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HomeMy WebLinkAbout972992PREPARED BY: Fred N. Diem Urban Oil Gas Group, LLC 1000 E. 14 Street, Suite 300 Plano, Texas 75074 (Fund II Aggregation 1 BTO and Black Diamond) RECEIVED 8/30/2013 at 11:27 AM RECEIVING 972992 BOOK: 819 PAGE: 225 JEANNE WAGNER LINCOLN COUNTY CLERK, KEMMERER, WY CONVEYANCE OF NET PROFITS OVERRIDING ROYALTY INTEREST This Conveyance of Net Profits Overriding Royalty Interest (this "Conveyance dated for reference purposes as of July 23, 2013 is made by Urban Fund II, LP, a Texas limited partnership (herein called "Grantor to Urban Oil and Gas Partners B, LP, a Delaware limited partnership (herein called "Grantee Capitalized terms used herein have the meanings given to them in Article I hereof unless otherwise defined herein. WHEREAS the Grantor is the owner of the Subject Interests; and 1 0225 WHEREAS the Grantor desires to sell and convey to the Grantee and the Grantee desires to purchase from the Grantor, an overriding royalty interest measured by the net profits from and affecting the Subject Interests. NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other good and valuable consideration paid by Grantee to Grantor, the receipt and sufficiency of which are hereby acknowledged, Grantor hereby GRANTS, BARGAINS, SELLS, CONVEYS, ASSIGNS, TRANSFERS, SETS OVER AND DELIVERS unto Grantee as a net profits overriding royalty interest (herein called the "Net Profits Overriding Royalty Interest in and to all of the Subject Hydrocarbons (as such term is hereinafter defined) equal to an undivided 97% "Designated Percentage of the net profits, if any, calculated in the manner provided for herein, that are realized from the oil, gas and other minerals produced, saved and marketed from the Subject Interests from and after the Effective Date. To have and to hold the Net Profits Overriding Royalty Interest, together with all and singular the rights and appurtenances thereto in anywise belonging, unto Grantee, its successors and assigns, forever, subject, however, to the terms and conditions set forth herein. ARTICLE I Certain Definitions and References Section 1.1. Certain Defined Terms. When used in this Conveyance, the following terms shall have the respective meanings assigned to them in this Section 1.1 or in the sections and subsections referred to below: "Affiliate" shall mean (a) any Person directly or indirectly owning, controlling or holding with power to vote 10% or more of the outstanding voting securities of the Grantor, (b) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote by the Grantor, (e) any Person directly or indirectly controlling, controlled by or under common control with the Grantor, and (d) any officer, director or partner of the Grantor or of any Person described in subsection (c) of this paragraph. For purposes hereof, "control" means the right or power to direct the policies of another through management authority, equity ownership, delegated authority, voting rights or otherwise. "Agreed Rate" shall mean a rate per annum which is equal to the lesser of (a) a rate which is two percent (2 above the rate published from time to time in The Wall Street Journal, Southwest Edition (or any successor publication thereto) designated therein as the London Interbank Offered Rate for three months, or if not so published, the rate of interest quoted by any money center bank as its London Interbank Offered Rate for three months, as identified in writing by the Grantor (adjusted to reflect any changes in such rate determined hereunder) or (b) the maximum rate from time to time permitted by applicable law. "Effective Date" shall have the meaning assigned to it in Section 9.10. "Gross Proceeds" shall have the meaning assigned to it in Section 2.2. "Manufacturing Costs" shall mean the costs of Processing any Subject Hydrocarbons that generate Manufacturing Proceeds. "Manufacturing Proceeds" shall mean the excess, if any, of (i) proceeds realized from the sale of Subject Hydrocarbons, and any products thereof, that have been Processed or are the result of any Processing over (ii) the part of such proceeds that represents the Market Value of such Subject Hydrocarbons before any Processing. "Market Value" of any Subject Hydrocarbons shall mean: (a) With respect to crude oil, field condensate and other field liquids, the fair market value of such crude oil and /or field liquids, on the date of delivery, at the lease level, determined in accordance with other generally accepted and usual industry practices; (b) With respect to any gas, gaseous substances, and other vaporous hydrocarbons, the fair market value of such gas and/or substances, on the date of delivery, at the lease level, determined in accordance with generally accepted and usual industry practices; and (c) With respect to any other minerals, (i) the highest price any Non Affiliate is paying for like substances of similar quality under similar terns and conditions at the delivery point of such minerals under a born fide arms- length contract, or (ii) if no such 2 0227 contract exists, the highest price any unaffiliated third party is paying to purchase such type of mineral under a bona fide arms length contract at the nearest point at which such type of mineral is being delivered (adjusted appropriately to take into account any differences in prices between the respective delivery points which are fairly attributable to delivery costs). "Net Profits Account" shall have the meaning assigned to it in Section 2.1. "Net Profits Overriding Royalty Interest" shall mean the Net Profits Overriding Royalty Interest created by this Conveyance and shall include all of the rights, titles and interests of Grantee provided for herein. "Non- Affiliate" shall mean with respect to Grantor, any Person who is not an Affiliate of Grantor. "Person" shall mean any individual or entity, including a corporation, partnership, association, limited liability company, limited liability partnership, joint -stock company, trust, unincorporated association, government or governmental agency or authority. "Processing" or "Processed" means to manufacture, fractionate or refine Subject Hydrocarbons, but such terms do not mean or include the use of normal lease or well equipment (such as dehydrators, gas treating facilities, separators, heater treaters, lease compression facilities, injection or recycling equipment, tank batteries, field gathering systems, pipelines and equipment and so forth) or other normal operations on any of the Subject Interests. "Production Sales Contracts" shall mean all contracts, agreements and arrangements for the sale or disposition of Subject Hydrocarbons that may be produced from or attributable to the Subject Interests, whether presently existing or hereafter created. "Subject Borrowings" means any debt for borrowed funds to the extent incurred by Grantor (i) to pay all or a portion of the purchase price and direct costs for Grantor's acquisition of the Subject Interests or (ii) to pay capital costs from and after the Effective Date which would be debits to the Net Profits Account under Subsection 2.3(a) except for operation of the last proviso of such Subsection. "Subject Hydrocarbons" shall mean that portion of the oil, gas and other minerals in and under and that may be produced, from and after the Effective Date, from the lands and depths covered by the Subject Interests and which are attributable to the Subject Interests, after deducting all royalties and any overriding royalties (except the Net Profits Overriding Royalty Interest), production payments and other similar charges burdening the Subject Interests. There shall not be included in the Subject Hydrocarbons any oil, gas or other minerals attributable to nonconsent operations conducted with respect to the Subject Interests (or any portion thereof) as to which Grantor is a nonconsenting party and dedicated to the recoupment or reimbursement of costs and expenses of the consenting parties by the terms of the relevant agreement, provided that Grantor's election not to participate is made in conformity with Section 3.9(c). 3 "Subject Interests" shall mean an undivided interest in and to the following: (a) the oil, gas and /or mineral properties described in Exhibit A; 0228 (b) all other rights, titles, interests and estates of Grantor of whatever kind and character (including without limitation leasehold interests under oil, gas and /or mineral leases (whether or not such leases are described on Annex A), fee mineral interests, fee royalty interests, overriding royalties, reversionary interests (whether leasehold or otherwise) and other interests) in and to the lands described in Annex A (or otherwise described, identified or referred to in any of the leases or other instruments described in Annex A), even though such interest of Grantor may be incorrectly described in, or omitted from, Annex A; and (c) all rights, titles and interests of Grantor in and to all presently existing (or hereafter created) oil, gas and /or mineral unitization, pooling, and communitization agreements, declarations and orders (including without limitation all amendments or modifications thereto) relating to the properties described in subsections (a) and (b) above, and in and to the properties covered and the units created thereby (including all units formed under orders, regulations, rules, or other official acts of any governmental agency having jurisdiction, and including so called "working interest units" created under operating or similar agreements). Section 1.2. References and Titles. All references in this Conveyance to articles, sections, subsections and other subdivisions refer to corresponding articles, sections, subsections and other subdivisions of this Conveyance unless expressly provided otherwise. Titles appearing at the beginning of any of such subdivisions are for convenience only and shall not constitute part of such subdivisions and shall be disregarded in construing the language contained in such subdivisions. The words `This Conveyance," `This instrument," "herein," "hereof," "hereby," "hereunder" and words of similar import refer to this Conveyance as a whole and not to any particular subdivision unless expressly so limited. Words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. All references in this Conveyance to annexes refer to annexes to this Conveyance unless expressly provided otherwise, and all such annexes are hereby incorporated herein by reference and made a part hereof for all purposes. ARTICLE II Net Profits Account Section 2.1. Establishment. Grantor shall establish and maintain a net profits account (herein called the "Net Profits Account in accordance with sound, accurate and comprehensive accounting practices and consistent with the various provisions of this Conveyance and at all times shall keep true and correct books and records with respect thereto. Section 2.2. Credits. Except as otherwise provided herein, the Net Profits Account shall be credited with the gross proceeds from the sale or other disposition of Subject Hydrocarbons; 4 0229 provided that, if such Subject Hydrocarbons are retained and/or used by Grantor (except as described in Section 2.2(e)) or are sold or disposed of in a transaction other than a bona fide anus- length transaction with a Non Affiliate, the Net Profits Account shall be credited with the Market Value of such Subject Hydrocarbons. The amount of gross proceeds or Market Value, as the case may be (herein collectively called the "Gross Proceeds to be credited to the Net Profits Account with respect to any sale or disposition of Subject Hydrocarbons shall be subject to the following: (a) Except as provided below in this Section 2.2, Gross Proceeds shall include all consideration received, directly or indirectly, for sales of Subject Hydrocarbons, including without limitation advance payments and payments under take -or -pay and similar provisions of Production Sales Contracts; (b) If any proceeds are withheld from Grantor by a Non Affiliate for any reason (other than at the request of Grantor), such proceeds shall not be considered to be Gross Proceeds until such proceeds are actually received by Grantor; provided that Gross Proceeds shall not include any interest, penalty, or other amount that is not derived from the sale of Subject Hydrocarbons; (c) Gross Proceeds relating to any nonconsent operations conducted with respect to all or any part of the Subject Interests after the Effective Date shall be subject to Section 3.9; (d) If any Subject Hydrocarbons shall be Processed before sale, the Gross Proceeds for such Subject Hydrocarbons shall be the Market Value less the excess, if any, of the Manufacturing Costs of such Processings over the Manufacturing Proceeds arising therefrom; (e) Gross Proceeds shall not include any amounts for Subject Hydrocarbons unavoidably lost in production or used by Grantor in conformity with good oil field practices for development drilling and production operations (including without limitation gas injection, fuel, secondary or tertiary recovery, pressure maintenance, repressuring or recycling operations) conducted solely for the purpose of producing Subject Hydrocarbons from the Subject Interests, but only so long as such Subject Hydrocarbons are so used; (f) Gross Proceeds shall include all amounts which Grantor shall receive as a result of production of oil or gas from the Subject Interests including receipts in respect of any landowner's, overriding and other royalty interests; (g) Gross Proceeds shall not include any amount which Grantor shall receive as a bonus for any lease or payments made to Grantor in connection with the drilling or deferring of drilling of any well on any of the Subject Interests or in connection with adjustment of any well and leasehold equipment upon unitization of any of the Subject Interests; and 5 (h) Gross Proceeds shall not include any other amounts which are described in Section 2.4. Section 2.3. Debits. Except as otherwise provided herein, the Net Profits Account shall be debited with the following without duplication: (a) All direct costs (including capital costs) incurred by Grantor which are attributable to the Subject Interests (i) for all direct labor (including fringe benefits) and other services necessary for developing, operating, producing, reworking and maintaining the Subject Interests from and after the Effective Date, (ii) for dehydration, treating, processing, compression, separation, transportation and marketing of the Subject Hydrocarbons from and after the Effective Date, excluding, however, any Manufacturing Costs, and (iii) for all material, supplies, equipment and other personal property and fixtures purchased for use on, or in connection with, any of the Subject Interests from and after the Effective Date (including without limitation (A) all amounts charged Grantor for conformance of investment if the Subject Interests or any part or parts thereof are hereafter from time to time unitized, (B) the costs of drilling, completing, testing, equipping, plugging back, reworking, recompleting and plugging and abandoning any well (subject to Section 2.10) on the Subject Interests, whether or not such well is a producer or is abandoned as a dry hole or junked, (C) the cost of constructing gathering facilities, tanks and other production and delivery facilities on the Subject Interests (subject to Section 2.3(2)) and (D) the cost of secondary recovery, pressure maintenance, repressuring, recycling and other operations conducted for the purpose of enhancing production); provided that the debits made to the Net Profits Account pursuant to this subsection (and, to the extent applicable, pursuant to the other applicable provisions of this Conveyance) with respect to any Subject Interest shall be made on the same basis as such costs are charged under the operating agreement or other management or operating agreements (whether or not such agreements are with and costs are charged by Affiliates of Grantor) applicable to such Subject Interest at the time the transaction giving rise to such debit occurred; provided further that, despite the limitations set forth in this subsection 2.3(a), Grantor may further debit the Net Profits Account for direct costs that Grantor reasonably anticipates will exceed the applicable credits associated with a well during the next 12 months in an amount up to $100,000 per well over the life of the Net Profits Overriding Royalty Interest (to the extent not previously charged to the Net Profits Account (said amount to be debited is herein the "Direct Cost Reserve provided further the direct costs debited as a Direct Cost Reserve will not be charged as an additional debit to the Net Profits Account pursuant to this Subsection 2.3(a) when actually incurred, and further, the amount of any debits for Direct Cost Reserves in any year may not exceed 25% of the Net Profits for that year determined without regard to such yearly Direct Cost Reserves; and provided further that any capital costs paid from Subject Borrowings shall not be charged as a debit to the Net Profits Account pursuant to this Subsection 2.3(a), but debits will be made to the Net Profits Account under Subsection 2.3(j) as principal repayments are made on Subject Borrowings; (b) The portion properly allocable to the Subject Interests of all costs incurred by Grantor (including without limitation outside legal, accounting and engineering 6 0230 services) of (i) handling, investigating and/or settling litigation, administrative proceedings and claims (including without limitation lien claims other than liens for borrowed funds) and (ii) payment of judgments, penalties and other liabilities (including interest thereon), incurred by Grantor (and not paid or reimbursed under insurance maintained by Grantor or others) and involving any of the Subject Interests, or incident to the development, operation or maintenance of the Subject Interests from and after the Effective Date, or requiring the payment or restitution of any proceeds of Subject Hydrocarbons; (c) All taxes (except income, transfer, inheritance, estate, franchise and like taxes and any such taxes included in Manufacturing Costs) incurred by Grantor with respect to the ownership of the Subject Interests from and after the Effective Date, including without limitation production, severance, and /or excise and other taxes assessed against, and /or measured by, the production of (or the proceeds or value of production of) Subject Hydrocarbons, occupation taxes, sales and use taxes, and ad valorem taxes (not previously estimated below) assessed against or attributable to the Subject Interests or any non Processing equipment located on any of the Subject Interests, and, as to any determination of ad valorem taxes on a quarterly basis, one -fourth (1/4) of Grantor's good faith estimate of the amount of yearly ad valorem taxes to be assessed by the applicable taxing authority; (d) Insurance premiums attributable to the Subject Interests incurred by Grantor for insurance actually carried for periods from and after the Effective Date with respect to the Subject Interests, or any non Processing equipment located on any of the Subject Interests, or incident to the development, operation or maintenance of the Subject Interests from and after the Effective Date; it being recognized that (i) Grantor may carry insurance in lieu of and /or in addition to that provided for in operating agreements covering the Subject Interests or that required under Section 3.3, and that the cost of such insurance shall be an appropriate debit to the Net Profits Account and (ii) where the coverage is general in nature, or relates to a group of properties (or more than one interest in the same property), only that portion which is reasonably allocated to the Subject Interests shall be debited hereunder; (e) All amounts incurred by Grantor and attributable to the Subject Interests and periods from and after the Effective Date consisting of (i) rent and other consideration incurred for the use or damage to the surface and (ii) rentals, shut -in gas well royalties, overriding royalties, minimum royalties and similar payments payable pursuant to the provisions of agreements in force and effect before the Effective Date; (f) Amounts attributable to the Subject Interests (and attributable to periods from and after the Effective Date) and charged as overhead charges specified in applicable operating agreements or other management or operating agreements (whether or not such agreements are with and costs are charged by Affiliates of Grantor) now or hereafter covering the Subject Interests; (g) If as a result of the occurrence of the bankruptcy or insolvency or similar 7 0231 occurrence of the purchaser of Subject Hydrocarbons any amounts previously included in Gross Proceeds are reclaimed from Grantor or its representative, then the amounts reclaimed as promptly as practicable following Grantor's payment thereof (h) If Grantor shall be a party as to any nonconsent operations conducted with respect to all or any of the Subject Interests after the Effective Date, all costs to be debited to the Net Profits Account with respect thereto shall be governed by Section 3.9; (i) If Grantor shall have incurred any Subject Borrowings, all interest, premiums, fees, expense reimbursements and other costs and charges arising out of Subject Borrowings and (ii) all payments (whether periodic or upon early termination) and all costs and charges incurred in respect of any hedging transaction entered into with respect to the anticipated interest on Subject Borrowings; (j) If Grantor shall have incurred any Subject Borrowings, each repayment of principal of Subject Borrowings; provided that any unpaid balance of the Subject Borrowings shall be deemed to be repaid and will result in a debit to the Net Profits Account upon the discharge of recourse for payment of the Subject Borrowings to Grantor's interest in the Subject Interests, whether upon any involuntary transfer (including judicial and non judicial foreclosure), a release upon a sale in lieu of foreclosure, pursuant to a bankruptcy, liquidation, dissolution or similar proceeding, or otherwise; (k) If Grantor shall have entered into any hedging transaction with respect to the expected production of Subject Hydrocarbons from the Subject Interests, all payments (whether periodic or upon early termination) and costs with respect to any such hedging transaction; (1) Except as otherwise provided elsewhere in this Conveyance, all other direct expenditures attributable to the Subject Interests paid or reasonably incurred by Grantor from and after the Effective Date for the necessary or proper development, operation, production, rework, and maintenance, after the Effective Date, of the Subject Interests; and (m) The amounts provided for in Section 2.7(a). Notwithstanding the foregoing provisions of this Section or anything else to the contrary contained in this Conveyance, the amounts debited to the Net Profits Account shall not include any of the following: (1) Any amount which has also been used to reduce the amount of the Subject Hydrocarbons and /or Gross Proceeds or has otherwise not been included therein (including, by way of example and without limitation, royalties, overriding royalties, production payments and other charges burdening the Subject Interests as of the Effective Date, production, severance, excise and other taxes and any other amounts deducted, withheld or paid by any other Person); 8 0232 (2) Any Manufacturing Costs; 0233 (3) Any amounts paid by Grantor (initial or a successor) to such Grantor's predecessor in interest with respect to part or all of the Subject Interests (including without limitation any purchase price or other consideration paid by Grantor to such successor in interest to acquire all or part of the Subject Interests); and (4) Any overriding royalty, production payment or other charge burdening the Subject Interests which is created by Grantor on or after the Effective Date. Section 2.4. Reduction of Debits. The debits to the Net Profits Account provided for in Section 2.3(a) through (m) and elsewhere in this Conveyance shall be reduced, but not below zero, by the following: (a) The gross proceeds received by Grantor from the sale, from and after the Effective Date, of (or, if disposed of from and after the Effective Date by Grantor other than by sale, the then current market value of) any materials, supplies, equipment and other personal property or fixtures, or any part thereof or interest therein, located on or used in connection with the Subject Interests (including without limitation all amounts attributable thereto which are received by Grantor by way of conformance of investment in personal property and equipment if the Subject Interests or any part or parts thereof are hereafter from time to time unitized) provided that the reductions to debits made pursuant to this subsection (and, to the extent applicable, pursuant to the other applicable provisions of this Conveyance) shall be effected on the same basis as the transactions giving rise to such reductions are accounted for under any operating agreement or other management or operating agreements (whether or not such agreements are with and costs are charged by Affiliates of Grantor) applicable thereto; (b) The gross proceeds of all insurance received by Grantor (i) the cost of which is charged to the Net Profits Account, directly or indirectly, or (ii) that accrue to Grantor as a consequence of the loss or damage to any one or more of the following which occurs from and after the Effective Date: the Subject Interests, or any part thereof or interest therein, the interest of Grantor in any materials, supplies, equipment or other personal property or fixtures located on or used in connection with any of the Subject Interests, or any Subject Hydrocarbons; (c) The gross proceeds of all judgments and claims received by Grantor for damages to one or more of the following which occurs from and after the Effective Date: the Subject Interests, or any part thereof or interest therein, any materials, supplies, equipment or other personal property or fixtures, or any part thereof or interest therein, located on or used in connection with any of the Subject Interests, or any Subject Hydrocarbons; (d) All gross proceeds of and /or from any of the following amounts received by Grantor (to the extent attributable to periods from and after the Effective Date) with 9 respect to the Subject Interests: (i) delay rentals, (ii) lease bonuses, (iii) shut -in gas well royalties or payments, (iv) rentals from reservoir use or storage, and (v) payments in connection with the drilling or deferring of drilling of any well on any of the Subject Interests, including without limitation any bottom hole, dry hole, or similar contribution; (e) If any Subject Hydrocarbons shall be Processed before sale, the excess, if any, of the Manufacturing Proceeds arising therefrom over the Manufacturing Costs of such Processings; (f) All overhead charges paid to the operator by non Affiliates under applicable joint operating agreements on the Subject Interests which are subsequently paid to Grantor pursuant to management or other agreements to the extent attributable to periods from and after the Effective Date; (g) All other monies and things of value which are received by Grantor by virtue of the ownership from and after the Effective Date of the Subject Interests and the materials, supplies, equipment and other personal property and fixtures located on or used in connection with the Subject Interests; (h) In the month following Grantor's payment of the yearly ad valorem taxes assessed on the Subject Interests, the amount, if any, by which the total of the quarterly estimates set forth in Section 2.3(c) exceeds the actual amount of the ad valorem taxes actually assessed against the Subject Interests and paid by Grantor; (i) All amounts of interest, penalty or other similar amounts received by Grantor in respect of amounts theretofore withheld from Grantor described in the proviso to Section 2.2(b); (j) The amount, if any, of any unused Direct Cost Reserve which was debited to the Net Profits Account in any annual accounting or quarterly estimate at least 15 months prior to the last day of the calendar year or calendar quarter, as applicable, and for which Grantor has not actually paid said Direct Cost Reserves to a third party or the operator of the Subject Interests for expenses of the type described in Section 2.3(a); (k) All gross proceeds (whether periodic or upon early termination) from any hedging transactions that (i) are entered into with respect to the expected production of Subject Hydrocarbons from the Subject Interests or (ii) are entered into with respect to the anticipated interest on Subject Borrowings; and (1) The amounts provided for in Section 2.7(b); provided that this Section 2.4 shall not operate to reduce any debits on account of (i) any amounts paid by third parties (except for overhead under applicable joint operating agreements) to Grantor as operator under any operating agreement now or hereafter in force covering any of the Subject Interests to reimburse or compensate Grantor as operator for costs incurred or services performed for the account or benefit of such third parties and (ii) any amount to which. 10 0234 Grantor is entitled by virtue of a judgment of a court of competent jurisdiction resolving a dispute hereunder between Grantee and Grantor in favor of Grantor, or any amount paid to Grantor in settlement of such dispute. Section 2,5. Accounting. All debits to the Net Profits Account which are attributable to costs and expenses paid by Grantor during a calendar year up to and including the last day of such calendar year shall be debited against the Net Profits Account as of the last day of such calendar year; provided that such debits shall be reduced (and not debited to the Net Profits Account) by the lesser of (a) the amount of such debits or (b) sum of the aggregate of all amounts provided for in Section 2.4 which have been received by Grantor from and after the Effective Date up to and including the last day of such calendar year and which have not previously been used to reduce such debits; and provided further that any such debits or reduction amounts which do not (and will not) result from payments to third parties or to Grantor shall be debited against the Net Profits Account or used (or shall be available for use) to reduce such debits, as the case shall be, as of the last day of the calendar year in which they arise. After such debits have been so reduced and so made for a given calendar year, all credits to the Net Profits Account which are actually received by Grantor during a calendar year up to and including the last day of such calendar year shall be credited to the Net Profits Account as of the last day of such calendar year; provided that any such credits which do not (and will not) result from credits given by or payments from third parties shall be credited to the Net Profits Account as of the last day of the calendar year in which they arise. The total net profits realized from the Subject Interests (or the total net losses, as the case may be) shall be determined after the applications and calculations provided for above have been made by Grantor. Grantee shall participate in the Designated Percentage of the net profits derived from the Subject Interests, as herein provided, only after and while all debits properly debited against the Net Profits Account (and after reduction of such debits by the amounts provided for in Section 2.4) shall have been offset by credits to the Net Profits Account and a credit balance shall exist in the Net Profits Account. It is understood and agreed that the amounts provided for in Section 2.4 shall be taken into account solely to reduce charges to the Net Profits Account and that Grantee shall have no right, title or interest therein and that all payments made to Grantee on account of the Net Profits Overriding Royalty Interest shall be made entirely and exclusively out of production accruing to the Subject Interests from and after the Effective Date. Section 2.6. Payments. Within ninety days after the end of each fiscal year, Grantor shall furnish to Grantee a statement reflecting the condition of the Net Profits Account as of the close of business on the last day of such fiscal year, less any estimated quarterly payments under this Section 2.6 for such calendar year, and reflecting (with sufficient description so that Grantee can identify such items and the particular Subject Interest involved) those items which gave rise to reductions, debits and credits to each Net Profits Account during such year (including any Direct Cost Reserve debits detailed by calendar year and the related actual amounts paid to third parties or the operator from such Direct Cost Reserve balance) and reflecting for each Subject Interest the quantities of Subject Hydrocarbons produced therefrom during the fiscal year covered by such statement, the volumes of such production sold, the prices at which such volumes were sold, and the taxes paid with respect to such sales. Any deficit reflected by any such statement shall be carried forward for the next and succeeding years until such deficit has been wiped out and liquidated. In case a net profit is reflected by any such statement (after such deduction of any 11 035 Section 2.7. Account Balance Charges. estimated quarterly payments under this Section 2.6 for such calendar year) and subject to adjustment pursuant to Section 2.8, payment to Grantee of the Designated Percentage of the amount of such credit balance shall be enclosed with the statement rendered thereto (or, if requested at any time by Grantee, paid by bank wire transfer to such bank and account designated in writing by Grantee), and the Net Profits Account shall be reduced by an amount equal to the quotient resulting from division of the amount paid by the Designated Percentage, so as to extinguish any credit balance. Within ninety days after the end of the first three calendar quarters of each calendar year, Grantor shall furnish to Grantee a statement reflecting an estimated condition of the Net Profits Account as of the close of business on the last day of such calendar quarter and reflecting (with sufficient description so that Grantee can identify such items and the particular Subject Interest involved) those items which gave rise to the estimated reductions, debits and credits to each Net Profits Account during such quarter (including any Direct Cost Reserve debits detailed by calendar quarter and the related actual amounts paid to third parties or the operator from such Direct Cost Reserve balance) and reflecting for each Subject Interest the quantities of Subject Hydrocarbons produced therefrom during the calendar quarter covered by such statement, the volumes of such production sold, the prices at which such volumes were sold, and the taxes paid with respect to such sales. In case a credit balance is reflected by any such quarterly estimated statement, Grantor will enclose with such statement an advance payment to Grantee of the Designated Percentage of the amount of such estimated credit balance. (a) If after all such reductions, debits and credits have been made to the Net Profits Account for a given calendar year or in an estimate thereof for a given calendar quarter, there remains a deficit balance in the Net Profits Account or estimate thereof, then an amount shall be computed equal to interest on the amount of such deficit balance (excluding any amounts in the Direct Cost Reserve which have not been paid to a third party or the operator of the Subject Interests) at the Agreed Rate for the period between the last day of such calendar year or quarter, as the case maybe, and the last day of the next succeeding calendar quarter, which amount shall, on the last day of the next succeeding calendar quarter, be charged to the Net Profits Account in the same manner as other debits to the Net Profits Account. (b) To the extent of the aggregate balance at the end of a given calendar year, or the estimated aggregate balance at the end of a given calendar quarter, of the amounts provided for in Section 2.4 from and after the Effective Date up to and including such last day of such period which have not been used to reduce debits (including debits for such period), an amount shall be computed equal to interest of such unused balance at the Agreed Rate for the period between the last day of such calendar year or quarter, as the case may be, and the last day of the next succeeding calendar quarter, which amount shall, on the last day of the next succeeding calendar quarter, be included in amounts under Section 2.4 in the same manner as other amounts provided for in such Section. Section 2.8. Overpayments. If at any time Grantor inadvertently pays Grantee more than the amount then due with respect to the Net Profits Overriding Royalty Interest, Grantee shall not be obligated to return any such overpayment, but the amount or amounts otherwise payable for 12 0236 O 37 any subsequent period or periods shall be reduced by such overpayment, plus an amount equal to interest computed at the Agreed Rate on the unrecovered balance of such overpayment during the period of such overpayment. Section 2.9. Past Due Payments. Any amount not paid by Grantor to Grantee with respect to the Net Profits Overriding Royalty Interest when due shall bear, and Grantor hereby agrees to pay, interest at the Agreed Rate from the due date until such amount has been paid. Section 2.10. Final Charges and Credits. Notwithstanding anything herein to the contrary, at such time as the estimated future net revenue from the Subject Interests shall equal the positive remainder (in this Section called the "Remaining Amount of (a) Grantor's share of the excess of the estimated costs of plugging and abandoning the open wells located on the Subject Interests over any Direct Cost Reserve in respect of such costs, minus (b) Grantor's share of the estimated fair market value of any salvageable materials, supplies, equipment and other personal property or fixtures located on or used in connection with the Subject Interests or such wells in excess of Grantor's share of the estimated cost of salvage of such items, Grantor shall cease making any payments to Grantee with respect to the Net Profits Overriding Royalty Interest (except as provided below in connection with the receipt of any proceeds from the Subject Interests in excess of the amounts estimated and except as a result of any revised estimate), but Grantor shall continue to make reductions, debits and credits to the Net Profits Account as herein required. Grantor shall use its best efforts in making all estimates required in this Section of the future net revenue from the Subject Interests, the net fair market value of salvageable items and the costs of plugging and abandoning wells, and shall furnish such estimates in writing to Grantee in such detail as shall be reasonably satisfactory to Grantee prior to withholding any payments from Grantee. At the termination of each three -month period thereafter, Grantor shall review and, to the extent Grantor determines appropriate, shall revise such estimates. If, as a result of any such revision, the estimated future net revenues from the Subject Interests have increased or the Remaining Amount has decreased, Grantor shall pay to Grantee the lesser of (i) the Designated Percentage of the net aggregate amount of such increase and decrease (if such amount is greater than zero) or (ii) the payments previously withheld from Grantee and the credit balance in the Net Profits Account shall be reduced by an amount equal to the quotient resulting from the division of such payment by the Designated Percentages, all in accordance with Section 2.6; to the extent that the Designated Percentage of such net aggregate amount is in excess of the payments previously withheld from Grantee, this Section shall cease to be applicable until such future date as the first sentence of this Section shall thereafter again become applicable. Grantor shall otherwise continue to withhold payments from Grantee pursuant to this Section until the earlier to occur of: (i) the aggregate amounts withheld by Grantor from Grantee pursuant to this Section shall equal the Designated Percentage of the Remaining Amount (as last revised), whereupon no further amounts shall be withheld by Grantor pursuant to this Section, or (ii) all of the Subject Interests shall have been released, surrendered or abandoned and the Net Profits Overriding Royalty Interest shall have terminated. Whenever 13 the event described in subsection (ii) of the preceding sentence occurs and after all costs of plugging and abandoning wells have been paid and all items have been salvaged and all related charges and reductions of charges have been made to the Net Profits Account, Grantor shall pay to Grantee the Designated Percentage of any credit balance in the Net Profits Account. If, at such time, a deficit balance exists in the Net Profits Account, Grantor shall not receive any payment or other compensation with respect thereto from Grantee. Section 2.11 Subject Borrowings. Grantor may incur Subject Borrowings under any type of agreement or arrangement, whether as a term loan, on revolving basis or otherwise, and under one or more senior or subordinated agreements or arrangements, (each a "Borrowing Facility on such terms and conditions, and with such interest rates, premiums, fees expenses and other charges, as Grantor may determine in the exercise of its good faith discretion under the relevant circumstances. Grantor may incur Subject Borrowings under a Borrowing Facility that includes other borrowings by Grantor that do not constitute Subject Borrowings, in which case, Grantor shall maintain on its books and records an identification, made on a reasonable basis, of (i) the principal amount of each Subject Borrowing, each repayment of Subject Borrowings, and the resulting outstanding balance of Subject Borrowings from time to time, (ii) an allocation of the costs of interest, premiums, fees, expenses, and other charges under such Borrowing Facility, and of the payments, costs and charges incurred under hedging arrangements with respect to the anticipated interest in respect of such Borrowing Facility, and (iii) the portion of the gross proceeds from hedging transactions entered into with respect to the anticipated interest under such Borrowing Facility that are attributable to anticipated interest on Subject Borrowings. Grantor may incur or permit to exist any mortgage, lien or security interest on the Subject Interests to secure a Borrowing Facility; provided that any such mortgage, lien or security interest is made expressly subject to this Conveyance. Grantor will exercise commercially reasonable efforts to perform its obligations under such Borrowing Facility and to enforce the performance of the obligations of third parties thereunder; provided that Grantor shall have no liability with respect to the performance of the obligations of any third party. Section 2.12 Hedging Transactions. Grantor may enter into hedging transactions with respect to the expected production of Subject Hydrocarbons from the Subject Interests and with respect to the anticipated interest on Subject Borrowings (which may include hedging transactions in respect of price risk and basis risk, and may include, without limitation, swaps, options, collars, caps or floors), in each case as Grantor may determine in the exercise of its good faith discretion under the relevant circumstances. Grantor will exercise commercially reasonable efforts to perform all obligations binding on it under such hedging transactions and to enforce the performance of the obligations of third parties thereunder; provided that Grantor shall have no liability with respect to the performance of the obligations of any third party. ARTICLE III Operation of Subject Interests Section 3.1. Prudent Operator Standard. Grantor (subject to the terms and provisions of any applicable operating agreements and subject to the other provisions of this Conveyance) shall have exclusive charge, management and control of all operations to be conducted on the 14 0238 Subject Interests and may take any and all actions which a reasonably prudent operator would deem necessary or advisable in the management, operation and control thereof and/or, where Grantor is not the operator of a Subject Interest, will use all reasonable efforts to cause the operator to take any actions which a reasonably prudent operator would deem necessary, in each case determined as if the Subject Interests were not burdened by the Net Profits Overriding Royalty Interest, but Grantor shall have no liability for breaches of the reasonably prudent operator standard except as may result from gross negligence or willful misconduct. Grantor shall have no charge, management or control of or with respect to the Overriding Royalty Interest, but instead such charge, management and control shall be vested solely in Grantee. Grantor shall promptly (and, unless the same are being contested in good faith and by appropriate proceedings, before the same are delinquent) pay all costs and expenses (including without limitation all taxes and all costs, expenses and liabilities for labor, materials and equipment incurred in connection with the Subject Interests and all obligations to the holders of royalty interests and other interests affecting the Subject Interests) incurred from and after the Effective Date in developing, operating and maintaining the Subject Interests and owing by Grantor, and where Grantor is not the operator of the Subject Interests it will use all reasonable efforts to cause the operator to promptly pay all costs and expenses. Grantor shall be obligated to develop, operate and maintain the Subject Interests as would a prudent operator under similar circumstances in accordance with good oil field practices. As to those of the Subject Interests as to which Grantor is not the operator, Grantor shall take all such action and exercise all such rights and remedies as are reasonably available to it to cause the operator to so develop, maintain and operate such Subject Interests (provided that Grantor shall never be obligated to pay any costs or expenses attributable to any interest other than the Subject Interests and all royalties related thereto). It is expressly understood that the powers given to Grantor in the first sentence of this Section shall include the power of Grantor, subject to the limitations therein and to Section 3.6 and 3.9(c), to elect to participate, or not participate, in drilling, reworking, plugging back, deepening, sidetracking or completing of a well, or in other operations (including, but not limited to, operations in connection with secondary and/or tertiary recovery) proposed to be conducted on the Subject Interests. Section 3.2. Sales of Subject Hydrocarbons. (a) Grantor shall have the obligation to market or cause to be marketed the Subject Hydrocarbons in accordance with reasonable and prudent business judgment and sound oil field practices and on such terms and conditions as Grantor shall determine to be in the best interests of Grantee; provided that all such sales of Subject Hydrocarbons (i) shall be upon terms and conditions which are the best terms and conditions available as determined in good faith by Grantor taking into account all relevant circumstances, including without limitation, price, quality of production, access to markets, minimum purchase guarantees, identity of purchaser and length of commitment, (ii) shall be upon terms and conditions at least as favorable as Grantor or its Affiliates obtains for oil, gas and /or minerals not subject to this Conveyance which are of comparable type and quality and in the same area, and (ii) shall not be burdened by any marketing or similar fee charged by any Affiliate of the Grantor. Grantor will exercise its best efforts to perform all obligations binding on it under Production Sales Contracts and to enforce the performance of the obligations of third parties thereunder; provided that Grantor shall have no liability for the performance of the obligations of any purchaser of Subject Hydrocarbons. As 15 to any third parties, all acts of Grantor in marketing the Subject Hydrocarbons and all Production Sales Contracts executed by Grantor shall be binding on Grantee and the Net Profits Overriding Royalty Interest; it being understood that the right and obligation to market the Subject Hydrocarbons is at all times vested in Grantor and Grantee does not have any such right or obligation or any possessory interest in all or part of the Subject Hydrocarbons. Accordingly, it shall not be necessary for Grantee to join in any new Production Sales Contracts or any amendments to existing Production Sales Contracts. (b) An Affiliate may purchase any Subject Hydrocarbons only in the event that the Grantor shall determine that any such sale to an Affiliate (an "Affiliated Purchaser shall comply with the provisions contained in Section 3.2(a) and the provisions of this Section 3.2(b). The Grantor and any such Affiliated Purchaser shall maintain accurate books and records of all such sales of Subject Hydrocarbons to Affiliated Purchasers and the subsequent disposition of such production, which books and records shall be available for inspection by the Grantee and its representatives at any time. The Grantee shall have the right to cause the Grantor to terminate any future sales of production to any Affiliated Purchaser at any time and for any reason upon written notice. Section 3.3. Insurance. Grantor shall obtain or cause to be obtained (and maintain or cause to be maintained during the economic life of the Subject Interests) insurance coverage in such amounts, with provisions for such deductible amounts and for such purposes as would a prudent operator under similar circumstances in accordance with good oil field practices. The insurance requirements under any applicable operating or management agreements shall meet the prudent operation standard set forth in this Section 3.3. Section 3.4. Contracts with Affiliates. Grantor or an Affiliate of Grantor may perform services and furnish supplies and equipment with respect to the Subject Interests, provided that the terns thereof are no less favorable than terms obtainable from non affiliated third party suppliers of services, supplies or equipment in the area of the relevant Subject Interest. Section 3.5. Government Regulation. (a) All obligations of Grantor hereunder shall be subject to all applicable federal, state and local laws, rules, regulations and orders (including those of any applicable agency, board, official or commission having jurisdiction). Rates permitted under the Natural Gas Policy Act of 1978 and any other applicable statute or law, and the rules and regulations thereunder, to be paid for Subject Hydrocarbons shall be controlling if lower than prices established in Production Sales Contracts or required hereunder. Grantor shall make all filings with all applicable agencies, boards, officials and commissions having jurisdiction with respect to the marketing of the Subject Hydrocarbons and the terms and conditions under which Subject Hydrocarbons may be sold. (b) Should any statute or any rules or regulations of any governmental body, or any provisions in private contracts (including, without limitation, those limiting the size of overriding royalties and similar interests) become applicable to the Net Profits Overriding Royalty Interests so as to, in effect, limit the portion of the Subject Hydrocarbons produced from the lands and depths covered by a particular Subject Interest which may be attributable to the Net Profits Overriding Royalty Interest, the Net Profits Overriding Royalty Interest shall, as to such Subject 16 0240 Interest, and for the period of time during which such statute, rule or regulation (or other provision) is applicable, be limited to the maximum amount of production from such lands and depths which can be attributed to the Net Profits Overriding Royalty Interest under such statute, rule or regulation (or other provision); provided that the portion of production from lands and depths covered by other Subject Interests which would be attributable to the Net Profits Overriding Royalty Interest in the absence of the provisions of this Section shall be increased, to the maximum extent possible (and, if necessary, from the Designated Percentage to 100% of the production attributable to such Subject Interests), so as to cause, to the maximum extent possible, the Grantee to receive, by virtue of ownership of the Net Profits Overriding Royalty Interest, the same aggregate amount as Grantee would have received had the aforementioned regulation (or other regulations or other provisions) not reduced the share of production from the aforementioned Subject Interest with respect to which the Net Profits Overriding Royalty Interest could be paid. Section 3.6. Sales and Fannouts. In the event Grantee sells, releases or otherwise extinguishes the Net Profits Overriding Royalty Interest to the extent it relates to any part of, or interest in, or any portion of the Subject Interests, the consideration received therefor shall be paid to and retained by Grantee and shall not be credited to the Net Profits Account. If Grantor and /or Grantee have retained an interest in the Subject Interests which are subject to any such release or extinguishment, or have retained a part of such Subject Interests or an interest therein, and provided Grantor and Grantee so agree, such retained interest, including applicable credits and debits (and reductions in debits) to the Net Profits Account attributable thereto, shall remain subject (in the same manner as the Subject Interests out of which it was retained was subject) to the terms and provisions hereof and to the Net Profits Overriding Royalty Interest. Except to the extent of any retained interest as discussed in the preceding sentence, the Net Profits Account shall not be credited or debited with respect to any costs or proceeds attributable to any Subject Interests, or part thereof, or interest therein, in respect of which the Net Profits Overriding Royalty Interest has been released pursuant to this Section and which arose out of production or operations occurring after the effective date of such release (specifically in this connection, but not in limitation thereof; if a Subject Interest, or part thereof or interest therein, is disposed of by Grantor in a farmout or other similar transaction in which the party receiving the same is obligated to conduct drilling or other obligations, the Grantee has released the Net Profits Overriding Royalty Interest to the extent it affects such farmout and the Grantor and Grantee have agreed that the interest so retained shall remain subject to this Conveyance, the cost of such drilling or other obligations shall not be debited to the Net Profits Account, except to the extent of any portion of the same which Grantor is obligated to pay as a result of its retention of an interest in the Subject Interests involved in such transaction). In the event of any involuntary transfer by Grantor (including without limitation judicial and non judicial foreclosure sales by a receiver or trustee in bankruptcy for Grantor), such transfer shall be binding only on the interest of Grantor in the Subject Interests and shall be subject to the continued existence of the Net Profits Overriding Royalty Interest. Section 3.7. Abandonments. Grantor shall have the right without the joinder of Grantee to release, surrender and /or abandon its interest in the Subject Interests, or any part thereof, or interest therein even though the effect of such release, surrender or abandonment will be to release, surrender or abandon the Net Profits Overriding Royalty Interest the same as though 17 O 24 Grantee had joined therein insofar as the Net Profits Overriding Royalty Interest covers the Subject Interests, or any part thereof or interest therein, so released, surrendered or abandoned by Grantor; provided that Grantor shall not release, surrender or abandon any Subject Interest unless and until Grantor has determined (acting like a reasonably prudent operator in the State in which such Subject Interests are located with respect to its own properties, without regard to the existence of the Net Profits Overriding Royalty Interest) that such Subject Interest will no longer produce Subject Hydrocarbons in paying quantities. Section 3.8. Pooling and Unitization. (a) Certain of the Subject Interests may have been pooled or unitized for the production of oil, gas and /or minerals prior to the Effective Date or, after the Effective Date, may be so pooled or unitized pursuant to Section 3.8(b). Such Subject Interests are and shall be subject to the terms and provisions of such pooling and unitization agreements, and the Net Profits Overriding Royalty Interest in each such Subject Interest shall apply to (and the term "Subject Hydrocarbons" shall include) the production from such units which is attributable to such Subject Interest (and the Net Profits Account shall be computed giving consideration to such production and costs, expenses, charges and credits attributable to such Subject Interest) under and by virtue of the applicable pooling and unitization agreements. (b) Without the joinder of Grantee with respect to the Net Profits Overriding Royalty Interest, Grantor shall have the right and power to unitize, pool or combine the lands covered by the Subject Interests, or any portion or portions thereof; as to oil and /or gas, and other substances produced in association therewith, or any one or more of them, with any other land or lease or leases so as to create one or more unitized areas (or, with respect to unitized or pooled areas theretofore created, to dissolve the same or to amend and /or reconfigure the same to include additional acreage or substances or to exclude acreage or substances), when, in the judgment of Grantor, such unitization, pooling or combination is necessary or advisable in order to form a drilling or proration unit to facilitate the orderly development of the Subject Interests or to comply with the requirements of any law or governmental order or regulation relating to the spacing of wells or proration of the production therefrom. If pursuant to any law, rule, regulation or order of any governmental body or official, any of the Subject Interests are pooled or unitized in any manner, the Net Profits Overriding Royalty Interest insofar as it affects such Subject Interest shall also be pooled and unitized, and in any such event the Net Profits Overriding Royalty Interest shall apply to (and the teen "Subject Hydrocarbons" shall include) the production which accrues to such Subject Interest under and by virtue of such pooling and unitization arrangements and the Net Profits Account shall be computed giving consideration to such production and costs, expenses, charges and credits attributable to such Subject Interest. Section 3.9. Non consent Operations. (a) If Grantor elects to be a non participating party with respect to any drilling, deepening, plugging back, reworking, sidetracking or completion (or other) operation on any Subject Interest or elects to be an abandoning party with respect to a well located on any Subject Interest, the consequence of which election is that Grantor's interest in such Subject Interest or part thereof is temporarily (i.e., during a recoupment period) or permanently forfeited to the parties participating in such operations, or electing not to abandon such well, then the costs and proceeds attributable to such forfeited interest shall not, for the period of such forfeiture (which may be a continuous and permanent period), be debited or credited to the Net Profits Account and such forfeited interest shall not, for the period of such 18 02 4 2 forfeiture, be subject to the Net Profits Overriding Royalty Interest. (b) If Grantor elects to be a participating party to such a drilling, deepening, plugging back, reworking, sidetracking or completing (or other) operation, or elects to be a non abandoning party with respect to such a well, and any other party or parties have elected not to participate in such operation (or have elected to abandon such well) with the result that (pursuant to an operating agreement or other agreement or arrangement, including without limitation, non consent rights and obligations imposed by statute and /or regulatory agency) Grantor becomes entitled to receive, either temporarily (i.e., through a period of recoupment) or permanently, interests belonging to such other party or parties, then the costs and proceeds attributable to such non participating parties' interests to which Grantor becomes so entitled shall be paid and received by Grantor separately for its own account and shall not be debited and credited to the Net Profits Account. (c) Notwithstanding anything to the contrary contained herein, Grantor shall not elect, as to any Subject Interest, to be a non participating party with respect to any operation contemplated in Section 3.9(a) in the event Grantor or any Affiliate of Grantor will be a participating party in such operation so long as the unused Direct Cost Reserve and estimated quarterly Net Profits Account credit balance would be sufficient to cover the anticipated costs for the Subject Interests to participate in such proposed operation contemplated in Section 3.9(a). Section 3.10. Renewals and Extensions of Leases. The Net Profits Overriding Royalty Interest shall apply to all amendments, renewals, extensions and other similar arrangements (and /or interests therein) of the oil, gas and /or mineral leases (or other determinable interests in oil, gas and other minerals) which are included (or interests in which are included) in Subject Interests, whether or not such amendments, renewals, extensions or arrangements have heretofore (whether or not described in Annex A) been obtained, or are hereafter obtained, by Grantor. ARTICLE IV Grantee Liability and Equipment Section 4.1. No Personal Liability of Grantee. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS CONVEYANCE, GRANTEE SHALL NEVER PERSONALLY BE RESPONSIBLE FOR PAYMENT OF ANY PART OF THE COSTS, EXPENSES OR LIABILITIES INCURRED IN CONNECTION WITH THE EXPLORING, PRODUCING, REWORKING, DEVELOPING, OPERATING AND MAINTAINING OF THE SUBJECT INTERESTS, AND GRANTOR AGREES TO INDEMNIFY AND HOLD GRANTEE HARMLESS FROM AND AGAINST ALL SUCH COSTS, EXPENSES AND LIABILITIES (WITH SUCH INDEMNITY TO ALSO COVER ALL COSTS AND EXPENSES OF GRANTEE, INCLUDING REASONABLE LEGAL FEES AND EXPENSES, WHICH ARE INCURRED INCIDENT TO THE MATTERS INDEMNIFIED AGAINST); PROVIDED THAT ALL SUCH COSTS AND EXPENSES SHALL, TO THE EXTENT THE SAME RELATE TO PERIODS FROM AND AFTER THE EFFECTIVE DATE, NEVERTHELESS BE CHARGED AGAINST THE NET PROFITS ACCOUNT AS AND TO THE EXTENT HEREIN 19 0`43 PERMITTED. Section 4.2. Ownership of Equipment. The Net Profits Overriding Royalty Interest does not include any right, title or interest in and to any of the personal property, fixtures, structures or equipment now or hereafter placed on, or used in connection with, the Subject Interests and the interest herein conveyed to Grantee is exclusively an interest in net profits, as herein defined and provided for, and Grantee shall look exclusively to the Subject Hydrocarbons for the satisfaction and realization of the Net Profits Overriding Royalty Interest. ARTICLE V Certain Remedies Upon Default 0244 If Grantor shall fail to perform or observe in any material respect any of the covenants or agreements herein provided to be performed or observed by Grantor, and such failure shall continue unremedied for a period of sixty days after delivery to Grantor of written notice from Grantee of Grantee's objection to such failure and Grantee's request that such failure be remedied, then Grantee, in addition to any other rights which Grantee may have at law or at equity, shall have the right (and is hereby assigned such right) to require any or all of the purchasers of production from Subject Interests to pay to Grantee or any trustee or paying agent designated by Grantee all or part of the proceeds of Subject Hydrocarbons. Such proceeds shall be used by Grantee or such trustee or paying agent to pay to Grantee all amounts to which Grantee is entitled by virtue of the Net Profits Overriding Royalty Interest and to reimburse Grantee for amounts expended in exercising such right and for all costs and expenses of any such trustee or paying agent and, where applicable, to pay Grantee interest as herein provided. Notwithstanding the right of Grantee to apply proceeds of production attributable to Grantor's interest in the Subject Interests to the liquidation of cost and expenses incurred by Grantee in connection with exercise of its rights under this Section, all expenses incurred by Grantee in the exercise of its rights under this Section shall be a demand obligation owing by Grantor to the Grantee and shall bear interest each day from the date of such expenditure, or the making of such payment, by the Grantee until paid at a rate equal to the Agreed Rate. Upon the receipt from Grantor of proper and satisfactory evidence of the debits, reductions and credits to the Net Profits Account, Grantee or such trustee or paying agent shall pay to Grantor as provided in Section 2.6 the net amounts due to Grantor, if any, after making the payments then due to Grantee as provided for above in this Section and elsewhere in this Conveyance. Where Grantee or such trustee or paying agent does not have knowledge of any debit, reduction or credit or the exact amount thereof, Grantee or such trustee or paying agent shall be entitled to assume that such debit, reduction or credit does not exist until receiving actual notice thereof In connection with any action taken by the Grantee or such trustee or paying agent pursuant to this Section, Grantee or such trustee or paying agent shall not be liable for any loss sustained by Grantor resulting from any act or omission of the Grantee or such trustee or paying agent unless such loss is caused by the gross negligence or bad faith of the Grantee or such trustee or paying agent. 20 ARTICLE VI Assignments Section 6.1 Assignment by Grantor. Grantor may sell, assign, transfer, convey, mortgage or pledge all or any portion of the Subject Interests, or create a security interest therein, without the consent of Grantee. In the event of any involuntary transfer (including judicial and non judicial foreclosure sales by a receiver or trustee in bankruptcy) of the interests of Grantor, such transfer shall be binding only on the interest of Grantor in the Subject Interests and shall be subject to the continued existence of the Net Profits Overriding Royalty Interest. Section 6.2 Assignments by Grantee. Grantee shall have the right to sell, assign, transfer, convey, mortgage, pledge or otherwise transfer all or any portion of the Net Profits Overriding Royalty Interests, or create a security interest therein, or its rights and obligations under this conveyance, without the consent of Grantor; provided that no such assignment shall affect the method in which debits, reductions and credits are made to the Net Profits Account. Grantee shall not assign a part of the Net Profits Overriding Royalty Interest unless the assignment affects an equal undivided interest in the Net Profits Overriding Royalty Interest attributable to all Subject Interests. If Grantee, or Grantee's successors and assigns, at any time shall execute a mortgage, pledge or deed of trust covering all or any part of the Net Profits Overriding Royalty Interest as security for any obligation, the mortgagee, the pledgee or the trustee therein named or the holder of the obligation secured thereby shall be entitled, to the extent such mortgage, pledge or deed of trust so provides, to exercise all of the rights, remedies, powers and privileges herein conferred upon Grantee and to give or withhold all consents herein required or permitted to be obtained from Grantee. Section 6.3. Change in Ownership. No change of ownership or right to receive payment of the Net Profits Overriding Royalty Interest, or of any part thereof, however accomplished shall be binding upon Grantor until notice thereof shall have been furnished by the Person claiming the benefit thereof, and then only with respect to payments thereafter made. Notice of sale or assignment shall consist of a copy of the recorded instrument accomplishing the same; notice of change of ownership or right to receive payment accomplished in any other manner (for example by reason of incapacity, death or dissolution) shall consist of copies of recorded documents and complete proceedings legally binding and conclusive of the rights of all parties. Until such notice shall have been furnished to Grantor as provided above, the payment or tender of all sums payable on the Net Profits Overriding Royalty Interest may be made in the manner provided herein precisely as if' no such change in interest or ownership or right to receive payment had occurred. The kind of notice herein provided shall be exclusive, and no other kind, whether actual or constructive, shall be binding on Grantor. ARTICLE VII Access to Information Section 7.1. Access to Books and Records. In addition to any reports and information specifically required by the terms of this Conveyance, Grantor agrees to furnish to Grantee full 21 0245 information pertaining to the operation of the Subject Interests, at all reasonable times, and in such form, as Grantee may reasonably request. Subject to any restrictions on Grantor's right to do so under applicable operating agreements or similar contracts with non Affiliates, Grantor will permit representatives designated by Grantee, including independent accountants, agents, attorneys, and other Persons, to visit and inspect the Subject Interests and Grantor's books and records pertaining to the Subject Interests and the Net Profits Account (and to make copies and photocopies from such records and to write down and record such information as such representatives may request), and Grantor shall permit the Grantee and its designated representatives reasonably to investigate and verify the accuracy of information furnished to the Grantee hereunder or in connection herewith and to discuss all such matters with its officers, employees and representatives. Section 7.2. Access to Geological Data. Upon request Grantor shall, subject to the limitations of confidentiality undertakings with co- owners or other third parties, furnish to Grantee copies of all electric and other logs of all wells hereafter drilled on the Subject Interests, and Grantee shall also have access to all cores, cuttings, and other geological, well and production data secured from operations on the Subject Interests. Grantee shall also have the right to receive upon request yearly reports showing the status of development, production and other operations conducted by Grantor on the Subject Interests. 0246 Section 7.3. Annual Audits. Grantor shall furnish to Grantee, within 120 days after the end of each fiscal year, financial statements for the Net Profits Account (to the extent such account is then operative) as of the end of and for such year, accompanied by an audit report of such nationally recognized independent auditors selected by Grantor with respect to such financial statements. ARTICLE VIII Warranties and Indemnification Section 8.1. Warranty. Grantor hereby binds itself to warrant and forever defend all and singular title to the Net Profits Overriding Royalty Interest unto Grantee, its successors and assigns, against every Person lawfully claiming or to claim the same or any part thereof by through or under Grantor, but not otherwise. Section 8.2. Subrogation. This Conveyance is made with full substitution and subrogation of Grantee in and to all covenants, representations and warranties by others heretofore given or made with respect to the Subject Interests or any part thereof to the extent they pertain to or are affected by the Net Profits Overriding Royalty Interest. ARTICLE IX Miscellaneous Section 9.1. Term. This Conveyance shall remain in effect so long as any of the Subject Interests are in effect. 22 Section 9.2. GOVERNING LAW. THE VALIDITY, EFFECT AND CONSTRUCTION OF THIS CONVEYANCE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS EXCEPT TO THE EXTENT MANDATORILY GOVERNED BY THE LAW OF ANY JURISDICTION IN WHICH ANY SUBJECT INTEREST IS LOCATED. Section 9.3. Intentions of the Parties. Nothing herein contained shall be construed to constitute either party hereto (under state law or for tax purposes) the agent of, or in partnership with, the other party. If, however, the parties hereto are deemed to constitute a partnership for federal income tax purposes, the parties elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986, and agree not to take any position inconsistent with such election. In addition, the parties hereto intend that the Net Profits Overriding Royalty Interest conveyed hereby by Grantor to Grantee shall at all times be treated as (a) an incorporeal (i.e., a non possessory) interest in real property or land under the laws of each state in which any of the Subject Interests are located and (b) an "economic interest" in the Subject Hydrocarbons within the meaning of the Internal Revenue Code of 1986 and the regulations and judicial authority relating thereto and as a net profits overriding royalty interest (rather than as a working or any other interest), and all provisions of this Conveyance shall be construed and treated accordingly. Section 9.4. Notices. All notices and other communications required or permitted under this Conveyance shall be in writing and, unless otherwise specifically provided, shall be delivered personally, by electronic transmission, by registered or certified mail, postage prepaid, or by delivery service for which a receipt is obtained (except for yearly statements provided for under Section 2.6 above which may be sent by regular mail), at the respective addresses shown opposite the signatures of Grantor and Grantee to this instrument, and shall be deemed delivered on the date of receipt. Either party may specify his proper address or any other post office address within the continental limits of the United States by giving notice to the other party, in the manner provided in this Section, at least fifteen (15) days prior to the effective date of such change of address. Section 9.5. Further Assurances. Grantor agrees to execute and deliver to Grantee all such other and additional instruments, notices, division orders, transfer orders and other documents and to do all such other and further acts and things as may be necessary to more fully and effectively grant, convey and assign to Grantee the rights, titles, interest and estates conveyed to Grantee hereby or intended to be so conveyed. Section 9.6. Counterparts. This conveyance is being executed in multiple originals, all of which are identical, except that, to facilitate recordation, in certain counterparts hereof only that portion of Annex A which contains specific descriptions of Subject Interests located in the recording jurisdiction where that counterpart is to be recorded are included, and other portions of Annex A are included herein by reference only. All of such counterparts together shall constitute but one and the same instrument. 23 0247 Section 9.7. Binding Effect. All the covenants and agreements of Grantor herein contained shall be deemed to be covenants running with Grantor's interest in the Subject Interests and the lands affected thereby. All of the provisions hereof shall inure to the benefit of Grantee and its successors and assigns and shall be binding upon Grantor and its successors and assigns and all other owners of the Subject Interests or any part thereof or any interest therein. Section 9.8. Partition. Grantor and Grantee acknowledge that Grantee has no right or interest that would permit it to partition any portion of the Subject Interests, and Grantee waives any such right. Section 9.9. Amendments. This Conveyance may not be amended, altered, or modified except pursuant to a written instrument executed by Grantor and Grantee. Section 9.10. Effective Date. This Conveyance shall become effective for all purposes (herein called its "Effective Date as of 7:00 a.m. (at the respective locations of the Subject Interests) on January 1, 2013. (Remainder of Page Intentionally Left Blank) 24 0248 IN WITNESS WHEREOF, Grantor and Grantee have executed this Conveyance on the dates set forth in their respective acknowledgements below. Grantor Address: 1000 E. 14 Street, Suite 300 Plano, Texas 75074 Attention: Fred Diem Grantee Address: 1000 E. 14 Street, Suite 300 Plano, Texas 75074 Attention: Fred Diem GRANTOR: URBAN FUND II, LP, a Texas limited partnership By: Urban Fund II GP, LLC, a Texas limited liability company General Partner By. Fred N. em, Vice President GRANTEE: URBAN OIL AND GAS PARTNERS B, L.P. a Delaware limited partnership By: Urban Fund II, LP a Texas limited partnership General Partner By: Urban Fund II GP, LLC a Texas limited liability company General Partner By trz.--1< Bonnie C. Shea, President 25 0249 STATE OF TEXAS COUNTY OF COLLIN (9 On this 3) day of July, 2013 before me appeared Fred N. Diem, to me personally known, who, being by me duly sworn, did say that he is the Vice President of Urban Fund II, GP, LLC, General Partner of Urban Fund II, LP, General Partner of Urban oil and Gas Partners B, LP, and that the foregoing instrument was signed on behalf of that entity and acknowledged the instrument to be the free act and deed of that entity. STATE OF TEXAS ACKNOWLEDGMENTS BRENDA GIANNINA NOTARY PUBLIC State of Texas Comm. Exp. 10/13/2013 avav Y4 vvvvevwaevvvavvvvvvvevwevd COUNTY OF COLLIN -yr On this ;jl day of July, 2013 before me appeared Bonnie C. Shea, to me personally known, who, being by me duly sworn, did say that she is the President of Urban Fund II GP, LLC, General Partner of Urban Fund II, LP, General Partner of Urban Oil and Gas Partners B, LP, and that the foregoing instrument was signed on behalf of that entity and acknowledged the instrument to be the free act and deed of that entity. •\0"0e BRENDA GIANNINA NOTARY PUBLIC State of Texas O s Comm. Exp. 10/13/2013 •ewwvva vvw ey rnvevnnvvvevvvv 26 otary Public otary Public 0250 EXHIBIT A 1) BTO Acquisition: 88.70 %of the oil, gas and mineral properties (specifically excluding any personal property that was conveyed) conveyed pursuant to the following Assignments: a. Assignment of Oil and Gas Leases and Bill of Sale dated December 18, 2012, recorded at Volume 3808, Page 422 of the records of Wichita County, Texas. 2) Black Diamond Acquisition: 88.70% of the oil, gas and mineral properties (specifically excluding any personal property that was conveyed) conveyed pursuant to the following Assignments: Page 1 of 2 0251 a. Assignment, Bill of Sale and Conveyance dated June 4, 2013, from Black Diamond Minerals, LLC to Urban Fund II, LP and Urban Oil and Gas Partners B -1, LP, recorded at Book 1490 Page 752 of the records of Converse County, Wyoming; b. Assignment, Bill of Sale and Conveyance dated June 4, 2013, from Black Diamond Minerals, LLC to Urban Fund II, LP and Urban Oil and Gas Partners B -1, LP, recorded at Book 813 Page 755 of the records of Lincoln County, Wyoming, the description of such properties being attached hereto as Exhibit A -1; c. Assignment, Bill of Sale and Conveyance dated June 4, 2013, from Black Diamond Minerals, LLC to Urban Fund II, LP and Urban Oil and Gas Partners B -1, LP, recorded at Book 464 Page 334 of the records of Niobrara County, Wyoming; d. Assignment, Bill of Sale and Conveyance dated June 4, 2012, from Black Diamond Minerals, LLC to Urban Fund II, LP and Urban Oil and Gas Partners B -1, LP, recorded at Book 149 O &G Page 462 of the records of Sublette County, Wyoming; and e. Assignment, Bill of Sale and Conveyance dated June 4, 2012, from Black Diamond Minerals, LLC to Urban Fund II, LP and Urban Oil and Gas Partners B -1, LP, recorded at Book 1201, Page 289 of the records of Sweetwater County, Wyoming. 3) All of the interests conveyed above are reduced by those interests conveyed by the following Assignments from Urban Fund II, LP et al. to Signal Petroleum Company dated and recorded as follows: BTO Acquisition: a. Dated December 1, 2012, recorded at Volume 3822, Page 675 of the records of Wichita County, Texas. Black Diamond Minerals Acquisition: a. Dated July 24, 2013, recorded at Book 1493 Page 802 of the records of Converse County, Wyoming; b. Dated July 24, 2013, recorded at Book 818 Page 204 of the records of Lincoln County, Wyoming; c. Dated July 24, 2013, recorded at Book 465 Page 16 of the records of Niobrara County, Wyoming; d. Dated July 24, 2013, recorded at Book 150 O &G Page 4 of the records of Sublette County, Wyoming; and e. Dated July 24, 2013, recorded at Book 1201 Page 5262 of the records of Sweetwater County, Wyoming Page 2 of 2 0252 o o Exhibit A Page Solo Exhibit A-1 Book 143PR Page 638 Book 157PR Page 427 Entry 526618 Lease Description Section 18: Lots 1, 2, 3, E /2, E /2W/2 INSOFAR AND ONLY INSOFAR as the leased lands contribute to the drill site spacing unit and limited to the Christmann No. 1 wellbore and the production therefrom. Section 28: NW /4NE /4, NE /4NW /4, E /2E/2 INSOFAR AND ONLY INSOFAR as it covers the leased lands, limited to the Frontier and Dakota formations. Section 6: NE /4SW /4 Limited to the wellbore of the Whiskey Buttes 1 -6 well. Also limited in depth from the surface of the earth to a depth of 11,300 feet, which is the total depth drilled in the Whiskey Buttes 1 -6 well. ai eQ asual LL6IIZZ/L 6L6I /1 /S v V Cr, r. N awgN aassaa John J. Christmann Pacific Transmission Supply Company Lessor Name Frank William Sears et al. USA WYW -54470 USA WYW -0 309532A BDM Lease 100611AM Z0061'IFM o o Exhibit A Page Solo Exhibit A-1