Sanchez Midstream Partners LP (Form: 10-Q, Received: 08/14/2017 17:05:12)

Common Units

Assumed net loss to be allocated

Basic and diluted loss per unit

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

☐ 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 001-33147

Sanchez Midstream Partners LP

(Exact name of registrant as specified in its charter)


Delaware	11-3742489
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1000 Main Street, Suite 3000 Houston, Texas	77002
(Address of Principal Executive Offices)	(Zip Code)

(713) 783-8000

(Registrant’s Telephone Number, Including Area Code)

(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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer ☐	Non‑accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Common units outstanding as of August 10, 2017: Approximately 14,602,148 units.

[

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		Page
PART I—Financial Information		5
Item 1.	Financial Statements	5
	Condensed Consolidated Statements of Operations (Unaudited)	5
	Condensed Consolidated Balance Sheets (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows (Unaudited)	7
	Condensed Consolidated Statements of Changes in Partners’ Capital (Unaudited)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
PART II—Other Information		46
Item 1.	Legal Proceedings	46
Item1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47
Signatures		47

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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined by the Securities and Exchange Commission that are subject to a number of risks and uncertainties, many of which are beyond our control. These statements may include discussions about our business strategy; acquisition strategy; financing strategy; ability to make, maintain and grow distributions; the ability of our customers to meet their drilling and development plans on a timely basis or at all and perform under gathering and processing agreements; future operating results; future capital expenditures; and plans, objectives, expectations, forecasts, outlook and intentions. All of these types of statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, are forward-looking statements. These forward-looking statements may be found in Part I, Item 2. and other items within this Quarterly Report on Form 10-Q. In some cases, forward-looking statements can be identified by terminology such as “may,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.

The forward-looking statements contained in this Quarterly Report on Form 10-Q are largely based on our expectations, which reflect estimates and assumptions made by the management of our general partner. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate.

Important factors that could cause our actual results to differ materially from the expectations reflected in the forward‑looking statements include, among others:

our ability to successfully execute our business, acquisition and financing strategies;

our ability to utilize the services, personnel and other assets of the sole member of our general partner, SP Holdings, LLC (“Manager”), pursuant to existing services agreements;

our ability to make, maintain and grow distributions;

the timing and extent of changes in prices for, and demand for, crude oil and condensate, natural gas liquids (“NGLs”), natural gas and related commodities;

the accuracy of reserve estimates, which by their nature involve the exercise of professional judgment and may, therefore, be imprecise;

the ability of our customers to meet their drilling and development plans on a timely basis or at all and perform under gathering and processing agreements which may affect our throughput rates;

our ability to successfully execute our hedging strategy and the resulting realized prices therefrom;

the credit worthiness and performance of our counterparties, including financial institutions, operating partners and other parties;

competition in the oil and natural gas industry for employees and other personnel, equipment, materials and services and, related thereto, the availability and cost of employees and other personnel, equipment, materials and services;

our ability to access the credit and capital markets to obtain financing on terms we deem acceptable, if at all, and to otherwise satisfy our capital expenditure requirements;

the availability, proximity and capacity of, and costs associated with, gathering, processing, compression and transportation facilities;

our ability to compete with other companies in the oil and natural gas industry;

the impact of, and changes in, government policies, laws and regulations, including tax laws and regulations, environmental laws and regulations relating to air emissions, waste disposal, hydraulic fracturing and access to and use of water, laws and regulations imposing conditions and restrictions on drilling and completion operations and laws and regulations with respect to derivatives and hedging activities;

the extent to which our crude oil and natural gas properties operated by others are operated successfully and economically;

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the use of competing energy sources and the development of alternative energy sources;

unexpected results of litigation filed against us;

the extent to which we incur uninsured losses and liabilities or losses and liabilities in excess of our insurance coverage; and

the other factors described under “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part II, Item 1A. Risk Factors” and elsewhere in this Quarterly Report on Form 10‑Q and in our other public filings with the Securities and Exchange Commission.

Management cautions all readers that the forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. The forward-looking statements speak only as of the date made, and other than as required by law, we do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statement s

SANCHEZ MIDSTREAM PARTNERS LP and SUBSIDIARIES

Condensed Consolidated Statements of Operation s

(In thousands, except unit data)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Revenues
Natural gas sales	$	2,252	$	600	$	5,031	$	4,275
Oil sales		8,109		(2,756)		19,459		2,587
Natural gas liquids sales		492		244		959		520
Gathering and transportation sales		14,176		14,258		25,387		28,133
Total revenues		25,029		12,346		50,836		35,515
Expenses:
Operating expenses:
Lease operating expenses		3,881		4,178		8,864		9,151
Transportation operating expenses		3,032		3,014		6,328		6,068
Cost of sales		40		63		77		193
Production taxes		353		326		826		547
General and administrative		6,353		4,978		11,962		10,697
Unit-based compensation expense		780		1,091		1,320		1,529
Depreciation, depletion and amortization		8,937		6,129		21,118		13,317
Asset impairments		—		—		4,688		1,309
Accretion expense		240		315		498		630
Total operating expenses		23,616		20,094		55,681		43,441
Other (income) expense
Interest expense, net		1,896		1,103		3,779		2,002
Gain on embedded derivatives		—		(6,898)		—		(13,192)
Earnings from equity investments		(1,042)		—		(1,524)		(12)
Other income		—		(1)		—		(49)
Total other (income) expenses		854		(5,796)		2,255		(11,251)
Total expenses		24,470		14,298		57,936		32,190
Income (loss) before income taxes		559		(1,952)		(7,100)		3,325
Income tax expense		—		—		—		—
Net income (loss)		559		(1,952)		(7,100)		3,325
Less:
Preferred unit distributions paid in common units		—		—		(2,625)		—
Preferred unit distributions		(8,750)		(8,750)		(15,750)		(17,500)
Preferred unit amortization		(433)		(6,505)		(837)		(13,772)
Net loss attributable to common unitholders	$	(8,624)	$	(17,207)	$	(26,312)	$	(27,947)
Net loss per unit
Net loss per unit
Common units - Basic and Diluted	$	(0.62)	$	(4.37)	$	(1.92)	$	(8.38)
Weighted Average Units Outstanding
Common units - Basic and Diluted		13,939,993		3,935,297		13,671,557		3,333,482

See accompanying notes to condensed consolidated financial statements.

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SANCHEZ MIDSTREAM PARTNERS LP and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except unit data)


	June 30,		December 31,
ASSETS	2017		2016
		(Unaudited)
Current assets
Cash and cash equivalents	$	2,031	$	957
Restricted cash		250		—
Accounts receivable		1,581		1,212
Accounts receivable - related entities		4,812		5,987
Prepaid expenses		2,608		2,041
Fair value of derivative instruments		5,993		4,568
Total current assets		17,275		14,765
Oil and natural gas properties and related equipment
Oil and natural gas properties, equipment and facilities (successful efforts method)		757,705		758,913
Gathering and transportation assets		176,195		152,209
Material and supplies		1,056		1,056
Less: accumulated depreciation, depletion, amortization and impairment		(708,315)		(689,358)
Oil and natural gas properties and equipment, net		226,641		222,820
Other assets
Intangible assets, net		178,942		185,766
Fair value of derivative instruments		6,291		3,964
Equity investments		117,519		111,614
Other non-current assets		647		776
Total assets	$	547,315	$	539,705

LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Current liabilities
Accounts payable and accrued liabilities	$	1,244	$	951
Accounts payable and accrued liabilities - related entities		14,822		7,046
Royalties payable		535		706
Fair value of derivative instruments		21		740
Total current liabilities		16,622		9,443
Other liabilities
Asset retirement obligation		14,227		13,579
Long-term debt, net of debt issuance costs		176,554		151,322
Fair value of derivative instruments		—		1,356
Other liabilities		4,049		4,270
Total other liabilities		194,830		170,527
Total liabilities		211,452		179,970
Commitments and contingencies (See Note 11)
Mezzanine equity
Class B preferred units, 31,000,887 and 29,296,441 units issued and outstanding as of June 30, 2017 and December 31, 2016, respectively		342,953		342,991
Partners' capital (deficit)
Common units, 14,606,028 and 13,447,749 units issued and outstanding as of June 30, 2017 and December 31, 2016, respectively		(7,090)		16,744
Total partners' capital (deficit)		(7,090)		16,744
Total liabilities and partners' capital	$	547,315	$	539,705

See accompanying notes to condensed consolidated financial statements.

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SANCHEZ MIDSTREAM PARTNERS LP and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


	Six Months Ended
	June 30,
	2017		2016
Cash flows from operating activities:
Net income (loss)	$	(7,100)	$	3,325
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation, depletion and amortization		14,294		7,262
Amortization of debt issuance costs		259		246
Revisions to asset retirement obligation included in DD&A		—		(862)
Asset impairments		4,688		1,309
Accretion expense		498		630
Distributions from equity investments		3,684		—
Equity earnings in affiliate		(1,524)		(12)
Bad debt expense		—		35
Gain from disposition of property and equipment		—		(9)
Total mark-to-market on commodity derivative contracts		(9,268)		3,736
Cash settlements on commodity derivative contracts		3,378		13,028
Unit-based compensation expense		2,019		1,952
Gain on embedded derivative		—		(13,192)
Amortization of intangible assets		6,824		6,917
Costs for plug and abandon activities		(45)		(86)
Changes in Operating Assets and Liabilities:
Accounts receivable		(369)		313
Accounts receivable - related entities		(125)		(5,836)
Prepaid expenses		(567)		(1,414)
Other assets		(146)		659
Accounts payable and accrued liabilities		7,309		(3,128)
Accounts payable and accrued liabilities - related entities		(222)		2,634
Royalties payable		(171)		(190)
Net cash provided by operating activities		23,416		17,317
Cash flows from investing activities:
Development of oil and natural gas properties		(210)		(2,269)
Proceeds from sale of oil and natural gas properties		—		16
Final settlement of oil and natural gas properties acquisition		1,468		—
Development of gathering and transportation assets		(15,240)		—
Purchases of equity investments		(8,286)		—
Net cash used in investing activities		(22,268)		(2,253)
Cash flows from financing activities:
Payments for offering costs		(293)		(87)
Proceeds from issuance of debt		25,000		2,000
Repurchase of common units under repurchase program		—		(2,948)
Units tendered by employees for tax withholdings		—		(140)
Distributions to common unitholders		(12,044)		(3,025)
Proceeds from issuance of common units		1,290		—
Class B preferred unit cash distributions		(14,000)		(16,168)
Debt issuance costs		(27)		(64)
Net cash used in financing activities		(74)		(20,432)
Net increase (decrease) in cash and cash equivalents		1,074		(5,368)
Cash and cash equivalents, beginning of period		957		6,571
Cash and cash equivalents, end of period	$	2,031	$	1,203
Supplemental disclosures of cash flow information:
Change in accrued capital expenditures	$	8,601	$	1,609
Change in asset retirement obligations	$	195	$	—
Cash paid during the period for interest	$	3,458	$	1,732
Earnout liability	$	221	$	—

See accompanying notes to condensed consolidated financial statements.

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SANCHEZ MIDSTREAM PARTNERS LP and SUBSIDIARIES

Condensed Consolidated Statements of Changes in Partners’ Capital for the Six Months Ended June 30, 2017

(In thousands, except unit data)

(Unaudited)


	Class A Preferred Units			Common Units			Total
	Units	Amount		Units	Amount		Capital
Partners' Capital (Deficit), December 31, 2015	11,694,364	$	17,112	3,240,813	$	(45,285)	$	(28,173)
Units tendered by employees for tax withholding	—		—	(12,227)		(140)		(140)
Units forfeited by employees	—		—	(2,000)		—		—
Unit-based compensation programs	—		—	67,627		2,044		2,044
Issuance of common units, net of offering costs of $5.3 million	—		—	9,226,595		96,278		96,278
Class A Preferred Units converted to common units	(11,694,364)		(17,112)	1,169,441		17,112		—
Common units retired via unit repurchase program	—		—	(242,500)		(2,948)		(2,948)
Cash distributions to common unit holders	—		—	—		(6,696)		(6,696)
Distributions - Class B preferred units	—		—	—		(62,852)		(62,852)
Net income	—		—	—		19,231		19,231
Partners' Capital, December 31, 2016	—		—	13,447,749		16,744		16,744
Unit-based compensation programs	—		—	215,814		2,019		2,019
Issuance of common units, net of offering costs of $0.3 million	—		—	549,174		7,253		7,253
Cash distributions to common unit holders	—		—	—		(12,044)		(12,044)
Common units issued as Class B Preferred distributions	—		—	393,291		5,250		5,250
Distributions - Class B preferred units	—		—	—		(19,212)		(19,212)
Net loss	—		—	—		(7,100)		(7,100)
Partners' Capital (Deficit), June 30, 2017	—	$	—	14,606,028	$	(7,090)	$	(7,090)

See accompanying notes to condensed consolidated financial statements.

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SANCHEZ MIDSTREAM PARTNERS LP AND SUBSIDIARIES

NOTE S TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND BUSINESS

Organization

Sanchez Midstream Partners LP, a Delaware limited partnership (“SNMP,” “we,” “us,” “our” or the “Partnership”) (formerly Sanchez Production Partners LP), is a growth oriented publicly-traded limited partnership focused on the acquisition, development, ownership and operation of midstream and production assets in North America. SNMP completed its initial public offering on November 20, 2006, as Constellation Energy Partners LLC (“CEP” or the “Company”). We have entered into a shared services agreement (the “Services Agreement”) with SP Holdings, LLC (the “Manager”), the sole member of our general partner, pursuant to which the Manager provides services that the Partnership requires to operate its business, including overhead, technical, administrative, marketing, accounting, operational, information systems, financial, compliance, insurance, acquisition, disposition and financing services. On March 6, 2015, the Company’s unitholders approved the conversion of Sanchez Production Partners LLC to a Delaware limited partnership and the name was changed to Sanchez Production Partners LP. On June 2, 2017, Sanchez Production Partners LP changed its name to Sanchez Midstream Partners LP. Manager owns the general partner of SNMP and all of SNMP’s incentive distribution rights. Our common units are currently listed on the NYSE American under the symbol “SNMP,” and were traded under the symbol “SPP” prior to our recent name change.

Historically, our operations have consisted of the production of proved reserves located in the Cherokee Basin in Oklahoma and Kansas, the Woodford Shale in the Arkoma Basin in Oklahoma, the Central Kansas Uplift in Kansas, the Eagle Ford Shale in South Texas and in other areas of Texas and Louisiana. In October 2015, we consummated the acquisition of midstream assets in the Eagle Ford Shale from Sanchez Energy Corporation (“Sanchez Energy”) and entered into a 15-year gathering and processing agreement with Sanchez Energy. We also commenced a process to sell our oil and natural gas properties in the Mid-Continent region. In July 2016, we sold a portion of our production assets in the Mid-Continent region and acquired a 50% equity interest in Carnero Gathering, LLC (“Carnero Gathering”). In November 2016, we completed a public offering of approximately 6,745,107 common units (which includes exercise of the underwriters’ option to purchase 194,305 common units) for net proceeds of approximately $69.7 million, after deducting customary offering expenses. Concurrent with the public offering, we completed a private placement of 2,272,727 common units representing limited partner interests for net proceeds of approximately $25.0 million. The combined proceeds were used to close the acquisition of a 50% equity interest in Carnero Processing, LLC (“Carnero Processing”) and the acquisition of working interests in 23 producing Eagle Ford Shale wellbores located in Dimmit and Zavala counties in South Texas and escalating working interests in an additional 11 producing wellbores in the Palmetto Field in Gonzales, Texas. In July 2017, we sold our equity interests in the entities that owned our remaining operated Oklahoma production assets for cash consideration of $5.5 million, subject to customary post-closing adjustments, and assumption by the buyer of certain plugging and abandonment costs. On June 30, 2017, we signed a purchase and sale agreement to sell certain oil and natural gas properties in Texas.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited condensed consolidated financial statements include the accounts of SNMP and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We conduct our business activities as two operating segments: the production of oil and natural gas and the midstream business, which includes Western Catarina Midstream (defined below). Our management evaluates performance based on these two business segments.

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim condensed consolidated financial statements have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.

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These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of SNMP and its subsidiaries included in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on March 28, 2017.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not effective, will not have a material impact on our condensed consolidated financial statements upon adoption.

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, and the Partnership is currently in the process of evaluating the impact of adoption of this guidance on our consolidated financial statements.

In December 2016, the FASB issued ASU 2016-19 “Technical Corrections and Improvements,” which amends a number of Topics in the FASB ASC. The ASU is part of an ongoing FASB project to facilitate codification updates for non-substantive technical corrections, clarifications, and improvements that are not expected to have a significant effect on accounting practice or create a significant administrative cost to most entities. The ASU will apply to all reporting entities within the scope of the affected accounting guidance. Most amendments are effective upon issuance (December 2016).

In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, and the Partnership is currently in the process of evaluating the impact of adoption of this guidance on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16 “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which eliminates a current exception in U.S. GAAP to the recognition of the income tax effects of temporary differences that result from intra-entity transfers of non-inventory assets. The intra-entity exception is being eliminated under the ASU. The standard is required to be applied on a modified retrospective basis and will be effective beginning with the first quarter 2018. Early adoption is permitted, and the Partnership is currently in the process of evaluating the impact of adoption of this guidance on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments” effective for annual and interim periods beginning after December 15, 2017. This ASU is intended to clarify the presentation of cash receipts and payments in specific situations. Early adoption is permitted including adoption in an interim period. We chose to adopt ASU 2016-15 for the year ended December 31, 2016 on a retrospective basis .

In March 2016, the FASB issued ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting,” effective for annual and interim periods for public companies beginning after December 15, 2016, with a cumulative-effect and prospective approach to be used for implementation. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions including accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842),” effective for annual and interim periods for public companies beginning after December 15, 2018, with a modified retrospective approach to be used for implementation. ASU 2016-02 updates the previous lease guidance by requiring the recognition of a right-to-use asset and lease liability on the statement of financial position for those leases previously classified as operating leases under the old guidance. In addition, ASU 2016-02 updates the criteria for a lessee’s classification of a finance lease. The Partnership will not early adopt this standard, and will apply the revised lease rules for our interim and annual reporting periods starting January 1, 2019. The Partnership is currently evaluating the impact of these rules on its consolidated financial statements and has started the assessment process by evaluating the population of leases under the revised definition. The adoption of this standard will result in an increase in the assets and liabilities on the Partnership’s consolidated balance sheets. The quantitative impacts of the new standard are dependent on the leases in force at the time of adoption. As a result, the evaluation of the effect of the new standards will extend over future periods.

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In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” In March, April, and May of 2016, the FASB issued rules clarifying several aspects of the new revenue recognition standard. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2017. This guidance outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods and services. The new standard also requires more detailed disclosures related to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Partnership will not early adopt the standard although early adoption is permitted. The Partnership’s expectation is to apply the modified retrospective approach. As part of the assessment, the Partnership has formed an implementation work team, completed trainings on the new revenue recognition model and gathered a representative sample of material revenue contracts covering current revenue streams for which we are currently evaluating the impact under the new standard. The Company is currently collecting all remaining contracts and evaluating the impacts to its consolidated financial statements under the revised standards.

Use of Estimates

The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserves and related cash flow estimates used in the calculation of depletion and impairment of oil and natural gas properties, the fair value of commodity derivative contracts and asset retirement obligations, accrued oil and natural gas revenues and expenses and the allocation of general and administrative expenses. Actual results could differ materially from those estimates.

3. ACQUISITIONS AND DIVESTITURES

Our acquisitions are accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.” A business combination may result in the recognition of a gain or goodwill based on the measurement of the fair value of the assets acquired at the acquisition date as compared to the fair value of consideration transferred, adjusted for purchase price adjustments. The initial accounting for acquisitions may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates. The results of operations of the properties obtained through our acquisitions have been included in the condensed consolidated financial statements since the closing dates of the acquisitions.

Non-Operated Production Divestiture

On July 14, 2017, we entered into an agreement to assign certain non-operated production assets located in Oklahoma, as well as our equity interests in the entities that owned the assets, in exchange for agreeing upon the apportionment of certain shared litigation costs (the “Non-Operated Production Divestiture”). The assignment was effective as of July 14, 2017, and we anticipate recording a gain on the sale during the third quarter 2017.

Texas Production Divestiture

On June 30, 2017, we entered into a purchase and sale agreement to sell certain non-operated production assets located in Texas for cash consideration of approximately $6.3 million, subject to adjustment for title and environmental defects (the “Texas Production Divestiture”), and assumption by the buyer of all obligations relating to the assets, including all plugging and abandonment costs relating to the assets. The transaction is expected to close in the third quarter 2017, and we anticipate recording a gain on the sale at such time.

Oklahoma Production Divestiture

On May 10, 2017, we entered into a purchase and sale agreement to sell all of the Partnership’s equity interests in the entities that owned our remaining Oklahoma production assets for cash consideration of $5.5 million, subject to adjustment for title and environmental defects (the “Oklahoma Production Divestiture”), and assumption by the buyer of all obligations relating to the assets arising after the closing date and all plugging and abandonment costs relating to the assets arising prior to the closing date. The transaction closed July 17, 2017, and we anticipate recording a gain on the sale during the third quarter 2017.

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Carnero Processing Acquisition

On November 22, 2016, we completed the acquisition of 50% of the outstanding membership interests in Carnero Processing from SN Midstream, LLC, a wholly-owned subsidiary of Sanchez Energy (“SN Midstream”), for cash consideration of approximately $55.5 million and the assumption of approximately $24.5 million of remaining capital commitments to Carnero Processing (the “Carnero Processing Transaction”). The remaining 50% membership interests in Carnero Processing are owned by TPL SouthTex Processing Company LP, an affiliate of Targa Resources Group (“Targa”). Carnero Processing owns a cryogenic gas processing facility located in La Salle County, Texas that is operated by Targa (the “Raptor Gas Processing Facility”). See Note 10. “Investments” for additional information relating to the Carnero Processing Transaction.

The Partnership made capital contributions to Carnero Processing totaling $14.1 million between November 22, 2016 and June 30, 2017.

Production Acquisition

On November 22, 2016, we completed the acquisition from SN Cotulla Assets, LLC and SN Palmetto, LLC, each a wholly-owned subsidiary of Sanchez Energy, of working interests in 23 producing Eagle Ford Shale wellbores located in Dimmit and Zavala counties in South Texas together with escalating working interests in an additional 11 producing wellbores located in the Palmetto Field in Gonzales County, Texas for aggregate cash consideration of approximately $24.2 million after approximately $2.8 million in normal and customary closing adjustments (the “Production Acquisition”). The effective date of the transaction was July 1, 2016. The Production Acquisition included initial conveyed working interests and net revenue interests which, for certain properties, escalated on January 1, 2017 and will escalate again on January 1, 2018, at which point, SNMP’s interests in the Production Acquisition properties will stay constant for the remainder of the respective lives of the assets.

The total purchase price was allocated to the assets purchased and liabilities assumed based upon their fair values on the date of acquisition as follows (in thousands):


Proved developed reserves	$	25,016
Fair value of assets acquired		25,016
Asset retirement obligations		(832)
Fair value of net assets acquired	$	24,184

Carnero Gathering Transaction

On July 5, 2016, we completed the acquisition of 50% of the outstanding membership interests in Carnero Gathering from SN Midstream for cash consideration of approximately $37.0 million, and the assumption of approximately $7.4 million of remaining capital commitments to Carnero Gathering (the “Carnero Gathering Transaction”). In addition, the Partnership is required to pay SN Midstream a monthly earnout based on gas received from SN Catarina, LLC, a wholly-owned subsidiary of Sanchez Energy (“SN Catarina”), at Carnero Gathering’s receipt points, as well as gas delivered and processed at the Raptor Gas Processing Facility for other producers. The remaining 50% membership interests in Carnero Gathering are owned by Targa. Carnero Gathering owns a gas gathering pipeline in the Western Eagle Ford in South Texas that is operated by Targa and interconnects with the Raptor Gas Processing Facility. See Note 10. “Investments” for additional information relating to the Carnero Gathering Transaction.

The Partnership made capital contributions to Carnero Gathering totaling $8.1 million between July 5, 2016 and June 30, 2017.

Mid-Continent Divestiture

On June 15, 2016, certain wholly-owned subsidiaries of the Partnership entered into an agreement with Gateway Resources U.S.A., Inc. (“Gateway”) to sell substantially all of the Partnership’s operated production assets in Oklahoma and Kansas (other than those arising under or related to a concession agreement with the Osage Nation) (the “Mid-Continent Divestiture”) for cash consideration of $7,120, subject to adjustment for title and environmental defects, effective as of August 1, 2016. In addition, Gateway agreed to assume all obligations relating to the assets arising after the effective date and all plugging and abandonment costs relating to the assets arising prior to the effective date. The Partnership closed the sale of this transaction on July 15, 2016. The Partnership recorded a $0.2 million loss related to an intangible asset balance comprised of marketing contracts from the 2007 Newfield acquisition which were included in the Mid-Continent Divestiture .

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4. FAIR VALUE MEASUREMENTS

Measurements of fair value of derivative instruments are classified according to the fair value hierarchy, which prioritizes the inputs to the valuation techniques used to measure fair value. Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:

Level 1: Measured based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2: Measured based on quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that can be valued using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instrument, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.

Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity).

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement . Management's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

The following table summarizes the fair value of our assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2017 (in thousands):


	Fair Value Measurements at June 30, 2017
	Active Markets for		Observable
	Identical Assets		Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Fair Value
Derivative assets (net)	$	—	$	12,263	$	—	$	12,263
Total net assets	$	—	$	12,263	$	—	$	12,263

The following table summarizes the fair value of our assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2016 (in thousands):


	Fair Value Measurements at December 31, 2016
	Active Markets for		Observable
	Identical Assets		Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Fair Value
Derivative assets (net)	$	—	$	6,436	$	—	$	6,436
Total net assets	$	—	$	6,436	$	—	$	6,436

As of June 30, 2017, and December 31, 2016, the estimated fair value of cash and cash equivalents, accounts receivable, other current assets and current liabilities approximated their carrying value due to their short-term nature.

Fair Value on a Non-Recurring Basis

The Partnership follows the provisions of ASC Topic 820-10 for nonfinancial assets and liabilities measured at fair value on a non-recurring basis. The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs under the fair value hierarchy. We periodically review oil and natural gas properties for impairment when facts and circumstances indicate that their carrying values may not be recoverable.

A reconciliation of the beginning and ending balances of the Partnership’s asset retirement obligations is presented in Note 8, “Asset Retirement Obligation.”

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The following table summarizes the non-recurring fair value measurements of our assets as of June 30, 2017 (in thousands):


	Fair Value Measurements at June 30, 2017
	Active Markets for		Observable
	Identical Assets		Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)
Impairment (a)	$	—	$	—	$	7,277
Total net assets	$	—	$	—	$	7,277

(a)

During the six months ended June 30, 2017, we recorded a non-cash impairment charge of $4.7 million to impair our producing oil and natural gas properties acquired in the Production Acquisition. The carrying values of the impaired proved properties were reduced to a fair value of $7.3 million, estimated using inputs characteristic of a Level 3 fair value measurement.

The following table summarizes the non-recurring fair value measurements of our assets as of December 31, 2016 (in thousands):


	Fair Value Measurements at December 31, 2016
	Active Markets for		Observable
	Identical Assets		Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)
Impairment (a)	$	—	$	—	$	10,733
Acquisitions (b)		—		—		24,184
Total net assets	$	—	$	—	$	34,917

(a)

During the year ended December 31, 2016, we recorded a non-cash impairment charge of $7.6 million to impair our producing oil and natural gas properties in Texas and Louisiana (acquired prior to the Eagle Ford Acquisition) and in Oklahoma. The carrying values of the impaired proved properties were reduced to a fair value of $10.7 million, estimated using inputs characteristic of a Level 3 fair value measurement.

(b)

During the year ended December 31, 2016, we acquired oil and natural gas properties with a fair value of $24.2 million. See Note 3. “Acquisitions and Divestitures” for fair value allocation.

The fair values of oil and natural gas properties were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; (iv) estimated future cash flows; and (v) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Partnership’s management at the time of the valuation and are the most sensitive and subject to change.

Fair Value of Financial Instruments

Fair value guidance requires certain fair value disclosures, such as those on our debt and derivatives, to be presented in both interim and annual reports. The estimated fair value amounts of financial instruments have been determined using available market information and valuation methodologies described below.

Credit Agreement – We believe that the carrying value of long-term debt for our Credit Agreement (defined below) approximates its fair value because the interest rates on the debt approximate market interest rates for debt with similar terms. The debt is classified as a Level 2 input in the fair value hierarchy and represents the amount at which the instrument could be valued in an exchange during a current transaction between willing parties. Our Credit Agreement is discussed further in Note 6, “Long-Term Debt.”

Derivative Instruments – The income valuation approach, which involves discounting estimated cash flows, is primarily used to determine recurring fair value measurements of our derivative instruments classified as Level 2 inputs. Our commodity derivatives are valued using the terms of the individual derivative contracts with our counterparties, expected future levels of oil and natural gas prices and an appropriate discount rate. Our interest rate derivatives are valued using the terms of the individual derivative contracts with our counterparties, expected future levels of the LIBOR interest rates and an appropriate discount rate. We did not have any interest rate derivatives as of June 30, 2017. We prioritize the use of the highest level inputs available in determining fair value such that fair value measurements are determined using the highest and best use as determined by market participants and the assumptions that they would use in determining fair value.

Embedded Derivative – The Partnership entered into a contract for the sale of preferred units in October 2015 which contained provisions that were required to be bifurcated from the contract and valued as a derivative. The embedded derivative was valued through the use of a Monte Carlo model which utilized observable inputs, the Partnership’s unit prices at various timelines, as well as unobservable inputs related to the weighted probabilities of certain redemption scenarios. We therefore classified the fair value measurements of our embedded derivative as Level 3 inputs. In November 2016, we completed a public offering and private placement

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of common units. As a result of these equity issuances, the Class B conversion rate was fixed and the provisions that required the bifurcation were removed. At that time, the fair value of the derivative was transferred to mezzanine equity.

The following table sets forth a reconciliation of changes in the fair value of the Partnership's embedded derivative classified as Level 3 in the fair value hierarchy for the year ended Dec ember 31 , 2016 (in thousands):


	December 31,
	2016
Beginning balance	$	(193,077)
Gain on embedded derivative		47,794
Transfer to mezzanine equity		145,283
Ending balance	$	—

Loss included in earnings related to derivatives still held as of December 31, 2016	$	—

5. DERIVATIVE AND FINANCIAL INSTRUMENTS

To reduce the impact of fluctuations in oil and natural gas prices on our revenues, we periodically enter into derivative contracts with respect to a portion of our projected oil and natural gas production through various transactions that fix or modify the future prices to be realized. These hedging activities are intended to support oil and natural gas prices at targeted levels and to manage exposure to oil and natural gas price fluctuations. It is never our intention to enter into derivative contracts for speculative trading purposes.

Under ASC Topic 815, “Derivatives and Hedging,” all derivative instruments are recorded on the condensed consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. We will net derivative assets and liabilities for counterparties where we have a legal right of offset. Changes in the derivatives’ fair values are recognized currently in earnings unless specific hedge accounting criteria are met. We have not elected to designate any of our current derivative contracts as hedges; however, changes in the fair value of all of our derivative instruments are recognized in earnings and included in natural gas sales and oil sales in the condensed consolidated statements of operations.

As of June 30, 2017, we had the following derivative contracts in place for the periods indicated, all of which are accounted for as mark-to-market activities:

Fixed Price Basis Swaps–West Texas Intermediate (WTI)


	March 31,			June 30,			September 30,			December 31,			Total
	Volume	Average		Volume	Average		Volume	Average		Volume	Average		Volume	Average
	(Bbls)	Price		(Bbls)	Price		(Bbls)	Price		(Bbls)	Price		(Bbls)	Price
2017	—	$	—	—	$	—	87,304	$	61.42	81,702	$	61.55	169,006	$	61.48
2018	88,854	$	60.82	83,976	$	60.90	79,683	$	60.96	75,864	$	61.02	328,377	$	60.92
2019	78,667	$	61.48	75,326	$	61.53	72,279	$	61.57	69,480	$	61.61	295,752	$	61.54
2020	66,914	$	53.50	64,477	$	53.50	62,251	$	53.50	60,224	$	53.50	253,866	$	53.50
													1,047,001

Fixed Price Swaps—NYMEX (Henry Hub)


	March 31,			June 30,			September 30,			December 31,			Total
	Volume	Average		Volume	Average		Volume	Average		Volume	Average		Volume	Average
	(MMBtu)	Price		(MMBtu)	Price		(MMBtu)	Price		(MMBtu)	Price		(MMBtu)	Price
2017	—	$	—	—	$	—	271,368	$	5.45	257,234	$	5.45	528,602	$	5.45
2018	260,841	$	3.18	248,018	$	3.18	235,810	$	3.18	225,208	$	3.18	969,877	$	3.18
2019	224,303	$	3.10	214,186	$	3.10	205,533	$	3.10	197,455	$	3.10	841,477	$	3.10
2020	188,696	$	2.85	176,946	$	2.85	170,637	$	2.85	164,747	$	2.85	701,026	$	2.85
													3,040,982

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The following table sets forth a reconciliation of the changes in fair value of the Partnership’s commodity derivatives for the six months ended June 30, 2017 and the year ended December 31, 2016 (in thousands):


	June 30,		December 31,
	2017		2016
Beginning fair value of commodity derivatives	$	6,436	$	31,018
Net gains (losses) on crude oil derivatives		8,543		(8,355)
Net gains on natural gas derivatives		725		1,116
Net settlements on derivative contracts:
Crude oil		(2,144)		(13,622)
Natural gas		(1,297)		(6,919)
Net premiums on derivative contracts		—		3,198
Ending fair value of commodity derivatives	$	12,263	$	6,436

The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):



		Amount of Gain (Loss) in Income
		Three Months Ended June 30,				Six Months Ended June 30,
Derivative Type	Location of Gain (Loss) in Income	2017		2016		2017		2016
Commodity – Oil Hedges	Oil sales	$	3,048	$	(6,260)	$	8,543	$	(3,568)
Commodity – Gas Hedges	Natural gas sales		165		(1,466)		725		(168)
		$	3,213	$	(7,726)	$	9,268	$	(3,736)

Derivative instruments expose us to counterparty credit risk. Our commodity derivative instruments are currently contracted with four counterparties. We generally execute commodity derivative instruments under master agreements which allow us, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If we choose to elect early termination, all asset and liability positions with the defaulting counterparty would be net cash settled at the time of election. We include a measure of counterparty credit risk in our estimates of the fair values of derivative instruments. As of June 30, 2017, and December 31, 2016, the impact of non-performance credit risk on the valuation of our derivative instruments was not significant.

Embedded Derivative

The Partnership entered into a contract for the sale of preferred units in October 2015 which contained provisions that were required to be bifurcated from the contract and valued as a derivative. The embedded derivative was valued through the use of a Monte Carlo model which utilized observable inputs, the Partnership’s unit prices at various timelines, as well as unobservable inputs related to the weighted probabilities of certain redemption scenarios. In November 2016, we completed a public offering and private placement of common units. As a result of these equity issuances, the Class B conversion rate was determined and the provisions that were required to bifurcate were removed. At that time, the fair value of the derivative was transferred to mezzanine equity.

The following table sets forth a reconciliation of the changes in fair value of the Partnership’s embedded derivative for the year ended December 31, 2016 (in thousands):


	December 31,
	2016
Beginning fair value of embedded derivative	$	(193,077)
Gain on embedded derivative		47,794
Transfer to mezzanine equity		145,283
Ending fair value of embedded derivative	$	—

6. LONG-TERM DEBT

We have entered into a credit facility with Royal Bank of Canada, as administrative agent and collateral agent, and the lenders party thereto (the “Credit Agreement”). The Credit Agreement provides a maximum commitment of $500.0 million and has a maturity date of March 31, 2020. Borrowings under the Credit Agreement are secured by various mortgages of oil and natural gas properties that we own as well as various security and pledge agreements among the Partnership and certain of its subsidiaries and the administrative agent.

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The amount available for borrowing at any one time under the Credit Agreement is limited to the borrowing base for our midstream assets and our oil and natural gas properties. Borrowings under the Credit Agreement are available for direct investment in oil and natural gas properties, acquisitions, and working capital and general business purposes. The Credit Agreement has a sub-limit of $15.0 million which may be used for the issuance of letters of credit. The initial borrowing base under the Credit Agreement was $200.0 million. The borrowing base for the credit available for the upstream oil and natural gas properties is re-determined semi-annually in the second and fourth quarters of the year, and may be re-determined at our request more frequently and by the lenders, in their sole discretion, based on reserve reports as prepared by petroleum engineers, using, among other things, the oil and natural gas pricing prevailing at such time. The borrowing base for the credit available for our midstream properties is equal to the rolling four quarter EBITDA of our midstream operations multiplied by 4.5. Outstanding borrowings in excess of our borrowing base must be repaid or we must pledge other oil and natural gas properties as additional collateral. We may elect to pay any borrowing base deficiency in three equal monthly installments such that the deficiency is eliminated in a period of three months. Any increase in our borrowing base must be approved by all of the lenders. As of June 30, 2017, the borrowing base under the Credit Agreement was $215.6 million, with an elected commitment amount of $200.0 million.

At our election, interest for borrowings under the Credit Agreement are determined by reference to (i) the London interbank rate (“LIBOR”) plus an applicable margin between 2.25% and 3.25% per annum based on utilization or (ii) a domestic bank rate (“ABR”) plus an applicable margin between 1.25% and 2.25% per annum based on utilization plus (iii) a commitment fee of 0.500% per annum based on the unutilized borrowing base. Interest on the borrowings for ABR loans and the commitment fee are generally payable quarterly. Interest on the borrowings for LIBOR loans are generally payable at the applicable maturity date.

The Credit Agreement contains various covenants that limit, among other things, our ability to incur certain indebtedness, grant certain liens, merge or consolidate, sell all or substantially all of our assets, make certain loans, acquisitions, capital expenditures and investments, and pay distributions.

In addition, we are required to maintain the following financial covenants:

current assets to current liabilities of at least 1.0 to 1.0 at all times;

senior secured net debt to consolidated adjusted EBITDA for the last twelve months, as of the last day of any fiscal quarter, of not greater than 4.5 to 1.0 if the adjusted EBITDA of our midstream operations equals or exceeds one-third of total Adjusted EBITDA or 4.0 to 1.0 if the adjusted EBITDA of our midstream operations is less than one-third of total adjusted EBITDA; and

minimum interest coverage ratio of at least 2.5 to 1.0 if the adjusted EBITDA of our midstream operations is greater than one-third of our total adjusted EBITDA.

The Credit Agreement also includes customary events of default, including events of default relating to non-payment of principal, interest or fees, inaccuracy of representations and warranties when made or when deemed made, violation of covenants, cross-defaults, bankruptcy and insolvency events, certain unsatisfied judgments, loan documents not being valid and a change in control. A change in control is generally defined as the occurrence of one of the following events: (i) our existing general partner ceases to be our sole general partner or (ii) certain specified persons shall cease to own more than 50% of the equity interests of our general partner or shall cease to control our general partner. If an event of default occurs, the lenders will be able to accelerate the maturity of the Credit Agreement and exercise other rights and remedies.

The Credit Agreement limits our ability to pay distributions to unitholders. We have the ability to pay distributions to unitholders from available cash, including cash from borrowings under the Credit Agreement , as long as no event of default exists and provided that no distributions to unitholders may be made if the borrowings outstanding, net of available cash, under the Credit Agreement exceed 90% of the borrowing base, after giving effect to the proposed distribution. Our available cash is reduced by any cash reserves established by the board of directors of our general partner for the proper conduct of our business and the payment of fees and expenses.

At June 30, 2017 , we were in compliance with the financial covenants contained in the Credit Agreement . We monitor compliance on an ongoing basis. If we are unable to remain in compliance with the financial covenants contained in our Credit Agreement or maintain the required ratios discussed above, the lenders could call an event of default and accelerate the outstanding debt under the terms of the Credit Agreement , such that our outstanding debt could become then due and payable. We may request waivers of compliance for any violation of a financial covenant from the lenders, but there is no assurance that such waivers would be granted.

Debt Issuance Costs

As of June 30, 2017, and December 31, 2016 , our unamortized debt issuance costs were $1. 4 million and $1.7 million, respectively. These costs are amortized to interest expense in our consolidated statements of operations over the life of our Credit Agreement . Amortization of debt issuance costs recorded during the three months ended June 30, 2017 and 2016 were $0.1 million.

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Amortization of debt issuance costs recorded during the six months ended June 30, 2017 and 2016 were $0.3 million and $0.2 million, respectively.

7. OIL AND NATURAL GAS PROPERTIES AND RELATED EQUIPMENT

Gathering and transportation assets consist of the following (in thousands):


	June 30,		December 31,
	2017		2016
Gathering and transportation assets
Midstream assets	$	176,195	$	152,209
Less: Accumulated depreciation and amortization		(23,203)		(15,020)
Total gathering and transportation assets	$	152,992	$	137,189

Oil and natural gas properties consisted of the following (in thousands):



	June 30,		December 31,
	2017		2016
Oil and natural gas properties and related equipment
Property costs
Proved property	$	757,150	$	758,366
Unproved property		54		46
Land		501		501
Total property costs		757,705		758,913
Materials and supplies		1,056		1,056
Total		758,761		759,969
Less: Accumulated depreciation, depletion, amortization and impairments		(685,112)		(674,338)
Oil and natural gas properties and equipment, net	$	73,649	$	85,631

Oil and Natural Gas Properties We follow the successful efforts method of accounting for our oil and natural gas production activities. Under this method of accounting, costs relating to leasehold acquisition, property acquisition and the development of proved areas are capitalized when incurred. If proved reserves are found on an undeveloped property, leasehold cost is transferred to proved properties.

Depreciation, Depletion and Amortization . Depreciation and depletion of producing oil and natural gas properties is recorded at the field level, based on the units-of-production method. Unit rates are computed for unamortized drilling and development costs using proved developed reserves and for unamortized leasehold costs using all proved reserves. Acquisition costs of proved properties are amortized on the basis of all proved reserves, developed and undeveloped, and capitalized development costs (including wells and related equipment and facilities) are amortized on the basis of proved developed reserves.

All other properties, including the gathering and transportation assets, are stated at historical acquisition cost, net of any impairments, and are depreciated using the straight-line method over the useful lives of the assets, which range from 3 to 15 years for furniture and equipment, and up to 36 years for gathering facilities.

Depreciation, depletion, amortization and impairments consisted of the following (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Depreciation, depletion and amortization of oil and natural gas-related assets	$	2,877	$	942	$	6,111	$	2,962
Depreciation, depletion and amortization of gathering and transportation-related assets		2,648		1,728		8,183		3,438
Amortization of intangible assets		3,412		3,459		6,824		6,917
Total Depreciation, depletion and amortization		8,937		6,129		21,118		13,317
Asset impairments		—		—		4,688		1,309
Total	$	8,937	$	6,129	$	25,806	$	14,626

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Impairment of Oil and Natural Gas Properties and Other Non-Current Assets. Oil and natural gas properties are reviewed for impairment on a field-by-field basis when facts and circumstances indicate that their carrying value may not be recoverable. We assess impairment of capitalized costs of proved oil and natural gas properties by comparing net capitalized costs to estimated undiscounted future net cash flows using expected prices. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement of impairment is based on estimated fair value, which would consider estimated future discounted cash flows. The cash flow estimates are based upon reserve reports using future expected oil and natural gas prices adjusted for basis differentials. Other significant inputs, besides reserves, used to determine the fair values of proved properties include estimates of: (i) future operating and development costs; (ii) future commodity prices; and (iii) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Partnership’s management at the time of the valuation and are the most sensitive and subject to change. Cash flow estimates for impairment testing exclude derivative instruments.

For the three months ended June 30, 2017, we recorded no impairment charges. For the six months ended June 30, 2017, we recorded non-cash charges of $4.7 million, to impair certain producing oil and natural gas properties in Texas acquired as part of the Production Acquisition. For the three months ended June 30, 2016, we did not record impairment charges. For the six months ended June 30, 2016, we recorded non-cash charges of $1.3 million, to impair our producing oil and natural gas properties in Texas and Louisiana acquired prior to the Eagle Ford acquisition .

Asset Retirement Obligation. As described in Note 8, estimated asset retirement costs are recognized when the asset is acquired or placed in service, and are amortized over proved developed reserves using the units-of-production method. Asset retirement costs are estimated by our engineers using existing regulatory requirements and anticipated future inflation rates.

Exploration and Dry Hole Costs. Exploration and dry hole costs represent abandonments of drilling locations, dry hole costs, delay rentals, geological and geophysical costs and the impairment, amortization and abandonment associated with leases on our unproved properties. All such costs on oil and natural gas properties relating to unsuccessful exploratory wells are charged to expense as incurred. We recorded no exploration or dry hole costs for the six months ended June 30, 2017 or 2016.

8. ASSET RETIREMENT OBLIGATION

We recognize the fair value of a liability for an asset retirement obligation (“ARO”) in the period in which it is incurred if a reasonable estimate of fair value can be made. Each period, we accrete the ARO to its then present value. The associated asset retirement cost (“ARC”) is capitalized as part of the carrying amount of our oil and natural gas properties, equipment and facilities or gathering and transportation assets. Subsequently, the ARC is depreciated using the units-of-production method for production assets and the straight-line method for midstream assets. The AROs recorded by us relate to the plugging and abandonment of oil and natural gas wells, and decommissioning of oil and natural gas gathering and other facilities.

Inherent in the fair value calculation of ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions result in adjustments to the recorded fair value of the existing ARO, a corresponding adjustment is made to the ARC capitalized as part of the oil and natural gas property balance.

The following table is a reconciliation of the ARO (in thousands):



	June 30,		December 31,
	2017		2016
Asset retirement obligation, beginning balance	$	13,579	$	20,364
Liabilities added from acquisitions		195		912
Sold		—		(6,291)
Revisions to cost estimates		—		(2,399)
Settlements		(45)		(134)
Accretion expense		498		1,127
Asset retirement obligation, ending balance	$	14,227	$	13,579

Additional AROs increase the liability associated with new oil and natural gas wells and other facilities as these obligations are incurred. Abandonments of oil and natural gas wells and other facilities reduce the liability for AROs. During the six months ended June 30, 2017, and the year ended December 31, 2016, there were no significant expenditures for abandonments and as of June 30, 2017 and December 31, 2016, there were no assets legally restricted for purposes of settling existing AROs. During 2016, obligations were sold as part of the Mid-Continent Divestiture that significantly lowered the Partnership’s future abandonment obligations. Additional reductions in future abandonment obligations are expected in the third quarter 2017 as a result of the Non-Operated Production Divestiture, Oklahoma Production Divestiture and expected Texas Production Divestiture.

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9. INTANGIBLE ASSETS

Intangible assets are comprised of customer and marketing contracts. The intangible assets balance includes $178.9 million related to the gathering agreement with Sanchez Energy that was entered into as part of the acquisition of the Western Catarina gathering system (“Western Catarina Midstream”). Pursuant to the 15-year agreement, Sanchez Energy tenders all of its crude petroleum, natural gas and other hydrocarbon-based product volumes on 35,000 dedicated acres in the Western Catarina of the Eagle Ford Shale in Texas for processing and transportation through Western Catarina Midstream, with a right to tender additional volumes outside of the dedicated acreage. These intangible assets are being amortized using the straight-line method over the 15-year life of the agreement. During 2016, the intangible asset balance was reduced by $0.2 million due to marketing contracts from the 2007 Newfield acquisition which were included in the Mid-Continent Divestiture.

Amortization expense for the six months ended June 30, 2017 and 2016 was $6.8 million and $6.9 million, respectively. These costs are amortized to depreciation, depletion, and amortization expense in our consolidated statement of operations. Intangible assets as of June 30, 2017, and December 31, 2016 are detailed below (in thousands):


	June 30,		December 31,
	2017		2016
Beginning balance	$	185,766	$	199,741
Disposals		—		(219)
Amortization		(6,824)		(13,756)
Ending balance	$	178,942	$	185,766

10. INVESTMENTS

On July 5, 2016, the Partnership purchased a 50% membership interest in Carnero Gathering from SN Midstream for an initial payment of approximately $37.0 million and the assumption of remaining capital commitments to Carnero Gathering, estimated at approximately $7.4 million as of the date of the acquisition. The remaining 50% membership interests of Carnero Gathering are owned by an affiliate of Targa. During the six months ended June 30, 2017, the Partnership made approximately $4.8 million of capital contributions to the joint venture. Prior to the sale, SN Midstream had invested approximately $26.0 million in the Carnero Gathering joint venture. The fair value of the intangible asset for the contractual customer relationship related to Carnero Gathering was valued at approximately $13.0 million. This amount is being amortized over the contract term of fifteen years and decrease earnings from Carnero Gathering. As part of the Carnero Gathering Transaction, the Partnership is required to pay SN Midstream a monthly earnout based upon gas received at Carnero Gathering’s receipt points from SN Catarina and gas delivered by other producers and processing by Carnero Processing. This earnout is considered as contingent consideration and its estimated fair value of $4.0 million was recorded on the balance sheet as a deferred liability as of June 30, 2017. No earnout payments were made in the three or six months ended June 30, 2017.

As of June 30, 2017, the Partnership had paid approximately $45.6 million for the Carnero Gathering Transaction related to the initial purchase price, acquisition costs and contributed capital to date. The Partnership has accounted for this investment as an equity method investment. Targa is the operator of the joint venture and has significant influence with respect to the normal day-to-day construction and operating decisions. We have included the investment balance in the “Equity investments” caption in our Condensed Consolidated Balance Sheet. For the six months ended June 30, 2017, the Partnership recorded earnings of approximately $2.6 million in equity investments from Carnero Gathering, which was offset by approximately $0.4 million related to the amortization of the contractual customer intangible asset. For the three months ended June 30, 2017, the Partnership recorded earnings of approximately $1.4 million in equity investments from Carnero Gathering, which was offset by approximately $0.2 million related to the amortization of the contractual customer intangible asset. We have included these equity method earnings in the “Earnings from equity investments” line within the Condensed Consolidated Statements of Operations. Cash distributions of $3.7 million were received during the six months ended June 30, 2017.

On November 22, 2016, the Partnership purchased a 50% membership interest in Carnero Processing from SN Midstream for an initial payment of approximately $55.5 million and the assumption of remaining capital commitments to Carnero Processing, estimated at approximately $24.5 million as of the date of the acquisition. The remaining 50% membership interests of Carnero Processing are owned by an affiliate of Targa. During the six months ended June 30, 2017, the Partnership made $3.5 million of capital contributions to the joint venture. Prior to the sale, SN Midstream had invested approximately $48.0 million in the Carnero Processing joint venture.

As of June 30, 2017, the Partnership had paid approximately $70.0 million for the Carnero Processing transaction related to the initial payment, acquisition costs and contributed capital. The Partnership has accounted for this investment as an equity method investment. Targa is the operator of the joint venture and has significant influence with respect to the normal day-to-day construction

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and operating decisions. We have included the investment balance in the “Equity investments” caption in our consolidated balance sheet. The Partnership recorded expenses of approximately $0.6 million in the “Earnings from equity investments” line within our consolidated statements of operations for the six months ended June 30, 2017 and $0.2 million for the three months ended June 30, 2017.

Summarized financial information of unconsolidated entities is as follows (in thousands):


	Six Months Ended
	June 30,
	2017
Sales	$	15,222
Total expenses		10,960
Net income	$	4,262


	June 30,		December 31,
	2017		2016
Current assets	$	21,780	$	27,779
Noncurrent assets		183,371		152,112
Current liabilities		12,078		16,577

11. COMMITMENTS AND CONTINGENCIES

As part of the Carnero Gathering Transaction, the Partnership is required to pay SN Midstream a monthly earnout based upon gas received at Carnero Gathering’s receipt points from SN Catarina and gas delivered and processed at Carnero Processing by other producers which began at the end of the second quarter 2017. This earnout has an approximate value of $4.0 million and was recorded on the balance sheet as a deferred liability as of June 30, 2017. We did not have any other material commitments and contingencies and no payments were made as of June 30, 2017.

12. RELATED PARTY TRANSACTIONS

We are controlled by our general partner. The sole member of our general partner is Manager, which has no officers. In May 2014, we entered into the Services Agreement with Manager pursuant to which Manager provides services that we require to operate our business, including overhead, technical, administrative, marketing, accounting, operational, information systems, financial, compliance, insurance, professionals, acquisition, disposition and financing services. In connection with providing services under the Services Agreement, Manager receives compensation consisting of: (i) a quarterly fee equal to 0.375% of the value of our properties other than our assets located in the Mid-Continent region, (ii) reimbursement for all allocated overhead costs as well as any direct third-party costs incurred and (iii) for each asset acquisition, asset disposition and financing, a fee not to exceed 2% of the value of such transaction. Each of these fees, not including the reimbursement of costs, is paid in cash unless Manager elects for such fee to be paid in our equity. The Services Agreement has a ten-year term and will be automatically renewed for additional one-year terms unless either Manager or the Partnership provides notice of termination to the other with at least 180 days’ notice. During the six months ended June 30, 2017, we expensed approximately $4.4 million to Manager pursuant to the Services Agreement.

Manager utilizes Sanchez Oil & Gas Corporation (“SOG”), to provide the services under the Services Agreement. In May 2014, we entered into a Contract Operating Agreement with SOG pursuant to which SOG either provides services to operate, develop and produce our oil and natural gas properties or engages a third-party operator to do so, other than with respect to our properties in the Mid-Continent Region. We also have entered into the Geophysical Seismic Data Use License Agreement with SOG pursuant to which SOG provides us a non-exclusive, royalty-free license to use seismic, geophysical and geological information relating to our oil and natural gas properties that is proprietary to SOG and not restricted by agreements that SOG has with landowners or seismic data vendors.

SOG, headquartered in Houston, Texas, is a private full-service oil and natural gas company engaged in the exploration and development of oil and natural gas primarily in the South Texas and onshore Gulf Coast areas on behalf of its affiliates. The Chairman of the board of directors of our general partner, the President and Chief Operating Officer of our general partner, Eduardo A. Sanchez, one of our directors, along with their immediate family members Ana Lee Sanchez Jacobs and Antonio R. Sanchez, Jr., collectively, either directly or indirectly, own a majority of the equity interests of SOG. In addition, Antonio R. Sanchez, Jr. is a member of the board of directors of SOG, and such other individuals, as well as Ana Lee Sanchez Jacobs, are officers of SOG.

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In October 2015, the Partnership entered into a Firm Gathering and Processing Agreement with Sanchez Energy for an initial term of 15 years under which production from approximately 35,000 acres in Dimmit County and Webb County, Texas is dedicated for gathering by Catarina Midstream, LLC (the “Gathering Agreement”). In addition, for the first five years of the Gathering Agreement, SN Catarina will be required to meet a minimum quarterly volume delivery commitment of 10,200 barrels per day of crude oil and condensate and 142,000 Mcf per day of natural gas, subject to certain adjustments. On June 30, 2017, the Gathering Agreement was amended to add an incremental infrastructure fee to be paid by SN Catarina based on water that is delivered through the gathering system through March 31, 2018.

As of June 30, 2017, and December 31, 2016, the Partnership had a net receivable from related parties of $4.8 million and $6.0 million, respectively, which are included in “Accounts receivable – related entities” in the condensed consolidated balance sheets. As of June 30, 2017, and December 31, 2016, the Partnership also had a net payable to related parties of $14.8 million and $7.0 million, respectively. The net receivables/payable as of June 30, 2017, and December 31, 2016 consist primarily of revenues receivable from oil and natural gas production and transportation, offset by costs associated with that production and transportation, development of gathering and transportation assets and obligations for general and administrative costs.

In July 2016, we acquired 50% of the outstanding membership interests in Carnero Gathering from SN Midstream for cash consideration of approximately $37.0 million, and the assumption of approximately $7.4 million of remaining capital commitments to Carnero Gathering. In addition, the Partnership is required to pay SN Midstream a monthly earnout based on gas received from SN Catarina at Carnero Gathering’s receipt points, as well as gas delivered and processed at the Raptor Gas Processing Facility for other producers. The remaining 50% of the membership interests are owned by an affiliate of Targa. Carnero Gathering operates a gas gathering pipeline in the Western Eagle Ford in South Texas that interconnects with the Raptor Gas Processing Facility. The Partnership made capital contributions to Carnero Gathering totaling $8.1 million between July 5, 2016, and June 30, 2017. See further discussion of the transaction in Note 3, “Acquisitions and Divestitures .”

In October 2016, the Partnership entered into a Purchase and Sale Agreement (the “Lease Option Purchase Agreement”) with Sanchez Energy and SN Terminal, LLC (the “SNT”), pursuant to which SNT granted and conveyed to the Partnership an option to acquire a ground lease (the “Lease Option”) to which SNT is a party for a tract of land leased from the Calhoun Port Authority in Point Comfort, Texas. In addition, if Sanchez Energy or any of its affiliates have entered into an option to engage in the construction of or participation in a Project (as defined below) and/or receive the benefit of an acreage dedication from an affiliate of the Sanchez Energy relating to a Project, then such option and/or acreage dedication will also be assigned to us, if we exercise the Lease Option. The Partnership will pay SNT $1.00 if the Lease Option is exercised, along with $250,000 if the Partnership or any of its affiliates elects to construct, own or operate a marine crude storage terminal on or within five miles of the Point Comfort lease or participates as an investor in the same, within five miles thereof (a “Project”).

In November 2016, in conjunction with our public offering of common units, the Partnership entered into a Common Unit Purchase Agreement with SN UR Holdings, LLC (the “Purchaser”), a wholly-owned subsidiary of Sanchez Energy, whereby we issued to the Purchaser 2,272,727 common units for proceeds of approximately $25.0 million. See further discussion of the transaction in Note 3, “Acquisitions and Divestitures .”

In November 2016, we acquired 50% of the outstanding membership interests in Carnero Processing from SN Midstream for cash consideration approximately $55.5 million and the assumption of approximately $24.5 million of remaining capital commitments to Carnero Processing. The Partnership made capital contributions to Carnero Processing totaling $14.1 million between November 22, 2016 and June 30, 2017. Also in November 2016, the Partnership consummated a Purchase and Sale Agreement with SN Cotulla Assets, LLC and SN Palmetto, LLC, each a wholly-owned subsidiary of Sanchez Energy, to purchase working interest in 23 producing Eagle Ford Shale wellbores located in Dimmit and Zavala counties in South Texas as well as escalating working interests in an additional 11 producing wellbores in the Palmetto Field in Gonzales, Texas for approximately $24.2 million. See further discussion of the transactions in Note 3, “Acquisitions and Divestitures .”

Sanchez Energy is an independent exploration and production company focused on the acquisition and development of U.S. onshore unconventional oil and natural gas resources, with a current focus on the Eagle Ford Shale in South Texas where it has assembled approximately 356,000 net acres. The Chairman of the board of directors of our general partner, Antonio R. Sanchez, III, is Sanchez Energy’s Chief Executive Officer and a member of its board of directors. A member of the board of directors of our general partner, Eduardo A. Sanchez, is the President of Sanchez Energy. The President and Chief Operating Officer of our general partner, Patricio D. Sanchez, who is also a member of the board of directors of our general partner, is an Executive Vice President of Sanchez Energy. Antonio R. Sanchez, Jr., the father of Antonio R. Sanchez, III, Eduardo A. Sanchez, and Patricio D. Sanchez, is the Executive Chairman of the board of directors of Sanchez Energy. Antonio R. Sanchez, Jr., Antonio R. Sanchez, III, Patricio D. Sanchez and Eduardo A. Sanchez beneficially own approximately 7.4%, 3.1%, 0.8% and 1.6%, respectively, of Sanchez Energy’s shares outstanding as of June 30, 2017. Sanchez Energy indirectly, through one of its wholly owned subsidiaries, beneficially owns approximately 15.6% of the outstanding common units of SNMP.

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13. UNIT-BASED COMPENSATION

The Sanchez Midstream Partners LP Long-Term Incentive Plan (the “LTIP”) allows for restricted common unit grants. Restricted common unit activity under the LTIP during the period is presented in the following table:


		Weighted
		Average
	Number of	Grant Date
	Restricted	Fair Value
	Units	Per Unit
Outstanding at December 31, 2016	219,144	$	14.22
Granted	215,814		14.83
Vested	(44,583)		15.70
Outstanding at June 30, 2017	390,375	$	14.39

In March 2017, the Partnership issued 171,231 restricted common units pursuant to the LTIP to executives of the Partnership’s general partner that vest on the first anniversary of grant. In April 2017, the Partnership issued 44,583 restricted common units pursuant to the LTIP to certain directors of the Partnership’s general partner that vested immediately on the date of grant. The unit-based compensation expense for the award was based on the fair value on the day before the date of grant. During the year ended December 31, 2016, the Partnership issued 67,627 restricted common units pursuant to the LTIP to certain directors of the Partnership’s general partner that vested immediately on the date of the grant. The unit-based compensation expense for the award was based on the fair value on the day before the date of grant.

As of June 30, 2017, 1,591,019 common units remain available for future issuance to participants under the LTIP.

14. DISTRIBUTIONS TO UNITHOLDERS

The table below reflects the payment of cash distributions on common units related to the six months ended June 30, 2017, and the year ended December 31, 2016.


	Distribution		Date of	Date of	Date of
Three Months Ended	Per Unit		Declaration	Record	Distribution
June 30, 2016	$	0.4183	August 10, 2016	August 22, 2016	August 31, 2016
September 30, 2016	$	0.4246	October 31, 2016	November 10, 2016	November 30, 2016
December 31, 2016	$	0.4310	February 9, 2017	February 20, 2017	February 28, 2017
March 31, 2017	$	0.4375	May 10, 2017	May 22, 2017	May 31, 2017
June 30, 2017	$	0.4441	August 9, 2017	August 22, 2017	August 31, 2017

The table below reflects the payment of distributions on Class B preferred units related to the six months ended June 30, 2017, and the year ended December 31, 2016.


	Distribution		Date of	Date of	Date of
Three Months Ended	Per Unit		Declaration	Record	Distribution
June 30, 2016	$	0.4500	August 10, 2016	August 22, 2016	August 31, 2016
September 30, 2016	$	0.4500	October 31, 2016	November 10, 2016	November 30, 2016
December 31, 2016 (a)	$	0.2258	February 9, 2017	February 20, 2017	February 28, 2017
March 31, 2017 (b)	$	0.2258	May 10, 2017	May 22, 2017	May 31, 2017
June 30, 2017	$	0.28225	August 9, 2017	August 22, 2017	August 31, 2017

(a)

The Partnership elected to pay the fourth quarter 2016 distribution on the Class B preferred units in part cash and, with the consent of the Class B preferred unitholder, in part common units (in lieu of additional Class B preferred units). Accordingly, the Partnership declared a cash distribution of $0.2258 per Class B preferred unit and an aggregate distribution of 208,594 common units, each paid on February 28, 2017 to holders of record on February 20, 2017.

(b)

The Partnership elected to pay the first quarter 2017 distribution on the Class B preferred units in part cash and, with the consent of the Class B preferred unitholder, in part common units (in lieu of additional Class B preferred units). Accordingly, the Partnership declared a cash distribution of $0.2258 per Class B preferred unit and an aggregate distribution of 184,697 common units, each payable on May 31, 2017 to holders of record on May 22, 2017.

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15. PARTNERS’ CAPITAL

Outstanding Units

As of June 30, 2017, we had 31,000,887 Class B Preferred Units outstanding, and 14,606,028 common units outstanding.

Common Unit Issuances

In connection with providing services under the Services Agreement for the first quarter 2017, the Partnership issued 139,110 common units to SP Holdings, LLC on June 30, 2017. In connection with providing services under the Services Agreement for the third and fourth quarters of 2016, the Partnership issued 170,750 and 154,737 common units, respectively, to SP Holdings, LLC on March 6, 2017. See Note 12, “Related Party Transactions” for additional information related to the Services Agreement.

In April 2017, we issued 84,577 common units in registered offerings for gross proceeds of approximately $1.3 million pursuant to a shelf registration statement originally filed with the SEC on March 6, 2015 as updated by that certain prospectus supplement filed with the SEC on April 6, 2017 (the “Shelf Registration Statement”). The Shelf Registration Statement allows the Partnership to sell up to $50.0 million of common units at-the-market to fund general limited partnership purposes, including possible acquisitions. Proceeds from the at-the-market equity issuance were used for general limited partnership purposes.

The Partnership elected to pay the fourth quarter 2016 distribution on the Class B preferred units in part cash and, with the consent of the Class B preferred unitholder, in part common units (in lieu of additional Class B preferred units). Accordingly, the Partnership issued 208,594 common units on February 20, 2017 to the holder of Class B preferred units.

In November 2016, we completed a public offering and private placement of common units. The public offering consisted of 6,745,107 common units (which includes partial exercise of the underwriters’ overallotment of 194,305 common units) for net proceeds of approximately $69.7 million, after deducting customary offering expenses. The private placement consisted of 2,272,727 common units issued to Sanchez Energy for net proceeds of approximately $25.0 million.

In March 2016, the Partnership converted all remaining outstanding Class A Preferred Units into common units of the Partnership on a one for one basis, adjusted for the 1-for-10 unit split in August 2015.

Class B Preferred Unit Offering

On October 14, 2015, pursuant to that certain Class B Preferred Unit Purchase Agreement dated September 25, 2015 between the Partnership and Stonepeak Catarina Holdings LLC (“Stonepeak”), the Partnership sold and Stonepeak purchased 19,444,445 of the Partnership’s newly created Class B Preferred Units (the “Class B Preferred Units”) in a privately negotiated transaction for an aggregate cash purchase price of $18.00 per Class B Preferred Unit, which resulted in gross proceeds to the Partnership of approximately $350.0 million. The Partnership used the net proceeds to pay a portion of the consideration for the acquisition of Western Catarina Midstream, along with the payment to Stonepeak of a fee equal to 2.25% of the consideration paid for the Class B Preferred Units.

Under the terms of our partnership agreement, holders of the Class B Preferred Units received a quarterly distribution, at the election of the board of directors of our general partner, of 10.0% per annum if paid in full in cash or 12.0% per annum if paid in part cash (8.0% per annum) and in part paid-in-kind units (4.0% per annum). Distributions are to be paid on or about the last day of each of February, May, August and November after the end of each quarter.

In accordance with the partnership agreement, on December 6, 2016, we issued an additional 9,851,996 Class B preferred units to Stonepeak. On January 25, 2017, the Partnership and Stonepeak entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) to settle a dispute arising from the calculation of an adjustment to the number of Class B Preferred Units pursuant to Section 5.10(g) of the Second Amended and Restated Agreement of Limited Partnership of the Partnership (the “Amended Partnership Agreement”). Pursuant to the Settlement Agreement, and in accordance with Section 5.4 of the Amended Partnership Agreement, the Partnership issued 1,704,446 Class B Preferred Units to Stonepeak in a privately negotiated transaction as partial consideration for the Settlement Agreement, with the “Class B Preferred Unit Price” being established at $11.29 per Class B Preferred Unit. Pursuant to the terms of the Amended Partnership Agreement, the Class B Preferred Units are convertible at any time, at the option of Stonepeak, into common units of the Partnership, subject to the requirement to convert a minimum of $17.5 million of Class B

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Preferred Units. The issuance of the Class B Preferred Units pursuant to the Settlement Agreement was made in reliance upon an exemption from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof.

The Class B Preferred Units are accounted for as mezzanine equity in the consolidated balance sheet consisting of the following (in thousands):


	June 30,		December 31,
	2017		2016
Mezzanine equity beginning balance	$	342,991	$	172,111
Discount		—		(87)
Amortization of discount		837		23,477
Distributions		18,375		39,375
Distributions paid		(19,250)		(37,168)
Transfer embedded derivative to Class B		—		145,283
Total mezzanine equity	$	342,953	$	342,991

Earnings per Unit

Net income (loss) per common unit for the period is based on any distributions that are made to the unitholders (common units) plus an allocation of undistributed net income (loss) based on provisions of the partnership agreement, divided by the weighted average number of common units outstanding. The two-class method dictates that net income (loss) for a period be reduced by the amount of distributions and that any residual amount representing undistributed net income (loss) be allocated to common unitholders and other participating unitholders to the extent that each unit may share in net income (loss) as if all of the net income for the period had been distributed in accordance with the partnership agreement. Unit-based awards granted but unvested are eligible to receive distributions. The underlying unvested restricted unit awards are considered participating securities for purposes of determining net income (loss) per unit. Undistributed income (loss) is allocated to participating securities based on the proportional relationship of the weighted average number of common units and unit-based awards outstanding. Undistributed losses (including those resulting from distributions in excess of net income) are allocated to common units based on provisions of the partnership agreement. Undistributed losses are not allocated to unvested restricted unit awards as they do not participate in net losses. Distributions declared and paid in the period are treated as distributed earnings in the computation of earnings per common unit even though cash distributions are not necessarily derived from current or prior period earnings.

Our general partner does not have an economic interest in the Partnership and, therefore, does not participate in the Partnership’s net income. The following table presents the weighted average basic and diluted units outstanding for the periods indicated:


	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2017	2016	2017		2016
Common units - Basic and Diluted	13,939,993	3,935,297		13,671,557	3,333,482
Weighted Common units - Basic and Diluted	13,939,993	3,935,297		13,671,557	3,333,482

At June 30, 2017, we had 390,375 common units that were restricted unvested common units granted and outstanding. No losses were allocated to participating restricted unvested units because such securities do not have a contractual obligation to share in the Partnership’s losses.

The following table presents our basic and diluted loss per unit for the three months ended June 30, 2017 (in thousands, except for per unit amounts):


	Total		Common Units

Assumed net loss to be allocated	$	(8,624)	$	(8,624)

Basic and diluted loss per unit			$	(0.62)

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The following table presents our basic and diluted loss per unit for the three months ended June 30, 2016 (in thousands, except for per unit amounts):

The following table presents our basic and diluted loss per unit for the six months ended June 30, 2017 (in thousands, except for per unit amounts):

The following table presents our basic and diluted loss per unit for the six months ended June 30, 2016 (in thousands, except for per unit amounts):

16. REPORTING SEGMENTS

“Midstream” and “Production” best describe the operating segments of the businesses that we separately report. The factors used to identify these reporting segments are based on the nature of the operations that are undertaken by each segment. The Midstream segment operates the gathering, processing and transportation of crude oil, natural gas and NGLs. The Production segment operates to produce crude oil and natural gas. These segments are broadly understood across the petroleum and petrochemical industries.

These functions have been defined as the operating segments of the Partnership because they are the segments (1) that engage in business activities from which revenues are earned and expenses are incurred; (2) whose operating results are regularly reviewed by the Partnership’s chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance; and (3) for which discrete financial information is available. Operating segments are evaluated for their contribution to the Partnership’s consolidated results based on operating income, which is defined as segment operating revenues less expenses.

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The following tables set forth our segment information for the periods indicated (in thousands):


	Three Months Ended June 30, 2017
	Production		Midstream		Total
Operating revenues
Natural gas sales	$	2,252	$	—	$	2,252
Oil sales		8,109		—		8,109
Natural gas liquids sales		492		—		492
Gathering and transportation sales		—		14,176		14,176
Total operating revenues		10,853		14,176		25,029

Operating expenses:
Lease operating expenses		3,648		233		3,881
Transportation operating expenses		—		3,032		3,032
Cost of sales		40		—		40
Production taxes		353		—		353
General and administrative		4,892		1,461		6,353
Unit-based compensation expense		780		—		780
Depreciation, depletion and amortization		2,924		6,013		8,937
Accretion expense		172		68		240
Total operating expenses		12,809		10,807		23,616

Operating income (loss)	$	(1,956)	$	3,369	$	1,413


	Three Months Ended June 30, 2016
	Production		Midstream		Total
Operating revenues
Natural gas sales	$	600	$	—	$	600
Oil sales		(2,756)		—		(2,756)
Natural gas liquids sales		244		—		244
Gathering and transportation sales		—		14,258		14,258
Total operating revenues		(1,912)		14,258		12,346

Operating expenses:
Lease operating expenses		3,905		273		4,178
Transportation operating expenses		—		3,014		3,014
Cost of sales		63		—		63
Production taxes		326		—		326
General and administrative		3,550		1,428		4,978
Unit-based compensation expense		1,091		—		1,091
Depreciation, depletion and amortization		1,035		5,094		6,129
Accretion expense		253		62		315
Total operating expenses		10,223		9,871		20,094

Operating income (loss)	$	(12,135)	$	4,387	$	(7,748)

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	Six Months Ended June 30, 2017
	Production		Midstream		Total
Operating revenues
Natural gas sales	$	5,031	$	—	$	5,031
Oil sales		19,459		—		19,459
Natural gas liquids sales		959		—		959
Gathering and transportation sales		—		25,387		25,387
Total operating revenues		25,449		25,387		50,836

Operating expenses:
Lease operating expenses		8,372		492		8,864
Transportation operating expenses		—		6,328		6,328
Cost of sales		77		—		77
Production taxes		826		—		826
General and administrative		8,996		2,966		11,962
Unit compensation expense		1,320		—		1,320
Depreciation, depletion and amortization		6,205		14,913		21,118
Asset impairments		4,688		—		4,688
Accretion expense		364		134		498
Total operating expenses		30,848		24,833		55,681

Operating income (loss)	$	(5,399)	$	554	$	(4,845)


	Six Months Ended June 30, 2016
	Production		Midstream		Total
Operating revenues
Natural gas sales	$	4,275	$	—	$	4,275
Oil sales		2,587		—		2,587
Natural gas liquids sales		520		—		520
Gathering and transportation sales		—		28,133		28,133
Total operating revenues		7,382		28,133		35,515

Operating expenses:
Lease operating expenses		8,780		371		9,151
Transportation operating expenses		—		6,068		6,068
Cost of sales		193		—		193
Production taxes		547		—		547
General and administrative		7,984		2,713		10,697
Unit-based compensation expense		1,529		—		1,529
Depreciation, depletion and amortization		3,149		10,168		13,317
Asset impairments		1,309		—		1,309
Accretion expense		507		123		630
Total operating expenses		23,998		19,443		43,441

Operating income (loss)	$	(16,616)	$	8,690	$	(7,926)

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The following table summarizes the total assets by operating segment as of June 30, 2017 and December 31, 2016 (in thousands):


	June 30,		December 31,
	2017		2016
Segment Assets
Production	$	205,482	$	207,219
Midstream		341,833		332,486
Total assets	$	547,315	$	539,705

17. VARIABLE INTEREST ENTITIES

As noted above in Note 10, “Investments,” the Partnership acquired a 50% membership interest in Carnero Gathering from SN Midstream for an initial payment of approximately $37.0 million and the assumption of remaining capital commitments to Carnero Gathering, estimated at approximately $7.4 million as of the date of the acquisition. The Partnership determined that the Carnero Gathering joint venture is more similar to a limited partnership than a corporation. Under the revised guidance of ASU 2015-02, a limited partnership or similar entity with equity at risk will not be a variable interest entity (“VIE”) if a partner is able to exercise kick-out rights over the general partner(s) or is able to exercise substantive participating rights. We concluded that the Carnero Gathering joint venture is a VIE under the revised guidance because we cannot remove Targa as operator and we do not have substantive participating rights. In addition, Targa has the discretion to direct activities of the VIE regarding the risks associated with price, operations, and capital investment which have the most significant impact on the VIE’s economic performance.

The Partnership’s investment in Carnero Gathering represents a VIE that could expose the Partnership to losses. The amount of losses the Partnership could be exposed to from the Carnero Gathering joint venture is limited to the capital investment of approximately $47.6 million.

As of June 30, 2017, the Partnership had invested approximately $45.6 million in Carnero Gathering. As of June 30, 2017, no debt has been incurred by Carnero Gathering. We have included this VIE in the “Equity investments” long-term asset line on the balance sheet.

As noted above in Note 10, “Investments,” the Partnership acquired a 50% membership interest in Carnero Processing from SN Midstream for an initial payment of approximately $55.5 million and the assumption of remaining capital commitments to Carnero Processing, estimated at approximately $24.5 million as of the date of the acquisition. The Partnership determined that the Carnero Processing joint venture is more similar to a limited partnership than a corporation. Under the revised guidance of ASU 2015-02, a limited partnership or similar entity with equity at risk will not be a VIE if a limited partner is able to exercise kick-out rights over the general partner(s) or is able to exercise substantive participating rights. We concluded that the Carnero Processing joint venture is a VIE under the revised guidance because we cannot remove Targa as operator and we do not have substantive participating rights. In addition, Targa has the discretion to direct activities of the VIE regarding the risks associated with price, operations, and capital investment which have the most significant impact on the VIE’s economic performance.

Similar to the Partnership’s investment in Carnero Gathering, the Partnership’s investment in Carnero Processing represents a VIE that could expose the Partnership to losses. The amount of losses the Partnership could be exposed to from the Carnero Processing joint venture is limited to the capital investment of approximately $79.3 million.

As of June 30, 2017, the Partnership had invested approximately $70.0 million in Carnero Processing. As of June 30, 2017, no debt has been incurred by Carnero Processing. We have included this VIE in the “Equity investments” long-term asset line on the balance sheet.

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Below is a tabular comparison of the carrying amounts of the assets and liabilities of the VIE and the Partnership’s maximum exposure to loss as of June 30, 2017 and December 31, 2016 (in thousands):


	June 30,		December 31,
	2017		2016
Capital investments	$	115,606	$	107,320
Earnings in equity investments		3,934		2,301
Distributions received		(6,600)		(2,950)
Estimated earnout accrued		4,049		4,270
Equity in equity investments	$	116,989	$	110,941

	June 30,		December 31,
	2017		2016
Equity in equity investments	$	116,989	$	110,941
Guarantees of capital investments		9,986		17,584
Maximum exposure to loss	$	126,975	$	128,525

18. SUBSEQUENT EVENTS

On August 9, 2017, the board of directors of our general partner declared a second quarter 2017 cash distribution on the Partnership’s common units of $0.4441 per unit ($1.7764 per unit annualized) payable on August 31, 2017 to holders of record on August 22, 2017. The Partnership also declared a second quarter distribution on the Class B preferred units and elected to pay the distribution in cash. Accordingly, the Partnership declared a cash distribution of $0.28225 per Class B preferred unit payable on August 31, 2017 to holders of record on August 22, 2017.

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

The following discussion and analysis should be read in conjunction with the financial statements and the summary of significant accounting policies and notes included herein and in our most recent Annual Report on Form 10-K. The following discussion contains “Forward-Looking Statements” that reflect our future plans, estimates, forecasts, guidance, beliefs and expected performance. Please read “Cautionary Note Regarding Forward-Looking Statements.”

Overview

Historically, our operations have consisted of the production of proved reserves located in the Cherokee Basin in Oklahoma and Kansas, the Woodford Shale in the Arkoma Basin in Oklahoma, the Central Kansas Uplift in Kansas, the Eagle Ford Shale in South Texas and in other areas of Texas and Louisiana. In October 2015, we consummated the acquisition of midstream assets in the Eagle Ford Shale from Sanchez Energy Corporation (“Sanchez Energy”) and entered into a 15-year gathering and processing agreement with Sanchez Energy. We also commenced a process to sell our production assets in the Mid-Continent region. In July 2016, we sold a portion of our production assets in the Mid-Continent region and acquired a 50% equity interest in Carnero Gathering. In November 2016, we completed a public offering of approximately 6,745,107 common units (which includes exercise of the underwriters’ option to purchase 194,305 common units) for net proceeds of approximately $69.7 million, after deducting customary offering expenses. Concurrent with the public offering, we completed a private placement of 2,272,727 common units representing limited partner interests for net proceeds of approximately $25.0 million. The combined proceeds were used to close the acquisition of a 50% equity interest in Carnero Processing, and the acquisition of working interest in 23 producing Eagle Ford Shale wellbores located in Dimmit and Zavala counties in South Texas and escalating working interests in an additional 11 producing wellbores in the Palmetto Field in Gonzales, Texas. In July 2017, we sold our equity interests in the entities that owned our remaining operated Oklahoma production assets for cash consideration of $5.5 million, subject to customary post-closing adjustments, and assumption by the buyer of certain plugging and abandonment costs. On June 30, 2017, we signed a purchase and sale agreement to sell certain oil and natural gas properties in Texas.

How We Evaluate our Operations

We evaluate our business on the basis of the following key measures:

our throughput volumes on the gathering system;

our operating expenses; and

our Adjusted EBITDA, a non-GAAP financial measure (for a reconciliation of Adjusted EBITDA to the most comparable GAAP financial measure please read “—Non-GAAP Financial Measures–Adjusted EBITDA”).

Throughput Volumes

Upon the acquisition of Western Catarina Midstream, our management began to analyze our performance based on the aggregate amount of throughput volumes on the gathering system. We must connect additional wells or well pads within the dedicated areas in order to maintain or increase throughput volumes on the Western Catarina Midstream. Our success in connecting additional wells is impacted by successful drilling activity by Sanchez Energy on the acreage dedicated to the Western Catarina Midstream, our ability to secure volumes from Sanchez Energy from new wells drilled on non-dedicated acreage, our ability to attract hydrocarbon volumes currently gathered by our competitors and our ability to cost-effectively construct or acquire new infrastructure.

Operating Expenses

Our management seeks to maximize Adjusted EBITDA, a non-GAAP financial measure, in part by minimizing operating expenses. These expenses are or will be comprised primarily of field operating costs (which generally consists of lease operating

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expenses, labor, vehicles, supervision, transportation, minor maintenance, tools and supplies expenses, among other items), compression expense, ad valorem taxes and other operating costs, some of which will be independent of our oil and natural gas production or the throughput volumes on the gathering system but fluctuate depending on the scale of our operations during a specific period.

Non-GAAP Financial Measures—Adjusted EBITDA

To supplement our financial results and guidance presented in accordance with U.S. generally accepted accounting principles (“GAAP”), we use Adjusted EBITDA, a non-GAAP financial measure, in this quarterly report. We believe that non-GAAP financial measures are helpful in understanding our past financial performance and potential future results, particularly in light of the effect of various transactions effected by us. We define Adjusted EBITDA as net income (loss) adjusted by: (i) interest (income) expense, net, which includes interest expense, interest expense net (gain) loss on interest rate derivative contracts, and interest (income); (ii) income tax expense (benefit); (iii) depreciation, depletion and amortization; (iv) asset impairments; (v) accretion expense; (vi) (gain) loss on sale of assets; (vii) unit-based compensation programs; (viii) unit-based asset management fees; (ix) distributions in excess of equity earnings; (x) (gain) loss on mark-to-market activities; (xi) commodity derivatives settlements applied to future positions; (xii) (gain) loss on embedded derivatives; and (xiii) acquisition and divestiture costs.

Adjusted EBITDA is a significant performance metric used by our management to indicate (prior to the establishment of any cash reserves by the board of directors of our general partner) the distributions that we would expect to pay to our unitholders. Specifically, this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support a quarterly distribution or any increase in our quarterly distribution rates. Adjusted EBITDA is also used as a quantitative standard by our management and by external users of our financial statements such as investors, research analysts, our lenders and others to assess: (i) the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; (ii) the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness; and (iii) our operating performance and return on capital as compared to those of other companies in our industry, without regard to financing or capital structure.

We believe that the presentation of Adjusted EBITDA provides useful information to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to Adjusted EBITDA is net income. Our non-GAAP financial measure of Adjusted EBITDA should not be considered as an alternative to GAAP net income. Adjusted EBITDA has important limitations as an analytical tool because it excludes some but not all items that affect net income. Adjusted EBITDA should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

The following table sets forth a reconciliation of Adjusted EBITDA to net income (loss), its most directly comparable GAAP performance measure, for each of the periods presented (in thousands):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Net income (loss)	$	559	$	(1,952)	$	(7,100)	$	3,325
Adjusted by:
Interest expense, net		1,896		1,103		3,779		2,002
Depreciation, depletion and amortization		8,937		6,129		21,118		13,317
Asset impairments		—		—		4,688		1,309
Accretion expense		240		315		498		630
Unit-based compensation expense		1,479		1,091		2,019		1,529
Unit-based asset management fees		2,345		1,627		4,375		2,912
Distributions in excess of equity earnings		803		—		1,771		—
(Gain) loss on mark-to-market activities		(1,347)		13,210		(5,827)		16,314
Gain on embedded derivatives		—		(6,898)		—		(13,192)
Acquisition and divestiture costs		424		—		553		—
Adjusted EBITDA	$	15,336	$	14,625	$	25,874	$	28,146

Significant Operational Factors

Throughput. During the three months ended June 30, 2017, Sanchez Energy transported average daily production through the gathering system of approximately 11.5 MBbls/d of crude oil, 169.6 MMcf/d of natural gas and 16.9 MBbls/d of water. During the three months ended June 30, 2016, Sanchez Energy transported average daily production through the gathering system of approximately 14.1 MBbls/d of crude oil, 193.3 MMcf/d of natural gas and an insignificant amount of

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water. During the six months ended June 30, 2017, Sanchez Energy transported average daily production through the gathering system of approximately 11.4 MBbls/d of crude oil, 160.7 MMcf/d of natural gas and 8.5 MBbls/d of water. During the six months ended June 30, 2016, Sanchez Energy transported average daily production through the gathering system of approximately 14.0 MBbls/d of crude oil, 190.4 MMcf/d of natural gas and an insignificant amount of water.

Production. Our production for the three months ended June 30, 2017, was 290 MBOE, or an average of 3,187 BOE per day, compared with approximately 304 MBOE, or an average of 3,335 BOE per day, for the three months ended June 30, 2016. Our production for the six months ended June 30, 2017, was 600 MBOE, or an average of 3,315 BOE per day, compared with approximately 607 MBOE, or an average of 3,334 BOE per day, for the six months ended June 30, 2016.

Capital Expenditures. For the three months ended June 30, 2017, we spent approximately $10.9 million in capital expenditures, consisting of $9.8 million related to the development of a pipeline off the tail of the Raptor Processing Facility and $1.1 million related to the development of Western Catarina Midstream. For the three months ended June 30, 2016, we spent approximately $1.2 million in capital expenditures, related to the development of Western Catarina Midstream. For the six months ended June 30, 2017, we spent approximately $24.0 million in capital expenditures, consisting of $21.7 million related to the development of the Raptor Gas Processing Facility and $2.3 million related to the development of Western Catarina Midstream. For the six months ended June 30, 2016, we spent approximately $2.3 million in capital expenditures, consisting of $1.8 million related to the development of Western Catarina Midstream, and $0.5 million related to the development of oil and natural gas properties in the Palmetto Field in Gonzales County. These expenditures were funded with cash on hand and borrowings under our Credit Agreement.

Hedging Activities . For the three months ended June 30, 2017, the non-cash mark-to-market gain for our commodity derivatives was approximately $1.3 million, compared to a loss of $13.2 million for the same period in 2016. For the six months ended June 30, 2017, the non-cash mark-to-market gain for our commodity derivatives was approximately $5.8 million, compared to a loss of $16.3 million for the same period in 2016.

Recent Developments

On July 17, 2017, we closed the Oklahoma Production Divestiture pursuant to which we sold all of the Partnership’s equity interests in the entities that owned our remaining operated Oklahoma production assets for cash consideration of $5.5 million. In addition, the buyer assumed all obligations relating to the assets arising after the effective date and all plugging and abandonment costs relating to the assets arising prior to the effective date. For the three months ended June 30, 2017, the net loss associated with the equity interests was approximately $0.7 million. After adding back approximately $0.7 million of depreciation, depletion and amortization plus approximately $0.1 million of accretion and $0.3 million of employee severance from the same quarter, the Adjusted EBITDA associated with these equity interests was approximately $0.4 million. For the six months ended June 30, 2017, the net loss associated with the equity interests was approximately $2.4 million. After adding back approximately $1.7 million of depreciation, depletion and amortization plus approximately $0.1 million of accretion and $0.3 million of employee severance from the same period, the Adjusted EBITDA associated with these equity interests was approximately $(0.3) million.

Results of Operations by Segment

Three months ended June 30, 2017 compared to three months ended June 30, 2016

Midstream Operating Results

The following table sets forth the selected financial and operating data pertaining to the Midstream segment for the periods indicated (in thousands):

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	For the Three Months Ended
	June 30,
	2017		2016			Variance
Revenues:
Gathering and transportation sales	$	14,176	$	14,258	$	(82)	(1)	%
Total gathering and transportation sales		14,176		14,258		(82)	(1)	%
Operating expenses:
Lease operating expenses		233		273		(40)	(15)	%
Transportation operating expenses		3,032		3,014		18	1	%
General and administrative		1,461		1,428		33	2	%
Depreciation and amortization expense		6,013		5,094		919	18	%
Accretion expense		68		62		6	10	%
Total operating expenses		10,807		9,871		936	9	%
Operating income	$	3,369	$	4,387	$	(1,018)	(23)	%

Gathering and transportation sales. We consummated the acquisition of Western Catarina Midstream from Sanchez Energy and entered into the related gathering and processing agreement with Sanchez Energy in October 2015. During the three months ended June 30, 2017, Sanchez Energy transported average daily production through the gathering system of approximately 11.5 MBbls/d of crude oil, 169.6 MMcf/d of natural gas and 16.9 MBbls/d of water. During the three months ended June 30, 2016, Sanchez Energy transported average daily production through the gathering system of approximately 14.1 MBbls/d of crude oil, 193.3 MMcf/d of natural gas and an insignificant amount of water. The decrease in throughput was driven by a decrease in Sanchez Energy’s Catarina production of 562 MBoe over the three months ended June 30, 2017 compared to the same period in 2016.

Lease operating expense. Lease operating expenses, which includes ad valorem taxes, decreased $0.1 million, to $0.2 million for the three months ended June 30, 2017 , compared to $0.3 million during the same period in 2016 which was entirely driven by an increase in the net taxable value of the midstream assets.

Transportation operating expenses. Our operating expenses generally consist of equipment rentals, chemicals, treating, metering fees, permit and regulatory fees, labor, minor maintenance, tools, supplies, and integrity management expenses. Our transportation operating expense remained flat for the three months ended June 30, 2017 and 2016 at $3.0 million.

G eneral and administrative expenses . General and administrative expenses include the costs of our employees, related benefits, field office expenses, professional fees, direct and indirect costs billed by the Manager in connection with the Services Agreement and other costs not directly associated with field operations. Our general and administrative expenses totaled $1.5 million and $1.4 million for the three months ended June 30 , 2017 and 2016, respectively. The increase resulted from a higher asset management fee due to a higher valuation for the gathering and transportation assets over the comparative periods.

Depreciation and amortization expense. Gathering and transportation assets are stated at historical acquisition cost, net of any impairments, and are depreciated using the straight-line method over the useful lives of the assets, which range from 5 to 15 years for equipment, and up to 36 years for gathering facilities. Our depreciation and amortization expense for the three months ended June 30, 2017 and 2016 was $6.0 million and $5.1 million, respectively. The increase was a result of revised useful lives used to depreciate the Western Catarina Midstream engines.

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Production Operating Results

The following tables sets forth the selected financial and operating data for the periods indicated (dollars and net production in thousands, except for average sales and costs):


	For the Three Months Ended
	June 30,
	2017		2016		Variance
Revenues:
Natural gas sales at market price	$	2,130	$	2,398	$	(268)	(11)	%
Natural gas hedge settlements		651		2,287		(1,636)	(72)	%
Natural gas mark-to-market activities		(486)		(3,753)		3,267	87	%
Natural gas total		2,295		932		1,363	146	%
Oil sales at market price		5,061		3,505		1,556	44	%
Oil hedge settlements		1,215		3,196		(1,981)	(62)	%
Oil mark-to-market activities		1,833		(9,457)		11,290	119	%
Oil total		8,109		(2,756)		10,865	394	%
Natural gas liquids sales		492		244		248	102	%
Miscellaneous expense		(43)		(332)		289	87	%
Total revenues		10,853		(1,912)		12,765	668	%
Operating expenses:
Lease operating expenses		3,648		3,905		(257)	(7)	%
Cost of sales		40		63		(23)	(37)	%
Production taxes		353		326		27	8	%
General and administrative		4,892		3,550		1,342	38	%
Unit-based compensation expense		780		1,091		(311)	(29)	%
Depreciation, depletion and amortization		2,924		1,035		1,889	183	%
Accretion expense		172		253		(81)	(32)	%
Total operating expenses		12,809		10,223		2,586	25	%
Operating loss	$	(1,956)	$	(12,135)	$	10,179	(84)	%

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	For the Three Months Ended
	June 30,
	2017		2016		Variance
Net production:
Natural gas production (MMcf)		925		1,209		(284)	(23)	%
Oil production (MBbl)		110		82		28	34	%
Natural gas liquids production (MBbl)		26		20		6	30	%
Total production (MBOE)		290		304		(14)	(5)	%
Average daily production (BOE/d)		3,187		3,335		(148)	(4)	%
Average sales prices:
Natural gas price per Mcf with hedge settlements	$	3.01	$	3.88	$	(0.87)	(22)	%
Natural gas price per Mcf without hedge settlements	$	2.30	$	1.98	$	0.32	16	%
Oil price per Bbl with hedge settlements	$	57.05	$	81.72	$	(24.67)	(30)	%
Oil price per Bbl without hedge settlements	$	46.01	$	42.74	$	3.27	8	%
Liquid price per Bbl without hedge settlements	$	18.92	$	12.20	$	6.72	55	%
Total price per BOE with hedge settlements	$	32.93	$	38.32	$	(5.39)	(14)	%
Total price per BOE without hedge settlements	$	26.49	$	20.25	$	6.24	31	%
Average unit costs per BOE:
Field operating expenses (a)	$	13.80	$	13.94	$	(0.14)	(1)	%
Lease operating expenses	$	12.58	$	12.87	$	(0.29)	(2)	%
Production taxes	$	1.22	$	1.07	$	0.15	14	%
General and administrative expenses	$	19.56	$	15.29	$	4.27	28	%
General and administrative expenses without unit-based compensation	$	16.87	$	11.70	$	5.17	44	%
Depreciation, depletion and amortization	$	10.08	$	3.41	$	6.67	196	%

(a)

Field operating expenses include lease operating expenses (average production costs) and production taxes.

Production. For the three months ended June 30, 2017, 38% of our production was oil, 9% was NGLs and 53% was natural gas as compared to the three months ended June 30, 2016, where 27% of our production was oil, 6% was NGLs and 67% was natural gas. The production mix between the periods has remained fairly consistent; however, we expect natural gas production to decrease as a percentage of total production due to the sale of our equity interests in the entities that owned our remaining Oklahoma production assets in a transaction that closed July 17, 2017. Additional production declines are anticipated due to the expected sale of non-operated production assets located in Texas. Combined production has decreased by 14 MBoe for the three months ended June 30, 2017, primarily due the sale of substantially all of our operated production assets in Oklahoma and Kansas (other than those arising under or related to a concession agreement with the Osage Nation) (the “Mid-Continent Divestiture”), and partially offset by the Production Acquisition.

Oil, NGL and natural gas sales. Unhedged oil sales increased $1.6 million, or 44%, to $5.1 million for the three months ended June 30, 2017, compared to $3.5 million for the same period in 2016. NGL sales increased $0.3 million, or 102%, to $0.5 million for the three months ended June 30, 2017, compared to $0.2 million for the same period in 2016. Unhedged natural gas sales decreased $0.3 million, or 11%, to $2.1 million for the three months ended June 30, 2017, compared to $2.4 million for the same period in 2016. Total increase in oil, NGL and natural gas sales for the three months ended June 30, 2017 was primarily the result of increased production from the Production Acquisition and higher market prices, partially offset by our Mid-Continent Divestiture.

Including hedges and mark-to-market activities, our total revenue increased $12.8 million for the three months ended June 30, 2017, compared to the same period in 2016. This increase was primarily the result of a $14.5 million increase in gains on mark-to-market activities plus a $1.6 million increase in oil sales, partially offset by a $3.6 million decrease in settlements on oil and natural gas derivatives.

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The following tables provide an analysis of the impacts of changes in average realized prices and production volumes between the periods on our unhedged revenues from the three months ended June 30, 2017 to the three months ended June 30, 2016 (dollars in thousands, except average sales price):


	Q2 2017	Q2 2016	Production	Q2 2016		Revenue
	Production	Production	Volume	Average		Increase/(Decrease)
	Volume	Volume	Difference	Sales Price		due to Production
Natural gas (Mcf)	925	1,209	(284)	$	1.98	$	(563)
Oil (MBbl)	110	82	28	$	42.74	$	1,196
Natural gas liquids (MBbl)	26	20	6	$	12.20	$	73
Total oil equivalent (Mboe)	290	304	(14)	$	20.25	$	706


		Q2 2017		Q2 2016				Revenue
		Average		Average	Average Sales		Q2 2017	Increase/(Decrease)
		Sales Price		Sales Price	Price Difference		Volume	due to Price
Natural gas (Mcf)	$	2.30	$	1.98	$	0.32	925	$	295
Oil (MBbl)	$	46.01	$	42.74	$	3.27	110	$	360
Natural gas liquids (Mbl)	$	18.92	$	12.20	$	6.72	26	$	175
Total oil equivalent (Mboe)	$	26.49	$	20.25	$	6.24	290	$	830

A 10% increase or decrease in our average realized sales prices, excluding the impact of derivatives, would have increased or decreased our revenues for the three months ended June 30, 2017 by $0.8 million.

Hedging activities. We apply mark-to-market accounting to our derivative contracts and the full volatility of the non-cash change in fair value of our outstanding contracts is reflected in oil and natural gas sales. For the three months ended June 30, 2017, the non-cash mark-to-market gain was $1.3 million, compared to a loss of $13.2 million for the same period in 2016. The 2017 non-cash gain resulted from lower future expected oil prices on these derivative transactions. Cash settlements received, including settlements receivable, for our commodity derivatives were $1.9 million for the three months ended June 30, 2017, compared to $5.5 million for the three months ended June 30, 2016.

Field operating expenses. Our field operating expenses generally consist of lease operating expenses, labor, vehicles, supervision, transportation, minor maintenance, tools and supplies expenses, as well as production and ad valorem taxes.

Lease operating expenses decreased $0.3 million, or 7%, to $3.6 million for the three months ended June 30, 2017 , compared to $3.9 million during the same period in 2016. On a per unit basis, lease operating expenses were $12.58 per BOE, for the three months ended June 30, 2017, and $12.87 per BOE for the same period in 2016. The decreased lease operating expenses per BOE for the comparative periods were primarily the result of the divestiture of our Oklahoma assets.

General and administrative expenses. General and administrative expenses include the costs of our employees, related benefits, field office expenses, professional fees, direct and indirect costs billed by the Manager in connection with the Services Agreement and other costs not directly associated with field operations. General and administrative expenses, inclusive of unit compensation expense, increased slightly to $5.7 million for the three months ended June 30, 2017 , compared to $4.6 million for the same period in 2016. This increase was primarily driven by an increase in asset management fees of $0.7 million for the production segment and a $0.3 million increase in professional fees related to the sale of non-core production assets.

Our general and administrative expenses were $19.56 per BOE for the three months ended June 30, 2017 , compared to $15.29 per BOE for the same period in 2016. Excluding unit-based compensation, our general and administrative costs were $16.87 per BOE for the three months ended June 30, 2017 , compared to $11.70 per BOE for the same period in 2016. This increase resulted from decreased production noted above, which had an insignificant impact on our general and administrative expenses, as well as an increase in asset management and professional fees as noted above.

Depreciation, depletion and amortization expense. Depreciation, depletion and amortization expense includes the depreciation, depletion and amortization of acquisition costs and equipment costs. Depletion is calculated using units-of-production under the successful efforts method of accounting. Assuming other variables remain constant, as oil, NGL and natural gas production increases or decreases, our depletion expense would increase or decrease as well.

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Our depreciation, depletion and amortization expense for the three months ended June 30, 2017 was $2.9 million, or $10.08 per BOE, compared to $1.0 million, or $3.41 per BOE, for the same period in 2016. This increase in the per BOE expense is primarily the result of the Mid-Continent Divestiture and a reduction in proved reserves due to changes in our development plans. Our non-oil and natural gas properties are depreciated using the straight-line basis.

Impairment expense. For the three months ended June 30, 2017 and 2016, we recorded no impairment charges.

Six months ended June 30, 2017 compared to six months ended June 30, 2016

Midstream Operating Results

The following table sets forth the selected financial and operating data pertaining to the Midstream segment for the periods indicated (in thousands):


	For the Six Months Ended
	June 30,
	2017		2016		Variance
Revenues:
Gathering and transportation sales	$	25,387	$	28,133	$	(2,746)	(10)	%
Total gathering and transportation sales		25,387		28,133		(2,746)	(10)	%
Operating expenses:
Lease operating expenses		492		371		121	33	%
Transportation operating expenses		6,328		6,068		260	4	%
General and administrative		2,966		2,713		253	9	%
Depreciation and amortization expense		14,913		10,168		4,745	47	%
Accretion expense		134		123		11	9	%
Total operating expenses		24,833		19,443		5,390	28	%
Operating income	$	554	$	8,690	$	(8,136)	(94)	%

Gathering and transportation sales. We consummated the acquisition of Western Catarina Midstream from Sanchez Energy and entered into the related gathering and processing agreement with Sanchez Energy in October 2015. During the six months ended June 30, 2017, Sanchez Energy transported average daily production through the gathering system of approximately 11.4 MBbls/d of crude oil, 160.7 MMcf/d of natural gas and 8.5 MBbls/d of water. During the six months ended June 30, 2016, Sanchez Energy transported average daily production through the gathering system of approximately 14.0 MBbls/d of crude oil, 190.4 MMcf/d of natural gas and an insignificant amount of water. The decrease in throughput was driven by a decrease in Sanchez Energy’s Catarina production of 1,481 MBoe over the six months ended June 30, 2017 compared to the same period in 2016.

Lease operating expense. Lease operating expenses, which includes ad valorem taxes, increased $0.1 million, to $0.5 million for the six months ended June 30, 2017 , compared to $0.4 million during the same period in 2016. This increase was a result of a crank shaft failure at a central processing facility.

Transportation operating expenses. Our operating expenses generally consist of equipment rentals, chemicals, treating, metering fees, permit and regulatory fees, labor, minor maintenance, tools, supplies, and integrity management expenses. Our transportation operating expense for the six months ended June 30, 2017 and 2016 was $6.3 million and $6.1 million, respectively. The increase resulted from higher maintenance costs.

G eneral and administrative expenses . General and administrative expenses include the costs of our employees, related benefits, field office expenses, professional fees, direct and indirect costs billed by the Manager in connection with the Services Agreement and other costs not directly associated with field operations. Our general and administrative expenses totaled $3.0 million and $2.7 million for the six months ended June 30 , 2017 and 2016, respectively. The increase resulted from a higher asset management fee due to a higher valuation for the gathering and transportation assets over the comparative periods.

Depreciation and amortization expense Gathering and transportation assets are stated at historical acquisition cost, net of any impairments, and are depreciated using the straight-line method over the useful lives of the assets, which range from 5 to 15 years for equipment, and up to 36 years for gathering facilities. Our depreciation and amortization expense for the six months ended June 30, 2017 and 2016 was $14.9 million and $10.2 million, respectively. The increase was a result of revised useful lives used to depreciate the Western Catarina Midstream engines.

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Production Operating Results

The following tables sets forth the selected financial and operating data for the periods indicated (dollars and net production in thousands, except for average sales and costs):


	For the Six Months Ended
	June 30,
	2017		2016			Variance
Revenues:
Natural gas sales at market price	$	4,406	$	4,508	$	(102)	(2)	%
Natural gas hedge settlements		1,297		4,526		(3,229)	(71)	%
Natural gas mark-to-market activities		(572)		(4,694)		4,122	88	%
Natural gas total		5,131		4,340		791	18	%
Oil sales at market price		10,916		6,155		4,761	77	%
Oil hedge settlements		2,144		8,052		(5,908)	(73)	%
Oil mark-to-market activities		6,399		(11,620)		18,019	155	%
Oil total		19,459		2,587		16,872	652	%
Natural gas liquid sales		959		520		439	84	%
Miscellaneous expense		(100)		(65)		(35)	(54)	%
Total revenues		25,449		7,382		18,067	245	%
Operating expenses:
Lease operating expenses		8,372		8,780		(408)	(5)	%
Cost of sales		77		193		(116)	(60)	%
Production taxes		826		547		279	51	%
General and administrative		8,996		7,984		1,012	13	%
Unit-based compensation expense		1,320		1,529		(209)	(14)	%
Depreciation, depletion and amortization		6,205		3,149		3,056	97	%
Asset impairments		4,688		1,309		3,379	258	%
Accretion expense		364		507		(143)	(28)	%
Total operating expenses		30,848		23,998		6,850	29	%
Operating loss	$	(5,399)	$	(16,616)	$	11,217	(68)	%

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	For the Six Months Ended
	June 30,
	2017		2016		Variance
Net production:
Natural gas production (Mcf)		1,903		2,381		(478)	(20)	%
Oil production (MBbl)		230		168		62	37	%
Natural gas liquids production (MBbl)		53		42		11	26	%
Total production (MBoe)		600		607		(7)	(1)	%
Average daily production (Boe/d)		3,315		3,334		(19)	(1)	%
Average sales prices:
Natural gas price per Mcf with hedge settlements	$	3.00	$	3.79	$	(0.79)	(21)	%
Natural gas price per Mcf without hedge settlements	$	2.32	$	1.89	$	0.43	23	%
Oil price per Bbl with hedge settlements	$	56.78	$	84.57	$	(27.79)	(33)	%
Oil price per Bbl without hedge settlements	$	47.46	$	36.64	$	10.82	30	%
Liquid price per Bbl without hedge settlements	$	18.09	$	12.38	$	5.71	46	%
Total price per Boe with hedge settlements	$	32.87	$	39.16	$	(6.29)	(16)	%
Total price per Boe without hedge settlements	$	27.14	$	18.43	$	8.71	47	%
Average unit costs per Boe:
Field operating expenses (a)	$	15.33	$	15.37	$	(0.04)	(0)	%
Lease operating expenses	$	13.95	$	14.47	$	(0.51)	(4)	%
Production taxes	$	1.38	$	0.90	$	0.48	53	%
General and administrative expenses	$	17.19	$	15.68	$	1.51	10	%
General and administrative expenses without unit-based compensation	$	14.99	$	13.16	$	1.83	14	%
Depreciation, depletion and amortization	$	10.34	$	5.19	$	5.15	99	%

(b)

Field operating expenses include lease operating expenses (average production costs) and production taxes.

Production. For the six months ended June 30, 2017, 38% of our production was oil, 9% was NGLs and 53% was natural gas as compared to the six months ended June 30, 2016, where 28% of our production was oil, 7% was NGLs and 65% was natural gas. The production mix between the periods has remained fairly consistent; however, we expect natural gas production to decrease as a percentage of total production due to the sale of our equity interests in the entities that owned our remaining operated Oklahoma production assets in a transaction that closed July 17, 2017. Additional production declines are expected due to the pending sale of certain non-operated production assets located in Texas. Combined production has decreased by 7 MBoe for the six months ended June 30, 2017, primarily due to the Mid-Continent Divestiture, partially offset by the Production Acquisition.

Oil, NGL and natural gas sales. Unhedged oil sales increased $4.8 million, or 77%, to $11.0 million for the six months ended June 30, 2017, compared to $6.2 million for the same period in 2016. NGL sales increased $0.4 million, or 84%, to $1.0 million for the six months ended June 30, 2017, compared to $0.5 million for the same period in 2016. Unhedged natural gas sales decreased $0.1 million, or 2%, to $4.4 million for the six months ended June 30, 2017, compared to $4.5 million for the same period in 2016. Total increase in oil, NGL and natural gas sales for the six months ended June 30, 2017 was primarily the result of increased production from the Production Acquisition and higher market prices, partially offset by our Mid-Continent Divestiture.

Including hedges and mark-to-market activities, our total revenue increased $18.1 million for the six months ended June 30, 2017, compared to the same period in 2016. This increase was primarily the result of a $22.1 million increase in gains on mark-to-market activities plus a $4.8 million increase in oil sales, partially offset by a $9.1 million decrease in settlements on oil and natural derivatives.

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The following tables provide an analysis of the impacts of changes in average realized prices and production volumes between the periods on our unhedged revenues from the six months ended June 30, 2017 to the six months ended June 30, 2016 (dollars in thousands, except average sales price):


	2017	2016	Production	2016		Revenue
	Production	Production	Volume	Average		Increase
	Volume	Volume	Difference	Sales Price		due to Production
Natural gas (Mcf)	1,903	2,381	(478)	$	1.89	$	(905)
Oil (MBbl)	230	168	62	$	36.64	$	2,272
Natural gas liquids (MBbl)	53	42	11	$	12.38	$	136
Total oil equivalent (Mboe)	600	607	(7)	$	18.43	$	1,503


	2017		2016			Average		Revenue
	Average		Average		Sales Price		2017	Increase/(Decrease)
	Sales Price		Sales Price		Difference		Volume	due to Price
Natural gas (Mcf)	$	2.32	$	1.89	$	0.42	1,903	$	803
Oil (MBbl)	$	47.46	$	36.64	$	10.82	230	$	2,489
Natural gas liquids (MBbl)	$	18.09	$	12.38	$	5.71	53	$	303
Total oil equivalent (Mboe)	$	27.14	$	18.43	$	8.71	600	$	3,595

A 10% increase or decrease in our average realized sales prices, excluding the impact of derivatives, would have increased or decreased our revenues for the six months ended June 30, 2017 by $1.7 million.

Hedging activities. We apply mark-to-market accounting to our derivative contracts and the full volatility of the non-cash change in fair value of our outstanding contracts is reflected in oil and natural gas sales. For the six months ended June 30, 2017, the non-cash mark-to-market gain was $5.8 million, compared to a loss of $16.3 million for the same period in 2016. The 2017 non-cash gain resulted from lower future expected oil prices on these derivative transactions. Cash settlements received, including settlements receivable, for our commodity derivatives were $3.4 million for the six months ended June 30, 2017, compared to $12.6 million for the six months ended June 30, 2016.

Lease operating expenses decreased $0.4 million, or 5%, to $8.4 million for the six months ended June 30, 2017 , compared to $8.8 million during the same period in 2016. On a per unit basis, lease operating expenses were $13.95 per BOE, for the six months ended June 30, 2017, and $14.47 per BOE for the same period in 2016. The decreased lease operating expenses per BOE for the comparative periods were primarily the result of our Mid-Continent divestiture.

General and administrative expenses. General and administrative expenses include the costs of our employees, related benefits, field office expenses, professional fees, direct and indirect costs billed by the Manager in connection with the Services Agreement and other costs not directly associated with field operations. General and administrative expenses, inclusive of unit compensation expense, increased 8% to $10.3 million for the six months ended June 30, 2017 , compared to $9.5 million for the same period in 2016. This increase was primarily driven by an increase in asset management fees of $1.2 million.

Our general and administrative expenses were $17.19 per BOE for the six months ended June 30, 2017 , compared to $15.68 per BOE for the same period in 2016. Excluding unit-based compensation, our general and administrative costs were $14.99 per BOE for the six months ended June 30, 2017 , compared to $13.16 per BOE for the same period in 2016. This increase resulted from increased asset management fees noted above.

Our depreciation, depletion and amortization expense for the six months ended June 30, 2017 was $6.2 million, or $10.34 per BOE, compared to $3.1 million, or $5.19 per BOE, for the same period in 2016. The increase in the per BOE expense is primarily the result of the Mid-Continent Divestiture and a reduction in proved reserves due to changes in our development plans. Our non-oil and natural gas properties are depreciated using the straight-line basis.

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Impairment expense. For the six months ended June 30, 2017, we recorded non-cash charges of $4.7 million, to impair certain of our producing oil and natural gas properties in Texas acquired as part of the Production Acquisition. During the same period in 2016, we recorded non-cash charges of $1.3 million to impair the value of our oil and natural gas fields located in Texas and Louisiana . The impairment expense recorded during the six months ended June 30, 2017 resulted from decreases in expectations for oil and natural gas prices in the future as well as changes to our expected future production estimates in certain areas.

Liquidity and Capital Resources

As of June 30, 2017 , we had approximately $2.0 million in cash and cash equivalents and $22.0 million available for borrowing under the Credit Agreement in effect on such date. During the three months ended June 30, 2017 , we paid approximately $1.9 million in cash for interest on borrowings under our Credit Agreement and approximately $40 thousand in cash for the commitment fee on undrawn commitments. For the six months ended June 30, 2017 , we paid approximately $3.4 million in cash for interest on borrowings under our Credit Agreement and approximately $80 thousand in cash for the commitment fee on undrawn commitments.

Our capital expenditures during the three and six months ended June 30, 2017 were funded with cash on hand and borrowings under our Credit Agreement. In the future, capital and liquidity are anticipated to be provided by operating cash flows, borrowings under our Credit Agreement and proceeds from the issuance of additional limited partner units. We expect that the combination of these capital resources will be adequate to meet our short-term working capital requirements, long-term capital expenditures program and expected quarterly cash distributions.

Credit Agreement

The amount available for borrowing at any one time under the Credit Agreement is limited to the borrowing base for our midstream assets and our oil and natural gas properties. Borrowings under the Credit Agreement are available for direct investment in oil and natural gas properties, acquisitions, and working capital and general business purposes. The Credit Agreement has a sub-limit of $15.0 million, which may be used for the issuance of letters of credit. The initial borrowing base under the Credit Agreement was $200.0 million. The borrowing base for the credit available for the upstream oil and natural gas properties is re-determined semi-annually in the second and fourth quarters of the year, and may be re-determined at our request more frequently and by the lenders, in their sole discretion, based on reserve reports as prepared by petroleum engineers, using, among other things, the oil and natural gas pricing prevailing at such time. The borrowing base for the credit available for our midstream properties is equal to the rolling four quarter EBITDA of our midstream operations multiplied by 4.5. Outstanding borrowings in excess of our borrowing base must be repaid or we must pledge other oil and natural gas properties as additional collateral. We may elect to pay any borrowing base deficiency in three equal monthly installments such that the deficiency is eliminated in a period of three months. Any increase in our borrowing base must be approved by all of our lenders. As of June 30, 2017, the borrowing base under the Credit Agreement was $215.6 million, with an elected commitment amount of $200.0 million.

In addition, we are required to maintain the following financial covenants:

Current assets to current liabilities for at least 1.0 to 1.0 at all times;

Senior secured net debt to consolidated adjusted EBITDA for the last twelve months, as of the last day of any fiscal quarter, of not greater than 4.5 to 1.0 if the adjusted EBITDA of our midstream operations equals or exceeds one-third of total

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Adjusted EBITDA or 4.0 to 1.0 if the adjusted EBITDA of our midstream operations is less than one-third of total adjusted EBITDA; and

minimum interest coverage ratio of at least 2.5 to 1.0 if the adjusted EBITDA of our midstream operations is greater than one-third of our total adjusted EBITDA.

The Credit Agreement limits our ability to pay distributions to unitholders. We have the ability to pay distributions to unitholders from available cash, including cash from borrowings under the Credit Agreement, as long as no event of default exists and provided that no distributions to unitholders may be made if the borrowings outstanding, net of available cash, under the Credit Agreement exceed 90% of the borrowing base, after giving effect to the proposed distribution. Our available cash is reduced by any cash reserves established by the board of directors of our general partner for the proper conduct of our business and the payment of fees and expenses.

At June 30, 2017, we were in compliance with the financial covenants contained in the Credit Agreement. We monitor compliance on an ongoing basis. If we are unable to remain in compliance with the financial covenants contained in our Credit Agreement or maintain the required ratios discussed above, the lenders could call an event of default and accelerate the outstanding debt under the terms of the Credit Agreement, such that our outstanding debt could become then due and payable. We may request waivers of compliance from the violated financial covenants from the lenders, but there is no assurance that such waivers would be granted.

Sources of Debt and Equity Financing

As of June 30, 2017, the elected commitment amount under our Credit Agreement was set at $200.0 million and we had $178.0 million of debt outstanding under the facility, leaving us with $22.0 million in unused borrowing capacity. Our Credit Agreement matures on March 31, 2020.

Open Commodity Hedge Position

We enter into hedging arrangements to reduce the impact of oil and natural gas price volatility on our operations. By removing the price volatility from a significant portion of our oil and natural gas production, we have mitigated, but not eliminated, the potential effects of changing prices on our cash flow from operations. While mitigating the negative effects of falling commodity prices, these derivative contracts also limit the benefits we might otherwise receive from increases in commodity prices. These derivative contracts also limit our ability to have additional cash flows to fund higher severance taxes, which are usually based on market prices for oil and natural gas. Our operating cash flows are also impacted by the cost of oilfield services. In the event of inflation increasing service costs or administrative expenses, our hedging program will limit our ability to have increased operating cash flows to fund these higher costs. Increases in the market prices for oil and natural gas will also increase our need for working capital as our commodity hedging contracts cash settle prior to our receipt of cash from our sales of the related commodities to third parties. In 2016, we restructured a portion of our commodity derivative portfolio by liquidating “in-the-money” crude oil and natural gas derivatives settling in fourth quarter 2016 and using the proceeds from the sale liquidation to enhance the fixed price on natural gas derivatives to be settled in 2017. Cash settlement receipts of approximately $3.2 million from the termination of the crude oil and natural gas derivatives were applied as premiums for the enhanced natural gas derivatives in 2016.

It is our policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. All of our derivatives are currently collateralized by the assets securing our Credit Agreement and therefore currently do not require the posting of cash collateral. This is significant since we are able to lock in sales prices on a substantial amount of our expected future production without posting cash collateral based on price changes prior to the hedges being cash settled.

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The following tables as of June 30, 2017, summarize, for the periods indicated, our hedges currently in place through December 31, 2020. All of these derivatives are accounted for as mark-to-market activities.

MTM Fixed Price Swaps— West Texas Intermediate (WTI)


	March 31,			June 30,			September 30,			December 31,			Total
	Volume	Average		Volume	Average		Volume	Average		Volume	Average		Volume	Average
	(Bbls)	Price		(Bbls)	Price		(Bbls)	Price		(Bbls)	Price		(Bbls)	Price
2017	—	$	—	—	$	—	87,304	$	61.42	81,702	$	61.55	169,006	$	61.48
2018	88,854	$	60.82	83,976	$	60.90	79,683	$	60.96	75,864	$	61.02	328,377	$	60.92
2019	78,667	$	61.48	75,326	$	61.53	72,279	$	61.57	69,480	$	61.61	295,752	$	61.54
2020	66,914	$	53.50	64,477	$	53.50	62,251	$	53.50	60,224	$	53.50	253,866	$	53.50
													1,047,001

MTM Fixed Price Basis Swaps– NYMEX (Henry Hub)


	March 31,			June 30,			September 30,			December 31,			Total
	Volume	Average		Volume	Average		Volume	Average		Volume	Average		Volume	Average
	(MMBtu)	Price		(MMBtu)	Price		(MMBtu)	Price		(MMBtu)	Price		(MMBtu)	Price
2017	—	$	—	—	$	—	271,368	$	5.45	257,234	$	5.45	528,602	$	5.45
2018	260,841	$	3.18	248,018	$	3.18	235,810	$	3.18	225,208	$	3.18	969,877	$	3.18
2019	224,303	$	3.10	214,186	$	3.10	205,533	$	3.10	197,455	$	3.10	841,477	$	3.10
2020	188,696	$	2.85	176,946	$	2.85	170,637	$	2.85	164,747	$	2.85	701,026	$	2.85
													3,040,982

Net Cash Provided by Operations

We had net cash flows provided by operating activities for the six months ended June 30, 2017 of $23.4 million, compared to net cash flow provided by operating activities of $17.3 million for the same period in 2016. This increase was primarily related to an increase in accounts payable and accrued liabilities of $7.3 million which was offset by a decrease in prepaid expenses of $0.6 million, a decrease in accounts receivable of $0.4 million and a decrease in accounts payable and accrued liabilities - related entities of $0.2 million.

Our operating cash flows are subject to many variables, the most significant of which is the volume of oil and natural gas transported through our Western Catarina midstream assets, volatility of oil and natural gas prices and our level of production of oil and natural gas. Oil and natural gas prices are determined primarily by prevailing market conditions, which are dependent on regional and worldwide economic activity, weather and other factors beyond our control. Our future operating cash flows will depend on oil and natural gas transported through our Western Catarina midstream assets, our ability to maintain and increase production through our development program or completing acquisitions, as well as the market prices of oil and natural gas and our hedging program.

Net Cash Used in Investing Activities

We had net cash flows used in investing activities for the six months ended June 30, 2017 of $22.3 million, consisting of $13.8 million related to pipeline construction and contributions to Carnero Processing and Carnero Gathering totaling $8.5 million.

We had net cash flows used in investing activities for the six months ended June 30, 2016 of $2.3 million, consisting of $1.8 million related to the development of midstream assets, and $0.5 related to the development of oil and natural gas properties in the Palmetto Field in Gonzales County.

Net Cash Used in Financing Activities

Net cash flows used in financing activities was $0.1 million for the six months ended June 30, 2017 . During the six months ended June 30, 2017 , we had borrowings under our Credit Agreement of $25.0 million. We distributed $14.0 million and $12.0 million to Class B preferred unit holders and common unit holders, respectively, during the same period. Additionally, we paid $0.3 million in offering costs and received $1.3 million in proceeds from issuance of common units.

Net cash flows used in financing activities was $20.4 million for the six months ended June 30, 2016. During the six months ended June 30, 2016, we had borrowings under our Credit Agreement of $2.0 million. We distributed $16.2 million and $3.0 million to Class B preferred unit holders and common unit holders, respectively, during the same period. As part of our unit repurchase program, we used $2.9 million to repurchase and cancel 242,500 common units. Additionally, we paid $0.1 million in offering costs and $0.1 million related to units tendered by employees for tax withholding.

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In April 2017, we issued 84,577 common units in registered offerings for gross proceeds of approximately $1.3 million pursuant to a shelf registration statement originally filed with the SEC on March 6, 2015 as updated by that certain prospectus supplement filed with the SEC on April 6, 2017 (the “Shelf Registration Statement”). The Shelf Registration Statement allows the Partnership to sell up to $50.0 million of common units to fund general limited partnership purposes, including possible acquisitions. Net proceeds of $1.3 million from the equity issuance were used for general limited partnership purposes.

Off-Balance Sheet Arrangements

As of June 30, 2017 , we had no off-balance sheet arrangements with third parties, and we maintained no debt obligations that contained provisions requiring accelerated payment of the related obligations in the event of specified levels of declines in credit ratings.

Credit Markets and Counterparty Risk

We actively monitor the credit exposure and risks associated with our counterparties. Additionally, we continue to monitor global credit markets to limit our potential exposure to credit risk where possible. Our primary credit exposures result from the sale of oil and natural gas and our use of derivatives. Through June 30, 2017 , we have not suffered any significant losses with our counterparties as a result of non-performance.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserves and related cash flow estimates used in the calculation of depletion and impairment of oil and natural gas properties, the fair value of commodity derivative contracts and asset retirement obligations, accrued oil and natural gas revenues and expenses and the allocation of general and administrative expenses. Actual results could differ materially from those estimates.

As of June 30, 2017 , there were no changes with regard to the critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on March 28, 2017. The policies disclosed included the accounting for oil and natural gas properties, oil and natural gas reserve quantities, revenue recognition and hedging activities. Please read Part 1. Item 1. Note 2. “Basis of Presentation and Summary of Significant Accounting Policies” to the condensed consolidated financial statements for a discussion of additional accounting policies and estimates made by management.

New Accounting Pronouncements

See Part 1. Item 1. Note 2. “Basis of Presentation and Summary of Significant Accounting Policies” to our condensed consolidated financial statements included in this report for information on new accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are not required to provide this disclosure as a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Principal Executive Officer and the Principal Financial Officer of the general partner of SNMP have evaluated the effectiveness of the disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of June 30, 2017 (the Evaluation Date). Based on such evaluation, the Principal Executive Officer and the Principal Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

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Changes in Internal Control over Financial Reporting

During the three months ended June 30, 2017 , there were no changes in SNMP’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, SNMP’s internal control over financial reporting.

Part II—Other Information

Item 1. Legal Proceedings

From time to time we may be the subject of lawsuits and claims arising in the ordinary course of business. Management cannot predict the ultimate outcome of such lawsuits or claims. Management does not currently expect the outcome of any of the known claims or proceedings to individually or in the aggregate have a material adverse effect on our results of operations or financial condition.

Item 1A. Risk Factor s

Consider carefully the risk factors under the caption “Risk Factors” under Part I, Item 1A in our 2016 Annual Report on Form 10-K, together with all of the other information included in this Quarterly Report on Form 10-Q; in our 2016 Annual Report; and in our other public filings, press releases, and public discussions with our management. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may materially adversely affect our business, financial condition or results of operations.

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

In connection with providing services under the Services Agreement for the first quarter 2017, the Partnership issued 139,110 common units to SP Holdings, LLC on June 30, 2017. See Note 12, “Related Party Transactions” for additional information related to the Services Agreement. The issuance of these common units was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof as a transaction by an issuer not involving a public offering.

The Partnership elected to pay the first quarter 2017 distribution on the Class B preferred units in part cash and, with the consent of the Class B preferred unitholder, in part common units (in lieu of additional Class B preferred units). Accordingly, the Partnership issued 184,697 common units on May 22, 2017. The issuance of these common units was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof as a transaction by an issuer not involving a public offering. These units were registered on June 21, 2017.

No common units were purchased in the second quarter 2017.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

The exhibits required to be filed pursuant to the requirements of Item 601 of Regulation S-K are set forth in the exhibit index accompanying this form 10-Q and are incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Sanchez Midstream Partners LP, the Registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	SANCHEZ MIDSTREAM PARTNERS LP (REGISTRANT) BY: Sanchez Midstream Partners GP LLC, its general partner

Date: August 14, 2017	By	/s/ Charles C. Ward
		Charles C. Ward
		Chief Financial Officer and Secretary (Duly Authorized Officer and Principal Financial Officer)

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EXHIBIT INDEX


Exhibit Number	Description
2.1*	Membership Interest Purchase and Sale Agreement between Sanchez Midstream Partners LP (f/k/a/ Sanchez Production Partners LP) and Exponent Energy, LLC dated May 10, 2017.

2.2*	Purchase and Sale Agreement between SEP Holdings IV, LLC and Sendero Petroleum, LLC dated June 30, 2017.

2.3*	Amendment No. 1 to Purchase and Sale Agreement between SEP Holdings IV, LLC and Sendero Petroleum, LLC dated July 31, 2017.

10.1*	Amendment No. 1 to Firm Gathering and Processing Agreement by and between SN Catarina, LLC and Catarina Midstream, LLC, dated June 30, 2017.

31.1*	Certification of Principal Executive Officer of Sanchez Midstream Partners GP LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	Certification of Principal Financial Officer of Sanchez Midstream Partners GP LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**	Certification of Principal Executive Officer of Sanchez Midstream Partners GP LLC pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**	Certification of Principal Financial Officer of Sanchez Midstream Partners GP LLC pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*	XBRL Instance Document

101.SCH*	XBRL Schema Document

101.CAL*	XBRL Calculation Linkbase Document

101.LAB*	XBRL Label Linkbase Document

101.PRE*	XBRL Presentation Linkbase Document

101.DEF*	XBRL Definition Linkbase Document

* Filed herewith.

** Furnished herewith.

Exhibit 2.1

Execution Version

MEMBERSHIP INTEREST PURCHASE AND SALE AGREEMENT

between

SANCHEZ PRODUCTION PARTNERS LP,

as Seller

and

EXPONENT ENERGY LLC,

as Buyer

Dated as of May 10, 2017

TABLE OF CONTENTS


ARTICLE I. DEFINITIONS AND RULES OF CONSTRUCTION		1

Section 1.1	Definitions	1
Section 1.2	Rules of Construction	13

ARTICLE II. PURCHASE AND SALE		14

Section 2.1	Purchase and Sale of Interests	14
Section 2.2	Company Assets	14

ARTICLE III. CONSIDERATION		14

Section 3.1	Consideration	14
Section 3.2	Earnest Money Deposit	15
Section 3.3	Adjustments to the Base Purchase Price	15
Section 3.4	Closing Statement	15
Section 3.5	Closing Payment	15
Section 3.6	Post-Closing Adjustment	15
Section 3.7	Payments and Reimbursements	17
Section 3.8	Purchase Price Allocation	18

ARTICLE IV. REPRESENTATIONS AND WARRANTIES RELATING TO SELLER		18

Section 4.1	Organization of Seller	18
Section 4.2	Authorization; Enforceability	18
Section 4.3	Ownership of Interests	19
Section 4.4	No Conflict; Consents	19

ARTICLE V. REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY GROUP		19

Section 5.1	Organization	20
Section 5.2	No Conflict; Consents	20
Section 5.3	Capitalization	20
Section 5.4	Litigation	21
Section 5.5	No Undisclosed Liabilities	21
Section 5.6	Taxes	22
Section 5.7	Material Contracts	22
Section 5.8	Compliance with Laws; Permits	23
Section 5.9	Preferential Purchase Rights	23
Section 5.10	Payment of Royalties	23
Section 5.11	Current Commitments	23
Section 5.12	Brokers’ Fees	24
Section 5.13	Employees	24
Section 5.14	Environmental Matters	24
Section 5.15	Working Interest and Net Revenue Interest for Leases	24
Section 5.16	Gas Regulatory Matters	24
Section 5.17	Liens	24
Section 5.18	Bankruptcy	25
Section 5.19	Payout Balances	25


Section 5.20	Performance Bonds	25
Section 5.21	Sufficiency of Assets	25

ARTICLE VI. REPRESENTATIONS AND WARRANTIES RELATING TO BUYER		25

Section 6.1	Organization of Buyer	25
Section 6.2	Authorization; Enforceability	25
Section 6.3	No Conflict; Consents	25
Section 6.4	Litigation	26
Section 6.5	Brokers’ Fees	26
Section 6.6	Financing; Resources and Other Capabilities	26
Section 6.7	Securities Law Compliance	26
Section 6.8	Buyer’s Independent Investigation	26
Section 6.9	Independent Evaluation	26
Section 6.10	Regulatory	27

ARTICLE VII. TITLE AND ENVIRONMENTAL EXAMINATION.		27

Section 7.1	Access	27
Section 7.2	Environmental and Title Review	27
Section 7.3	Indemnity	28

ARTICLE VIII. INTERIM OPERATIONS		28

Section 8.1	Operations Prior to Closing	28
Section 8.2	Restricted Activities	28
Section 8.3	Casualty Loss	30
Section 8.4	Casualty Loss Limitation	30

ARTICLE IX. OTHER PRE-CLOSING COVENANTS		30

Section 9.1	Third-Party Approvals	30
Section 9.2	Insurance	30
Section 9.3	Replacement of Bonds, Letters of Credit and Guarantees	30
Section 9.4	Transfer of Excluded Entities	31

ARTICLE X. CONDITIONS TO CLOSING		31

Section 10.1	Conditions to Obligations of Buyer to Closing	31
Section 10.2	Conditions to the Obligations of Seller to Closing	32

ARTICLE XI. CLOSING		32

Section 11.1	Closing Date	32
Section 11.2	Closing Deliverables	32

ARTICLE XII. TERMINATION		33

Section 12.1	Termination	33
Section 12.2	Effect of Termination	34
Section 12.3	Other Provisions	34

ARTICLE XIII. ASSUMPTION; INDEMNIFICATION AND WAIVERS		35

Section 13.1	Assumed Obligations	35
Section 13.2	Seller’s Indemnity	35


Section 13.3	Buyer’s Indemnity		36
Section 13.4	Express Negligence Rule		36
Section 13.5	Limitations on Liability		36
Section 13.6	Procedures		39
Section 13.7	Waiver of Consequential Damages		40
Section 13.8	Waivers and Disclaimers		41
Section 13.9	Exclusive Remedy and Release		42

ARTICLE XIV. TAX MATTERS		43

Section 14.1	Responsibility for Filing Tax Returns and Paying Taxes		43
Section 14.2	Responsibility for Tax Audits		44
Section 14.3	Tax Refunds		44
Section 14.4	Transfer Taxes		45
Section 14.5	Tax Treatment of Indemnities		45
Section 14.6	Survival and Conflict		45

ARTICLE XV. OTHER POST-CLOSING COVENANTS		45

Section 15.1	Books and Records		45
Section 15.2	Use of Seller Marks		45

ARTICLE XVI. MISCELLANEOUS		46

Section 16.1	Notices		46
Section 16.2	Further Assurances		47
Section 16.3	Fees and Expenses		47
Section 16.4	Assignment		47
Section 16.5	Rights and Obligations of Third Parties		47
Section 16.6	Counterparts		47
Section 16.7	Entire Agreement		47
Section 16.8	Disclosure Schedules		47
Section 16.9	Amendments		48
Section 16.10	Publicity		48
Section 16.11	Severability		48
Section 16.12	Certain Remedies		49
Section 16.13	Governing Law; Jurisdiction		49
Section 16.14	Retention of Counsel		50
Section 16.15	Buyer Right to Employ		50

EXHIBITS AND SCHEDULES

Exhibits:

Exhibit A	-	Title and Environmental Defects Procedures
Exhibit B	-	Assignment and Assumption Agreement
Exhibit C	-	Leases
Exhibit D	-	Wells
Exhibit E	-	Surface Interests

iii

Exhibit F	-	Gathering Systems
Exhibit G	-	Excluded Assets
Exhibit H	-	Allocated Values


Schedules:

Schedule 1.1	-	Knowledge
Schedule 4.3	-	Ownership of Interests
Schedule 4.4	-	No Conflict; Consents -- Seller
Schedule 5.2	-	No Conflict; Consents -- Company Group
Schedule 5.3	-	Indebtedness for Borrowed Money
Schedule 5.4	-	Litigation
Schedule 5.5	-	Liabilities
Schedule 5.6	-	Taxes
Schedule 5.7	-	Material Contracts
Schedule 5.8(a)	-	Compliance With Laws;
Schedule 5.8(b)	-	Permits
Schedule 5.9	-	Preferential Purchase Rights
Schedule 5.10	-	Payment of Royalties
Schedule 5.11	-	Current Commitments
Schedule 5.14	-	Environmental Matters
Schedule 5.15	-	Working Interests
Schedule 5.19	-	Payout Balances
Schedule 5.20	-	Performance Bonds
Schedule 9.2	-	Insurance
Schedule 9.3	-	Bonds, Letters of Credit and Guarantees
Schedule 13.2(c)	-	Environmental Indemnity

MEMBERSHIP INTEREST PURCHASE AND SALE AGREEMENT

This MEMBERSHIP INTEREST PURCHASE AND SALE AGREEMENT (this “ Agreement ”), dated as of May 10, 2017, is by and between (i) Sanchez Production Partners LP, a Delaware limited partnership (“ Seller ”) and (ii) Exponent Energy LLC, a Delaware limited liability company (“ Buyer ”). Each of Seller and Buyer is sometimes referred to herein individually as a “ Party ” and they are sometimes collectively referred to herein as the “ Parties .”

Recitals:

Seller owns all of the issued and outstanding membership interests (the “ Interests ”) in CEP Mid-Continent LLC, a Delaware limited liability company (the “ Company ”).

The Company and the Wholly-Owned Subsidiaries (as defined below) own and/or operate, certain oil and gas wells, leases and other associated assets and interests in Osage County, Oklahoma (the “ Oklahoma County ”).

Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, the Interests, on and subject to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Parties agree as follows:

ARTICLE I.

DEFINITIONS AND RULES OF CONSTRUCTION

Section 1.1 Definitions . Capitalized terms used throughout this Agreement and not defined in this Section 1.1 have the meanings ascribed to them elsewhere in this Agreement or in the Schedules or Exhibits, including Section 1 of Exhibit A . As used herein, the following terms shall have the following meanings:

“ Adjustment Amount ” is defined in Section 3.3 .

“ Affiliate ” means, with respect to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with, such specified Person through one or more intermediaries or otherwise. For the purposes of this definition, “control” means, where used with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have correlative meanings; provided, however , that the Company Group is not an Affiliate of either Buyer or Seller.

“ Affiliate Contracts ” is defined in the definition of “Material Contracts.”

“ Agreement ” is defined in the preamble to this Agreement.

“ Assignment and Assumption Agreement ” means an Assignment and Assumption Agreement in the form attached hereto as Exhibit B .

“ Assumed Obligations ” means (A) all obligations and liabilities of any kind whatsoever of the Seller’s Group directly and solely arising from the Company Assets or the Company Group, whether known or unknown, liquidated or contingent, which arise, accrue or are attributable to periods on or after the Effective Time, including obligations and liabilities of the Seller’s Group concerning: (i) the use, ownership or operation of the Company Assets; (ii) any obligations under or relating to any Contracts; (iii) paying all obligations owed to Working Interest, royalty, overriding royalty, net profits and other interest owners and operators relating to the Company Assets, including their share of any revenues or proceeds attributable to production or sales of Hydrocarbons; (iv) properly plugging, re-plugging and abandoning the Wells; (v) any obligation or liability for the dismantling, decommissioning, abandoning and removing of the Wells or Equipment; (vi) any obligation or liability for the cleaning up, restoration and/or remediation of the premises covered by or related to the Company Assets in accordance with applicable Contracts and Laws, including all Environmental Laws; and (vii) any obligation or liability regarding Permits and (B) all obligations and liabilities of any kind whatsoever of the Seller’s Group arising from or relating to the Company Assets, whether known or unknown, liquidated or contingent, which are deemed to have arisen, accrued or are attributable to periods prior to the Effective Time concerning (y) properly plugging, re-plugging and abandoning the Wells and (z) any obligation or liability for the dismantling, decommissioning, abandoning and removing of the Wells or Equipment; provided, however, that Assumed Liabilities shall not include (1) general accounting, legal or other overhead expenses incurred in the ordinary course of business prior to the Closing Date, (2) liabilities and obligations arising from or related to Excluded Entities or Excluded Assets, (3) Indebtedness for Borrowed Money incurred by any member of the Seller Group, (4) liabilities and obligations that (i) but for a breach or default by any Seller Group member, would have been paid, performed or otherwise discharged in accordance with their terms prior to the Closing Date, or (ii) arise out of a breach or default by any Seller Group member, (5) liabilities and obligations that are past due as of the Closing Date or (6) for furnishing makeup Hydrocarbons and/or settling and paying for Imbalances according to the terms of applicable operating agreements, gas balancing agreements, Hydrocarbons sales, processing, gathering or transportation Contracts.

“ Base Purchase Price ” is defined in Section 3.1 .

“ BIA ” means the Bureau of Indian Affairs, Department of the Interior, United States of America.

“ Burden ” is defined in Section 5.10 .

“ Business Day ” means any day that is not a Saturday, Sunday, or legal holiday in the State of Texas and that is not otherwise a federal holiday in the United States.

“ Buyer ” is defined in the preamble to this Agreement.

“ Buyer Indemnified Parties ” is defined in Section 13.2 .

“ Buyer’s Credits ” means (without duplication) the sum of (i) proceeds received by Seller or the Company Group and distributed to Seller prior to Closing that are attributable to the sale of Hydrocarbons produced from the Company Assets on or after the Effective Time and less amounts payable as royalties, overriding royalties and other burdens measured by or payable out of such production, and less severance taxes applicable to such production; (ii) any Property Costs payable to Buyer that are attributable to the ownership or operation of the Company Assets prior to the Effective Time; (iii) the value of all Hydrocarbons produced from and after the Effective Time, downstream of the applicable sales meter as of the Effective Time; (iv) the Resolved Defect Amount; (v) the amount of any reduction of the Base Purchase Price under Sections 3(e)(i)(C) and 3(e)(ii)(D) of Exhibit A ; (iv) an amount equal to the Suspended Funds; and (v) except as expressly provided otherwise herein, any other amount provided for elsewhere in this Agreement or otherwise agreed in writing by the Parties.

“ Casualty Loss ” is defined in Section 8.3 .

“ Central Time ” means Central Standard Time or Central Daylight Saving Time, as applicable.

“ Claim ” means both Direct Claims and Third-Party Claims, collectively and individually.

“ Claim Notice ” is defined in Section 13.6(a) .

“ Closing ” is defined in Section 11.1 .

“ Closing Date ” is defined in Section 11.1 .

“ Closing Statement ” is defined in Section 3.4 .

“ Closing Statement Arbitrator ” is defined in Section 3.6(b) .

“ Code ” means the Internal Revenue Code of 1986, as amended.

“ Company ” is defined in the recital of this Agreement.

“ Company Assets ” means:

(a) the Interests;

(b) with respect to the Company, (i) 100% of the issued and outstanding ownership interests in Mid-Continent Oilfield Supply, L.L.C., an Oklahoma limited liability company (“ MidCon ”); and (ii) 100% of the issued and outstanding ownership interests in Northeast Shelf Energy, L.L.C., an Oklahoma limited liability company (“ Northeast ”; and with MidCon, the “ Wholly-Owned Subsidiaries ”); and

(i) the oil and gas leases, oil, gas and mineral leases, fee mineral interests, royalty interests, non-working and carried interests, overriding royalty interests, non-

participating royalty interests, production payments, Working Interests, Net Revenue Interests, operating rights and other interests in land described or referred to in Exhibit C (collectively, the “ Leases ”), together with all oil and gas pooling and unitization agreements, declarations, designations and order relating to the Leases (such pooled or unitized areas being, collectively, the “ Units ”);

(ii) any and all oil and gas wells, salt water disposal wells, injection wells and other wells and wellbores, whether abandoned, not abandoned, plugged or unplugged, located on the Leases and in existence as of the Effective Date (collectively, the “ Wells ”), that are identified on Exhibit D ;

(iii) all easements, rights-of-way, servitudes, surface and subsurface lease agreements, surface use agreements and other rights or agreements related to the use of the surface and subsurface, in each case to the extent relating to the operation of the Leases, Wells, Units and Gathering Systems, including, without limitation, the interests described on Exhibit E (the “ Surface Interests ”);

(iv) the gathering systems described on Exhibit F (collectively, the “ Gathering Systems ”), including without limitation, all gathering lines, pipelines, pumps, meters, equipment, valves, fittings, tanks, measurement facilities, machinery, cathodic protection equipment, dehydration equipment, gas, gas inventories, gaseous substances located within such gathering systems or associated pipelines, and all appurtenances thereto;

(v) all Hydrocarbons produced and saved from, or allocable to, the Leases and the Wells from and after the Effective Time (collectively, the “ Sale Hydrocarbons ”);

(vi) all structures, facilities, down-hole equipment, inventory, after-acquired title, wellheads, tanks, pumps, compressors, operating records, well logs, well files, cuttings, cores and core analysis, seismic analysis, bottom hole pressure tests, decline curves and other information whether in written or electronic form, separators, equipment, machinery, fixtures, flowlines, gathering lines, materials, improvements, SCADA hardware and software, rolling stock and vehicles and any other personal property used in the operation of the Leases, Units, Wells, Gathering Systems or Surface Interests, as well as all general intangibles, payment intangibles, accounts, accounts receivable, instruments, deposit accounts and “As Extracted Collateral” attributable to the Company Assets from and after the Effective Time (collectively, the “ Personal Property ”);

(vii) all licenses, Permits, contracts, pooling, unitization and communitization agreements, operating agreements, processing agreements, division orders, development agreements, gas purchase agreements, oil purchase agreements, assignments, assumption agreements, construction agreements, interconnect agreements, operational balancing agreements, conveyances, master service agreements, drilling agreements, gathering agreements, marketing agreements, storage agreements, rights of first refusal, farm-in and farm-out agreements, rental agreements, equipment lease agreements and all other agreements of any kind or nature, whether recorded or unrecorded, including, without limitation, those agreements demarcated on Schedule 5.7 , but insofar and only insofar as the foregoing relate to the Leases, Units, Wells, Gathering Systems, Surface Interests or Personal Property, the ownership and

operation thereof, or the production, treatment, sale, transportation, gathering, storage, sale or disposal of Sale Hydrocarbons, water or other substances produced therefrom or associated therewith (collectively, the “ Specified Contracts ”);

(viii) books, records, logs, files, reports and other documents and materials that relate to the Interests, Leases, Surface Interests, Wells, Units, Gathering Systems, Sale Hydrocarbons, Contracts, Personal Property, any other Company Asset or any member of the Company Group in the possession or control of the Seller’s Group (the “ Records ”); and

(ix) all other properties, rights and assets of the Company Group, including all intellectual property rights related to any of the foregoing.

provided, however , that the Company Assets shall not include the Excluded Assets.

“ Company Group ” means, collectively and individually, as applicable, the Company and the Wholly-Owned Subsidiaries.

“ Confidentiality Agreement ” means that certain confidentiality agreement, dated as of May 7, 2015, between Buyer and Seller or its Affiliates.

“ Contracts ” means any written and legally binding agreement, commitment, lease, license or other written and legally binding contractual undertaking.

“ Defect Deductible ” means an amount equal to two percent (2.0%) of the Base Purchase Price.

“ Direct Claim ” is defined in Section 13.6(d) .

“ Disclosure Schedules ” means the schedules attached hereto.

“ Dollars ” and “ $ ” mean the lawful currency of the United States.

“ Earnest Money Deposit ” is defined in Section 3.2 .

“ Effective Date ” means the Closing Date.

“ Effective Time ” means 7:00 AM Central Time on the Effective Date.

“ Environmental Laws ” means all applicable Laws relating to health, safety, the protection of the environment, natural resources, or threatened or endangered species, pollution, or its impacts on human health, including those Laws relating to the storage, handling and use of chemicals and other Hazardous Substances and those relating to the generation, processing, treatment, storage, transportation, disposal or other management thereof.

“ Environmental Permits ” means all Permits of Governmental Authorities required by Environmental Laws for the conduct of the business of the Seller’s Group.

“ Escrow Account ” is defined in Section 3.2 .

“ Escrow Agent ” is defined in Section 3.2 .

“ Escrow Agreement ” is defined in Section 3.2 .

“ Estimated Adjustment Amount ” is defined in Section 3.4 .

“ Estimated Purchase Price ” is defined in Section 3.5 .

“ Excluded Assets ” means (i) all trade credits and all accounts, accounts receivable, checks, funds, promissory notes, instruments and general intangibles attributable to the Company Assets with respect to any period of time prior to the Effective Time; (ii) all rights and interests of Seller in respect of any deposits, bonds, letters of credit or other type of security or credit support posted by Seller (including the right to request and receive any refunds thereof); (iii) all rights and interests in and to any hedges or other derivative contracts relating to Seller; (iv) all of the Seller’s and its respective Affiliates’ (with the exception of the Company Group) proprietary computer software, technology, patents, and trade secrets, proprietary or licensed copyrights, names (other than Seller’s names), trademarks, logos and other intellectual property except information that is necessary for operating the Company Assets; (v) claims of the Seller’s Group for refund of or loss carry forwards with respect to Taxes attributable to any period prior to the Effective Time or Taxes attributable to Excluded Assets; (vi) furniture, fixtures, computer equipment and other office furnishings owned by Seller and/or its Affiliates in locations outside the Oklahoma County; (vii) all documents and instruments of Seller that may be protected by an attorney-client privilege or that relate to any other Excluded Asset, the transactions contemplated by this Agreement or any transactions between either of Seller or any of its Affiliates (with the exception of the Company Group); (viii) data and other information that cannot be disclosed or assigned to Buyer as a result of confidentiality or similar arrangements; (ix) any and all research, valuation or pricing information prepared by the Seller’s Group or its respective Representatives in connection with efforts to sell the Interests and the Company Assets, including, but not limited to bids received and information and correspondence in connection therewith; (x) any assets that are assigned to Seller pursuant to Sections 3(e)(i)(C) and 3(e)(ii)(B) of Exhibit A ; (xi) all equity interests in and assets of the Excluded Entities; and (xii) those wells and wellbores listed on Exhibit G .

“ Excluded Entities ” means collectively (i) Purgatory Creek Gas Company, L.L.C., a Delaware limited liability company; (ii) White Hawk Gas, L.L.C., a Delaware limited liability company; (iii) Wild West Gas, L.L.C., an Oklahoma limited liability company; (iv) Bullseye Operating, L.L.C., a Delaware limited liability company; (v) Gashoma, L.L.C., an Oklahoma limited liability company; and (vi) Cotton Valley Compression, L.L.C., an Oklahoma limited liability company.

“Final Settlement ” is defined in Section 3.6(c)

“ Fundamental Representations ” means those representations and warranties of Seller set forth in Article IV and in Section 5.1 , Section 5.2 , Section 5.3 , Section 5.6 and Section 5.12 .

“ GAAP ” means generally accepted accounting principles of the United States, consistently applied.

“ Gathering Systems ” is defined in the definition of Company Assets.

“ Governmental Authority ” means any federal, state, municipal, local or similar governmental authority, regulatory or administrative agency, tribunal or court.

“ Hazardous Substances ” means any chemicals, constituents, fractions, derivatives, compounds or other substances that are defined or regulated as pollutants, contaminants, wastes, toxic substances, hazardous substances, hazardous materials, radioactive materials or radioactive wastes or that may form the basis of liability or obligations under any Environmental Laws. Hazardous Substances shall also expressly include petroleum substances (and any components, fractions or derivatives thereof) and exploration and production wastes.

“ Hydrocarbons ” means oil, gas, natural gas liquids, casinghead gas, coal bed methane, condensate and other gaseous and liquid hydrocarbons or any combination thereof.

“ Imbalance ” means any over-production or under-production or over-deliveries or under-deliveries on account of (a) any imbalance at the wellhead between the amount of Hydrocarbons produced from a Well constituting part of the Company Assets and allocable to the interests of the Seller’s Group, and the shares of production from the relevant Well that are actually taken by or delivered to or for the account of the Seller’s Group and (b) any marketing imbalance between the quantity of Hydrocarbons constituting part of the Company Assets and required to be delivered by or to the Seller’s Group under any Contracts relating to the purchase and sale, gathering, transportation, storage, treating, processing, or marketing of Hydrocarbons and the quantity of Hydrocarbons actually delivered by or to the Seller’s Group pursuant to the applicable Contracts.

“ Indebtedness for Borrowed Money ” means all obligations, including the principal amount, plus any related accrued and unpaid interest, fees and prepayment premiums or penalties, to any Person for borrowed money. In addition, for the avoidance of doubt, Indebtedness for Borrowed Money includes: (i) any obligations, contingent or otherwise, under banker’s acceptance credit or similar facilities (other than any letters of credit, performance bonds or similar obligations entered into in the ordinary course of business consistent with past practices); (ii) any obligations to pay the deferred purchase price of property or services, except trade accounts payable and other current liabilities arising in the ordinary course of business; (iii) any obligations with respect to hedging, swaps or similar arrangements; (iv) any obligations to pay rent or other payment amounts under leases that would be required to be classified as a capital lease on a balance sheet prepared in accordance with GAAP; (v) all advances from Seller or any Affiliate or former Affiliate of Seller to the Company Group; and (vi) any guaranty of any of the foregoing.

“ Indemnified Party ” is defined in Section 13.6(a) .

“ Indemnifying Party ” is defined in Section 13.6(a) .

“ Indemnity Cap ” means an amount equal to forty percent (40%) of the Base Purchase Price.

“ Indemnity Deductible ” means an amount equal to one and one-half percent (1.5%) of the Base Purchase Price.

“ Individual Indemnity Threshold ” is defined in Section 13.5(a) .

“ Interests ” is defined in the recital of this Agreement.

“ IRS ” means the Internal Revenue Service of the United States.

“ Knowledge ” means, as to Seller, the actual knowledge, after reasonable inquiry that a prudent individual could be expected to discover in the ordinary course of business in performing their regular duties on behalf of Seller Group, of those Persons listed in Schedule 1.1 as of the date of this Agreement.

“ Law ” means any applicable statute, writ, law, rule, regulation, ordinance, Order, judgment, injunction, award, determination or decree of a Governmental Authority, in each case as in effect on and as interpreted on the date of this Agreement.

“ Leases ” is defined in the definition of Company Assets.

“ Legal Proceeding ” means any and all actions, proceedings, claims, suits, notice of violation, notice of non-compliance and causes of action by or before any Governmental Authority and all arbitration, administrative and mediation proceedings.

“ Legal Right ” means, to the extent arising from, or in any way related to the Company Group or the Company Assets, the legal authority and right, including through the exercise of voting, managerial or other authority or right, if any; provided, however , that a Legal Right shall be deemed not to exist with respect to any contemplated conduct unless Seller reasonably determines that such conduct would not constitute a violation, termination or breach of, or require any payment under, or permit any termination by any third party under, any agreement, applicable Law, duty or any other obligation.

“ Liens ” means liens, pledges, claims, encumbrances, options, mortgages, deeds of trust and security interests.

“ Losses ” is defined in Section 13.2 .

“ Material Adverse Effect ” means, with respect to the Company Group and/or the Company Assets (as currently owned and operated), any circumstance, violation, inaccuracy, change, or effect that is materially adverse to the business, operations, capitalization, assets or financial condition of the Company Group or the Company Assets, taken as a whole, but shall exclude any circumstance, change or effect resulting or arising from: (i) any general change in conditions in the industries or markets in which the Company Group operates or where the Company Assets are located; (ii) seasonal reductions in revenues and/or earnings of the Company Group or attributable to the Company Assets in the ordinary course of its business; (iii) any adverse change, event or effect on the global, national or regional energy industry as a whole, including those impacting energy prices or the value of oil and gas assets and properties or other commodities, goods or services, or the availability or costs of hedges; (iv) changes in the

prices of oil, gas or other Hydrocarbon products; (v) national or international political conditions, including any engagement in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack; (vi) changes in Law, GAAP or the interpretation thereof; (vii) the entry into or announcement of this Agreement, actions contemplated by this Agreement, or the consummation of the transactions contemplated hereby; (viii) any failure to meet internal or third-party projections or forecasts or revenue or earnings or reserve predictions; (ix) changes or developments in financial or securities markets or the economy in general; (x) effects of weather, meteorological events, natural disasters or other acts of God; (xi) natural declines in well performances; or (xii) actions taken or omitted to be taken by or at the written request of Buyer.

“ Material Contracts ” means any of the following Contracts to which any member of the Company Group is a party or by which any member of the Company Group, or any of the Company Assets, are bound or subject or to which any of the Company Assets relate:

(a) Contracts that can reasonably be expected to involve obligations of, or payments to or from the Company Group or with respect to the Company Assets after the date hereof, in excess of fifty thousand Dollars ($50,000) in any given calendar year;

(b) Contracts restricting, in any material respect, the Company Group from freely engaging in any business or competing anywhere or the Company Assets from being utilized, encumbered or transferred;

(c) Contracts evidencing Indebtedness for Borrowed Money or the granting of a Lien securing any such indebtedness or any liability or obligation, including any indenture, mortgage, loan, note, credit, sale-leaseback, deed of trust, fixture filing, security agreement, assignment of “as extracted collateral” or similar Contract (in each case) to which the Company Assets are subject (whether a member of the Company Group is the borrower or the lender) and all related security agreements or similar agreements associated therewith, unless the Company Assets subject thereto are to be released from such Contracts on or before the Closing;

(d) Contracts guaranteeing any obligation of another Person or guaranteeing any hedge;

(e) Contracts evidencing a hedging or swap transaction;

(f) Contracts between the Company Group, on the one hand, and the Seller’s Group or any Affiliate of Seller, on the other hand (the “ Affiliate Contracts ”);

(g) Contracts granting any power of attorney with respect to the affairs of any of the Company Group;

(h) Contracts for the sale, gathering, processing, treating, conditioning, storage or transportation of production or Hydrocarbons from and including the Company Assets, or otherwise relating to the marketing of production of Hydrocarbons from and including the Company Assets, other than Contracts which are subject to cancellation on not more than thirty (30) days’ notice without penalty or other detriment to the Company Group;

(i) Contracts that contain calls upon or options to purchase production or Company Assets;

(j) Contracts that constitute a partnership or joint venture agreement (excluding any tax partnership); and

(k) Contracts that constitute a farmout agreement, exploration agreement, participation agreement, operation agreement, development agreement, sale, disposition, or lease agreement or other similar Contract.

“ Midcon ” is defined in the definition of Company Assets.

“ Net Revenue Interest ” means the percentage of revenues due a Working Interest owner, net of royalties, overriding royalties, non-participating royalties and all “cost free shares of production”, as well as all additional burdens on the Working Interest.

“ NORM ” means naturally occurring radioactive material, including technologically enhanced naturally occurring radioactive material.

“ Northeast ” is defined in the definition of Company Assets.

“ Notice of Disagreement ” is defined in Section 3.6(a) .

“ Notices ” is defined in Section 16.1 .

“ Oil and Gas Properties ” means, collectively, the Leases, Wells and Units.

“ Oklahoma County ” is defined in the recital to this Agreement.

“ Order ” means any order, judgment, injunction, ruling, decree, consent decree, sentence, charge, subpoena, plea agreement, diversion agreement, writ or award issued, made, entered, rendered or approved by any court, administrative agency, or other Governmental Authority or by any arbitrator or mediator.

“ Organizational Documents ” means any charter, certificate of incorporation, certificate or articles of formation, articles of association, partnership agreements, limited liability company agreements, bylaws, operating agreement or similar formation or governing documents and instruments.

“ Overhead Rate ” means the rate charged by an operator to the joint interest owners for one hundred percent (100%) of the interests under an operating agreement.

“ Party ” and “ Parties ” are defined in the preamble of this Agreement.

“ Permits ” means authorizations, approvals, registrations, licenses, permits or certificates issued by any Governmental Authority (including the BIA), including, but not limited to, the Osage Nation.

“ Permitted Encumbrances ” is defined in Exhibit A .

“ Person ” means any individual, firm, corporation, partnership, limited partnership, limited liability company, incorporated or unincorporated association, joint venture, joint-stock company, Governmental Authority or other entity of any kind.

“ Personal Property ” is defined in the definition of Company Assets.

“ Pre-Closing Tax Period ” means any Tax period ending on or before the Closing Date.

“ Pre-Effective Date Tax Period ” means any Tax period ending on or before the Effective Date.

“ Proceeding ” means any action, suit, litigation, arbitration, lawsuit, claim, proceeding, hearing, inquiry, investigation, or dispute commenced, brought, conducted or heard by or before or otherwise involving, any Governmental Authority or any arbitrator or mediator.

“ Property Costs ” means the Seller’s Group, if prior to the Effective Time, or Buyer, if from after the Effective Time, or any of their respective Affiliates’ obligation for any expenses or costs (including lease operating expense, drilling and completion costs, seismic costs, workover costs, capital expenditures, joint interest billings and overhead charges under applicable operating agreements) which relate to the Company Assets or are otherwise incurred by Seller’s Group, if prior to the Effective Time, or Buyer, if from and after the Effective Time, or any of their respective Affiliates in connection with the ownership, operation, development or maintenance of the Company Assets, but excluding (in all cases) costs and expenses attributable to (i) obligations to pay an owner of any Working Interest, royalty, overriding royalty, net profits interests or other similar burdens on or measured by production any revenues or proceeds attributable to sales of Hydrocarbons relating to the Company Assets, including those held in suspense; (ii) Losses for personal injury or death, property damage or loss (other than damage to structures, fences, irrigation systems and other fixtures, crops, livestock and other personal property in the ordinary course of business), torts, breach of Contract (other than failure to make payments due under the terms of a Contract) or violation of any Lease or Law (or private rights of action under any Law); (iii) obligations to plug wells (including the Wells), dismantle or decommission facilities, close pits and restore the surface around such wells, facilities and pits; (iv) environmental liabilities, including obligations to remediate any contamination of groundwater, surface water, soil, sediments or personal property under applicable Environmental Laws; (v) obligations with respect to Imbalances; and (vi) claims for indemnification or reimbursement from any third party with respect to costs of the type described in preceding clauses (i) through (v), whether such claims are made pursuant to Contract or otherwise.

“ Purchase Price ” is defined in Section 3.1 .

“ Records ” is defined in the definition of Company Assets.

“ Representatives ” means a Person’s directors, officers, partners, members, managers, employees, agents or advisors (including attorneys, accountants, consultants, bankers, financial advisors, and any Representatives of those advisors).

“ Resolved Defect Amount ” means the amount by which the sum of all Defect Amounts determined in accordance with the procedures in Exhibit A exceeds the Defect Deductible.

“ Response Date ” is defined in Section 3.6(a) .

“ Restricted Period ” is defined in Section 8.1 .

“ Sale Hydrocarbons ” is defined in the definition of Company Assets.

“ Seller ” is defined in the preamble to this Agreement.

“ Seller Indemnified Parties ” is defined in Section 13.3 .

“ Seller Marks ” means all trademarks, service marks, and trade names owned by Seller or its Affiliates, including, without limitation, the rights of Seller and its Affiliates to the name “Sanchez Production Partners” or any trade names, trademarks, service marks, corporate names or logos, or any derivative or combination thereof, that are confusingly similar thereto; provided, however , that the term “Seller Marks” shall not include the names of the Company Group.

“ Seller’s Credits ” means (without duplication) (i) proceeds received by Buyer or the Company Group that are attributable to the sale of Hydrocarbons produced from the Company Assets prior to the Effective Time and less amounts payable as royalties, overriding royalties and other burdens measured by or payable out of such production, and less severance taxes applicable to such production; (ii) any Property Costs payable by Seller’s Group that are attributable to the ownership or operation of the Company Assets from and after the Effective Time; (iii) the value of all Hydrocarbons produced prior to the Effective Time but in tanks or downstream of the applicable sales meter as of the Effective Time; (iv) for each of the Oil and Gas Properties operated by Seller’s Group and as to which there are one or more Non-Parties that is a joint interest owner in such property, a monthly amount for the period commencing as of the Effective Time through the Closing Date equal to the Overhead Rate (proportionately reduced to the percentage interest conveyed, and prorated for the month in which the Closing Date occurs based on the number of Days in such month through the Closing Date); and (v) except as expressly provided otherwise herein, any other amount provided for elsewhere in this Agreement or otherwise agreed in writing by the Parties; provided, however, that (A) crude oil shall be considered only the crude oil in the tanks that is above the load line of the tank; and (B) crude oil value shall be determined by the 30-day average price of crude oil on the Closing Date.

“ Seller’s Group ” means, collectively and individually, as applicable, Seller, the Company, and the Wholly-Owned Subsidiaries.

“ Settlement Date ” is defined in Section 3.6(b) .

“ Specified Contracts ” is defined in the definition of Company Assets.

“ Straddle Period ” means any Tax period that includes but does not end at the Effective Time.

“ Subsidiary Interest ” is defined in Section 5.3(a) .

“ Suspended Funds ” is defined in Section 5.10 .

“ Surface Interests ” is defined in the definition of Company Assets.

“ Target Formation ” is defined in Exhibit D with respect to each corresponding Well.

“ Tax Allocation ” is defined in Section 3.8(b) .

“ Tax Audit ” means any audit, adjustment, claim, examination, assessment, contest or other Proceeding with respect to Taxes.

“ Tax Returns ” means any report, return, election, document, estimated tax filing, declaration, claim for refund, information returns or other filing provided to any Governmental Authority with respect to Taxes, including any schedules or attachments thereto and any amendment thereof.

“ Taxes ” means all taxes, assessments, charges, duties, fees, levies, imposts or other similar charges imposed by a Governmental Authority, including all income, franchise, profits, margins, capital gains, capital stock, transfer, gross receipts, sales, use, transfer, service, occupation, ad valorem, real or personal property, excise, severance, production, windfall profits, customs, premium, stamp, license, payroll, employment, social security, unemployment, disability, environmental, alternative minimum, add-on, value-added, withholding and other taxes, and assessments, charges, duties, fees, levies, imposts or other similar charges of any kind, and all estimated taxes, deficiency assessments, additions to tax, penalties and interest with respect to taxes, whether disputed or otherwise.

“ Third-Party Claim ” is defined in Section 13.6(a) .

“ United States ” means United States of America.

“ Units ” is defined in the definition of Company Assets.

“ Wells ” is defined in the definition of Company Assets.

“ Wholly-Owned Subsidiaries ” is defined in the definition of Company Assets.

“ Working Interest ” means that interest which bears a share of all costs and expenses proportionate to the interest owned or associated with the exploration, development and operation of a Lease(s) and the Well(s) associated therewith, that the owner of a Lease(s) or Well(s) is required to bear and pay by reason of such ownership or association, expressed as a decimal.

Section 1.2 Rules of Construction .

(a) All article, section, schedule, and Exhibit references used in this Agreement are to articles and sections of, and schedules and exhibits to, this Agreement unless otherwise specified. The schedules and exhibits attached to this Agreement constitute a part of this Agreement and are incorporated herein for all purposes.

(b) If a term is defined as one part of speech (such as a noun), it shall have a corresponding meaning when used as another part of speech (such as a verb). Terms defined in the singular have the corresponding meanings in the plural, and vice versa. Unless the context of this Agreement clearly requires otherwise, words importing the masculine gender shall include the feminine and neutral genders and vice versa. The term “includes” or “including” shall mean “including without limitation.” Unless the context of this Agreement clearly requires otherwise, the words “hereof,” “hereto,” “hereby,” “herein,” “hereunder” and words of similar import, when

used in this Agreement, shall refer to this Agreement as a whole and not to any particular Section or Article in which such words appear.

(c) The Parties acknowledge that each Party and its attorney have reviewed this Agreement and that any rule of construction to the effect that any ambiguities are to be resolved against the drafting Party, or any similar rule operating against the drafter of an agreement, shall not be applicable to the construction or interpretation of this Agreement.

(d) The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement.

(e) All references to currency herein shall be to, and all payments required hereunder shall be paid in, Dollars.

ARTICLE II.
PURCHASE AND SALE

Section 2.1 Purchase and Sale of Interests . Upon the terms and subject to the conditions set forth in this Agreement, Seller shall sell, assign, transfer, and convey to Buyer, and Buyer shall purchase and acquire from Seller, at the Closing, the Interests free and clear of all Liens (other than restrictions under federal and state securities laws and in the Organizational Documents of the Company) and unencumbered by any Indebtedness. Seller shall transfer the Interests to Buyer by delivery of the Assignment and Assumption Agreement at Closing.

Section 2.2 Company Assets . At the time of Closing, the assets of the Company shall consist solely of the Company Assets. At the time of Closing, Seller agrees to assign, convey, set over and deliver all of Seller’s right, title, and interest in, to and under any of the Company Assets unto Buyer. Prior to Closing, Seller shall cause the Company Group to assign and transfer to Seller or one of its Affiliates all of the Company Group’s right, title and interest in and to the Excluded Assets.

ARTICLE III.
CONSIDERATION

Section 3.1 Consideration . In consideration for the purchase of the Interests, Buyer agrees to (i) pay to Seller at Closing the sum of Five Million Five Hundred Thousand Dollars ($5,500,000) (the “ Base Purchase Price ”), as adjusted by the Adjustment Amount (the Base Purchase Price as so adjusted, the “ Purchase Price ”) and (ii) assume the Assumed Obligations.

Section 3.2 Earnest Money Deposit . Upon the Parties’ execution of this Agreement, Buyer shall deliver to SunTrust Bank (the “ Escrow Agent ”) a performance guarantee deposit in an amount equal to Two Hundred Fifty Thousand Dollars ($250,000) (the “ Earnest Money Deposit ”). The Earnest Money Deposit shall be delivered by Buyer to the Escrow Agent by means of a completed federal funds transfer to such interest-bearing escrow account as the Escrow Agent may designate to the Parties (the “ Escrow Account ”). The Earnest Money Deposit shall be held by the Escrow Agent subject to the terms of an Escrow Agreement mutually acceptable to the Parties and the Escrow Agent (the “ Escrow Agreement ”). All interest earned on the Earnest Money Deposit while in the Escrow Account shall be added to, and deemed a part of, the Earnest Money Deposit. In the event Buyer fails to timely pay the Earnest Money Deposit, Seller may, upon Notice to Buyer, terminate this Agreement in accordance with Section 12.1 .

Section 3.3 Adjustments to the Base Purchase Price . The Base Purchase Price shall be adjusted by an amount (which could be a positive or negative number) equal to (a) the Seller’s Credits, minus (b) the Buyer’s Credits, plus or minus, as applicable (c) Tax allocations pursuant to Section 14.1(c) and Section 14.1(d) (such amount being referred to herein as the “ Adjustment Amount ”). For purposes of clarity, a positive Adjustment Amount will increase the Base Purchase Price and a negative Adjustment Amount will decrease the Base Purchase Price.

Section 3.4 Closing Statement . Not later than five (5) Business Days prior to the Closing Date, Seller shall prepare and deliver to Buyer a statement (the “ Closing Statement ”) showing the estimated Adjustment Amount (using actual numbers and amounts where available, and using Seller’s good faith estimate of other amounts, where actual amounts are not available, in each case showing the associated calculations in reasonable detail) (the “ Estimated Adjustment Amount ”). Within five (5) Business Days after receipt of the Closing Statement, Buyer will deliver to Seller a written report containing all changes with the explanation therefor that Buyer proposes to be made to the Closing Statement. The parties shall negotiate in good faith with respect thereto. The Closing Statement, as agreed upon by the Parties, will be used to determine the Estimated Adjustment Amount at Closing. If the Parties are unable to reach agreement, after negotiating in good faith, the Closing Statement as adjusted by Buyer will be used to determine the Estimated Adjustment Amount at Closing, absent manifest error.

Section 3.5 Closing Payment . At Closing, (i) Buyer shall pay to Seller, in cash by wire transfer of immediately available Dollar funds to the account or accounts designated by Seller, an amount equal to the difference between the Base Purchase Price and the Earnest Money Deposit, with such difference increased or decreased, as the case may be, by the Estimated Adjustment Amount (the “ Estimated Purchase Price ”) and (ii) the Escrow Agent shall deliver the Earnest Money Deposit to Seller, which the Escrow Agent shall disburse in accordance with the provisions of the Escrow Agreement.

Section 3.6 Post-Closing Adjustment .

Closing Statement (and reasonable access to Seller’s personnel, including internal accountants) to permit Buyer to perform or cause to be performed an audit of the Closing Statement, at Buyer’s expense. The Closing Statement shall become final and binding upon the Parties on the date that is thirty (30) days following receipt thereof by Buyer (the “ Response Date ”) unless Buyer gives Notice of its disagreement (“ Notice of Disagreement ”) to Seller on or before such Response Date. Any Notice of Disagreement shall specify in reasonable detail the Dollar amount, nature and basis of any disagreement so asserted. If a Notice of Disagreement is not received by Seller on or before the Response Date, then the Response Date shall be deemed the “ Settlement Date .” If a Notice of Disagreement is received by Seller by the Response Date, then the Closing Statement (as revised in accordance with paragraph (b) below) shall become final and binding on the Parties on the date upon which the Arbitrated Closing Statement (defined below) is delivered to the Parties, unless the Parties come to a mutual agreement in writing before the delivery of the Arbitrated Closing Statement, in which case the Settlement Date will be deemed to be the date on which such a mutual agreement is executed by the Parties.

(b) Arbitrated Closing Statement . During the sixty (60) days following the date upon which Seller receives a Notice of Disagreement, Seller and Buyer shall use commercially reasonable efforts to attempt to resolve in writing any differences that they may have with respect to all matters specified in the Notice of Disagreement. If at the end of such sixty (60) day period (or earlier by mutual agreement), Buyer and Seller have not reached agreement on such matters, the matters that remain in dispute (and only such matters) shall promptly be submitted for review and final and binding resolution to an independent national accounting firm that has not represented either Party at any time during the five (5) year period of time immediately preceding its designation hereunder and who is mutually agreed upon by Seller and Buyer in good faith (the “ Closing Statement Arbitrator ”). Buyer and Seller shall, not later than seven (7) days prior to the hearing date set by the Closing Statement Arbitrator, each submit a written brief to the Closing Statement Arbitrator (and a copy thereof to the other Party on the same day) with Dollar figures for settlement of the disputes as to the Adjustment Amount (together with a proposed Closing Statement that reflects such figures) consistent with their respective calculations delivered pursuant to Section 3.6(a) . The hearing shall be conducted on a confidential basis. The Closing Statement Arbitrator shall consider only those items or amounts in the Closing Statement which were identified in the Notice of Disagreement and which remain in dispute and the Closing Statement Arbitrator’s decision resolving the matters in dispute shall be based upon and be consistent with the terms and conditions in this Agreement. In deciding any matter, the Closing Statement Arbitrator (i) shall be bound by the provisions of this Section 3.6 and the related definitions and (ii) may not assign a value to any disputed item greater than the greatest value for such item claimed by either Seller or Buyer or less than the smallest value for such item claimed by Seller or Buyer in their respective calculations delivered pursuant to Section 3.6(a) . The Closing Statement Arbitrator shall render a decision (the “ Arbitrated Closing Statement ”) resolving the matters in dispute (which decision shall include a written statement of findings and conclusions) promptly after the conclusion of the hearing, unless the Parties reach agreement prior thereto and withdraw the dispute from arbitration. The Closing Statement Arbitrator shall provide to the Parties explanations in writing of the reasons for its decisions regarding the adjusted Adjustment Amount and shall issue a Closing Statement reflecting such decision. The decision of the Closing Statement Arbitrator shall be (i) final and binding on the Parties and (ii) final and non-appealable for all purposes hereunder ; provided, however , that such decision may be reviewed, corrected or set aside by a court of competent jurisdiction, but only if

and to the extent that such court of competent jurisdiction finds that (A) the Closing Statement Arbitrator made mathematical errors with respect to its decision, (B) fraud was committed by either Party in connection with the matters in dispute or (C) the Arbitrator considered matters outside of its authority and/or its evaluation was in direct contravention of the terms of this Agreement. The cost of any arbitration (including the fees and expenses of the Closing Statement Arbitrator) under this Section 3.6(b) shall be borne equally by the Parties. The fees and disbursements of Seller’s independent auditors and other costs and expenses incurred in connection with the services performed with respect to the Closing Statement shall be borne by Seller and the fees and disbursements of Buyer’s independent auditors and other costs and expenses incurred in connection with their preparation of the Notice of Disagreement shall be borne by Buyer.

(c) Final Settlement . If the amount of the Purchase Price as set forth on the Closing Statement (or Arbitrated Closing Statement) exceeds the amount of the Estimated Purchase Price paid at Closing, then, within five (5) days after the Settlement Date (or within five (5) days after the Closing Statement Arbitrator delivers the Arbitrated Closing Statement), Buyer shall pay to Seller the amount of such difference. If the amount of the Purchase Price as set forth on the Closing Statement (or Arbitrated Closing Statement) is less than the Estimated Purchase Price paid at Closing, then Seller shall pay to Buyer, within five (5) days after the Settlement Date (or within five (5) days after the Closing Statement Arbitrator delivers the Arbitrated Closing Statement), the amount of such difference. Any post-Closing payment made pursuant to this Section 3.6(c) shall be made by means of a wire transfer of immediately available Dollar funds to a bank account designated by the Party receiving the funds.

Section 3.7 Payments and Reimbursements . Notwithstanding any other provision hereof, from the Closing Date until ninety (90) days following the Settlement Date, any proceeds, costs or expenses that would constitute a Buyer’s Credit or a Seller’s Credit (and other proceeds, costs or expenses attributable to the Company Assets on or after the Closing Date) but that are not reflected in the Closing Statement shall be treated as follows:

(a) Seller will promptly forward, or cause to be forwarded, to Buyer any payments received by the Seller’s Group or any Affiliates thereof after the Closing Date with respect to proceeds attributable to the sale of Hydrocarbons produced from the Company Assets on or after the Effective Time but that are not reflected in the Closing Statement;

(b) Seller will be responsible pursuant to the terms of this Agreement for Property Costs that would constitute a Buyer’s Credit but that are not reflected in the Closing Statement and shall promptly pay, or, if paid by Buyer (or the Company Group after Closing), promptly reimburse Buyer for and hold Buyer harmless from and against such costs or expenses;

(c) Buyer will promptly forward, or cause to be forwarded, to Seller any payments received by Buyer (or the Company Group or any Affiliates thereof after Closing) with respect to proceeds attributable to the sale of Hydrocarbons produced from the Company Assets prior to the Effective Time but that are not reflected in the Closing Statement; and

(d) Buyer will be responsible pursuant to the terms of this Agreement for Property Costs that would constitute a Seller’s Credit but that are not reflected in the Closing

Statement and shall promptly pay, or, if paid by the Seller’s Group, promptly reimburse Seller for and hold Seller harmless from and against, such costs or expenses.

Section 3.8 Purchase Price Allocation .

(a) Adjustment Allocation . Pursuant to the terms of Exhibit A , Buyer and Seller have allocated the Purchase Price among the Company Assets as set forth on Exhibit H and such values shall be used for purposes of calculating adjustments to the Base Purchase Price under the procedures set forth on Exhibit A . Notwithstanding anything herein to the contrary, neither Party shall be bound for Tax purposes by the Allocated Values (as defined in Exhibit A ) set forth on Exhibit H to this Agreement.

(b) Tax Allocation . The Parties agree that the transactions contemplated hereby will be treated for U.S. federal income Tax purposes and applicable state income Tax purposes as a sale by Seller and a purchase by Buyer of the Company Assets and the assets of the Wholly-Owned Subsidiaries. All Parties hereto agree to file all Tax Returns consistent with the foregoing and shall not take any position inconsistent with the foregoing for Tax purposes. Within ninety (90) days after the Final Settlement the Parties shall allocate the Purchase Price for Tax purposes among the Company Assets and the assets of the Wholly-Owned Subsidiaries affected thereby in accordance with Section 1060 of the Code and the U.S. Treasury Regulations promulgated thereunder (the “ Tax Allocation ”).

(c) Adjustment . If an adjustment is made to the Purchase Price pursuant to this Agreement, the Tax Allocation shall be adjusted accordingly in accordance with Section 1060 of the Code and as mutually agreed by Buyer and Seller based solely on such adjustment.

(d) Reporting . Seller and Buyer shall report consistently with the Tax Allocation in all Tax Returns, including IRS Form 8594, and neither Seller nor Buyer shall take any position in any Tax Return that is inconsistent with the Tax Allocation, as adjusted, in each case, unless required to do so by a final determination as defined in Section 1313 of the Code, or otherwise with the written consent of the other Party.

ARTICLE IV.
REPRESENTATIONS AND WARRANTIES RELATING TO SELLER

Seller hereby represents and warrants to Buyer as follows:

transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Seller (and all documents required hereunder to be executed and delivered by Seller at the Closing will be duly executed and delivered by Seller), and this Agreement constitutes, and at the Closing each such document will constitute, a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, and similar Laws affecting creditors’ rights generally and subject, as to enforceability, to general principles of equity.

Section 4.3 Ownership of Interests . Except as set forth on Schedule 4.3 :

(a) Seller holds of record and owns beneficially the Interests, free and clear of all Liens (other than restrictions under federal and state securities laws and in the Organizational Documents of the Company and other than Liens relating to Indebtedness for Borrowed Money set forth on Schedule 4.4 and Schedule 5.2 to be released on or prior to Closing);

(b) Seller is not a party to any option, warrant, purchase right or other contract or commitment (other than this Agreement) that could require Seller to sell, transfer or otherwise dispose of the Interests, and other than this Agreement, the Interests are not subject to any voting agreement or other contract, agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights, or disposition of the Interests; and

(c) Upon the occurrence of the Closing, the delivery of the Interests to Buyer in accordance with the terms of this Agreement will transfer good and marketable title to the Interests free and clear of any Liens (but subject to applicable restrictions on transferability under federal and state securities Laws and in the Organizational Documents of the Company).

Section 4.4 No Conflict; Consents . Except as set forth on Schedule 4.4 , the execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated hereby do not and shall not:

(a) violate any Law applicable to Seller or, with respect to Seller, require any filing with or Permit, consent, approval, or authorization of or notice to, any Person;

(b) violate any Organizational Document of Seller; or

(c) (i) breach any Material Contract to which Seller is a party or by which any of its assets are bound; (ii) result in the termination of any such Material Contract; or (iii) constitute an event that, after notice or lapse of time or both, would result in the creation or imposition of a Lien.

ARTICLE V.
REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY GROUP

Seller hereby represents and warrants to Buyer as follows:

Section 5.1 Organization .

(a) The Company is a limited liability company, duly organized, validly existing, and in good standing under the Laws of the State of Delaware and has the requisite power and authority to own or lease the Company Assets that are owned or leased by it and to operate and use the Company Assets and to carry on the business as currently conducted; and the Company is duly registered and qualified to do business, and in good standing, in each jurisdiction where so required, except where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect.

(b) the Wholly-Owned Subsidiaries are limited liability companies, duly organized, validly existing, and in good standing under the Laws of the State of Oklahoma and have the requisite organizational power and authority to own or lease the Company Assets that are owned or leased by them and to operate and use the Company Assets and to carry on the business as currently conducted.

Section 5.2 No Conflict; Consents . Except as set forth on Schedule 5.2 , the execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated hereby do not and shall not:

(a) violate any Law applicable to the Company, the Wholly-Owned Subsidiaries or the Company Assets that are owned or leased by them or, with respect to the Company, the Wholly-Owned Subsidiaries or the Company Assets that are owned or leased by them, require any filing with or Permit, consent, approval, or authorization of or notice to, any Person, except where such violation or failure to make or obtain such filing, consent or approval would not have a Material Adverse Effect;

(b) (i) violate any Organizational Document of the Company or the Wholly-Owned Subsidiaries or (ii) by written or oral agreement to which any member of Seller Group is a party, restrict the drilling of further Wells on the Leases or adversely restrict the use or operation of any Company Asset or prevent Buyer from becoming or continuing to be the operator of record from and after the Effective Time; or

(c) (i) breach any Material Contract to which the Company or the Wholly-Owned Subsidiaries are a party or by which any Company Assets that are owned or leased by them may be bound; (ii) result in the termination of any such Material Contract; (iii) result in the creation of any Lien under any Material Contract or on any Company Asset; or (iv) constitute an event that, after notice or lapse of time or both, would result in any such breach, termination or creation of a Lien.

Section 5.3 Capitalization .

(a) Interests . The Interests (i) are duly authorized, validly issued and fully paid and nonassessable (except as such nonassessability may be affected by matters described in Sections 18-303, 18-607 and 18-804 of the Delaware Limited Liability Company Act); (ii) were issued free of preemptive rights; (iii) were issued in accordance with the registration or qualification provisions of the Securities Act of 1933, as amended, and any relevant state securities Laws or pursuant to valid exemptions therefrom; and (iv) are uncertificated.

(b) Subsidiary Interests . The Company holds of record and beneficially owns 100% of the membership interest of each Wholly-Owned Subsidiary (the “ Subsidiary Interests ”). The Subsidiary Interests (i) are duly authorized, validly issued and fully paid and nonassessable (except as such nonassessability may be affected by matters described in Sections 2030, 2031 and 2040 of the Oklahoma Limited Liability Company Act); (ii) were issued free of preemptive rights; (iii) were issued in accordance with the registration or qualification provisions of the Securities Act of 1933, as amended, and any relevant state securities Laws or pursuant to valid exemptions therefrom; and (iv) are uncertificated.

(c) No Other Rights . Except as set forth on the Organizational Documents of the Company Group, there are no (i) outstanding securities of the Company Group which are convertible into, or exchangeable or exercisable for, membership interests, equity interests or other securities of the Company Group; (ii) authorized or outstanding options, warrants, stock or other rights to purchase or acquire from the Company Group, or obligations of the Company Group to issue, any equity interests, stock or other securities, including securities convertible into or exchangeable for membership interests, stock or other securities of such entity or profit, phantom or similar rights or interests; (iii) preemptive rights related to any membership interests, equity interests, stock or other securities of the Company Group; (iv) except for such relating to Indebtedness for Borrowed Money to be released on or prior to Closing and set forth on Schedule 5.3 , contractual arrangements giving any Person a right to receive any benefits or rights similar to the rights enjoyed by or accruing to the holders of any equity or other interest in the Company Group; or (iv) except for such relating to Indebtedness for Borrowed Money to be released on or prior to Closing and set forth on Schedule 5.3 , authorized or outstanding bonds, debentures, notes or other indebtedness that entitles the holders to vote (or convertible or exercisable for or exchangeable into securities that entitle the holders to vote) with holders of units or interests of the Company Group on any matter.

(d) Subsidiaries . With the exception of (i) the Wholly-Owned Subsidiaries and (ii) prior to the Closing, the Excluded Entities, the Company does not own, directly or indirectly, any capital stock or equity interests (excluding ownership of marketable securities or similar investment accounts representing less than two percent (2%) of the issuer’s voting securities) of any other Person.

Section 5.4 Litigation . Schedule 5.4 sets forth all Legal Proceedings pending against the Company and the Wholly-Owned Subsidiaries or otherwise related to the Company Assets or, to Seller’s Knowledge, threatened in writing, against any member of the Company Group or otherwise related to the Company Assets.

Section 5.5 No Undisclosed Liabilities . To Seller’s Knowledge, the Company Group does not have any liabilities that are required to be reflected, reserved against or otherwise described in a balance sheet of such Company Group prepared in accordance with GAAP as of the Closing Date, other than (i) liabilities arising in connection with the consummation of the transaction contemplated hereunder; and (ii) liabilities disclosed in Schedule 5.5 . Notwithstanding the foregoing, the representation and warranty contained in this Section 5.5 will not apply to (and will exclude) any liability arising out of or related to facts, events, transactions, or actions or inactions, the category of which is the subject of another representation or warranty

set forth in this Article V , whether or not the existence of such liability would constitute a breach or inaccuracy of such representation or warranty.

Section 5.6 Taxes . Except as set forth on Schedule 5.6 , with respect to the Company and the Wholly-Owned Subsidiaries and the Company Assets, (i) all Tax Returns required to be filed prior to the date hereof by the Seller’s Group or with respect to the Company Assets have been timely filed and all of such Tax Returns are complete and correct in all material respects; (ii) all Taxes shown as due on such Tax Returns have been timely paid; (iii) there is no claim pending by any Governmental Authority in connection with any Tax or any Tax Return described in clause (i) or (ii); (iv) no Tax Returns described in clause (i) are under audit or examination by any Governmental Authority and Seller knows of no basis for any such audit or examination; (v) there are no agreements or waivers currently in effect or pending that provide for an extension of time with respect to the filing of any Tax Return of the Company Group or the assessment or collection of any material Tax from or payment by the Company Group or with respect to the Interests or the Company Assets; (vi) no written claim has been made by any Governmental Authority in a jurisdiction where the Company Group does not file a Tax Return that it is or may be subject to material taxation in that jurisdiction with respect to the Company Assets; (vii) each of the Company Group is treated as a disregarded entity or partnership for federal income tax purposes; (viii) Seller is not a foreign person within the meaning of Section 1445 of the Code; (ix) the Company Group is not subject to any tax allocation or sharing agreement or arrangement, obligated to indemnify another under any tax indemnification agreement or arrangement, or, other than for Texas franchise Tax purposes, a member of any consolidated, combined or unitary group; (x) there are no Tax Liens on any of the Company Assets except for Liens for Taxes not yet due; (xi) none of the Company Assets is “tax exempt use property” within the meaning of Section 168(h) of the Code or “tax exempt bond financed property” within the meaning of Section 168(g)(5) of the Code; and (xii) all of the Company Assets that are subject to property tax has been rendered to the appropriate taxing jurisdiction and to Seller’s Knowledge is properly listed and described on the property tax rolls of the appropriate taxing jurisdiction for all periods prior to the Effective Time and no portion of the Company Assets constitutes omitted property for property tax purposes.

Section 5.7 Material Contracts . As of the date hereof, Schedule 5.7 lists each Material Contract. Each Material Contract constitutes the legal, valid and binding obligation of the Company and the Wholly-Owned Subsidiaries that are a party thereto and, to Seller’s Knowledge, the counterparties thereto, and is enforceable in accordance with its terms. The Company and the Wholly-Owned Subsidiaries are not in breach or default in any material respect of its obligations under any of the Material Contracts. Except as set forth in Schedule 5.7 or as would not reasonably be expected to have a Material Adverse Effect, (i) to Seller’s Knowledge, no breach or default by any third-party exists under any Material Contract and (ii) no counterparty to any Material Contract of the Company and the Wholly-Owned Subsidiaries has canceled, terminated, or modified, or, to Seller’s Knowledge, threatened to cancel, terminate or modify, any Material Contract. Except for any such Contract identified on Schedule 5.7 as confidential, true, correct and complete copies of all Material Contracts have been made available to Buyer.

Section 5.8 Compliance with Laws; Permits .

(a) Laws . Except as disclosed on Schedule 5.8(a) , the Company and the Wholly-Owned Subsidiaries are in compliance in all material respects with, all applicable Laws relating to the ownership, use and operation of the Company Assets. Notwithstanding any provision in this Section 5.8 (or any other provision of this Agreement) to the contrary, Section 5.6 and Exhibit A shall be the exclusive representations, warranties and covenants with respect to Tax and environmental issues (including Environmental Permits) and no other representations or warranties are made with respect to such matters, including under this Section 5.8 . Notwithstanding the foregoing, the representation and warranty contained in this Section 5.8(a) will not apply to (and will exclude) any liability arising out of or related to facts, events, transactions, or actions or inactions, the category of which is the subject of another representation or warranty set forth in this Article V , whether or not the existence of such liability would constitute a breach or inaccuracy of such representation or warranty.

(b) Permits . Except as disclosed on Schedule 5.8(b) , (i) the Company and the Wholly-Owned Subsidiaries possess all Permits which are necessary to own or lease the applicable Company Assets owned or leased by them and to operate the Company Assets and their business as currently conducted; (ii) all such Permits of the Company and the Wholly-Owned Subsidiaries are in full force and effect; and (iii) there are no Proceedings pending against the Company and the Wholly-Owned Subsidiaries or otherwise affecting the Company Assets, or to Seller’s Knowledge, threatened before any Governmental Authority that seeks the revocation, cancellation, suspension or adverse modification of any such Permit. True, correct and complete copies of all such material Permits have been made available to Buyer. Notwithstanding any provision in this Section 5.8 (or any other provision of this Agreement) to the contrary, Section 5.6 and Exhibit A shall be the exclusive representations, warranties and covenants with respect to Tax and environmental issues (including Environmental Permits) and no other representations or warranties are made with respect to such matters, including under this Section 5.8 .

Section 5.9 Preferential Purchase Rights . Except as set forth in Schedule 5.9 , with respect to the Company and the Wholly-Owned Subsidiaries, there are no (i) preferential purchase rights, rights of first refusal or similar rights and (ii) rights of first offer, tag-along rights, drag-along rights or other similar rights, in each case of clause (i) and (ii) above, that are applicable to the transactions contemplated by this Agreement.

Section 5.10 Payment of Royalties . Except as set forth on Schedule 5.10 , with respect to the Company and the Wholly-Owned Subsidiaries, and except for such amounts that are being held in suspense as permitted pursuant to applicable Law (“ Suspended Funds ”), all royalties (including lessor’s royalties), overriding royalties and other burdens upon, measured by or payable out of production (each, a “ Burden ”) due by the Company and the Wholly-Owned Subsidiaries with respect to the Company Assets have been paid or, if not paid, is contesting such Burden in good faith in the ordinary course of business.

Section 5.11 Current Commitments . Schedule 5.11 sets forth, as of the date of this Agreement, all authorizations for expenditures and other capital commitments approved by the Company and the Wholly-Owned Subsidiaries relating to the Company Assets that (i) are in an

amount exceeding one hundred thousand Dollars ($100,000), individually, and (ii) relate to activities that have not been completed by the date of this Agreement.

Section 5.12 Brokers’ Fees . Seller has not entered into any Contract with any Person that would require the payment by Buyer or its Affiliates of any brokerage fee, finders’ fee or other commission in connection with the transactions contemplated by this Agreement.

Section 5.13 Employees . With respect to the Company and the Wholly-Owned Subsidiaries, none of the Company or the Wholly-Owned Subsidiaries has any employees.

Section 5.14 Environmental Matters . Except as set forth on Schedule 5.14 or would not reasonably be expected to have a Material Adverse Effect, (a) there is no violation of any Environmental Law with respect to, or arising from, the operation of the Lease(s) or the Well(s), which currently requires remediation, and there have been no uncured violations of Environmental Laws, including, but not limited to, those pertaining to air and water quality and/or Hazardous Substances, (b) Seller has not since January 1, 2014, in violation of applicable Environmental Laws, caused or allowed the generation, treatment, storage, disposal or release of Hazardous Substances within the Lease(s), and otherwise within the drillsite and acreage surrounding the Well(s), (c) Seller has been since January 1, 2014 and is in compliance with all applicable Environmental Laws concerning the handling of Hazardous Substances within the Lease(s) and otherwise within the drillsite and acreage surrounding the Well(s), (d) Seller has complied with all Environmental Laws of all Governmental Authorities having jurisdiction over the Company Assets, (e) all necessary Permits which are required to have been obtained from Governmental Authorities having jurisdiction over the Company Assets under applicable Environmental Laws in order to operate the Company Assets as currently operated have been obtained and are in force, (f) Seller has not received notice of any actual or potential Proceeding relating to the breach of any applicable Environmental Law involving or relating to the Company Assets, and (g) Seller has provided Buyer with copies of all written notices and filings delivered by Seller since January 1, 2014 to any Governmental Authority under applicable Environmental Laws relating to the Company Assets .

Section 5.15 Working Interest and Net Revenue Interest for Leases . Schedule 5.15 sets forth a complete and accurate list of all of the Leases and includes, for each Lease, a legal description, a description of Seller’s Net Revenue Interest and Working Interest in each Leases and the gross acreage and net mineral acres covered by and included within the Leases. Except for Permitted Encumbrances, the Working Interest in the Leases is free and clear of all Liens existing by, through and under Seller.

Section 5.16 Gas Regulatory Matters . No member of Company Group is a “natural-gas” company under the Natural Gas Act of 1938, and the Company Assets have never been used in a manner that would require certification under the Natural Gas Act of 1938. The Gathering Systems are for intrastate gathering and transportation of natural gas and gas liquids and are not subject to FERC compliance.

Section 5.17 Liens . Except for the Permitted Encumbrances, none of the Company Assets are bound by or subject to any Liens.

Section 5.18 Bankruptcy . There are no bankruptcy, reorganization, arrangement or similar Proceedings pending, being contemplated by or, to Seller’s Knowledge, threatened against any member of the Company Group or otherwise related to any Company Asset.

Section 5.19 Payout Balances . Schedule 5.19 contains a complete and accurate list of the status of any “payout” balance, as of the Effective Time, for the Wells and Units subject to a reversion or other adjustment at some level of cost recovery or payout (or passage of time or other event other than termination of a Lease by its terms).

Section 5.20 Performance Bonds . Schedule 5.20 sets forth all of the bonds, letters of credit and guarantees relating or applicable to the Company Assets.

Section 5.21 Sufficiency of Assets . The Company Assets constitute all of the assets necessary to conduct the business of the Company Group as currently conducted, except for the Excluded Assets. The Company Assets are sufficient for the continued conduct of such business after the Closing in substantially the same manner as conducted prior to the Closing, except with respect to the Excluded Assets. Except for the Excluded Assets, following the Closing, none of the members of the Company Group nor any of their Affiliates (other than members of the Company Group) will own or hold any assets or property (tangible or intangible) that are currently being used or useful in connection with such business or previously used in connection with such business.

ARTICLE VI.
REPRESENTATIONS AND WARRANTIES RELATING TO BUYER

Buyer hereby represents and warrants to Seller as follows:

Section 6.1 Organization of Buyer . Buyer is a limited liability company, validly existing and in good standing under the Laws of the State of Delaware.

Section 6.2 Authorization; Enforceability . Buyer has all requisite limited liability company power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery, and performance of this Agreement, and the performance of the transactions contemplated hereby have been duly and validly authorized and approved by Buyer, and no other limited liability company proceeding on the part of Buyer is necessary to authorize this Agreement. This Agreement has been duly and validly executed and delivered by Buyer (and all documents required hereunder to be executed and delivered by Buyer at the Closing will be duly executed and delivered by Buyer), and this Agreement constitutes, and at the Closing each such document will constitute, a valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar Laws affecting creditors’ rights generally and subject, as to enforceability, to general principles of equity.

Section 6.3 No Conflict; Consents . Except as would not reasonably be expected to prevent, impede, or materially delay the ability of Buyer to enter into and perform its obligations under this Agreement, the execution and delivery of this Agreement by Buyer and the consummation of the transactions contemplated hereby by Buyer do not and shall not:

(a) violate any Law applicable to Buyer or require any filing with, consent, approval or authorization of, or, notice to, any Governmental Authority;

(b) violate any Organizational Document of Buyer; or

Section 6.4 Litigation . Except as would not reasonably be expected to prevent, impede, or materially delay the ability of Buyer to enter into and perform its obligations under this Agreement, Buyer (i) is not subject to any outstanding Order; (ii) is not a party to a Proceeding; and (iii) to the knowledge of Buyer, has not been threatened with any Proceeding.

Section 6.5 Brokers’ Fees . Buyer and its Affiliates have not entered into any Contract with any Person that would require the payment by Seller or its Affiliates of any brokerage fee, finders’ fee or other commission in connection with the transactions contemplated by this Agreement.

Section 6.6 Financing; Resources and Other Capabilities . Buyer has, and shall have as of the Closing Date, sufficient funds with which to pay the adjusted Purchase Price and consummate the transactions contemplated by this Agreement. Buyer has the financial, technical and other capabilities to perform all of Buyer’s other obligations under this Agreement and all of the obligations assumed from Seller with respect to the Company Assets and the Company Group.

Section 6.7 Securities Law Compliance . Buyer (i) is acquiring the Interests for its own account and not with a view to distribution in violation of applicable securities laws; (ii) has sufficient knowledge and experience in financial and business matters so as to be able to evaluate the merits and risk of an investment in the Interests and is able financially to bear the risks thereof; and (iii) understands that the Interests will, upon purchase, be characterized as “restricted securities” under state and federal securities Laws and that under such Laws the Interests may be resold without registration under such Laws only in certain limited circumstances.

Section 6.8 Buyer’s Independent Investigation . Buyer and its Representatives have undertaken an independent investigation and verification of the Company Assets and the business, operations and financial condition of the Company Group. Except for the representations and warranties made by Seller in Article IV and Article V , Buyer acknowledges that there are no representations or warranties, express or implied, as to the Company Assets or the condition (financial or otherwise), assets, liabilities, operations, business or prospects of the Company Group.

Section 6.9 Independent Evaluation . Buyer is sophisticated in the evaluation, purchase, ownership and operation of oil and gas properties and related facilities. Buyer acknowledges and agrees that Seller has not made any representations or warranties as to the Company Assets or the Company Group except as expressly and specifically provided in Article IV and Article V and that Buyer may not rely on any other representations or warranties made by Seller or its representatives or on any of Seller’s estimates with respect to reserves or the value of

the Company Assets or the Company Group, or any projections as to future events or other analyses or forward looking statements. In making its decision to enter into this Agreement and to consummate the transaction contemplated herein, subject to the express representations of Seller set forth in this Agreement, Buyer (i) has relied or shall rely solely on its own independent investigation and evaluation of the Company Assets and the Company Group and the express provisions of this Agreement and (ii) has satisfied or shall satisfy itself as to the environmental and physical condition of and contractual arrangements affecting the Company Assets and the Company Group. Buyer has no Knowledge of any fact that results in the breach of any representation, warranty or covenant of Seller made hereunder.

Section 6.10 Regulatory . Buyer is now qualified to own and assume operatorship of all Leases, Wells and Company Assets comprising of a part of the Oil and Gas Properties, including federal oil, gas and mineral leases and Leases with the BIA or other Governmental Authorities, and the consummation of the transaction contemplated in this Agreement will not cause Buyer to be disqualified as such an owner or operator. To the extent required by any applicable Laws, Buyer currently has lease bonds, area-wide bonds or any other surety bonds as may be required by, and in accordance with, all applicable Laws governing the ownership and operation of such Leases, Wells and Company Assets and has filed any and all required reports necessary for such operations with all Governmental Authorities having jurisdiction over such operations.

ARTICLE VII.
TITLE AND ENVIRONMENTAL EXAMINATION.

Section 7.1 Access . From the date hereof through the Closing, Seller shall afford, and shall cause, to the extent it has the Legal Right to, the Company Group to afford, to Buyer and its Representatives reasonable access, during normal business hours and in such manner as not to unreasonably interfere with normal operation of the Company Group’s business, to the properties, books, contracts and records of the Seller’s Group and to the appropriate officers and employees of Affiliates of Seller and the Company Group and shall furnish such Representatives with all financial and operating data and employment data with respect to the employees of the Seller’s Group who are located in the Oklahoma County and whose job responsibilities encompass the Company Group or the Company Assets and other information concerning the Company Group and/or the Company Assets as Buyer and such Representatives may reasonably request. Seller shall have the right to have a Representative present at all times during any such inspections, interviews and examinations. Buyer shall hold in confidence all such information on the terms and subject to the conditions contained in the Confidentiality Agreement. Notwithstanding the foregoing, Buyer shall have no right of access to, and Seller shall have no obligation to provide to Buyer, information relating to: (i) bids received from others in connection with the transactions contemplated by this Agreement (or similar transactions) and information and analyses (including financial analyses) relating to such bids; (ii) any information the disclosure of which would jeopardize any privilege available to the Seller’s Group relating to such information or would cause the Seller’s Group to breach a confidentiality obligation; or (iii) any information the disclosure of which would result in a violation of Law.

Group to provide access to the Company Assets the Company Group operates during regular business hours and Seller shall use its commercially reasonable efforts to obtain permission for Buyer to gain access to the Company Assets operated by third parties. Buyer shall have no right to perform or conduct any environmental sampling or other invasive environmental investigation on or about any of the Company Assets without the prior written consent of Seller, which shall not be unreasonably withheld.

Section 7.3 Indemnity . Buyer shall indemnify the Seller Indemnified Parties from and against Losses arising out of, or in connection with, the actions of Buyer and/or its Representatives on any site visits or inspections of the Company Assets or any other properties of any Seller Indemnified Party by Buyer and its Representatives, EXCEPT TO THE EXTENT CAUSED BY THE SOLE, JOINT AND/OR CONCURRENT NEGLIGENCE, STRICT LIABILITY, OR OTHER FAULT OF THE SELLER INDEMNIFIED PARTIES .

ARTICLE VIII.
INTERIM OPERATIONS

Section 8.1 Operations Prior to Closing . Except as provided in this Agreement, during the period from and including the date hereof until and including the Closing Date (the “ Restricted Period ”), without the prior written consent of Buyer, which consent shall not be unreasonably withheld, conditioned or delayed, Seller shall and shall cause, to the extent it has the Legal Right to, the Seller’s Group to:

(a) operate the Company Assets operated by the Seller’s Group in all material respects in (i) the ordinary course consistent with past practices and (ii) compliance with all applicable Laws;

(b) pay all expenses incurred with respect to the Company Assets owned or operated by the Seller’s Group in the usual, regular and ordinary manner consistent with past practice;

(c) collect the accounts receivable attributable to the Company Assets owned or operated by the Seller’s Group in the usual, regular and ordinary manner consistent with past practice;

(d) maintain the books of account and records relating to the Company Assets owned or operated by the Seller’s Group in the usual, regular and ordinary manner, in accordance with the usual accounting practices of each such Person; and

(e) give prompt Notice to Buyer of any written notice received by the Seller’s Group of any material claim asserting any breach of contract, tort or violation of Law or any investigation, suit, action or litigation by or before a Governmental Authority or otherwise, that (in each case) relates to the assets and operations of the Company Group or the Company Assets.

Section 8.2 Restricted Activities . Without the prior written consent of Buyer, which consent shall not be unreasonably withheld, conditioned or delayed, Seller shall and shall cause, to the extent it has the Legal Right, the Company Group not to take any action during the Restricted Period to:

(a) amend their Organizational Documents;

(b) adopt a plan of complete or partial liquidation, dissolution, restructuring, recapitalization or other reorganization;

(d) sell, transfer, abandon, lease (other than oil and gas leasehold interests acquired by the Company Group in the Restricted Period), encumber (other than Permitted Encumbrances), exchange or otherwise dispose of any of the assets of the Company Group except in the ordinary course of business and except for the Excluded Assets;

(e) merge or consolidate with, or purchase substantially all of the assets or business of, or equity interests in or make an investment in, any Person (other than extensions of credit to customers in the ordinary course of business);

(f) issue or sell any equity interests, notes, bonds or other securities of the Company Group, or any option, warrant or right to acquire same;

(g) incur any Indebtedness for Borrowed Money, whether or not evidenced by a note, bond, debenture or similar instrument (nor enter into any guarantees with respect to any such indebtedness), except any such indebtedness that will be paid in full at or prior to the Closing;

(h) hire any employees to provide services to the Company Group, terminate without cause any employees currently providing services to the Company Group or make any changes to the benefit levels, wages or other compensation to such employees;

(i) enter into any Contract that would have been a Material Contract if it had been in effect on the date hereof;

(j) amend, modify or terminate any Material Contract or otherwise waive, release or assign any material rights, Claims or benefits of the Company Group under any Material Contract;

(k) enter into any derivative, option, hedge or futures contracts;

(l) propose or agree to participate in or authorize enter into any authorization for expenditure or other approved capital expenditure in excess of one hundred thousand Dollars ($100,000);

(m) sell or otherwise transfer any tubulars, trucks and equipment of the Company Group; or

(n) agree, whether in writing or otherwise, to do any of the foregoing.

Section 8.3 Casualty Loss . If, between the date of this Agreement and the Closing, any substantial portion of the Company Assets are materially damaged or destroyed by fire or other casualty (not including normal wear and tear, downhole mechanical failure or reservoir changes) or if any substantial portion of the Company Assets are taken by condemnation or under the right of eminent domain or are under suit for or have been put on notice of an impending condemnation (all of which are herein called “ Casualty Loss ” and are limited to property damage or taking only), Seller shall notify Buyer promptly after Seller learns of such event. Seller shall have the right, but not the obligation, to cure a Casualty Loss that consists of property damage by repairing the affected Company Asset no later than the Closing Date at no cost to buyer, in the alternative. If any uncured Casualty Loss exists at the Closing, Buyer shall proceed to purchase the Asset affected thereby, and upon receipt of the Purchase Price, Seller shall pay to Buyer all sums paid to Seller by third Persons by reason of the damage or taking of such Company Asset, and to the extent Seller is not contractually prohibited from doing so, Seller shall assign, transfer and set over unto Buyer all of the right, title and interest of Seller in and to any claims, unpaid proceeds or other payments or rights to receive payments from third Persons arising out of such damage or taking. EXCEPT AS SET FORTH IN SCHEDULE 9.2 , SELLER DISCLAIMS ANY REPRESENTATION OR WARRANTY AS TO THE EXISTENCE OF INSURANCE COVERING CASUALTY LOSS TO THE ASSETS, AND DISCLAIMS ANY OBLIGATION, COVENANT OR DUTY TO BUYER TO ASSERT OR PURSUE ANY CLAIM AGAINST ANY INSURER OR OTHER PERSON FOR CASUALTY LOSS TO THE ASSETS.

Section 8.4 Casualty Loss Limitation . Anything in this Agreement to the contrary notwithstanding, Buyer’s recourse with respect to a Casualty Loss shall be limited to the proceeds of the Seller’s Group’s casualty insurance coverage actually recovered by Seller in respect thereof or other sums paid to Seller by third Persons (or an assignment of claims related thereto). If such sums are received by Seller prior to Closing, such sums will be paid to Buyer at Closing, and if such sums are received after Closing, such sums will be paid to Buyer promptly after receipt thereof by Seller. Seller shall have no other liability or responsibility to Buyer with respect to a Casualty Loss.

ARTICLE IX.
OTHER PRE-CLOSING COVENANTS

Section 9.1 Third-Party Approvals . Buyer and Seller shall (and shall each cause their respective Affiliates to) use commercially reasonable efforts to obtain all material consents and approvals of third parties and releases of Liens that any of Buyer, Seller, or their Affiliates are required to obtain to consummate the transactions contemplated hereby.

Section 9.2 Insurance . At or prior to the Closing, Seller shall be entitled to terminate or modify the insurance policies described in Schedule 9.2 to exclude coverage of the Company Group, and Buyer will obtain its own insurance coverage with respect to the Company Group and the Company Assets.

Section 9.3 Replacement of Bonds, Letters of Credit and Guarantees . The Parties understand that none of the bonds, letters of credit, and guarantees, posted by Seller or the Company Group on behalf of the Company Group with any Governmental Authority or third

Person and relating to the Company Group or the Company Assets, will be transferred to Buyer. On or before the Closing Date, Buyer shall obtain, or cause to be obtained in the name of the Company Group or Buyer, replacements for the bonds and guarantees listed on Schedule 9.3 to the extent such replacement are permitted under the terms thereof, and to the extent permitted under the terms thereof shall cause, effective as of the Closing Date, the cancellation or return to Seller of such bonds and guarantees posted (or supported) by Seller or the Company Group with respect to the Company Group or the Company Assets.

Section 9.4 Transfer of Excluded Entities . Prior to the Closing, Seller shall cause the Company and the Wholly-Owned Subsidiaries to transfer all of the equity interests of the Excluded Entities to a Person other than a member of the Company Group.

ARTICLE X.
CONDITIONS TO CLOSING

Section 10.1 Conditions to Obligations of Buyer to Closing . The obligation of Buyer to consummate the transactions contemplated by this Agreement at the Closing is subject to the satisfaction (or waiver by Buyer) of the following conditions:

(a) Representations, Warranties and Covenants . (i) The representations and warranties of Seller made in this Agreement (disregarding all materiality and Material Adverse Effect qualifications contained therein) will be true and correct as of the date of this Agreement and as of the Closing Date as if made on the Closing Date (except to the extent that such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been true and correct as of such earlier date); (ii) Seller shall have performed or complied in all material respects with all of the covenants and agreements required by this Agreement to be performed or complied with by the Seller’s Group on or before the Closing; and (iii) Buyer shall have received a certificate of an executive officer of Seller, dated the Closing Date, to such effect.

(b) No Proceeding or Injunction . No Proceeding instituted by a third-party shall be pending before any Governmental Authority or arbitral body seeking to restrain, prohibit, enjoin or declare illegal, or seeking damages in connection with, the transactions contemplated by this Agreement. No provision of any applicable Law and no Order shall be in effect that prohibits or makes illegal the consummation of the Closing.

(c) Consents and Approvals . All consents and approvals, if any, required by applicable Law or otherwise necessary for the consummation of the transactions contemplated herein, shall have been obtained and shall not have been withdrawn or revoked, and all Liens on the Interests and the Company Assets, other than Permitted Encumbrances, shall have been released (except, in the case of the Interests, those under federal and state securities Laws and the Company’s Organizational Documents).

(d) Preference Rights . The Parties shall have acknowledged that no third party(ies) exercised any Subject Preferential Right to purchase Company Assets.

Section 10.2 Conditions to the Obligations of Seller to Closing . The obligation of Seller to consummate the transactions contemplated by this Agreement at the Closing is subject to the satisfaction (or waiver by Seller) of the following conditions:

(a) Representations, Warranties and Covenants . (i) The representations and warranties of Buyer made in this Agreement (disregarding all materiality qualifications contained therein) will be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as if made on the Closing Date (except to the extent that such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been true and correct as of such earlier date), (ii) Buyer shall have performed or complied in all material respects with all of the covenants and agreements required by this Agreement to be performed or complied with by Buyer on or before the Closing and (iii) Seller shall have received a certificate of an executive officer of Buyer, dated the Closing Date, to such effect.

(b) No Proceeding or Injunction . No Proceeding instituted by a Third-Party shall be pending before any Governmental Authority or arbitral body seeking to restrain, prohibit, enjoin or declare illegal or seeking substantial damages in connection with, the transactions contemplated by this Agreement. No provision of any applicable Law and no Order shall be in effect that prohibits or makes illegal the consummation of the Closing.

(c) Consents and Approvals . All material consents and approvals, if any, required by applicable Law or otherwise necessary for the consummation of the transactions contemplated herein, shall have been obtained and shall not have been withdrawn or revoked, and all Liens on the Interests and the Company Assets, other than Permitted Encumbrances, shall have been released (except, in the case of the Interests, those under federal and state securities Laws and the Company Group’s Organizational Documents).

ARTICLE XI.
CLOSING

Section 11.1 Closing Date . Subject to the conditions set forth in Article X , the closing of the sale and transfer of the Interests to Buyer as contemplated by this Agreement (the “ Closing ”) shall take place at the offices of Andrews Kurth Kenyon LLP at 600 Travis, Suite 4200, Houston, Texas 77002 on June 15, 2017, or such other date as Buyer and Seller may mutually determine (the date on which the Closing occurs is referred to herein as the “ Closing Date ”), subject to Seller’s right to extend the Closing Date under Section 3(d) of Exhibit A ; provided, however , that Buyer shall have the right in its sole discretion to extend such date to July 17, 2017 upon providing written notice to Seller by June 8, 2017 that Seller desires additional time to complete its due diligence of the Company Assets.

Section 11.2 Closing Deliverables . At Closing, the following events shall occur, each being a condition precedent to the others and each being deemed to have occurred simultaneously with the others:

(a) Closing Payment . Buyer shall pay to Seller the Closing Payment.

(b) Assignment and Assumption Agreement . Each of Seller and Buyer shall execute and deliver the Assignment and Assumption Agreement.

(c) Resignations of Officers and Directors . Seller shall cause to be delivered resignations (or evidence of removal) of each officer, director and manager of the Company Group appointed by Seller or the Company, subject to the terms and conditions of any Organizational Documents or operating agreements of the Company Group, effective as of the Closing.

(d) Buyer’s Certificate . Buyer shall deliver the certificate required pursuant to Section 10.2(a) .

(e) Seller’s Certificate . Seller shall deliver the certificate required pursuant to Section 10.1(a) .

(f) Certification of Non-Foreign Status . Seller shall deliver a certification of non-foreign status in accordance with U.S. Treasury Regulation Section 1.1445-2(b)(2).

(g) Other Matters . Seller and Buyer shall execute and deliver any other appropriate assignments, bills of sale, or other instruments necessary to effect or support the transactions contemplated by this Agreement.

ARTICLE XII.
TERMINATION

Section 12.1 Termination . At any time prior to the Closing, this Agreement may be terminated and the transactions contemplated hereby abandoned:

(a) by the mutual written consent of Buyer and Seller;

(b) by Buyer, (i) if Seller shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would give rise to the failure of a condition set forth in Section 10.1 , (ii) pursuant to any other right of termination by Buyer set forth herein or in Exhibit A hereto or (iii) if all of the conditions set forth in Section 10.2 have been satisfied or waived, as applicable, and Seller nevertheless refuses or fails to close the transactions contemplated in this Agreement; provided, Seller shall first be entitled to ten (10) days’ notice and the opportunity to cure and provided furthermore that Buyer shall not be in material breach at such time;

(c) by Seller, (i) if Buyer shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would give rise to the failure of a condition set forth in Section 10.2 , (ii) pursuant to any other right of termination by Seller set forth herein or in Exhibit A hereto or (iii) if all of the conditions set forth in Section 10.1 have been satisfied or waived, as applicable, and Buyer nevertheless refuses or fails to close the transactions contemplated in this Agreement; provided, Buyer shall first be entitled to ten (10) days’ notice

and the opportunity to cure and provided furthermore that Seller shall not be in breach at such time;

(d) by either Buyer or Seller, upon Notice to the other Party, if any Governmental Authority having competent jurisdiction has issued a final, non-appealable Order, decree, ruling or injunction (other than a temporary restraining order) or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such injunction shall have become final and non-appealable;

(e) by either Buyer or Seller, upon Notice to the other Party, if the transactions contemplated at the Closing have not been consummated by July 15, 2017, provided that neither Buyer nor Seller shall be entitled to terminate this Agreement pursuant to this Section 12.1(e) if such Person’s breach of this Agreement has prevented the consummation of the transactions contemplated by this Agreement;

(f) by either Buyer or Seller, upon Notice to the other Party, if the sum of all Defect Amounts (as defined in Exhibit A ) validly asserted in any Defect Notice (as defined in Exhibit A ) less the sum of all Title Benefit Amounts (as defined in Exhibit A ) validly claimed by Seller under Exhibit A is equal to or greater than ten percent (10%) of the Base Purchase Price; or

(g) by Seller, immediately upon Notice to Buyer, if the Earnest Money Deposit has not been timely delivered by Buyer to the Escrow Agent in accordance with Section 3.2 . Should the earnest money not be properly and/or timely tendered, upon notice of the failure Buyer shall have five (5) days to remedy the non-payment prior to Seller terminating the Agreement.

Section 12.2 Effect of Termination . In the event of termination of this Agreement under Section 12.1(a) , Section 12.1(b) , Section 12.1(d) , Section 12.1(e) (except as provided in the following sentence) or Section 12.1(f) , the Parties shall jointly instruct the Escrow Agent to return the Earnest Money Deposit to Buyer in immediately available Dollar funds within three (3) Business Days after such termination. If this Agreement is terminated (i) by Seller under Section 12.1(c) or (ii) by either Party under Section 12.1(e) if at such time Seller could have terminated this Agreement under Section 12.1(c) , then the Parties shall jointly instruct the Escrow Agent to deliver the Earnest Money Deposit to Seller as liquidated damages, which remedy shall be the sole and exclusive remedy available to Seller for such termination. Buyer and Seller acknowledge and agree that (A) Seller’s actual damages upon the event of termination of this Agreement as contemplated under the preceding sentence are difficult to ascertain with any certainty; (B) the Earnest Money Deposit is a reasonable estimate of such actual damages; and (C) such liquidated damages do not constitute a penalty. If this Agreement is terminated by Seller under Section 12.1(g) , Buyer’s obligation to deliver the Earnest Money Deposit under Section 3.2 shall survive such termination by Seller, but such delivery shall be made directly to Seller rather than the Escrow Agent.

Section 12.3 Other Provisions . Except for Section 12.2 , Section 7.3 , Section 13.7 and Article XVI (excluding Section 16.12 ) (and the definitions related to any of the foregoing), this Agreement shall, upon termination hereof pursuant to Section 12.1 , become of no further force

or effect. Nothing in Section 12.2 will relieve any Party to this Agreement of liability for breach of this Agreement occurring prior to any termination, or for breach of any provision of this Agreement that specifically survives termination hereunder. The Confidentiality Agreement shall not be affected by a termination of this Agreement.

ARTICLE XIII.
ASSUMPTION; INDEMNIFICATION AND WAIVERS

Section 13.1 Assumed Obligations . Without limiting Buyer’s rights to indemnity under this Agreement and Buyer’s rights under any Title Indemnity Agreement (as defined in Exhibit A ), from and after the Closing Date, Buyer shall assume and hereby agrees to fulfill, perform, pay and discharge (or cause to be fulfilled, performed, paid or discharged) the Assumed Obligations.

Section 13.2 Seller’s Indemnity From and after Closing, subject to the limitations set forth in this Agreement, Seller shall indemnify, defend and hold harmless Buyer, its Affiliates and each of their respective Representatives (the “ Buyer Indemnified Parties ”) against any and all liabilities, obligations, damages, losses, costs, debts, penalties, fines, expenses (including reasonable attorneys’ and consultants’ fees and expenses), claims, causes of actions, payments, charges, judgments and assessments (collectively “ Losses ”) incurred or suffered by the Buyer Indemnified Parties as a result of, relating to, or arising out of:

(a) any breach of any representation or warranty contained in Article IV and Article V of this Agreement made by Seller as though such representation or warranty were made as of the Closing Date (except to the extent that such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been made as of such earlier date);

(b) the breach of any covenant or agreement made or to be performed by Seller under this Agreement;

(c) any Environmental Defect or any Hazardous Substances with respect to any Company Asset occurring prior to or as of the Closing Date, any violation of, or other liability under, any Environment Laws by any member of the Company Group, or otherwise related to any Company Asset, occurring prior to or on the Closing Date, or any other activity or condition occurring or existing with respect to the Company Assets on or prior to the Closing Date that results in an Environmental Defect, including, without limitation those set forth on Schedule 13.2(c) ;

(d) the Excluded Assets or Excluded Entities, including, without limitation, any assets held by Seller outside of Osage County, Oklahoma;

(e) obligations and liabilities of any kind whatsoever of the Seller Group or the Company Group arising from or relating to the Seller Group, the Company Group or the Company Assets, whether known or unknown, liquidated or contingent, which are not Assumed Obligations, including, without limitation, any pending or future lawsuits against the Seller Group with respect to properties and assets not constituting Company Assets; and

(f) any and all liabilities related to outstanding surface damage negotiations from operations in Osage County, Oklahoma unless those liabilities are disclosed to Buyer and Buyer agrees in writing to accept those liabilities.

In no event shall Seller have any obligation to provide indemnification for any matters to the extent accounted for in the Closing Statement or any revised Closing Statement. Notwithstanding anything herein to the contrary, Buyer acknowledges that it has had the opportunity to conduct due diligence and investigation with respect to the Company Group and the Company Assets, and in no event shall Seller have any liability to Buyer with respect to any breach of any representation, warranty or covenant under this Agreement to the extent that Buyer was aware of such breach as of the Closing Date.

Section 13.3 Buyer’s Indemnity . From and after Closing, subject to the limitations set forth in this Agreement, Buyer shall indemnify, defend and hold harmless Seller, its Affiliates, and each of their respective Representatives (the “ Seller Indemnified Parties ”) against any and all Losses incurred or suffered by the Seller Indemnified Parties as a result of, relating to or arising out of:

(a) any breach of any representation or warranty made by Buyer in this Agreement as though such representation or warranty were made as of the Closing Date (except to the extent that such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been made as of such earlier date);

(b) the breach of any covenant or agreement made or to be performed by Buyer under this Agreement; and

Section 13.4 Express Negligence Rule . THE INDEMNIFICATION AND WAIVER PROVISIONS IN THIS AGREEMENT SHALL BE ENFORCEABLE REGARDLESS OF WHETHER ANY PERSON (INCLUDING THE PERSON FROM WHOM INDEMNIFICATION IS SOUGHT) ALLEGES OR PROVES THE SOLE, CONCURRENT, CONTRIBUTORY OR COMPARATIVE NEGLIGENCE OF THE PERSON SEEKING INDEMNIFICATION OR THE SOLE OR CONCURRENT STRICT LIABILITY IMPOSED UPON THE PERSON SEEKING INDEMNIFICATION, EXCEPT IN THE CASE OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT BY SUCH PERSON.

Section 13.5 Limitations on Liability .

maximum aggregate liability of Seller under Section 13.2(b) of this Agreement shall not exceed the Indemnity Cap. The Indemnity Deductible and the Indemnity Cap shall not apply to any claim for indemnification under Section 13.2(a) with respect to any breach of the Fundamental Representations, Section 13.2(d) or Section 13.2(e) .

(b) Survival .

(i) Except as otherwise expressly provided herein, the representations, warranties and covenants of the Parties under this Agreement shall survive the Closing; provided, however , that:

(a) unless otherwise set forth herein, and except for the Fundamental Representations, all other representations and warranties of Seller shall survive the Closing for a period of twelve (12) months;

(b) the Fundamental Representations shall survive the Closing for the period of the applicable statute of limitations, plus ninety (90) days;

(c) all covenants and agreements of Seller in this Agreement shall survive the Closing for a period of twelve (12) months, except for (i) Seller’s covenants in Section 3.8 and Article XIV , which shall survive for the applicable statute of limitations, plus ninety (90) days; and (ii) Seller’s covenants in this Article XIII , which shall survive the Closing for the period specified in this Article XIII ;

(d) Buyer’s representations and warranties set forth in this Agreement shall survive the Closing for a period of twelve (12) months; and

(e) all covenants and agreements of Buyer in this Agreement shall survive the Closing for a period of twelve (12) months, except for (i) Buyer’s covenants in Section 3.8 Section 7.3 and Article XIV , which shall survive for the applicable statute of limitations, plus ninety (90) days; (ii) Buyer’s covenants in Section 15.1 , which shall survive for a period of five (5) years; (iii) Buyer’s covenants in Section 15.2 , which shall survive without limitation as to duration; and (iv) Buyer’s covenants in this Article XIII , which shall survive the Closing for the period specified in this Article XIII ;

(ii) Subject to Section 13.5(b)(iii) below, the Parties’ respective indemnity obligations under this Article XIII shall survive as follows:

(a) Seller’s indemnities in Section 13.2(a) and Buyer’s indemnities in Section 13.3(a) shall terminate as of the termination date of each respective representation or warranty that is subject to indemnification; provided that if there is no termination date for a representation or warranty, then the indemnities provided with respect thereto shall survive the Closing without time limit;

covenant, then the indemnities provided with respect thereto shall survive the Closing without time limit;

(c) Seller’s indemnities in Section 13.2(c) shall survive the Closing for a period of twelve (12) months; provided, however, that the indemnity with respect to those matter set forth on Schedule 13.2(c) shall survive the Closing for a period of sixty (60) months;

(d) Seller’s indemnities in Section 13.2(d) shall survive the Closing without time limit;

(e) Seller’s indemnities in Section 13.2(e) and Section 13.2(f) shall survive the Closing for a period of twelve (12) months; and

(f) Buyer’s indemnities in Section 13.3(c) shall survive the Closing without time limit.

(iii) Any assertion by any Indemnified Party of Losses under this Article XIII must be made in a Notice delivered to the Indemnifying Party (or not at all) on or prior to the end of the survival period applicable to such indemnity as provided above, and the Indemnified Parties’ right to indemnification under this Article XIII shall be deemed waived and released if not made on or prior to the end of such survival period. Notwithstanding the foregoing, there shall be no termination of any bona fide claim asserted pursuant to the indemnities in this Article XIII if such bona fide claim is asserted prior to the date of termination for the applicable indemnity, and with respect to a timely asserted bona fide claim for indemnification, the Indemnifying Party’s indemnity covenants under this Article XIII shall survive until performed.

(c) Reductions . The amount of any Losses subject to indemnification under this Article XIII shall be reduced or reimbursed, as the case may be, by any third-party insurance proceeds and third-party recoveries actually received by the Indemnified Parties with respect to such Losses (net of any expenses or costs incurred in connection with the claim or collection relating thereto and any increase in premiums as a result thereof). The Indemnified Parties shall use commercially reasonable efforts to collect any amounts available under such insurance coverage and from such other third-party alleged to have responsibility. If an Indemnified Party receives an amount under insurance coverage or from such third-party with respect to Losses that were the subject of indemnification under this Article XIII at any time subsequent to indemnification provided thereunder, then such Indemnified Party shall promptly reimburse the Indemnifying Party for such amount (net of any expenses or costs incurred in connection with the claim or collection relating thereto and any increase in premiums as a result thereof).

(d) Mitigation . Each Indemnified Party shall make reasonable efforts to mitigate or minimize Losses under this Agreement upon and after becoming aware of any event or condition which would reasonably be expected to give rise to any Losses that are indemnifiable under this Article XIII . If an Indemnified Party fails to so mitigate an indemnifiable loss under the preceding sentence, the Indemnifying Party shall have no liability

for any portion of such loss that reasonably could have been avoided had the Indemnified Party made such efforts.

(e) Payment . Subject to Section 13.5(a) , all amounts for which indemnification is provided under Section 14.1(b) and this Article XIII will be paid in cash in immediately available Dollar funds upon (i) agreement of Buyer and Seller with respect to the amount thereof or (ii) a final, binding and non-appealable judgment of a court of competent jurisdiction concerning same.

Section 13.6 Procedures . Claims for indemnification under this Agreement shall be asserted and resolved as follows:

(a) Third-Party Claim . If any Person entitled to seek indemnification under Article XIII (an “ Indemnified Party ”) receives written notice of the assertion or commencement of any claim asserted against an Indemnified Party by a third-party (“ Third-Party Claim ”) in respect of any matter that is subject to indemnification under Article XIII , the Indemnified Party shall promptly (i) notify the Party obligated to the Indemnified Party pursuant to this Article XIII (the “ Indemnifying Party ”) of the Third-Party Claim and (ii) transmit to the Indemnifying Party a Notice (a “ Claim Notice ”) describing in reasonable detail the nature of the Third-Party Claim, a copy of all papers served with respect to the Third-Party Claim (if any), the Indemnified Party’s best estimate of the amount of Losses attributable to the Third-Party Claim and the basis of the Indemnified Party’s request for indemnification under this Agreement. Failure to timely provide such Claim Notice shall not affect the right of the Indemnified Party’s indemnification hereunder, except to the extent the Indemnifying Party is materially prejudiced by such delay or omission.

(b) Indemnifying Party . Except with respect to Tax Audits described in Section 14.2 , the Indemnifying Party shall have the right to defend the Indemnified Party against such Third-Party Claim. If the Indemnifying Party notifies the Indemnified Party that the Indemnifying Party elects to assume the defense of the Third-Party Claim (such election to be without prejudice to the right of the Indemnifying Party to dispute whether such claim is an indemnifiable Loss under this Agreement), then the Indemnifying Party shall have the right to defend such Third-Party Claim with counsel selected by the Indemnifying Party (who shall be reasonably satisfactory to the Indemnified Party), by all appropriate proceedings, which proceedings shall be prosecuted diligently by the Indemnifying Party to a final conclusion or settlement at the discretion of the Indemnifying Party in accordance with this Section 13.6(b) . In such circumstances, the Indemnifying Party shall defend any such Third-Party Claim in good faith and shall have full control of such defense and proceedings, including any compromise or settlement thereof; provided that the Indemnifying Party shall not enter into any settlement agreement or consent to the entry of any judgment with respect thereto without the written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned, or delayed) that (i) does not result in a final resolution of the Indemnified Party’s liability to the third-party with respect to the Third-Party Claim (including, in the case of a settlement, an unconditional written release of the Indemnified Party from all further liability in respect of such Third-Party Claim) or (ii) may materially and adversely affect the Indemnified Party (other than as a result of money damages covered by the indemnity). If requested by the Indemnifying Party, the Indemnified Party agrees, at the sole cost and expense of the Indemnifying Party, to cooperate with the Indemnifying Party and its counsel in contesting any

Third-Party Claim which the Indemnifying Party elects to contest pursuant to this Section 13.6(b) , including the making of any related counterclaim against the Person asserting the Third-Party Claim or any cross complaint against any Person. The Indemnified Party may participate in, but not control, any defense or settlement of any Third-Party Claim controlled by the Indemnifying Party pursuant to this Section 13.6(b) , and the Indemnified Party shall bear its own costs and expenses with respect to such participation.

(c) Indemnified Party . Except with respect to Tax Audits described in Section 14.2 , if the Indemnifying Party does not notify the Indemnified Party that the Indemnifying Party elects to defend the Indemnified Party pursuant to Section 13.6(b) , then the Indemnified Party shall have the right to defend, and be reimbursed for its reasonable cost and expense (but only if the Indemnified Party is actually entitled to indemnification hereunder) in regard to the Third-Party Claim with counsel selected by the Indemnified Party (who shall be reasonably satisfactory to the Indemnifying Party), by all appropriate proceedings, which proceedings shall be prosecuted diligently by the Indemnified Party. In such circumstances, the Indemnified Party shall defend any such Third-Party Claim in good faith and have full control of such defense and proceedings; provided, however , that the Indemnified Party may not enter into any compromise or settlement of such Third-Party Claim if indemnification is to be sought hereunder, without the Indemnifying Party’s consent (which consent shall not be unreasonably withheld, conditioned or delayed). The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this Section 13.6(c) , and the Indemnifying Party shall bear its own costs and expenses with respect to such participation.

(d) Direct Claim . Any claim by the Indemnified Party on account of Losses that do not result from a Third-Party Claim (a “ Direct Claim ”) will be asserted by giving the Indemnifying Party reasonably prompt Notice thereof, but in any event not later than thirty (30) days after the Indemnified Party becomes aware of the events that gave rise to such Direct Claim. Such Notice by the Indemnified Party will describe the Direct Claim in reasonable detail, will include copies of all available material written evidence thereof and will indicate the estimated amount, if reasonably practicable, of Losses that have been or may be sustained by the Indemnified Party. The Indemnifying Party will have a period of ten (10) Business Days within which to respond in writing to such Direct Claim. If the Indemnifying Party does not so respond within such ten (10) Business Day period, the Indemnifying Party will be deemed to have rejected such Direct Claim, in which event the Indemnified Party will be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Agreement.

Section 13.7 Waiver of Consequential Damages . WITH RESPECT TO ANY AND ALL LOSSES FOR WHICH INDEMNIFICATION MAY BE AVAILABLE HEREUNDER, NO INDEMNIFYING PARTY SHALL HAVE ANY LIABILITY FOR ANY CONSEQUENTIAL, INDIRECT, PUNITIVE, EXEMPLARY OR SPECIAL DAMAGES WITH RESPECT TO ANY CLAIM FOR WHICH SUCH INDEMNIFYING PARTY MAY HAVE LIABILITY PURSUANT TO THIS AGREEMENT; PROVIDED, HOWEVER , THAT THIS WAIVER SHALL NOT APPLY TO THE EXTENT SUCH CONSEQUENTIAL, INDIRECT, PUNITIVE, EXEMPLARY OR SPECIAL DAMAGES ARE AWARDED IN A PROCEEDING BROUGHT OR ASSERTED BY A THIRD-PARTY AGAINST AN INDEMNIFIED PARTY.

Section 13.8 Waivers and Disclaimers.

(a) NO RELIANCE . BUYER HAS REVIEWED AND HAS ACCESS TO ALL CONTRACTS, DOCUMENTS, RECORDS AND INFORMATION WHICH IT HAS DESIRED TO REVIEW IN CONNECTION WITH ITS DECISION TO ENTER INTO THIS AGREEMENT, AND TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY. BUYER HAS NOT RELIED UPON ANY REPRESENTATION, WARRANTY, STATEMENT, ADVICE, DOCUMENT, PROJECTION OR OTHER INFORMATION OF ANY TYPE PROVIDED BY SELLER, OR ITS AFFILIATES, OR ANY OF THEIR REPRESENTATIVES, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS AGREEMENT. IN DECIDING TO ENTER INTO THIS AGREEMENT, AND TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY, BUYER HAS RELIED SOLELY UPON ITS OWN KNOWLEDGE, INVESTIGATION AND ANALYSIS (AND THAT OF ITS REPRESENTATIVES) AND NOT ON ANY DISCLOSURE OR REPRESENTATION MADE BY, OR ANY DUTY TO DISCLOSE ON THE PART OF SELLER OR ITS AFFILIATES, OR ANY OF THEIR REPRESENTATIVES, OTHER THAN THE REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS AGREEMENT. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT, NOTHING IN THIS AGREEMENT SHALL RESTRICT OR IN ANY WAY LIMIT CLAIMS BY THE PARTIES WITH RESPECT TO BREACHES OR CLAIMS BASED UPON FRAUD, AS TO WHICH THE PARTIES SHALL HAVE ALL OF THEIR RIGHTS OR REMEDIES AT LAW.

(b) LIMITED DUTIES . ANY AND ALL DUTIES AND OBLIGATIONS WHICH EITHER PARTY MAY HAVE TO THE OTHER PARTY WITH RESPECT TO OR IN CONNECTION WITH THE INTERESTS, THE COMPANY ASSETS, THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY ARE LIMITED TO THOSE IN THIS AGREEMENT. THE PARTIES DO NOT INTEND (i) THAT THE DUTIES OR OBLIGATIONS OF EITHER PARTY, OR THE RIGHTS OF EITHER PARTY, SHALL BE EXPANDED BEYOND THE TERMS OF THIS AGREEMENT ON THE BASIS OF ANY LEGAL OR EQUITABLE PRINCIPLE OR ON ANY OTHER BASIS WHATSOEVER OR (ii) THAT ANY EQUITABLE OR LEGAL PRINCIPLE OR ANY IMPLIED OBLIGATION OF GOOD FAITH OR FAIR DEALING OR ANY OTHER MATTER REQUIRES EITHER PARTY TO INCUR, SUFFER, OR PERFORM ANY ACT, CONDITION, OR OBLIGATION CONTRARY TO THE TERMS OF THIS AGREEMENT AND THAT IT WOULD BE UNFAIR, AND THAT THEY DO NOT INTEND, TO INCREASE ANY OF THE OBLIGATIONS OF ANY PARTY UNDER THIS AGREEMENT ON THE BASIS OF ANY IMPLIED OBLIGATION OR OTHERWISE.

(c) DISCLAIMER . THE INTERESTS BEING TRANSFERRED TO BUYER AS A RESULT OF THE TRANSFER OF THE INTERESTS ARE BEING ACCEPTED BY BUYER IN THEIR “AS IS, WHERE IS” CONDITION AND STATE OF REPAIR, AND WITH ALL FAULTS AND DEFECTS, WITHOUT, SUBJECT TO THE EXCEPTION BELOW, ANY REPRESENTATION, WARRANTY OR COVENANT OF ANY KIND OR NATURE, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MARKETABILITY, QUALITY, CONDITION, CONFORMITY TO SAMPLES, MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE,

ALL OF WHICH ARE EXPRESSLY DISCLAIMED BY SELLER AND WAIVED BY BUYER, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS AGREEMENT. BUYER RECOGNIZES THAT THE COMPANY ASSETS HAVE BEEN USED FOR OIL AND GAS DRILLING, COMPLETING, FRACTURING, PRODUCTION, GATHERING, PIPELINE, TRANSPORTATION, STORAGE AND RELATED OPERATIONS. PHYSICAL CHANGES IN THE COMPANY ASSETS AND IN THE LANDS INCLUDED THEREIN MAY HAVE OCCURRED AS A RESULT OF SUCH USES. THE COMPANY ASSETS ALSO MAY INCLUDE BURIED PIPELINES AND OTHER EQUIPMENT, THE LOCATIONS OF WHICH MAY NOT BE KNOWN BY SELLER OR READILY APPARENT BY A PHYSICAL INSPECTION OF THE COMPANY ASSETS. IT IS UNDERSTOOD AND AGREED THAT BUYER SHALL HAVE INSPECTED PRIOR TO CLOSING (OR SHALL BE DEEMED TO HAVE WAIVED ITS RIGHT TO INSPECT) THE LEASES, EQUIPMENT, PIPELINES AND THE ASSOCIATED PREMISES INCLUDED IN THE COMPANY ASSETS AND SATISFIED ITSELF AS TO THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, AND THAT BUYER SHALL ACCEPT ALL OF THE SAME IN THEIR “AS IS, WHERE IS” CONDITION AND STATE OF REPAIR, AND WITH ALL FAULTS AND DEFECTS, INCLUDING, BUT NOT LIMITED TO, THE PRESENCE OF NORM AND MAN-MADE MATERIAL FIBERS, SUBJECT TO THE REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS AGREEMENT.

(d) ADDITIONAL DISCLAIMERS . SELLER MAKES NO REPRESENTATION, COVENANT OR WARRANTY, EXPRESS, IMPLIED OR STATUTORY, (i) AS TO THE ACCURACY OR COMPLETENESS OF ANY DATA OR RECORDS DELIVERED TO BUYER WITH RESPECT TO THE COMPANY GROUP OR THE COMPANY ASSETS (INCLUDING, WITHOUT LIMITATION, ANY PROCESSING, REPROCESSING OR OTHER INTERPRETATION OR ANALYSIS BY THE COMPANIES, SELLER OR ANY OF THEIR AFFILIATES OF ANY SEISMIC DATA INCLUDED IN THE COMPANY ASSETS) OR (ii) CONCERNING THE QUALITY OR QUANTITY OF HYDROCARBON RESERVES, IF ANY, ATTRIBUTABLE TO THE COMPANY ASSETS, OR THE ABILITY OF THE COMPANY ASSETS TO PRODUCE HYDROCARBONS, OR THE PRODUCT PRICES WHICH THE COMPANIES ARE OR WILL BE ENTITLED TO RECEIVE FROM THE SALE OF ANY SUCH HYDROCARBONS.

Section 13.9 Exclusive Remedy and Release . The indemnification and remedies set forth in Section 7.3 , Article XIV , this Article XIII , Exhibit A and any Title Indemnity Agreement (as defined in Exhibit A ) shall constitute the sole and exclusive post-Closing remedies of the Parties with respect to any breach of representation or warranty or non-performance of any covenant or agreement contained in this Agreement. Except as provided in this Agreement or any Title Indemnity Agreement (as defined in Exhibit A ), if the Closing occurs, each of Buyer and Seller hereby waives, releases, acquits, and forever discharges the other, and all of the Buyer Indemnified Parties or Seller Indemnified Parties, as applicable, or any other Person acting on behalf of the other, of and from any and all Losses whatsoever, whether direct or indirect, known or unknown, foreseen or unforeseen, which such party, as applicable, may have or which may arise in the future directly or indirectly arising out of the transactions contemplated hereby, including any of the foregoing that is from or relating to the possession, use, handling,

management, disposal, investigation, remediation, cleanup, or release of any Hazardous Substances or any Environmental Law applicable thereto.

ARTICLE XIV.
TAX MATTERS

Section 14.1 Responsibility for Filing Tax Returns and Paying Taxes .

(a) Filing . Seller shall, to the extent it has the Legal Right to, file all Tax Returns required to be filed by or with respect to the Company, a Wholly-Owned Subsidiary or the assets of the Company or a Wholly-Owned Subsidiary for a Pre-Closing Tax Period that are required to be filed prior to or on the Closing Date and any Tax Returns that are required to be filed as a result of the sale of the Company, the Company Assets or the assets of a Wholly-Owned Subsidiary and the distribution of the Excluded Assets . If Closing occurs, Buyer shall file all other Tax Returns required to be filed by or with respect to the Company Group, the Wholly-Owned Subsidiary and the Company Assets.

(b) Payment . Subject to the limitations of Section 14.4 and Section 14.6 , Seller shall pay, or cause the Company to pay, Taxes owed and payable by the Company and the assets and operations of the Company or the Wholly-Owned Subsidiaries at or with respect to any time prior to or on the Closing Date, including, without limitation, with respect to such Taxes arising from errors in Tax Returns with respect to such period. Seller shall indemnify and hold harmless Buyer and its Affiliates from and against all Taxes (except Taxes that are included in the calculation of the Buyer’s Credit) with respect to (i) the Company, the Company Assets and the assets of a Wholly-Owned Subsidiary attributable to any Pre-Effective Date Tax Period or portion of any Straddle Period prior to and including the Effective Date; (ii) the Excluded Assets and the distribution of the Excluded Assets to Seller for all periods; and (iii) the sale of the Interest, the Company, the Company Assets and the assets of a Wholly-Owned Subsidiary. If Closing occurs, Buyer shall pay all other Taxes owed with respect to the Company, the Wholly-Owned Subsidiaries, any of the Company Assets and any of the assets owned by the Wholly-Owned Subsidiaries. Buyer shall, with respect to any Tax Return for which Buyer is responsible for preparing and filing, make the Tax work papers for such Tax Return available for review by Seller if the Tax Return is with respect to Taxes for which Seller may be liable (in whole or in part) hereunder or under applicable Law. Buyer shall make such work papers available for review sufficiently in advance of the due date for filing such Tax Returns to provide Seller with a meaningful opportunity to analyze and comment on such Tax Returns and have such Tax Returns modified before filing. Any Tax Return which includes or is based on the operation, ownership, assets or activities of the Company, the Company Assets or the Wholly-Owned Subsidiaries for any taxable period beginning before and ending after the Closing Date, and any Tax Return in respect of any Taxes for which Seller may be liable (in whole or in part) hereunder shall be prepared substantially in accordance with past Tax accounting practices used with respect to the Tax Returns in question (unless such past practices are no longer permissible under the applicable Law), and to the extent any items are not covered by past practices (or in the event such past practices are no longer permissible under the applicable tax Law), in accordance with reasonable tax accounting practices selected by the filing party with respect to such Tax Return under this Agreement with the consent (not to be unreasonably withheld or delayed) of the non-filing party.

(c) Straddle Period . For purposes of this Agreement, liability for Taxes with respect to the Company, the Company Assets and the assets of a Wholly-Owned Subsidiary with respect to any Straddle Period shall be apportioned as follows: property, ad valorem and similar Taxes assessed with respect to any Straddle Period shall be apportioned between Seller and Buyer on a ratable daily basis, and Seller shall pay any such Taxes for any Pre-Effective Date Tax Period or portion of the Straddle Period prior to and including the Effective Date. All other Taxes shall be apportioned based on an interim closing of the books of the Company, the Company Assets and the assets of a Wholly-Owned Subsidiary as of the end of the Effective Date, provided that exemptions, allowances or deductions that are calculated on an annual basis (including depreciation and amortization deductions) shall be allocated between the period ending on and including the Effective Date and the period beginning after the Effective Date in proportion to the number of days in each period . If Closing occurs, Buyer and Seller shall each timely provide the other with all information and cooperation reasonably requested by the other to prepare any Tax Return relating to the Company, the Company Assets and the assets of a Wholly-Owned Subsidiary or the transactions contemplated by this Agreement.

(d) Texas Franchise Taxes . Notwithstanding any provision of this Agreement to the contrary, the responsibility for Texas franchise Taxes with respect to the operations of each of the Company and its Wholly-Owned Subsidiaries (as opposed to the sale of the Interests which shall be governed by Section 14.1(b)(iii) ) shall be prorated between Seller and Buyer as of the Effective Date, with Seller responsible for such Texas franchise Taxes for all periods on or prior to the Effective Date, and such proration based on a closing of the books and the operational results of the Company and its Wholly-Owned Subsidiaries for the year of the Effective Date, notwithstanding that such Texas franchise Taxes are payable in a subsequent year.

Section 14.2 Responsibility for Tax Audits . Seller shall control any Tax Audit relating to Taxes for which Seller is liable pursuant to Section 14.1 , and if Closing occurs, Buyer shall control any other Tax Audit relating to Taxes for which Buyer is liable pursuant to Section 14.1 ; provided, however , that if a Tax Audit relates to Taxes for which both Parties could be liable under this Agreement, to the extent practicable, the Tax items with respect to such Tax Audit will be distinguished and each Party will have the option to control the defense and settlement of those Taxes for which it could be so liable, but if any Tax item cannot be identified as being a liability of only one Party or cannot be separated from a Tax item for which the other Party is liable, Buyer, at its expense, shall have the option to control the defense and settlement of the Tax Audit, provided that Buyer shall keep Seller notified of any developments in such Tax Audit and Seller shall have the right to participate in such Tax Audit at its own expense; and provided further that no such matter shall be settled without the written consent of Seller, not to be unreasonably withheld, delayed or conditioned. Buyer and Seller shall each timely provide the other with all information and cooperation reasonably requested to defend a Tax Audit with respect to Taxes relating to the Company Group, the Company Assets or the transactions contemplated by this Agreement. Each Party shall provide the other with notice of any pending or threatened Tax Audits that could adversely affect the other.

Section 14.3 Tax Refunds . The Parties shall be entitled to any refund, offset or credit with respect to Taxes for which the Party is responsible pursuant to Section 14.1 or Section 14.4 . If a Party receives a refund, offset or credit to which the other Party is entitled, the Party

receiving the refund, offset or credit shall pay it to the Party entitled to the refund within ninety (90) Business Days after receipt and usage thereof.

Section 14.4 Transfer Taxes . Buyer shall be responsible for and indemnify Seller against any state or local transfer, sales, use, stamp, registration or other similar Taxes resulting from the transactions contemplated by this Agreement. The Parties shall reasonably cooperate in good faith to minimize, to the extent permissible under applicable Law, the amount of any such Taxes.

Section 14.5 Tax Treatment of Indemnities . Any indemnity paid by a Party to another Party pursuant to this Article XIV or Article XIII shall be treated for federal, state and local income Tax purposes, as an adjustment to the Purchase Price, unless otherwise required by Law or as agreed by the Parties.

Section 14.6 Survival and Conflict . Notwithstanding any provision of this Agreement to the contrary, the obligations set forth in Article XIV shall survive Closing for the applicable statute of limitations plus 90 days. Further, in the event of a conflict between the provisions of this Article XIV and any other provision of this Agreement, this Article XIV shall control.

ARTICLE XV.
OTHER POST-CLOSING COVENANTS

Section 15.1 Books and Records .

(a) Delivery of Records . Seller shall deliver the Records to Buyer at or as soon as practicable after the Closing.

(b) Retention . Seller may retain copies of any or all of the Records.

(c) Record Preservation . Buyer shall preserve and keep a copy of all Records in Buyer’s possession for a period of at least five (5) years after the Closing Date. Buyer shall provide to Seller, at no cost or expense to Seller, full access to such Records as remain in Buyer’s possession and full access to the properties and employees of Buyer and the Company in connection with matters relating to the business or operations of the Company on or before the Closing Date and any disputes relating to this Agreement, all during normal business hours, after reasonable advance written notice and in a way that is not disruptive to Buyer, its business or operations.

Section 15.2 Use of Seller Marks . Buyer acknowledges and agrees that it obtains no right, title, interest, license or any other right whatsoever to use the Seller Marks. Buyer shall, within sixty (60) days after the Closing Date, remove or cover the Seller Marks from the Company Assets, including signage, and provide written verification thereof to Seller promptly after completing such removal. Buyer agrees never to challenge Seller’s (or its Affiliates’) ownership of the Seller Marks or any application for registration thereof or any registration thereof or any rights of Seller or its Affiliates therein as a result, directly or indirectly, of its ownership of the Company. Buyer will not do any business or offer any goods or services under the Seller Marks. Buyer will not send, or cause to be sent, any correspondence or other materials to any Person on any stationery that contains any Seller Marks or otherwise operate the

Company in any manner which would or might reasonably be expected to confuse any Person into believing that Buyer has any right, title, interest, or license to use the Seller Marks.

ARTICLE XVI.
MISCELLANEOUS

Section 16.1 Notices . Any notice, communication, request, instruction or other document by any party to another required or permitted hereunder shall be given in writing and addressed as set forth below. Any such notice, communication, request, instruction or other document shall be deemed to have been duly made or given and the receiving Party charged with notice as follows: (a) if personally delivered, when received; (b) if sent by facsimile, with electronic confirmation of delivery, if sent during normal business hours on a Business Day, and if not sent during normal business hours on a Business Day, on the next subsequent Business Day; (c) if mailed certified mail, return receipt requested, on the day such notice is received, and if such day is not a Business Day, on the next subsequent Business Day, or (d) if sent by overnight courier, the next Business Day after placement into the custody of the overnight courier. All notices shall be addressed as follows:

If to Buyer, to:

	Exponent Energy LLC
	1560 E. 21st Street
	Tulsa, OK 74114
	Attention: Nathan Buchanan
	E-Mail: nathan@exponenet-energy.com

If to Seller, to:

	Sanchez Production Partners LP
	1000 Main St., Suite 3000
	Houston, Texas 77002

	Attention: Mr. Charles C. Ward, Chief Financial Officer and Secretary
	Fax: (832) 308 - 3720
	E-Mail: Chuck.Ward@sanchezpp.com

with a copy (which shall not constitute Notice) to:

	Andrews Kurth Kenyon LLP
	600 Travis, Suite 4200
	Houston, Texas 77002
	Attention: Scott Olson
	Fax: (713) 238-7410
	E-Mail: solson@andrewskurth.com

A Party may, by written notice so delivered to the other Parties, change its address for notice purposes hereunder.

Section 16.2 Further Assurances . Subject to the terms and conditions of this Agreement, each Party will use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable, under applicable Law or otherwise, to consummate the transactions contemplated by this Agreement. The Parties agree to, and Seller, prior to the Closing, and Buyer, after the Closing, agree to cause the Company Group to, execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement in accordance with the terms hereof.

Section 16.3 Fees and Expenses . Except as otherwise provided in this Agreement, all fees and expenses, including fees and expenses of counsel, financial advisors, and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such fee or expense. For the avoidance of doubt, the Company Group shall not bear any costs or reimburse Seller for any fees and expenses incurred in connection with this Agreement or the transactions contemplated hereby.

Section 16.4 Assignment . Neither Party shall assign this Agreement or any part hereof without the prior written consent of the other Party. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the Parties and their respective permitted successors and assigns.

Section 16.5 Rights and Obligations of Third Parties . Except for the provisions of Article XIII , which are intended to be enforceable by the Indemnified Parties, nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give any Person, other than the Parties, any rights, remedies or obligations under or by reason of this Agreement.

Section 16.6 Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Any counterpart of this Agreement may be delivered by fax or an emailed PDF or other image of the executed signature page hereof.

Section 16.7 Entire Agreement . This Agreement (together with the Disclosure Schedules and exhibits to this Agreement), the Assignment and Assumption Agreement, and the Confidentiality Agreement constitute the entire agreement among the Parties with respect to the subject matter herein and therein and supersede any other agreements, whether written or oral, that may have been made or entered into by or among any of the Parties or any of their respective Affiliates relating to the transactions contemplated hereby. If there is any conflict between the terms of this Agreement and Exhibit A , the terms of this Agreement shall control.

Section 16.8 Disclosure Schedules .

makes such discovery and in any event no later than three (3) Business Days prior to the Closing Date. For all purposes of this Agreement, including for purposes of determining whether the conditions set forth in Article X have been fulfilled, the Disclosure Schedules shall be deemed to include only that information contained therein on the date of this Agreement and shall be deemed to exclude all information contained in any such correction, supplement, or amendment thereto; provided, however , that if Closing shall occur, then all matters set forth on any such addition, supplement or amendment at or prior to Closing shall be waived and Buyer shall not be entitled to make a claim with respect thereto pursuant to the terms of this Agreement or otherwise.

(b) Unless the context otherwise requires, all capitalized terms used in the Disclosure Schedules shall have the respective meanings assigned in this Agreement. No reference to or disclosure of any item or other matter in the Disclosure Schedules shall be construed as an admission or indication that such item or other matter is material or that such item or other matter is required to be referred to or disclosed in the Disclosure Schedule. No disclosure in the Disclosure Schedules relating to any possible breach or violation of any agreement or Law shall be construed as an admission or indication that any such breach or violation exists or has actually occurred. The inclusion of any information in the Disclosure Schedules shall not be deemed to be an admission or acknowledgment by Seller, in and of itself, that such information is material to or outside the ordinary course of the business of the Company or required to be disclosed on the Disclosure Schedules.

Section 16.9 Amendments . This Agreement may be amended or modified in whole or in part, and terms and conditions may be waived, only by a duly authorized agreement in writing that makes reference to this Agreement and is executed by each Party.

Section 16.10 Publicity . Buyer and Seller may make a press release or other public communication or announcement in connection with the execution of this Agreement, provided that the Person making such release, communication, or announcement provides the other Party reasonable opportunity to review and comment on any such release, communication, or announcement. Except for the foregoing, all press releases or other public communications of any nature whatsoever relating to the transactions contemplated by this Agreement, and the method of the release for publication thereof, shall be subject to the prior written consent of Buyer and Seller, which consent shall not be unreasonably withheld, conditioned, or delayed by such Party. Nothing herein shall prevent a Party from publishing such press releases or other public communications as is necessary to satisfy such Party’s obligations at Law or under the rules of any stock or commodities exchange after consultation with the other Party. If a Party believes it is required to issue or make any press release or announcement, such Party shall (i) give prompt notice thereof to the other Party; (ii) allow such other Party reasonable opportunity to review and provide comments with respect to the content of such press release or announcement; and (iii) use commercially reasonable efforts to incorporate any reasonable comment from any other Party prior to any release or announcement.

they shall take any actions necessary to render the remaining provisions of this Agreement valid and enforceable to the fullest extent permitted by Law and, to the extent necessary, shall amend or otherwise modify this Agreement to replace any provision contained herein that is held invalid or unenforceable with a valid and enforceable provision giving effect to the intent of the Parties to the greatest extent legally permissible.

Section 16.12 Certain Remedies . Seller agrees that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by Seller prior to Closing or in connection with the consummation of Closing in accordance with their specific terms or were otherwise breached by Seller. It is accordingly agreed that Buyer will be entitled to an injunction or injunctions to prevent breaches of this Agreement by Seller prior to Closing or in connection with the consummation of Closing and to enforce specifically the terms and provisions hereof against Seller in any court having jurisdiction, this being in addition to any other remedy to which Buyer is entitled at law or in equity, without posting any bond or other undertaking. Prior to Closing, Seller’s remedies for any breach by Buyer of this Agreement will be limited to those set forth in Section 12.1 and Section 12.2 . After Closing, the Parties will be entitled to any remedy available at law or in equity for breaches of this Agreement.

Section 16.13 Governing Law; Jurisdiction .

(a) Law . This Agreement shall be governed and construed in accordance with the Laws of the State of Delaware, without regard to the Laws that might be applicable under conflicts of laws principles.

(b) Forum . The Parties agree that the appropriate, exclusive and convenient forum for any disputes between any of the Parties hereto arising out of this Agreement or the transactions contemplated hereby shall be in any federal or state court in Delaware, and each of the Parties hereto irrevocably submits to the jurisdiction of such court solely in respect of any Legal Proceeding arising out of or related to this Agreement. The Parties further agree that the Parties shall not bring suit with respect to any disputes arising out of this Agreement or the transactions contemplated hereby in any court or jurisdiction other than the above specified courts. The Parties further agree, to the extent permitted by Law, that a final and nonappealable judgment against a Party in any action or Proceeding contemplated above shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and amount of such judgment. Except to the extent that a different determination or finding is mandated due to the applicable Law being that of a different jurisdiction, the Parties agree that all judicial determinations or findings by a federal or state court in Delaware, with respect to any matter under this Agreement shall be binding, subject to applicable appeal rights.

(c) Jurisdiction . To the extent that any Party has or hereafter may acquire any immunity from the jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, each such Party hereby irrevocably (i) waives such immunity in respect of its obligations with respect to this Agreement and (ii) submits to the personal jurisdiction of any court described in Section 16.13(b) .

(d) Waiver of Jury Trial . The Parties hereto agree that they hereby irrevocably waive the right to trial by jury in any action to enforce or interpret the provisions of this Agreement.

Section 16.14 Retention of Counsel . In any dispute or Proceeding arising under or in connection with this Agreement following the Closing, Seller shall have the right, at its election, to retain Andrews Kurth Kenyon LLP to represent it in such matter, and Buyer, for itself and the Company Group, and for their respective Affiliates, successors and assigns, hereby irrevocably consents to any such representation in any such matter and the communication by such counsel to Seller in connection with any such representation of any fact known to such counsel arising by reason of such counsel’s prior representation of any member of the Company Group. Buyer, for itself and (after the Closing) the Company Group, and for their respective Affiliates, successors and assigns, irrevocably acknowledges and agrees that all communications between any member of the Company Group and counsel made in connection with the negotiation, preparation, execution, delivery and Closing under, or any dispute or Proceeding arising under or in connection with, this Agreement or otherwise that, immediately prior to the Closing, would be deemed to be privileged communications of any member of the Company Group and its counsel and would not be subject to disclosure to Buyer in connection with any process relating to a dispute arising under or in connection with this Agreement or otherwise, shall continue after the Closing and for all purposes be deemed to be privileged communications between Seller and such counsel, and neither Buyer nor any Person purporting to act on behalf of or through Buyer shall seek to obtain the same by any process on the grounds that the privilege attaching to such communications, belongs to any member of the Company Group and not Seller.

Section 16.15 Buyer Right to Employ . Buyer shall have the right but not the obligation to retain any employee of Seller or its Affiliates who regularly performs work relating to the Company Assets.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF this Agreement has been duly executed and delivered by each of the Parties as of the date first above written.

/s/
	SELLER:

	SANCHEZ PRODUCTION PARTNERS LP

	By:	SANCHEZ PRODUCTION PARTNERS GP LLC, its general partner


	By:	/s/ Charles C. Ward

	Name:	Charles C. Ward

	Title:	Chief Financial Officer


	BUYER:

	EXPONENT ENERGY LLC


	By:	/s/ Nathan Buchanan

	Name:	Nathan Buchanan

	Title:	Managing Member

Signature Page

Exhibit 2.2

PURCHASE AND SALE AGREEMENT

between

SEP HOLDINGS IV, LLC,

as Seller

and

SENDERO PETROLEUM, LLC,

as Buyer

Dated as of June 30, 2017

TABLE OF CONTENTS


ARTICLE I. DEFINITIONS AND RULES OF CONSTRUCTION		1

Section 1.1	Definitions	1
Section 1.2	Rules of Construction	10

ARTICLE II. PURCHASE AND SALE		11

Section 2.1	Purchase and Sale of Company Assets	11

ARTICLE III. CONSIDERATION		11

Section 3.1	Consideration	11
Section 3.2	Adjustments to the Base Purchase Price	11
Section 3.3	Closing Statement	11
Section 3.4	Closing Payment	12
Section 3.5	Post-Closing Adjustment	12
Section 3.6	Payments and Reimbursements	13
Section 3.7	Purchase Price Allocation	14

ARTICLE IV. REPRESENTATIONS AND WARRANTIES RELATING TO SELLER		15

Section 4.1	Organization of Seller	15
Section 4.2	Authorization; Enforceability	15
Section 4.3	No Conflict; Consents	15

ARTICLE V. REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY ASSETS		15

Section 5.1	No Conflict; Consents	15
Section 5.2	Litigation	16
Section 5.3	Taxes	16
Section 5.4	Material Contracts	16
Section 5.5	Compliance with Laws; Permits	17
Section 5.6	Preferential Purchase Rights	17
Section 5.7	Payment of Royalties	17
Section 5.8	Current Commitments	17
Section 5.9	Brokers’ Fees	18

ARTICLE VI. REPRESENTATIONS AND WARRANTIES RELATING TO BUYER		18

Section 6.1	Organization of Buyer	18
Section 6.2	Authorization; Enforceability	18
Section 6.3	No Conflict; Consents	18
Section 6.4	Litigation	18
Section 6.5	Brokers’ Fees	18
Section 6.6	Financing; Resources and Other Capabilities	19
Section 6.7	Buyer’s Independent Investigation	19
Section 6.8	Independent Evaluation	19
Section 6.9	Regulatory	19

ARTICLE VII. TITLE AND ENVIRONMENTAL EXAMINATION.		19

Section 7.1	Access	19
Section 7.2	Environmental and Title Review	20
Section 7.3	Indemnity	20

ARTICLE VIII. INTERIM OPERATIONS		20

Section 8.1	Operations Prior to Closing	20
Section 8.2	Restricted Activities	21
Section 8.3	Casualty Loss	21
Section 8.4	Casualty Loss Limitation	22

ARTICLE IX. OTHER PRE-CLOSING COVENANTS		22

Section 9.1	Third-Party Approvals	22
Section 9.2	Insurance	22
Section 9.3	Replacement of Bonds, Letters of Credit and Guarantees	22

ARTICLE X. CONDITIONS TO CLOSING		23

Section 10.1	Conditions to Obligations of Buyer to Closing	23
Section 10.2	Conditions to the Obligations of Seller to Closing	23

ARTICLE XI. CLOSING		24

Section 11.1	Closing Date	24
Section 11.2	Closing Deliverables	24

ARTICLE XII. TERMINATION		25

Section 12.1	Termination	25
Section 12.2	Other Provisions	25

ARTICLE XIII. ASSUMPTION; INDEMNIFICATION AND WAIVERS		26

Section 13.1	Assumed Obligations	26
Section 13.2	Seller’s Indemnity	26
Section 13.3	Buyer’s Indemnity	26
Section 13.4	Express Negligence Rule	27
Section 13.5	Limitations on Liability	27
Section 13.6	Procedures	29
Section 13.7	Waiver of Consequential Damages	31
Section 13.8	Waivers and Disclaimers	31
Section 13.9	Exclusive Remedy and Release	33

ARTICLE XIV. TAX MATTERS		33

Section 14.1	Responsibility for Filing Tax Returns and Paying Taxes	33
Section 14.2	Responsibility for Tax Audits	34
Section 14.3	Tax Refunds	34
Section 14.4	Transfer Taxes	35
Section 14.5	Tax Treatment of Indemnities	35
Section 14.6	Survival and Conflict	35


ARTICLE XV. OTHER POST-CLOSING COVENANTS		35

Section 15.1	Books and Records	35
Section 15.2	Use of Seller Marks	35

ARTICLE XVI. MISCELLANEOUS		36

Section 16.1	Notices	36
Section 16.2	Further Assurances	37
Section 16.3	Fees and Expenses	37
Section 16.4	Assignment	37
Section 16.5	Rights and Obligations of Third Parties	37
Section 16.6	Counterparts	37
Section 16.7	Entire Agreement	37
Section 16.8	Disclosure Schedules	38
Section 16.9	Amendments	38
Section 16.10	Publicity	38
Section 16.11	Severability	39
Section 16.12	Certain Remedies	39
Section 16.13	Governing Law; Jurisdiction	39
Section 16.14	Covenant Not to Disclose Confidential Information	40

EXHIBITS AND SCHEDULES


Exhibits:
Exhibit A	-	Title and Environmental Defects Procedures
Exhibit B	-	Assignment and Assumption Agreement
Exhibit C	-	Leases
Exhibit D	-	Wells
Exhibit E	-	Surface Interests
Exhibit F	-	Gathering Systems
Exhibit G	-	Allocated Values
Schedules:
Schedule 1.1	-	Knowledge
Schedule 4.3	-	No Conflict; Consents — Seller
Schedule 5.1	-	No Conflict; Consents — Company Assets
Schedule 5.2	-	Litigation
Schedule 5.3	-	Taxes
Schedule 5.4	-	Material Contracts
Schedule 5.5(a)	-	Compliance With Laws;
Schedule 5.5(b)	-	Permits
Schedule 5.6	-	Preferential Purchase Rights
Schedule 5.7	-	Payment of Royalties
Schedule 5.8	-	Current Commitments
Schedule 9.2	-	Insurance
Schedule 9.3	-	Bonds, Letters of Credit and Guarantees

PURCHASE AND SALE AGREEMENT

This PURCHASE AND SALE AGREEMENT (this “ Agreement ”), dated as of June 30, 2017, is by and between (i) SEP Holdings IV, LLC, a Delaware limited liability company (“ Seller ”) and (ii) Sendero Petroleum, LLC, a Texas limited liability company (“ Buyer ”). Each of Seller and Buyer is sometimes referred to herein individually as a “ Party ” and they are sometimes collectively referred to herein as the “ Parties .”

Recitals:

Seller owns and/or operates, certain oil and gas wells, leases and other associated assets and interests in Chambers County, Wharton County, Jackson County, Matagorda County, Duval County, Willacy County, Hidalgo County and Cameron County (collectively, the “ Texas Counties ”).

Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, the Company Assets (as defined below), on and subject to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Parties agree as follows:

ARTICLE I.

DEFINITIONS AND RULES OF CONSTRUCTION

“ Adjustment Amount ” is defined in Section 3.2 .

“ Agreement ” is defined in the preamble to this Agreement.

“ Assignment and Assumption Agreement ” means an Assignment and Assumption Agreement in the form attached hereto as Exhibit B .

“ Assumed Obligations ” means all obligations and liabilities of any kind whatsoever of Seller arising from or relating to the Company Assets, whether known or unknown, liquidated or contingent, and regardless of whether the same are deemed to have arisen, accrued or are

attributable to periods prior to, on or after the Effective Time, including obligations and liabilities of Seller concerning: (i) the use, ownership or operation of the Company Assets; (ii) any obligations under or relating to any Contracts; (iii) paying all obligations owed to working interest, royalty, overriding royalty, net profits and other interest owners and operators relating to the Company Assets, including their share of any revenues or proceeds attributable to production or sales of Hydrocarbons; (iv) properly plugging, re-plugging and abandoning the Wells; (v) any obligation or liability for the dismantling, decommissioning, abandoning and removing of the Wells or Equipment; (vi) any obligation or liability for the cleaning up, restoration and/or remediation of the premises covered by or related to the Company Assets in accordance with applicable Contracts and Laws, including all Environmental Laws; (vii) furnishing makeup Hydrocarbons and/or settling and paying for Imbalances according to the terms of applicable operating agreements, gas balancing agreements, Hydrocarbons sales, processing, gathering or transportation Contracts; and (viii) any obligation or liability regarding Permits.

“ Base Purchase Price ” is defined in Section 3.1 .

“ Burden ” is defined in Section 5.7 .

“ Business Day ” means any day that is not a Saturday, Sunday, or legal holiday in the State of Texas and that is not otherwise a federal holiday in the United States.

“ Buyer ” is defined in the preamble to this Agreement.

“ Buyer Indemnified Parties ” is defined in Section 13.2 .

“ Buyer’s Credits ” means (without duplication) the sum of (i) proceeds received by the Seller and distributed to the Seller prior to Closing that are attributable to the sale of Hydrocarbons produced from the Company Assets on or after the Effective Time and less amounts payable as royalties, overriding royalties and other burdens measured by or payable out of such production, and less severance taxes applicable to such production; (ii) the Resolved Defect Amount; (iii) the amount of any reduction of the Base Purchase Price under Sections 3(e)(i)(C) and 3(e)(ii)(D) of Exhibit A ; (iv) an amount equal to the Suspended Funds; and (v) except as expressly provided otherwise herein, any other amount provided for elsewhere in this Agreement or otherwise agreed in writing by the Parties.

“ Casualty Loss ” is defined in Section 8.3 .

“ Central Time ” means Central Standard Time or Central Daylight Saving Time, as applicable.

“ Claim ” means both Direct Claims and Third-Party Claims, collectively and individually.

“ Claim Notice ” is defined in Section 13.6(a) .

“ Closing ” is defined in Section 11.1 .

“ Closing Date ” is defined in Section 11.1 .

“ Closing Statement ” is defined in Section 3.3 .

“ Closing Statement Arbitrator ” is defined in Section 3.5(b) .

“ Code ” means the Internal Revenue Code of 1986, as amended.

“ Company ” is defined in the preamble to this Agreement.

“ Company Assets ” means:

(a) the oil and gas leases, oil, gas and mineral leases, fee mineral interests, royalty interests, non-working and carried interests, operating rights and other interests in land described or referred to in Exhibit C (collectively, the “ Leases ”), together with all oil and gas pooling and unitization agreements, declarations, designations and order relating to the Leases (such pooled or unitized areas being, collectively, the “ Units ”);

(b) any and all oil and gas wells, salt water disposal wells, injection wells and other wells and wellbores, whether abandoned, not abandoned, plugged or unplugged, located on the Leases and in existence as of the Effective Date (collectively, the “ Wells ”), that are identified on Exhibit D ;

(c) all easements, rights-of-way, servitudes, surface and subsurface lease agreements, surface use agreements and other rights or agreements related to the use of the surface and subsurface, in each case to the extent used directly relating to the operation of the Leases, Wells, Units and Gathering Systems, including, without limitation, the interests described on Exhibit E (the “ Surface Interests ”);

(d) the gathering systems described on Exhibit F (collectively, the “ Gathering Systems ”);

(e) all Hydrocarbons produced and saved from, or allocable to, the Leases and the Wells from and after the Effective Time (collectively, the “ Sale Hydrocarbons ”);

(f) all structures, facilities, wellheads, tanks, pumps, compressors, separators, equipment, machinery, fixtures, flowlines, gathering lines, materials, improvements, SCADA hardware and software, rolling stock and vehicles and any other personal property used solely in the operation of the Leases, Units, Wells, Gathering Systems or Surface Interests (collectively, the “ Personal Property ”);

(g) all licenses, permits, contracts, pooling, unitization and communitization agreements, operating agreements, processing agreements, division orders, farm-in and farm-out agreements, rental agreements, equipment lease agreements and all other agreements of any kind or nature, whether recorded or unrecorded, set forth on Schedule 5.4 , but insofar and only insofar as the foregoing solely relate to the Leases, Units, Wells, Gathering Systems, Surface Interests or Personal Property, the ownership and operation thereof, or the production, treatment, sale, transportation, gathering, storage, sale or disposal of Sale Hydrocarbons, water or other substances produced therefrom or associated therewith (collectively, the “ Specified Contracts ”); and

(h) records that solely relate to the Leases, Surface Interests, Wells, Gathering Systems, Sale Hydrocarbons, Contracts and Personal Property in the possession of the Seller (the “ Records ”).

“ Contracts ” means any written and legally binding agreement, commitment, lease, license or other written and legally binding contractual undertaking.

“ Defect Deductible ” means an amount equal to three percent (3.0%) of the Base Purchase Price.

“ Direct Claim ” is defined in Section 13.6(d) .

“ Disclosure Schedules ” means the schedules attached hereto.

“ Dollars ” and “ $ ” mean the lawful currency of the United States.

“ Effective Date ” means the Closing Date.

“ Effective Time ” means 7:00 a.m. Central Time on the Effective Date.

“ Environmental Permits ” means all Permits of Governmental Authorities required by Environmental Laws for the conduct of the business of the Seller relating to the Company Assets.

“ Estimated Adjustment Amount ” is defined in Section 3.3 .

“ Estimated Purchase Price ” is defined in Section 3.4 .

information that cannot be disclosed or assigned to Buyer as a result of confidentiality or similar arrangements; (ix) any and all research, valuation or pricing information prepared by the Seller or its Representatives in connection with efforts to sell the Company Assets, including, but not limited to bids received and information and correspondence in connection therewith; and (x) any assets that are retained by Seller pursuant to Sections 3(e)(i)(C) and 3(e)(ii)(B) of Exhibit A .

“ Final Settlement ” is defined in Section 3.5(c)

“ Fundamental Representations ” means those representations and warranties of Seller set forth in Article IV and in Section 5.1 , Section 5.3 and Section 5.9 .

“ GAAP ” means generally accepted accounting principles of the United States, consistently applied.

“ Gathering Systems ” is defined in the definition of Company Assets.

“ Governmental Authority ” means any federal, state, municipal, local or similar governmental authority, regulatory or administrative agency or court.

“ Hydrocarbons ” means oil, gas, natural gas liquids, casinghead gas, coal bed methane, condensate and other gaseous and liquid hydrocarbons or any combination thereof.

“ Imbalance ” means over-production or under-production or over-deliveries or under-deliveries on account of (a) any imbalance at the wellhead between the amount of Hydrocarbons produced from a Well constituting part of the Company Assets and allocable to the interests of the Seller, and the shares of production from the relevant Well that are actually taken by or delivered to or for the account of the Seller and (b) any marketing imbalance between the quantity of Hydrocarbons constituting part of the Company Assets and required to be delivered by or to the Seller under any Contracts relating to the purchase and sale, gathering, transportation, storage, treating, processing, or marketing of Hydrocarbons and the quantity of Hydrocarbons actually delivered by or to the Seller pursuant to the applicable Contracts.

(iii) any obligations with respect to hedging, swaps or similar arrangements; (iv) any obligations to pay rent or other payment amounts under leases that would be required to be classified as a capital lease on a balance sheet prepared in accordance with GAAP; and (v) any guaranty of any of the foregoing.

“ Indemnified Party ” is defined in Section 13.6(a) .

“ Indemnifying Party ” is defined in Section 13.6(a) .

“ Indemnity Cap ” means an amount equal to ten percent (10%) of the Base Purchase Price.

“ Indemnity Deductible ” means an amount equal to three percent (3.0%) of the Base Purchase Price.

“ Individual Indemnity Threshold ” is defined in Section 13.5(a) .

“ IRS ” means the Internal Revenue Service of the United States.

“ Knowledge ” means, as to Seller, the actual knowledge of those Persons listed in Schedule 1.1 as of the date of this Agreement.

“ Leases ” is defined in the definition of Company Assets.

“ Legal Proceeding ” means any and all proceedings, suits and causes of action by or before any Governmental Authority and all arbitration proceedings.

“ Liens ” means liens, pledges, options, mortgages, deeds of trust and security interests.

“ Losses ” is defined in Section 13.2 .

“ Material Adverse Effect ” means, with respect to the Company Assets (as currently owned and operated), any circumstance, change, or effect that is materially adverse to the business, operations, assets or financial condition of the Company Assets, taken as a whole, but shall exclude any circumstance, change or effect resulting or arising from: (i) any general change in conditions in the industries or markets where the Company Assets are located; (ii) seasonal reductions in revenues and/or earnings attributable to the Company Assets in the ordinary course of its business; (iii) any adverse change, event or effect on the global, national or regional energy industry as a whole, including those impacting energy prices or the value of oil and gas assets and properties or other commodities, goods or services, or the availability or costs of hedges; (iv) changes in the prices of oil, gas or other hydrocarbon products; (v) national or international political conditions, including any engagement in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack; (vi) changes in Law, GAAP or the interpretation thereof; (vii) the entry into or

announcement of this Agreement, actions contemplated by this Agreement, or the consummation of the transactions contemplated hereby; (viii) any failure to meet internal or third-party projections or forecasts or revenue or earnings or reserve predictions; (ix) changes or developments in financial or securities markets or the economy in general; (x) effects of weather, meteorological events, natural disasters or other acts of God; (xi) natural declines in well performances; (xii) the existence of a preferred right as to any of the Company Assets; or (xiii) actions taken or omitted to be taken by or at the request of Buyer.

“ Material Contracts ” means any of the following Contracts to which any of the Company Assets are bound or subject:

(a) Contracts that can reasonably be expected to involve obligations of, or payments with respect to the Company Assets after the date hereof in excess of One Hundred Thousand Dollars ($100,000) in any given calendar year;

(b) Contracts evidencing Indebtedness for Borrowed Money or the granting of a Lien securing any such indebtedness;

(c) Contracts for the sale, gathering, processing, storage or transportation of production, or otherwise relating to the marketing of production from the Company Assets, other than Contracts which are subject to cancellation on not more than sixty (60) days’ notice without penalty or other detriment to the Seller;

(d) Contracts that contain calls upon or options to purchase production;

(e) Contracts that constitute a partnership or joint venture agreement (excluding any tax partnership); and

(f) Contracts that constitute a pending farmout agreement, exploration agreement, participation agreement or other similar Contract where the primary obligation thereunder has not fully been performed.

“ NORM ” means naturally occurring radioactive material, including technologically enhanced naturally occurring radioactive material.

“ Notice of Disagreement ” is defined in Section 3.5(a) .

“ Notices ” is defined in Section 16.1 .

“ Oil and Gas Properties ” means, collectively, the Leases, Wells and Units.

“ Organizational Documents ” means any charter, certificate of incorporation, certificate or articles of formation, articles of association, partnership agreements, limited liability company

agreements, bylaws, operating agreement or similar formation or governing documents and instruments.

“ Overhead Rate ” means the rate charged by an operator to the joint interest owners for one hundred percent (100%) of the interests under an operating agreement.

“ Party ” and “ Parties ” are defined in the preamble of this Agreement.

“ Permits ” means authorizations, licenses, permits or certificates issued by any Governmental Authority.

“ Permitted Encumbrances ” is defined in Exhibit A.

“ Personal Property ” is defined in the definition of Company Assets.

“ Pre-Closing Tax Period ” means any Tax period ending on or before the Closing Date.

“ Pre-Effective Date Tax Period ” means any Tax period ending on or before the Effective Date.

“ Property Costs ” means the Seller or any of its Affiliates’ obligation for any expenses or costs (including lease operating expense, drilling and completion costs, seismic costs, workover costs, capital expenditures, joint interest billings and overhead charges under applicable operating agreements) which relate to the Company Assets or are otherwise incurred by the Seller or any of its Affiliates in connection with the ownership, operation, development or maintenance of the Company Assets, but excluding (in all cases) costs and expenses attributable to (i) obligations to pay an owner of any working interest, royalty, overriding royalty, net profits interests or other similar burdens on or measured by production any revenues or proceeds attributable to sales of Hydrocarbons relating to the Company Assets, including those held in suspense; (ii) Losses for personal injury or death, property damage or loss (other than damage to structures, fences, irrigation systems and other fixtures, crops, livestock and other personal property in the ordinary course of business), torts, breach of Contract (other than failure to make payments due under the terms of a Contract) or violation of any Lease or Law (or private rights of action under any Law); (iii) obligations to plug wells (including the Wells), dismantle or decommission facilities, close pits and restore the surface around such wells, facilities and pits; (iv) environmental liabilities, including obligations to remediate any contamination of groundwater, surface water, soil, sediments or personal property under applicable Environmental Laws; (v) obligations with respect to Imbalances; and (vi) claims for indemnification or reimbursement from any third party with respect to costs of the type described in preceding clauses (i) through (v), whether such claims are made pursuant to Contract or otherwise.

“ Purchase Price ” is defined in Section 3.1 .

“ Records ” is defined in the definition of Company Assets.

“ Resolved Defect Amount ” means the amount by which the sum of all Defect Amounts determined in accordance with the procedures in Exhibit A exceeds the Defect Deductible.

“ Response Date ” is defined in Section 3.5(a) .

“ Restricted Period ” is defined in Section 8.1 .

“ Sale Hydrocarbons ” is defined in the definition of Company Assets.

“ Seller ” is defined in the preamble to this Agreement.

“ Seller Indemnified Parties ” is defined in Section 13.3 .

“ Seller’s Credits ” means (without duplication) (i) proceeds received by Buyer that are attributable to the sale of Hydrocarbons produced from the Company Assets prior to the Effective Time and less amounts payable as royalties, overriding royalties and other burdens measured by or payable out of such production, and less severance taxes applicable to such production; (ii) any Property Costs payable by Seller that are attributable to the ownership or operation of the Company Assets from and after the Effective Time; (iii) the value of all Hydrocarbons produced prior to the Effective Time but in tanks or upstream of the applicable sales meter as of the Effective Time; (iv) the amount of any increase to the Base Purchase Price with respect to Title Benefits pursuant to Section 3(g) of Exhibit A ; and (v) except as expressly provided otherwise herein, any other amount provided for elsewhere in this Agreement or otherwise agreed in writing by the Parties.

“ Settlement Date ” is defined in Section 3.5(b) .

“ Specified Contracts ” is defined in the definition of Company Assets.

“ Straddle Period ” means any Tax period that includes but does not end at the Effective Time.

“ Suspended Funds ” is defined in Section 5.7 .

“ Surface Interests ” is defined in the definition of Company Assets.

“ Target Formation ” is defined in Exhibit D with respect to each corresponding Well.

“ Tax Allocation ” is defined in Section 3.7(b) .

“ Tax Audit ” means any audit, adjustment, claim, examination, assessment, contest or other Proceeding with respect to Taxes.

“ Texas Counties ” is defined in the recital to this Agreement.

“ Third-Party Claim ” is defined in Section 13.6(a) .

“ United States ” means United States of America.

“ Units ” is defined in the definition of Company Assets.

“ Wells ” is defined in the definition of Company Assets.

Section 1.2 Rules of Construction .

(d) The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement.

(e) All references to currency herein shall be to, and all payments required hereunder shall be paid in, Dollars.

ARTICLE II.

PURCHASE AND SALE

Section 2.1 Purchase and Sale of Company Assets . Upon the terms and subject to the conditions set forth in this Agreement, Seller shall sell, assign, transfer, and convey to Buyer, and Buyer shall purchase and acquire from Seller, at the Closing, the Company Assets free and clear of all Liens (other than Permitted Encumbrances). Seller shall transfer the Company Assets to Buyer by delivery of the Assignment and Assumption Agreement at Closing.

ARTICLE III.

CONSIDERATION

Section 3.1 Consideration . In consideration for the purchase of the Company Assets, Buyer agrees to (i) pay to Seller at Closing the sum of Six Million Two Hundred Fifty Thousand Dollars ($6,250,000) (the “ Base Purchase Price ”), as adjusted by the Adjustment Amount (the Base Purchase Price as so adjusted, the “ Purchase Price ”) and (ii) assume the Assumed Obligations.

Section 3.2 Adjustments to the Base Purchase Price . The Base Purchase Price shall be adjusted by an amount (which could be a positive or negative number) equal to the Seller’s Credits minus the Buyer’s Credits (such amount being referred to herein as the “ Adjustment Amount ”). For purposes of clarity, a positive Adjustment Amount will increase the Base Purchase Price and a negative Adjustment Amount will decrease the Base Purchase Price.

Section 3.3 Closing Statement . Not later than five (5) Business Days prior to the Closing Date, Seller shall prepare and deliver to Buyer a statement (the “ Closing Statement ”) showing the estimated Adjustment Amount (using actual numbers and amounts where available, and using Seller’s good faith estimate of other amounts, where actual amounts are not available, in each case showing the associated calculations in reasonable detail) (the “ Estimated Adjustment Amount ”). Within three (3) Business Days after receipt of the Closing Statement, Buyer will deliver to Seller a written report containing all changes with the explanation therefor that Buyer proposes to be made to the Closing Statement. The Closing Statement, as agreed upon by the Parties, will be used to determine the Estimated Adjustment Amount at Closing. If the Parties are unable to reach agreement, the Closing Statement as prepared by Seller will be used to determine the Estimated Adjustment Amount at Closing, absent manifest error.

Section 3.4 Closing Payment . At Closing, Buyer shall pay to Seller, in cash by wire transfer of immediately available Dollar funds to the account or accounts designated by Seller, an amount equal to the difference between the Base Purchase Price and the Earnest Money Deposit, with such difference increased or decreased, as the case may be, by the Estimated Adjustment Amount (the “ Estimated Purchase Price ”).

Section 3.5 Post-Closing Adjustment .

(a) Revised Closing Statement . On or before the date that is ninety (90) days after the Closing Date, Seller shall prepare and deliver to Buyer a revised Closing Statement setting forth the Adjustment Amount as of the Closing Date. Seller shall provide to Buyer such data and information as Buyer may reasonably request supporting the amounts reflected on the Closing Statement (and reasonable access to Seller’s personnel, including internal accountants) to permit Buyer to perform or cause to be performed an audit of the Closing Statement, at Buyer’s expense. The Closing Statement shall become final and binding upon the Parties on the date that is thirty (30) days following receipt thereof by Buyer (the “ Response Date ”) unless Buyer gives Notice of its disagreement (“ Notice of Disagreement ”) to Seller on or before such Response Date. Any Notice of Disagreement shall specify in reasonable detail the Dollar amount, nature and basis of any disagreement so asserted. If a Notice of Disagreement is not received by Seller on or before the Response Date, then the Response Date shall be deemed the “ Settlement Date .” If a Notice of Disagreement is received by Seller by the Response Date, then the Closing Statement (as revised in accordance with paragraph (b) below) shall become final and binding on the Parties on the date upon which the Arbitrated Closing Statement (defined below) is delivered to the Parties, unless the Parties come to a mutual agreement in writing before the delivery of the Arbitrated Closing Statement, in which case the Settlement Date will be deemed to be the date on which such a mutual agreement is executed by the Parties.

3.5 and the related definitions and (ii) may not assign a value to any disputed item greater than the greatest value for such item claimed by either Seller or Buyer or less than the smallest value for such item claimed by Seller or Buyer in their respective calculations delivered pursuant to Section 3.5(a) . The Closing Statement Arbitrator shall render a decision (the “ Arbitrated Closing Statement ”) resolving the matters in dispute (which decision shall include a written statement of findings and conclusions) promptly after the conclusion of the hearing, unless the Parties reach agreement prior thereto and withdraw the dispute from arbitration. The Closing Statement Arbitrator shall provide to the Parties explanations in writing of the reasons for its decisions regarding the adjusted Adjustment Amount and shall issue a Closing Statement reflecting such decision. The decision of the Closing Statement Arbitrator shall be (i) final and binding on the Parties and (ii) final and non-appealable for all purposes hereunder ; provided, however , that such decision may be reviewed, corrected or set aside by a court of competent jurisdiction, but only if and to the extent that such court of competent jurisdiction finds that (A) the Closing Statement Arbitrator made mathematical errors with respect to its decision or (B) fraud was committed by any Party in connection with the matters in dispute. The cost of any arbitration (including the fees and expenses of the Closing Statement Arbitrator) under this Section 3.5(b) shall be borne entirely by the Party awarded the smaller percentage of the disputed amount by the Closing Statement Arbitrator. The fees and disbursements of Seller’s independent auditors and other costs and expenses incurred in connection with the services performed with respect to the Closing Statement shall be borne by Seller and the fees and disbursements of Buyer’s independent auditors and other costs and expenses incurred in connection with their preparation of the Notice of Disagreement shall be borne by Buyer.

(c) Final Settlement . If the amount of the Purchase Price as set forth on the Closing Statement (or Arbitrated Closing Statement) exceeds the amount of the Estimated Purchase Price paid at Closing, then, within five (5) days after the Settlement Date (or within five (5) days after the Closing Statement Arbitrator delivers the Arbitrated Closing Statement), Buyer shall pay to Seller the amount of such difference. If the amount of the Purchase Price as set forth on the Closing Statement (or Arbitrated Closing Statement) is less than the Estimated Purchase Price paid at Closing, then Seller shall pay to Buyer, within five (5) days after the Settlement Date (or within five (5) days after the Closing Statement Arbitrator delivers the Arbitrated Closing Statement), the amount of such difference. Any post-Closing payment made pursuant to this Section 3.5(c) shall be made by means of a wire transfer of immediately available Dollar funds to a bank account designated by the Party receiving the funds.

Section 3.6 Payments and Reimbursements . Notwithstanding any other provision hereof, from the Closing Date until ninety (90) days following the Settlement Date, any proceeds, costs or expenses that would constitute a Buyer’s Credit or a Seller’s Credit (and other proceeds, costs or expenses attributable to the Company Assets on or after the Closing Date) but that are not reflected in the Closing Statement shall be treated as follows:

(a) Seller will promptly forward, or cause to be forwarded, to Buyer any payments received by the Seller or any Affiliates thereof after the Closing Date with respect to proceeds attributable to the sale of Hydrocarbons produced from the Company Assets on or after the Effective Time but that are not reflected in the Closing Statement;

(b) Seller will be responsible pursuant to the terms of this Agreement for Property Costs prior to the Effective Time that would constitute a Buyer’s Credit but that are not reflected in the Closing Statement and shall promptly pay, or, if paid by Buyer, promptly reimburse Buyer for such costs or expenses;

(c) Buyer will promptly forward, or cause to be forwarded, to Seller any payments received by Buyer or any Affiliates thereof with respect to proceeds attributable to the sale of Hydrocarbons produced from the Company Assets prior to the Effective Time but that are not reflected in the Closing Statement; and

(d) Buyer will be responsible pursuant to the terms of this Agreement for Property Costs that would constitute a Seller’s Credit (or that are attributable to the Company Assets on or after the Closing Date) but that are not reflected in the Closing Statement and shall promptly pay, or, if paid by Seller, promptly reimburse Seller for and hold Seller harmless from and against, such costs or expenses.

Section 3.7 Purchase Price Allocation .

(a) Adjustment Allocation . Pursuant to the terms of Exhibit A , Buyer and Seller have allocated the Purchase Price among the Company Assets as set forth on Exhibit G and such values shall be used for purposes of calculating adjustments to the Base Purchase Price under the procedures set forth on Exhibit A . Notwithstanding anything herein to the contrary, no Party shall be bound for Tax purposes by the Allocated Values (as defined in Exhibit A ) set forth on Exhibit G to this Agreement.

(b) Tax Allocation . The Parties agree that the transactions contemplated hereby will be treated for U.S. federal income Tax purposes and applicable state income Tax purposes as a sale by Seller and a purchase by Buyer of the Company Assets. All Parties hereto agree to file all Tax Returns consistent with the foregoing and shall not take any position inconsistent with the foregoing for Tax purposes. Within ninety (90) days after the Final Settlement the Parties shall allocate the Purchase Price for Tax purposes among the Company Assets affected thereby in accordance with Section 1060 of the Code and the U.S. Treasury Regulations promulgated thereunder (the “ Tax Allocation ”).

ARTICLE IV.

REPRESENTATIONS AND WARRANTIES RELATING TO SELLER

Seller hereby represents and warrants to Buyer as follows:

Section 4.1 Organization of Seller . Seller is duly formed, validly existing, and in good standing under the Laws of the State of Delaware and has the requisite organizational power and authority to own its assets and conduct its business as presently conducted. Seller is duly qualified to do business, and in good standing, in each jurisdiction in which it is required to be so qualified, except where the failure to be so qualified and in good standing would not have a Material Adverse Effect.

Section 4.2 Authorization; Enforceability . Seller has full capacity, power, and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery, and performance of this Agreement, and the performance of the transactions contemplated hereby, have been duly and validly authorized on the part of Seller, and no other proceeding on the part of Seller is necessary to authorize this Agreement or performance of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Seller (and all documents required hereunder to be executed and delivered by Seller at the Closing will be duly executed and delivered by Seller), and this Agreement constitutes, and at the Closing each such document will constitute, a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, and similar Laws affecting creditors’ rights generally and subject, as to enforceability, to general principles of equity.

Section 4.3 No Conflict; Consents . Except as set forth on Schedule 4.3 , the execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated hereby do not and shall not:

(a) violate any Law applicable to Seller or, with respect to Seller, require any material filing with, consent, approval, or authorization of or notice to, any Person;

(b) violate any Organizational Document of Seller; or

(c) (i) breach any material contract to which Seller is a party; (ii) result in the termination of any such Material Contract; or (iii) constitute an event that, after notice or lapse of time or both, would result in the creation or imposition of a Lien.

ARTICLE V.

REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY ASSETS

Seller hereby represents and warrants to Buyer as follows:

Section 5.1 No Conflict; Consents . Except as set forth on Schedule 5.1 , the execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated hereby do not and shall not:

(a) violate any Law applicable to the Company Assets that are owned or leased by it or require any filing with or Permit, consent, approval, or authorization of or notice to, any Person, except where such violation or failure to make or obtain such filing, consent or approval would not have a Material Adverse Effect; or

(b) (i) breach any Material Contract to which any Company Assets that are owned or leased by it may be bound; (ii) result in the termination of any such Material Contract; (iii) result in the creation of any Lien under any Material Contract; or (iv) constitute an event that, after notice or lapse of time or both, would result in any such breach, termination or creation of a Lien, except where such breach, termination, Lien or event would not have a Material Adverse Effect.

Section 5.2 Litigation . Schedule 5.2 sets forth all Legal Proceedings pending against Seller or, to Seller’s Knowledge, threatened in writing, against Seller, in each case in respect of any of the Company Assets that are owned or leased by Seller.

Section 5.3 Taxes . Except as set forth on Schedule 5.3 , (i) all Tax Returns required to be filed prior to the date hereof with respect to the Company Assets have been timely filed and all of such Tax Returns are complete and correct in all material respects; (ii) all Taxes shown as due on such Tax Returns have been timely paid; (iii) there is no claim pending by any Governmental Authority in connection with any Tax or any Tax Return described in clause (i) or (ii); (iv) no Tax Returns described in clause (i) are under audit or examination by any Governmental Authority and Seller knows of no basis for any such audit or examination; (v) there are no agreements or waivers currently in effect or pending that provide for an extension of time with respect to the filing of any such Tax Return or the assessment or collection of any material Tax from or payment with respect to the Company Assets; (vi) no written claim has been made by any Governmental Authority in a jurisdiction where Seller does not file a Tax Return that it is or may be subject to material taxation in that jurisdiction with respect to the Company Assets; and (vii) Seller is not a foreign person within the meaning of Section 1445 of the Code.

Section 5.4 Material Contracts . As of the date hereof, Schedule 5.4 lists each Material Contract. Each Material Contract constitutes the legal, valid and binding obligation of Seller and, to Seller’s Knowledge, the counterparties thereto, and is enforceable in accordance with its terms, except, in each case, as would not reasonably be expected to have a Material Adverse Effect. Seller is not in breach or default in any material respect of its obligations under any of the Material Contracts. Except as set forth in Schedule 5.4 , or as would not reasonably be expected to have a Material Adverse Effect, (i) to Seller’s Knowledge, no breach or default by any third-party exists under any Material Contract and (ii) no counterparty to any Material Contract of Seller has canceled, terminated, or modified, or, to Seller’s Knowledge, threatened to cancel, terminate or modify, any Material Contract. Except for any such Contract identified on Schedule 5.4 as confidential, true, correct and complete copies of all Material Contracts have been made available to Buyer.

Section 5.5 Compliance with Laws; Permits .

(a) Laws . Except as disclosed on Schedule 5.5(a) , Seller is in compliance in all material respects with, all applicable Laws relating to the ownership, use and operation of the Company Assets. Notwithstanding any provision in this Section 5.5 (or any other provision of this Agreement) to the contrary, Section 5.3 and Exhibit A shall be the exclusive representations, warranties and covenants with respect to Tax and environmental issues (including Environmental Permits) and no other representations or warranties are made with respect to such matters, including under this Section 5.5 . Notwithstanding the foregoing, the representation and warranty contained in this Section 5.5(a) will not apply to (and will exclude) any liability arising out of or related to facts, events, transactions, or actions or inactions, the category of which is the subject of another representation or warranty set forth in this Article V , whether or not the existence of such liability would constitute a breach or inaccuracy of such representation or warranty.

(b) Permits . Except as disclosed on Schedule 5.5(b) , (i) Seller possesses all material Permits which are necessary to own the applicable Company Assets owned by them and to operate its business as currently conducted; (ii) all such material Permits of Seller are in full force and effect; and (iii) there are no Proceedings pending against Seller or, to Seller’s Knowledge, threatened before any Governmental Authority that seeks the revocation, cancellation, suspension or adverse modification of any such material Permit. True, correct and complete copies of all such material Permits have been made available to Buyer. Notwithstanding any provision in this Section 5.5 (or any other provision of this Agreement) to the contrary, Section 5.3 and Exhibit A shall be the exclusive representations, warranties and covenants with respect to Tax and environmental issues (including Environmental Permits) and no other representations or warranties are made with respect to such matters, including under this Section 5.5 .

Section 5.6 Preferential Purchase Rights . Except as set forth in Schedule 5.6 , with respect to Seller, there are no (i) preferential purchase rights, rights of first refusal or similar rights and (ii) rights of first offer, tag-along rights, drag-along rights or other similar rights, in each case of clause (i) and (ii) above, that are applicable to the transactions contemplated by this Agreement.

Section 5.7 Payment of Royalties . Except as set forth on Schedule 5.7 , with respect to Seller, and except for such amounts that are being held in suspense as permitted pursuant to applicable Law (“ Suspended Funds ”), all royalties (including lessor’s royalties), overriding royalties and other burdens upon, measured by or payable out of production (each, a “ Burden ”) due by the Seller with respect to the Company Assets have been paid in all material respects or, if not paid, is contesting such Burden in good faith in the ordinary course of business.

Section 5.8 Current Commitments . Schedule 5.8 sets forth, as of the date of this Agreement, all authorizations for expenditures and other capital commitments approved by Seller relating to the Company Assets that (i) are in an amount exceeding Two Hundred Fifty Thousand Dollars ($250,000), individually, and (ii) relate to activities that have not been completed by the date of this Agreement.

Section 5.9 Brokers’ Fees . Seller has not entered into any Contract with any Person that would require the payment by Buyer or its Affiliates of any brokerage fee, finders’ fee or other commission in connection with the transactions contemplated by this Agreement.

ARTICLE VI.

REPRESENTATIONS AND WARRANTIES RELATING TO BUYER

Buyer hereby represents and warrants to Seller as follows:

Section 6.1 Organization of Buyer . Buyer is a limited liability company, validly existing and in good standing under the Laws of the State of Texas.

Section 6.2 Authorization; Enforceability . Buyer has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery, and performance of this Agreement, and the performance of the transactions contemplated hereby have been duly and validly authorized and approved by Buyer, and no other proceeding on the part of Buyer is necessary to authorize this Agreement. This Agreement has been duly and validly executed and delivered by Buyer (and all documents required hereunder to be executed and delivered by Buyer at the Closing will be duly executed and delivered by Buyer), and this Agreement constitutes, and at the Closing each such document will constitute, a valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar Laws affecting creditors’ rights generally and subject, as to enforceability, to general principles of equity.

(a) violate any Law applicable to Buyer or require any filing with, consent, approval or authorization of, or, notice to, any Governmental Authority;

(b) violate any Organizational Document of Buyer; or

Section 6.6 Financing; Resources and Other Capabilities . Buyer has received commitment for financing, and shall have as of the Closing Date, sufficient funds with which to pay the Adjusted Purchase Price and consummate the transactions contemplated by this Agreement. Buyer has the financial, technical and other capabilities to perform all of Buyer’s other obligations under this Agreement and all of the obligations assumed from Seller with respect to the Company Assets.

Section 6.7 Buyer’s Independent Investigation . Buyer and its Representatives are conducting an independent investigation and verification of the Company Assets. Except for the representations and warranties made by Seller in Article IV and Article V , Buyer acknowledges that there are no representations or warranties, express or implied, as to the Company Assets.

Section 6.8 Independent Evaluation . Buyer is sophisticated in the evaluation, purchase, ownership and operation of oil and gas properties and related facilities. Buyer acknowledges and agrees that Seller has not made any representations or warranties as to the Company Assets except as expressly and specifically provided in Article IV and Article V and that Buyer may not rely on any other representations or warranties made by Seller or its representatives or on any of Seller’s estimates with respect to reserves or the value of the Company Assets, or any projections as to future events or other analyses or forward looking statements. In making its decision to enter into this Agreement and to consummate the transaction contemplated herein, subject to the express representations of Seller set forth in this Agreement, Buyer (i) has relied or shall rely solely on its own independent investigation and evaluation of the Company Assets and the express provisions of this Agreement and (ii) has satisfied or shall satisfy itself as to the environmental and physical condition of and contractual arrangements affecting the Company Assets. Buyer has no Knowledge of any fact that results in the breach of any representation, warranty or covenant of Seller made hereunder.

Section 6.9 Regulatory . Buyer is now, and will be on the Closing Date, qualified to own and assume operatorship of all Leases, Wells and Company Assets comprising of a part of the Oil and Gas Properties, including federal oil, gas and mineral leases and Leases with Governmental Authorities, and the consummation of the transaction contemplated in this Agreement will not cause Buyer to be disqualified as such an owner or operator. To the extent required by any applicable Laws, Buyer currently has, and will hereafter continue to maintain, lease bonds, area-wide bonds or any other surety bonds as may be required by, and in accordance with, all applicable Laws governing the ownership and operation of such Leases, Wells and Company Assets and has filed any and all required reports necessary for such operations with all Governmental Authorities having jurisdiction over such operations.

ARTICLE VII.

TITLE AND ENVIRONMENTAL EXAMINATION.

Section 7.1 Access . From the date hereof through the Closing, Seller shall afford Buyer and its Representatives reasonable access, during normal business hours and in such manner as not to unreasonably interfere with normal operation of Seller’s business, to the properties, books, contracts and records of Seller and to the appropriate officers and employees of Affiliates of Seller and shall furnish such Representatives with all financial and operating data and employment data with respect to the employees of the Seller who are located in the Texas

Counties and whose job responsibilities encompass the Company Assets and other information concerning the Company Assets as Buyer and such Representatives may reasonably request. Seller shall have the right to have a Representative present at all times during any such inspections, interviews and examinations. Notwithstanding the foregoing, Buyer shall have no right of access to, and Seller shall have no obligation to provide to Buyer, information relating to: (i) bids received from others in connection with the transactions contemplated by this Agreement (or similar transactions) and information and analyses (including financial analyses) relating to such bids; (ii) any information the disclosure of which would jeopardize any privilege available to Seller relating to such information or would cause Seller to breach a confidentiality obligation; or (iii) any information the disclosure of which would result in a violation of Law.

Section 7.2 Environmental and Title Review . Buyer shall have the right to examine the environmental condition of and title to the Company Assets in accordance with the procedures in Exhibit A . Seller shall provide access to the Company Assets during regular business hours that Seller operates, and Seller shall use its commercially reasonable efforts to obtain permission for Buyer to gain access to the Company Assets operated by third parties. Buyer shall have no right to perform or conduct any environmental sampling or other invasive environmental investigation on or about any of the Company Assets without the prior written consent of Seller, which may be withheld for any reason.

Section 7.3 Indemnity . Buyer shall indemnify the Seller Indemnified Parties from and against Losses arising out of, or in connection with, any site visits or inspections of the Company Assets or any other properties of any Seller Indemnified Party by Buyer and its Representatives, EVEN IF CAUSED BY THE SOLE, JOINT AND/OR CONCURRENT NEGLIGENCE, STRICT LIABILITY, OR OTHER FAULT OF THE SELLER INDEMNIFIED PARTIES, EXCEPTING ONLY LOSSES CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF A MEMBER OF THE SELLER INDEMNIFIED PARTIES .

ARTICLE VIII.

INTERIM OPERATIONS

(a) operate the Company Assets operated by Seller in all material respects in (i) the ordinary course consistent with past practices and (ii) compliance with all applicable Laws;

(b) pay all expenses incurred with respect to the Company Assets owned or operated by Seller in the usual, regular and ordinary manner consistent with past practice;

(c) collect the accounts receivable attributable to the Company Assets owned or operated by Seller in the usual, regular and ordinary manner consistent with past practice;

(d) maintain the books of account and records relating to the Company Assets owned or operated by Seller in the usual, regular and ordinary manner, in accordance with the usual accounting practices of each such Person; and

(e) give prompt Notice to Buyer of any written notice received by Seller of any material claim asserting any breach of contract, tort or violation of Law or any investigation, suit, action or litigation by or before a Governmental Authority or otherwise, that (in each case) relates to the Company Assets.

Section 8.2 Restricted Activities . Without the prior written consent of Buyer, which consent shall not be unreasonably withheld, conditioned, or delayed, Seller shall not take any action during the Restricted Period to:

(a) sell, transfer, abandon, lease (other than oil and gas leasehold interests acquired by Seller in the Restricted Period), encumber (other than Permitted Encumbrances), exchange or otherwise dispose of any of the Company Assets except in the ordinary course of business;

(b) merge or consolidate with any Person;

(c) incur any Indebtedness for Borrowed Money to the extent secured by Company Assets, whether or not evidenced by a note, bond, debenture or similar instrument (nor enter into any guarantees with respect to any such indebtedness), except any such indebtedness that will be paid in full at or prior to the Closing;

(d) enter into any Contract that would have been a Material Contract if it had been in effect on the date hereof;

(e) amend, modify or terminate any Material Contract or otherwise waive, release or assign any material rights, Claims or benefits of Seller under any Material Contract;

(f) propose or agree to participate in or enter into any authorization for expenditure or other approved capital expenditure in excess of two hundred fifty thousand Dollars ($250,000) to the extent relating to the Company Assets; or

(g) agree, whether in writing or otherwise, to do any of the foregoing.

Section 8.3 Casualty Loss . If, between the Execution Date and the Closing, any substantial portion of the Company Assets are materially damaged or destroyed by fire or other casualty (not including normal wear and tear, downhole mechanical failure or reservoir changes) or if any substantial portion of the Company Assets are taken by condemnation or under the right of eminent domain (all of which are herein called “ Casualty Loss ” and are limited to property damage or taking only), Seller shall notify Buyer promptly after Seller learns of such event. Seller shall have the right, but not the obligation, to cure a Casualty Loss that consists of property damage by repairing the affected Company Asset no later than the Closing Date. If any uncured Casualty Loss exists at the Closing, Buyer shall proceed to purchase the Company Asset affected thereby, and upon receipt of the Purchase Price, Seller shall pay to Buyer all sums paid to Seller by third Persons by reason of the damage or taking of such Company Asset, and to the

extent Seller is not contractually prohibited from doing so, Seller shall assign, transfer and set over unto Buyer all of the right, title and interest of Seller in and to any claims, unpaid proceeds or other payments or rights to receive payments from third Persons arising out of such damage or taking; provided, however, that Buyer shall have the right to terminate this Agreement if such Casualty Loss exceeds 5% of the Purchase Price. EXCEPT AS SET FORTH IN SCHEDULE 9.2 , SELLER DISCLAIMS ANY REPRESENTATION OR WARRANTY AS TO THE EXISTENCE OF INSURANCE COVERING CASUALTY LOSS TO THE ASSETS, AND DISCLAIMS ANY OBLIGATION, COVENANT OR DUTY TO BUYER TO ASSERT OR PURSUE ANY CLAIM AGAINST ANY INSURER OR OTHER PERSON FOR CASUALTY LOSS TO THE COMPANY ASSETS.

Section 8.4 Casualty Loss Limitation . Anything in this Agreement to the contrary notwithstanding, Buyer’s recourse with respect to a Casualty Loss shall be limited to the proceeds of Seller’s casualty insurance coverage actually recovered by Seller in respect thereof or other sums paid to Seller by third Persons (or an assignment of claims related thereto). If such sums are received by Seller prior to Closing, such sums will be paid to Buyer at Closing, and if such sums are received after Closing, such sums will be paid to Buyer promptly after receipt thereof by the Seller. Seller shall have no other liability or responsibility to Buyer with respect to a Casualty Loss, EVEN IF SUCH CASUALTY LOSS SHALL HAVE RESULTED FROM OR SHALL HAVE ARISEN OUT OF THE SOLE OR CONCURRENT NEGLIGENCE, FAULT, BREACH OF STATUTE OR WILLFUL MISCONDUCT OF SELLER.

ARTICLE IX.

OTHER PRE-CLOSING COVENANTS

Section 9.1 Third-Party Approvals . Buyer and Seller shall (and shall each cause their respective Affiliates to) use reasonable efforts to obtain all material consents and approvals of third parties and releases of Liens that any of Buyer, Seller, or their Affiliates are required to obtain to consummate the transactions contemplated hereby.

Section 9.2 Insurance . At the Closing, Seller shall be entitled to terminate or modify the insurance policies described in Schedule 9.2 to exclude coverage of the Company Assets, and Buyer will obtain its own insurance coverage with respect to the Company Assets.

Section 9.3 Replacement of Bonds, Letters of Credit and Guarantees . The Parties understand that none of the bonds, letters of credit, and guarantees, posted by Seller with any Governmental Authority or third Person and relating to the Company Assets will be transferred to Buyer. On or before the Closing Date, Buyer shall obtain, or cause to be obtained in the name of Buyer, replacements for the bonds and guarantees listed on Schedule 9.3 to the extent such replacement are permitted under the terms thereof, and to the extent permitted under the terms thereof shall cause, effective as of the Closing Date, the cancellation or return to Seller of such bonds and guarantees posted (or supported) by Seller with respect to the Company Assets.

ARTICLE X.

CONDITIONS TO CLOSING

(a) Representations, Warranties and Covenants . (i) The representations and warranties of Seller made in this Agreement (disregarding all materiality and Material Adverse Effect qualifications contained therein) will be true and correct as of the date of this Agreement and as of the Closing Date as if made on the Closing Date (except to the extent that such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been true and correct as of such earlier date) except where all such breaches taken collectively would not reasonably be expected to have a Material Adverse Effect; (ii) Seller shall have performed or complied in all material respects with all of the covenants and agreements required by this Agreement to be performed or complied with by Seller on or before the Closing; and (iii) Buyer shall have received a certificate of an executive officer of Seller, dated the Closing Date, to such effect.

(b) No Proceeding or Injunction . No Proceeding instituted by a third-party shall be pending before any Governmental Authority or arbitral body seeking to restrain, prohibit, enjoin or declare illegal, or seeking substantial damages in connection with, the transactions contemplated by this Agreement. No provision of any applicable Law and no Order shall be in effect that prohibits or makes illegal the consummation of the Closing.

ARTICLE XI.

CLOSING

Section 11.1 Closing Date . Subject to the conditions set forth in Article X , the closing of the sale and transfer of the Company Assets to Buyer as contemplated by this Agreement (the “ Closing ”) shall take place at the offices of Andrews Kurth Kenyon LLP at 600 Travis, Suite 4200, Houston, Texas 77002 on July 31, 2017, or such other date as Buyer and Seller may mutually determine (the date on which the Closing occurs is referred to herein as the “ Closing Date ”), subject to Seller’s right to extend the Closing Date under Section 3(d) of Exhibit A .

Section 11.2 Closing Deliverables . At Closing, the following events shall occur, each being a condition precedent to the others and each being deemed to have occurred simultaneously with the others:

(a) Closing Payment . Buyer shall pay to Seller the Closing Payment.

(b) Assignment and Assumption Agreement . Seller and Buyer shall execute and deliver the Assignment and Assumption Agreement.

(d) Seller’s Certificate . Seller shall deliver the certificate required pursuant to Section 10.1(a) .

(e) Certification of Non-Foreign Status . Seller shall deliver a certification of non-foreign status in accordance with U.S. Treasury Regulation Section 1.1445‑2(b)(2).

(f) Other Matters . Seller and Buyer shall execute and deliver any other appropriate assignments, bills of sale, or other instruments necessary to effect or support the transactions contemplated by this Agreement.

ARTICLE XII.

TERMINATION

Section 12.1 Termination . At any time prior to the Closing, this Agreement may be terminated and the transactions contemplated hereby abandoned:

(a) by the mutual written consent of Buyer and Seller;

(b) by Buyer, (i) if Seller shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would give rise to the failure of a condition set forth in Section 10.1 or (ii) if all of the conditions set forth in Article X have been satisfied or waived, as applicable, and Seller nevertheless refuses or fails to Close the transactions contemplated in this Agreement; provided, Seller shall first be entitled to ten (10) days’ notice and the opportunity to cure and provided furthermore that Buyer shall not be in breach at such time or (iii) in accordance with Section 8.3 if a Casualty Loss specified therein occurs;

(c) by Seller, (i) if Buyer shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would give rise to the failure of a condition set forth in Section 10.2 or (ii) if all of the conditions set forth in Article X have been satisfied or waived, as applicable, and Buyer nevertheless refuses or fails to Close the transactions contemplated in this Agreement; provided, Buyer shall first be entitled to ten (10) days’ notice and the opportunity to cure and provided furthermore that Seller shall not be in breach at such time;

(e) by either Buyer or Seller, upon Notice to the other Party, if the transactions contemplated at the Closing have not been consummated by July 31, 2017, provided that neither Buyer nor Seller shall be entitled to terminate this Agreement pursuant to this Section 12.1(e) if such Person’s breach of this Agreement has prevented the consummation of the transactions contemplated by this Agreement; or

Section 12.2 Other Provisions . Except for Section 7.3 , Section 13.7 and Article XVI (excluding Section 16.12 ) (and the definitions related to any of the foregoing), this Agreement shall, upon termination hereof pursuant to Section 12.1 , become of no further force or effect.

Nothing in Section 12.1 will relieve any Party to this Agreement of liability for breach of this Agreement occurring prior to any termination, or for breach of any provision of this Agreement that specifically survives termination hereunder.

ARTICLE XIII.

ASSUMPTION; INDEMNIFICATION AND WAIVERS

Section 13.2 Seller’s Indemnity From and after Closing, subject to the limitations set forth in this Agreement, Seller shall indemnify, defend and hold harmless Buyer, its Affiliates and each of their respective officers, members, managers, partners, directors, employees and representatives (the “ Buyer Indemnified Parties ”) against any and all liabilities, obligations, damages, losses, costs, debts, penalties, fines, expenses (including reasonable attorneys’ and consultants’ fees and expenses), claims, causes of actions, payments, charges, judgments and assessments (collectively “ Losses ”) incurred or suffered by the Buyer Indemnified Parties as a result of, relating to or arising out of:

(b) the breach of any covenant or agreement made or to be performed by Seller under this Agreement; and

In no event shall Seller have any obligation to provide indemnification for any matters to the extent accounted for in the Closing Statement or any revised Closing Statement. Notwithstanding anything herein to the contrary, Buyer acknowledges that it is being provided the opportunity to conduct due diligence and investigation with respect to the Company Assets, and in no event shall Seller have any liability to the Buyer with respect to any breach of any representation, warranty or covenant under this Agreement to the extent that the Buyer was aware of such breach as of the Closing Date.

Section 13.3 Buyer’s Indemnity . From and after Closing, subject to the limitations set forth in this Agreement, Buyer shall indemnify, defend and hold harmless Seller, its Affiliates, and each of their respective officers, members, managers, partners, directors, employees and representatives (the “ Seller Indemnified Parties ”) against any and all Losses incurred or suffered by the Seller Indemnified Parties as a result of, relating to or arising out of:

(b) the breach of any covenant or agreement made or to be performed by Buyer under this Agreement; and

Section 13.5 Limitations on Liability .

(a) Except as set forth below, a Buyer Indemnified Party will not be entitled to indemnity under Section 13.2(b) of this Agreement for Losses with respect to any individual Claim that does not equal or exceed one hundred thousand Dollars ($100,000) (the “ Individual Indemnity Threshold ”) and all such Claims that equal or exceed the Individual Indemnity Threshold must collectively also exceed the Indemnity Deductible, and thereafter, the Buyer Indemnified Parties shall only be entitled to indemnity for the amount in excess of the Indemnity Deductible, subject to the limitations set forth in this Agreement. Except as set forth below, the maximum aggregate liability of Seller under Section 13.2(b) of this Agreement shall not exceed the Indemnity Cap. The Indemnity Deductible and the Indemnity Cap shall not apply to any claim for indemnification under Section 13.2(a) with respect to any breach of the Fundamental Representations.

(b) Survival .

(i) Except as otherwise expressly provided herein, the representations, warranties and covenants of the Parties under this Agreement shall survive the Closing; provided, however, that:

(a) except for the Fundamental Representations, all other representations and warranties of Seller shall survive the Closing for a period of six (6) months;

(b) the Fundamental Representations shall survive the Closing for the period of the applicable statute of limitations;

(c) all covenants and agreements of Seller in this Agreement shall survive the Closing for a period of six (6) months, except for (i) Seller’s covenants in Section 3.7 and Article XIV , which shall survive for the applicable statute of limitations; and

(ii) Seller’s covenants in this Article XIII , which shall survive the Closing for the period specified in this Article XIII ;

(d) Buyer’s representations and warranties set forth in this Agreement shall survive the Closing forever; and

(e) all covenants and agreements of Buyer in this Agreement shall survive the Closing for a period of twelve (12) months, except for (i) Buyer’s covenants in Section 3.7 , Section 7.3 and Article XIV , which shall survive for the applicable statute of limitations plus ninety (90) days; (ii) Buyer’s covenants in Section 15.1 , which shall survive for a period of seven (7) years; (iii) Buyer’s covenants in Section 15.2 , which shall survive without limitation as to duration; and (iv) Buyer’s covenants in this Article XIII , which shall survive the Closing for the period specified in this Article XIII ;

(ii) Subject to Section 13.5(b)(iii) below, the Parties’ respective indemnity obligations under this Article XIII shall survive as follows:

(b) Seller’s indemnities in Section 13.2(b) and Buyer’s indemnities in Section 13.3(b) shall terminate as of the termination date of each respective covenant that is subject to indemnification; provided that if there is no termination date for a covenant, then the indemnities provided with respect thereto shall survive the Closing without time limit;

(d) Buyer’s indemnities in Section 13.3(c) shall survive the Closing without time limit.

(c) Reductions . The amount of any Losses subject to indemnification under this Article XIII shall be reduced or reimbursed, as the case may be, by any third-party insurance

proceeds and third-party recoveries actually received by the Indemnified Parties with respect to such Losses (net of any expenses or costs incurred in connection with the claim or collection relating thereto and any increase in premiums as a result thereof). The Indemnified Parties shall use commercially reasonable efforts to collect any amounts available under such insurance coverage and from such other third-party alleged to have responsibility. If an Indemnified Party receives an amount under insurance coverage or from such third-party with respect to Losses that were the subject of indemnification under this Article XIII at any time subsequent to indemnification provided thereunder, then such Indemnified Party shall promptly reimburse the Indemnifying Party for such amount (net of any expenses or costs incurred in connection with the claim or collection relating thereto and any increase in premiums as a result thereof).

Section 13.6 Procedures . Claims for indemnification under this Agreement shall be asserted and resolved as follows:

defend such Third-Party Claim with counsel selected by the Indemnifying Party (who shall be reasonably satisfactory to the Indemnified Party), by all appropriate proceedings, to a final conclusion or settlement at the discretion of the Indemnifying Party in accordance with this Section 13.6(b) . The Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof; provided that the Indemnifying Party shall not enter into any settlement agreement or consent to the entry of any judgment with respect thereto without the written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned, or delayed) that (i) does not result in a final resolution of the Indemnified Party’s liability to the third-party with respect to the Third-Party Claim (including, in the case of a settlement, an unconditional written release of the Indemnified Party from all further liability in respect of such Third-Party Claim) or (ii) may materially and adversely affect the Indemnified Party (other than as a result of money damages covered by the indemnity). If requested by the Indemnifying Party, the Indemnified Party agrees, at the sole cost and expense of the Indemnifying Party, to cooperate with the Indemnifying Party and its counsel in contesting any Third-Party Claim which the Indemnifying Party elects to contest pursuant to this Section 13.6(b) , including the making of any related counterclaim against the Person asserting the Third-Party Claim or any cross complaint against any Person. The Indemnified Party may participate in, but not control, any defense or settlement of any Third-Party Claim controlled by the Indemnifying Party pursuant to this Section 13.6(b) , and the Indemnified Party shall bear its own costs and expenses with respect to such participation.

(c) Indemnified Party . Except with respect to Tax Audits described in Section 14.2 , if the Indemnifying Party does not notify the Indemnified Party that the Indemnifying Party elects to defend the Indemnified Party pursuant to Section 13.6(b) , then the Indemnified Party shall have the right to defend, and be reimbursed for its reasonable cost and expense (but only if the Indemnified Party is actually entitled to indemnification hereunder) in regard to the Third-Party Claim with counsel selected by the Indemnified Party (who shall be reasonably satisfactory to the Indemnifying Party), by all appropriate proceedings, which proceedings shall be prosecuted diligently by the Indemnified Party. In such circumstances, the Indemnified Party shall defend any such Third-Party Claim in good faith and have full control of such defense and proceedings; provided, however, that the Indemnified Party may not enter into any compromise or settlement of such Third-Party Claim if indemnification is to be sought hereunder, without the Indemnifying Party’s consent (which consent shall not be unreasonably withheld, conditioned or delayed). The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this Section 13.6(c) , and the Indemnifying Party shall bear its own costs and expenses with respect to such participation.

(d) Direct Claim . Any claim by the Indemnified Party on account of Losses that do not result from a Third-Party Claim (a “ Direct Claim ”) will be asserted by giving the Indemnifying Party reasonably prompt Notice thereof, but in any event not later than thirty (30) days after the Indemnified Party becomes aware of the events that gave rise to such Direct Claim. Such Notice by the Indemnified Party will describe the Direct Claim in reasonable detail, will include copies of all available material written evidence thereof and will indicate the estimated amount, if reasonably practicable, of Losses that have been or may be sustained by the Indemnified Party. The Indemnifying Party will have a period of thirty (30) days within which to respond in writing to such Direct Claim. If the Indemnifying Party does not so respond within such thirty (30) day period, the Indemnifying Party will be deemed to have rejected such Direct

Claim, in which event the Indemnified Party will be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Agreement.

Section 13.7 Waiver of Consequential Damages . WITH RESPECT TO ANY AND ALL LOSSES FOR WHICH INDEMNIFICATION MAY BE AVAILABLE HEREUNDER, NO INDEMNIFYING PARTY SHALL HAVE ANY LIABILITY FOR ANY CONSEQUENTIAL, INDIRECT, PUNITIVE, EXEMPLARY OR SPECIAL DAMAGES WITH RESPECT TO ANY CLAIM FOR WHICH SUCH INDEMNIFYING PARTY MAY HAVE LIABILITY PURSUANT TO THIS AGREEMENT; PROVIDED, HOWEVER, THAT THIS WAIVER SHALL NOT APPLY TO THE EXTENT SUCH CONSEQUENTIAL, INDIRECT, PUNITIVE, EXEMPLARY OR SPECIAL DAMAGES ARE AWARDED IN A PROCEEDING BROUGHT OR ASSERTED BY A THIRD-PARTY AGAINST AN INDEMNIFIED PARTY.

Section 13.8 Waivers and Disclaimers .

(a) NO RELIANCE . BUYER IS REVIEWING AND IS BEING PROVIDED ACCESS TO ALL CONTRACTS, DOCUMENTS, RECORDS AND INFORMATION WHICH IT HAS DESIRED TO REVIEW IN CONNECTION WITH ITS DECISION TO ENTER INTO THIS AGREEMENT, AND TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY. BUYER HAS NOT RELIED UPON ANY REPRESENTATION, WARRANTY, STATEMENT, ADVICE, DOCUMENT, PROJECTION OR OTHER INFORMATION OF ANY TYPE PROVIDED BY SELLER, OR ITS AFFILIATES, OR ANY OF THEIR REPRESENTATIVES, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS AGREEMENT. IN DECIDING TO ENTER INTO THIS AGREEMENT, AND TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY, BUYER IS RELYING SOLELY UPON ITS OWN INVESTIGATION AND ANALYSIS (AND THAT OF ITS REPRESENTATIVES) AND NOT ON ANY DISCLOSURE OR REPRESENTATION MADE BY, OR ANY DUTY TO DISCLOSE ON THE PART OF SELLER OR ITS AFFILIATES, OR ANY OF THEIR REPRESENTATIVES, OTHER THAN THE REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS AGREEMENT. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT, NOTHING IN THIS AGREEMENT SHALL RESTRICT OR IN ANY WAY LIMIT CLAIMS BY THE PARTIES WITH RESPECT TO BREACHES OR CLAIMS BASED UPON FRAUD, AS TO WHICH THE PARTIES SHALL HAVE ALL OF THEIR RIGHTS OR REMEDIES AT LAW.

(b) LIMITED DUTIES . ANY AND ALL DUTIES AND OBLIGATIONS WHICH ANY PARTY MAY HAVE TO THE OTHER PARTY WITH RESPECT TO OR IN CONNECTION WITH THE COMPANY ASSETS, THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY ARE LIMITED TO THOSE IN THIS AGREEMENT. THE PARTIES DO NOT INTEND (i) THAT THE DUTIES OR OBLIGATIONS OF ANY PARTY, OR THE RIGHTS OF ANY PARTY, SHALL BE EXPANDED BEYOND THE TERMS OF THIS AGREEMENT ON THE BASIS OF ANY LEGAL OR EQUITABLE PRINCIPLE OR ON ANY OTHER BASIS WHATSOEVER OR (ii) THAT ANY EQUITABLE OR LEGAL PRINCIPLE OR ANY IMPLIED OBLIGATION OF GOOD FAITH OR FAIR DEALING OR ANY OTHER MATTER REQUIRES ANY PARTY TO INCUR, SUFFER, OR PERFORM ANY ACT, CONDITION, OR OBLIGATION

CONTRARY TO THE TERMS OF THIS AGREEMENT AND THAT IT WOULD BE UNFAIR, AND THAT THEY DO NOT INTEND, TO INCREASE ANY OF THE OBLIGATIONS OF ANY PARTY UNDER THIS AGREEMENT ON THE BASIS OF ANY IMPLIED OBLIGATION OR OTHERWISE.

(c) DISCLAIMER . THE COMPANY ASSETS BEING TRANSFERRED TO BUYER ARE BEING ACCEPTED BY BUYER IN THEIR “AS IS, WHERE IS” CONDITION AND STATE OF REPAIR, AND WITH ALL FAULTS AND DEFECTS, WITHOUT, SUBJECT TO THE EXCEPTION BELOW, ANY REPRESENTATION, WARRANTY OR COVENANT OF ANY KIND OR NATURE, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MARKETABILITY, QUALITY, CONDITION, CONFORMITY TO SAMPLES, MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE, ALL OF WHICH ARE EXPRESSLY DISCLAIMED BY SELLER AND WAIVED BY BUYER, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS AGREEMENT. BUYER RECOGNIZES THAT THE COMPANY ASSETS HAVE BEEN USED FOR OIL AND GAS DRILLING, COMPLETING, FRACTURING, PRODUCTION, GATHERING, PIPELINE, TRANSPORTATION, STORAGE AND RELATED OPERATIONS. PHYSICAL CHANGES IN THE COMPANY ASSETS AND IN THE LANDS INCLUDED THEREIN MAY HAVE OCCURRED AS A RESULT OF SUCH USES. THE COMPANY ASSETS ALSO MAY INCLUDE BURIED PIPELINES AND OTHER EQUIPMENT, THE LOCATIONS OF WHICH MAY NOT BE KNOWN BY SELLER OR READILY APPARENT BY A PHYSICAL INSPECTION OF THE COMPANY ASSETS. IT IS UNDERSTOOD AND AGREED THAT BUYER SHALL HAVE INSPECTED PRIOR TO CLOSING (OR SHALL BE DEEMED TO HAVE WAIVED ITS RIGHT TO INSPECT) THE LEASES, EQUIPMENT, PIPELINES AND THE ASSOCIATED PREMISES INCLUDED IN THE COMPANY ASSETS AND SATISFIED ITSELF AS TO THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, AND THAT BUYER SHALL ACCEPT ALL OF THE SAME IN THEIR “AS IS, WHERE IS” CONDITION AND STATE OF REPAIR, AND WITH ALL FAULTS AND DEFECTS, INCLUDING, BUT NOT LIMITED TO, THE PRESENCE OF NORM AND MAN-MADE MATERIAL FIBERS, SUBJECT TO THE REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS AGREEMENT.

(d) ADDITIONAL DISCLAIMERS . SELLER MAKES NO REPRESENTATION, COVENANT OR WARRANTY, EXPRESS, IMPLIED OR STATUTORY, (i) AS TO THE ACCURACY OR COMPLETENESS OF ANY DATA OR RECORDS DELIVERED TO BUYER WITH RESPECT TO THE COMPANY ASSETS (INCLUDING, WITHOUT LIMITATION, ANY PROCESSING, REPROCESSING OR OTHER INTERPRETATION OR ANALYSIS BY SELLER OR ANY OF ITS AFFILIATES OF ANY SEISMIC DATA INCLUDED IN THE COMPANY ASSETS) OR (ii) CONCERNING THE QUALITY OR QUANTITY OF HYDROCARBON RESERVES, IF ANY, ATTRIBUTABLE TO THE COMPANY ASSETS, OR THE ABILITY OF THE COMPANY ASSETS TO PRODUCE HYDROCARBONS, OR THE PRODUCT PRICES WHICH ANY PERSON IS OR WILL BE ENTITLED TO RECEIVE FROM THE SALE OF ANY SUCH HYDROCARBONS.

ARTICLE XIV.

TAX MATTERS

Section 14.1 Responsibility for Filing Tax Returns and Paying Taxes .

(a) Filing . Seller shall, to the extent it has the legal right to, file all Tax Returns required to be filed by or with respect to the Company Assets for a Pre-Closing Tax Period that are required to be filed prior to or on the Closing Date and any Tax Returns that are required to be filed as a result of the sale of the Company Assets . If Closing occurs, Buyer shall file all other Tax Returns required to be filed by or with respect to the Company Assets.

(b) Payment . Subject to the limitations of Section 14.4 and Section 14.6 , Seller shall pay Taxes owed and payable by Seller and the assets and operations of Seller at any time prior to or on the Closing Date. Seller shall indemnify and hold harmless Buyer and its Affiliates from and against all Taxes (except Taxes that are included in the calculation of the Buyer’s Credit) with respect to (i) the Company Assets attributable to any Pre-Effective Date Tax Period or portion of any Straddle Period prior to and including the Effective Date; (ii) the Excluded Assets; and (iii) the sale of the Company Assets. If Closing occurs, Buyer shall pay all other Taxes owed with respect to any of Company Assets. Buyer shall, with respect to any Tax Return for which the Buyer is responsible for preparing and filing, make the Tax work papers for such Tax Return available for review by Seller if the Tax Return is with respect to Taxes for which Seller may be liable (in whole or in part) hereunder or under applicable law. Buyer shall make such work papers available for review sufficiently in advance of the due date for filing such Tax Returns to provide Seller not less than ten (10) days to analyze and comment on such Tax Returns and have such Tax Returns modified before filing. Any Tax Return which includes or is based on the Company Assets for any taxable period beginning before and ending after the Closing Date, and any Tax Return in respect of any Taxes for which Seller may be liable (in whole or in part) hereunder shall be prepared in accordance with past Tax accounting practices used with respect to the Tax Returns in question (unless such past practices are no longer permissible under the applicable law), and to the extent any items are not covered by past practices (or in the event such past practices are no longer permissible under the applicable tax law), in accordance with reasonable tax accounting practices selected by the filing party with

respect to such Tax Return under this Agreement with the consent (not to be unreasonably withheld or delayed) of the non-filing party.

(c) Straddle Period . For purposes of this Agreement, liability for Taxes with respect to the Company Assets with respect to any Straddle Period shall be apportioned as follows: property, ad valorem and similar Taxes assessed with respect to any Straddle Period shall be apportioned between the Seller and the Buyer on a ratable daily basis, and Seller shall pay any such Taxes for any Pre-Effective Date Tax Period or portion of the Straddle Period prior to and including the Effective Date. All other Taxes shall be apportioned based on an interim closing of the books of the Company Assets as of the end of the Effective Time, provided that exemptions, allowances or deductions that are calculated on an annual basis (including depreciation and amortization deductions) shall be allocated between the period ending on and including the Effective Date and the period beginning after the Effective Date in proportion to the number of days in each period . If Closing occurs, Buyer and Seller shall each timely provide the other with all information and cooperation reasonably requested by the other to prepare any Tax Return relating to the Company Assets or the transactions contemplated by this Agreement.

(d) Texas Franchise Taxes . Notwithstanding any provision of this Agreement to the contrary, the responsibility for Texas franchise Taxes with respect to the operations of the Company Assets shall be prorated between Seller and Buyer as of the Effective Date, with the Seller responsible for such Texas franchise Taxes for all periods on or prior to the Effective Date, and such proration based on a closing of the books and the operational results of the Company Assets for the year of the Effective Date, notwithstanding that such Texas franchise Taxes are payable in a subsequent year.

Section 14.2 Responsibility for Tax Audits . Seller shall control any Tax Audit relating to Taxes for which Seller is liable pursuant to Section 14.1 , and if Closing occurs, Buyer shall control any other Tax Audit relating to Taxes for which Buyer is liable pursuant to Section 14.1 ; provided, however, that if a Tax Audit relates to Taxes for which both Parties could be liable under this Agreement, to the extent practicable, the Tax items with respect to such Tax Audit will be distinguished and each Party will have the option to control the defense and settlement of those Taxes for which it could be so liable, but if any Tax item cannot be identified as being a liability of only one Party or cannot be separated from a Tax item for which the other Party is liable, Buyer, at its expense, shall have the option to control the defense and settlement of the Tax Audit, provided that Buyer shall keep Seller notified of any developments in such Tax Audit and Seller shall have the right to participate in such Tax Audit at its own expense; and provided further that no such matter shall be settled without the written consent of Seller, not to be unreasonably withheld, delayed or conditioned. Buyer and Seller shall each timely provide the other with all information and cooperation reasonably requested to defend a Tax Audit with respect to Taxes relating to the Company Assets or the transactions contemplated by this Agreement. Each Party shall provide the other with notice of any pending or threatened Tax Audits that could adversely affect the other.

receiving the refund, offset or credit shall pay it to the Party entitled to the refund within ninety (90) Business Days after receipt and usage thereof.

ARTICLE XV.

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	SELLER:

	SEP HOLDINGS IV, LLC

	By:	/s/ Charles C. Ward

	Name:	Charles C. Ward

	Title:	Chief Financial Officer

	BUYER:

	SENDERO PETROLEUM, LLC

	By:	/s/ Zach Hendershott

	Name:	Zach Hendershott

	Title:	Chief Executive Officer

/s/ Gerry F. Willinger
Gerry F. Willinger
Chief Executive Officer


/s/ Charles C. Ward
Charles C. Ward
Chief Financial Officer and Secretary