1 Case 4:12-cv Document 7-5 Filed in TXSD on 10/24/12 Page 1 of 8 EXPLORATION AND DEVELOPMENT AGREEMENT Leon, Robertson, Houston, Cherokee, Madison, Anderson, Angelina, Nacogdoches, Shelby, San Augustine, Trinity, Polk and Sabine Counties, Texas This Exploration and Development Agreement ("Agreement") is made and entered into this 4th day of November, 2005, by and between Chesapeake Exploration Limited Partners hip ("Chesapeake"), whose mailing address is P.O. Box , Oklahoma City, Oklahoma and Gastar Exploration Ltd., and First Source Gas, L.P., a wholly owned subsidiary of Gastar Exploration Ltd. ("collectively First Source"), whose mailing address is 1331 Lamar, Suite 1080, Houston, Texas In consideration of the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Chesapeake and First Source agree as follows: 1. EXHIBITS The following Exhibits are attached hereto and are made a part of this Agreement: Exhibit "A" Exhibit "B" Outline of First Source's Hilltop Prospect Form of Joint Operating Agreement II. PURPOSE OF AGREEMENT The purpose of this Agreement is to set forth the terms by which First Source shall offer Chesapeake the exclusive option to purchase all Oil and Gas Leasehold (as hereinafter defined) owned or acquired by First Source in the Texas Counties of Leon, Robertson, Houston, Cherokee, Madison, Anderson, Angelina, Nacogdoches, Shelby, San Augustine, Trinity, Polk and Sabine, excluding, however, that portion of Leon and Robertson Counties, Texas, lying inside the boundaries of First Source's Hilltop Prospect as described on Exhibit "A" attached hereto (collectively the "AM1 Area") and to establish the manner of joint exploration and development for Oil and Gas Leasehold in the AM1 Area. Ill. TERM OF THE AGREEMENT This Agreement shall be effective as of the Closing Date (as hereinafter defined) and continue thereafter for a period of three (3) years, unless terminated at an earlier date pursuant to the terms hereof or by mutual agreement of the parties. Thereafter, any jointly owned wells, leases and units then producing or being drilled in an established Exploration and Development Area, as defined herein, shall continue to be subject to the governing joint operating agreement for each Exploration and Development Area.
2 Case 4:12-cv Document 7-5 Filed in TXSD on 10/24/12 Page 2 of 8 IV. EXCLUSIVE OPTION TO PURCHASE 4.1 During the term of this Agreement, should First Source acquire directly or indirectly (whether through its agent, affiliates, subsidiaries, representatives, principals, partners, contractors, or otherwise) any oil and/or gas leasehold rights within, or partially within, the AM1 Area by any means, including but not limited to, lease, term assignment, farmout agreement, farmout option agreement, lease option agreement, seismic option agreement, area of mutual interest agreement, trade, merger or corporate acquisition ("Oil and Gas Leasehold"), First Source shall offer Chesapeake the exclusive right to purchase an undivided fifty percent (50%) of said Oil and Gas Leasehold within thirty (30) days of such acquisition (or if already owned by First Source, within fifteen (15) days of the effective date of this Agreement) at a cost to Chesapeake equal to two hundred percent (200%) of First Source's actual lease bonus costs ("Purchase Price") for the acreage to be assigned and delivered to Chesapeake. Should an individual oil and gas lease cover non-contiguous tracts in which one or more tracts lie within the AM1 area and one or more tracts lie outside of the AM1 area the oil and gas lease will be offered to Chesapeake as if all tracts are located inside the AM1 area. First Source shall bear alone any costs of brokerage, recording fees or title examination and other incidental costs specifically related to oil and gas leasehold acquisiti.on. (Title costs related to lease operations such as run sheets, abstracts and title opinions shall be shared by the joint account as described in the attached operating agreement. First Source shall offer such Oil and Gas Leasehold in a written submittal no more frequently than once per month, which shall include a description of the total consideration paid for the Oil and Gas Leasehold including verifiable lease or option bonus paid, and copies of any agreements governing such Oil and Gas Leasehold setting forth the specific terms and conditions of such acquisition. Said written notification shall be made in the manner provided herein and shall include the legal description of the lands, any known burdens and encumbrances, copies of the corresponding title information, any title curative, applicable correspondence, and copies of oil and gas leases, paid drafts, and any other information concerning the acquired interest. Chesapeake shall have a period of fifteen (15) days from receipt of written notice of such acquisition accompanied by the required information in which to notify First Source by letter or fax whether or not it elects to acquire the Oil and Gas Leasehold under the terms and conditions set forth in the notice. If Chesapeake does not make an affirmative election by letter or fax given in the manne.r for notices provided herein to acquire its proportionate share of the Oil and Gas Leasehold within such fifteen (15) day period, it shall be deemed that Chesapeake has elected not to acquire the Oil and Gas Leasehold being offered. The inclusion of multiple Oil and Gas Leasehold in a single submittal shall be for convenience only and shall not require Chesapeake to elect to purchase all or none of the Oil and Gas Leasehold included in such submittal. Each acquisition shall be considered independent.
3 Case 4:12-cv Document 7-5 Filed in TXSD on 10/24/12 Page 3 of In the event Chesapeake elects not to acquire, or is deemed not to acquire, any Oil and Gas Leasehold, such Oil and Gas Leasehold shall be owned entirely by First Source and deemed to be excluded from the terms and conditions of this Agreement and the attached joint operating agreement. In such event, First Source will have the right to secure other investors and partners in such declined Oil and Gas Leasehold. Likewise, any Oil and Gas Leasehold owned or acquired by Chesapeake independent of First Source in the AM1 Area shall not be subject to this Agreement and the attached joint operating agreement. 4.3 If Chesapeake timely elects to purchase an Oil and Gas Leasehold offered by First Source, Chesapeake shall deliver to First Source a corporate check for the Purchase Price within fifteen (15) days following its election. With respect to option acreage, Chesapeake shall pay the Purchase Price applicable to the lease bonus to First Source within fifteen (15) days of invoice when such option is exercised and only with respect to the leasehold actually acquired. If payment is not timely received, First Source shall give Chesapeake notice of default in the manner provided herein and a five (5) day period to cure the default. Chesapeake's failure to timely deliver payment in full, following receipt of such notice to cure, will be deemed an election not to participate in the acquisition of the Oil and Gas Leasehold by Chesapeake notwithstanding its previous election. First Source shall prepare, execute and deliver an assignment, without warranty of title, express or implied, except by, through and under First Source, but not otherwise, to Chesapeake covering an undivided fifty percent (50%) of all of First Source's right, title and interest in the Oil and Gas Leasehold or acquisition agreement within thirty (30) days of receipt of said payment. Said assignment shall be delivered at existing net revenue interests and free of any burdens or restrictions except those in favor of any unrelated third parties existing at the time of the acquisition. 4.4 Any lease maintenance payments (including, but not limited to lease rentals, shut-in payments, and minimum royalty payments) for any leases in which Chesapeake elects to participate and acquire, and arising after the date of assignment from First Source to Chesapeake, shall be borne equally by the parties. Chesapeake shall reimburse First Source for its share of these payments within thirty (30) days of receiving First Source's invoice for these payments. In the event First Source elects not to make lease maintenance payments, sixty (60) days advanced notice shall be delivered to Chesapeake to enable Chesapeake to make such payment should it so elect. In such event, First Source shall assign its undivided fifty percent (50%) interest in the affected Oil and Gas Leasehold to Chesapeake and the interest so assigned shall no longer be subject to this Agreement or the attached operating agreement. Likewise, should Chesapeake elect not to make a lease maintenance payment it shall assign its undivided fifty percent (50%) interest in the affected Oil and Gas Leasehold to First Source and the leasehold so assigned shall not be subject to this agreement or the attached operating agreement.
4 Case 4:12-cv Document 7-5 Filed in TXSD on 10/24/12 Page 4 of The exclusive option described in this Section IV. is a one way obligation, i.e., it binds only First Source to offer Oil and Gas Leasehold to Chesapeake; Chesapeake shall have no corresponding obligation to offer Oil and Gas Leasehold it may acquire or have previously acquired in the AM1 Area to First Source. V. EXPLORATION AND DEVELOPMENT 5.1 The parties shall establish one or more exploration and development areas encompassing the subject Oil and Gas Leasehold for the purpose of drilling exploration andlor development wells (an "Exploration and Development Area"). An Exploration and Development Area shall include all lands necessary to define the geologic prospectivity of the prospect. Due to the complex title in some of the AM1 lands the parties agree that the acquisition of Oil and Gas Leasehold in the lands included in a proposed, or existing, Exploration and Development Area may not be finalized. Therefore, any new Oil and Gas Leasehold acquired by First Source in a proposed or existing Exploration and Development Area shall be offered to Chesapeake pursuant to Article IV. The costs to extend or renew any Oil and Gas Leasehold, subject to this agreement, within a proposed or existing Exploration and Development Area will be shared equally by the parties based on actual costs. Within thirty (30) days of Chesapeake's election to acquire an Oil and Gas Leasehold, First Source will provide a plat of the proposed Exploration and Development Area(s) covering such Oil and Gas Leasehold to Chesapeake with a supporting geological assessment, and the number and general location of all wells proposed to be drilled within the Exploration and Development Area(s). Such proposed Exploration and Development Area(s) and First Source's drilling plan will be deemed acceptable to Chesapeake unless within thirty (30) days of its receipt, Chesapeake provides First Source with written notice of any objection thereto, supported with Chesapeake's own geological assessment and a plat of its own alternative proposed Exploration and Development Area(s) and drilling plan for the prospect. If such objection is timely made, then the parties shall endeavor within thirty (30) days thereafter to meet and attempt to reconcile the conflict in the proposed Exploration and Development Areas and/or drilling plans. In the event the parties cannot come to an agreement, the Exploration and Development Area for such prospect shall be established by default to encompass 5,760 acres, to be determined by First Source, but in no event larger than the original Exploration and Development Area originally proposed by First Source. 5.2 Once an Exploration and Development Area is established by the parties, First Source will use its best efforts to commence drilling operations on the first test well in the Exploration and Development Area within one hundred eighty (1 80) days thereafter. If First Source has not timely commenced drilling operations on such initial well, Chesapeake shall have the right to drill the well and be designated operator of the subject Exploration and Development Area. In addition, if First Source fails to timely commence operations on a well required to perpetuate an expiring Oil and Gas
5 Case 4:12-cv Document 7-5 Filed in TXSD on 10/24/12 Page 5 of 8 Leasehold and/or declines its option to participate in the renewal of an expiring Oil and Gas Leasehold, Chesapeake shall be entitled to be substituted as operator of such well to allow Chesapeake to drill the well prior to the expiration of the subject Oil and Gas Leasehold. 5.3 In the event Chesapeake or First Source elect not to participate in the initial test well drilled in any Exploration and Development Area, then, as to that Exploration and Development Area, the non-participating party shall assign its entire Oil and Gas Leasehold interest to the participating party within 30 days after the initial test well is spud and shall have no right to participate in any subsequent wells drilled within that Exploration and Development Area. The Oil and Gas Leasehold interest assigned by the non- participating party shall be subject only to the burdens that existed when said leasehold was originally assigned to Chesapeake from First Source. If the participating party does not commence actual drilling operations on such initial test well within onehundred and eighty (180) days of the non-participating party's election or deemed election not to participate, then the non-participating party shall not have forfeited any right in the subject Exploration and Development Area and the initial test well may be re-proposed. 5.4 First Source and Chesapeake shall both have the right to propose wells in an Exploration and Development Area under the notice and election provisions of the joint operating agreement described herein. VI. JOINT OPERATING AGREEMENT All operations in the AM1 Area shall be governed, as between First Source and Chesapeake, by the terms and conditions of the form of Joint Operating Agreement attached here as Exhibit "B" ("Operating Agreement"). A separate Operating Agreement shall cover each Exploration and Development Area and upon the establishment of each such area, First Source shall prepare signature pages and a separate Exhibit "A" reflecting the parties' ownership in the Exploration and Development Area covered by the Operating Agreement and provide same to Chesapeake for approval and execution. First Source shall be designated Operator under all such Operating Agreements and shall have exclusive authority over drilling and other activities in an Exploration and Development Area, except as otherwise provided herein and subject to the terms of the Operating Agreement. As designated Operator, First Source shall provide Chesapeake with drilling reports, logs, cores, tests and any and all information gathered from the well bore, contemporaneously as produced, both electronically (when available) and in print form. In the event of a conflict between this Agreement and the Operating Agreement, the terms of this Agreement shall control. After termination of this Agreement, each separate Operating Agreement so executed shall stand independent of each other and apply to all
6 Case 4:12-cv Document 7-5 Filed in TXSD on 10/24/12 Page 6 of 8 wells drilled and lands designated as Exploration and Development Areas hereunder. In the event third parties own leasehold interests in a proposed unit for a well proposed pursuant to the Operating Agreement, First Source shall prepare a separate joint operating agreement, substantially similar to the Operating Agreement, covering the lands and leases that comprise said proposed pooled unit. After termination of this Agreement, each separate joint operating agreement so executed shall stand independent of each other and apply to all wells drilled and lands and leases pooled. VII. EFFECTIVE DATE This Agreement shall become effective as of the date of closing (the "Closing Date") of all transactions covered under the parties' Letter of Intent dated September 16, 2005 (the "Letter of Intent"). Pursuant to Section D of the Letter of Intent, if all such related transactions do not close, this Agreement shall be null and void and have no legal or equitable effect whatsoever. VIII. NOTICES All notices shall be in writing and delivered in person or by overnight delivery, certified mail, or facsimile, confirmation received. Notice shall be deemed given only when received by the party to whom such notice is directed. Each party's response to a notice shall also be in writing. All notices shall be sent to the parties' representative and addressed as follows: Chesapeake Exploration Limited Partnership 6100 N. Western P. 0. Box I 8496 Oklahoma City, OK Attn: Mr. Henry J. Hood Phone: (405) Fax: (405) First Source Gas, L.P Lamar, Suite 1080 Houston, Texas Attn: Henry J. Hansen Phone: (713) , ext. 206 Fax: (71 3)
7 Case 4:12-cv Document 7-5 Filed in TXSD on 10/24/12 Page 7 of 8 Each party hereto shall have the right to change its designated representative andlor address by giving written notice to the other party at least five (5) days prior to the effective date of the change. IX. RELATIONSHIP OF THE PARTIES Chesapeake and First Source do not intend to create, nor shall this agreement be construed as creating, a mining or other partnership or association, nor does this Agreement render the parties hereto liable as partners. The liability of the parties shall be several and not joint or collective. X. ENTIRE AGREEMENT This Agreement sets forth the entire agreement between First Source and Chesapeake and supersedes all prior agreements (written or oral) with respect to the subject matter herein contained. This Agreement may be amended only by written agreement of the parties. In the event of a conflict between the terms and conditions of this Agreement and any other agreement, including but not limited to the operating agreement or any subsequent third party agreements, the terms, conditions, elections and reservations contained in this Exploration and Development Agreement shall control. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. XI. SUCCESSORS AND ASSIGNS The terms, covenants, and conditions of this agreement shall be binding upon and shall inure to the benefit of the parties hereto and to their respective heirs, devisees, legal representatives, successors and assigns; and such terms, covenants, and conditions shall be deemed as covenants running with the lands and leases covered hereby and with each transfer or assignment of said lands or leases. IN WITNESS WHEREOF, this Agreement is executed as of the date first above written. CHESAPEAKE PARTNERSHIP Henry J. Hood Senior Vice President - Land and Legal of Chesapeake Operating, Inc., General Partner
8 Case 4:12-cv Document 7-5 Filed in TXSD on 10/24/12 Page 8 of 8 GASTAR EXPLORATION, LTD.. Russell Porter President and CEO FIRST SOURCE GAS, L.P., by its general partner, Bossier Basin, LLC Its Authorized Officer