shall terminate on the Title Claim Date, and those contained in Section 3.08 for matters arising between the Title Claim Date and the Closing shall terminate three (3) months after the Closing Date;

(b) if another survival period for making a claim is expressly provided in the underlying covenant or agreement, then such other survival period shall apply with respect to such specific covenant or agreement;

(c) the indemnities contained in this Article 10 shall survive the Closing and continue in accordance with their respective terms set forth below in this Article 10; and

(d) the representations, warranties, covenants, and agreements in Article 12 and Sections 3.01, 3.09, 3.10, 4.01 and 4.09 shall continue indefinitely.

10.02. Indemnification and Payment of Damages by Seller. Except as otherwise limited in this Article 10, from and after the Closing (or before or after the Closing in the case of Section 10.02(c) below) Seller shall defend, indemnify and hold harmless Buyer and its respective Representatives, stockholders, controlling persons, and Affiliates (collectively, the “Buyer Group”) for, and shall pay to the Buyer Group the amount of, any loss, liability, claim, or damage, whether or not involving a third-party claim (collectively, “Damages”), arising from:

(a) any Breach of any representation or warranty made by Seller in this Agreement, or in any certificate delivered by Seller pursuant to this Agreement;

(b) any Breach by Seller of any covenant or obligation of Seller in this Agreement;

(c) any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding alleged to

have been made by any such Person with Seller (or any Person acting on its behalf) in connection with any of the Contemplated Transactions;

(d) any Retained Liabilities;

(e) any Existing Environmental Liabilities;

(f) the use, ownership, or operation of the Assets by Seller or any Affiliate of Seller prior to the Effective Time, except to the extent assumed by Buyer as Assumed Liabilities;

(g) the use, ownership, or operation of the Excluded Assets;

(h) the use, ownership, or operation of the Retained Assets; or

(i) Seller’s or its agents’, contractors’ or employees’ performance of the Remediation work carried out pursuant to Section 11.13(a) or their presence on the Assets in connection with such Remediation work, WHETHER OR NOT BASED UPON STRICT LIABILITY OR CAUSED BY THE SOLE OR CONCURRENT NEGLIGENCE (WHETHER ACTIVE OR PASSIVE) OF BUYER GROUP, OR ANY PERSON OR ENTITY, UNLESS SUCH INJURY WAS OCCASIONED SOLELY BY THE GROSS NEGLIGENCE OR INTENTIONAL TORT OF BUYER OR ANY OFFICER, DIRECTOR, OR EMPLOYEE OR AGENT OF BUYER.

Except for Buyer’s termination rights under Articles 9 and 11 of this Agreement, the remedies provided in this Article 10 (if Closing occurs) and Section 2.02 (if Closing does not occur) are Buyer’s and Buyer Group’s exclusive remedies for Seller’s Breaches. Seller’s obligations under Section 10.02(g) are not intended to cover, and shall not release Buyer Group from, any obligations and responsibilities that any member of Buyer Group may have (i) as owner of the Assets from and after the Effective Time or (ii) as a participating party in any non-consent or similar operation in which a member of Seller Group does not participate from and after the Effective Time.

10.03. Indemnification and Payment of Damages by Buyer. Except as otherwise limited in this Article 10, from and after the Closing (or before or after the Closing in the case of Sections 10.03(c) and 10.03(d) below) Buyer shall defend, indemnify and hold harmless Seller and its Representatives, stockholders, controlling persons, and Affiliates (collectively, the “Seller Group”) for, and shall pay to Seller Group the amount of any Damages arising from:

(a) any Breach of any representation or warranty made by Buyer in this Agreement or in any certificate delivered by Buyer pursuant to this Agreement;

(b) any Breach by Buyer of any covenant or obligation of Buyer in this Agreement;

(c) any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with Buyer (or any Person acting on its behalf) in connection with any of the Contemplated Transactions; or

(d) any loss, liability, claim, damage or suit which any of Buyer’s employees or agents or their heirs, executors, or assigns may assert against Seller, based upon injury to person, including death or to property, arising in any manner whatsoever from any inspections of Seller’s property prior to Closing, whether or not based upon strict liability or caused by the sole or concurrent negligence (whether active or passive) of Seller, or any person or entity, unless such injury was occasioned solely by the gross negligence or intentional tort of Seller or any officer, director, or employee or agent thereof;

(e) the use, ownership, or operation of the Assets from and after the Effective Time, excluding any Damages arising from any Retained Liabilities or Existing Environmental Liabilities; and

(f) the Assumed Liabilities.

Except for Seller’s termination rights under Articles 9 and 11 of this Agreement, the remedies provided in this Article 10 (if Closing occurs) and Section 2.02 (if Closing does not occur) are Seller’s and Seller Group’s exclusive remedies for Buyer’s Breaches. Buyer’s indemnities under Sections 10.03(e) and (f) are subject and subordinate to any claims for indemnity that Buyer may have against Seller pursuant to Section 10.02(a) or 10.02(b). Buyer’s obligations under Sections 10.03(e) and (f) are not intended to cover, and shall not release Seller Group from, any obligations and responsibilities that any member of Seller Group may have (i) as operator under any operating or similar agreement with respect to the period after the Effective Time, (ii) as owner of the Excluded Assets from and after the Effective Time, or (iii) as a participating party in any non-consent or similar operation in which a member of Buyer Group does not participate from and after the Effective Time.

10.04. Time Limitations. Neither Seller nor Buyer shall have any liability (for indemnification or otherwise) with respect to any Breach of any representation, warranty, covenant or agreement under this Agreement unless, during the survival period set forth in Section 10.01 with respect to such representation, warranty, covenant or agreement, the other party notifies the Breaching party of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by the party asserting such claim. Claims for indemnity under Sections 10.02(a), 10.02(b), 10.03(a), 10.03(b), and 10.03(d) with respect to the Breach of any representation, warranty, covenant or agreement may only be made during the survival period set forth in Section 10.01 with respect to the particular representation, warranty, covenant or agreement as to which a claim of

Breach is being made. The parties’ respective indemnity obligations under Section 10.02(c), 10.02(d), 10.02(f), 10.02(g), 10.02(h), 10.02(i), 10.03(c), 10.03(e) and 10.03(f) shall survive indefinitely. Seller’s indemnity obligations under Section 10.02(e) shall survive for two (2) years after the Closing Date.

10.05. Limitations on Amount—Seller. If the Closing occurs, Seller shall have no liability under Section 10.02 until the total of all Damages indemnified thereunder exceeds one percent (1%) of the Purchase Price, and then Seller shall be liable for the entire amount of such Damages, not to exceed, however, twenty-five percent (25%) of the Purchase Price. Notwithstanding the foregoing and anything to the contrary in the Agreement, no limit on liability under this Section and no deductible or liability threshold under this Agreement shall be applied to reduce Seller’s obligations under Section 10.02 with respect to Sections 2.02, 2.05, 2.08, 3.01, 3.07(b), 3.09, 3.10, 3.12 (in regard to Part 3.12(d) of the Seller’s Disclosure Schedule), 3.20, 5.02, 5.03, 10.02(c), 10.02(d), 10.02(g), 10.02(i), 12.01, 12.02, 12.05 and 12.16 or Article 11. Seller’s liability for a breach of Section 3.08 for matters arising between the Title Claim Date and the Closing shall be subject to the deductibles and limitations to the extent made applicable under Section 11.08 rather than this Section.

10.06. Limitations on Amount—Buyer. If the Closing occurs, Buyer shall have no liability under Section 10.03 until the total of all Damages indemnified thereunder exceeds one percent (1%) of the Purchase Price, and then Buyer shall be liable for the entire amount of such Damages, not to exceed, however, twenty-five percent (25%) of the Purchase Price. Notwithstanding the foregoing and anything to the contrary in the Agreement, no limit on liability under this Section and no deductible or liability threshold under this Agreement shall be applied to reduce Buyer’s obligations under Section 10.03 with respect to Sections 2.02, 2.05, 2.08, 4.01, 4.09, 10.03(c), 12.02, and 12.05.

10.07. Procedure for Indemnification--Third Party Claims.

(a) Promptly after receipt by an indemnified party under Section 10.02 or 10.03 of a claim for Damages or notice of the commencement of any Proceeding against it, such indemnified party shall, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim. The failure of any indemnified party to give notice of a claim as provided in this Section 10.07 shall not relieve the indemnifying party of its obligations under this Article 10 except to the extent such failure results in insufficient time being available to permit the indemnifying party to effectively defend against the claim or otherwise prejudices the indemnifying party’s ability to defend against the claim.

(b) If any Proceeding referred to in Section 10.07(a) is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party shall be entitled to participate in such Proceeding and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the

indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel reasonably satisfactory to the indemnified party and, after notice from the indemnifying party to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party shall not, as long as it diligently conducts such defense, be liable to the indemnified party under this Article 10 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the indemnified party in connection with the defense of such Proceeding. If the indemnifying party assumes the defense of a Proceeding, no compromise or settlement of such claims may be effected by the indemnifying party without the indemnified party’s consent unless (A) there is no finding or admission of any violation of Legal Requirements or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnified party, and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party, and (C) the indemnified party shall have no liability with respect to any compromise or settlement of such claims effected without its consent.

(c) Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its Affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party shall not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld).

10.08. Procedure for Indemnification--Other Claims. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought.

10.09. Extent of Representations and Warranties.

(a) EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS AGREEMENT OR THE SELLER’S CLOSING DOCUMENTS, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, AND DISCLAIMS ALL LIABILITY AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY, STATEMENT OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO BUYER (INCLUDING ANY OPINION, INFORMATION OR ADVICE

WHICH MAY HAVE BEEN PROVIDED TO BUYER BY ANY AFFILIATE OR REPRESENTATIVE OF SELLER OR BY ANY INVESTMENT BANK OR INVESTMENT BANKING FIRM, ANY PETROLEUM ENGINEER OR ENGINEERING FIRM, SELLER’S COUNSEL OR ANY OTHER AGENT, CONSULTANT OR REPRESENTATIVE). WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS AGREEMENT OR THE SELLER’S CLOSING DOCUMENTS, SELLER EXPRESSLY DISCLAIM AND NEGATES ANY REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED, AT COMMON LAW, BY STATUTE, OR OTHERWISE RELATING TO (A) THE TITLE TO ANY OF THE ASSETS, EXCEPT THAT SELLER EXPRESSLY WARRANTS THAT THE LEASES ARE FREE AND CLEAR OF ALL LIENS, SECURITY INTERESTS, ENCUMBRANCES OR DEFECTS IN TITLE, EXCEPT PERMITTED ENCUMBRANCES, (B) THE CONDITION OF THE ASSETS (INCLUDING WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, OF FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS), IT BEING DISTINCTLY UNDERSTOOD THE ASSETS ARE BEING SOLD “AS IS,” “WHERE IS” AND “WITH ALL FAULTS AS TO ALL MATTERS,” (C) ANY INFRINGEMENT BY SELLER OF ANY PATENT OR PROPRIETARY RIGHT OF ANY THIRD PARTY, (D) ANY INFORMATION, DATA, OR OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED TO BUYER BY OR ON BEHALF OF SELLER (INCLUDING WITHOUT LIMITATION, IN RESPECT OF GEOLOGICAL AND ENGINEERING DATA, THE EXISTENCE OR EXTENT OF OIL, GAS, OR THE MINERAL RESERVES, THE RECOVERABILITY OF SUCH RESERVES, ANY PRODUCT PRICING ASSUMPTIONS, AND THE ABILITY TO SELL OIL OR GAS PRODUCTION AFTER CLOSING), AND (E) THE ENVIRONMENTAL CONDITION AND OTHER CONDITION OF THE ASSETS AND ANY POTENTIAL LIABILITY ARISING FROM OR RELATED TO THE ASSETS.

10.10. Compliance With Express Negligence Test. THE PARTIES AGREE THAT THE OBLIGATIONS OF THE INDEMNIFYING PARTY TO INDEMNIFY THE INDEMNIFIED PARTY SHALL BE WITHOUT REGARD TO THE NEGLIGENCE OR STRICT LIABILITY OF THE INDEMNIFIED PARTY, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT, OR SOLE. The foregoing is a specifically bargained for allocation of risk among the parties, which the parties agree and acknowledge satisfies the express negligence rule and conspicuousness requirement under Texas law.

10.11. Limitations of Liability. In no event shall Seller or Buyer ever be liable to the other for any consequential, special, indirect, exemplary, or punitive damages relating to or arising out of the Contemplated Transactions; provided, however, that any consequential, special, indirect, exemplary, or punitive damages recovered by a third party (including a Governmental Body, but

excluding any Affiliate of any party) against a party entitled to indemnity pursuant to this Article 10 shall be included in the Damages recoverable under such indemnity.

ARTICLE 11

TITLE MATTERS AND ENVIRONMENTAL MATTERS

11.01. Title Examination and Access. Buyer may make or cause to be made at its expense such examination as it may desire of the title of Seller to the Assets. For such purposes, Seller shall (a) give to Buyer and its Representatives full access at any reasonable time to all of the files, records, contracts, correspondence, computer output and data files, maps, data, reports, plats, abstracts of title, lease files, well files, unit files, division order files, production marketing files, title opinions, title files and title records, title insurance policies, ownership maps, surveys, and any other information, data, records, and files that Seller has (or has access to) relating in any way to the title to the Assets, the past or present operation thereof, and the marketing of production therefrom, except, however, where restricted by license agreements or other agreements or contracts with a non-affiliated third party; (b) furnish to Buyer all other information in the possession of or available to Seller with respect to the title to the Assets as Buyer may from time to time reasonably request, except to the extent that Seller is prohibited therefrom by any agreement or contract to which it is a party or of which it is a beneficiary with a non-affiliated third party; and (c) authorize Buyer and its representatives to consult with attorneys, abstract companies, and other Representatives of Seller, whether utilized in the past or presently, concerning title-related matters with respect to the Assets. Seller shall advise Buyer in writing of any restrictions, constraints or prohibition on the right of Seller to provide and disclose to Buyer all data and information herein provided, and Seller shall use commercially reasonable efforts to attempt to remove such restrictions, constraints or prohibition or to obtain the consent to provide and disclose such data and information to Buyer.

11.02. Preferential Purchase Rights. Within five (5) Business Days following the execution of this Agreement, Seller shall initiate all procedures required to comply with or obtain the waiver of all Preferential Purchase Rights which are applicable to the transactions contemplated by this Agreement prior to the Closing Date. Buyer will have the right to review and approve the forms of notices sent to the holders of Preferential Purchase Rights, however, Buyer shall not unreasonably withhold or delay such approval. Seller shall provide Buyer with copies of all correspondence sent or received by Seller in connection with such efforts contemporaneously with the receipt or sending thereof. To the extent any such Preferential Purchase Rights are exercised by any holders thereof, or waivers thereof are not obtained prior to the Closing Date, then the Assets subject to such Preferential Purchase Rights shall not be sold to Buyer and shall be excluded from the Assets and sale under this Agreement. The Purchase Price shall be adjusted downward by the Allocated Value of the Assets so excluded. If any holder of a Preferential Purchase Right applicable to this transaction initially elects to exercise that preferential right, but subsequently refuses or elects not to consummate the purchase under the preferential right (whether such failure occurs before or after the Closing Date), or if, after the Closing, the time period for a holder to exercise such a Preferential Purchase Right expires, the parties agree that Buyer shall purchase such interests covered by the preferential right in accordance with Allocated Value thereof (subject to the adjustments pursuant to Section 2.05) and the closing of

such transaction shall take place on a date designated by Seller not more than ninety (90) days after the Closing Date. Notwithstanding the foregoing, Buyer will have no obligation to purchase an Asset that is subject to a Preferential Purchase Right unless such Preferential Purchase Right is waived in form and substance reasonably satisfactory to Buyer not more than ninety (90) days after the Closing Date.

11.03. Required Consents. Within five (5) Business Days following the execution of this Agreement, Seller shall initiate all procedures required to comply with or obtain all Consents and the waiver of maintenance of uniform provisions required for the transfer of the Assets. Seller shall provide Buyer with copies of all correspondence sent or received by Seller in connection with such efforts contemporaneously with the receipt or sending thereof. If Seller shall fail to obtain any Consent or waiver of maintenance of uniform interest provision required for the transfer of any Asset, Seller’s failure shall be handled as follows:

(a) If the holder of the right to consent or party to a maintenance of uniform interest provision affirmatively refuses to consent or waive prior to Closing, such refusal shall be considered a Title Defect under this Article and the Purchase Price shall be adjusted downward by the Allocated Value of the affected Asset.

(b) Except for approvals from Governmental Bodies normally received subsequent to assignment, if Seller reasonably believes a Consent or waiver will be obtained within a reasonable period of time subsequent to Closing, the Asset shall be held by Seller for the benefit of Buyer after Closing and Seller shall provide Buyer with the economic benefits thereof until such Consent or waiver is received or until ninety (90) days after the Closing, if later, and Buyer shall pay for the Asset at the Closing in accordance with this Agreement as though the Consent or waiver had been obtained. If Seller obtains the Consent or waiver within ninety (90) days after the Closing, then Seller shall deliver conveyances of the Asset to Buyer. If the Consent or waiver is not obtained or is affirmatively refused within ninety (90) days after the Closing, Seller shall promptly pay to Buyer an amount equal to the Allocated Value of the affected Asset (less any net revenues (revenues net of Property Costs) received by Buyer in connection with such Asset) plus interest on such amount from the Closing Date until paid at the Agreed Interest Rate, and Seller’s holding for the benefit of Buyer shall thereupon terminate.

11.04. Defensible Title. On the Closing Date, Seller shall convey to Buyer Defensible Title to the Assets. As used herein, the term “Defensible Title” shall mean, as to the Assets, that title which is filed, recorded or otherwise referenced of record in the records of the applicable Governmental Body in a manner which under applicable Legal Requirements constitutes imputed notice of such Asset to third parties acquiring an interest in or an encumbrance against such Asset, and which:

(a) Entitles Seller, as to each Well (or the specified zone(s) therein), to receive and retain without suspension, reduction or termination, not less than the Net Revenue Interest set forth for such Well (or the specified zone(s) therein) in Exhibit A, through the plugging, abandonment, and salvage of such Well (or the specified zone(s) therein), except for any decrease (i) caused by orders of the appropriate regulatory body having jurisdiction over the Well that are promulgated after the Closing Date that concern pooling, unitization, communitization, or spacing matters; or (ii) caused by Buyer, its successors or assigns;

(b) Obligates Seller, as to each Well (or the specified zone(s) therein), to bear not more than the Working Interest set forth for such Well (or the specified zone(s) therein) in Exhibit A, through the plugging, abandonment, and salvage of such Well (or the specified zone(s) therein), except for any increase (i) caused by Buyer, its successors or assigns; (ii) that also results in the Net Revenue Interest associated with the Well being proportionately increased; or (iii) caused by orders of the appropriate regulatory body having jurisdiction over the Well that are promulgated after the Closing Date that concern pooling, unitization, communitization, or spacing matters;

(d) Reflects that all royalties, rentals, Pugh clause payments, shut-in gas payments and other payments due with respect to such Well (or the specified zone(s) therein) have been properly and timely paid, except for payments held in suspense for title or other reasons which are customary in the industry and which will not result in grounds for cancellation of the Seller’s rights in such Well (or the specified zone(s) therein);

(e) Reflects that all consents to assignment, notices of assignment or Preferential Purchase Rights which are applicable to or must be complied with in connection with the transaction contemplated by this Agreement, or any prior sale, assignment or the transfer of such Well (or the specified zone(s) therein), have been obtained and complied with to the extent the failure to obtain or comply with the same could render this transaction or any such sale, assignment or transfer (or any right or interest affected thereby) void or voidable or could result in Buyer incurring any liability; and

(f) In the case of Assets other than Wells (such as pipeline interests), entitles Seller to the ownership interest reflected in Exhibit A.

11.05. Title Defects. Buyer shall notify Seller in writing of Title Defects (“Title Defect Notice(s)”) no later than 5:00 p.m. Central Time on the tenth (10th) Business Day prior to the Closing Date (the “Title Claim Date”). The Title Defect Notice shall state with reasonable specificity: (i) the

Asset affected; (ii) the particular Title Defect claimed; (iii) Buyer’s good faith estimate of the amount the Title Defect reduces the Allocated Value of the affected Asset (such amount being the “Defect Value”); and (iv) appropriate documentation, if any, substantiating Buyer’s claim. Without limiting Section 3.08 or the Instruments of Conveyance, Buyer shall conclusively be deemed to have waived any Title Defects not asserted by a Title Defect Notice no later than 5:00 p.m. Central Time on the Title Claim Date. For all Title Defects asserted in Title Defect Notices, Seller shall have the option of (a) curing the Title Defect, (b) contesting the Title Defect or Buyer’s good faith estimate of the Defect Value, (c) adjusting the Purchase Price downward by Buyer’s good faith estimate of the Defect Value, subject to the limitations set forth below, or (d) if the Defect Value exceeds seventy percent (70%) of the Allocated Value of the affected Asset, excluding the affected Asset and reducing the Purchase Price by the Allocated Value thereof. Seller shall notify Buyer in writing of its election no more than four (4) Business Days following its receipt of a Title Defect Notice, and Seller’s failure to make an election shall be deemed an election under clause (c) of the preceding sentence.

The Defect Value shall be determined pursuant to the following guidelines, where applicable:

(a) if the Title Defect is that the actual Net Revenue Interest attributable to any Well (or the specified zone(s) therein) is less than that stated in Exhibit A, then the Defect Value is the product of the Allocated Value of such Asset, multiplied by a fraction, the numerator of which is the difference between the Net Revenue Interest set forth in Exhibit A and the actual Net Revenue Interest, and the denominator of which is the Net Revenue Interest stated in Exhibit A;

(b) if the Title Defect results from Seller having a greater Working Interest in a Well (or the specified zone(s) therein) than the Working Interest specified therefor in Exhibit A, without a corresponding increase in the Net Revenue Interest, the Defect Value shall be equal to the present value (discounted at 10% compounded annually) of the increase in the costs and expenses forecasted in the Reserve Report with respect to such Well (or the specified zone(s) therein) for the period from and after the Effective Time which is attributable to such increase in the Seller’s Working Interest;

(c) if the Title Defect results from the existence of a lien, security interest, pledge or collateral assignment, the Defect Value shall be an amount sufficient to fully discharge such lien, security interest, pledge or collateral assignment;

(d) if the Title Defect results from any matter not described in paragraphs (a), (b) or (c) above, the Defect Value shall be an amount equal to the difference between the value of the Well(s) (or the specified zone(s) therein) or other Asset with such Title Defect and the value of the Well(s) (or the specified zone(s) therein) or other Asset without such Title Defect (taking into account the Allocated Value of the affected Asset);

(e) if a Title Defect is not effective or does not affect a Well (or the specified zone(s) therein) or other Asset throughout the entire productive life of such Well (or the specified zone(s) therein) or other Asset, such fact shall be taken into account in determining the Defect Value.

In no event, however, shall the total of the Defect Values related to a particular Asset exceed the Allocated Value of such Asset.

11.06. Seller’s Right to Cure. If Seller elects to cure a Title Defect, then Seller shall so notify Buyer in writing within four (4) Business Days after receipt of the particular Title Defect Notice (“Cure Notice”). Seller shall either cure the Title Defect to the reasonable satisfaction of Buyer (“Cure”), or if Seller is unable to Cure such Title Defect within sixty (60) days after receipt of the Title Defect Notice, adjust the Purchase Price downward by Buyer’s good faith estimate of the Defect Value set forth in the Title Defect Notice, subject to the limitations set forth below.

If Seller elects to cure a Title Defect but is unable to do so prior to Closing, Seller shall convey the affected Asset to Buyer and Buyer shall pay for the affected Asset at Closing in accordance with this Agreement as though the Title Defect had been Cured; however, if Seller is unable to Cure the Title Defect within sixty (60) days after receipt of the Title Defect Notice, then Seller shall adjust the Purchase Price downward by the Defect Value and shall promptly pay to Buyer an amount equal to such Defect Value plus interest thereon at the Agreed Interest Rate from the Closing Date until paid.

11.07. Contested Title Defects. If Seller contests the existence of a Title Defect or Buyer’s good faith estimate of the Defect Value, then Seller shall so notify Buyer in writing no more than four (4) Business Days after Seller’s receipt of the Title Defect Notice (“Rejection Notice”). The Rejection Notice shall state with reasonable specificity the basis of Seller’s rejection of the Title Defect or of Buyer’s good faith estimate of the Defect Value. Within ten (10) days after Buyer’s receipt of the Rejection Notice, representatives of Buyer and Seller, knowledgeable in title matters, shall meet and, within twenty (20) days after Buyer’s receipt of such Rejection Notice, either: (i) agree to mutually reject the particular Title Defect, or (ii) agree on the validity of such Title Defect and the Defect Value, in which case Seller shall have sixty (60) days after the date of such agreement within which to Cure such Title Defect and failing such Cure, to adjust the Purchase Price as provided above. If the parties cannot agree on either options (i) or (ii) in the preceding sentence, the Title Defect or the Defect Value subject to the Rejection Notice shall be submitted to arbitration in accordance with the procedures set forth in Section 12.15. For any Title Defect asserted by Buyer in a Title Defect Notice by the Title Claim Date, if Seller fails to timely deliver a Rejection Notice or a Cure Notice, or, if applicable, to notify Buyer that Seller elects to exclude the affected Asset and reduce the Purchase Price by the Allocated Value thereof, then Seller shall be deemed to have accepted the validity of the Title Defect and Buyer’s good faith estimate of the Defect Value, and the Purchase Price shall be adjusted downward by an amount equal to the Defect Value of the Title Defect.

In the event a contested Title Defect cannot be resolved prior to Closing, Seller shall convey the affected Asset to Buyer and Buyer shall pay for the Asset at Closing in accordance with this Agreement as though there were no Title Defect; however, if the Title Defect contest results in a determination that a Title Defect exists, and Seller elects not to Cure or is unable to Cure the Title Defect within sixty (60) days after such determination, then Seller shall adjust the Purchase Price downward by the Defect Value and shall promptly pay to Buyer an amount equal to such Defect Value plus interest thereon at the Agreed Interest Rate from the Closing Date until paid.

11.08. Limitations on Adjustments for Title Defects. Notwithstanding the provisions of Sections 11.04, 11.05, 11.06, and 11.07, Seller is obligated to adjust the Purchase Price to account for Title Defects only if the aggregate Defect Value of all Title Defects that Seller has agreed to pay pursuant to Sections 11.05 or 11.06 or which are resolved pursuant to Section 11.07 (the “Aggregate Title Defect Value”) exceeds a deductible (not a threshold) equal to Five Hundred Thousand Dollars ($500,000.00). If the Defect Value for any single Asset is less than Fifty Thousand Dollars ($50,000.00) (“De Minimis Title Defect Cost”), such value shall not be considered in calculating the Aggregate Title Defect Value; provided, however, that once the aggregate amount of De Minimis Title Defect Costs exceeds a threshold amount of $250,000, no Defect Value regardless of amount shall be excluded from the Aggregate Title Defect Value by virtue of being a De Minimis Title Defect Cost, including the Defect Values applied to reach the aforesaid threshold amount. The aggregated Defect Value(s) for any Asset shall never exceed the Allocated Value of such Asset. If the sum of (i) the Aggregate Title Defect Value (including any unresolved disputed Title Defects and any uncured Title Defects, whether or not Seller has elected to attempt to cure), plus (ii) the Aggregate Environmental Defect Value (including any unresolved disputed Environmental Defects and any uncured Environmental Defects, whether or not Seller has elected to attempt to cure), plus (iii) the aggregate value of Assets requiring consent to assign for which a consent has not been obtained by the Closing Date, plus (iv) in connection only with Buyer’s election to terminate, the aggregate value of Assets subject to preferential purchase rights that have not been waived by the Closing Date exceeds twenty-five percent (25%) of the unadjusted Purchase Price, either Buyer or Seller may terminate this Agreement upon written notice to the other, and neither party shall thereafter have any further rights or obligations hereunder; provided, however, that the amounts covered by clause (iv) of this sentence shall not be taken into account for purposes of determining if Seller has a right to terminate this Agreement. Any claim by Buyer for Seller’s Breach of Section 3.08 for matters arising between the Title Claim Date and the Closing, shall be subject to the limitations of this Section, however, in applying such limitations, the Defect Value of all Title Defects under this Article 11 shall be aggregated with the amounts claimed by Buyer for Seller’s Breach of Section 3.08 for matters arising between the Title Claim Date and the Closing. Buyer’s claims for Breach by Seller of Section 5.02 shall not be subject to the limitations of this Section.

11.09. Interest Additions. If Seller discovers an increase in the Net Revenue Interest shown on Exhibit A with respect to an Asset that is free of Title Defects (an “Interest Addition”), then Seller shall, from time to time and without limitation, have the right to give Buyer written notice of such Interest Additions (“Interest Addition Notice”), as soon as practicable but not later than the Title Claim Date, stating with reasonable specificity the Asset affected, the particular Interest Addition

claimed, and Seller’s good faith estimate of the amount the additional interest increases the value of the affected Asset over and above that Asset’s Allocated Value (“Interest Addition Value”). The Interest Addition Value shall be determined by multiplying the Allocated Value of the subject Well (or the specified zone(s) therein) by a fraction, the numerator of which is the increase in the Net Revenue Interest in such Well (or the specified zone(s) therein) over the Net Revenue Interest specified therefor in Exhibit A, and the denominator of which is the Net Revenue Interest specified for such Well (or the specified zone(s) therein) in Exhibit A. Seller shall conclusively be deemed to have waived any additional interest not asserted by an Interest Addition Notice on or before the Title Claim Date. If Buyer agrees with the existence of the Additional Interest and Seller’s good faith estimate of the Interest Addition Value, then any Purchase Price adjustment which Seller is required to make pursuant to Section 11.08 shall be decreased by the amount of the Interest Addition Value. If Buyer contests the existence of the Interest Addition or Seller’s good faith estimate of the Interest Addition Value, then Buyer shall so notify Seller in writing within five (5) Business Days after Buyer’s receipt of the Interest Addition Notice (“Interest Addition Rejection Notice”). The Interest Addition Rejection Notice shall state with reasonable specificity the basis of Buyer’s rejection of the Additional Interest or of Buyer’s good faith estimate of the Interest Addition Value. Within ten (10) days after Seller’s receipt of the Interest Addition Rejection Notice, representatives of Buyer and Seller, knowledgeable in title matters, shall meet and either (a) agree to mutually reject the Interest Addition in which case Seller shall waive the Interest Addition, or (b) agree on the validity of such Interest Addition and the Interest Addition Value, in which case any Purchase Price adjustment which Seller is required to make pursuant to Section 11.08 shall be decreased accordingly. If the parties cannot agree on either option (a) or (b) in the preceding sentence, the Interest Addition subject to the Interest Addition Rejection Notice shall be submitted to arbitration in accordance with the procedures set forth in Section 12.15. If Buyer fails to timely deliver an Interest Addition Rejection Notice, Buyer shall be deemed to have accepted the validity of the Interest Addition and Seller’s good faith estimate of the Interest Addition Value, and Seller shall be entitled to setoff any Purchase Price adjustment as described above.

11.10. Reconveyance. If the Purchase Price is adjusted downward by one-hundred percent (100%) of the Allocated Value of any Asset, Buyer shall, at Seller’s sole option to be exercised no later than sixty (60) days after such Purchase Price adjustment, reconvey to Seller the Asset (effective as of the Effective Time). In connection with such reconveyance, Buyer shall pay Seller all revenues received by Buyer with respect to such reconveyed Assets and Seller shall reimburse Buyer for all Property Costs paid by Buyer with respect to such reconveyed Assets.

11.11. Phase I Environmental Assessment. Beginning on the date of this Agreement and ending ten (10) Business Days prior to the Closing Date (the “Environmental Claim Date”), Buyer shall have the right, at its sole cost, risk, and expense, to conduct an environmental assessment of the Assets. During normal business hours and after providing Seller reasonable prior notice of any such activities, Buyer and its representatives shall be permitted to enter upon the Assets operated by Seller and all buildings and improvements thereon, inspect the same, review all of Seller’s files and records (other than those for which Seller has an attorney-client privilege) relating to the Assets and generally conduct such tests, examinations, and investigations as are customary for transactions of a similar

nature. Seller will have the right to (i) observe such investigation and (ii) promptly receive a copy of all results, analyses, and reviews, except for such information for which Buyer has an attorney-client privilege. All information obtained or reviewed by Buyer shall be maintained confidential pursuant to the Confidentiality Agreement, which shall continue in force under its terms.

11.12. Environmental Defect Notice. Buyer shall notify Seller in writing of any Environmental Defect (“Environmental Defect Notice(s)”) no later than 5:00 p.m. Central Time on the Environmental Claim Date. The Environmental Defect Notice shall state with reasonable specificity: (i) the Asset affected; (ii) a complete description of the Environmental Defect claimed; (iii) Buyer’s good faith estimate of the cost of Remediation of such Environmental Defect (the “Environmental Defect Value”); and (iv) appropriate documentation substantiating Buyer’s claim. Without limiting Section 3.06, Buyer shall conclusively be deemed to have waived any Environmental Defect not asserted by an Environmental Defect Notice by 5:00 p.m. Central Time on the Environmental Claim Date.

11.13. Seller’s Election with Respect to Environmental Defects. For any Environmental Defect asserted in an Environmental Defect Notice, Seller, in its sole discretion, shall have the option of (i) Remediating the Environmental Defect, (ii) contesting the existence of the Environmental Defect or the Environmental Defect Value, (iii) paying the Environmental Defect Value as an adjustment to the Purchase Price subject to the limitations set forth below, or (iv) if the Environmental Defect Value exceeds seventy percent (70%) of the Allocated Value of the affected Asset, excluding the affected Asset and reducing the Purchase Price by the Allocated Value thereof. Seller shall notify Buyer in writing of its election no more than five (5) days following its receipt of an Environmental Defect Notice, and Seller’s failure to make an election shall be deemed an election under clause (iii) of the preceding sentence.

(a) If Seller elects to Remediate an Environmental Defect, Seller shall give written notice of such an election to Buyer no more than five (5) Business Days after receipt of the Environmental Defect Notice, together with Seller’s proposed plan and timing for such Remediation, and Seller shall remain liable for all losses arising out of or in connection with such Environmental Condition until such time as the Remediation is completed. If Seller elects the option set forth in this clause (a), Seller shall implement such Remediation in a manner which is consistent with all Legal Requirements in a prompt and timely fashion for the type of Remediation. Seller’s proposed plan and timing for such Remediation shall be subject to Buyer’s approval which shall not be unreasonably withheld, conditioned, or delayed, however, Buyer may withhold approval of any Remediation that is reasonably estimated to take more than one twenty (120) days to complete. If Buyer does not approve Seller’s proposed plan and timing for such Remediation in accordance with the foregoing and the parties do not agree on a mutually acceptable plan and timing for such Remediation within ten (10) Business Days after Buyer’s receipt of Seller’s proposed plan and timing for such Remediation, then Buyer shall have the option to remove

and exclude the Assets subject to such Remediation (together with other Assets which are appurtenant thereto) from the “Assets” and upon such election the Purchase Price shall be adjusted downward by one-hundred percent (100%) of the Allocated Value of the Assets so removed and excluded from the “Assets.” If such election by Buyer occurs after the Closing Date, the removed and excluded Assets shall be reconveyed by Buyer to Seller (effective as of the Effective Time). In connection with such reconveyance, Buyer shall pay Seller all revenues received by Buyer with respect to such reconveyed Assets and Seller shall reimburse Buyer for all Property Costs paid by Buyer with respect to such reconveyed Assets.

(b) If Seller contests the existence of an Environmental Defect or the Environmental Defect Value, then Seller shall so notify Buyer in writing no more than four (4) Business Days after receipt of the Environmental Defect Notice (“Environmental Rejection Notice”). The Environmental Rejection Notice shall state with reasonable specificity the basis of Seller’s rejection of the Environmental Defect or the Environmental Defect Value. Within ten (10) days of Buyer’s receipt of the Environmental Rejection Notice, representatives of Buyer and Seller, knowledgeable in environmental matters, shall meet and, within twenty (20) days after Buyer’s receipt of such Environmental Rejection Notice, either: (i) agree to mutually reject the particular Environmental Defect Notice, or (ii) agree on the validity of such Notice including the Environmental Defect Value, in which case Seller shall have ten (10) days after the date of such agreement within which to elect in writing to Remediate the Environmental Defect pursuant to Section 11.13(a) above or to adjust the Purchase Price downward by the Environmental Defect Value, subject to the limitations set forth below. If Buyer and Seller cannot agree on either options (i) or (ii) in the preceding sentence, the dispute shall be submitted to arbitration in accordance with the procedures set forth in Section 12.15. In such case, Seller shall have five (5) Business Days following the final decision of the arbitration panel to notify Buyer in writing of its election to Remediate the Environmental Defect or to adjust the Purchase Price.

(c) If a contested Environmental Defect cannot be resolved prior to Closing, Seller shall convey the affected Asset to Buyer and Buyer shall pay for the Asset at Closing in accordance with the Agreement as though there were no Environmental Defect, subject to Seller’s obligations as set forth above upon resolution of the contested matter.

(d) If the Purchase Price is adjusted pursuant to Section 11.13(iii) above, or if Buyer waives an Environmental Defect pursuant to this section or otherwise, Buyer shall assume all losses associated with its respective interest in the Assets relating to such Environmental Defect(s).

11.14. Limitation. Notwithstanding the provisions of Sections 11.12 and 11.13, no adjustment to the Purchase Price for Environmental Defect Values shall be made unless and until the aggregate value of all Environmental Defect Values (the “Aggregate Environmental Defect Value”) exceeds a deductible (not a threshold) equal to Five Hundred Thousand Dollars ($500,000.00). If the Environmental Defect Value with respect to any single Environmental Defect is less than Fifty Thousand Dollars ($50,000.00) (“De Minimis Environmental Defect Cost”), such cost shall not be considered in calculating the Aggregate Environmental Defect Value; provided, however, that (A) the Environmental Defect Values with respect to Environmental Defects arising from or related to a common occurrence or related events or substantially the same or similar facts or circumstances, will be aggregated and such aggregated amount shall not, if in excess of $50,000, be treated as a De Minimis Environmental Defect Cost and (B) once the aggregate amount of De Minimis Environmental Defect Costs exceeds a threshold amount of $250,000, no Environmental Defect Value regardless of amount shall be excluded from the Aggregate Environmental Defect Value by virtue of being a De Minimis Environmental Defect Cost, including the Environmental Defect Values applied to reach the aforesaid threshold amount. If the sum of (i) the Aggregate Title Defect Value (including any unresolved disputed Title Defects and any uncured Title Defects, whether or not Seller has elected to attempt to cure), plus (ii) the Aggregate Environmental Defect Value (including any unresolved disputed Environmental Defects and any uncured Environmental Defects, whether or not Seller has elected to attempt to cure), plus (iii) the aggregate value of Assets requiring consent to assign for which a consent has not be obtained by the Closing Date, plus (iv) in connection only with Buyer’s election to terminate, the aggregate value of Assets subject to preferential purchase rights that have not been waived by the Closing Date exceeds twenty-five percent (25%) of the unadjusted Purchase Price, either Buyer or Seller may terminate this Agreement upon written notice to the other, and neither party shall thereafter have any further rights or obligations hereunder; provided, however, that the amounts covered by clause (iv) of this sentence shall not be taken into account for purposes of determining if Seller has a right to terminate this Agreement.

11.15. Exclusive Remedies. The rights and remedies granted each party in this Agreement are the exclusive rights and remedies against the other party related to any Environmental Condition, or losses related thereto. EACH PARTY EXPRESSLY WAIVES ANY AND ALL OTHER RIGHTS AND REMEDIES WHICH IT MAY HAVE UNDER ENVIRONMENTAL LAWS AGAINST THE OTHER PARTY REGARDING ENVIRONMENTAL CONDITIONS, WHETHER FOR CONTRIBUTION, INDEMNITY OR OTHERWISE, REGARDLESS OF THE FAULT OR NEGLIGENCE OF THE CLAIMING PARTY, INCLUDING STRICT OR STATUTORY LIABILITY OF THAT PARTY UNDER ANY APPLICABLE LAW.

11.16. Casualty Loss and Condemnation.

(a) If after the date of execution of this Agreement and prior to the Closing any part of the Assets is destroyed by fire or other casualty or if any part of the Assets is taken in condemnation or under the right of eminent domain or if proceedings for such purposes are pending or Threatened, Seller shall promptly give Buyer written notice of such occurrence, including reasonable particulars with respect thereto, and this Agreement shall remain

in full force and effect notwithstanding any such destruction, taking, proceeding, or threat, subject to Section 7.05.

(b) With regard to a loss occurring after the date of execution of this Agreement, except to the extent permitted or required pursuant to this Agreement, after the date of execution of this Agreement, without Buyer’s prior consent, no insurance or condemnation proceeds shall be committed or applied by Seller prior to the Closing Date to repair, restore, or replace a damaged or taken portion of the Assets if the cost to repair, restore, or replace a damaged or taken portion of the Assets is projected to exceed $50,000. To the extent such proceeds are not committed or applied by Seller prior to the Closing Date in accordance with this Section 11.16(b), Seller shall at the Closing pay to Buyer all sums paid to Seller by reason of such destruction or taking, less any reasonable costs and expenses incurred by Seller in collecting such proceeds. In addition and to the extent such proceeds have not been committed or applied by Seller in accordance with this Section 11.16(b), in such repair, restoration, or replacement, Seller shall transfer to Buyer, at Closing, without recourse against Seller, all of the right, title, and interest of Seller in and to any unpaid insurance or condemnation proceeds arising out of such destruction or taking, less any reasonable costs and expenses incurred by Seller in collecting such proceeds. Any such funds which have been committed by Seller for repair, restoration, or replacement as aforesaid shall be paid by Seller for such purposes or, at Seller’s option, delivered to Buyer upon Seller’s receipt from Buyer of adequate assurance and indemnity that Seller shall incur no liability or expense as a result of such commitment.

(c) If and to the extent any portion of the loss attributable to a casualty occurring after the date of execution of this Agreement and before Closing is not covered by insurance (such uncovered portion of the casualty being referred to in this Section as an “uninsured loss”), Buyer and Seller shall attempt to agree on the value of the uninsured casualty on or before the date five (5) days after Buyer receives written notice of the casualty. If the parties are not able to agree on such value within such 5-day period, the value shall be determined by an independent casualty adjuster, experienced in determining casualty losses in matters similar to the disputed casualty loss, who shall be selected by Seller from a list of three (3) such independent casualty adjusters that is provided to Seller by the Buyer. Said independent casualty adjuster shall be selected by Seller within five (5) days of the written receipt by Seller of Buyer’s written listing of independent casualty adjusters and shall provide both Seller and Buyer with a complete and documented report as to his findings within ten (10) Business Days after being selected by Seller.

For purposes of this Section, the value of the uninsured casualty shall be equal to the lesser of (i) the aggregate reduction in Allocated Value of the affected Assets resulting from the uninsured casualty, if such affected Assets are not repaired, or (ii) the amount required to repair the affected portion of the Assets to its condition immediately preceding the occurrence of the casualty plus any other Damages which may be suffered on account of such casualty. The Purchase Price shall be reduced by the amount of the value of such an uninsured casualty as finally determined pursuant to this Section, and if such final determination is not available on the scheduled Closing Date, Closing shall not be delayed, but rather, such Purchase Price reduction shall be a part of the final adjustments to be made after Closing as contemplated by Section 2.05.

ARTICLE 12

GENERAL PROVISIONS

12.01. Records. Seller shall retain its original records and documents relating to the Assets, including but not limited to land and lease files, division of interest computer printouts, contract files, well files, and copies of well logs. Seller, at Seller’s cost, shall use reasonable efforts to deliver the Asset Records that are included in the Assets to Buyer (FOB Seller’s office) within thirty (30) days following Closing.

12.02. Expenses. Except as otherwise expressly provided in this Agreement each party to this Agreement shall bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the Contemplated Transactions, including all fees and expenses of agents, representatives, counsel, and accountants.

12.03. Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and shall be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by fax (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, (c) sent by electronic mail with receipt acknowledged, or (d) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and fax numbers set forth below (or to such other addresses and fax numbers as a party may designate by notice to the other party):

	Buyer:	MitEnergy Upstream LLC
		c/o Mitsui & Co. (U.S.A.), Inc., Houston Office,
		Energy Department
		1300 Post Oak Blvd., Suite 1700,
		Houston, Texas 77056
		Fax:	713.236.6211
		Phone:	713.236.6205
		Attention:	Eiichi Ueno, Director

		with copies to:

		Mitsui & Co., Ltd.
		E&P Division, Business Department II
		2-1, Ohtemachi 1-Chome,
		Chiyoda-Ku, Tokyo, Japan
		Fax:	+81.3.3285.9126
		Phone:	+81.3.3285.6483
		Attention:	Ryoichi Sekijima, General Manager

		and

		Mitsui Oil Exploration Co., Ltd.
		Projects & New Ventures Div.
		Hibiya Central Building 11th floor.
		2-9, Nishi Shimbashi 1-Chome,
		Minato-Ku, Tokyo, Japan
		Fax:	+81.3.3502.5768
		Phone:	+81.3.3502.5782
		Attention:	Takeshi Kasuga, Unit General Manager, Unit 2

		and

		Fulbright & Jaworski L.L.P.
		1301 McKinney, Suite 5100
		Houston, Texas 77010
		Fax:		713.651.5246
		Phone:		713.651.3702
		Attention:		George F. Kutzschbach

Seller:		Pogo Producing Company
		Five Greenway Plaza, Suite 2700
		Houston, Texas 77046

	Fax:	713.297.5000
	Phone:	713.295.5100
	Attention:	Sharon S. Rodgers, Chief Counsel
	E-mail:	rodgerss@pogoproducing.com

	with a copy to:

	Cotton, Bledsoe, Tighe & Dawson, P.C.
	1415 Louisiana, Suite 2100
	Houston, Texas 77002
	Fax:	713.759.2153
	Phone:	713.759.9281
	Attention:	Michael J. Byrd
	E-mail:	mbyrd@cbtd.com

12.04. Jurisdiction; Service of Process. WITHOUT LIMITING THE PARTIES AGREEMENT TO ARBITRATE IN SECTION 12.15, ANY ACTION OR PROCEEDING SEEKING A TEMPORARY OR PRELIMINARY INJUNCTION TO ENFORCE ANY PROVISION OF, OR BASED ON ANY RIGHT ARISING OUT OF, THIS AGREEMENT OR THE CONTEMPLATED TRANSACTIONS MUST BE BROUGHT AGAINST ANY OF THE PARTIES IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF HARRIS, OR, IF IT HAS OR CAN ACQUIRE JURISDICTION, IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS (HOUSTON DIVISION), AND EACH OF THE PARTIES CONSENTS TO THE JURISDICTION OF SUCH COURTS (AND OF THE APPROPRIATE APPELLATE COURTS) FOR SUCH LIMITED PURPOSE IN ANY SUCH ACTION OR PROCEEDING AND WAIVES ANY OBJECTION TO VENUE LAID THEREIN FOR SUCH LIMITED PURPOSE. PROCESS IN ANY ACTION OR PROCEEDING REFERRED TO IN THE PRECEDING SENTENCE MAY BE SERVED ON ANY PARTY ANYWHERE IN THE WORLD.

12.05. Further Assurances. The parties agree (a) to furnish upon request to each other such further information, (b) to execute, acknowledge and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement, including documentation evidencing Buyer’s entitlement to all revenues, production, proceeds, income, credits, receipts and products from or attributable to the Assets on and after the Effective Time as provided for in Section 2.05. Following the Closing, the appropriate Instruments of Conveyance will be promptly filed by Buyer with, and approval sought from, the Louisiana State Mineral Board for the assignment from Seller to Buyer of the interests in the Louisiana State Leases that are included in the Assets. If Buyer, after using commercially reasonable efforts, is unable to obtain approval of the Louisiana State Mineral Board to any such assignment of an interest in a Louisiana State Lease, then Buyer may reconvey to Seller such interest together with such other Assets as are appurtenant to such interest (effective as of the Effective Time), whereupon the Purchase Price shall be adjusted downward by the sum of the Allocated Value of the Assets reconveyed plus any Property Costs in connection with the affected Assets paid by Buyer, less any revenues received by Buyer in connection with the affected Assets, and Seller shall promptly pay the difference to Buyer, without interest.

12.06. Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement shall operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege shall preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party shall be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party shall be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

12.07. Entire Agreement and Modification. This Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by Buyer and Seller. No representation, promise, inducement, or statement of intention with respect to the subject matter of this Agreement has been made by any party which is not embodied in this Agreement together with the documents, instruments, and writings that are delivered pursuant hereto, and none of the parties shall be bound by or liable for any alleged representation, promise, inducement. or statement of intention not so set forth.

12.08. Assignments, Successors, and No Third-Party Rights. Neither party may assign any of its rights under this Agreement without the prior written consent of the other party (which consent may be granted or denied at the discretion of the other party), and in the event of such consent, such assignment nevertheless shall not relieve such party of any of its obligations under this Agreement without the prior written consent of the other party; provided that Buyer may assign all or part of its rights and obligations under this Agreement to one or more of its Affiliates without consent or prior written approval; provided, however, that no such assignment shall relieve Buyer of any of its obligations or liabilities under this Agreement. Subject to the preceding sentences, this Agreement shall apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement shall be construed to give any Person other than the parties to this Agreement or any other agreement contemplated herein (and the Buyer Group and Seller Group who are entitled to indemnification under Article 10), any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement, any other agreement contemplated herein, and all provisions and conditions hereof and thereof are for the sole and exclusive benefit of the parties to this Agreement and such other agreements (and the Buyer Group and Seller Group who are entitled to indemnification under Article 10), and their respective successors and assigns. Notwithstanding the foregoing, any indemnitee under Article 10 which is a third party shall be indemnified and held

harmless under the terms of this Agreement only to the extent that a party expressly elects to exercise such right of indemnity and hold harmless on behalf of such third party indemnitee pursuant to Article 10; and no party shall have any direct liability or obligation to any third party or be liable to any third party for any election or non-election or any act or failure to act under or in regard to any term of this Agreement. Any claim for indemnity or hold harmless hereunder on behalf of an indemnitee must be made and administered by a party to this Agreement.

12.09. Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement shall remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree shall remain in full force and effect to the extent not held invalid or unenforceable.

12.10. Article and Section Headings, Construction. The headings of Sections and Articles in this Agreement are provided for convenience only and shall not affect its construction or interpretation. All references to “Section” or “Article” refer to the corresponding Section or Article of this Agreement. Unless expressly provided to the contrary, “hereunder”, “hereof’, “herein” and words of similar import are references to this Agreement as a whole and not any particular Section or other provision of this Agreement. Each definition of a defined term herein shall be equally applicable both to the singular and the plural forms of the term so defined. All words used in this Agreement shall be construed to be of such gender or number, as the circumstances require. Unless otherwise expressly provided, the word “including” does not limit the preceding words or terms. Each of Seller and Buyer has had substantial input into the drafting and preparation of this Agreement and has had the opportunity to exercise business discretion in relation to the negotiation of the details of the transactions contemplated hereby. This Agreement is the result of arm’s-length negotiations from equal bargaining positions. It is expressly agreed that this Agreement shall not be construed against any party, and no consideration shall be given or presumption made, on the basis of who drafted this Agreement or any particular provision hereof or who supplied the form of Agreement.

12.11. Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

12.12. Governing Law. This Agreement and the relationship of the parties with respect to the Contemplated Transactions shall be governed by the laws of the State of Texas without regard to conflicts of laws principles, except that the law of another jurisdiction shall apply to this Agreement and the Contemplated Transactions insofar as this Agreement and the Contemplated Transactions cover or relate to a part of the Assets for which it is mandatory that the law of another jurisdiction, wherein or adjacent to which such part of the Assets are located, shall apply.

12.13. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original copy of this Agreement and all of which, when taken together, shall be deemed to constitute one and the same agreement.

12.14. Waiver of Texas Deceptive Trade Practices - Consumer Protection Act. Buyer’s rights and remedies with respect to this transaction and with respect to all acts or practices of Seller,

past, present, or future, in connection with this transaction shall be governed by legal principles other than the Texas Deceptive Trade Practices - Consumer Protection Act, V.C.T.A. BUS & COMM Ann. § 17.41 et seq. (the “DTPA”), or any similar statute of any jurisdiction that may be applicable to the transactions contemplated hereby. Buyer hereby unconditionally waives the applicability of the DTPA, or any similar statute, to this transaction and any and all rights, duties, or remedies that might be imposed by the DTPA, or any similar statute, provided, however, Buyer does not waive Section 17.555 of the DTPA. Buyer represents, warrants, and acknowledges that it is purchasing the Assets for commercial or business use. Buyer further acknowledges, represents, and warrants that Buyer has knowledge and experience in financial and business matters that enables it to evaluate the merits and the risks of a transaction such as this and that Buyer is not in a significantly disparate bargaining position with Seller. Buyer expressly acknowledges and recognizes that the price for which Seller has agreed to sell the Assets and perform its obligations under the terms of this Agreement has been predicated upon the inapplicability of the DTPA, or any similar statute, and this waiver of the DTPA, and any similar statute, by the Buyer. BUYER FURTHER RECOGNIZES THAT SELLER, IN DETERMINING TO PROCEED WITH ENTERING INTO THIS AGREEMENT, HAS EXPRESSLY RELIED ON THE PROVISIONS OF THIS SECTION 12.14.

12.15. Arbitration. It is agreed, as a severable and independent arbitration agreement separately enforceable from the remainder of this Agreement, that all disputes, controversies, or claims (whether contractual, tortious, equitable, statutory or otherwise) that may arise among the parties (or any Person included in Buyer Group or Seller Group) arising out of or in any way relating to this Agreement shall be finally and exclusively submitted to, and determined by, binding arbitration. The arbitration proceedings shall be held in Houston, Texas. The arbitration shall be conducted before a single arbitrator pursuant to the then current Commercial Arbitration Rules of the American Arbitration Association (the “AAA”). The AAA shall appoint an independent arbitrator who does not have any financial interest in the dispute, controversy or claim or bear any relationship to either party and who maintains such independence throughout the arbitration proceedings. The arbitrator must be a licensed and practicing attorney (including any attorney practicing in-house for a company, with an outside law firm, as a solo practitioner, or as a professional arbitrator) or a retired judge of a state or federal court. If the arbitrator should die, withdraw or otherwise become incapable of serving, or refuse to serve, a successor arbitrator shall be selected and appointed in the same manner as the original arbitrator. In the event of any conflict between the Commercial Arbitration Rules of the AAA and the provisions of this Section 12.15, the provisions of this Section 12.15 shall govern and control. The arbitrator shall apply the laws of the State of Texas (without regard to conflict of law rules) to the dispute, controversy, or claim, except that the law of another jurisdiction shall apply to this Agreement and the Contemplated Transactions insofar as this Agreement and the Contemplated Transactions cover or relate to a part of the Assets for which it is mandatory that the law of another jurisdiction, wherein or adjacent to which such part of the Assets are located, shall apply. To the extent that they are not inconsistent with the Commercial Arbitration Rules of the AAA, evidentiary questions shall be governed by the Texas Rules of Evidence. The arbitration shall proceed in the absence of a party who, after due notice, fails to answer or appear; provided, however, that an award shall not be made solely on the default of a party, but the arbitrator shall require the party who is present to submit such evidence as the arbitrator may determine is reasonably required to

make an award. The arbitrator’s award shall be in writing and shall set forth findings and conclusions upon which the arbitrator based the award. The prevailing party in the arbitration shall be entitled to recover its reasonable attorneys’ fees, costs, and expenses incurred in connection with the arbitration, as determined by the arbitrator. Consequential, indirect, special, exemplary or punitive damages shall not be allowed except those payable to third parties (and permitted under Section 10.11) for which liability is allocated among the parties by the arbitration award. Any award pursuant to the arbitration shall be final and binding upon the parties and judgment on the award may be entered in any federal, state, or international court having jurisdiction, or application may be made to such court for a judicial confirmation of the award and an order and judgment enforcing the same, as the case may be. The provisions of this Section shall survive the termination of this Agreement. Notwithstanding the foregoing, this Section shall not prevent any party from seeking temporary or preliminary injunctive relief from a court of competent jurisdiction under appropriate circumstances; provided, however, such action shall not constitute a waiver of the provisions of this Section.

12.16. Tax Deferred Exchange. If Seller so requests, Buyer agrees to cooperate with Seller in a tax-deferred exchange described in Section 1031 of the Internal Revenue Code of 1986, as amended. Notwithstanding the foregoing, Buyer shall not be obligated to enter into any agreement or to consent to an assignment of Seller’s rights or obligations hereunder which may have the effect of (i) impairing the title to the Assets, (ii) increasing Buyer’s obligations or liability hereunder or resulting in any additional cost, expense, or liability to Buyer; or (iii) requiring Buyer to execute a purchase agreement for the purchase of the exchange property or to take record title to the exchange property. Seller hereby agrees to indemnify, defend, and hold Buyer harmless from and against any and all costs, expenses, claims, damages, losses, or liabilities (including, without limitation, reasonable attorney fees and costs) incurred by Buyer in connection with any exchange transaction or transactions or the performance by Buyer of its obligations pursuant to this Section.

12.17. Press Release. Until two (2) years after the Closing Date, neither Buyer nor Seller shall make any press release or other public announcement respecting this Agreement or the Contemplated Transactions without the consent of the other party, which shall not be unreasonably withheld, conditioned, or delayed, unless the party desiring to make the release or other announcement is advised by its counsel that the release or other announcement is required to comply with any Legal Requirement or stock exchange rule; provided, however, that the foregoing shall not prevent Buyer or Seller from recording the Instruments of Conveyances delivered at Closing or from complying with any disclosure requirements of Governmental Bodies that are applicable to the transfer of the Assets from Seller to Buyer. In the event that any party wishes or is required to make a press release or other public announcement respecting this Agreement or the Contemplated Transactions that is subject to the restrictions of this Section, such party will provide the other with a draft of the press release or other public announcement for review at least five (5) Business Days prior to the time that such press release or other public announcement is to be made. The parties will attempt in good faith to expeditiously reach agreement on such press release or other public announcement and the contents thereof. Failure to provide comments back to the other party within five (5) Business Days of receipt of the draft release or announcement will be deemed consent to the public disclosure of such press release or other public announcement and the content thereof. If the

proposed press release or other public announcement contains any information required to be kept confidential under Section 12.18, the withholding of consent by the other party shall not be deemed to be unreasonable.

12.18. Confidentiality. Each party shall keep confidential, and cause its Affiliates and instruct its officers, directors, employees and advisors to keep confidential, all terms and provisions of this Agreement, except (a) as required by Legal Requirements or any standards or rules of any stock exchange to which such party or any of its Affiliates is subject, (b) for information which is available to the public on the Closing Date, or thereafter becomes available to the public other than as a result of a breach of this Section, (c) to the extent required to be disclosed in connection with complying with or obtaining a waiver of any Preferential Purchase Right or Consent, (d) to the extent required to be disclosed in connection with Buyer becoming qualified with the MMS or the Louisiana State Mineral Board, and (e) to the extent that such party must disclose the same in any court or arbitration proceedings brought by it to enforce its rights hereunder. This Section shall not prevent Buyer or Seller from recording the Instruments of Conveyances delivered at Closing or from complying with any disclosure requirements of Governmental Bodies that are applicable to the transfer of the Assets from Seller to Buyer. The covenant set forth in this Section shall terminate two (2) years after the Closing Date.

IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above.

	SELLER:

	POGO PRODUCING COMPANY

	By:
	Name: Paul G. Van Wagenen
	Title: Chairman, President & Chief Executive Officer

	BUYER:

	MITENERGY UPSTREAM LLC

	By:
	Name: Noriaki Sakamoto
	Title: President

EX-10.1 4 a06-15149_1ex10d1.htm EX-10

Exhibit 10.1

Pogo Producing Company

7.875% Senior Subordinated Notes due 2013

Purchase Agreement

June 1, 2006

Goldman, Sachs & Co.,

As representative of the several Purchasers

named in Schedule I hereto,

c/o Goldman, Sachs & Co.,

85 Broad Street,

New York, New York 10004

Ladies and Gentlemen:

Pogo Producing Company, a Delaware corporation (the “Company”), proposes, subject to the terms and conditions stated herein, to issue and sell to the Purchasers named in Schedule I hereto (the “Purchasers”) an aggregate of $450,000,000 principal amount of the notes specified above (the “Notes”). The Notes will be issued under the Indenture to be dated as of June 6, 2006 (the “Indenture”) between the Company and The Bank of New York Trust Company, N.A., as trustee (the “Trustee”).

The Company also proposes to use the net proceeds from its sale of the Notes pursuant to this Purchase Agreement (this “Agreement”) as indicated in the Offering Circular (as defined below).

1. The Company represents and warrants to, and agrees with, each of the Purchasers that:

(a) A preliminary offering circular, dated May 31, 2006 (the “Preliminary Offering Circular”) has been prepared, and an offering circular, to be dated today (the “Offering Circular”), is being prepared, in connection with the offering of the Notes. The Preliminary Offering Circular, as amended and supplemented immediately prior to the Applicable Time (as defined in Section 1(b)), is hereinafter referred to as the “Pricing Circular.” Any reference to the Preliminary Offering Circular, the Pricing Circular or the Offering Circular shall be deemed to refer to and include each of the Company’s Annual Report on Form 10-K, its Quarterly Report on Form 10-Q and its Current Reports on Form 8-K (excluding information therein that was furnished to (and not filed with) the United States Securities and Exchange Commission (the “Commission”)) that is specifically incorporated by reference therein as indicated therein under “Available Information,” and any reference to the Preliminary Offering Circular or the Offering Circular, as the case may be, as amended or supplemented, as of any specified date, shall be deemed to include (i) any documents filed with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”) after the date of such circular, and prior to such specified date (excluding information therein that was furnished to (and not filed with) the Commission) and (ii) any

Additional Issuer Information (as defined in Section 5(e)) furnished by the Company prior to the completion of the distribution by the Purchasers of the Notes; and all documents filed under the Exchange Act and so deemed to be included in the Preliminary Offering Circular, the Pricing Circular or the Offering Circular, as the case may be, or any amendment or supplement thereto are hereinafter called the “Exchange Act Reports.” The Exchange Act Reports, when they were or are filed with the Commission, conformed or will conform in all material respects to the applicable requirements of the Exchange Act and the applicable rules and regulations of the Commission thereunder; and no such documents were filed with the Commission since the Commission’s close of business on the business day immediately prior to the date of this Agreement and prior to the execution of this Agreement. The Preliminary Offering Circular did not, the Offering Circular and any amendments or supplements thereto will not and the Exchange Act Reports did not and will not, in each case as of their respective dates, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by a Purchaser through Goldman, Sachs & Co. expressly for use therein;

(b) For the purposes of this Agreement, the “Applicable Time” is 7:25 pm (Eastern time) on the date of this Agreement; the Pricing Circular as supplemented by the information set forth in Schedule II hereto, taken together (collectively, the “Pricing Disclosure Package”) as of the Applicable Time, did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;

(c) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included in the Pricing Circular any material loss or material interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Pricing Circular; and, since the date as of which information is given in the Pricing Circular, there has not been any change in the capital stock (other than regular quarterly dividends on the Company’s common stock or pursuant to employee benefit plans or arrangements described in the Exchange Act Reports and in effect on the date hereof) or long-term debt (other than under the Company’s bank credit agreement or uncommitted money market lines of credit in effect on the date hereof) of the Company or any of its subsidiaries, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, shareholders’ equity or results of operations of the Company and its subsidiaries taken as a whole, otherwise than as set forth or contemplated in the Pricing Circular;

(d) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware and has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Pricing Circular and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to

qualify or to be in good standing would not result in a material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a “Material Adverse Effect”);

(e) Each “significant subsidiary” (as such term is defined in Rule 1-02 of Regulation S-X under the Exchange Act) of the Company as of the date hereof (each a “Designated Subsidiary” and, collectively, the “Designated Subsidiaries”) is identified on Schedule III hereto, has been duly formed or incorporated and is validly existing as a corporation or other business entity in good standing under the laws of the jurisdiction of its formation or incorporation, has the corporate, partnership or company power and authority to own, lease and operate its properties and to conduct its business as described in the Pricing Circular and is duly qualified as a foreign corporation or other business entity to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; all of the issued and outstanding capital stock or equivalent equity interests of each Designated Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable and (except for directors’ qualifying shares or shares representing an immaterial equity interest that are required under the laws of any foreign jurisdiction to be owned by others, and except as set forth in the Pricing Circular) are owned by the Company, directly or through subsidiaries, free and clear of any non-intercompany security interest, mortgage, pledge, lien, encumbrance or claim; and none of the outstanding shares of capital stock or equivalent equity interests of the Designated Subsidiaries were issued in violation of any preemptive or similar rights arising by operation of law, or under the charter, by-laws or other comparable organizational documents of any Designated Subsidiary or under any agreement to which the Company or any Designated Subsidiary is a party;

(f) Each of the Company and its subsidiaries has (i) generally satisfactory title to its oil and gas properties, title investigations having been carried out by the Company or its subsidiaries in accordance with the practice in the oil and gas industry in the areas in which the Company and its subsidiaries operate, (ii) good and marketable title to all other real property owned by it to the extent necessary to carry on its business and (iii) good and marketable title to all personal property owned by it, in each case free and clear of all liens, encumbrances and defects except such as are described in the Pricing Circular or such as do not materially affect the value of the properties of the Company and its subsidiaries, considered as one enterprise, and do not interfere with the use made and proposed to be made of such properties, by the Company and its subsidiaries, considered as one enterprise; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Pricing Circular, are in full force and effect, and neither the Company nor any of its subsidiaries has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or its subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or any subsidiary thereof to the continued possession of the leased or subleased premises under any such lease or sublease;

(g) The authorized, issued and outstanding capital stock of the Company is as set forth in the Pricing Circular in the column entitled “Actual” under the caption “Capitalization”

(except as indicated in the notes thereto with respect to any subsequent issuances pursuant to employee or director benefit plans referred to in the Pricing Circular or pursuant to the exercise of convertible securities or options referred to in the Pricing Circular); and the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company;

(h) The Notes, and notes having terms substantially identical to the Notes other than the payment of additional interest (the “Exchange Notes”) issuable in exchange for the Notes in an exchange offer (the “Exchange Offer”) pursuant to the Registration Rights Agreement (as defined in Section 1(i) below), have been duly authorized and, when issued and delivered pursuant to this Agreement (in the case of the Notes) or, if and when issued and delivered pursuant to the Registration Rights Agreement (in the case of the Exchange Notes) and duly authenticated pursuant to the Indenture, will have been duly executed, authenticated, issued and delivered and will constitute valid and legally binding obligations of the Company entitled to the benefits provided by the Indenture; the Indenture has been duly authorized by the Company and upon execution and delivery by the parties thereto will (assuming the due authorization, execution and delivery by the Trustee) constitute a valid and legally binding instrument of the Company, enforceable against the Company in accordance with its terms, except as limited by bankruptcy, insolvency, moratorium, fraudulent transfer, reorganization and other similar laws of general application affecting the rights and remedies of creditors and by general equity principles (regardless of whether enforceability is considered in a proceeding in equity or at law);

(i) This Agreement has been duly authorized, executed and delivered by the Company, and the exchange and registration rights agreement (the “Registration Rights Agreement”), to be dated as of the Time of Delivery (as defined below), has been duly authorized by the Company and, when duly executed and delivered by the Company and the other parties thereto (assuming the due authorization, execution and delivery by each party thereto other than the Company), will be the valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms, except as limited by bankruptcy, insolvency, moratorium, fraudulent transfer, reorganization and other similar laws of general application affecting the rights and remedies of creditors and by general equity principles (regardless of whether enforceability is considered in a proceeding in equity or at law) and, as to rights of indemnification and contribution, subject to principles of public policy or federal or state securities laws relating thereto;

(j) None of the transactions contemplated by this Agreement (including, without limitation, the use of the proceeds from the sale of the Notes) will violate or result in a violation of Section 7 of the Exchange Act, or any regulation promulgated thereunder, including, without limitation, Regulations T, U, and X of the Board of Governors of the Federal Reserve System;

(k) Prior to the date of this Agreement, neither the Company nor any of its affiliates has taken any action which is designed to or which has constituted or which reasonably might have been expected to cause or result in stabilization or manipulation of the price of any security of the Company in connection with the offering of the Notes;

(l) Neither the Company nor any of its subsidiaries is in violation of its charter, by-laws or other governing documents, as applicable, or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or its subsidiaries is a party or by which any of them may be bound, or to which any of the property or assets of the Company or its subsidiaries is subject (collectively, “Agreements and Instruments”) except for such violations or defaults that have not resulted or would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the Indenture and the Notes and any other agreement or instrument entered into or issued or to be entered into or issued by the Company in connection with the transactions contemplated hereby or thereby or in the Pricing Circular (including the Registration Rights Agreement) and the consummation of the transactions contemplated herein and therein and in the Pricing Circular (but in the Pricing Circular only to the extent such transactions relate to the offering and sale of the Notes and the use of the proceeds therefrom) do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or a Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or its subsidiaries pursuant to the Agreements and Instruments, except for such conflicts, breaches, Repayment Events, defaults, liens, charges or encumbrances that, singly or in the aggregate, have not resulted or would not result in a Material Adverse Effect, nor will such action result in any violation of the provisions of any applicable law, statute, rule, regulation, judgment, order, writ or decree of any governmental agency or body or court, domestic or foreign, having jurisdiction over the Company or its subsidiaries or any of their assets or properties, except for such violations that, singly or in the aggregate, have not resulted or would not result in a Material Adverse Effect, or any violation of the provisions of the charter or by-laws of the Company or the charter, by-laws or other comparable organizational documents of any of its subsidiaries; as used herein, a “Repayment Event” means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or its subsidiaries;

(m) No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Notes or the consummation by the Company of the transactions contemplated by this Agreement or the Indenture, except for the filing and effectiveness of one or more registration statements by the Company with the Commission pursuant to the United States Securities Act of 1933, as amended (the “Act”) pursuant to the Registration Rights Agreement, the qualification of the Indenture under the Trust Indenture Act of 1939 (“Trust Indenture Act”) and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Notes by the Purchasers;

(n) The statements set forth in the Pricing Disclosure Package and the Offering Circular under the caption “Description of the Notes”, insofar as they purport to constitute a summary of the terms of the Notes, the Indenture and the Registration Rights Agreement, under the caption “Certain United States Federal Income Tax Considerations” insofar as they purport to describe the provisions of the laws and documents referred to therein and under the

caption “Underwriting”, insofar as they purport to describe the provisions of this Agreement referred to therein, are accurate and fair in all material respects;

(o) Except as disclosed in the Pricing Circular, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary thereof which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the consummation of the transactions contemplated by this Agreement (including the transactions contemplated by the Registration Rights Agreement) or the performance by the Company of its obligations hereunder;

(p) When the Notes are issued and delivered pursuant to this Agreement, no Notes will be of the same class (within the meaning of Rule 144A under the Act) as securities which are listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system;

(q) The Company is subject to Section 13 or 15(d) of the Exchange Act;

(r) The Company is not, and after giving effect to the offering and sale of the Notes and the application of the net proceeds therefrom, will not be an “investment company” or an entity “controlled” by an “investment company,” as such terms are defined in the United States Investment Company Act of 1940, as amended (the “Investment Company Act”);

(s) Neither the Company nor any person acting on its behalf (other than the Purchasers, for whom the Company makes no representation) has offered or sold the Notes by means of any general solicitation or general advertising within the meaning of Rule 502(c) under the Act or, with respect to Notes sold outside the United States to non-U.S. persons (as defined in Rule 902 under the Act), by means of any directed selling efforts within the meaning of Rule 902 under the Act, and the Company, any affiliate of the Company and any person acting on its or their behalf (other than the Purchasers, for whom the Company makes no representation) have complied with and will implement the “offering restrictions” within the meaning of such Rule 902 to the extent applicable to them;

(t) Within the preceding six months, neither the Company nor any other person acting on its behalf has offered or sold to any person any Notes, or any securities of the Company of the same or a similar class as the Notes, other than Notes offered or sold to the Purchasers hereunder and the Company’s 6.875% Senior Subordinated Notes due 2017 issued pursuant to a registered exchange offer; and the Company will take reasonable precautions designed to insure that any offer or sale, direct or indirect, in the United States or to any U.S. person (as defined in Rule 902 under the Act) of any Notes or any substantially similar security issued by the Company, within six months subsequent to the date on which the distribution of the Notes has been completed (as notified to the Company by Goldman, Sachs & Co. or, in the absence of any such notification, such date shall be deemed to be 20 days after the Time of Delivery), is made under restrictions and other circumstances reasonably designed not to affect the status of the offer and sale of the Notes in the United States and to U.S. persons contemplated by this Agreement as transactions exempt from the registration provisions of the Act;

(u) PricewaterhouseCoopers LLP, who have audited certain financial statements of the Company and its subsidiaries and have audited the Company’s internal control over financial reporting and management’s assessment thereof as of December 31, 2005, and who have audited certain financial statements of Northrock Resources Ltd., an Alberta corporation (“Northrock”), are an independent registered public accounting firm with respect to each of the Company and Northrock within the meaning of the Act and the rules and regulations thereunder adopted by the Commission and the Public Accounting Oversight Board (United States);

(v) The Company maintains a system of internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) that complies with the requirements of the Exchange Act and has been designed by the Company’s principal executive officer and principal financial officer, or under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and based on the Company’s evaluation of its internal control over financial reporting under the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, the Company’s management concluded that its internal control over financial reporting was effective as of December 31, 2005;

(w) Since December 31, 2005, the date of the latest audited financial statements of the Company incorporated by reference in the Pricing Circular, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting;

(x) The Company maintains disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Exchange Act) that comply with the requirements of the Exchange Act; such disclosure controls and procedures have been designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s principal executive officer and principal financial officer by others within those entities; and such disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Commission rules and forms;

(y) The historical financial statements of the Company, together with the related schedules and notes, included in the Pricing Circular present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statements of operations, shareholders’ equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; and said financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) applied on a consistent basis throughout the periods involved, except as noted therein;

(z) To the knowledge of the Company, (i) the historical financial statements of Northrock, together with the related schedules and notes, included in the Pricing Circular present fairly the financial position of Northrock and its consolidated subsidiaries at the dates indicated and the statements of operations, shareholders’ equity and cash flows of Northrock and its consolidated subsidiaries for the periods specified and (ii) said financial statements have been prepared in conformity with GAAP applied on a consistent basis throughout the periods involved, except as noted therein;

(aa) The pro forma financial information included in the Pricing Circular has been prepared on a basis consistent with the historical financial statements from which it has been derived, includes all material adjustments to the historical financial information required by Rule 11-02 of Regulation S-X under the Act and the Exchange Act to reflect the transactions described in the Pricing Circular to which it relates, gives effect to assumptions made on a reasonable basis and fairly presents the transactions described in the Pricing Circular to which it relates;

(bb) The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, “Governmental Licenses”) issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, except where the failure to possess such Governmental Licenses, would not, singly or in the aggregate, have a Material Adverse Effect; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except where the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to result in a Material Adverse Effect;

(cc) The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns or have timely requested extensions thereof and have paid all taxes shown as due thereon or made adequate reserve or provision therefor; and other than tax deficiencies which the Company or any subsidiary is contesting in good faith and for which the Company or such subsidiary has provided adequate reserves, there is no tax deficiency that has been asserted against the Company or any subsidiary that would individually or in the aggregate have a Material Adverse Effect;

(dd) Except as described in the Pricing Circular and except for such matters as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, “Hazardous Materials”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, “Environmental Laws”), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or, to the knowledge of the Company, threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the

basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or Environmental Laws;

(ee) No labor dispute with the employees of the Company or its subsidiaries exists or, to the knowledge of the Company, is imminent, which, in either case, may reasonably be expected to result in a Material Adverse Effect; and

(ff) Subject to compliance by the Purchasers with the representations, warranties and agreements set forth in Section 3 and Annex I, it is not necessary in connection with the offer, sale and delivery of the Notes to the Purchasers and the Purchasers’ subsequent sales to QIBs (as defined below) or pursuant to Annex I in the manner contemplated by this Agreement and the Pricing Circular to register the Notes under the Act or to qualify the Indenture under the Trust Indenture Act.

2. Subject to the terms and conditions herein set forth, the Company agrees to issue and sell to each of the Purchasers, and each of the Purchasers agrees, severally and not jointly, to purchase from the Company, at a purchase price of 98.250% of the principal amount thereof, plus accrued interest, if any, from June 6, 2006 to the Time of Delivery hereunder, the principal amount of Notes set forth opposite the name of such Purchaser in Schedule I hereto.

3. Upon the authorization by you of the release of the Notes, the several Purchasers propose to offer the Notes for sale upon the terms and conditions set forth in this Agreement and the Offering Circular and each Purchaser hereby represents and warrants to, and agrees with the Company that:

(a) It will offer and sell the Notes only to: (i) persons who it reasonably believes are “qualified institutional buyers” (“QIBs”) within the meaning of Rule 144A under the Act in transactions meeting the requirements of Rule 144A or (ii) upon the terms and conditions set forth in Annex I to this Agreement;

(b) It is an institutional “accredited investor” within the meaning of Rule 501 under the Act; and

(c) It will not offer or sell the Notes by any form of general solicitation or general advertising, including but not limited to the methods described in Rule 502(c) under the Act.

4. (a) The Notes to be purchased by each Purchaser hereunder will be represented by one or more definitive global Notes in book-entry form which will be deposited by or on behalf of the Company with The Depository Trust Company (“DTC”) or its designated custodian. The Company will deliver the Notes to Goldman, Sachs & Co., for the account of each Purchaser, against payment by or on behalf of such Purchaser of the purchase price therefor by wire transfer to the account of the Company of same day funds, by causing DTC to credit the Notes to the account of Goldman, Sachs & Co. at DTC. The time and date of such delivery and payment shall be 9:30 a.m., New York City time, on June 6, 2006 or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and date are herein called the “Time of Delivery”.

(b) The documents to be delivered at the Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross-receipt for the Notes and any

additional documents requested by the Purchasers pursuant to Section 7(j) hereof, will be delivered at such time and date at the offices of Baker Botts L.L.P., 910 Louisiana, Houston, Texas 77002 (the “Closing Location”), and the Notes will be delivered to the Trustee as custodian for DTC, all at the Time of Delivery. A meeting will be held at the Closing Location at 5:00 p.m., Houston time, on the New York Business Day next preceding the Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4, “New York Business Day” shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close.

5. The Company agrees with each of the Purchasers:

(a) To prepare the Offering Circular in a form approved by you; to make no amendment or any supplement to the Offering Circular which shall be reasonably disapproved by you promptly after reasonable notice thereof; and to furnish you with copies thereof;

(b) Promptly from time to time to take such action as you may reasonably request to qualify the Notes for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for so long as may be necessary to complete the distribution of the Notes, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction or to qualify as a dealer in securities in any U.S. jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject;

(c) To furnish the Purchasers with copies of each amendment or supplement to the Offering Circular and additional written and electronic copies of the Offering Circular and such amendments or supplements in such quantities as you may from time to time reasonably request, and if, at any time prior to the earlier of the effectiveness of a registration statement filed in accordance with the Registration Rights Agreement or the expiration of nine months after the date of the Offering Circular, any event shall have occurred as a result of which the Offering Circular as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Offering Circular is delivered, not misleading, or, if for any other reason it shall be necessary or desirable during such same period to amend or supplement the Offering Circular, to notify you and upon your request to prepare and furnish without charge to each Purchaser and to any dealer in Notes as many written and electronic copies as you may from time to time reasonably request of an amended Offering Circular or a supplement to the Offering Circular which will correct such statement or omission or effect such compliance;

(d) During the period beginning from the date hereof and continuing for 90 days thereafter, the Company will not, and will not permit any of its subsidiaries or other “affiliates” (as defined in Rule 405 under the Act) over which it exercises management or voting control or any person acting on its behalf, to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder, any securities that are substantially similar to the Notes (other than as

provided for in or required by the Registration Rights Agreement), without the prior written consent of Goldman, Sachs & Co.;

(e) At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, for the benefit of holders from time to time of Notes, to furnish at its expense, upon request, to holders of Notes and prospective purchasers of Notes, information (the “Additional Issuer Information”) satisfying the requirements of subsection (d)(4)(i) of Rule 144A under the Act, unless all the Notes are no longer “restricted securities” within the meaning of Rule 144(a)(3) under the Act or may be sold under Rule 144(k) under the Act;

(f) To execute and deliver the Registration Rights Agreement in the form previously agreed upon and, if conducted, to comply with all applicable federal and state securities laws in connection with the Exchange Offer;

(g) To use its reasonable best efforts to cause the Notes to be eligible for the PORTAL trading system of the National Association of Securities Dealers, Inc.;

(h) During the period of five years after the Time of Delivery, the Company will furnish or will make generally available via the EDGAR System to Goldman, Sachs & Co. and, upon request, to each of the other Purchasers, promptly upon their becoming available, copies of (i) all reports or other publicly available information that the Company shall mail or otherwise make available to its public stockholders and (ii) all reports, financial statements and proxy or information statements filed by the Company with the Commission or any national securities exchange and such other publicly available information concerning the Company and its subsidiaries including, without limitation, press releases, as the Purchasers may reasonably request;

(i) During the period of two years after the Time of Delivery, the Company will not, and will not permit any of its “affiliates” (as defined in Rule 144 under the Act) to, resell any of the Notes which constitute “restricted securities” under Rule 144 that have been reacquired by any of them;

(j) To comply with all agreements set forth in the representation letter of the Company to DTC relating to the approval of the Notes by DTC for “book-entry” transfer;

(k) To advise the Purchasers promptly, and, if requested by the Purchasers, confirm such advice in writing, of the issuance by any state securities commission of any stop order suspending the qualification or exemption of any of the Notes for offering or sale in any jurisdiction, or the initiation of any proceeding for such purpose by any state securities commission or other regulatory authority, and to use its reasonable best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption of any of the Notes under any state securities or Blue Sky laws, and if, at any time, any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption of any of the Notes under any state securities or Blue Sky laws, to use its reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; and

(l) To use the net proceeds received by it from the sale of the Notes pursuant to this Agreement in the manner specified in the Pricing Circular under the caption “Use of Proceeds”.

6. The Company covenants and agrees with the several Purchasers that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company’s counsel and accountants in connection with the issue of the Notes, and the Exchange Notes and all other expenses in connection with the preparation, printing, reproduction and filing of the Preliminary Offering Circular and the Offering Circular and any amendments and supplements thereto and the mailing and delivering of copies thereof to the Purchasers and dealers; (ii) the cost of printing or producing any Agreement among Purchasers, this Agreement, the Indenture, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Notes; (iii) all expenses in connection with the qualification of the Notes for offering and sale under state securities laws as provided in Section 5(b) hereof; (iv) any fees charged by securities rating services for rating the Notes; (v) the cost of preparing and delivering the Notes and the Exchange Notes; (vi) the fees and expenses of the Trustee and any agent of the Trustee and the fees and disbursements of counsel for the Trustee in connection with the Indenture, the Notes and the Exchange Notes; (vii) any cost incurred in connection with the designation of the Notes for trading in PORTAL and (viii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. It is understood, however, that, except as provided in this Section, and Sections 8 and 11 hereof, the Purchasers will pay all of their own costs and expenses, including the fees, disbursements and expenses of their counsel, transfer taxes on resale of any of the Notes by them, and any advertising expenses connected with any offers they may make.

7. The obligations of the Purchasers hereunder shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company as set forth herein are, at and as of the Time of Delivery, true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions:

(a) Vinson & Elkins L.L.P., counsel for the Purchasers, shall have furnished to you such opinion or opinions, dated the Time of Delivery, with respect to the matters covered in paragraphs (i), (iii), (iv), (v), (vi) and (viii) of Exhibit A-1 hereto, as well as such other related matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters;

(b) (i) Baker Botts L.L.P., counsel for the Company, shall have furnished to you their written opinion, dated the Time of Delivery, in form and substance reasonably satisfactory to you, to the effect set forth in Exhibit A-1 hereto, (ii) Michael J. Killelea, Senior Vice President and General Counsel of the Company, shall have furnished to you his written opinion, dated the Time of Delivery, in form and substance reasonably satisfactory to you, to the effect set forth in Exhibit A-2 hereto, (iii) Fraser Milner Casgrain LLP, Canadian counsel for the Company, shall have furnished to you their written opinion, dated the Time of Delivery, in form and substance reasonably satisfactory to you, to the effect set forth in Exhibit A-3 hereto, and (iv) Eamon Hurley, General Counsel of Northrock, shall have furnished to you his written opinion, dated the Time of Delivery, in form and substance reasonably satisfactory to you, to the effect set forth in Exhibit A-4 hereto;

(c) (i) On the date of the Offering Circular prior to the execution of this Agreement, PricewaterhouseCoopers LLP shall have furnished to you a letter or letters, dated the date of delivery thereof, in form and substance reasonably satisfactory to you, containing statements

and information of the type ordinarily included in accountants’ “comfort letters” to initial purchasers with respect to the financial statements of both the Company and Northrock and certain other financial information contained in the Offering Circular and (ii) at the Time of Delivery, PricewaterhouseCoopers LLP shall have furnished to you a letter or letters, dated the date of delivery thereof, to the effect that they reaffirm the statements made in their letter or letters furnished pursuant to the preceding clause (i), except that the specified date referred to shall be a date not more than three business days prior to the Time of Delivery;

(d) At the Time of Delivery, Ryder Scott Company, L.P. shall have furnished to you a letter or letters regarding certain information with respect to oil and natural gas reserves associated with the Company’s and Northrock’s oil and natural gas properties dated the date of delivery thereof and in the form and substance reasonably satisfactory to you;

(e) At the Time of Delivery, Miller and Lents, Ltd. shall have furnished to you a letter or letters regarding certain information with respect to oil and natural gas reserves associated with the Company’s oil and natural gas properties dated the date of delivery thereof in the form and substance reasonably satisfactory to you;

(f) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Pricing Circular any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Pricing Circular and (ii) since the date as of which information is given in the Pricing Circular, there shall not have been any change in the capital stock (other than regular quarterly dividends on the Company’s common stock or pursuant to employee benefit plans or arrangements described in the Exchange Act Reports and in effect on the date hereof) or long-term debt (other than under the Company’s bank credit agreement or uncommitted money market lines of credit in effect on the date hereof) of the Company or any of its subsidiaries, or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, shareholders’ equity or results of operations of the Company and its subsidiaries taken as a whole, otherwise than as set forth or contemplated in the Pricing Circular, the effect of which, in any such case described in clause (i) or (ii), is in your judgment so material and adverse as to make it impracticable or inadvisable to proceed with the offering or the delivery of the Notes on the terms and in the manner contemplated in this Agreement and in the Offering Circular;

(g) Immediately after the Applicable Time (i) no downgrading shall have occurred in the rating accorded the Company’s debt securities by any “nationally recognized statistical rating organization,” as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company’s debt securities;

(h) Immediately after the Applicable Time there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange (“NYSE”); (ii) a suspension or material limitation in trading in the Company’s common stock on the NYSE; (iii) a general moratorium on commercial banking activities declared by either Federal or New York or Texas State authorities or a material disruption in commercial banking or securities settlement or clearance services in the United

States; (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war or (v) the occurrence of any other calamity or crisis or any change in financial, political or economic conditions in the United States or elsewhere, if the effect of any such event specified in clause (iv) or (v) in your judgment makes it impracticable or inadvisable to proceed with the offering or the delivery of the Notes on the terms and in the manner contemplated in the Offering Circular;

(i) The Notes shall have been designated for trading on PORTAL; and

(j) The Company shall have furnished or caused to be furnished to you at the Time of Delivery certificates of officers of the Company reasonably satisfactory to you as to the accuracy of the representations and warranties of the Company herein at and as of the Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to the Time of Delivery, as to the matters set forth in subsections (f) and (g) of this Section 7 and as to such other matters as you may reasonably request.

8. (a) The Company will indemnify and hold harmless each Purchaser against any losses, claims, damages or liabilities, joint or several, to which such Purchaser may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Offering Circular, the Pricing Circular, the Offering Circular, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and will reimburse each Purchaser for any legal or other expenses reasonably incurred by such Purchaser in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Offering Circular, the Pricing Circular, the Offering Circular or any such amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Purchaser through Goldman, Sachs & Co. expressly for use therein.

(b) Each Purchaser will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Offering Circular, the Pricing Circular, the Offering Circular, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Offering Circular, the Pricing Circular, the Offering Circular or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by such Purchaser through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred.

(c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with a single counsel (in addition to any local counsel) reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act, by or on behalf of any indemnified party.

(d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Purchasers on the other from the offering of the Notes. If, however, the

allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Purchasers on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Purchasers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Purchasers, in each case as set forth in the Offering Circular or herein. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Purchasers on the other and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Purchasers agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Notes underwritten by it and distributed to investors were offered to investors exceeds the amount of any damages which such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The Purchasers’ obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

(e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Purchaser within the meaning of the Act; and the obligations of the Purchasers under this Section 8 shall be in addition to any liability which the respective Purchasers may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Act.

9. (a) If any Purchaser shall default in its obligation to purchase the Notes which it has agreed to purchase hereunder, you may in your discretion arrange for you or another party or other parties to purchase such Notes on the terms contained herein. If within thirty-six hours after such default by any Purchaser you do not arrange for the purchase of such Notes, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Notes on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged

for the purchase of such Notes, or the Company notifies you that it has so arranged for the purchase of such Notes, you or the Company shall have the right to postpone the Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Offering Circular, or in any other documents or arrangements, and the Company agrees to prepare promptly any amendments to the Offering Circular which in your opinion may thereby be made necessary. The term “Purchaser” as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Notes.

(b) If, after giving effect to any arrangements for the purchase of the Notes of a defaulting Purchaser or Purchasers by you and the Company as provided in subsection (a) above, the aggregate principal amount of such Notes which remains unpurchased does not exceed one-eleventh of the aggregate principal amount of all the Notes, then the Company shall have the right to require each non-defaulting Purchaser to purchase the principal amount of Notes which such Purchaser agreed to purchase hereunder and, in addition, to require each non-defaulting Purchaser to purchase its pro rata share (based on the principal amount of Notes which such Purchaser agreed to purchase hereunder) of the Notes of such defaulting Purchaser or Purchasers for which such arrangements have not been made; but nothing herein shall relieve a defaulting Purchaser from liability for its default.

(c) If, after giving effect to any arrangements for the purchase of the Notes of a defaulting Purchaser or Purchasers by you and the Company as provided in subsection (a) above, the aggregate principal amount of Notes which remains unpurchased exceeds one-eleventh of the aggregate principal amount of all the Notes, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Purchasers to purchase Notes of a defaulting Purchaser or Purchasers, then this Agreement shall thereupon terminate, without liability on the part of any non-defaulting Purchaser or the Company, except for the expenses to be borne by the Company and the Purchasers as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Purchaser from liability for its default.

10. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Purchasers, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Purchaser or any controlling person of any Purchaser, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Notes.

11. If this Agreement shall be terminated pursuant to Section 9 hereof, the Company shall not then be under any liability to any Purchaser except as provided in Sections 6 and 8 hereof; but, if for any other reason, the Notes are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Purchasers through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Purchasers in making preparations for the purchase, sale and delivery of the Notes, but the Company shall then be under no further liability to any Purchaser except as provided in Sections 6 and 8 hereof.

12. In all dealings hereunder, you shall act on behalf of each of the Purchasers, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or

agreement on behalf of any Purchaser made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the Purchasers.

All statements, requests, notices and agreements hereunder shall be in writing, and if to the Purchasers shall be delivered or sent by mail, telex or facsimile transmission to you as the Purchasers in care of Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004, Attention: Registration Department; and if to the Company shall be delivered or sent by mail or facsimile transmission to the address of the Company set forth in the Offering Circular, Attention: Secretary; provided, however, that any notice to a Purchaser pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Purchaser at its address set forth in its Purchasers’ Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the Company by you upon request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof.

13. This Agreement shall be binding upon, and inure solely to the benefit of, the Purchasers, the Company, and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company, or any Purchaser, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Notes from any Purchaser shall be deemed a successor or assign by reason merely of such purchase.

14. Time shall be of the essence of this Agreement.

15. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

16. The Company acknowledges and agrees that (i) the purchase and sale of the Notes pursuant to this Agreement is an arm’s-length commercial transaction between the Company, on the one hand, and the several Purchasers, on the other, (ii) in connection therewith and with the process leading to such transaction each Purchaser is acting solely as a principal and not the agent or fiduciary of the Company, (iii) no Purchaser has assumed an advisory or fiduciary responsibility in favor of the Company with respect to the offering contemplated hereby or the process leading thereto (irrespective of whether such Purchaser has advised or is currently advising the Company on other matters) or any other obligation to the Company except the obligations expressly set forth in this Agreement and (iv) the Company has consulted its own legal and financial advisors to the extent it deemed appropriate. The Company agrees that it will not claim that the Purchasers, or any of them, has rendered advisory services of any nature or respect, or owes a fiduciary or similar duty to the Company, in connection with such transaction or the process leading thereto.

17. This Agreement supersedes all prior agreements and understandings (whether written or oral) between the Company and the Purchasers, or any of them, with respect to the subject matter hereof.

18. The Company and each of the Purchasers hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

19. Notwithstanding anything herein to the contrary, the Company (and the Company’s employees, representatives, and other agents) are authorized to disclose to any and all persons, the tax treatment and tax structure of the potential transaction and all materials of any kind (including tax opinions and other tax analyses) provided to the Company relating to that treatment and structure, without the Purchasers’ imposing any limitation of any kind. However, any information relating to the tax treatment and tax structure shall remain confidential (and the foregoing sentence shall not apply) to the extent necessary to enable any person to comply with securities laws. For this purpose, “tax treatment” means U.S. federal and state income tax treatment, and “tax structure” is limited to any facts that may be relevant to that treatment.

20. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument.

[Signature page follows.]

If the foregoing is in accordance with your understanding, please sign and return to us one for the Company and each of you plus one for each counsel counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Purchasers, this letter and such acceptance hereof shall constitute a binding agreement between each of the Purchasers and the Company. It is understood that your acceptance of this letter on behalf of each of the Purchasers is pursuant to the authority set forth in a form of Agreement among Purchasers, the form of which shall be submitted to the Company for examination upon request, but without warranty on your part as to the authority of the signers thereof.

	Very truly yours,
	Pogo Producing Company
	By:	/s/ James P. Ulm, II
		James P. Ulm, II
		Senior Vice President and
		Chief Financial Officer

Accepted as of the date hereof:

Goldman, Sachs & Co.
	As representative of the several Purchasers
	named in Schedule I hereto,

/s/ Goldman, Sachs & Co.
(Goldman, Sachs & Co.)

SCHEDULE I

Purchaser	Principal Amount of Notes to be Purchased
Goldman, Sachs & Co.	$	225,000,000
Banc of America Securities LLC	45,000,000
Citigroup Global Markets Inc	45,000,000
Harris Nesbitt Corp.	45,000,000
BNP Paribas Securities Corp.	22,500,000
Scotia Capital (USA) Inc.	22,500,000
TD Securities (USA) LLC	22,500,000
Wachovia Capital Markets, LLC	22,500,000

Total	$	450,000,000

Schedule I

SCHEDULE II

Title of Purchased Securities:	7.875% Senior Subordinated Notes due 2013
Aggregate Principal Amount Offered:	$450,000,000
Price to Public:	100.000%
Settlement Date:	June 6, 2006
Managing Underwriters:	Goldman, Sachs & Co.
Purchase Price by Underwriters:	98.250%
Maturity Date:	May 1, 2013
Interest Rate:	7.875%
Interest Payment Dates:	May 1 and November 1
First Interest Payment Date:	November 1, 2006
Optional Redemption:	The Notes will be redeemable by the Company, in whole or in part, on or after May 1, 2010, at the prices set forth below (expressed as percentages of the principal amount), plus accrued and unpaid interest:
	Date	Price
	May 1, 2010	103.938%
	May 1, 2011	101.969%
	May 1, 2012	100.000%
	Prior to May 1, 2010, the Notes will be redeemable by the Company, in whole or in part, at a redemption price equal to the principal amount of the Notes plus a “make-whole” premium (Treasury Rate plus 50 basis points), plus accrued and unpaid interest.
Optional Redemption with Equity Proceeds:	In addition, up to 35% of the Notes will be redeemable by the Company using proceeds from specified equity offerings before May 1, 2009, at a price equal to 107.875% of their principal amount, plus accrued and unpaid interest.

Schedule II

SCHEDULE III

Name of Designated Subsidiary		Jurisdiction of Its Organization
Pogo Finance, ULC		Canada
Pogo Alberta, ULC		Canada
Northrock Resources Ltd.		Canada
Northrock Resources P/S		Canada

Schedule III

ANNEX I

(1) The Notes have not been and will not be registered under the Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the Act or pursuant to an exemption from the registration requirements of the Act. Each Purchaser represents and agrees that it has offered and sold the Notes, and will offer and sell the Notes (i) as part of their distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering and the Time of Delivery (the “restricted period”), only in accordance with Rule 903 of Regulation S or Rule 144A under the Act. Accordingly, each Purchaser agrees that neither it, its affiliates nor any persons acting on its or their behalf has engaged or will engage in any directed selling efforts with respect to the Notes, and it and they have complied and will comply with the offering restriction requirements of Regulation S. Each Purchaser agrees that, at or prior to confirmation of sale of Notes (other than a sale pursuant to Rule 144A), it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes from it during the restricted period a confirmation or notice to substantially the following effect:

“The Notes covered hereby have not been registered under the U.S. Securities Act of 1933 (the “Securities Act”) and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date, except in either case in accordance with Regulation S (or Rule 144A if available) under the Securities Act. Terms used above have the meaning given to them by Regulation S.”

Terms used in this paragraph have the meanings given to them by Regulation S.

Each Purchaser further agrees that it and each of its affiliates has not entered and will not enter into any contractual arrangement with respect to the distribution or delivery of the Notes, except with its affiliates or with the prior written consent of the Company.

In addition,

(A) except to the extent permitted under U.S. Treas. Reg. § 1.163-5(c)(2)(i)(D) (the “D Rules”), (i) each Purchaser agrees that it has not offered or sold, and during the restricted period will not offer or sell, Notes in bearer form to a person who is within the United States or its possessions or to a U.S. person, and (ii) it has not delivered and will not deliver within the United States or its possessions definitive Notes in bearer form that are sold during the restricted period;

(B) each Purchaser represents and agrees that it has, and throughout the restricted period will have, in effect procedures reasonably designed to ensure that its employees or agents who are directly engaged in selling Notes in bearer form are aware that such Notes may not be offered or sold during the restricted period to a person who is within the United States or its possessions or to a United States person, except as permitted by the D Rules;

(C) if it is a United States person, each such Purchaser represents that it is acquiring the Notes in bearer form for purposes of resale in connection with their original

Annex I-1

issuance and if it retains Notes in bearer form for its own account, it will only do so in accordance with the requirements of U.S. Treas. Reg. § 1.163-5(c)(2)(i)(D)(6); and

(D) with respect to each affiliate that acquires from it Notes in bearer form for the purpose of offering or selling such Notes during the restricted period, such Purchaser either (i) repeats and confirms the representations and agreements contained in clauses (A), (B) and (C) on its behalf or (ii) agrees that it will obtain from such affiliate for the Company’s benefit the representations and agreements contained in clauses (A), (B) and (C).

Terms used in this paragraph have the meanings given to them by the United States Internal Revenue Code and regulations thereunder, including the D Rules.

(2) Notwithstanding the foregoing, Notes in registered form may be offered, sold and delivered by the Purchasers in the United States and to U.S. persons pursuant to Section 3 of this Agreement without delivery of the written statement required by paragraph (1) above.

(3) Each Purchaser represents, warrants and agrees that: (i) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (“FSMA”)) received by it in connection with the issue or sale of any Notes in circumstances in which section 21(1) of the FSMA does not apply to the Company; and (ii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.

(4) In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), each Purchaser represents, warrants and agrees that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of Notes to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Notes which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of Notes to the public in that Relevant Member State at any time:

(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

(c) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.

Annex I-2

For the purposes of this provision, the expression an “offer of Notes to the public” in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State, and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

(5) Each Purchaser agrees that it will not offer, sell or deliver any of the Notes in Hong Kong, Singapore, Japan or any other jurisdiction outside the United States except under circumstances (including those described in the “Underwriting” section of the Offering Circular in relation to Hong Kong, Singapore and Japan) that will result in compliance with the applicable laws thereof, and that it will take at its own expense whatever action is required to permit its purchase and resale of the Notes in such jurisdictions. Each Purchaser understands that no action has been taken to permit a public offering in any jurisdiction outside the United States where action would be required for such purpose. Each Purchaser agrees not to cause any advertisement of the Notes to be published in any newspaper or periodical or posted in any public place and not to issue any circular relating to the Notes, except in any such case with Goldman, Sachs & Co.’s express written consent and then only at its own risk and expense.

Annex I-3

Exhibit A-1

FORM OF OPINION OF BAKER BOTTS L.L.P.
TO BE DELIVERED PURSUANT TO
SECTION 7(b)(i)

(i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware.

(ii) The Company has corporate power and authority to own its properties and to conduct its business as described in the Offering Circular and to enter into and perform its obligations under the Purchase Agreement and the Registration Rights Agreement.

(iii) The Purchase Agreement and the Registration Rights Agreement have been duly authorized, executed and delivered by the Company.

(iv) The Indenture has been duly authorized, executed and delivered by the Company and (assuming the due authorization, execution and delivery thereof by the Trustee) constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors’ rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law).

(v) The Notes have been duly authorized by the Company, each global certificate representing the Notes is in the form contemplated by the Indenture and has been duly executed by the Company and, when such global certificate has been authenticated by the Trustee in the manner provided in the Indenture (assuming the due authorization, execution and delivery of the Indenture by the Trustee) and the Notes have been delivered through the facilities of DTC against payment of the purchase price therefor, the Notes will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors’ rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be entitled to the benefits of the Indenture.

(vi) The Notes, the Indenture and the Registration Rights Agreement conform, as to legal matters, in all material respects to the descriptions thereof contained in the Offering Circular, and the statements set forth in the Offering Circular under the caption “Certain United States Federal Income Tax Considerations” insofar as they purport to describe the provisions of the law referred to therein are complete, accurate and fair in all material respects.

(vii) No authorization, approval, consent or order of any court or governmental authority or agency other than such as have been obtained or made or as may be required under the applicable securities laws of the various jurisdictions in which the Notes will be offered or sold (as to which we express no opinion) is required to be obtained by the Company in connection with the due authorization, execution and delivery of the Purchase Agreement or the due execution, delivery or performance of the Indenture by the Company or for the offering, issuance, sale or delivery of the Notes to the Purchasers or the initial resale of the Notes by the Purchasers in accordance with the Purchase Agreement.

Exhibit A-1-1

(viii) Assuming the accuracy of the representations and warranties of the Company and the Purchasers as to matters of fact contained in the Purchase Agreement, the performance by them of the agreements contained therein and compliance with the related procedures set forth in the Offering Circular, it is not necessary in connection with the offer, sale and initial resale of the Notes in the manner contemplated by the Purchase Agreement and the Offering Circular to register the Notes under the Act or to qualify the Indenture under the Trust Indenture Act.

(ix) The Company is not an “investment company,” as such term is defined in the 1940 Act.

We have participated in conferences with certain officers and representatives of the Company, representatives of the Purchasers, counsel to the Purchasers and representatives of the independent registered public accountants of the Company at which the contents of the Pricing Disclosure Package and the Offering Circular and related matters were discussed. Although we have not undertaken to determine independently, are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained or incorporated by reference in the Pricing Disclosure Package and the Offering Circular, we advise you that, on the basis of the foregoing, no facts have come to our attention that have caused us to believe that (A) the Pricing Disclosure Package, as of the Applicable Time (other than the reserve information, financial statements (including the notes and schedules thereto and auditors’ reports thereon), and other financial data included or incorporated by reference in the Pricing Disclosure Package and the exhibits to the documents incorporated by reference therein, as to which we have not been asked to comment), contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (B) the Offering Circular (other than the reserve information, financial statements (including the notes and schedules thereto and auditors’ reports thereon), and other financial data included or incorporated by reference in the Offering Circular and the exhibits to the documents incorporated by reference therein, as to which we have not been asked to comment), as of its date or as of the date hereof, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

The opinions set forth above are limited in all respects to matters of the laws of the State of Texas, the General Corporation Law of the State of Delaware, the contract law of the State of New York and the applicable federal laws of the United States, each as in effect on the date hereof.

In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion may include a statement that any tax advice embodied therein is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer, that it was written to support the promotion or marketing of the Notes, and that any affected taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to,

Exhibit A-1-2

any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).

Exhibit A-1-3

Exhibit A-2

FORM OF OPINION OF MICHAEL J. KILLELEA
TO BE DELIVERED PURSUANT TO
SECTION 7(b)(ii)

(i) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.

(ii) The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company.

(iii) The documents filed with the Commission pursuant to the Exchange Act that are incorporated by reference in the Offering Circular (other than the financial statements, including the notes thereto and auditors’ reports thereon, other financial information and reserve information and supporting schedules therein, as to which I express no opinion), when filed with the Commission, complied as to form in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder.

(iv) There is not pending or, to my knowledge, threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary is a party, or to which the property of the Company or any subsidiary thereof is subject, before or brought by any court or governmental agency or body, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the ability of the Company to consummate the transactions contemplated in the Purchase Agreement or the performance by the Company of its obligations thereunder or the transactions contemplated by the Offering Circular (but in the Offering Circular only to the extent such transactions relate to the offering and sale of the Notes and the use of the proceeds from the sale of the Notes as described therein under the caption “Use of Proceeds”).

(v) The execution, delivery and performance of the Purchase Agreement, the Indenture, the Registration Rights Agreement and the Notes and the consummation of the transactions contemplated therein and in the Offering Circular (but in the Offering Circular only to the extent such transactions relate to the offering and sale of the Notes and the use of the proceeds from the sale of the Notes as described therein under the caption “Use of Proceeds”) will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Covered Subsidiary (as defined below) pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to me, to which the Company or its Covered Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any Covered Subsidiary is subject (except for such conflicts, breaches, Repayment Events, defaults, liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter, by-laws or other governing document, as applicable, of the Company or its Covered Subsidiaries, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to me (other than federal and state securities

Exhibit A-2-1

or blue sky laws, as to which I express no opinion), of any governmental agency or body or court, domestic or foreign, having jurisdiction over the Company or any of its Covered Subsidiaries or any of their respective properties, assets or operations. “Covered Subsidiaries” means the subsidiaries of the Company other than those formed or organized under the laws of Canada.

In addition, I have participated in conferences with certain officers and representatives of the Company, representatives of the Purchasers, counsel to the Purchasers and representatives of the independent registered public accountants of the Company at which the contents of the Pricing Disclosure Package and the Offering Circular and related matters were discussed. Although I have not undertaken to determine independently, am not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained or incorporated by reference in the Pricing Disclosure Package and the Offering Circular, I advise you that, on the basis of the foregoing, no facts have come to my attention that have caused me to believe that (A) the Pricing Disclosure Package, as of the Applicable Time (other than the reserve information, financial statements (including the notes and schedules thereto and auditors’ reports thereon), and other financial data included or incorporated by reference in the Pricing Disclosure Package and the exhibits to the documents incorporated by reference therein, as to which I have not been asked to comment), contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (B) the Offering Circular (other than the reserve information, financial statements (including the notes and schedules thereto and auditors’ reports thereon), other financial data included or incorporated by reference in the Offering Circular and the exhibits to the documents incorporated by reference therein, as to which I have not been asked to comment), as of its date or as of the date hereof, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

The opinions set forth above are limited in all respects to matters of the laws of the State of Texas, the General Corporation Law of the State of Delaware and the applicable federal laws of the United States, each as in effect on the date hereof.

In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent he deems proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).

Exhibit A-2-2

Exhibit A-3

FORM OF OPINION OF FRASER MILNER CASGRAIN LLP
TO BE DELIVERED PURSUANT TO SECTION 7(b)(iii)

June 6, 2006

Goldman, Sachs & Co.,

As representative of the several Purchasers

named in Schedule I to the Purchase Agreement

referred to below

c/o Goldman, Sachs & Co.

85 Broad Street

New York, New York 10004

Ladies and Gentlemen:

We have acted as local counsel to Pogo Producing Company (“Pogo”) in connection with the issue and sale by Pogo of an aggregate of $450,000,000 principal amount of notes (the “Notes”) pursuant to a purchase agreement (the “Purchase Agreement”) dated June 1, 2006 among Goldman, Sachs & Co., as representative of the several Purchasers named in Schedule I thereto, and Pogo.

Capitalized terms used in this opinion that are not otherwise defined herein have the meanings ascribed thereto in the Purchase Agreement.

This opinion is being provided to you pursuant to Section 7(b) of the Purchase Agreement.

Examinations

We have examined originals or copies, certified or otherwise identified to our satisfaction, of:

(a) the Purchase Agreement, the Indenture, the Registration Rights Agreement, the Notes and the Offering Circular;

(b) certificates of status from the Registrar of Corporations under the Business Corporations Act (Alberta), each dated June ·, 2006, in respect of Pogo Finance, ULC (“Pogo Finance”), Pogo Alberta, ULC (“Pogo Alberta”) and Northrock Resources Ltd. (“Northrock”) (Pogo Finance, Pogo Alberta and Northrock collectively referred to herein as the “Corporations”), copies of which have been provided to you (collectively, the “Certificates of Status”);

(c) certificates of status from the Registrar of Corporations under the Business Corporations Act (British Columbia) from the Director of Corporations under the Business Corporations Act (Saskatchewan) and

Exhibit A-3-1

the Deputy Registrar of Corporations under the Business Corporations Act (Northwest Territories), each dated June ·, 2006, in respect of Northrock, copies of which have been provided to you (collectively, the “Extra-Provincial Certificates of Status”)

(d) certificates (the “Officers’ Certificates”) of an officer of each of the Corporations, each dated June ·, 2006, with respect to:

(i) the articles and by-laws of each of the Corporations;

(ii) the jurisdictions in which each of the Corporations carry on business in Canada, the completeness of the minute books of the Corporations and certain other factual matters; and

(iii) in respect of such certificates of an officer of each of Pogo Finance and Pogo Alberta, identifying the contracts, agreements and other instruments to which Pogo Finance or Pogo Alberta is a party or by which Pogo Finance or Pogo Alberta may be bound, or to which any of the property or assets of Pogo Finance or Pogo Alberta is subject;

copies of which certificates have been provided to you;

(e) a certificate (the “Northrock Officer’s Certificate”) of an officer of Northrock, as managing partner of the Northrock Resources, (the “Partnership”) dated June ·, 2006 with respect to the partnership agreement of the Partnership and certain other factual matters, a copy of which certificate has been provided to you;

(f) a certificate (the “Energy Officer’s Certificate”) of an officer of Northrock Energy, ULC and a certificate (the “Prairie Officer’s Certificate”) of an officer of Prairie Pacific Energy Corporation, each dated June ·, 2006, with respect to the articles and by-laws of such corporations and certain other factual matters); and

(g) a certificate (the “Pogo Officer’s Certificate”) of an officer of Pogo dated June ·, 2006 as to the identity of the corporate subsidiaries of Pogo and any other subsidiaries of Pogo which are incorporated under, or the governing documents of which are governed by, the laws of the Province of Alberta or the federal laws of Canada applicable therein (or the laws of any other jurisdiction in Canada)(the “Canadian Subsidiaries”), a copy of which certificate has been provided to you.

We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such public and corporate records, certificates, including certificates of public officials, instruments and other documents and have made or caused to be made such searches and investigations and inquiries of officers or representatives of the Canadian Subsidiaries and have considered such questions of law as we have deemed relevant and necessary as a basis for the opinions hereinafter expressed.

Exhibit A-3-2

Whenever our opinion is qualified by the phrase “of which we are aware”, it means the current actual knowledge of the lawyers in the Calgary office of our firm who have been involved in this transaction. We have not undertaken any special or independent investigation with respect to any matters qualified by such phrase and no inference as to our knowledge of the existence or absence of any facts and circumstances relating to such matters should be drawn merely from our representation of Pogo or any of the Canadian Subsidiaries.

Assumptions

For purposes of the opinions expressed herein, we have assumed:

(a) the genuineness of all signatures (whether on originals or copies of documents);

(b) the authenticity, truth, accuracy and completeness of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies, whether facsimile, photostatic, certified or otherwise, the accuracy and completeness of all facts set forth in certificates of officers referred to herein and in official public records, certificates and documents supplied by public officials or regulatory clerks or agents, or otherwise conveyed to us by public officials or registry clerks or agents, and the veracity of all information contained in those records, documents and certificates;

(d) the accuracy and currency of the indices and filing systems maintained at all public offices where we made or conducted searches or inquiries or have caused searches or inquiries to be made or conducted;

(e) that persons registered in the share registers of the Canadian Subsidiaries which are corporations as the registered holder of the shares referred to therein is the legal and beneficial owner of such shares; and

(f) no offering or sale of the Notes will take place in Canada.

Reliances

In expressing our opinions set forth in paragraph 1(a) below, we have relied exclusively on the Certificates of Status.

In expressing our opinions set forth in paragraph 1(c) below, we have relied exclusively on the Extra-Provincial Certificates of Status and the Officers’ Certificates.

In expressing our opinions set forth in paragraphs 2 (a), 2 (b), 4 (b), 5 (a) and 5 (c) below, we have relied on the Northrock Officer’s Certificate.

In expressing our opinions set forth in paragraphs 3, 4 (a), 5 (a) and 5 (c) below, we have relied on the Officers’ Certificates.

Exhibit A-3-3

In expressing our opinions set forth in paragraphs 5 (a) and 5 (c) below, we have relied on the Energy Officer’s Certificate and the Prairie Officer’s Certificate.

In expressing our opinions set forth in paragraph 5 (d) below, we have also relied on the Pogo Officer’s Certificate.

Scope of Opinions

We are qualified to render opinions as to, and this opinion is limited to, the laws of the Province of Alberta and the federal laws of Canada applicable therein. We have not made any independent examination of the laws of any jurisdiction other than the Province of Alberta and the federal laws of Canada applicable therein and, in our opinions set forth herein, we do not express or imply any opinion in respect of the laws of any other jurisdiction. This opinion is limited to the matters expressly stated herein and no opinions are to be inferred or may be implied beyond the opinions expressly set forth herein.

The opinions hereinafter expressed are based on legislation and regulations in effect on the date hereof. We can give no assurance that any of the opinions herein will not be affected by future amendments to, or by regulations, rules, orders, rulings, policy statements or interpretation notes made or issued pursuant to the laws of the Province of Alberta or federal laws of Canada applicable therein. We assume no responsibility to update our opinions if any of those laws are, subsequent to the date hereof, amended, revoked, revised or supplemented in any way which impacts on the opinions contained herein.

Opinions

Based and relying on and subject to the foregoing, and subject to the qualifications hereinafter expressed, we are of the opinion that:

2. (a) Each of the Corporations has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Province of Alberta;

(b) each of the Corporations has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Circular; and

(c) each of the Corporations is duly qualified as an extra-provincial corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.

3. (a) The Partnership has been duly formed as a general partnership under the laws of the Province of Alberta; and

(b) the Partnership has the partnership power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Circular.

Exhibit A-3-4

4. All of the issued and outstanding shares of each of the Corporations has been duly authorized and validly issued as fully paid and non-assessable.

5. (a) Pogo or its directly or indirectly, wholly-owned subsidiaries is registered in the share registers of the Corporations as the holder of all of the issued and outstanding shares of the Corporations; and

(b) the current partners of the Partnership are Northrock and Northrock Energy, ULC, each of which are indirectly, wholly-owned subsidiaries of Pogo.

6. The execution, delivery and performance of the Purchase Agreement, the Indenture, the Registration Rights Agreement and the Notes and the consummation of the transactions contemplated therein and in the Offering Circular (but, with respect to the Offering Circular, only to the extent such transactions directly relate to the offering and sale of the Notes as described in the Offering Circular and the use of the proceeds from the sale of the Notes as described in the Offering Circular under the caption “Use of Proceeds”) will not:

(a) result in any violation of the provisions of the articles and by-laws of the Canadian Subsidiaries which are corporations or the partnership agreement of the Partnership; or

(b) result in any violation of any applicable law, statute, rule or regulation in force in the Province of Alberta or the federal laws of Canada applicable therein, or

(c) result in any violation of any judgement, order, writ or decree in effect in the Province of Alberta of any Alberta or Canadian federal government, government instrumentality or court having jurisdiction over the Canadian Subsidiaries or any of their respective properties, assets or operations, in each such case, of which we are aware; or

(d) whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of Pogo Finance or Pogo Alberta pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, of which we are aware, to which Pogo Finance or Pogo Alberta is a party or by which Pogo Finance or Pogo Alberta may be bound, or to which any of the property or assets of Pogo Finance or Pogo Alberta is subject (except for such conflicts, breaches, Repayment Events, defaults, liens, charges or encumbrances that would not have a Material Adverse Effect).

Benefit of Opinion

This opinion is furnished solely for the benefit of the addressees hereof in connection with the sale of the Notes and may not be circulated to, relied on by, quoted from or distributed to any other person, or used for any other purpose, without our express prior written consent.

Yours truly,

Exhibit A-3-5

Exhibit A-4

FORM OF OPINION OF EAMON HURLEY
TO BE DELIVERED PURSUANT TO SECTION 7(b)(iv)

June 6, 2006

Goldman, Sachs & Co.,

As representative of the several Purchasers

named in Schedule I to the Purchase Agreement

referred to below

c/o Goldman, Sachs & Co.

85 Broad Street

New York, New York 10004

Ladies and Gentlemen:

I am General Counsel and Corporate Secretary to Northrock Resources Ltd. (“Northrock”) and am rendering this opinion in connection with the issue and sale by Pogo Producing Company (“Pogo”) of an aggregate of $450,000,000 principal amount of notes (the “Notes”) pursuant to a purchase agreement (the “Purchase Agreement”) dated June 1, 2006 among Goldman, Sachs & Co., as representative of the several Purchasers named in Schedule I thereto, and Pogo.

Capitalized terms used in this opinion that are not otherwise defined herein have the meanings ascribed thereto in the Purchase Agreement.

This opinion is being provided to you pursuant to Section 7(b) of the Purchase Agreement.

Examinations

I have examined originals or copies, certified or otherwise identified to my satisfaction, of the Purchase Agreement, the Indenture, the Registration Rights Agreement, the Notes and the Offering Circular.

Whenever my opinion is qualified by the phrase “of which I am aware”, it means the current actual knowledge that I have. I have not undertaken any special or independent investigation with respect to any matters qualified by such phrase and no inference as to my knowledge of the existence or absence of any facts and circumstances relating to such matters should be drawn merely from my position as General Counsel and Corporate Secretary of Northrock.

Assumptions

For purposes of the opinions expressed herein, I have assumed:

(a) the genuineness of all signatures (whether on originals or copies of documents); and

Exhibit A-4-1

(b) the authenticity, truth, accuracy and completeness of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as copies, whether facsimile, photostatic, certified or otherwise.

Scope of Opinions

I am qualified to render opinions as to the laws of the Province of Alberta and the federal laws of Canada applicable therein. I have not made any independent examination of the laws of any jurisdiction other than the Province of Alberta and the federal laws of Canada applicable therein and, in my opinions set forth herein, I do not express or imply any opinion in respect of the laws of any other jurisdiction. This opinion is limited to the matters expressly stated herein and no opinions are to be inferred or may be implied beyond the opinions expressly set forth herein.

The opinions hereinafter expressed are based on legislation and regulations in effect on the date hereof. I can give no assurance that any of the opinions herein will not be affected by future amendments to, or by regulations, rules, orders, rulings, policy statements or interpretation notes made or issued pursuant to the laws of the Province of Alberta or federal laws of Canada applicable therein. I assume no responsibility to update my opinions if any of those laws are, subsequent to the date hereof, amended, revoked, revised or supplemented in any way which impacts on the opinions contained herein.

Opinions

Based and relying on and subject to the foregoing, and subject to the qualifications hereinafter expressed, I am of the opinion that the execution, delivery and performance of the Purchase Agreement, the Indenture, the Registration Rights Agreement and the Notes and the consummation of the transactions contemplated therein and in the Offering Circular (but, with respect to the Offering Circular, only to the extent such transactions relate to the offering and sale of the Notes as described in the Offering Circular and the use of the proceeds from the sale of the Notes as described in the Offering Circular under the caption “Use of Proceeds”) will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of Northrock or any subsidiary thereof pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, of which I am aware, to which Northrock or its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of Northrock or any subsidiary thereof is subject (except for such conflicts, breaches, Repayment Events, defaults, liens, charges or encumbrances that would not have a Material Adverse Effect).

Benefit of Opinion

Yours truly,

Exhibit A-4-2

EX-10.2 5 a06-15149_1ex10d2.htm EX-10

Exhibit 10.2

Execution Version

Goldman Sachs Credit Partners L.P.

85 Broad Street

New York, New York 10004

COMMITMENT LETTER

PERSONAL AND CONFIDENTIAL

April 18, 2006

Pogo Producing Company

5 Greenway Plaza

P.O. Box 2504

Houston, Texas 77252-2504

Attention: James P. Ulm, II
Senior Vice President and Chief Financial Officer

Ladies and Gentlemen:

We are pleased to confirm the arrangements under which Goldman Sachs Credit Partners L.P. (“GSCP” or the “Administrative Agent”) is exclusively authorized by Pogo Producing Company (the “Company”) to act as sole lead arranger, sole bookrunner, sole syndication agent and administrative agent in connection with the bridge loans described herein, and, together with any other lenders set forth on Schedule I hereto and any entities that become lenders in accordance with the syndication arrangements set forth below (collectively with GSCP, the “Lenders”), commits to provide the bridge loans described herein, in each case, on the terms and subject to the conditions set forth in this letter, the attached Annex A and Annex B (collectively, the “Commitment Letter”) and the Fee Letter (as defined below).

You have informed GSCP that the Company, a Delaware corporation, intends to sign an agreement (the “Acquisition

Agreement”) to acquire by merger (the “Acquisition”) all of the capital stock of a private company code-named Lambada (the “Seller”), as specified in the Acquisition Agreement (the “Acquired Business”). You have also informed us that the total purchase price for the Acquisition (including the refinancing of certain debt of the Acquired Business, but excluding the payment of fees, commissions and expenses in connection with the Acquisition) will be approximately $750.0 million and that the Acquisition will be financed with (i) the issuance by the Company of up to $500.0 million in aggregate principal amount of debt, equity or equity-linked securities (the “Permanent Securities”) or, in the event the Permanent Securities are not issued at the time the Acquisition is consummated, borrowings by the Company of up to $500.0 million under senior unsecured increasing rate bridge loans (the “Bridge Loans”) having the terms of set forth in Annex B and (ii) borrowings by the Company of up to $375.0 million under its existing credit agreement, dated as of December 16, 2004, as amended on August 31, 2005, among the Company, as borrower, certain commercial lending institutions, as the lenders, and Bank of Montreal, acting through its Chicago, Illinois branch, as the administrative agent (the “Credit Facility”). On the Closing Date (as defined below), neither the Company nor any of its subsidiaries will have any debt for borrowed money or equity outstanding, except for (i) debt and equity outstanding as of the date hereof, (ii) borrowings not to exceed an amount to be agreed upon under the Credit Facility, (iii) equity issued to management and employees of the Company pursuant to existing equity compensation plans or (iv) as described in this paragraph. In addition, the Acquired Business will have permanently repaid all of its indebtedness on or before the Closing Date.

1. Commitment. GSCP is pleased to confirm its commitment to act as sole lead arranger and sole bookrunner to provide the Company with structuring advice in connection with the Bridge Loans, to act as sole syndication agent to provide the Company with syndication advice in connection with the Bridge Loans and to act as administrative agent for the Bridge Loans. Each of the Lenders is pleased to confirm its commitment (each, a “Commitment” and, collectively, the “Commitments”), severally and not jointly, to provide the Bridge Loans having the terms set forth on Annex B, in each case, on the terms and subject to the conditions contained in this Commitment Letter and the Fee Letter. The Commitment of each Lender individually is set forth opposite its name on Schedule 1 hereto; all of the Commitments together equal up to $500.0 million. The Company agrees that the Lenders will have the exclusive right during the term of this Commitment Letter to provide any bridge or interim financing utilized by the Company or any of its affiliates to finance any portion of the Acquisition.

Each Lender’s commitment is subject, in its discretion, to the conditions set forth in Annex B hereto and there not having occurred any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders’ equity or results of operations of the Company or the Acquired Business and their respective subsidiaries since December 31, 2005 (the date of the most recent audited financial statements for the Company and the Acquired Business, respectively, furnished by the Company to GSCP). Each Lender’s commitment is also subject, in its discretion, to the satisfactory negotiation, execution and delivery of appropriate definitive documentation relating to the Bridge Loans, including, without limitation, a bridge loan agreement (the “Bridge Loan Agreement”), to be based upon and substantially consistent with the terms set forth in this Commitment Letter. Our commitment is also conditioned upon and made subject to our not becoming aware after the date hereof of any new or inconsistent information or other matter not previously disclosed to us relating to the Company, the Acquired Business or the Acquisition or the transactions contemplated by this Commitment Letter, which GSCP, in its reasonable judgment, deems material and adverse relative to the information or other matters disclosed to us prior to the date hereof

2. Fees and Expenses. The fees for these services are set forth in a separate letter (the “Fee Letter”), dated as of the date hereof, entered into by the Lenders and the Company. In addition, pursuant to an engagement letter (the “Engagement Letter”), dated as of the date hereof, between the Company and Goldman, Sachs & Co. (“Goldman Sachs”), the Company has, among other things, offered Goldman Sachs the right to act (or to have one of its affiliates act) as the sole placement agent, sole purchaser or sole underwriter in connection with the sale of the Permanent Securities.

3. Syndication. GSCP intends and reserves the right to syndicate the Commitments and/or the Bridge Loans to other Lenders, commencing on the earlier of 30 days after the Closing Date and June 30, 2006 (or at any time during which the Company is not diligently pursuing the issuance of Permanent Securities or cooperating with GSCP in accordance with Section 4). GSCP will select the Lenders after consultation with the Company. GSCP will lead the syndication, including determining the timing of all offers to potential Lenders and the acceptance of Commitments, any title of agent or similar designations or roles awarded to Lenders, the amounts offered and the compensation provided to each Lender from the amounts to be paid to GSCP pursuant to the terms of this Commitment Letter and the Fee Letter. GSCP will determine the final Commitment allocations and will notify the Company of such determinations. The Company agrees to use all commercially reasonable efforts to ensure that

GSCP’s syndication efforts benefit from the existing lending relationships of the Company. To facilitate an orderly and successful syndication of the Bridge Loans, you agree that, until the later of the termination of the syndication as determined by GSCP and 120 days following the date of initial funding under the Bridge Loans (the “Closing Date”), the Company will not, and will use commercially reasonable efforts to cause the Acquired Business to agree that it will not, syndicate or issue, attempt to syndicate or issue, announce or authorize the announcement of the syndication or issuance of, or engage in discussions concerning the syndication or issuance of, any debt facility or debt or preferred equity security of the Company or any of its affiliates (other than the Bridge Loans, any Permanent Securities and other indebtedness contemplated hereby), including any renewals or refinancings of any existing debt facility or debt or preferred equity security, without the prior written consent of GSCP.

4. Cooperation. The Company agrees to cooperate with GSCP, and to cause the Acquired Business to cooperate with GSCP, in each case commencing promptly after the Closing Date, in connection with (i) the preparation of an information package regarding the business, operations, financial projections and prospects of the Company and the Acquired Business, including, without limitation, the delivery of all information relating to the transactions contemplated hereunder prepared by or on behalf of the Company or the Acquired Business deemed reasonably necessary by GSCP to complete the syndication of the Commitments and/or the Bridge Loans (including, without limitation, obtaining and maintaining a credit rating by Moody’s Investor Services, Inc. (“Moody’s”), and Standard & Poor’s Ratings Group, a division of The McGraw Hill Corporation (“S&P”)) and (ii) the presentation of an information package acceptable in format and content to GSCP in meetings and other communications with prospective Lenders in connection with the syndication of the Commitments and/or the Bridge Loans (including, without limitation, direct contact between senior management and representatives of the Company with prospective Lenders and participation of such persons in meetings). The Company will be solely responsible for the contents of any such information package and presentation and acknowledge that GSCP will be using and relying upon the information contained in such information package and presentation without independent verification thereof. The Company agrees that information regarding the Bridge Loans and information provided by the Company, the Acquired Business or their respective representatives to GSCP in connection with the Bridge Loans (including, without limitation, draft and execution versions of the Loan Documents, publicly filed financial statements, and draft or final offering materials relating to contemporaneous or prior securities issuances by the Company or the Acquired Business) may be disseminated to potential Lenders and other persons through one or more internet sites (including an IntraLinks workspace) created for purposes of syndicating the Bridge Loans or otherwise, in accordance with GSCP’s standard syndication practices (including hard copy and via electronic transmissions). Without limiting the foregoing, the Company authorizes the use of its logos in connection with any such dissemination,

At the request of GSCP, the Company agrees to prepare a version of the information package and presentation that does not contain material non-public information concerning the Company or the Acquired Business, their respective affiliates or their securities. In addition, the Company agrees that unless specifically labeled “Private—Contains Non-Public Information,” no information, documentation or other data disseminated to prospective Lenders in connection with the syndication of the Bridge Loans, whether through an internet site (including, without limitation, an IntraLinks workspace), electronically, in presentations at meetings or otherwise, will contain any material non-public information concerning the Company or the Acquired Business, their respective affiliates or their securities.

The Company represents and covenants that (i) all information (other than forward-looking statements and data, including projections) provided directly or indirectly by the Company to GSCP or the Lenders in connection with the transactions contemplated hereunder is and will be, when taken as a whole, complete and correct in all material respects and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading and (ii) the projections that have been or will be made available to GSCP or the Lenders by the Acquired Business or the Company have been and will be prepared in good faith based upon assumptions that are believed by the preparer thereof to be reasonable at the time made. You agree that if at any time prior to the Closing Date, any of the representations in the preceding sentence would be incorrect in any material respect if the information and projections were being furnished, and such representations were being made, at such time, then you will promptly supplement, or cause to be supplemented, the information and projections so that such representations will be correct in all material respects under those circumstances.

5. Annex A. In connection with arrangements such as this, it is our firm’s policy to receive indemnification. The Company agrees to the provisions with respect to our indemnity and other matters set forth in Annex A, which is incorporated by reference into this Commitment Letter,

This Commitment Letter may not be assigned by you without the prior written consent of GSCP (and any purported assignment without such consent will be null and void), is intended to be solely for the benefit of the parties hereto and is not intended to confer any benefits upon, or create any rights in favor of, any person other than the parties hereto. GSCP may assign its Commitment hereunder, in whole or in part, to any of its affiliates or to any Lender, and upon such assignment, GSCP will be released from the portion of its Commitment hereunder that has been assigned. This Commitment Letter (including the Annexes hereto) may not be amended or any term or provision hereof or thereof waived or modified, except by an instrument in writing signed by each of the parties hereto, and any term or provision hereof or thereof may be amended or waived only by a written agreement executed and delivered by all parties hereto.

GSCP hereby notifies the Company and the Acquired Business that pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”) it and each Lender may be required to obtain, verify and record information that identifies the Company and the Acquired Business, which information includes the name and address of the Company and the Acquired Business and other information that will allow GSCP and each Lender to identify the Company and the Acquired Business in accordance with the Act. This notice is given in accordance with the requirements of the Act and is effective for GSCP and each Lender.

6. Confidentiality. Please note that this Commitment Letter, the Fee Letter and any written or oral advice provided by GSCP in connection with this arrangement are exclusively for the information of the Company and may not be disclosed to any third party or circulated or referred to publicly without our prior written consent, except, after providing written notice to GSCP, pursuant to a subpoena or order issued by a court of competent jurisdiction or by a judicial, administrative or legislative body or committee. In addition, we hereby consent to your disclosure of (i) this Commitment Letter, the Fee Letter and such advice to the Company’s officers, directors, agents and advisors who are directly involved in the consideration of the Bridge Loans to the extent such persons agree to hold the same in confidence, (ii) this Commitment Letter or the information contained herein (but not the Fee Letter or the information

contained therein) to the Acquired Business and the Seller to the extent you notify such persons of their obligations to keep such material confidential, and to the Acquired Business’s and the Seller’s respective officers, directors, agents and advisors who are directly involved in the consideration of the Bridge Loans; provided that you use commercially reasonable efforts to cause such persons to agree to hold the same in confidence, (iii) this Commitment Letter and the Fee Letter as required by applicable law (including regulations promulgated by the Securities and Exchange Commission and rules of the New York Stock Exchange) or compulsory legal process (in which case you agree to inform us promptly thereof) and (iv) the information contained in this Commitment Letter in any prospectus or other offering memorandum relating to the Permanent Securities, The provisions of this paragraph shall survive any termination or completion of the arrangement provided by this Commitment Letter.

7. Additional Matters. As you know, GSCP may from time to time effect transactions, for its own account or the account of customers, and hold positions in loans or options on loans of the Company, the Acquired Business and other companies that may be the subject of this arrangement. In addition, Goldman Sachs is a full service securities firm and as such may from time to time effect transactions, for its own account or the account of customers, and hold positions in securities or options on securities of the Company, the Acquired Business and other companies that may be the subject of this arrangement. Each of GSCP and Goldman Sachs may have economic interests that conflict with those of the Company. You acknowledge that the transactions contemplated by this Commitment Letter and the Fee Letter are arms-length commercial transactions and that each of GSCP and Goldman Sachs is acting as principal and in its own best interests. The Company is relying on its own experts and advisors to determine whether the transactions contemplated by this Commitment Letter and the Fee Letter are in the Company’s best interests. You agree that each of GSCP and Goldman Sachs will act under this Commitment Letter and the Fee Letter as an independent contractor and that nothing in this Commitment Letter, the Fee Letter, the nature of our services, or in any prior relationship will be deemed to create an advisory, fiduciary or agency relationship between GSCP or Goldman Sachs, on the one hand, and the Company, its stockholders or its affiliates, on the other hand. In addition, GSCP may employ the services of its affiliates in providing certain services hereunder and may exchange with such affiliates information concerning the Company, the Acquired Business and other companies that may be the subject of this arrangement, and such affiliates shall be entitled to the benefits afforded to GSCP hereunder.

The Commitments hereunder will terminate upon the first to occur of (i) the consummation of the Acquisition, (ii) the abandonment or termination of the Acquisition Agreement, (iii) a material breach by the Company under this Commitment Letter, the Fee Letter or the Engagement Letter and (iv) June 30, 2006, unless the closing of the Bridge Loans, on the terms and subject to the conditions contained herein, shall have been consummated prior to such date. In addition, the Commitment hereunder will terminate upon the closing of the sale of the Permanent Securities,

In addition, please note that GSCP, Goldman Sachs and their affiliates do not provide accounting, tax or legal advice. Notwithstanding anything herein to the contrary, the Company (and each employee, representative or other agent of the Company) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the offering and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment and tax structure. However, any information relating to the tax treatment or tax structure shall remain subject to the confidentiality provisions hereof (and the foregoing sentence shall not apply) to the extent reasonably necessary to enable the

parties hereto, their respective affiliates, and their and their respective affiliates’ directors and employees to comply with applicable securities laws. For this purpose, “tax treatment” means US federal or state income tax treatment, and “tax structure” is limited to any facts relevant to the US federal income tax treatment of the transactions contemplated by this Commitment Letter but does not include information relating to the identity of the parties hereto or any of their respective affiliates.

All payments under this Commitment Letter (including Annex A and Annex B) and the Fee Letter will be made in U.S. dollars and without withholding or deduction of any tax, assessment or other governmental charge (collectively, “Tax”) unless required by law; and if the Company will be required to deduct or withhold any Tax, or if any Tax is required to be paid by any Lender solely on account of services performed hereunder or under the Fee Letter, the Company will pay to such Lender such additional amounts as will be required so that the net amount received by such Lender from the Company after such deduction, withholding or payment will equal the amounts otherwise due to such Lender hereunder or under the Fee Letter, as applicable.

This Commitment Letter may be executed in any number of counterparts, each of which when executed will be an original, and all of which, when taken together, will constitute one agreement. Delivery of an executed counterpart of a signature page of this Commitment Letter by facsimile transmission will be effective as delivery of a manually executed counterpart hereof. This Commitment Letter, the Fee Letter and the Engagement Letter are the only agreements that have been entered into among the parties hereto with respect to the Bridge Loans and set forth the entire understanding of the parties with respect thereto and supersede any prior written or oral agreements among the parties hereto with respect to the Bridge Loans.

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Please confirm that the foregoing is in accordance with your understanding by signing and returning to GSCP the enclosed copies of this Commitment Letter, together, if not previously executed and delivered, with the Fee Letter and the Engagement Letter on or before the close of business on the date hereof, whereupon this Commitment Letter, the Fee Letter and the Engagement Letter shall become binding agreements between us. If not signed and returned by that time, this offer will terminate at that time. We look forward to working with you on this transaction.

Very truly yours,

GOLDMAN SACHS CREDIT PARTNERS L.P.


By:	/s/ William W. Archer
	Authorized Signatory

Confirmed as of the date above:

POGO PRODUCING COMPANY

By:	/s/ James P. Ulm, II
	Name:	James P. Ulm, II
	Title:	SVP & CFO

SCHEDULE 1

(in millions)

Lender	Commitment
Goldman Sachs Credit Partners L.P.	$	500.0
Total	$	500.0

Annex A

In the event that any of the Lenders or the Administrative Agent (each, an “Indemnified Party”) becomes involved in any capacity in any action, proceeding or investigation brought by or against any person, including stockholders, partners or other equity holders of the Company or the Acquired Business, in connection with or as a result of either this arrangement or any matter referred to in this Commitment Letter or the Fee Letter (together, the “Letters”), the Company periodically will reimburse such Indemnified Party for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith. The Company also will indemnify and hold each Indemnified Party harmless against any and all losses, claims, damages or liabilities to any such person in connection with or as a result of either this arrangement or any matter referred to in the Letters and without regard to the exclusive or contributory negligence of any of the Indemnified Parties, except to the extent that such have been found by a final, non-appealable judgment of a court that any such loss, claim, damage or liability results from the gross negligence, willful misconduct or bad faith of such Indemnified Party in performing the services that are the subject of the Letters. If for any reason the foregoing indemnification is unavailable to any Indemnified Party or insufficient to hold it harmless, then the Company shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative economic interests of the Company and the Acquired Business and their respective affiliates, stockholders, partners or other equity holders, on the one hand, and such Indemnified Party, on the other hand, in the matters contemplated by the Letters as well as the relative fault of the Company and the Acquired Business and their respective affiliates, stockholders, partners or other equity holders, on the one hand, and such Indemnified Party, on the other hand, with respect to such loss, claim, damage or liability and any other relevant equitable considerations. The reimbursement, indemnity and contribution obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any affiliate of any Indemnified Party and the partners, directors, agents, employees and controlling persons (if any), as the case may be, of such Indemnified Party and any such affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, such Indemnified Party, any such affiliate and any such person. The Company also agrees that neither any Indemnified Party nor any of such affiliates, partners, directors, agents, employees or controlling persons shall have any liability based on its or their exclusive or contributory negligence or otherwise to the Company, the Acquired Business or any person asserting claims on behalf of or in right of the Company, the Acquired Business or any other person in connection with or as a result of either this arrangement or any matter referred to in the Letters, except in the case of the Company, to the extent that any losses, claims, damages, liabilities or expenses incurred by the Company or its affiliates, stockholders, partners or other equity holders have resulted from the gross negligence, willful misconduct or bad faith of such Indemnified Party in performing the services that are the subject of the Letters; provided, however, that in no event shall such Indemnified Party or such other parties have any liability for any indirect, consequential or punitive damages in connection with or as a result of such Indemnified Party’s or such other parties’ activities related to the Letters, Any right to trial by jury with respect to any action or proceeding arising in connection with or as a result of either this arrangement or any matter referred to in the Letters is hereby waived by the parties hereto. The Company agrees that any suit or proceeding arising in respect to this agreement or our engagement will be tried exclusively in the U.S. District Court for the Southern District of New York or, if that court does not have subject matter jurisdiction, in any state court located in the City of New York, and the Company agrees to submit to the jurisdiction of, and to venue in, such courts. The provisions of this Annex A shall

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survive any termination or completion of the arrangement provided by the Letters, and this Commitment Letter shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws.

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Annex B

Pogo Producing Company Summary of Terms and Conditions of the Bridge Loans

This Summary of Terms and Conditions outlines certain terms of the Bridge Loans and the Bridge Loan Agreement referred to in the Commitment Letter, of which this Annex B is a part. Certain capitalized terms used herein are defined in the Commitment Letter.

Borrower		The Company.

Guarantors		Each of the Guarantors (if any) under the Credit Facility (collectively, the “Guarantors”) will guarantee (the “Guarantee”) all obligations under the Bridge Loans; provided, however, that the obligation of any particular subsidiary to issue a Guarantee will be suspended so long as that subsidiary has not guaranteed any other indebtedness of the Company or any of its subsidiaries (other than indebtedness under the Credit Facility).

Ranking		The Bridge Loans and the Guarantees will rank pari passu with all other senior existing and future indebtedness and guarantees of indebtedness of the Company and its subsidiaries, as the case may be (including, without limitation, the Acquired Business), including, without limitation, the indebtedness under the Credit Facility.

Sole Lead Arranger, Sole Bookrunner, Sole Syndication Agent and Administrative
Agent		Goldman Sachs Credit Partners L.P. (“GSCP”; in its capacities as Sole Lead Arranger, Sole Bookrunner and Sole Syndication Agent, the “Arranger”; and, in its capacity as Administrative Agent, the “Administrative Agent”).

Lenders		GSCP and/or other financial institutions selected by GSCP (each, a “Lender” and, collectively, the “Lenders”).

Loans		Up to $500.0 million in aggregate principal amount of Senior Increasing Rate Loans due 2012 (the “Bridge Loans”); provided that the aggregate principal amount of the Bridge Loans will be reduced by an amount equal to the aggregate amount of any Permanent Securities sold on or before the date on which the Bridge Loans are made (in escrow or otherwise).

Maturity		Six years from the date of the making of the Bridge Loans. At any time on or after the first anniversary of the Closing Date, at the option of the applicable Lender, the Bridge Loans may be exchanged in whole or in part for Senior

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		Exchange Notes due 2012 (the “Exchange Notes”) having an equal principal amount.

		The Exchange Notes will be issued pursuant to an Indenture that will have the terms set forth on Exhibit 1 to this Annex B.

Interest		The Bridge Loans will initially bear interest at a rate per annum equal to 6.875%. If the Bridge Loans are not repaid in whole within three months following the Closing Date, the interest rate on the Bridge Loans will increase by 50 basis points at the end of such three-month period and will increase by an additional 50 basis points at the end of each three-month period thereafter. Notwithstanding the foregoing, at no time will the interest rate in effect on the Bridge Loans be less than the rate in effect on the Credit Facility or exceed a per annum rate equal to the yield then in effect on United States Treasury Notes with a maturity of 10 years plus 600 basis points

		Interest will be payable quarterly in arrears and on the date of any prepayment of the Bridge Loans.

Mandatory Repayment		The net proceeds to the Company, any parent holding company of the Company or any subsidiary of the Company (including, without limitation, the Acquired Business following the Closing Date) from (i) any direct or indirect public offering or private placement of any debt or equity securities (other than issuances pursuant to employee stock plans), (ii) any future bank borrowings other than under the Credit Facility (including the increase of commitments permitted thereunder) as in effect on the Closing Date and borrowings of up to $100 million under money market lines and (iii) subject to certain ordinary course exceptions (including any required pro rata prepayment of pari passu debt pursuant to the “asset sale” covenant contained in the indentures governing the Company’s existing senior subordinated notes), any future asset sales or receipt of casualty insurance proceeds will be used to redeem the Bridge Loans subject, except in the case of a Qualifying Refinancing Transaction (to be defined), to the required prior repayment of any amount outstanding under the Credit Facility, in each case, at 100% of the principal amount of the Bridge Loans redeemed plus accrued interest to the date of the redemption.

Change of Control		Each holder of Bridge Loans will be entitled to require the Company, and the Company must offer, to repay the

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		Bridge Loans held by such holder at a price of 100% of principal amount, plus accrued interest, upon the occurrence of a Change of Control (as defined in the indenture governing the Company’s 6.875% Senior Subordinated Notes due 2017 (the “2005 Indenture”)). Prior to making the repayment offer, the Company will, within 30 days of the Change of Control, repay all obligations under the Credit Facility or obtain any required consent of the lenders under the Credit Facility to make such repayment of the Bridge Loans.

Optional Repayment		The Bridge Loans may be prepaid, in whole or in part, at the option of the Company at any time upon three business days’ written notice at a price equal to 100% of the principal amount thereof plus accrued interest to the date of redemption.

Payments		Payments by the Company will be made by wire transfer of immediately available funds.

Representations and Warranties		The Bridge Loan Agreement will contain such representations and warranties by the Company (with respect to the Company and the Acquired Business) as are usual and customary for financings of this kind or as are otherwise deemed appropriate by the Arranger for this transaction in particular (in its sole discretion).

Covenants		The Bridge Loan Agreement will contain such covenants by the Company (with respect to the Company and its subsidiaries) as are usual and customary for financings of this kind or as are otherwise deemed appropriate by the Arranger for this transaction in particular (in its sole discretion), based upon (and substantially identical to) the covenants in the 2005 Indenture. In addition, the Bridge Loan Agreement will contain a covenant that prohibits the Company from consummating any acquisition of assets or businesses for a purchase price that, individually or in the aggregate, exceeds $100.0 million (excluding like-kind exchanges or asset swaps).

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Events of Default		The Bridge Loan Agreement will include such events of default (and, as appropriate, grace periods) as are usual and customary for financings of this kind or as are otherwise deemed appropriate by the Arranger for this transaction in particular (in its sole discretion), based upon (and substantially identical to) the events of default in the 2005 Indenture.

Conditions Precedent		The several obligations of the Lenders to make, or cause one of their respective affiliates to make, the Bridge Loans will be subject to closing conditions deemed appropriate by the Arranger for financings of this kind generally and for this transaction in particular, including, without limitation, the following closing conditions:

		1. Concurrent Transactions. The Acquisition shall have been consummated pursuant to the Acquisition Agreement and all conditions precedent to the consummation of the Acquisition shall have been satisfied or, with the prior approval of the Arranger, waived. The terms of the Acquisition Agreement and the Bridge Loan Agreement shall be satisfactory in all respects to the Arranger and its counsel. The pro forma capitalization of the Company shall be as described in the Commitment Letter. There shall not exist (pro forma for the Acquisition and the financing thereof) any default or event of default under the Credit Facility, the Bridge Loans, the Bridge Loan Agreement or any of the other Loan Documents (as defined), or under any other material indebtedness of the Company or its subsidiaries.

		2. Confirmatory Due Diligence. The Arranger shall not have become aware of any information relating to conditions or events not previously described to the Arranger or constituting new information or additional developments concerning conditions or events previously disclosed to the Arranger which it, in its judgment, believe may have a material adverse effect on the condition (financial or otherwise), assets, liabilities (contingent or otherwise), properties, solvency. business, management or prospects of the Company or the Acquired Business.

		3. Financial Statements. At least five days prior to the Closing Date, the Arranger shall have received audited financial statements of the Company for

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		each of the three fiscal years immediately preceding the Acquisition and any appropriate available unaudited financial statements for any interim period or periods of the Company and all other recent, probable or pending acquisitions.

		4. Approvals and Consents. All necessary governmental, shareholder and third-party approvals and consents necessary or desirable in connection with the Acquisition and the financing thereof and the transactions contemplated thereby and otherwise referred to herein shall have been received and shall be in full force and effect, and all applicable waiting periods shall have expired without any action being taken by any applicable authority. The Arranger, in its sole discretion, shall be satisfied that the borrowings under the Bridge Loans and the performance by the Company of the transactions contemplated by the Commitment Letter, the Fee Letter and the Engagement Letter, including, but not limited to, the issuance of the Permanent Securities and the repayment of the Bridge Loans at maturity or upon a mandatory repayment event, will not conflict with, result in a breach or violation of any of the terms or provisions of, require a waiver or amendment to, or constitute a default under the Credit Facility, the indentures governing the Company’s senior subordinated notes or any other agreement governing material indebtedness of the Company or its subsidiaries.

		5. Litigation, etc. There shall not exist any action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental authority that, in the opinion of the Arranger, materially affects the Acquisition, the financing thereof or any of the other transactions contemplated hereby, or that has had or could have a material adverse effect on the Company or the Acquired Business or their respective subsidiaries, the Acquisition, the financing thereof, or any of the transactions contemplated hereby.

		6. Availability under Credit Facility. After giving effect to the consummation of the Acquisition, the Company shall have availability under the Credit Facility in an amount to be agreed upon.

		7. Performance of Obligations. All costs, fees, expenses (including, without limitation, legal fees and expenses) and other compensation

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		contemplated by the Commitment Letter, the Fee Letter and the Engagement Letter payable to GSCP, Goldman Sachs, the Arranger, the Administrative Agent or the Lenders shall have been paid to the extent due and the Company shall have complied in all material respects with all of its other obligations under the Commitment Letter, the Fee Letter and the Engagement Letter.

		8. Funding Notice. The Lenders shall have received not less than three business days’ prior written notice of the Closing Date.

		9. Corporate Structure: Organizational Documents. All agreements relating to, and the corporate structure and management of, the Company and its subsidiaries (including, without limitation, the Acquired Business), and all organizational documents of such entities, shall be satisfactory to the Arranger.

		10. Environmental Matters. The Lenders shall have received reports and other information in form, scope and substance satisfactory to the Arranger concerning any environmental liabilities.

		11. Customary Closing Documents. All documents required to be delivered under the definitive financing documents, including customary legal opinions, corporate records and documents from public officials and officers’ certificates shall have been delivered. The Arranger shall have received all documentation and other information required by bank regulatory authorities under applicable “know-your-customer” and anti-money laundering rules and regulations, including the U.S.A. Patriot Act.

		12. Solvency. The Lenders shall have received a certificate from the chief financial officer of the Company, in form and substance satisfactory to the Arranger, supporting the conclusions that after giving effect to the Acquisition and the related transactions contemplated hereby, the Company will not be insolvent or be rendered insolvent by the indebtedness incurred in connection therewith, or be left with unreasonably small capital with which to engage in its businesses, or have incurred debts beyond its ability to pay such debts as they mature.

		13. Satisfactory Documentation. The definitive documentation evidencing the Bridge Loans shall

B-6

		be prepared by counsel to the Arranger and shall be in form and substance satisfactory to the Arranger and the Lenders.

Transferability and Participations		Each of the Lenders will be free to sell or transfer all or any part of or any participation in any of the Bridge Loans to any third party with the consent of the Arranger and to pledge any or all of the Bridge Loans to any commercial bank or other institutional lender, to the extent permitted by law.

Modification of the Bridge Loans		Modification of the Bridge Loans may be made with the consent of Lenders holding greater than 50% of the Bridge Loans then outstanding, except that no modification or change may extend the maturity of any Bridge Loan or change the time of payment of interest on any Bridge Loan, reduce the rate of interest or the principal amount of any Bridge Loan, alter the redemption provisions of any Bridge Loan or reduce the percentage of holders necessary to modify or change the Bridge Loans, without the consent of Lenders holding 100% of the Bridge Loans affected thereby.

Taxes, Reserve Requirements and Indemnities		The Bridge Loan Agreement will provide that all payments will be made free and clear of any taxes (other than franchise taxes and taxes on overall net income), imposts, assessments, withholdings or other deductions whatsoever. Any foreign lenders will be required to furnish to the Arranger appropriate certificates or other evidence of exemption from U.S. federal tax withholding.

		The Company will indemnify the Lenders against all increased costs of capital resulting from reserve requirements or otherwise imposed, in each case subject to customary increased costs, capital adequacy and similar provisions to the extent not taken into account in the calculation of the Base Rate or the reserve adjusted Eurodollar Rate.

Indemnity		The Bridge Loan Agreement will contain customary and appropriate provisions relating to indemnity and related matters in a form reasonably satisfactory to the Arranger.

Governing Law and Jurisdiction		The Bridge Loan Agreement will provide that the Company will submit to the non-exclusive jurisdiction and venue of the federal and state courts of the State of New York and

B-7

		will waive any right to trial by jury. New York law will govern the Loan Documents.

Counsel to the Arranger and Administrative Agent		Latham & Watkins LLP.

The foregoing is intended to summarize certain basic terms of the Bridge Loans. It is not intended to be a definitive list of all of the requirements of the Lenders in connection with the Bridge Loans.

B-8

Exhibit 1 to Annex B

Summary of Terms and Conditions of Exchange Notes

This Summary of Terms and Conditions of Exchange Notes outlines certain terms of the Exchange Notes referred to in Annex B to the Commitment Letter, of which this Exhibit 1 is a part. Capitalized terms used herein have the meanings assigned to them in Annex B to the Commitment Letter.

At any time on or after the first anniversary of the Closing Date, upon five or more business days prior notice, the Bridge Loans may, at the option of a Lender, be exchanged for a principal amount of Exchange Notes equal to 100% of the aggregate principal amount of the Bridge Loans so exchanged. No Exchange Notes will be issued until the Company receives requests to issue at least $50.0 million in aggregate principal amount of Exchange Notes. The Company will issue Exchange Notes under an indenture (the “Indenture”) that complies with the Trust Indenture Act of 1939, as amended. The Company will appoint a trustee reasonably acceptable to the Lenders.

Maturity		The Exchange Notes will mature on the sixth anniversary of the Closing Date.

Interest Rate		Each Exchange Note will bear interest at a fixed rate equal to the interest rate on the Bridge Loan surrendered in exchange for such Exchange Note as of the date of such exchange. Interest will be payable in arrears at the end of each fiscal quarter of the Company.

Optional Redemption		Exchange Notes will be non-callable until the fourth anniversary of the Closing Date. Thereafter, each Exchange Note will be callable at par plus accrued interest plus a premium equal to (i) one half of the coupon on such Exchange Note commencing on the fourth anniversary of the Closing Date and (ii) one quarter of the coupon on such Exchange Note commencing on the fifth anniversary of the Closing Date. In addition, prior to the third anniversary of the Closing Date, up to 35% of the original principal amount of each series of the Exchange Notes may be redeemed from the proceeds of a qualifying equity offer by the Company at a redemption price equal to par plus the coupon and accrued interest.

Defeasance Provisions of Exchange Notes		Customary.

Modification		Customary.

Change of Control		Customary at 101%.

Registration Rights		The Company will file within 30 days after the first anniversary of the Closing Date and will use its best efforts to cause to become effective as soon thereafter as practicable, a shelf registration statement with respect to the Exchange Notes (a “Shelf Registration Statement”). If a Shelf Registration Statement is filed, the Company will keep such registration statement effective and available (subject to customary exceptions) until it is no longer needed to permit unrestricted resales of all of the Exchange Notes. If within 90 days from such first anniversary of the Closing Date (the “Effectiveness Date”) a Shelf Registration Statement for the Exchange Notes has not been declared effective, then the Company will pay liquidated damages in the form of increased interest of 50 basis points per annum on the principal amount of Exchange Notes and Bridge Loans outstanding to holders of such Exchange Notes and Bridge Loans who are unable freely to transfer Exchange Notes from and including the 91st day after such first anniversary of the Closing Date to but excluding the effective date of such Shelf Registration Statement. On the 90th day after the Effectiveness Date, the liquidated damages shall increase by 50 basis points per annum, and on each 90 day anniversary of the Effectiveness Date thereafter, shall increase by 50 basis points per annum, to a maximum increase in interest of 200 basis points per annum. The Company will also pay such liquidated damages for any period of time (subject to customary exceptions) following the effectiveness of a Shelf Registration Statement that such Shelf Registration Statement is not available for sales thereunder. All accrued liquidated damages will be paid on each quarterly interest payment date.

Covenants		The indenture relating to the Exchange Notes will contain covenants substantially identical to those contained in the 2005 Indenture.

Events of Default		The indenture relating to the Exchange Notes will provide for Events of Default substantially identical to those contained in the 2005 Indenture.

The foregoing is intended to summarize certain basic terms of the Exchange Notes. It is not intended to be a definitive list of all of the requirements of the Lenders in connection with the Exchange Notes.

EX-12.1 6 a06-15149_1ex12d1.htm EX-12

Exhibit 12.1

POGO PRODUCING COMPANY & SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)

	Six Months ended June 30,						For the year ended December 31,
	2006			2005			2005			2004			2003			2002			2001

EARNINGS:
Income from continuing operations before taxes, minority interest, and accounting change	$	487,403		$	183,173		$	457,953		$	397,901		$	372,606		$	116,325		$	91,762
Add —
Fixed charges	69,123			25,611			72,016			32,118			48,687			63,164			67,316
Capitalized interest amortized	1,301			1,667			2,506			3,033			3,173			2,437			1,956
Less —
Preferred dividend requirement of consolidated subsidiary	—			—			—			—			—			(4,140		)	(9,999		)
Capitalized interest	(34,825		)	(4,910		)	(23,480		)	(14,216		)	(16,531		)	(24,033		)	(33,242		)

Total earnings	$	523,002		$	205,541		$	508,995		$	418,836		$	407,935		$	153,753		$	117,793

FIXED CHARGES:
Interest expense	$	29,709		$	19,151		$	45,174		$	15,117		$	29,829		$	33,417		$	23,017
Capitalized interest	34,825			4,910			23,480			14,216			16,531			24,033			33,242
Preferred dividend requirement of consolidated subsidiary	—			—			—			—			—			4,140			9,999
Portion of rental expense representing interest	4,589			1,550			3,362			2,785			2,327			1,574			1,058

Total fixed charges	$	69,123		$	25,611		$	72,016		$	32,118		$	48,687		$	63,164		$	67,316

RATIO OF EARNINGS TO FIXED CHARGES	7.6		x	8.0		x	7.1		x	13.0		x	8.4		x	2.4		x	1.7		x

Rent expense

Office space	$	2,928		$	1,478		$	3,305		$	2,859		$	2,739		$	2,700		$	2,520
Other equipment	10,840			3,173			6,782			5,497			4,241			2,022			654
FPSO	0			0			0			0			0			0			0
FSO	0			0			0			0			0			0			0

Total rent expense	$	13,768		$	4,651		$	10,087		$	8,356		$	6,980		$	4,722		$	3,174
Percent assumed to be interest	33		%	33		%	33		%	33		%	33		%	33		%	33		%
	$	4,589		$	1,550		$	3,362		$	2,785		$	2,327		$	1,574		$	1,058

EX-31.1 7 a06-15149_1ex31d1.htm EX-31

EXHIBIT 31.1

POGO PRODUCING COMPANY AND SUBSIDIARIES

CERTIFICATIONS

I, Paul G. Van Wagenen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Pogo Producing Company,

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2006

	/s/ Paul G. Van Wagenen
	Paul G. Van Wagenen
	Chairman, President and Chief
	Executive Officer

EX-31.2 8 a06-15149_1ex31d2.htm EX-31

EXHIBIT 31.2

POGO PRODUCING COMPANY AND SUBSIDIARIES

I, James P. Ulm, II, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Pogo Producing Company,

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2006

	/s/ James P. Ulm, II
	James P. Ulm, II
	Senior Vice President and Chief
	Financial Officer

EX-32.1 9 a06-15149_1ex32d1.htm EX-32

EXHIBIT 32.1

POGO PRODUCING COMPANY AND SUBSIDIARIES

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Pogo Producing Company (the “Company”) on Form 10-Q for the period ended June 30, 2006 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Paul G. Van Wagenen, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Paul G. Van Wagenen
Paul G. Van Wagenen
Chairman, President and Chief Executive Officer
July 28, 2006

EX-32.2 10 a06-15149_1ex32d2.htm EX-32

EXHIBIT 32.2

POGO PRODUCING COMPANY AND SUBSIDIARIES

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Pogo Producing Company (the “Company”) on Form 10-Q for the period ended June 30, 2006 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, James P. Ulm II, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ James P. Ulm II
James P. Ulm II
Senior Vice President and Chief Financial Officer
July 28, 2006

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